Commonwealth Grants Commission

COMMONWEALTH GRANTS COMMISSION

Report on Indian Ocean Territories 1999

CANBERRA O Commonwealth of Australia 1999

ISBN 0642 42752 6

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Printed by CanPrint Communications Pty Limited, Canberra. The Hon. John Fahey MP Minister for Finance and Administration Parliament House CANBERRA ACT 2600

Dear Minister

As Members of the Commonwealth Grants Commission appointed under the Commonwealth Grants Commission Act 1973, we respond in this report to terms of reference in your letter of 24 May 1999. The report provides advice on the appropriate level of funding for the Indian Ocean Territories in 2000-01 and how that level of funding might be adjusted annually.

A summary of our response to the terms of reference is at the front of the report.

Yours sincerely

A G Morris, Chairman

K W Wiltshire AO, Member

L J Early PSM, Member

R J Searle Secretary 16 December 1999 CONTENTS

Terms of Reference xiii xvii Overview and Response to the Terms of Reference xvii Comparable Communities xvii The Levels of Services xix Infrastructure xx Revenue Raising Capacities xx Additional Net Operating Expenditure Required in 1998-99 xxi Indian Ocean Territories Operating Expenses for 2000-01 xxi The Mechanisms for Updating Future Funding Levels

Chapter

1. Introduction 1

The Task 1 Our Approach 2 Comparable Communities 2 Services, Infrastructure and Revenue Raising 3 Expenditure Requirement in 1998-99 for Services 3 Expenditure on Infrastructure in 2000-01 4 Local Government Grants 4 Expenditure for 2000-01 and Beyond 4 The Report 5 The Inquiry Processes 6 Acknowledgments 7

v 2. The Indian Ocean Territories 8

The Territories 8 Cocos (Keeling) Islands 8 Christmas Island 11 The Indian Ocean Territories’ Economies 12 The Cocos (Keeling) Islands 12 Christmas Island 14 Cost of Living 17 Published Data 17 Freight Costs 17 Commonwealth Policy 18 Historical Development 18 Commonwealth Policies and Practices on the IOTs in the 1990s 20 Present Commonwealth Policy Objectives 20 Political, Legislative and Administrative Arrangements 21 Current Political Representation 21 Present Legislative Framework 21 Administrative Arrangements 23 Service Delivery Arrangements 24 Funding Arrangements 27

3. Governance 30

Legislative Framework 30 Mainstreaming 32 Role of the Shires 32 Department of Transport and Regional Services Administrative Arrangements 33 Service Delivery Agreements (SDAs) 34 Other Service Delivery Arrangements 35 Consultation 37 Other Commonwealth Policy Objectives 38 Accountability and Transparency 39 Conclusions 40

vi 4. Alignment With Comparable Communities 41

What is Meant by Alignment? 42 Views of Commonwealth Agencies 42 Other Views 43 Conclusions 43 What are Comparable Communities? 44 Selection of Comparable Remote Communities 46 Territories Office — Perth 46 Other Views 48 The Commission’s View 49 The Approach to Selecting Comparable Communities 50 Expenditure Needed for and Revenue Capacity of the Indian Ocean Territories 50

5. Commonwealth Services 52

Air Services 52 Shipping Service 57 Postal Services 61 Employment And Social Security — Centrelink Services 62 Telecommunications 65 Broadcasting 68 Immigration 69 Customs 73 Quarantine Services 75 Fisheries Management 77 Meteorology 79 Other Commonwealth Services 80 Conclusions 80 Comparable Communities 80 Expenditure Adjustments 80

