Key Words: Asset management plans, scenarios, long-term financial planning, financial sustainability, affordability, levels of service, consultation.

Transcription

1 Abstract John Howard, IPWEA NAMS.AU Project Manager, Jeff Roorda & Associates Asset management plans set out the service required by a community, how the services are provided and what funds are required to provide the services. The required expenditure outlays identified in the AM Plan feed into the organisation s long-term financial plan (LTFP) with the objective of providing the services that the community needs and can afford. Getting to this point can be a challenge. An easy way of achieving a sustainable LTFP is to ignore the AM Plans. Linking the AM Plans to the LTFP can be done using the 3 scenario approach used in IPWEA s NAMS.PLUS2. Scenario 1 is developed from the asset register and generally identifies the need to review and improve useful life estimates of assets. Scenario 2 uses technical sources to identify what is needed to maintain current service levels plus provide planned upgrades and new assets/services. Scenario 3 links Scenario 2 to the LTFP and identifies what can be done with available financial resources. Scenario 3 also identifies what cannot be done and what are the service consequences and service risks associated with deferral of projects. It provides information to have a discussion with decision makers and the community about matching needed service levels, risks and affordability. It can thus also help refine the LTFP. The paper outlines the 3 scenario process in NAMS.PLUS2 and show how this information can be used to facilitate an intelligent community discussion on service levels and affordability. Key Words: Asset management plans, scenarios, long-term financial planning, financial sustainability, affordability, levels of service, consultation. Introduction Most Australian local governments are required to develop asset management and long-term financial plans covering a period of at least 10 years. The plans are prepared in an environment of ageing and declining infrastructure, community demand for new and improved services and revenues falling in real terms. Preparing financially sustainable asset management and long-term financial plans that meet community expectation under these conditions can be a challenge to local government asset and finance managers. Asset Management Plans Asset management is the combination of management, financial, economic, engineering and other practices applied to physical assets with the objective of providing the required level of service in the most cost-effective manner. 1 Asset management plans (AM Plans) are developed for the management of one or more infrastructure assets that combines multidisciplinary management techniques (including technical and financial) over the life cycle of the asset in the most cost-effective manner to provide a specified level of service. A significant component of the plan is a long-term cashflow projection for the activities. 2 1 IPWEA, 2012, AIFMG, Glossary, p xxxii. 2 IPWEA, 2012, AIFMG, Glossary, p xxxii.

2 Long-Term Financial Plan A long-term financial plan (LTFP) is an estimate of forward revenue and expenditure projections that: is underpinned by a sound financial strategy that ensures that the organisation s financial sustainability is protected or improved as necessary, ensures that asset maintenance and asset renewal and replacement activity is carried out at levels and at points in time than minimises whole-of-life economic costs (relative to required service levels), and accommodates service levels proposed in the organisation s strategic plans. 3 Financial Sustainability The Australian Infrastructure Financial Management Guidelines Glossary defines financial sustainability for local governments in two forms: being able to maintain its infrastructure capital and financial capital over the long term, and being able to manage likely developments and unexpected financial shocks in future periods without having at some time to introduce substantial and economically significant or socially destabilising revenue or expenditure adjustments. 4 What does Financial Sustainability mean? In simple terms, financial sustainability is about the organisation providing the services the community users need at the service levels that the community users are able to afford over the long term. This is complicated by experience that tells us that we don t have enough funds to maintain current service levels, let alone meet community demands for more and better services. 3 IPWEA, 2012, PN6, p 5 4 IPWEA, 2012, AIFMG, Glossary, p xxxvii For a financially sustainable position, the expenditure projections required to meet the essential service levels set out in the asset management plan must be fully financed in the organisation s long-term financial plan. It is rare for an organisation s long-term financial plan to fully accommodate the expenditure projections from asset management plans in the first instance. An easy way to balance the long-term financial plan is to ignore the expenditure projections in AM Plans and base the LTFP on projections of current expenditures. Many iterations are required to revise service levels and expenditure projections in AM Plans and update the long-term financial plan to achieve a financially sustainable position. Achieving a Sustainable Position IPWEA s NAMS.PLUS2 includes methodology to assist asset and finance managers reach a financial sustainability position. This involves a three scenario process to: highlight any financing difference between asset management plans and long term-financial plans, identify options to modify services, review of services and cost with service and risk consequences, to enable decision makers to make an informed decision on the service levels to be provided, financing needs and acceptance of the service and risk consequences. Scenario 1 Scenario 1 AM Plans are developed from the organisation s audited asset register showing what you need to do to renew and replace existing assets plus planned upgrade of existing assets and new services and assets. Asset registers were developed and maintained for financial reporting purposes. Required accuracy is determined by materiality considerations for financial statements.

