Session 1 Asset Management and Financial Planning

Transcription

1 Session 1 Asset Management and Financial Planning Based on Australian Infrastructure Financial Management Guidelines John Howard, IPWEA NAMS.AU Project Manager Jeff Roorda & Associates AASHTO Workshops October 2013 Batman Bridge, Tasmania Session 1 Program Background to Australia s experience National direction Asset management plans Long-term financial plan Achieving financial sustainability Benefits gained 2

2 Our Terminology Me Renewal Upgrade/New Footpath Council You Preservation Capacity Sidewalk Local government 3 Australia 6 States 2 Territories (ACT & NT) 23.2 M people Road miles 100,000 Federal/State 400,000 Local Brisbane Perth 2,245 miles 4

3 Background Local Government Sector 1994 Accrual Accounting Standard Asset register Current cost values with regular revaluations Recognise and depreciate infrastructure 2000 Infrastructure needs studies Victoria & South Australia 2006 Financial sustainability studies All states and national 5 LGA South Australia Infrastructure Study 2001 Conclusions Councils now facing the renewal of assets that were constructed yrs ago Projected levels of annual renewal over the next 15yrs are almost 3 times the current level Expenditure on new assets exceeds renewal expenditure Councils currently only spending 1/3 of required funding on renewal Source LGASA Wealth of Opportunities Report

4 Australian LG Financial Sustainability Studies LGA South Australia 2005 LGSA New South Wales 2006 MAV Victoria 2006 ALGA National 2006 WALGA Western Aust 2006 LGA Queensland 2007 LGAT Tasmania NSW Financial Sustainability Report 2006 Findings 80 % of asset registers recorded at cost not indexed or revalued since Asset consumption $0.86B /yr Renewal $0.41B /yr (48%) Renewal Gap $0.45B / yr This gap is likely to be $0.5 $0.6B using fair value IPWEA calculates the renewal gap to be $0.7B per year for transport assets only $14.6B is needed over the next 15 yrs for renewal or double existing expenditure Effectively, councils had recognised depreciation but ignored it for decision making on revenue raising and service levels JRA, 2006, Local Government Infrastructure, Report to Local Government Inquiry, NSW, pp 4-6 8

5 ALGA National Financial Sustainability Report (PwC) 2006 State Renewal Backlog Annual funding gap / council % of councils unsustainable NSW $6,300M $5.9M 25% SA $300M $0.6M 38% WA $1,750M $1.5M 58% Vic * $806M $2.6M 10% Mid case national est. $14,533M $3.1M 35% Source PWC, 2006, Table E.2 p 11 * Victoria in 2003/04 $ values 9 ALGA PwC Report 2006 Weaknesses in financial reporting Valuation and depreciation Poor AM practices Inconsistent application of standards and accounting approach Data deficiencies Lack of understanding of levels of service and cost Whole of life costs for new assets 10

6 National Direction and Support Local Government & Planning Ministers Council (Federal and State) endorsed nationally consistent approaches for: Framework 1 Criteria for assessing financial sustainability of local councils Framework 2 Asset planning & management (2009) Framework 3 Financial planning & reporting (2009) LGPMC 27 March 2007, 8 May 2009 ( 11 Federal view on Asset Management "We must improve asset management and financial management Councils that plan and manage their assets effectively are councils that can deliver value for money to their communities" We need to know what we've got, what condition it is in, whether it needs to be repaired and how much it costs to maintain The Commonwealth will also consider making its future infrastructure investments linked to the implementation of nationally consistent asset management systems Prime Minister s speech to Aust Council of Local Government (ACLG) meeting, 18 Nov

7 Enhanced National Framework 2 Asset Planning & Management Elements of national approach 1. Development of AM Policy 2. Strategy & planning 3. Governance & management arrangements 4. Defining levels of service 5. Data & systems 6. Skills & processes 7. Evaluation 13 Results of good AM & Financial Planning SA LG Study Conclusions 2001 Asset renewal rates are 3.5 Councils now facing the renewal of assets times level that of 10 years ago were constructed yrs ago Projected levels of annual renewal over the next 15yrs are almost 3 times the current level Expenditure on new assets exceeds renewal Distinguished between capital expenditure renewal and upgrade/new Councils currently only spending 1/3 of required funding on renewal Annual finance performance improved from $100 operating deficit in to operating breakeven position for past 3 years Source LGASA Wealth of Opportunities Report