vii 6. State-Type Services The Cocos (Keeling) Islands 83

Introduction 83 School Education (including Pre-School Education) 84 Vocational Education and Training (VET) 91 Health Services 92 Police 100 Administration of Justice 102 Legal Aid 104 Corrective Services 105 Public Safety and Emergency Services 106 Welfare Services 107 Public (Welfare) Housing 110 Culture and Recreation 114 National Park Management 116 Environment Protection 118 Power Supply 121 Water Supply 124 Sewerage Services 127 Public Transport 128 Port and Harbour Services 129 Roads 131 Tourism 133 Services to Other Industries 134 Land Administration 136 Other Services 137 Services Not Provided 137 Summary of Comparable Communities and Recommended Additional Expenditures 139 Comparable Communities 139 Required Additional Expenditure 140

viii 7. State-Type Services Christmas Island 143

Introduction 143 School Education (including Pre-School Education) 144 Vocational Education and Training 149 Health 151 Police 159 Administration of Justice 162 Legal Aid 164 Corrective Services 164 Public Safety and Emergency Services 166 Welfare Services 167 Public (Welfare) Housing 171 Culture and Recreation 174 National Park Management 176 Environment Protection 179 Power Supply 181 Water Supply 184 Sewerage Services 186 Public Transport 188 Port and Harbour Services 189 Roads 192 Tourism 195 Services to Other Industries 197 Land Administration 201 Other Services 202 Services Not Provided 203 Summary of Comparable Communities and Recommended Additional Expenditures 203 Comparable Communities 203 Required Additional Expenditure 205

ix 8. Commonwealth Infrastructure On The Indian Ocean Territories 206

Introduction 206 The Department of Transport and Regional Services Infrastructure 207 Achievements 207 Projects Proposed and Budgeted For 211 Projects Proposed But Not Yet Budgeted For 214 Evaluation Of Infrastructure Proposals 218 The Approach 218 The Evaluation Criteria 219 Applying The Criteria 220 The Costings 221 Evaluation of Infrastructure Proposals — The Cocos (Keeling) Islands 221 Port and Marine 221 Civil Works and Roads 223 Water Supply 224 Power Supply 225 Sewerage 225 Other Commonwealth and Shire Property 226 Health 228 Education 228 Summary 228 Evaluation of Infrastructure Proposals — Christmas Island 229 Port and Marine 229 Housing 231 Civil Works and Roads 231 Other Commonwealth and Shire Property 233 Health 234 Water Supply 234 Power Supply 234 Education 236 Airport 236 Sewerage 237 Broadcasting and Communications 238 Rockfall 238 Summary 239 The Department of Transport and Regional Services Infrastructure Management System 239 The Role of Canberra 240 The Role of the Islands’ Administrations 240 Asset Management and Maintenance 241 Infrastructure Provided by Other Commonwealth Agencies 242

x 9. Capital Transactions and their Impacts on Budgets 243

Introduction 243 The Depreciation of Present Assets 244 The Asset Registers 245 The Value of the Assets 245 The Depreciation Rates 245 Estimated Depreciation Expenses 246 Asset Repairs and Maintenance 247 Impact of Future Capital Expenditure 248 Conclusions 252

10. Government Revenue Capacity 253

Commonwealth Taxes and Charges 254 State-Type Government Taxes and Charges 256 The Cocos (Keeling) Islands 257 Christmas Island 259 Indian Ocean Territories and Tax Reform 261 Section 31 Revenues 262 Cocos (Keeling) Islands 262 Christmas Island 263 Local Government 264 Summary and Conclusions 265 Commonwealth Taxes and Charges 265 State-Type Taxes and Charges 266 Conclusion 266

xi 11. Local Government Grants 267

Local Government Services and Revenues 268 The Cocos (Keeling) Islands 268 Christmas Island 269 Commonwealth Funding of Local Government Services 270 The Approach 271 Local Government General Purpose and Identified Local Roads Grants 271 The WALGGC Methods – General Purpose Grants 272 The WALGGC methods — Identified Roads Grants 275 Comparisons of General Revenue and Identified Roads Grants 276 Conclusions 279 Specific Purpose Grants 280 Roads Grants 280 Other Specific Purpose Grants 280 Conclusions 283 Funding for Non-Local Government Purposes 283 Conclusions 283

