5.2 Financial Sustainability Explained
Financial sustainability focuses on the affordability of road needs over the long term, i.e. the financial sustainability of the road network in question.
Financial sustainability in the government sector requires that:
‘the Government be able to manage financial risks and financial shocks in future periods without having to introduce significant and economically or socially destabilising expenditure or revenue adjustments in those future periods. What is considered consistent with fiscal sustainability will vary depending on the strength and outlook for the economy, the structure of expenditure and revenue of the budget, the outlook for the State’s credit rating, demographic and social trends that will affect the budget, and the nature of financial risks faced by the Government at any given time.’ (LGI 2006).
Effectively, a financial sustainability assessment involves a comparison of an agency’s long-term financial capacity with its long-term financial requirements. An agency’s financial capacity means the sum total of the financial resources (both operating and capital) that the agency can mobilise through its (present and prospective) revenue-raising and financing policies. An agency’s financial requirements means the sum total of the spending (both operating and capital) that is necessary by the agency to meet both its present statutory obligations and any expected additional functions, spending pressures and financial shocks.
At the heart of financial sustainability is the principle that the needs of the current generation are met without compromising the needs of future generations. In the current context, financial sustainability focuses on the affordability of the road needs of the organisation in the long-term (IPWEA 2015b). This principle can be applied to the organisation’s AMP, i.e. comparison of the organisation’s asset management requirements with its funding capacity (ability to raise revenues from current and future sources). The financial sustainability of the organisation is measured in terms of whether its infrastructure and financial capital can be maintained over the long term.
If the agency’s long-term finances are indeed sustainable, then disruptive or unforeseen rates/tax increases or spending cuts can be avoided, the taxation burden will be fairly shared between current and future taxpayers and the stability or predictability of government taxes and charges will not be at risk.