3 Although this data is subject to financial audit and is generally the best asset data available, the key data item (useful life) is not of sufficient accuracy for asset renewal planning as shown in Figure I. Figure 2 shows projected operating and capital expenditure projections under a scenario 2. Figure II: Projected Operating and Capital Expenditure Scenario 2 Figure I: Projected Operating and Capital Expenditure Scenario 1 Scenario 1 AM Plans are generally not realistic as the asset renewal plans are not reflected in the organisation s capital works programs. Scenario 1 AM Plans highlight the need to improve the accuracy of asset registers. Scenario 2 Scenario 2 AM Plans are based on what we need to do to maintain current service levels plus planned upgrades and new assets and services. NAMS.PLUS2 offers 2 methods for scenario 2 AM Plans: condition modelling systems such as pavement management systems, network renewals (what we need to spend on average over the network) plus defect repairs (projects we need to fix). The network renewal spend can be developed for assets requiring regular replacement such as road resurfacing. For example, an organisation has 300 km of sealed roads, reseals have a useful life of 15 year, therefore the organisation should reseal one fifteenth of its 300 km each year at a cost of $20,000/km giving an annual network renewal expenditure need of $400,000 (300 / 15 x $20,000). Scenario 2 AM Plans are generally more realistic than Scenario 1 AM Plans. Scenario 3 The scenario 3 AM Plan indicates what we can do and be financially sustainable. Scenario 3 has: AM Plans matching LTFPs, and identifies major capital renewal and upgrade/new proposals that cannot be done in the next 10 years, and determines the service consequences where there will be service levels below desired levels, and determines the service risks associated with deferral of capital renewal and upgrade/new proposals. Projected operating and capital expenditure projections under scenario 3 are shown in Figure 3. Development of scenario 3 included deferring all unfunded activities and expenditures until after year 10. This illustrated by the high projected capital renewal bars in years and provides time to review the service, risk and cost implications of the deferral in future budget decisions.

4 Balancing Service Levels, Costs and Risks This involves careful consideration of the effect of the scenario 3 AM Plans on the community users. Reviews can cover: 1. Is this position acceptable to me and the people I represent? 2. Is there anything that is not included that will really hurt anyone? Figure III: Projected Operating and Capital Expenditure Scenario 3 The Trade-off Scenario 3 provides a starting point for discussion and consultation on options to assess and tradeoff financially sustainability of iteration options with resulting service levels, risks and funding levels. Transparency of the options is critical. It is important that scenario 3 AM Plans document and highlight the list of services that have been reduced or terminated, the list of capital renewal and upgrade projects that cannot be afforded and the risks to services than cannot be managed. This is the eye opening moment for decision makers and the beginning of informed discussion on the trade-off of service levels, costs and risks. Communicating the risks is essential. Decision makers and the community need to be aware of service risks (a road bridge has a high risk of collapse with the road being out of service for some time) and that if the risk event occurs (the bridge does collapse), it is due to the councillors and community s acceptance of the risk of collapse in deciding to allocate funding to higher priority expenditure items (eg building a new aquatic centre) or determining that the funding of risk management actions (repair/replace the bridge) was not of sufficient priority/urgency to levy additional rates or charges on the community. 3. Is there anything that we are doing that we really don t need to or can reduce? 4. Are we happy to accept the risk that something that we know about may occur and people may be affected? 5. Are we able to raise any additional revenue for really essential items? The objective of this stage is to identify and provide the services that the community users need at an affordable cost while managing risks over the medium to long term. An organisation may plan its renewal program based on intervening at desired minimum service levels but not be in a position to fund renewal at these service levels thresholds. In these cases the service levels should be adjusted to reflect the tacit acceptance of lower service levels by the organisation in its funding priorities rather than desired service levels. Communicating the Issues IPWEA is developing a Practice Note for Infrastructure Levels of Service and Community Consultation to assist organisations in defining levels of service and communicating the issues involved in balancing service levels, costs and risks. It is important to present all the information in a simple readily understandable manner. This includes explaining why the service is provided, detailing what is required to provide the service, the levels of service, the costs of providing the service as well as the risks and service consequences.

