Part 4: Managing district health boards' assets

Health sector: Results of the 2010/11 audits.

4.1
In this Part, we detail the findings of our high-level review in 2011 of how DHBs manage their assets.

4.2
Our review covered:

the overall approach to planning;
strategy;
the fundamentals of asset management;
organisational factors; and
the specialist areas of demand and risk management.

4.3
In our view:

DHBs need to see asset management planning as a core part of their own service and financial planning, and to regularly update their plans (to improve them and keep them relevant). There is scope for the Ministry to encourage DHBs in this.
Information about all of a DHB's assets and their condition needs to be brought together and linked to asset lifecycle management strategies, with a clear rationale for any work that is planned on assets.
Links need to be clearer between the assets, models of care, required service levels, demand for health services, and the outcomes sought.

Background

4.4
Asset management is an essential part of public sector governance, and should be part of an organisation's strategic, corporate, service, and financial planning.

4.5
A complex range of property, plant, and equipment assets underpins DHBs' services. These assets need to be managed so that services are effective and efficient. Asset management means thinking about assets in the context of the services they are supporting, not only now but in the future, and being clear why an asset is held.

4.6
We expect each DHB to:

know how well its mix of assets meets its outcome and service delivery needs, now and in the future (that is, include its asset management in its strategic planning);
have information about its assets and their condition that is reliable enough to support its planning, defined service levels, documented lifecycle management strategies, and complete financial forecasts;
ensure that there are good links between asset management planning and its other service and financial planning, with clear responsibility for planning and for having an up-to-date documented plan in place; and
understand, respond to, and manage demand for its assets and the risks related to them.

4.7
An entity's approach to asset management forms part of our management control environment assessment in each annual audit. In 2011, we carried out a high-level review of how DHBs manage their assets, as a follow-up on work in previous audits. Our findings are set out below.

Overall approach to planning

4.8
In 2009, the Ministry required DHBs to formally document their approach to asset management in an asset management plan. In response to that requirement, all DHBs produced an asset management plan in 2009. Regional asset management plans were also produced then.

4.9
Since 2009, the Ministry has required DHBs to submit their capital intentions (as part of applying for capital funding). By the end of July 2012, the Ministry must provide to the Treasury a report on its capital intentions that links individual, regional, and national plans. The Ministry requires DHBs' business cases for new investments to link to local and regional service and asset plans.

4.10
In our view, most DHBs have not improved how they plan to manage assets since 2009. However, there have been discernible improvements in some, notably Auckland, MidCentral, Capital and Coast, and Hutt Valley DHBs. In these DHBs, asset management planning is a core part of service and financial planning, and there is evidence that they regularly update their plans to improve them and keep them relevant. Canterbury DHB is also noteworthy for the integration of its planning for assets with its service and financial planning (see paragraphs 4.41-4.44).

4.11
We consider that there is scope for the Ministry to further encourage and support the other DHBs to see asset management planning as a core part of their service and financial planning, and to produce regional, "joined up" asset management. At the same time, the Ministry needs to ensure that business cases for capital investment are fully integrated with service planning, for the individual DHB, between DHBs, throughout a region, and nationally.

Strategy

What we expected

4.12
Asset management planning needs to be a main element of strategic planning for health services. It should be done before budgets have been set, and after approaches to meeting health needs have been determined. It has to happen within the DHB's planning cycle.

What we found

4.13
Links between asset management planning and DHBs' other service and financial planning are variable. The DHBs that have updated their planning (for example, Auckland and Capital and Coast DHBs) have gone further than a simple summary of assets. They have defined their outcomes and service delivery needs, completed a structured assessment of asset functionality, capacity, and performance, and linked this to models of care, demand for health services, and the outcomes sought (even if they have had to make assumptions about some of this).

4.14
In the wider group of DHBs, which is still relying on 2009 planning, the links between the assets, models of care, demand for health services, and the outcomes sought are typically either not documented or out of date. For example, Southern DHB (formed from the merger of Otago and Southland DHBs) is yet to produce an integrated Southern DHB asset management plan. An integrated plan would enable the DHB to have a better overview of its assets and its relative priorities and needs.

4.15
Few DHBs have documented their policy for managing assets. Each DHB should be clear on the appropriate level of sophistication for its asset management practices, proportionate to the scale and risk of its assets, so that services are supported effectively. We agree with international guidance on infrastructure management²⁶ that the best place to set this out is in a brief corporate policy statement.

