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Debt recovery: the high stakes challenge for local government

The introduction of rate capping in Victoria is going to have a pronounced effect on councils’ bottom lines and fundamentally change the role of local government in recovering debt, according to Chairman and head of Maddocks’ government group, Mark Henry.

The Andrews’ government won power in 2014 on a platform including limiting the amount which local governments could increase council rates — known as ‘rate capping’ or ‘rate pegging’.

The policy, which will come into effect for the 2016/17 financial year, puts the onus on councils to justify rate increases above the consumer price index (CPI) to the Essential Services Commission. According to a January report in The Age, CPI was at the time running at around 2.43%, while in the 2013/14 financial year council rates increased by an average of 4.23% to around $1725.

It’s not Victoria’s first foray into rate capping; in the mid-90s the Victorian Liberal government led by Jeff Kennett introduced the policy, while also significantly reducing the number of councils from 210 to 78. The cap was removed in 1999 by the incoming Labor Government led by Steve Bracks.

Rate capping is also a hot button issue in several other states across Australia. Since the introduction of the Local Government Act in 1993, New South Wales councils who wish to raise rates beyond the cap set by the Independent Pricing and Regulatory Tribunal need to apply for a “special variation”. Rate capping is also currently being considered by a South Australian parliamentary committee while the Western Australia Labor Party took a rate capping policy to the 2013 election, but ultimately failed to win power.

Pressure of rate caps

Henry, who also supervises ML&C Collections, a debt recovery service for government that Maddocks established about 20 years ago, says the introduction of rate capping will increase pressure on local Government. Councils will not only face burdens regarding how they spend their money, but must ensure they have an efficient system for debt recovery to ensure compliance, integrity and fairness for all, Henry says.

“If rate revenues are capped than, particularly in newer municipalities which have significant infrastructure, there’s going to be potential cash flow (given a lot of councils have adopted a softer approach to recovery) and revenue issues which the councils are going to have to think about addressing in different ways,” he says.

Collecting debt from rate payers is a lot different than collecting debt in the private sector, Henry says.

“Unlike normal service providers, where you just cut off the phone or electricity, governments don’t have those sorts of options. The traditional cost recovery approaches involve issuing legal proceedings on the debtor because you recover all the costs from the debt. At the moment, most councils have reasonable recovery rates, but they can be reasonably painful for them politically.”

Henry says there are two reasons why governments are being forced into taking different approaches to debt recovery.

“The first is that the scale of costs for the Magistrates Court is very high and can often rise to either half or the total amount of the original debt,” he says. “The second is an acknowledgement that better processes are likely to improve outcomes for debtors. Increasingly, there is a sense that councils need to engage with people at an earlier level in a way which is less confrontational to achieve outcomes.”

Step in early

Early intervention is also a more effective way of recovering debt, says Henry.

“One of the issues for debt recovery at any level is that you do not let debt blow out – the larger the debt the harder it is to collect. You’ll notice that your telco provider will give you, say, two weeks and then start to chase you,” he says. “That’s because they know that once the debt gets above $2000 the recovery becomes a lot more complex than if it were $300. So they’ll invest a lot more early in that process, which traditionally government doesn’t.”

The key to early intervention is corresponding with debtors in a more proactive and cooperate way.

“The current methodology is if you get a rate notice, and then if you don’t pay, you get followed up and when you do get followed up it may be with a final notice, it’s not a direct phone call – or direct contact, which is the sort of approach adopted elsewhere.

“Local governments have always been very responsive to people calling them, they are very reasonable with debtors, but we’re seeing pressure for a lot more steps involving people being called earlier. As a rule, early to intervene leads to better payment outcomes.”

But this form of early intervention is not always logistically possible for local councils.

“If you’ve only got one or two people in your debt recovery unit, then it’s not practical for them to make a lot of phone calls to people or to respond proactively,” he says. “Usually you’re calling more reactively because you have routines that trigger those calls like final notices. Equally, the sort of investment required by councils in adopting a proactive approach may be prohibitive in an environment where your revenue is potentially frozen and there are pressures to keep employee numbers low.

“What we’re going to find with rate capping is that there will be increased pressure on local government to cut indirect and direct costs. It’s going to be a lot harder to employ people and they’re going to be more reluctant to hire contractors, so I think that they’re going to have to look at different methodologies.”

Outsourcing debt recovery

Outsourcing aspects of debt recovery and revenue management, similar to private enterprise, could help reduce costs, but comes with possible political ramifications.

“As a rule, government is very concerned that tax payers don’t interact with foreign calls centres [in debt recovery approaches] which can send out all the wrong messages. They’re very keen to be seen to be working with their stakeholders to achieve outcomes.”

But Henry says there is a space in the market for sophisticated recovery that may be able to reduce costs and provide better services.

“I expect to see either this process is outsourced with sophisticated contracts that actually have abatements, possibly around key performance indicators (KPIs) around stakeholder participation and satisfaction, recovery, and turnaround. This could ultimately deliver better outcomes. It’s about good contracting, detailed specifications and good monitoring of the contract provisions.

“I think another option is for councils to look at building internal resources across multiple municipalities.”

Communicating with citizens

But communicating with citizens and informing them of their responsibilities towards rate payments can often be easier said than done. Councils often do not have up to date personal information.

“There are also significant changes in rate payer demographics, including a lot more foreign owners of property, and as they’re often very difficult to locate and communicating with them is complex, serving them with documents is sometimes impossible and quite costly.

“There’s not really adequate legislative provisions to deal with these land owners and it is very difficult to advise them what their obligations are and what you can and can’t do in regards to paying rates.”

A more sophisticated technological approach to data retention is required, says Henry.

“You can’t pick up the phone and make a call because you don’t have the number, or no one is required to give a number and with mobiles it’s much harder to find someone’s contact number,” says Henry. “As a result it’s often very hard unless they’ve initiated contact to follow them up; it means that at least for the moment you need to write to them.

“There’s a great deal of work that needs to be done in terms of that data retention and the capacity for local government to obtain that information. But significantly it’s also about what the fields are in the system, and what materials are required to be submitted and common platforms.”

One way or another, councils in Victoria are shortly going to feel the revenue pressures of rate capping, which will put more emphasis on cash flow.

“One of the big impacts it will have is making councils maximise the amount of revenue they’ve got or the amount of revenue they’re entitled to,” says Henry. “Otherwise they’ll find they’re running deficits.”

Written by: Jacob Robinson

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The Mandarin

The Mandarin staff journalists.