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Part 6: Asset management planning — Office of the Auditor-General New Zealand
Part 6: Asset management planning Matters arising from the 2006-16 Long-Term Council Community Plans. https://oag.parliament.nz/2007/ltccp/part6.htm https://oag.parliament.nz/@@site-logo/logo.png
In this Part, we consider asset management planning as the second of three main individual content areas of the LTCCP. We discuss the performance framework in Part 5 and the financial management framework in Part 7.
The importance of good quality asset management planning
For more than a decade, the Auditor-General’s reports to Parliament have raised issues about asset management by local authorities. These reports have, in particular, highlighted:
the importance of quality underlying information to allow reliable estimates to be prepared; and
the need for asset management plans to be based on levels of service established in consultation with ratepayers or users of services.
As part of our LTCCP work, we undertook a range of assessments and enquiries to assess the asset information on which LTCCPs were based. Section 94(1)(b) of the Act states that the auditor must report on "the quality of the information and assumptions underlying the forecast information provided in the plan".
Local authorities manage significant infrastructural and community assets that are the means by which they deliver most of their critical quality-of-life services to their communities. It is essential that local authorities clearly demonstrate the intended use of assets to enable communities to see what services will be provided if those plans are implemented.
For most local authorities, these assets also represent the largest value asset class in the Statement of Financial Position. Because they need to be maintained and renewed, and require continual capital development to deal with growth and changing standards, assets often also generate the greatest value expense in the Statement of Financial Performance. Therefore, the asset information base and the projections associated with this information were of particular interest in our audit work.
Various information requirements of the LTCCP have reinforced the need for reliable information so that communities can have confidence in the proposals and underlying information in these plans. In particular, clause 2(1)(d) of Schedule 10 of the Act requires local authorities to:
how the local authority will assess and manage the asset management implications of changes to —
demand for, or consumption of, relevant services; and
service provision levels and standards:
what additional asset capacity is estimated to be required in respect of changes to each of the matters described in subparagraph (i):
how the provision of additional asset capacity will be undertaken:
the estimated costs of the provision of additional asset capacity identified under subparagraph (ii), and the division of those costs between each of the matters in respect of which additional capacity is required:
how the costs of the provision of additional asset capacity will be met:
how the maintenance, renewal, and replacement of assets will be undertaken:
how the costs of the maintenance, renewal, and replacement of assets will be met.
Our previous assessments of asset management plans
In our report on the results of the 2002/03 local government audits,1 we advised the results of our assessments of local authority asset management plans (or information that functions as such a plan), selecting the best and least developed plans of each local authority for review. Because many regional councils are not extensively involved in asset-intensive activities, they were included in the review only where they held significant assets.
The two selected plans for each local authority were ranked from 1 (low) to 5 (high) against 12 criteria. These criteria were based on the dimensions set out in the International Infrastructure Management Manual Creating Customer Value,2 which, in our view, represented current best practice for the sector in asset management planning.
The 12 assessment criteria were:
planning preparation;
outline improvement programmes;
planning assumptions and confidence levels;
description of assets.
In choosing to use these criteria, we were nonetheless aware that not all local authority asset information would need to be prepared to the extent suggested by the manual, and that the criteria were relevant primarily to key service and high-value assets.
At that time, we concluded that some local authorities needed to improve their asset information to meet the new disclosure requirements of the Act. We also considered that many needed to improve information on future-oriented uses, such as risk management and optimised decision-making.
Our assessment of asset management plans in 2005
In 2005, before we started our LTCCP audit work, we assessed 92 asset management plans covering 52 local authorities.3 This work suggested that common areas of weakness in asset management plans were likely to be:
levels of service - the ability of local authorities to define levels of service that are meaningful to the public and that measure the achievement of community outcomes;
improvement planning - the ability of local authorities to demonstrate a track record of improvement from earlier versions of plans and that they have in place an improvement plan that is specific and credible, and outlines the resources and time needed, with a clear way to assess its achievement; and
financial forecasting - the ability of local authorities to set clear financial forecasts in their plans, based on the described levels of service and consistent with asset life cycle management needs.
