Funding and Capitalising Council-Owned Corporations

Introduction

Welcome to the third article in our series on council-owned corporations. This article provides practical guidance for councils on funding strategies, compliance considerations, dividend management, and transparency when establishing or managing a council-owned corporation.

Council-owned corporations allow councils to deliver commercial projects, infrastructure, and services with greater flexibility than traditional council structures. A key factor in their success is ensuring they are appropriately funded and capitalised. Without clear financial structures and governance frameworks, even well-managed companies can struggle to achieve operational sustainability and deliver value to both the council and the community.

1. Options for Funding and Capitalisation

Council-owned corporations can be funded through a combination of equity and debt, depending on the company’s purpose, risk profile, and strategic objectives.

Equity Funding

Councils often provide initial equity to reflect ownership and maintain control. Equity contributions may include:

• Cash injections
• Transfers of council-owned assets
• Assignment of service agreements

Documenting the value of these contributions is critical for financial management and reporting. Councils should consider a Funding Deed, a legally binding agreement detailing:

• Conditions for the use of funds
• Reporting requirements
• Performance indicators
• Security arrangements
• Repayment obligations if the funding is a loan rather than a grant

Debt Funding

Debt is commonly used for larger projects or ongoing operations. Options include:

• Bank loans or commercial debt facilities secured against the corporation’s assets or revenue
• Government grants or infrastructure funding, such as Queensland’s Local Government Grants and Subsidies Program (LGGSP) or debt financing via Queensland Treasury Corporation (QTC)

Before finalising funding, councils should conduct a comprehensive funding needs assessment to balance short-term operational needs with long-term strategic goals. It is also important to distinguish between funding intended for commercial purposes and funding for community service delivery, as this may affect compliance and reporting obligations.

Councils should also consider aligning funding arrangements with policies such as:

• Financial Management & Reporting Policy
• Treasury & Investment Policy
• Procurement & Contracting Policy

2. Compliance with Local Government Borrowing Rules

Council-owned corporations operate under the Corporations Act 2001 and the relevant local government legislation in each state and territory. Councils must ensure any loans to a council-owned corporation comply with statutory borrowing limits and approvals, which may include:

• Council resolutions
• internal authorisations
• Treasurer or regulatory consent

Loans may constitute financial accommodation and trigger additional approval requirements. Embedding borrowing limits in the corporation’s constitution or funding deeds helps prevent the corporation’s board from incurring debt outside approved parameters.

Queensland example: Under the Local Government Act 2009 and associated regulation, councils must maintain a Debt Policy outlining borrowing plans, debt servicing strategies, and compliance measures. Borrowings via QTC require approval from the Queensland Treasurer.

Policy Alignment: The council’s Treasury & Investment Policy, Audit & Assurance Policy, and Financial Management & Reporting Policy provide governance frameworks to support compliance, risk management, and internal audit oversight of borrowing and funding arrangements.

3. Managing Dividends and Returns to Council

Council-owned corporations may generate profits or surpluses that can be returned to the council when they are financially self-sufficient. Managing these returns effectively is critical to balancing commercial sustainability with community value. Councils should develop a clear policy on whether profits will be reinvested in the company or distributed as dividends. Dividend payments typically require a recommendation from the board and approval by the council as shareholder.

It is important to consider:

• whether dividend distributions align with the council’s budgeting and long-term financial planning;
• potential tax implications for both the company and the council when dividends are paid;
• a portion of the potential dividend must be set aside to cover potential future shortfalls, to ensure the business’s long-term stability; and
• whether to reinvest profits in strategic projects, such as local infrastructure or economic development initiatives, where the council’s financial return may be indirect but still delivers community benefit.

Establishing a formal dividend policy in the company’s constitution or shareholder agreement ensures consistency and prevents ad hoc or politically influenced decisions. This approach promotes transparency and supports the sustainable operation of the company.

4. Structuring for Transparency and Accountability

Transparency is essential when a council is the shareholder of a commercial entity. Funding and capital arrangements should be structured to enable clear oversight and reporting. Councils must maintain separate accounts and financial systems for the company to distinguish commercial activity from council operations.

Regular reporting protocols should be established to ensure the corporation’s board provides timely and comprehensive updates to the council. Reports should cover financial performance, debt servicing, dividend payments, and key operational metrics. All funding agreements, loan terms, and shareholder resolutions should be documented and retained to support accountability and audit requirements.

By embedding transparency into the financial structure from the outset, councils can maintain public confidence while allowing the company to operate with commercial flexibility. Clear documentation and reporting also help the council demonstrate compliance with both the Corporations Act and local government legislation.

Conclusion

Proper funding and capitalisation are essential to the success of council-owned corporations. Councils must carefully consider how the company will be financed, how debt will be managed, how returns will flow back to the council, and how transparency will be ensured.

A thoughtful approach balances commercial independence with public accountability, enabling the company to operate efficiently while protecting council and community interests. Planning funding structures, complying with statutory borrowing requirements, and establishing clear dividend policies and reporting frameworks ensures that council-owned corporations can achieve both operational success and long-term sustainability.

Our firm regularly advises councils on funding, capitalisation, and financial governance for council-owned corporations, including structuring loans and equity contributions, ensuring compliance with local government legislation, and implementing transparent reporting and dividend arrangements. Councils considering the establishment of a new company, or reviewing an existing entity’s financial arrangements, can benefit from early legal guidance to ensure both compliance and operational success.