8 IPWEA International Infrastructure Management Manual NAMS.PLUS provides tools and templates to facilitate use of IIMM AM Plan based on IIMM Section Australian Infrastructure Financial Management Guidelines Joint project of IPWEA and National Local Government Financial Management Forum 4 Parts A Introduction B Planning C Financial Reporting D Application 6 How To Guides Linking the technical and financial aspects of infrastructure services management 16

9 What is Asset Management? A strategic and systematic process of operating, maintaining and improving physical assets with a focus on engineering and economic analysis based on quality information to identify a structure sequence of maintenance, preservation, repair, rehabilitation and replacement actions that will achieve and sustain a desired state of good repair over the lifecycle of the assets at minimum practicable cost. Source: 23 USC 101(a)(2), MAP What is Asset Management? Renewing? "Transportation Asset Management is a strategic and systematic process of operating, maintaining, upgrading and expanding physical assets effectively throughout their lifecycle. It focuses on business and engineering practices for resource allocation and utilization, with the objective of better decision making based upon quality information and well-defined objectives." Source: AASHTO, Subcommittee on Asset Management 18

10 What is Asset Management? The systematic and coordinated activities and practices of an organisation to optimally and sustainably deliver on its objectives through the cost effective life cycle management of assets Source: IIMM 2011, Glossary, p xii 19 What is Asset Management? Asset management involves the balancing of costs, opportunities and risks against the desired performance of assets to achieve the organizational objectives. Source: ISO 55000:2013 Asset Management (Draft) 20

11 Goal of Asset Management To meet a required level of service in the most cost effective manner, through the creation, acquisition, maintenance, operation, renewal and disposal of assets to provide for present and future consumers 21 Asset Management Plans 1. Exec summary 2. Introduction 3. Levels of service 4. Future demand 5. Lifecycle mangt. plan 6. Financial summary 7. AM practices 8. Plan improvement & monitoring 22

12 Asset Management Plans 1. Executive Summary Context What does it Cost? What we will do What we cannot do Managing the Risks Confidence Levels The Next Steps 23 Asset Management Plans 1. Executive Summary What Council Provides 2. Introduction What does it Cost? Background Plans for the Future Goals & Objectives of AM Measuring our Performance Plan Framework (Key elements) Core and Advanced AM The Next Steps Community Consultation 24

13 Asset Management Plans 1. Executive Summary What Council Provides 2. Introduction What does it Cost? Background 3. Levels of Service Plans for the Future Infrastructure Customer Research assets in & Expectations plan Measuring Strategic & our Corporate Performance Goals Link to organisations vision, mission, goals The Legislative Next & objectives Steps requirements Current Levels of Service Desired Levels of Service 25 Community Level of Service Community Levels of Service relate to the service outcomes that the community wants in terms of safety, quality, quantity, reliability, costeffectiveness and legislative compliance Community levels of service measured used in the AM Plan template are: Quality Function Capacity/Utilisation How good is the service? Does it meet users needs? Is the service over or under used? 26

14 Technical Levels of Service Technical Levels of Service - Supporting the community service levels are operational or technical measures of performance. These technical measures relate to the allocation of resources to service activities that the Council undertakes to best achieve the desired community outcomes and demonstrate effective organisational performance. Technical service measures are linked to annual budgets covering: Operations the regular activities to provide services, Maintenance the activities necessary to retain an assets as near as practicable to an appropriate service condition, Renewal the activities that return the service capability of an asset up to that which it had originally, Upgrade the activities to provide an higher level of service 27 Level of Service Unsealed Roads Outcomes Effectiveness Inputs Service Gap 28

15 Level of Service Aids Preparation advice Warning Signs Multiple use 29 Asset Management Plans 1. Executive Summary What Council Provides 2. Introduction What does it Cost? Background 3. Levels of Service Plans for the Future Infrastructure 4. Future Legislative Demand assets requirements in plan Measuring Demand our Performance Link to Current drivers organisations Levels of vision, Service mission, goals The Demand Next Desired & objectives Steps forecast Levels of Service Demand impact on assets How any gap is to be closed Demand management plan Asset programs to meet demand 30