Underlying asset information in the LTCCPs
As part of issuing audit opinions4 on LTCCPs, we assessed underlying asset information and reviewed LTCCP context disclosures.
Non-standard audit opinions issued
We issued five non-standard audit opinions (two "adverse" audit opinions and three "except-for" audit opinions) on LTCCP Statements of Proposal and final adopted LTCCPs for reasons related to the quality of underlying asset information.
We issued adverse audit opinions for:
Carterton District Council; and
For these two councils, we concluded that, overall, their LTCCPs were not fit for purpose5 because underlying information, mainly for infrastructure assets, was inadequate to support the prospective information. Because of the cumulative effect of these fundamental issues, we were unable to affirm that the LTCCPs were financially prudent.6
For Carterton District Council, these information weaknesses related to both the prospective information on the levels of service that the council will provide the ratepayer and the associated operational and capital expenditure required to be incurred. The inadequacy of the information meant that the council's costs could be materially misstated and that it was uncertain whether the council could deliver the levels of service agreed with the community.
For Invercargill City Council, our view was based on the cumulative effects of either inadequate or inconsistently applied underlying information. This underlying information was mainly infrastructure asset information associated with the council's major service activities of water and roading. It was not possible to affirm that the level of proposed expenditure over the life of the LTCCP would deliver the levels of service or that the expenditure was not materially misstated. Further, the performance information could not be adequately linked to the disclosed performance measures.
In three other instances - Kaikoura District Council, Chatham Islands Council, and Dunedin City Council - we issued except-for audit opinions because these councils had not completed a water and sanitary services assessment, as required by section 125 of the Act.
For these councils, the asset management information held adequately supported the prospective information set out in the LTCCP. However, the failure to complete the water and sanitary services assessment (including the specific statements and proposals set out in sections 126 and 127 of the Act and consultation under section 128) meant that information may have been omitted that could have affected these councils' asset management intentions. The statements and proposals relate to:
current and estimated future demands for services;
the options available to meet the current and future demands;
the council's intended role in meeting the current and future demands; and
the council's proposals for meeting the current and future demands.
General observations on underlying asset information
Our general observations have been drawn from issues raised by auditors when issuing LTCCP audit opinions. The observations are, therefore, primarily focused on assessing underlying asset information for the purpose of issuing an audit opinion, rather than assessing the state of asset management planning.
Many of the issues raised were remedied before the LTCCP Statements of Proposal were released. In instances where issues remained, they were assessed as being not material for the purpose of giving assurance on LTCCPs. Nonetheless, this does not mean that the local authorities do not need to improve these areas for the long-term needs of their communities. To give an accurate picture of a local authority's long-term strategy, the LTCCP requires reliable underlying information and sound integration of those information sources and plans within the local authority. Consequently, internal systems for asset management and asset management planning are pivotal to supporting policies planned by local authorities.
The three areas of concern about asset management most common among local authorities were:
the completeness and reliability of asset management plans;
the disclosure of levels of service; and
the effect of anticipated growth on asset management.
Completeness and reliability of asset management plans
In general, the completeness of asset management plans was poor. More than 20% of local authorities had asset management plans that were incomplete and, therefore, potentially unreliable. However, further testing found that, in most instances, the local authorities held information that allowed reasonable projections to be made in LTCCPs and that it was the plans that were inadequate or out of date.
Up to 15% more local authorities had asset management plans that were unreliable because the plans were out of date or in the process of being updated. Also, about 15% of local authorities had incomplete financial forecasts for asset management, indicating that the application of the underlying asset information was weak.
Disclosure of levels of service
Determining and understanding levels of service and their link to community outcomes provides the basis for a local authority to plan its asset management intentions.
