IPART will review its method for estimating the local government discount rate, which is the rate used for discounting future cash flows when setting contribution charges using an NPV approach. The scope of this review does not extend to potential future changes to contributions plans, the NPV framework or the IPART WACC method.
In undertaking the review, IPART will:
- consider potential changes to its existing methodology for calculating the local government discount rate (which we recommend councils apply when setting contributions using an NPV approach)
- in particular, consider whether it is appropriate to refer to the cost of equity in determining a local government discount rate, including
- the nature of the risks faced by a council in providing local infrastructure
- a council’s opportunity cost of using retained earnings to fund local infrastructure
- constraints on a council’s ability to directly raise equity funding
- consider whether councils are actually able to reinvest their contributions balances at the discount rate specified by the methodology
- consider potential proxy firms with a known cost of capital undertaking similar activities to council provision of local infrastructure
- consider whether the discount rate should be specified on a pre-tax or post-tax basis
- have regard to any differences in risk level faced by councils outside of Western Sydney growth areas in providing local infrastructure
- have regard to any impact of the discount rate on the timeliness of local infrastructure provision and the feasibility of housing development
- have regard to any other matters it considers relevant.
This review will require broad consultation with the local government sector and other stakeholders to inform IPART’s findings. We will consult publicly, and consultation may occur in the form of informal discussions with stakeholders, public workshops, and a publicly released issues paper and draft report.
IPART will aim to publish a final report within 9 months of self-initiating the review. Depending on the outcomes of the final report, adjustments may then subsequently be made to IPART’s method for calculating the local government discount rate.