16 Asset Management Plans 1. Executive Summary 2. Introduction What Council Provides 3. Levels What does of it Service Cost? Background 4. Plans Future for the Demand Future Infrastructure Legislative assets requirements in plan Measuring 5. Life Cycle our Performance Management Link Factors Current organisations affecting Levels of vision, demand Service mission, goals The Growth Next Desired & objectives Steps or Levels decline of Service Asset data (condition, capacity, valuation) Infrastructure risk management plan Changes How any in gap expectations is to be closed Routine operations and maintenance plan Renewal/replacement plan Technology Creation/acquisition/upgrade plan Demand management Disposal plan 31 Risk Management Risks that may result in loss or reduction in service or financial shock to council: Structural failure Capacity / utilisation Level of service failures Obsolescence Cost to maintain & operate Flood damage Nambucca Shire, NSW 32

17 Network and Critical Asset Risks Network asset Risk to reduction in service over network Critical assets Risk to a critical part of a network 33 Risk Management Plan 34

18 Pavement AM Plans Assumptions - Road Lane Lengths Road Category lane miles IS > 50,000 ADT 4,288 IS < 50,000 ADT 2,828 Other > 25,000 ADT 2,604 Other < 25,000 ADT 16,083 Source: Georgia DoT, Transportation Asset Management, p Pavement AM Plans Assumptions - Pavement & Rehab Types Road Category Depth Base Rehab IS > 50,000 ADT 10 4 IS < 50,000 ADT 10 4 Other > 25,000 ADT 8 2 Other < 25,000 ADT 6 2 Source: Gordon Proctor, Based on Ohio DOT data 36

19 Pavement AM Plans Assumptions - Pavement Rehab cost Road Category Rehab Cost $/lane mile IS > 50,000 ADT $1,214,500 IS < 50,000 ADT $1,214,500 Other > 25,000 ADT $553,805 Other < 25,000 ADT $553,805 Base Rehab life 10 years Pavement sub-base proportioned 50 yr life Source: Costs Georgia DoT, TAMP, p 20 Lives my estimate 37 Pavement AM Plans Assumptions - Pavement Budgets State Motor Fuel $M Debt servicing $279 Local M&I Grants $100 Routine Maint $184 Gen Operations $118 Capital Projects $250 Total $934 Federal Funds $1,210 Source: My apportionment of Georgia DoT data AM Plan Budgets $M Operations $118 Maintenance $36 $108 Renewal $147 $411 Upgrade $50 $24 Operations $118 Maintenance $145 Renewal $559 Upgrade/New $74 38

20 Projected Operating & Maintenance Expenditure 39 Projected Renewal Expenditure 40

21 Asset Management Plans 1. Executive Summary 2. Introduction What Council Provides 3. Levels What does of it Service Cost? Background 4. Plans Future for the Demand Future Infrastructure Legislative assets requirements in plan Measuring 5. Life Cycle our Performance Management Link Factors Current organisations affecting Levels of vision, demand Service Asset mission, 6. Financial data (condition, Summary capacity, valuation) goals The Growth Next Desired & objectives Steps or Levels decline of Service Routine Financial maintenance statements plan & projections Changes How Funding any in strategy gap expectations is to be closed Renewal/replacement plan Technology Valuation forecasts New assets Key assumptions Demand management Disposals Forecast reliability and confidence 41 Financial Projections 42

22 Long Term Financial Plan Expenditure Projections Asset Management Plans 1. Executive Summary 2. Introduction What Council Provides 3. Levels What does of it Service Cost? Background 4. Plans Future for the Demand Future Infrastructure Legislative assets requirements in plan Measuring 5. Life Cycle our Performance Management Link Factors Current organisations affecting Levels of vision, demand Service Asset mission, 6. Financial data (condition, Summary capacity, valuation) goals The Growth Next Desired & objectives Steps or Levels decline of Service Routine Financial maintenance statements plan& projections 7. Plan Improvement & Monitoring Changes How any in gap expectations is to be closed Renewal/replacement Funding Status of strategy AM practices plan Technology New Valuation Improvement assets forecasts program Demand Monitoring management & review Disposals Key assumptions Performance measures 44

23 Asset Management Plans 1. Executive Summary 2. Introduction What Council Provides 3. Levels of Service What does it Cost? 4. Future Background Demand Plans for the Future 5. Infrastructure Life Legislative Cycle Management assets requirements in plan Measuring our Performance Link 6. Financial Factors Current organisations affecting Levels Summary of vision, demand Service Asset data (condition, capacity, mission, valuation) goals The 7. Growth Next Asset Desired & objectives Steps or Management Levels decline of Service Practices Routine Financial maintenance statements plan& projections References & Appendices Changes How any in gap expectations is to be closed Renewal/replacement Funding strategy plan Technology New Valuation assets forecasts Demand management Disposals Key assumptions App A Maintenance response service levels App B Proj 10 yr Capital Renewal Program App C Proj 10 yr Capital Upgrade/New Prog 45 AM Plans and Long-Term Financial Plans 46

