Commonwealth Grants Commission

Capital assessments

May 2011

Background

The capital assessments –

Treatment of capital grants for infrastructure

Outline

2

Some background

4

Determine a distribution of the GST which equalises State fiscal capacities to provide services

Commission’s task

5

determines a GST distribution which, after allowing for material factors affecting revenues and expenditures, provides each State with the same capacity to provide services and associated infrastructure at the same standard, if each made the same effort to raise revenue and operated at the same level of efficiency

It actually

6

Revenue, including◦ PRT, Mining revenue, etc◦ Interest earnings and dividends◦ GST◦ Other Grants

Expenses including◦ Education, Health, Law and Order, etc◦ Depreciation

Net Operating Balance (NOB) = R – E Net investment (NI) Net lending = NOB - NI

Operating statement

7

GST = Expenses plus: Net investment plus: Net lending less: State own-source

revenue less: Revenue from SPPs

The rearranged budget identity

8

Average budget – average State revenues and expenditures

Assessed budgets – the expenditures States would incur if they provided the average services and the revenues they would raise if they applied average revenue efforts

Two important concepts

The Capital Assessments

10

Assessments for infrastructure: Net investment Depreciation expenses

Assessments for financial assets Net lending Net interest revenue and revenue from PTEs

Capital assessments include

11

Capital assessments have always been made

We used to equalise the capacity of States

to pay debt charges on borrowings used to acquire real and financial assets

Now we give States the up front capacity to acquire assets needed to provide services and hold equal amounts of financial assets

12

Simpler - the debt charges assessment was too complex

To reflect ‘what States do’ with the GST◦ GST funds investment and financial assets

To capture effects of population growth To be more contemporary

◦ Recognises investment needs and changes in net financial assets ‘up front’

Why did we change?

13

Change 2004 Review 2010 ReviewWhat is Equalised

Net operating balance Net financial worth

Calculation of GST required for equalisation

= Assessed expenses plus average NOBless assessed revenue less revenue from SPPs

= Assessed expenses plus assessed investmentplus assessed net lendingless assessed revenueless revenue from SPPs

Outcome Overtime provision of capacity to pay debt charges on borrowings to fund infrastructure

Annual recognition of impact of population growth on need for infrastructure and stock of financial assetsQuicker increase in GST for high growth States – Qld, WA, NT

Changes in methods

Assessment methodsNet investment

DepreciationNet lending

Interest & dividend revenue

15

Assumption - States need the average stock of infrastructure per capita, adjusted for its infrastructure disabilities, to deliver average per capita services

Assessed investment is the difference between the assets required to provide average services at the end of the year and those required at the start

Investment assessment

16

Population growth Capital stock (or quantity) disabilities

◦ Measured as expense use disabilities, discounted by 12.5% and averaged over three years

◦ Examine roads and other infrastructure separately◦ No disabilities applied to land

Cost disabilities◦ Measured using interstate wage differences and

regional cost differences

Factors affecting Investment

17

Investment resultsNSW Vic Qld WA SA Tas ACT NT Redist

Dollars million -294.9 -298.9 503.6 254.3 -146.3 -60.6 -48.4 91.2 849.1

Dollars per capita -41.36 -54.75 113.08 112.43 -89.74 -120.02 -136.92 402.65 38.56

NSW Vic Qld WA SA Tas ACT NT Redist$m $m $m $m $m $m $m $m $m

Population growth -430.1 23.2 353.8 234.4 -123.6 -56.4 -9.5 8.3 619.7Capital stock disabilities 70.2 -127.5 -31.2 5.7 9.8 12.7 -14.6 74.9 173.3Cost disabilities 16 -25.6 -9.5 14.7 -5.3 -2.6 -4.8 17.2 47.9NNR 47.1 -169.7 188.1 -2 -27.9 -14.7 -19.9 -1 235.2Interactions 1.9 0.6 2.5 1.4 0.8 0.5 0.5 -8.2 8.2TOTAL -294.9 -298.9 503.6 254.3 -146.3 -60.6 -48.4 91.2 849.1

18

Assessed depreciation is a proportion of the assessed stock of infrastructure at end of each year

Depreciation

19

Net lending each State requires to achieve the same NFW per capita is assessed NFW at year’s end less assessed NFW at year’s start

Assessed NFW is the State’s population share of the total NFW

This assessment is only influenced by population growth

Net lending needs are discounted by 25%

Net lending

20

Impact on GST distribution, 2010 Review

Population growth

Net lending results

NSW Vic Qld WA SA Tas ACT NT Redist

Dollars million -167.7 9.3 138.4 89.8 -47.5 -22.0 -3.7 3.3 240.8

Dollars per capita -23.51 1.70 31.08 39.71 -29.13 -43.48 -10.44 14.38 10.93

NSW Vic Qld WA SA Tas ACT NT Total% % % % % % % % %

2005-06 0.86 1.43 2.48 1.93 0.90 0.80 1.29 2.27 1.44

2006-07 1.06 1.67 2.37 2.33 1.10 0.67 1.41 1.88 1.60

2007-08 1.24 1.77 2.49 2.56 1.08 0.73 1.48 2.40 1.75

2008-09 1.40 1.95 2.52 3.09 1.16 0.99 1.69 1.95 1.91

21

Since State NFW is equalised, each State could earn the average per capita revenue from these sources

