Letter: Call for Thorough Independent Review

Filed in editorletters, Just In by October 23, 2019

To the Editor,

Four weeks ago Upper Hunter Shire Council launched its Scone Airport Re-Development Project with an Information Session at Scone Aero Club.  This project had apparently been developed secretly over the past four years.  There was no previous consultation with the airport’s 30 stakeholders (owners, lessees and operators of aircraft, airport businesses, land and hangar buildings) regarding the project’s potential to adversely impact their existing Airport operations.  The seven stakeholders who are also members of Council’s Airport Management Committee must have had significant knowledge of the project for quite some time.  It would seem though, that these stakeholders must have been sworn to secrecy by Council to avoid any opposition from the other stakeholders until it was too late for their objections to be considered.

The Information Session was a real sales spectacular, complete with an aerobatic flypast by a WWII Mustang fighter plane to set the scene for Council’s presentation.  During the presentation Council claimed that CASA may well de-register, and possibly close, Scone Airport should Council not proceed to implement the airside components of this project within the next twelve months.  An independent enquiry of CASA subsequently revealed though, that:

  • CASA will not close Scone Airport in the event that Council was to decide not to proceed with its airport re-development project; and
  • there are currently no outstanding compliance issues that would cause CASA to withdraw its approval for instrument-approach landings and departures at Scone in low visibility weather conditions.

So why is Council so hell-bent on implementing this project at any cost?  Where did the idea for it come from?  If CASA is happy with our airport as it is, why don’t we just keep it that way but improve the level of maintenance?

In the Executive Summary of its “Scone Airport Capital Expenditure Review” Council contends that its “subsidy of the airport (currently $300,000 pa and certain to increase in future) will be at least $200,000 pa higher on average over the first 3 years of the project.  But it will then be eliminated over the medium term (5 years) as the business establishes and from then on, Council will generate a surplus that can be re-invested into the airport or other services.”

I believe that this statement provides the underlying reason for Council deciding to implement this project.  It seems that it’s this compulsion to avoid subsidising the airport operations to the extent of $300,000 pa that has motivated Council to take on debt of $10.75m – and the consequent commitment to meet debt servicing costs of $600,000 pa for the next 20 years!  Pardon?  Have I missed something?  I’d better read that sentence again!  How does it make sense to avoid paying an annual subsidy of $300,000 by instead paying $600,000 pa to service new debt?

If the airport was producing even a very small surplus, I’m sure Council wouldn’t be considering this project.  Various project components, such as the Warbird “Attraction” and a plan to build ten hangar buildings (sufficient to house 100 light aircraft!) over the next six years, appear to have been included just because someone thought they looked interesting and might generate a bit of income.

Is the airport really meant to be a profit-generating enterprise?  Or is it a public service, provided to enable pilots and air travellers to land safely – and perhaps to stay for a while, enjoy our Shire and spend some money on food, fuel, aircraft servicing and accommodation?

Let’s re-visit this $300,000 pa “subsidy” figure which appears to be the core assumption on which the airport project is based – and which is simply incorrect.  The $300,000 is the amount Council says is the airport’s annual operating loss.  The figure comes from Council’s 2019/20 Airport Operating Budget which shows expected revenue of $142,739 and running costs of $432,466.  The difference between these two figures indicates a projected loss of $289,727 for the year – not quite $300,000 – but that’s where the subsidy figure comes from.

My issue is (and I am quoting from Council’s own budget figures), that the $432,466 running costs figure includes, apart from the direct running costs of mowing, line marking, weed control etc,  amounts of:

  • $163,822 for depreciation, which is not an operating expense at all and doesn’t result in any actual cost to either the airport or the Shire;
  • $58,791, for Council overhead share. The Shire’s overhead expenses are apportioned across all of Council’s activity areas.  This is not a direct airport cost though, and in fact would still have to be met from Council’s general revenue if the airport was no longer there.
  • $53,851 in interest and principal payments on the existing loan for the runway surface re-seal undertaken in 2010. This loan, of $550,000, still has another 12 years to run before the remaining $421,495 will have been repaid.  This is a legitimate airport expense though, and should remain as part of the airport running costs.

Removing these depreciation and Council overhead figures from the operating expenses total, and including the existing loan servicing costs, puts the correct projected nett operating cost (or subsidy) at $89,350 for the current financial year.  This is somewhat (70%) less than the $300,000 claimed by Council!

Council has therefore based its application to the Office of Local Government, for approval to borrow $10.75m, the most capital ever borrowed by the Shire for a single project, on a core assumption that is wrong.  This error will be compounded for each year of Council’s cash flow projections and calls into question the project’s entire financial plan.

Overall, the marketing and financial assumptions underlying this project plan are highly questionable and often quite misleading.  The tone of Council’s Capital Expenditure Review report, and every other document I have read relating to this project, is that of a sales brochure, rather than a business plan.  Why did Council feel it needed to “sell” this project to the Office of Local Government in order to gain approval to raise a loan of $10.75m – rather than simply provide a factual report?

Borrowing $10.75m for this project can be expected to have a significant negative impact on Council’s ability to borrow for other projects in the Shire as unforeseeable funding needs arise over the 20 year life of this loan.  It could also be expected to impact negatively on Council’s ability to meet the ‘Fit-For-The-Future’ criteria in the area of Financial Sustainability.

Are we to now just sit back and watch Council blithely spend $23.5m in total project funds (that is, provided construction can actually be completed within that amount), only to find in a few years that the claimed project revenue has not materialised sufficiently to meet the $600,000 pa loan payments?  What then?  Council would most likely ask IPART to allow it to levy a Special Rate Increase, so it can extract the amount needed to fund the shortfall from each and every ratepayer.

This cannot be allowed to happen!  Council must put this project on hold until its financial and marketing plans, and its risk assessment analysis, have been comprehensively reviewed by a major independent accounting firm.  A detailed business plan must then be prepared, for a modified project that this Shire can actually afford.  Only then should any construction contracts be entered into.

Regards,

Geoff Pinfold

Geoff is a resident and ratepayer of Scone. He is also a pilot, aircraft owner and owns hangers at the Scone airfield. He is a qualified engineer, with an MBA who spent most of his career building and developing businesses in the venture capital industry. When he moved to Scone he became the Director of Technical Services at Scone Council (which he jokingly says was at the turn of the century) and the airport was part of his remit in that role.

Response: Letter: GM Criticises Pinfold’s Letter.

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