Introduction. Who should read this part?

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1 Introduction This part of the Asset Management Series describes the purpose and fundamental principles of effective asset management and provides a strategic framework through which agencies can achieve its benefits. The principles outlined in this part must be reflected in agencies corporate and business planning and form the basis of asset management performance. Who should read this part? This part is intended for: Chief Executive Officers and senior managers who are ultimately responsible for asset management in their agencies; and all staff in agencies who make decisions about assets. In this part, 'agency' is used to mean all departments, service agencies and statutory authorities in the Victorian public sector.

2 What is asset management about? Definition Asset management is the process of guiding the acquisition, use and disposal of assets to make the most of their service delivery potential and manage the related risks and costs over their entire life. Objectives The principal objective of asset management is to enable an agency to meet its service delivery objectives efficiently and effectively. Effective asset management also: makes the most of the service potential of assets by ensuring they are appropriately used and maintained; reduces the demand for new assets and saves money through demand management techniques and non-asset service delivery options; achieves greater value for money through economic evaluation of options that take into account life cycle and full costs, value management techniques and private sector involvement; reduces unnecessary acquisition of assets by making agencies aware of, and requiring them to pay for, the full costs of holding and using assets; and focuses attention on results by clearly assigning responsibility, accountability and reporting requirements.

3 Figure 1.1 Key activities Asset management is a continuous process covering the whole life of the asset. An agencyís asset management program should encompass all the activities illustrated above.

4 Key activities Needs analysis The starting point for asset management. Agencies must thoroughly examine the need for service and infrastructure provision and consider the full range of options for responding to it. These include both non-asset and asset solutions as well as demand management strategies and the possible role of private sector providers. Economic appraisal The second step. This is a systematic weighing up of the costs and benefits of the various asset based and non-asset based solutions identified. Value management is one technique that assists in this process. The appraisal, taken together with Government policy objectives, should lead agencies to develop recommendations that make the best use of scarce resources. Planning The essential tool for achieving service delivery objectives by means of assets. Agencies' asset management plans, decisions and activities must be fully integrated with the Government's planning processes, including departmental corporate and business plans. Risk assessment and allocation must start at the planning stage. Agencies must continue to verify service needs throughout the planning process. Budgeting Planning of funding for the asset. Assets require the commitment of funding over their entire lives ñ capital expenditure for their purchase or construction and recurrent expenditure for their ongoing maintenance and operation. The disposal value at the end of their service life must also be considered. Expenditure requirements must be covered by identified sources of funding. Pricing A determination of the charge or price for the use of an asset. It should be based on the true cost of creating, operating, maintaining and eventually disposing of the asset, and should reflect the agency's service objectives and market conditions. The true cost includes a rate of return (ie the opportunity cost of capital investment), the operating and maintenance expenditure and a depreciation allowance. Pricing may also be used as a way of managing demand.

5 Acquisition and disposal Decisions requiring thorough examination and economic appraisal. The options for acquiring assets include creating, purchasing or leasing. Seeking private sector involvement to provide assets or services required must also be considered. The options for disposal include alternative use, rental, sale, or sale and lease-back, and should be considered as part of the acquisition strategy. Recording, valuation and reporting These activities make informed decision-making possible. Agencies are accountable for the physical and financial performance of the assets they control, operate and maintain. Information about the performance and condition of an asset provided by accurate recording, valuation and reporting procedures is critical to decisions to modify, refurbish, find an alternative use for, or dispose of an asset. The maintenance of an asset register which comprises an accurate record and valuation of assets will support effective decision-making about asset utilisation. Management in use Protecting service delivery potential is a priority when making decisions about asset use and maintenance. How long an asset is useful depends on how effectively it is maintained for its purpose. Post-acquisition reviews and evaluations must be carried out periodically to verify that required outcomes are being achieved.

