In our last update, we discussed recent regulatory changes to provide Local Government Authorities with more flexibility in procurement and contracting during the COVID-19 pandemic, including increasing the procurement threshold from $150,000 to $250,000. Here we take a look at the most recent developments, including the Auditor General's report which provides a timely reminder as to the proper administration of contracts and procurement.

Auditor General's report into contract extensions and variations

On 4 May 2020, the Auditor General released a report on the findings of her investigation into whether Local Government Authorities adequately managed extensions and variations to their contracts, and whether they maintained comprehensive contract registers (Report). Of the eight Local Government Authorities audited, the audit concluded:

• Overall requirement for most Local Government Authorities to enhance their contracting and procurement policies with comprehensive guidance to ensure regulatory compliance;
• Overall finding that most Local Government Authorities' contract registers lacked key information essential to effective monitoring of contractual obligations.

The Report revealed a common lack of appropriate guidance for staff to correctly and consistently process extensions and variations. The Report also reiterated the requirement to maintain accurate contract registers or databases containing all key contract details, to effectively manage contract extensions and variations. This is critical to ensuring Local Government Authorities satisfy their financial reporting obligations.

The Auditor General also expressed concern that contracts were being extended in some cases with no clear indication of contractor performance having been reviewed prior to the grant of the extension.

The audit recommended that all Local Government Authorities:

• Ensure their policies and procedures include comprehensive guidance to staff on how to record essential contract information and manage contract extensions and variations claims;
• Establish delegated authorisation limits for the approval of contract extensions and variations claims;
• Ensure comprehensive registers of all contracts are maintained including all the key information relating to contracts (the level of information included will depend on the significance, number and complexity of the contractual arrangement);
• Ensure records of key decisions are retained and are readily available;
• Ensure that timely document reviews of contractor performance are conducted prior to exercising contract extension options;
• Ensure there is adequate documentation describing the nature and reasons for variations (i.e. associated costs, time and scope implications); and
• Ensure the approval of all contract extensions and variations is in accordance with approved delegations and contract processes.

Given the State Government's recent changes to provide for flexibility in procurement and contracting, and the new short-term loan facility, we expect to see more scrutiny on Local Government Authorities' procurement and contracting going forward. It will be up to each local government to ensure compliance with these recommendations.

To ensure regulatory compliance, we recommend all Local Governments consider the Report and their legislative obligations, and review their policies, procedures and contract registers in this context. Please contact us for advice and assistance on this.

Short-term lending facility

Many Local Government Authorities have seen a significant reduction in their revenue due to containment measures introduced as a result of the pandemic. Additionally, many Local Government Authorities are offering relief to ratepayers and economic stimulus subsidies to help mitigate the effects of COVID-19. Consequently, many Local Government Authorities' forecasted cash flows for the 2020/21 financial year will be negatively impacted.

To assist with liquidity during the COVID-19 pandemic, on 7 May 2020, the State Government announced the creation of a new short-term lending facility for Local Government Authorities and Universities. The new loan facility complements the removal of restrictions passed by the State Government last month and provides local governments with additional flexibility in their responses to the pandemic.

According to the Government media statement, loans will be available by application to Western Australian Treasury Corporation (Treasury), with applications opening on 1 June 2020. While the State Government has not yet released a test or eligibility criteria, it has stated that eligibility will require Local Government Authority applicants to demonstrate the impact COVID-19 has had, and is expected to have, on forecast cash flows for 2020-21.

We understand that, while Local Government Authorities are not limited in the amount they can borrow through Treasury, applications for loans will be assessed according to the borrower's ability to pay, which factors in revenue streams (i.e. rates, service charges and Developer Contribution Plans).

In terms of operation, we presume that the short-term loans will operate in the same manner as existing Treasury short-term liquidity lending. Under existing short-term liquidity lending:

• Applicants may borrow for terms as short as one day to a maximum of one year;
• Interest rates are determined at the outset of the loan; and
• Interest is payable with the principal on maturity.

We will provide further updates on the proposed operation of the new short-term lending facility as more information becomes available.

Local Government (COVID-19 Response) Order 2020

The Minister for Local Government's recent Local Government (COVID-19 Response) Order 2020 (Order) provides for a number of measures to assist Local Government Authorities and their ratepayers during the pandemic.

In announcing the Order, Minister Templeman encouraged Local Government Authorities to 'adopt a financial hardship policy [to] address the manner in which the local government will deal with financial hardship that may be suffered by ratepayers …'.

The Order provides that:

• Persons experiencing financial hardship due to COVID-19 will not be charged interest in the 2020/21 financial year;
• For persons not experiencing hardship, the interest rate will be capped at 8% (a reduction from the 11% capped in the Local Government (Financial Management) Regulations 1996);
• Persons experiencing financial hardship must not be charged for paying for rates or charges in instalments (ordinarily, Local Government Authorities may charge up to the capped 5.5% for paying in instalments);
• In the event the Local Government Authorities do not have a hardship policy, the ratepayers must not be charged more than 3% for paying for rates or charges in instalments;
• In preparing the annual budget, Local Government Authorities are to have regard to the consequences of the COVID-19 pandemic;
• In respect of differential interest rates, Local Government Authorities that freeze their rates in the dollar at or below those imposed in 2019/20 will not be required to obtain ministerial approval if they obtained approval in the previous year; and
• The required yield from the general rate for the 2020/21 financial year is reduced to not less than 80% of the budget deficiency (ordinarily the yield is required to be 90% to 110% of estimated budget deficiency).

We recommend Local Government Authorities with existing hardship policies revisit those policies in the context of the COVID-19 pandemic. In the context of the Order, we strongly encourage all Local Government Authorities to adopt a hardship policy as the existence of a policy will have an impact on revenue going forward.