5 An example of consultation presentation material developed from AM Plans is shown in Appendices A and B. In this example, the consultation discussion is based on two major options: 1. Maintaining current service levels will require an additional $23,000 per annum, 2. Maintaining current funding levels will require reducing service levels in some areas. Role of the Asset Manager The engineer/asset manager has responsibility for preparing the AM Plans, documenting the service level to be provided, expenditure projections required and the service and risk consequences of the scenario 3 AM Plan. The service levels and expenditure projections must be realistic and not based on unattainable technical aspirations to ensure credibility of the AM Plans. This continues with providing information to assist decision makers make an appropriate resource allocation decision on service levels and funding required (what we can afford to do) with acceptance of service (what we cannot do) and risk (what may happen) consequences. And after the decision, update the AM Plans to reflect the decisions made on service levels, costs and risks and manage the delivery of required service levels at the appropriate life cycle cost within approved budget resources. Role of the Finance Manager The finance manager works with the asset manager to develop a financially sustainable LTFP and financial strategy to enable the organisation to meet its objectives. With realistic and affordable AM Plans, the finance manager s responsibility is to manage the organisation s financial resources and strategy so that resources are available to provide the services set out in the AM Plans and financed in LTFP. Conclusion It is not the role of the asset and finance managers to solve all problems but to provide information for decision makers to make an informed decision on what services and service levels are to be provided, in recognition and acceptance of the required financial resources and service and risk consequences. It is the role of the asset manager and finance manager to implement the decisions made in setting service levels with budgets while managing risks. The asset manager and finance manager must work together to use the information gained from developing sustainable AM Plans and LTFPs to upgrade the accuracy of asset register data (mainly replacement cost and useful life) as required by Australian Accounting Standards and improve asset renewal planning capability and financial reporting. Useful lives must be based on realistic service levels set in budget and financial planning decisions. This will facilitate the annual update of AM Plans and LTFPs required for preparation of annual budgets. References IPWEA, 2012, Australian Infrastructure Financial Management Guidelines, Version 1.3, Institute of Public Works Engineering Australia, Sydney IPWEA, 2012, Long-Term Financial Planning, Practice Note 6, Institute of Public Works Engineering Australia, Sydney IPWEA, 2013, NAMS.PLUS2 Asset Management Guidelines, Version 2.8, Institute of Public Works Engineering Australia, Sydney IPWEA, 2013, Levels of Service Discussion Paper, Institute of Public Works Engineering Australia, Sydney.

6 Appendix A Recreation Services Overview Sheet Source, IPWEA, 2013, Level of Service Discussion Paper, Figure 5, p 26 Based on JRA asset management strategy summary dashboards.

7 Appendix B Playground Service Level Options Playgrounds PARADISE COUNCIL 10 Year Financing Plan ($000) Shows projected expenditures required to maintain Recreation Services in current condition. The black line shows projected available funding. Overall Service Levels Physical Condition quality of the service Data Confidence Medium Good/Fair 83% 64% Poor 17% 36% Cost of the Service This is the estimated cost to provide the service including operations, maintenance and renewal of existing assets plus upgrade of existing and acquisition of new assets Over the 10 year Financial Planning Period Average Cost per annum $773,000 Available Funding per annum $750,000 Financing Gap per annum $23, Year Financing Indicator 97% Function meeting program delivery needs Data Confidence Low Capacity/Utilisation usage matches design capacity Major Options OPTION A. Increase funding by $23,000 per annum to maintain current services OPTION B. Maintain projected available funding levels and accept and manage the service level decline and associated risks Data Confidence Low Risks Play equipment becomes unsafe and unusable, does not comply with current Australian Standards and will lose attractiveness to families. Our Response Maintain existing inspection frequency, rationalise playgrounds to provide improved equipment at centralised locations when equipment is replaced. Source, IPWEA, 2013, Level of Service Discussion Paper, Figure 5, p 27 Based on JRA asset management strategy summary dashboards.