6 Asset management principles 1. Service delivery needs are to guide asset practices and decisions. Agencies are to undertake asset management activities within a strategic framework that is driven by program and service delivery needs. 2. Asset planning and management are to be integrated with corporate and business plans, budgetary and reporting processes. Planning, budgeting for, and reporting on assets are to be integrated with broader planning processes, both within agencies and between central and other agencies. 3. Asset management decisions are to be based on evaluations of alternatives that take into account full life cycle costs, benefits and risks of assets. Capital expenditure decisions are to be based on rigorous and documented economic appraisals of options that include financial as well as non-financial parameters. The economic appraisals should be evaluated by a party other than the proponent of the project. 4. Ownership, control, accountability and reporting requirements for assets are to be established, clearly communicated and implemented. Ownership and control of all assets are to be fully defined. Accountability and reporting requirements for both ownership and control are to be determined and clearly communicated. 5. Asset management activities are to be undertaken within an integrated Government asset management policy framework. Agency asset management is to be based on best practice in government and industry and on Government policy as reflected in the Asset Management Series.

7 The asset management checklist at the end of this part provides more details of the requirements for implementing these principles. Figure 1.2 shows diagrammatically the inter-relationship between the asset management principles. Figure 1.2 Key principles

8 Framework for an integrated approach Only by an integrated approach to asset management can agencies deliver quality services efficiently and effectively (see Figure 1.3). Agency corporate plans reflect and translate Government policy and customer needs into broad program and service strategies and priorities. These program and service strategies may be non-asset-based or assetbased. For example, some may require additional capital facilities or increased use of existing facilities, while others may involve contracting out or leasing to make them operational. Each agency determines the best mix for its operating environment, consistent with overall Government policy. The budget process involves the allocation of funds to carry out the non-asset and asset strategies. The agency business plan translates strategies and budget into annual operational plans with output measures and performance indicators. Finally, agency reports on service delivery outcomes and asset management activities provide important feedback into Government policy and corporate planning processes. Figure 1.3 An integrated approach to asset management

9 An agency's planning process must link its non-asset and asset strategies to service delivery needs and Government and administrative policy.

10 Asset management checklist Is your agency applying the asset management principles? Service focus 1. Are assets managed within a strategic framework driven by program and service delivery needs and strategies? 2. Do all asset creation, refurbishment and disposal proposals: o o identify the service capacity needs? assess other options and compare predicted service delivery outcomes with identified service needs? 3. Are performance management of assets and reporting on assets carried out in terms of service delivery potential, service delivery outcomes, continuing service delivery needs and economic viability? 4. Have asset service delivery objectives, outputs and outcomes been explicitly identified? Is the asset strategy based on the needs analysis? An integrated approach 5. Have non-asset alternatives to asset-based service provision been considered? 6. Have asset strategies been integrated with corporate and business plans? Will they achieve the objectives of these plans? 7. Are asset strategies linked to a budgetary process that integrates capital and recurrent resource allocation? 8. Are all costs, liabilities and risks incorporated in forward asset planning and budget estimates? 9. Are full costs as well as service delivery outcomes monitored and reported on as part of the regular reporting cycle? Informed decision-making 10. Are capital expenditure decisions based on rigorous and fully documented economic appraisals that take into account the full life cycle costs, benefits and risks of the asset, and financial as well as non-financial parameters? Are proposals reviewed by a party other than the originator of the proposal?

11 11. Does the agency maintain an effective asset register that provides an accurate record and valuation of assets? 12. Is the performance of assets regularly reviewed? Clear accountability and responsibility 13. Have responsibility and accountability for both ownership and control of assets been determined and communicated? 14. Are asset management responsibilities reflected in the performance agreements of the Chief Executive Officer, and in service agreements established between the Chief Executive Officer and service agencies in the portfolio? 15. Have staff been informed about their responsibilities for asset planning, pricing, recording, valuation and reporting, acquisition, management in use and disposal? Victorian Government policies 16. Are the agency s asset management policies and practices in keeping with the Asset Management Series and with best practice in government and industry?