The NSW Audit Office has released its annual Financial Audit Report of the state’s local government sector, declaring that $1 billion in council water supply infrastructure funding is required to meet agreed service levels for rural and regional communities.
The Auditor-General also found that fewer than half of the state’s councils have an AI strategy or governance framework, and many need to improve cyber security control practices.
The report, which presents key findings and recommendations from financial audits of local councils, joint organisations and county councils for the year ended 30 June 2025, states two regional and 13 rural councils that supply water reported operating losses.
“Based on council estimates, almost $1 billion is required to ensure water infrastructure continues to meet agreed service levels,” it states.
“Fifteen councils made operating losses for their water supply businesses for the year ended 30 June 2025.
“Even if councils can cover operating costs, a small customer base makes it unlikely they can generate sufficient revenue to upgrade infrastructure to councils estimates of agreed service levels.
“Fifteen councils reported operating losses for water supply businesses in 2024–25; without grant funding, 30 would have reported operating losses. Grants are the primary source of funding for water supply infrastructure managed by councils.”
The Audit Office found that financial sustainability continues to be a concern for some councils across the state. Seventeen councils reported operating losses this year and 19 had insufficient cash (not subject to external restrictions) to cover three months of general expenses. Six of the 19 councils identified as being the least liquid also incurred operating losses.
Eleven councils were found to be at heightened financial sustainability risk due to various combinations of operating losses, insufficient cash, declining populations and low capacity to generate own source revenue.
The Report also revealed that the state’s councils held $5.4 billion in local infrastructure contributions, but spending was low for some organisations.
“There were 14 councils that held more than half of LIC funds. Of these, 10 spent less than 20% of their balance in the 2024–25 financial year,” said Auditor-General Bola Oyetunji.
“Delays between collecting and spending LIC funds may indicate that infrastructure planning and delivery processes are not operating effectively. The current LIC system is particularly complex for councils experiencing significant population growth,” he said.
Capital project guidance was also found to be “outdated and inadequate”.
Of the 29 major capital projects reviewed, 14 were delayed by more than six months, and six were more than 10% over budget.
Current guidelines are more than 15 years old and do not reflect the complexity and risks of modern infrastructure delivery, the Report stated.
Internal controls and governance was an ongoing area of concern for the Office, with deficiencies identified at most councils, mainly associated with asset management, information technology and fraud control.
The Auditor-General found that most councils lack an AI strategy and governance of the technology.
“Councils are in the early stages of adopting AI. Fewer than half have a strategy or governance framework, limiting oversight and opportunities to leverage benefits and mitigate AI risks,” he said.
He said councils also have critical weaknesses in managing supply chain risks.
“Policies and processes for assessing the cyber security exposure of technology assets are inadequate, and monitoring of cyber security investments and their associated benefits is limited.”
The Audit Office report makes five recommendations – read the full 79-page report here.
