DME 48678 LGA ‘Waste Collection and Disposal – Financial Issues’ Discussion Paper July 2009
MODEL CONTRACTS AND TEDERING TOOLKIT FOR WASTE MANAGEMENT
WASTE COLLECTION, CONTROL AND DISPOSAL
FINANCIAL ISSUES
DISCUSSION PAPER
TABLE OF CONTENTS
TABLE OF CONTENTS 2
1. Introduction 3
2. What does the Legislation require? 3
3. Risk Management and Internal Control 4
3.1 Collection 4
3.2 Disposal 4
3.3 Recovery 4
3.4 Internal Financial Control 4
4. Internal and External Auditing 5
5. Audit Committee 6
5.1 Service provided by Council 6
5.2 Resource Sharing 6
5.3 Regional Subsidiary 6
5.4 Contracting Out 7
6. Long Term Financial Planning and Sustainability 7
6.1 Operating 7
6.2 Remediation 7
7. Key Performance Indicators 8
8. Shared Services 8
Appendix One – Legislative Responsibility 9
Appendix Two – Regional Subsidiary Legislative Requirements 11
Appendix Three – Accounting for Reinstatement Provisions 19
1. Introduction
Waste collection and disposal is one if the most significant activities undertaken by Local Government. This paper deals with financial issues associated with the provision of this service.
The purpose of this information paper is to provide a practical approach to assist Councils when they are making waste and resource recovery decisions.
The paper draws on much of the material released through the LGA’s Financial Sustainability Program and should be read in conjunction with other information papers through that Program which highlight the increasing demands on Councils and the importance of efficiently managing the delivery of services. The following Financial Sustainability Information Papers can be accessed from the LGA website at: www.lga.sa.gov.au/goto/fsp.
· Financial Sustainability
· An Overview of Audit Mechanisms
· Audit Committees
· Scope of External Audit - Audit Specification
· Efficiency and Economy Audits
· Infrastructure and Asset Management (Policy and Planning)
· Service Delivery Framework including the Role of Shared Services
· Long-term Financial Plans
· Local Government Financial Indicators
· Debt Management
· Governance in Local Government
· Targets for Local Government Financial Indicators
· Model Framework for Council Annual Business Plans
· Model Work Program for Council Audit Committees
· Treasury Management
· Long-term Financial Plan - A Model Format for Financial Information
· Depreciation and Related Issues
· Financial Policies
· Audit Committee Reporting
· Funding Policies and Strategies
· Financial Governance
· Audit Management Letter
· Risk Management Framework (currently being prepared)
2. What does the Legislation require?
Under Section 7 of the Local Government Act 1999 the roles and objectives of local government are spelled out. These are detailed in Appendix One.
The functions of a Council specified under the Act include the requirement to plan for and provide a service for waste collection and disposal. The scope of the service needs to consider the welfare of its residents whilst mitigating hazards and protecting, restoring, enhancing and conserving the environment. Waste management is an integral part of making a council area attractive for business, commerce and tourism. In recent years disposal has also had an element of recovery. Recycling initiatives in relation to green waste and recyclable materials have significantly reduced waste disposal.
In providing a service for waste collection Councils must to be responsive to the community. They also should consider public policy being set by State and Federal governments. Services need to be delivered effectively and efficiently with due consideration being given to co-ordinating with other local governments. Council policies also need to ensure the equitable access of ratepayers to the service.
There is currently proposed legislation that will further strengthen this requirement.
3. Risk Management and Internal Control
There are numerous financial risks associated with the management of waste collection and disposal. A further information paper on a Risk Management Framework is currently being prepared.
3.1 Collection
Historically a waste collection service was provided to urban residents whilst many smaller rural communities had no waste collection service. In recent years the waste collection service has been extended to many more communities. This has substantially increased the cost of waste collection and disposal.
In an effort to improve waste recovery many Councils have expanded their waste collection service. For example additional bins for green waste and recyclables. This has also increased the cost of the collection service.