12. Funding for the Indian Ocean Territories: Operating Expenses for 2000-01 and Beyond 284

The Terms of Reference 284 What is Meant by Updating Funding Levels? 285 Views of DOTRS and DOFA 285 Commission’s View 286 The Base — 1998-99 288 The Appropriate Level Of Gross Operating Expenditure for DOTRS Activities In 1998-99 289 Revenue Raising Capacity 292 DOTRS Expenditure Requirements and Revenue Capacity For 1998-99 293 The Appropriate Level of Operating Expenditure by Commonwealth Agencies Other than DOTRS, 1998-99 294 Updating Mechanisms 294 DOTRS Services and Grants 294 Agencies Other than DOTRS 298 In Summary 298 Expenditure for 2000-01 300 Conclusion 301

xii Attachment

A Commission Activities 302 B Inquiry Documents 305 C A Set of Accounts 308 D Depreciation Calculations 316 E Updating Mechanisms and Estimation Processes to Derive 322 Operating Expenses for the Indian Ocean Territories for 2000-01 and Beyond

Acronyms 333

xiii TERMS OF REFERENCE

REVIEW OF FUNDING FOR THE INDIAN OCEAN TERRITORIES

24 May 1999

The Chairman Commonwealth Grants Commission Cypress Court 5 Torrens Street CANBERRA ACT 2601

Dear Mr Rye

I am writing to provide the Commonwealth Grants Commission with terms of reference to inquire into the financing of works and services on the Indian Ocean Territories, and to recommend an appropriate level of funding for those Territories in 2000-2001. The Government’s objective is to align as far as practical conditions and standards in the Territories with those in comparable communities in the rest of Australia.

In undertaking its inquiries, the Commission should note the conclusion of the studies undertaken by the Bureau of Transport Economics in December 1998, including that current economic activity indicates that Christmas Island and the Cocos (Keeling) Islands are economically sustainable in the long term only with significant Commonwealth funding.

The terms of reference are as follows:

Pursuant to section 16D of the Commonwealth Grants Commission Act 1973, I ask the Commission, by 16 December 1999 at the latest, to inquire into and make recommendations on:

(i) what other Australian communities are comparable, in terms of service provision needs, with those of the Indian Ocean Territories;

(ii) what range and level of services, grants and infrastructure are provided in or for those communities;

(iii) what it would cost to provide similar services, grants and infrastructure for the Indian Ocean Territories in 2000-2001; and

(iv) how these funding levels could be updated annually.

xiii Terms of Reference

.0 Specifically, the Commission should, to the extent possible within the timeframe and limits of data availability:

(i) identify an appropriate group of communities with similar government service requirements for one or more services, that could be used as the standards of comparison on which to base the range and level of services, grants and infrastructure to be provided on the Territories;

(ii) calculate the level of expenditure required to provide the standard services in each Territory, or jointly in both where that is the current method of provision;

(iii) calculate the capacity of the Commonwealth or other governments to raise revenues in each Territory;

(iv) recommend the appropriate amount of funding for the Territories needed to provide comparable services, taking into account the available revenue capacity to fund those services;

(v) consider and report on whether the present methods for determining local government general revenue, roads and specific purpose funding provide an outcome for the Territories broadly in line with that applying in comparable mainland local authorities;

(vi) calculate the funding required in total, as well as the amount that should be provided in 2000-2001, to ensure that each Territory’s infrastructure is at a standard similar to that found in comparable communities in the rest of Australia; and

(vii) recommend any funding for special needs that is required to bring the Territories up to the standard of comparable communities in the rest of Australia.

.1 The Commission should also report on ongoing mechanisms for providing appropriate levels of funding — for services, grants and infrastructure — for the Territories beyond 2000-01.