4.16
Apart from formal plans to manage assets, many DHBs are substantially redeveloping their assets to better meet service needs. This leaves these organisations well placed to take a more strategic view.

Fundamentals of asset management

What we expected

4.17
The four aspects that we consider to be fundamental to asset management, and that we assessed, were whether:

asset information supports strategic planning;
information about levels of service is integral to the asset management plan;
lifecycle strategies to manage assets cover acquiring, procuring, operational planning, repairs and maintenance, renewal, capital upgrades, responding to growth, and disposal; and
there are financial forecasts of operational, maintenance, renewal, and new capital work that are based on explicit assumptions, are precise and reliable, and are supported by up-to-date valuations and a clear, plausible approach to funding work on the assets.

Information about assets

4.18
Most DHBs' asset management plans – whether they date from 2009 or are more recent – provide a summary of assets owned, but that information typically focuses on the age and a description of assets, without information about their condition and performance.

4.19
Typically, two factors hamper asset management planning:

Information on different assets is usually held in separate systems – for example, buildings information is held separately from clinical equipment and vehicle information – making it difficult to consider planning as a whole.
Most DHBs' data contains information about equipment that has been fully depreciated and is beyond the end of its (theoretical) useful life, but is still in use.

4.20
This latter factor is particularly unhelpful in asset management planning. For example, if asset A is at the end of its theoretical life, but has been assessed to be in good condition and performing well, we would expect the remaining life to be extended to reflect its actual remaining life. Conversely, if asset B, with theoretically five years of useful life left, becomes obsolete, it actually has no useful life left. Unless these useful lives are adjusted to match reality, a profile of remaining life will not match the renewal needs of the DHB. It will wrongly show assets as needing renewal when actually they continue to function adequately, or conversely show assets as having useful life left when actually they need replacing.

4.21
This makes it difficult to distinguish between equipment whose useful life has proved longer than originally estimated, and equipment whose appropriate renewal has been deferred, perhaps because of funding shortfalls.

4.22
We would expect renewal forecasting to be based on analysis of remaining useful life, condition, and performance. The lack of these aspects of information about some assets makes this difficult.

Linking assets to levels of service

4.23
"Levels of service", which define the standards of a DHB's health services, are at the heart of good asset management.²⁷ Defining service levels helps to put asset management planning in the context of supporting service delivery.

4.24
In our 2011 review, we found some good examples of planning based on levels of service. Capital and Coast DHB has defined an initial set of levels of service linked to the assets required to deliver them, and has begun what it calls a "staged introduction of levels of service philosophy". Similarly, Auckland DHB, in dedicated sections of its 2010 and 2011 asset management plans, refers specifically to "asset service levels". Although its service levels are defined at a relatively high level, they do cover the breadth of asset groups.

4.25
It is clear that other DHBs have standards, expectations, performance measures, and other information that could form the basis of defining asset-related service levels. In our view, pulling them together to support planning should be a priority for these DHBs.

Lifecycle strategies

4.26
We expect lifecycle management strategies to clearly set out the rationale for any work that is planned on assets. Instead, we found that DHBs' plans typically focus on the capital needed, not on why the asset is needed and when.

4.27
Most DHBs' plans contain good discussion of growth and other demographic change. Auckland DHB's asset management plan stands out by linking this analysis to capital, maintenance, and operational costs. This positions Auckland DHB well to take a whole-of-lifecycle view to maintaining or renewing its assets.

4.28
Without a lifecycle strategy that a DHB follows, maintenance or renewal might be deferred to a point that is a risk to the DHB's services. The level of risk will depend on the level of service required. More importantly, deferred maintenance and renewal can lead to a shortening of the useful lives of key assets and, in the longer term, increased costs. Deferred maintenance and renewal of assets may lead to equipment breakdowns, and health services being unavailable.

4.29
Many DHB asset management plans refer to deferred maintenance and renewals, without saying how much deferred maintenance there is, or what service levels are expected to be delivered using those assets.

Linking capital and operational forecasts

4.30
The Ministry requires a statement of capital intentions from each DHB. Although important, it is only one aspect of financial planning.

4.31
We found that most DHBs have not brought together financial forecasts of capital and operational expenditure. This is a weakness in financial planning for DHBs' assets.

