As part of the consultation process on the proposed new Financial and Prudential Standards, the Aged Care Quality and Safety Commission has asked for submissions, with aged care benchmarking firm StewartBrown and peak body Ageing Australia among those making contributions that include much feedback given to the new liquidity standard.
In a LinkedIn post last Thursday, Ageing Australia chief executive officer Tom Symondson wrote they had been been working hard to achieve changes in the proposed liquidity standard.
In particular, he raised the point that the standard needs to be proportional to the risk, or it runs the risk of providers stopping building – or never starting – because the prposed liquidity standard made the project unviable, or tied up so much cash they couldn’t afford to progress.
Ageing Australia’s submission to the quality commission was made public on 17 March and references StewartBrown’s modelling that the proposed standard would increase the amount of liquid cash assets needing to be held without substantial benefit.
Under the proposed new Financial and Prudential Standards, a providers’ minimum liquidity amount will be equivalent to 35 per cent of their cash expenses for the previous quarter, and 10 per cent of refundable deposit liabilities, which Ageing Australia is concerned would likely inhibit the sector’s ability to meet current and future demand of residential care.
On Friday StewartBrown gave its full support to the “development and implementation of a phased approach to risk management and financial monitoring from the quality commission as recommended by the royal commission.”
However, they also concluded that a one-size-fits-all approach would have inherent complexity, and that StewartBrown did not favour a tiered approach, as it would become subjective.
Instead, it recommends additional complimentary criteria be included, such as:
- net asset – equity – backing to support refundable loans
- current capital work in progress in the calculation
- unused line of credit in the calculation
- provision of a 12 month cash flow to forecast – operating and capital – to be updated annually together with actual movements for the previous quarter to assist the quality commission.
StewartBrown also noted that the proposed liquidity calculation settings is likely to increase the cost of capital for providers and discourage the proposed and essential planned capex for new construction in a time when investment in new builds and renewal of existing building stock is essential.
Ageing Australia also mentioned this in its submission, bringing attention to Australia’s ageing population and the necessity for this “unintended consequence” to be addressed.
StewartBrown recommended the liquidity calculation settings be amended to a sector average level, similar to the current liquidity minimum standard minimum liquidity amount.
StewartBrown’s recommended settings are 25 per cent quarterly cash expenses, 5 per cent of refundable accommodation deposit liability and 2 per cent of independent living units liability.
In its submission, Ageing Australia also recommended that the quality commission amend the proposed minimum liquidity calculation to 25 per cent of quarterly cash expenses and 5 per cent of RAD liability but recommended omitting refundable ILU and retirement village payment amounts in the calculation for the minimum liquidity standard.
The ability to submit an alternate LMS if they do not meet the above calculated requirement must also be included in the standard, StewartBrown and Ageing Australia recommended, with the latter suggesting a 12-month cash flow forecast be provided to the quality commission with actual movements for the previous quarter, or proof of their ability to maintain the minimum liquidity amount if current capital work in progress or unused line of credit are included in the amount worked out.
StewartBrown suggested the provision of cashflow statements to the commission as an alternative strategy.
This would help large providers in particular, who could have to tie up hundreds of millions of dollars to comply, Mr Symondson wrote on LinkedIn.
StewartBrown conducted a detailed modelling and analysis of the proposed new minimum liquidity guidelines for its submission, which can be found here.
The full submission by Ageing Australia can be accessed here.
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