The Department of Transport and Regional Services has undertaken to provide the information it has in a timely manner.

xiv Terms of Reference

I have provided a copy of this correspondence to the Treasurer, the Minister for Transport and Regional Services, the Minister for Regional Services, Territories and Local Government and the Shire Presidents of the Christmas Island and Cocos (Keeling) Islands Shire Councils.

Yours sincerely

JOHN FAHEY

xv OVERVIEW AND RESPONSE TO THE TERMS OF REFERENCE

.0 In summary, the terms of reference for this inquiry asked the Commission to report on:

(i) what other Australian communities are comparable, in terms of their needs for services and infrastructure, with the Indian Ocean Territories;

(ii) what level of expenditure would be required in 2000-01 to provide the IOT communities with services, grants and infrastructure that aligned with those in the comparable communities;

(iii) how this amount could be updated annually in a way that does not require annual consideration by Government; and

(iv) the capacity of the Commonwealth and other governments to raise revenues in each Territory.

Comparable Communities

.1 No communities in Australia are strictly comparable in every respect to the Indian Ocean Territories (IOTs). They are unique in terms of their governance arrangements, physical location, and social and cultural composition. However, there are communities that, in terms of service delivery requirements, can provide a guide to assessing standards of government services, revenue raising efforts and levels of infrastructure that should apply.

.2 Expenditure comparisons. Comparable standards are not set by capital cities or large shires. We have concluded that aligning services on the IOTs with those in comparable communities means that the range and standard of services should be similar to those provided in remote Australian communities with similar characteristics, particularly demographic characteristics or service provision needs, recognising any special needs of the IOTs. As a result, the communities we used in establishing the required standards of government services differed:

 between the two Territories — because of differences between them in population characteristics and service delivery needs; and

 between different types of services — because different characteristics of population and service delivery needs apply to each service. For example, two communities of similar size might have very different ethnic mixes, age structures and wealth, all of which cause differences in service needs and make comparisons difficult.

xvii Overview and Response to the Terms of Reference

.3 Revenue comparisons. For revenue comparisons, the community used was dictated by the tax being assessed. Commonwealth taxes are generally applied to the whole Australian population and the standard Australian tax rates and collection efficiency thus give a natural point of comparison. The IOTs can legitimately be compared with the whole of Australia

.4 State-type1 taxes are applied uniformly to the whole of a State’s population. Because Western Australia tax rates and concession arrangements apply in the Territories, Western Australia was the comparable community used for whole-of-State tax comparisons.

.5 Infrastructure project evaluations. When looking at infrastructure proposals for the Territories, we had limited information on comparable communities. Commission work in examining State finances, however, gives it a working knowledge of infrastructure in small remote communities on the mainland and this formed the basis for our judgement on appropriate standards. The assessments were done on a project basis that took account of health and safety, protection of the environment, public interest and economic benefit.

.6 Local Government Grants. The adequacy of annual grants to the IOT Shires was addressed by examining the methods used by the Western Australian agencies recommending those grants. Their comparisons are with Western Australian Shires that have similarities with those on the IOTs, including in terms of size and remoteness.

The Levels of Services

.7 In calculating the expenditure required in 2000-01 to align services with those in comparable communities, we differentiated between services provided by the different levels of government on the mainland. Because it was the last year for which data are available, our initial comparisons used 1998-99 information.

.8 Commonwealth-type services. We have concluded that the level of Commonwealth-type services on the IOTs is at the standard found in comparable mainland communities. We do not think that any increase in the level of expenditure on Commonwealth-type services is necessary on either Territory.

.9 State-type services. There are a few areas on both Territories where we have concluded that State-type services are below the standard provided in comparable communities on the mainland. Additional expenditure is necessary in those areas of service provision if they are to align with comparable communities on the mainland.

.10 On the Cocos (Keeling) Islands, the services we think need additional expenditure are: vocational education and training; health (carer and patient support, and specialist services); welfare services (including a social worker); environment protection; assistance for industry; and grants for cultural and recreation services, and non-government welfare activities. We estimate the additional expenditure required on these functions to be $720 000 at 1998-99 prices.