24 Cash Accounting Example basing revenue targets on cash v s accrual accounting expenses $M (current values) Year Operating Revenue Operating Expenses Operating Deficit Cash Accrual Accounting Example basing revenue targets on cash v s accrual accounting expenses $M (current values) Asset consumption (depreciation) introduced intergenerational equity. Year Operating Revenue Operating Expenses Asset consumption (deprn) Total Operating Expenses Operating Deficit Infrastructure Value at year end Land Value at year end Total Assets Value at yr end Value of assets will decline by $2.5M per annum. May be OK for some time. Ageing assets will require more maintenance and earlier renewal. Need to increase revenue and borrowings or accept lower service levels 48

25 Accrual Accounting Example where operating revenue offsets operating expenses $M (current values) Taxpayers/users paying full cost of service Year Operating Revenue Operating Expenses Asset consumption (deprn) Total Operating Expenses Operating Deficit Infrastructure Value at year end Land Value at year end Financial Assets Value at yr end Total Assets Value at yr end Likely to approx. have enough cash on average to finance asset renewals Source: IPWEA Long-Term Financial Plan Practice Note, pp Financial Strategy & Plan The Financial Strategy & Plan Sets down the financial objectives, goals and targets for the coming ten year period; Details the outcomes sought and measures by which Council can be held accountable to the community; Forecasts revenues, expenses and the capital works program; Forecasts the financial position of Council; and Guides the preparation of future Annual Budgets Source: Manningham City Council Financial Strategy,

26 Financial Strategy Plan Establish policy and targets for strategic financial management and planning Prepare forecasts under various scenarios to show impacts on critical decisions on income, expenditure and capital investment Compare modelled outcomes with targets outcomes established in the Financial Strategy to form opinions on future financial stability and sustainability Develop, consider and adopt Annual Budgets within the sustainable financial framework Source: Manningham City Council Financial Strategy, Financial Strategy How the AM and LTFP is financed Land taxes Federal grants User charges Project selection Borrowings Treasury management Controls on expenditure Private partnerships 52

27 AIFMG Financial Sustainability Indicators National Indicators 1. Operating surplus ratio 2. Net financial liabilities ratio 3. Asset sustainability ratio 4. Asset renewal funding ratio Secondary Indicators 5. Operating surplus 6. Net financial liabilities 7. Interest cover ratio 8. Asset consumption ratio 53 National Financial Indicators 1. Operating Surplus Ratio 2. Net Financial Liabilities Ratio 3. Asset Sustainability Ratio 4. Asset Renewal Funding Ratio The operating result expressed as a percentage of total operating income The significance of net amount owed by an entity compared to its operating income for the period. The ratio of asset replacement expenditure relative to depreciation for a period. It measures whether assets are being replaced at the rate they are wearing out The ratio of the net present value of asset renewal and replacement funding accommodated over a 10 year period in a LTFP relative to the net present value of projected asset capital renewal and replacement expenditure identified in an AM Plan for the same period. Source: AIFMG, Section 2.6.1, p

28 Secondary Financial Indicators 5. Operating Surplus The excess of operating income (excluding amounts received specifically for new or upgraded assets and donated assets) over operating expenses. 6. Net Financial Liabilities What is owed to others less money held, invested or owed to the entity 7. Interest Cover Ratio The proportion of operating income used to pay interest on loans net of interest income 8. Asset Consumption Ratio The average proportion of as new condition left in assets Source: AIFMG, Section 2.6.1, p Barossa Council LTFP Objective To be financially sustainable over years 1-10 by achieving a cumulative breakeven result Assumptions Operating income & expenditure, growth, grants, etc Funding Land tax, Special tax, fees & charges Sustainability Indicators Expenditure projections Financial indicators Impact on community Source: The Barossa Council; SA, Long Term Financial Plan to

29 Barossa Council LTFP Capital Renewal Projected Expenditures 57 Barossa Council LTFP Capital Upgrade/New Proj. Expenditures 58