About 20% of local authorities did not clearly define levels of service in their asset management plans. This has implications for the links from asset management plans to strategic corporate planning and community outcomes.
It also has implications for the links from asset management plans to the local authority's performance framework. Clause 2(2)(a) of Schedule 10 of the Act specifies that this information must include "a statement of intended levels of service provision for the group of activities, including the performance targets and other measures by which actual levels of service provision may meaningfully be assessed".
This highlights the need to provide clear intentions about levels of service, along with the need for clear targets and other measures to assess achievement of those services and, more importantly, achievement of related community outcomes. Without clearly defined levels of service in asset management plans, local authorities will find it very difficult to measure the levels of service that are being achieved.
Effect of anticipated growth on asset management
Application of the growth assumption is the third area of concern. Because local authorities rely heavily on their assets, in particular, infrastructural assets, it is important that they consider the capacity of current assets to sustain the pressures of future growth and that they acknowledge the capital expenditure required to maintain that capacity.
Clause 2 of Schedule 10 of the Act requires local authorities to identify how they will assess and manage the asset management implications of changes to demand for, or consumption of, relevant services and what additional capacity is required for these changes. This creates a requirement to allocate capital expenditure to changes in demand for, or consumption of, relevant services; changes in levels of service and standards; and the maintenance, renewal, and replacement of assets.
About 30% of local authorities did not clearly allocate capital expenditure to growth, levels of service, renewals, or "other", and did not separately and clearly identify the capacity and levels of service components of their asset management projections. Furthermore, two local authorities did not provide a clear explanation of asset management in relation to their allocation of capital expenditure. They also had no growth assumption.
About 15% of local authorities did not fully discuss the capacity of current infrastructure to meet future growth and the flow-on effect of how the maintenance, renewal, and replacement of assets will be carried out. Consequently, there was a weak link from growth strategies to financial forecasts.
These results demonstrate that a significant number of local authorities did not clearly meet the disclosure requirements of clause 2(1)(d) of Schedule 10 of the Act and, therefore, did not clearly explain the way they were dealing with anticipated growth in relation to asset management.
Review of asset management plans subsequent to the 2006-16 LTCCPs
For our review of the 2006-16 LTCCPs, we reassessed local authorities' asset management plans (or information that functions as such a plan) using the same approach that we took in 2003. This approach involved selecting and reviewing the best and least developed plans of each local authority (see paragraphs 6.7-6.9).
Figures 18 and 19 show the average rankings for each of the 12 criteria for best and least developed asset management plans for both 2003 and 2006. A comparison of the figures allows us to see that, for 2003, most criteria were ranked between 2 and 3, whereas, for 2006, most criteria were ranked between 2 and 3.5. This demonstrates that, overall, there was some improvement in asset management plans.
Average rankings in 2003 for the 12 criteria for asset management planning
Average rankings in 2006 for the 12 criteria for asset management planning
Of the best asset management plans we reviewed in 2006:
three cities, 13 districts, and three regions scored 3 or above on every criteria ranked;
nine cities, 12 districts, and three regions scored 3 or above for all but one or two of the criteria ranked; and
no local authority scored 2 or less on every criteria ranked.
Of the least developed asset management plans we reviewed in 2006:
three cities, 12 districts, and two regions scored 3 or above for all but one or two of the criteria ranked;
four cities, 10 districts, and two regions scored 2 or below for all but one or two of the criteria ranked; and
one region ranked no higher than 1 on all criteria.
For both the best and least developed asset management plans, the two criteria that were ranked lowest were risk management and optimised decision-making. This result is perhaps unsurprising – many local authorities initially drew up asset management plans in 1996 to help establish whether their projected operating revenue was enough to cover operating expenses, as required by amendments to the 1974 Act. Future uses of information, such as for risk management and optimised decision-making, would not have been a primary focus.