1 In this report, the word State(s) includes the Australian Capital Territory and the Northern Territory unless the context indicates otherwise.

xviii Overview and Response to the Terms of Reference

.11 On Christmas Island, we think additional expenditure is needed for: vocational education and training; health (carer and patient support, and specialist services); welfare services; assistance for industry; and grants for cultural and recreation services, and non-government welfare activities. We estimate the additional expenditure required on these functions to be $900 000 at 1998-99 prices.

.12 Asset management and development. For depreciation and the repairs and maintenance of assets, we have concluded that more needs to be spent on the Cocos (Keeling) Islands in both areas, and that, on Christmas Island, the depreciation expense has been overestimated but more needs to be spent on repairs and maintenance. Based on our analysis of 1998-99 expenditures, we estimate that the depreciation expense should be increased by $380 000 on the Cocos (Keeling) Islands, but reduced by $1.440 million on Christmas Island. Repairs and maintenance expenditure needs to be increased by $380 000 on Cocos and $1.400 million on Christmas Island.

.13 Local government funding. We did not examine the levels of local government services in detail. Instead, we looked at the system by which the Shires on the IOTs receive Commonwealth and State-type assistance, and assessed whether this gave them the capacity to provide the same levels of services as are provided by local government on the mainland. We concluded that the funding the IOT Shires received did not have to be adjusted to align it with that received by comparable communities on the mainland.

Infrastructure

.14 We have identified a number of capital works projects in both Territories that are required as a matter of priority. On the Cocos (Keeling) Islands, the most important are the commencement of the marine facility at Rumah Baru, the water, power and sewerage projects on Home Island and the work required at fuel facilities on both Home Island and West Island. On Christmas Island, the projects with highest priority are the provision of welfare housing at Homeswest standards, separation of the sewerage and storm water systems, projects aimed at improving safety at the wharf, and the replacement and reconditioning of the water supply infrastructure.

.15 We have concluded that $88.930 million in capital works expenditure is necessary on the IOTs over the next five years — $26.680 million on Cocos and $62.250 million on Christmas Island. However, we believe that these works can all be funded from appropriations from earlier years that have not yet been spent, and from depreciation that will accumulate on IOT assets. There should be no need for further equity injections in the next five years.

Revenue Raising Capacities

.16 Commonwealth revenues. Except for wholesale sales tax, excise duties and customs duties, which are not applied, all Commonwealth taxes and charges are levied on the IOTs at mainland rates. With these exceptions, which are the result of Commonwealth policies, Commonwealth taxes are raised at the same level as those that apply on the mainland.

xix Overview and Response to the Terms of Reference

.17 State-type taxes. Except for petroleum taxes (which are levied by the Commonwealth on behalf of the States), all State-type taxes are levied on the IOTs, and Western Australian rates of tax are applied. We have concluded that there is very little capacity to raise revenue on the IOTs from petroleum taxes. Because State taxes are levied at the same rate across a State, and because Western Australian State tax rates and concessions are applied, we have concluded that, compared with remote communities in Western Australia, the residents of the IOTs are paying appropriate levels of tax.

.18 State-type charges for services. Electricity and sewerage charges on the IOTs are at the same rates as they are in remote Western Australian communities. However, although there is a connection fee that is the same as that in Western Australia, there are no charges levied for water consumption. On the Cocos (Keeling) Islands, a consumption charge is to be introduced on 1 January 2000 at the rates applicable in remote communities in Western Australia, but there are currently no plans to do so on Christmas Island. We have estimated that an additional $40 000 will be raised from this source of revenue on Cocos in 2000-01, and that an additional $200 000 could be raised on Christmas Island. This charge should be introduced on Christmas Island.

.19 Other user charges levied by the Commonwealth apply to housing rents (for both welfare housing and employees), airport charges and some health services. These are at levels that would be expected in small remote communities on the mainland.