More Councils are now also offering a regular hard waste collection which is a further cost.
3.2 Disposal
Public policy has led to more stringent requirements for waste disposal. The cost of waste disposal has therefore increased. Most Councils have a direct and indirect liability for the impact of these requirements on existing, proposed or closed waste disposal sites.
3.3 Recovery
The cost of the recovery of waste (recycling) varies depending on the prevailing market for the recycled materials.
3.4 Internal Financial Control
An objective of internal financial control is to manage the risk to the organisation from error. It will not remove all risk but is a means of managing risk and reducing the likelihood and consequence of adverse events. Using the risk management framework outlined in Information Paper 21 – Internal Financial Controls Council problems with the waste collection and disposal activity will generally have major or catastrophic consequences.
Internal financial control is instrumental in:
· safeguarding the Council assets;
· ensuring reliability of both financial and non-financial reporting;
· complying with legislation and Council policies; and
· promoting the effectiveness and operational efficiency of Council.
A sound system of internal financial control is essential for a Council to ensure that its resources are allocated in the most appropriate manner to ensure that operational and financial objectives are being met and to comply with the accountability provisions of the Local Government Act. The benefits of a coordinated, systematic approach to risk management include:
· the leadership team having a clear view of the key risks facing the Council;
· controls operating effectively to reduce risks to an acceptable level;
· Council being confident that it’s administration is operating effectively.
As the waste service is a large percentage of Council’s budget any changes in costs will have a significant impact on the operating result.
The loss of the capability and or failure to collect waste would have an immediate community impact. There would be major adverse public/staff reaction and negative publicity.
If council failed to meet its legislative requirements for managing waste disposal there would significant costs to remediate the breach and major adverse public/staff reaction and negative publicity.
Even if the likelihood is assessed as being unlikely or rare due to the consequences the risk would be extreme or high. That is the risk requires senior management attention or immediate action.
The process to assist Councils reviewing or developing their internal controls is:
· examine current procedures;
· identify key risks threatening the achievement of Council’s objectives;
· identify existing internal financial controls;
· assess current controls for effectiveness;
· identify any new controls needed as well as existing controls requiring adjustment;
· identify relevant officers for each internal control.
An outcome of an internal financial controls review will be a list of controls for implementation or refinement. It is likely that all staff will be affected by the internal financial controls, not just finance staff, and to receive the full benefit of the review it is important that Council’s senior management team drive the process to ensure these controls are actioned.
If new waste services are introduced or key staff and contractors are replaced it is essential that the internal financial controls affected are reviewed.
4. Internal and External Auditing
Business risks faced by Council can and do change and a critical element of any comprehensive internal financial control model is regular monitoring and/or review to ensure the internal financial controls remain effective and are functioning properly.
In order to maintain confidence in their internal financial controls Councils should conduct regular spot checks on key controls. If spot checks are undertaken regularly the timing for a full review may be extended. Ideally an internal auditor would undertake such checks within an audit program but not all Councils have internal auditors. Alternatively a responsible officer might be required to sign that the internal financial controls relating to his or her position are in place and are being adhered to.
The external auditor will mainly be concerned about the accounting treatment for waste disposal sites. Under Australian Accounting Standards an estimate of the present value of remediation liabilities needs to be brought to account. This process is set out in the South Australian Model Financial Statements 2009 (refer Appendix Three). The auditor’s responsibility is spelled out in Information Paper 4 – Scope of External Audit – Auditor Specification and Information together with Information Paper 24 - Audit Management Letter.
For new disposal sites there is good information available as to the future costs of remediation. For current and closed disposal sites quantifying the remediation liability is more problematic. The experience in other States is that the responsible agency, the Environment Protection Authority requires all sites to be returned to their “natural” state. For many rural Councils only a small estimate has been accounted for to date.