30 LTFP Income Statement & Financial Indicators Source: The Barossa Council; SA, Long Term Financial Plan to LTFP Balance Sheet Source: The Barossa Council; SA, Long Term Financial Plan to

31 LTFP Financial Indicators AIFMG National Indicator 1 Proposed Target: To achieve an operating surplus ratio of between -2 % and 10% Source: The Barossa Council; SA, Long Term Financial Plan to LTFP Financial Indicators AIFMG National Indicator 2 Proposed Target: Net financial liabilities ratio is greater than zero but less than 100% of total operating revenue Source: The Barossa Council; SA, Long Term Financial Plan to

32 LTFP Financial Indicators AIFMG National Indicator 3 Proposed Target: Capital outlays on renewing/replacing assets net of proceeds from sale of replaces assets is greater than 80% but less than 110% of depreciation over a rolling 3 year period 63 Source: The Barossa Council; SA, Long Term Financial Plan to Impact on the Community Land tax increases incl Special Tax 64

33 Long-Term Financial Plan and Asset Management Plan LTFP should accommodate the organization's cashflow needs to enable it to carry out the maintenance, renewal and replacement of assets as set out in the AM Plans provided the AM Plan is based on financially sustainable levels 65 Achieving Financial Sustainability Balancing the AM Plans with the LTFP Defer unfunded expenditures 66

34 NAMS.PLUS2 S1 Scenario Modelling S2 S3 Financial Sustainability Involves trade-offs What do we really need to do? What can we do without? What can we defer? What are the risks and consequences? Are they acceptable? Can we raise additional revenue Can we use borrowings? 68

35 Risk and Service Consequences We cannot do everything Service consequences Service below desired levels Risk consequences Some existing risks cannot be fixed Some new risks may be created Accept consequences Service Consequences What are the service consequences if the project does not proceed? Reduced service levels Economic disruption and delay Increased travel time Community dissatisfaction 70

36 Benefits of good AM and Financial Planning 1. Annual budgeting longer-term planning Annual budget 1 year horizon AM plans year horizon LTFP - 10 years horizon GDoT Highway Maintenance Challenges 2012 Need Planned Completed Asphalt pavement resurfacing & repair $196M $17M $12M AM Plans and LTFP gives tools to overcome challenges 71 Example of good AM & Financial Planning 2. Understanding life cycle costs Disposal 5% Operating cost 40% Initial cost 20% Maintenance 35% 72

37 Perceived Project Costs Design Costs Construction Costs Site costs 73 Whole-of-Life Costs Design Costs Construction Costs Site costs Finance Costs Maintenance Costs Operations Costs Depreciation Expense Management Costs 74

38 Annual Service Cost Sum that would be tendered for a Build Own Operate (BOO) contract to provide the service required Expresses annual financial cost of project in dollars impact on operating funds eg $250,000 pa. New Service $$$ 75 Annual Service Cost Specify service to be delivered in performance terms what where at what service level and for how long. 76

39 Public BBQ Foreshore Reserve, 1770, Qld 77 Annual Service Cost Public BBQ Capital $8,000 Capital Annual Remarks Interest $640 8% pa Depreciation $ years Operations $7,600 / annum Maintenance $500 / annum Demolition $100 $1k over 10 yrs $8,000 $9,640 $13.20 If used twice per day on average per use 78

40 Example of good AM & Financial Planning 3. Increase in awareness Service levels & financial sustainability Life cycle costs Better decisions Longer-term view beyond this budget Consider implications and consequences Risk acceptance by Board of Directors 79 Example of good AM & Financial Planning 4. More sustainable organisations 80

41 Results of good AM & Financial Planning SA LG Study Conclusions 2001 Asset renewal rates are 3.5 Councils now facing the renewal of assets times level that of 10 years ago were constructed yrs ago Projected levels of annual renewal over the next 15yrs are almost 3 times the current level Expenditure on new assets exceeds renewal Distinguished between capital expenditure renewal and upgrade/new Councils currently only spending 1/3 of required funding on renewal Annual finance performance improved from $100 operating deficit in to operating breakeven position for past 3 years Source LGASA Wealth of Opportunities Report Taking a long term view to Infrastructure Financial Management A common Technical and Financial view through Asset Management Plans & Long Term Financial Plans John Howard, IPWEA NAMS.AU Project Manager Jeff Roorda & Associates M E jhoward@jr.net.au 82