Nonetheless, we had hoped that, when local authorities recognised the benefits of asset management planning for managing and predicting the need for services, they would have enhanced their basic asset information. Although there has been some improvement, we consider that there is room for further improvement to better meet the intentions of the Act.
The results of our review suggest that there is not much variation in the quality of asset management plans between the best and least developed plans within each local authority. While this result is heartening, we are aware that some local authorities may not have prepared asset management plans for noninfrastructure-intensive assets – for example, parks and reserves. As our review looked at prepared information about assets, this could reflect a more positive state of asset management than actually exists for some types of assets.
Comparison of asset management plans in 2003 and 2006
A comparison of the results from the 2003 and 2006 reviews of asset management plans shows that, as a whole, the quality of asset management plans has improved. Despite this improvement, the main results in 2006 resembled those of 2003.
Improvement is evident because the ratings for the best and least developed asset management plans have either remained the same or improved for all criteria. As shown in Figure 20, both the best and least developed asset management plans experienced improvement for 75% of the criteria.
Comparison of best and least developed asset management plans
Local authorities scoring 3 or above for all but one or two of the criteria ranked 6 17
Local authorities scoring 2 or below for all but one or two of the criteria ranked 31 15
Local authorities ranked no higher than 1 on all criteria 2 1
Best developed asset management plans
Local authorities scoring 3 or above on every criteria ranked 6 19
Local authorities scoring 3 or above for all but one or two of the criteria ranked 17 24
Local authorities scoring 2 or less on every criteria ranked 4 0
Figure 20 shows that there has been a significant increase in the number of local authorities scoring 3 or higher in all, or all but one or two, of the criteria. In addition, there was a significant reduction in the number of local authorities scoring 2 or less for all, or all but one or two, of the criteria. Interestingly, there were no local authorities with best developed asset management plans that scored 2 or less on every criteria in 2006, whereas four local authorities did in 2003.
The range in quality between the best and least developed asset management plans for all criteria continues to be relatively small. This shows that local authorities have improved, in a similar proportion, the best and least developed asset management plans.
The main trends identified in 2006 have not changed significantly from those identified in 2003. Risk management and optimised decision-making were the two criteria that ranked lowest in 2003, and they maintained this grading in 2006. Although these areas were still weak, both experienced some improvement.
Our review found some improvement in the asset management plans of local authorities. Notwithstanding this, a number of local authorities still need to further improve their asset information to give effect to the new disclosure requirements of the Act.
There is no statutory requirement for local authorities to follow a framework such as the criteria in the Creating Customer Value manual (see paragraphs 6.8-6.9) that we used to assess asset management plans. In our view, using such a framework would assist local authorities to prepare asset information that addresses most of the requirements of the Act. The National Asset Management Steering Group is actively involved in and supports the improvement of asset management planning.
All local authorities would benefit from investing effort in improving asset information to meet the requirements of the Act by gaining an enhanced understanding of:
how assets deliver service and the effect of asset decisions on levels of service; and
Our review also suggests that, although most local authorities have a reasonable standard of base information, many need to apply the information to future-oriented uses, such as risk management and optimised decision-making. By using reliable asset information for these purposes, local authorities will be able to identify and meet future needs effectively and efficiently, and protect their ability to deliver critical services to communities.
We recognise the improvement achieved in this area to date, and encourage the sector and the National Asset Management Steering Group to continue their work towards further improvement. We will maintain our interest in the state of asset management information because of its importance for future LTCCPs.
1: Local Government: Results of the 2002-03 audits, Part 2.4 Asset management plans, parliamentary paper B.29[04b], page 52.
2: The Creating Customer Value manual is one in a set of manuals developed by the National Asset Management Steering Group. The manual is being revised in 2007.
3: Audit New Zealand (2005), Asset Management Planning In Support Of Long Term Council Community Planning - A National Report.
4: For more information on audit opinions, refer to Part 8.
5: See section 93(6) of the Act.
6: See section 101 of the Act.