Net interest and PTE revenue

Treatment of capital grants

23

SPPs and NPPs have a revenue and a spending effect on State budgets

The two effects are assessed separately◦ SPP and NPP revenues are all assessed the

same way - States receiving above average per capita SPP and NPP revenue receive less GST

◦ Spending effects are part of the relevant expenditure assessment and reflect the relevant drivers of service use and cost

Capital grants

24

A simple GST ‘Impact’ Aust Assessed GST Average State A Impact

$ $ $SPP expenses 100 130 30

SPP revenue 100 125 -25

GST impact for State A 5

25

Roads NPPs help fund construction of the national network

Road use and length disabilities affected half the spending on construction

Nationally determined needs also affected the other half of the spending – the interstate distribution of the NPP reflected the needs

All differences from the average revenue affected the GST

Roads

26

Most rail services are provided by PTEs and are not general government services

Support for PTE investment takes form of capital grants or equity injections which increase State equity in the PTE and NFW

Those transactions are captured in net lending assessment which equalises NFW

On revenue side, all differences from the average receipts are offset by GST distribution

Rail

27

ComparisonRoad Rail Revenue side effect is same in both cases. It offsets the difference from average revenue. Expenditure effects: A general govt service Capital grant creates

non-financial asset Equalising capacity to

provide service means recognise population growth and service specific disabilities

A PTE service Capital grant creates

a financial asset Equalising NFW, not

PTE’s capacity to provide services, means only population growth is recognised

28

Questions?

29

Assets

Non-financial (real) assets

Financial assets

Produced assets Non-produced assets

Tangible produced assets•Dwellings•Other buildings•Other construction/infrastructure•Transport equipment•Computer equipment•Other equipment•Defence weapons platforms•Cultivated assets•Inventories

Intangible produced assets and valuables

Tangible non-produced assets•Land•Other

Intangible non-produced assets

Infrastructure

GFS asset classification

•Cash and deposits•Investments, loans and placements•Accounts receivable•Advances outstanding•Equity in PTEs

Net financial assets or Net financial worth

30

Revenue, including◦ PRT, Mining revenue, etc◦ Interest earnings◦ Dividends◦ Grants

Expenses including◦ Education, Health, Law and Order, etc◦ Debt charges◦ Depreciation

Net Operating Balance (NOB) = R – E Net investment (NI) Net lending = NOB - NI

Operating statement – impact of real assets

31

Revenue, including◦ PRT, Mining revenue, etc◦ Interest earnings◦ Dividends◦ Grants

Expenses including◦ Education, Health, Law and Order, etc◦ Debt charges◦ Depreciation

Net Operating Balance (NOB) = R – E Net investment (NI) Net lending = NOB - NI

Operating statement – impact of financial assets

32

Net lending assessment – 2008-09

NSW Vic Qld WA SA Tas ACT NT Total

End of year net financial worth (a)

5 447.20

Population (million) 7.0 5.4 4.3 2.2 1.6 0.5 0.3 0.2 21.6Assessed net financial worth ($m) 38 356 29 223 23 693 12 006 8 781 2 725 1 895 1 208 117 886

Start of year net financial worth (b)

6 044.09

Population (million) 6.9 5.3 4.2 2.1 1.6 0.5 0.3 0.2 21.2Assessed net financial worth ($m) 41 969 31 806 25 644 12 923 9 631 2 994 2 068 1 314 128 349

Net lendingAssessed net lending ($m) -3 613.6 -2 583.2 -1 951.0 -916.8 -850.3 -269.0 -172.8 -106.6 -10 463.3

Assessed net lending ($pc) -513.19 -481.51 -448.56 -415.96 -527.49 -537.67 -496.64 -481.09 -483.48Undiscounted factor 1.06144 0.99593 0.92777 0.86034 1.09103 1.11209 1.02723 0.99506 1.00000

Discounted category factor 1.04608 0.99695 0.94583 0.89525 1.06827 1.08407 1.02042 0.99629 1.00000

Average net financial worth ($pc)

Average net financial worth ($pc)

33

Depreciation results Impact on GST

Capital stock factorNSW Vic Qld WA SA Tas ACT NT Average

2003-04 0.94772 0.92835 1.04015 1.11469 1.04881 1.07377 0.92182 2.19129 1.00000

2004-05 0.94815 0.92825 1.03902 1.11393 1.04803 1.07306 0.92134 2.19318 1.00000

2005-06 0.94856 0.92781 1.03810 1.11279 1.04737 1.07287 0.92089 2.19564 1.00000

2006-07 0.94950 0.92701 1.03693 1.11141 1.04709 1.07381 0.91955 2.20188 1.00000

2007-08 0.95121 0.92660 1.03520 1.10829 1.04695 1.07484 0.91774 2.19779 1.00000

2008-09 0.95207 0.92518 1.03436 1.10749 1.04852 1.07536 0.91121 2.20677 1.00000