Australia: Joint ventures are a smart way for local governments to beat funding constraints

It's no secret that Australian governments at all levels are finding it difficult to raise funds for critical infrastructure and other projects.

One proven way for Queensland local governments to overcome these constraints is to use the beneficial enterprise powers in the Local Government Act to joint venture with private sector companies to undertake these projects.

Joint ventures have many benefits, including the opportunity to share costs and risk. Parties also gain from the different expertise and skill sets that each brings to the project.

Private sector companies have a strong preference for joint ventures that will result in a cash flow that secures repayment of the initial cost of the development, commonly known as "securitisation".

With this in mind, local governments have much to offer the private sector in a joint venture arrangement. For instance, local governments already own land on which cash-flow businesses can be established such as mixed use developments, car-parks etc.

Government-owned land can also be used for joint venture developments that would be leased back to the government, such as construction and lease-back of commercial office buildings. Rental payments would provide the securitisation required by the private sector participant.

Local governments' acquisition powers are also a prized asset. They can facilitate the development and operation of community services such as waste treatment plants by the joint venture. In this case the waste water rates would provide the securitisation.

As with any project, risk plays a major role in determining whether a party will join a joint venture or not. This is another area where local governments have a clear advantage. In general, joint venturing with government is seen as "low risk" by the private sector. For instance, local governments bring a "government gravitas" to the other side of the joint venture in relation to default risk.

LOCAL GOVERNMENT ACT REQUIREMENTS

The Local Government Act sets out the mechanism for Queensland local governments to establish enterprises including:

• Consulting with all local government employees who may be directly affected by the beneficial enterprise;
• Compiling a beneficial enterprises register (which must be open to the public for inspection);
• Notifying the Local Government Department's chief executive (DCE) and the State's auditor general of the establishment of, and entries in, the register;
• Planning for the enterprise through the Local Government's budgetary process, including obtaining DCE approval if the investment is to be equal to or more than 10% of the Local Government's own source revenue (as defined in section 5(5) of the Local Government (Beneficial Enterprises and Business Activities) Regulation, 2010 (Qld)).

PROJECT STRUCTURES

The Local Government would not usually contract itself directly in any joint venture project. Rather it would establish a company through which the enterprise would be conducted.

The Local Government may also establish a trust or series of trusts for each separate project. Whether it is a single trust or a series will depend on the type of project, likelihood of future projects and factors such as distribution and retention of earnings and return of capital.

So long as the company and trusts are properly established, there should be no liability for them to pay income tax. From a tax perspective, they are treated in the same manner as the Local Government in its day to day business.

Company and trust structures are commonplace in private sector developments and are well understood by experienced project participants, so Local Governments' participation via these types of structures should not be an impediment in any overlying joint venture arrangements.

Several Local Governments have already used their enterprise powers to successfully joint venture with private companies and complete developments in their local areas. These include retail developments, sustainable housing and other residential projects.

In an era where governments are expected to do more with less, appropriately using these powers is a proven option for delivering "must have" projects which would otherwise remain in limbo.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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