1. Fit for the Future – IPART Report

2. 2. Not Fit – Scale and Capacity higher under Independent Local Government Review Panel (ILGRP) recommendation Recap - ILGRP Recommendation: The potential for an amalgamation warrants further investigation, but if that option is rejected or deferred indefinitely, then a Joint Organisation should be established and should assume responsibility for water along with other strategic functions [emphasis added]. Fit – All objective financial criteria 20 Year NPV benefit of $196 million supporting a merger Alternative for Joint Organisation IPART Conclusions on Wyong

3. 3. How did IPART assess fitness NSW Government established “Scale and Capacity” as a threshold criteria… So if Council did not satisfy “Scale and Capacity”, it could not be considered “fit” regardless of how it performed on remaining criteria Wyong met and exceeded all objective financial health benchmarks: Sustainability, Infrastructure / Service Management, Efficiency

4. 4. There were no objective criteria to define scale or capacity. No metrics. Advised that ILGRP recommendation a starting point for scale and capacity What does Scale and Capacity mean? It was not possible to pass “Scale and Capacity if the submission did not agree with the ILGRP recommendation. Real concepts of “Scale and Capacity” do not appear to have been applied consistently across the State

5. 5. How did Wyong perform on financial measures? Sustainability (Operating Performance, Own Source Revenue, Building and Infrastructure asset renewal ratio)…. Satisfies (FIT) Infrastructure and Service Management (Infrastructure Backlog Ratio, asset maintenance ratio, debt service ratio)…. Satisfies (FIT) Efficiency (decrease in real operating expenditure)…. Satisfies (FIT)

6. 6. One of the big State Government selling points for a merger is a Net Present Value (NPV) of Savings of $196 million over 20 years. Staff reverse engineered and recreated the Business Case based on Ernst and Young (EY) assumptions included in the report. Allowed us to: -Understand the assumptions -Calculate the inputs to the model (implementation costs, assumed savings, etc.) -Model same methods for other merger options (Lake Mac and 3 way merger) Merger $196 Million 20 Year NPV

7. 7. Savings of 10-15% of Total Operational Expense of the smaller Council (s) in the merger. Savings assumed to be realised in full within 5 years….. (30% in Year 1, 60% in Year 2, 80% in Year 3, 90% in Year 4) In the case of Wyong and Gosford, ongoing annual Savings of between $22 million and $33 million Implementation costs assumed to be 3 times the ongoing annual saving….so in the case of Wyong and Gosford, one off implementation costs of between $67m and $100m 60% of merger costs spent in Year 1, 20% in Year 2, 10% in Year 3, 7% in Year 4 and 3% in Year 5 7% discount rate Merger - Ernst and Young Business Case Assumptions SAVINGS ONE OFF COSTS DISCOUNT RATE

8. 8. Numbers arising from this analysis

9. 9. Gosford and Wyong Merger 10 Year Cash-Flow profile

10. 10. Implementation costs for the GCC option of between $67m and $100m over 5 years (versus the $10m the State intends to provide to assist). Negative Cash in Year 1 of between $33 million and $50 million. Discounted payback of 4.4 years (so some service delivery would need to drop to fund in the first 4 years) Five year NPV is marginal. Is 7% an appropriate discount rate given the risk? A higher discount rate of 10% (to cater for risk) provides a lower NPV 10-15% assumed saving off one council cost base appears optimistic. Realising 30% of this in year 1 and 60% of this in year 2 even more optimistic. Staff Observations on Business Case

11. 11. Joint Organisation should be established and should assume responsibility for water along with other strategic functions Based on other JO pilots and previous experience with Central Coast Water Corporation (CCWC) and Joint Services Business (JSB)….. Corporate Functions (Finance, IT, HR, Legal and Governance, Plant and Fleet) JSB included Plant and Fleet Joint planning has been included in scope of other Joint Organisations ILGRP specifically notes “responsibility for water” Potential “Cons” May not Satisfy OLG as first preference for a merger. Potential “Pros” Retain separate Councils/Councillors to cater for local issues. Wyong identity and strategy retained Can submit up to 3 merger proposals Options / ILGRP Fallback Joint Organisation – Potential Scope

12. 12. Both/All Councils need to agree on a voluntary merger (or JO) to secure incentive funding. Government needs to agree with the merger proposal Proposals must be submitted by 18 November 2015. Can submit up to 3 merger proposals Boundary adjustments would only be considered if part of a voluntary merger. Not OK if only expanding. The transition process (including involvement of Councillors and impacts on senior staff) has not been confirmed under either a voluntary or forced merger. Award staff protected for 3 years from commencement of merger. Ground Rules and Other Information

13. 13. “Newcastle and Surrounds” classified as “metro” Waiting for confirmation this includes the Central Coast. Assuming we are Metro… $10 million from “stronger communities” fund ($15 million if 3 Councils)…. plus $10 million merger implementation grant. Assistance with consultants to start implementation. Confirmed “streamlined” SRV process. Other previously noted benefits (e.g. increased planning power) not confirmed Incentives for voluntary merger

14. 14. The Government has not explicitly mentioned forcing amalgamations, but the language implies they are prepared to force mergers if voluntary mergers are not undertaken. No information has been forthcoming on the State Government’s intended avenue for forcing amalgamations, but options include: Change Legislation (requiring to go through both houses of parliament) Referral to Boundaries Commission. Suspend Councils and appoint an Administrator Legal Counsel analysis suggests that all avenues would require a Public Inquiry but that forced amalgamations are within the powers of the State Government Mechanisms for State Government to “force” an amalgamation

15. 15. Under the Local Government Act, there are processes that needs to be undertaken depending on the path the Government chooses to take. These processes have not yet commenced. However, our analysis suggests there are existing Legislative tools to enable the State Government to: Progress voluntary amalgamations Force amalgamations between Councils. Suspend Councils and appoint administrators. In more limited circumstances the State Government has the power to dismiss Councils. Legislative tools already available