.20 The housing rents charged by the Shire of Cocos (Keeling) Islands for their tenants that would not qualify for welfare housing are too low, and should be increased. Rents charged to tenants that would otherwise qualify for welfare housing are probably also too low, and the Shire should review its rental policy for these tenants to bring it into line with that of Homeswest. Rental arrangements matching those of Homeswest should apply and the Commonwealth should match the general arrangements of the Commonwealth State Housing Agreement and subsidise the Shire, as the provider of welfare housing, as if it were a State housing authority.

Additional Net Operating Expenditure Required in 1998-99

.21 If the Government’s objective of aligning services with those in comparable remote communities is to be achieved, we think it is necessary for both DOTRS and Parks Australia to increase expenditure on services on the IOTs. The suggested increase in DOTRS funding is shown in Table 1.

Table 1 ADDITIONAL NET OPERATING EXPENDITURE REQUIRED FOR INDIAN OCEAN TERRITORIES, DEPARTMENT OF TRANSPORT AND REGIONAL SERVICES, 1998-99

xx Overview and Response to the Terms of Reference

The Cocos (Keeling) Christmas Island Total Islands $m $m $m Gross Expenditure 18.046 40.389 54.435 Less Section 31 Revenue 0.884 5.470 6.354 Net Operating Expenditure 17.162 34.919 52.081 Variations Services +0.720 +0.900 +1.620 Depreciation +0.380 -1.440 -1.060 Repairs and Maintenance +0.380 +1.400 +1.780 Water Charges -0.040 -0.200 -0.240 Assessed Net Operating Expenditure 18.602 35.579 54.181 Required Increase in Expenditure +1.440 +0.660 +2.100 Note: Tables throughout this report may not add due to rounding.

.22 The increase in expenditure by Parks Australia should be a one-off $1.0 million for 2000-01 for Christmas Island to cover the cost of eradicating crazy ants.

Indian Ocean Territories Operating Expenses for 2000-01

.23 Because of data limitations, the actual level of expenditure for the IOTs and related revenues for 1998-99 were varied by estimates of what it would have cost to provide comparable services for the IOTs in that year. The net estimated costs (or operating results) were then updated to obtain estimates of the required levels of expenditure for 2000-01. We concluded that the required levels of expenditures were $19.987 million for the Cocos (Keeling) Islands and $38.128 for Christmas Island, a total of $58.115 million for the IOTs.

The Mechanisms for Updating Future Funding Levels

.24 For the period beyond 2000-01, different approaches are required to decide funding levels for different elements of IOT funding.

.25 Services — operating expenditure. The mechanisms for updating expenditures on services (including depreciation and asset maintenance) require determination of a base, and an annual adjustment mechanism for each type of expenditure within that base. The components of the base were determined for 1998-99. The adjustment mechanisms we propose are as follows.

(i) Normal Commonwealth budget processes2 should be used for:

 DOTRS policy advice relating to the IOTs;

2 By normal budgetary processes, we mean adjustments which will allow the level of outputs (that is the level and standards of services) to be maintained in forward years, including adjustments for price and efficiency, and new policy proposals.

xxi Overview and Response to the Terms of Reference

 DOTRS depreciation associated with IOT assets;

 Commonwealth services provided direct by DOTRS; and

 Commonwealth services provided by other Commonwealth agencies.

(ii) For service delivery agreements, contracts and other agreements, the negotiated price (preferably after tendering or other market testing) for the year under consideration should be used;

(iii) For DOTRS expenditures on non-SDA State-type services, an index that takes account of changes in IOT populations, price, and State real per capita expenditure, should apply;

(iv) For Section 31 revenues, an index that takes account of changes in IOT population and Western Australian rates of user charges should be used;

(v) For grants to the Shires, the grants determined annually by the Western Australian Local Government Grants Commission and the Western Australian Department of Main Roads should be applied; and

(vi) For IOT revenues paid into Commonwealth Consolidated Revenue, normal budget processes should be used.