Local Government (Financial Management) Regulation 14 (2) states:
“In forming an audit opinion for a council under section 129(3) of the Act, the auditor must give due consideration to the adequacy of the council's policies, practices and procedures of internal control under section 125 of the Act.”
In December 2008, the Minister for State/Local Government Relations advised of her intention to strengthen the current requirement in Financial Management Regulation 14 (2) in two ways:
· first, by prescribing the requirement in the Local Government Act itself rather than in the Regulations; and,
· second, by amending the Act to require external auditors to include in their reports to Councils a report on internal financial controls being exercised and, specifically, whether those controls are sufficient to provide a reasonable assurance that the financial activities of Councils have been conducted properly and in accordance with law.
The external auditor would need to satisfy him or herself that Council has met the second requirement.
5. Audit Committee
Section 126 (4) (c) of the Local Government Act identifies one of the functions of an audit committee as:
“reviewing the adequacy of the accounting, internal control, reporting and other financial management systems and practices of the council on a regular basis.”
This is explained in Information Paper 3 – Audit Committees and Information Paper 14 – Model Work Program for Audit Committees.
There are four main options for the delivery of waste collection and disposal services.
5.1 Service provided by Council
If the service is provided by Council then the role of the Audit Committee is the same as that for other services delivered by Council. Where there is a User Charge the Audit Committee should consider whether the charge is less than the “market price” for alternative service providers. If classed as a significant business activity Part 4 of the Government Business Enterprises (Competition) Act 1996 needs to be considered.
Also when undertaking the annual review of the Financial Statements the committee has to satisfy itself as to the adequacy and calculation of any estimate relating to the remediation of waste disposal sites.
5.2 Resource Sharing
Some rural councils share Waste Compactor units. Rather than each Council buy or hire its own unit one Council purchases the unit and hires it out to adjoining regional councils. The Audit Committee, on a regular basis, should review these arrangements to ensure they still meet the strategic objectives of Council in an efficient manner. Further guidance can be obtained from Information Paper 7 – Delivery Framework including the Role of Shared Services.
5.3 Regional Subsidiary
Under Section 43 of the Local Government Act 1999 several Councils can set up a Regional Subsidiary to manage waste collection and disposal. Examples being “Eastwaste” for the eastern Councils and “NAWMA” for the northern Councils. Some Councils have or are intending to have Regional Subsidiaries to manage regional waste disposal sites. An example being “Wastecare”. Regional Subsidiaries have to meet the various requirements set out in Schedule 2, Part 2, of the Act (refer Appendix Two). The Audit Committees role is to ensure that any Regional Subsidiary their Council is a member of is meeting these legislative requirements. It is particularly important that they review the Regional Subsidiaries compliance with Australian Accounting Standards in relation to remediation liabilities. Constituent Councils need to be made aware of any significant change in accounting estimates as soon as practicable. The financial impact then should be incorporated into Council’s budget and Long Term Financial Plan.
5.4 Contracting Out
Councils may contract out their waste collection and disposal activities. Regional Subsidiaries could also contract out their collection and/or disposal.
From the Deloiitte Touche Tohmatsu (Deloitte) ‘Best Practice Model - Internal Financial Controls below are the risks applicable to contracting that need to be considered by the Audit Committee.
· robust selection process for preferred suppliers/contractors/tenders, including compliance with Code of Conduct and Conflict of Interest policies.
· suitably qualified and independent personnel to sit on the Selection Panel.
· designated person (i.e. Internal or Probity Auditor) to review Contract process to ensure compliance with Council policy.
· robust evaluation process both during the selection process and throughout the term of the contract.
· Clear and instructive policy on Contracting process readily available to all relevant employees.
Whilst Councils may collect their waste they may dispose of it in a “privately owned” waste disposal site. In rural areas, where they may be no alternative disposal sites in the short term, if a privately owned waste disposal site fails then the local Councils could inherit the liability. The Audit Committee needs to consider whether there is adequate contract documentation to minimise this risk to Council.