Organisational factors

What we expected

4.32
We expected DHBs:

to have a complete, up-to-date asset management plan in place;
to be clear how asset management planning is linked to other operational service and financial planning, such as annual budgeting processes; and
to be clear how asset-related service delivery is organised, with responsibility for asset management at management and governance levels, supported by access to suitably qualified experts where needed.

What we found

4.33
Most DHBs do not keep their asset management planning up to date. Some DHBs state that they are working to a three-year asset management planning cycle, with an update due in 2012.

4.34
In our view, a three-year asset management planning cycle can be appropriate once asset management planning is mature and established as part of business as usual. However, most DHBs are not in this position. A more appropriate approach is to update and improve planning incrementally in the early years. This was the approach taken by Auckland, MidCentral, Capital and Coast, and Hutt Valley DHBs, for example.

4.35
As noted above, links between asset management plans and other planning need to be strengthened. In particular, planning cycles need to be better aligned.

4.36
One of the better examples is Auckland DHB's asset management plan, which is well integrated with the DHB's capital and other budgeting processes. The mix of outsourcing and in-house work is explained and justified. Responsibility for asset management is clear at the operational and governance levels.

Managing demand and risks

4.37
Most DHBs have documented the factors that influence demand on their assets, with explicit and detailed growth and demand assumptions.

4.38
To help manage risks, some DHBs have followed good practice by formally identifying certain assets as critical to service delivery. Capital and Coast DHB has a risk framework and is applying a risk-criticality model to all its assets to identify potential effects on business deliverables. Formally identifying critical assets allows them to be prioritised for inspection, maintenance, and renewal as appropriate.

4.39
Auckland DHB's plan outlines the corporate approach to risk management, using a web-based event (incident) reporting system. Risk and asset criticality are addressed throughout the plan, showing that asset-related risks are well considered.

4.40
However, most DHBs have not included within their asset management plans a risk register of major asset-related risks and approaches for managing those risks. As a result, the approach to managing risk or dealing with disaster is not clear. The lack of clarity weakens this aspect of DHB management.

Effect of the Canterbury earthquakes on asset management

4.41
In 2009, Canterbury DHB prepared a plan for a significant realignment of health services followed by a redevelopment of facilities. Asset analysis and appraisal was one of the three components of its plan. The other two aspects were clinical services planning and the concept master plan. Canterbury DHB told us that a business plan was submitted to the Government in November 2010 for building work at Christchurch and Burwood Hospitals.

4.42
The recent earthquakes have caused substantial damage. Canterbury DHB continues to assess damage after significant aftershocks. It has prepared some temporary provisions to enable service delivery to be maintained, and has taken care to ensure that these temporary developments are aligned to the overall direction of service delivery and effective asset management in line with the concept master plan.

4.43
To ensure that Canterbury DHB's asset planning is also aligned to provide more complex hospital services and meet regional needs, it is working with colleagues across the southern region to prepare a regional asset management plan that is aligned with projected clinical needs.

4.44
This planning work will be based on:

future clinical demands;
its current assets, their current state, and whether they are fit for purpose;
an analysis of the gap between what the DHB has and what its future needs are expected to be; and
asset developments in line with overall clinical need across the South Island.

4.45
We expect that there will be wider repercussions for DHBs from the Canterbury earthquakes. Upgrading buildings to meet existing building codes, and the possibility of more rigorous codes, introduce new challenges for DHBs.²⁸

Our focus for future audit work on asset management

4.46
To follow up on the findings of our review, we are currently considering whether DHB asset management will be one of the topics focused on in our audit work in 2012/13. The focus of our work would be the more general issue of whether the public sector, and DHBs in particular, are well prepared to meet future service needs.

4.47
We will continue to encourage the Ministry, in its work with DHBs on asset management planning, to get DHBs to see it as a core part of their service and financial planning, and to work on regional, "joined up" asset management. At the same time, the Ministry needs to ensure that business cases for capital investment that it manages nationally are fully integrated with service planning, for the individual DHB, the district, the region, and nationally.

26: International Infrastructure Management Manual (NAMS, 4th edition, 2011). We note that, although this guidance is international, it was produced in New Zealand and is highly relevant.

27: One of the basic tenets of sound asset management practice is: "To provide the levels of service the current and future community want, and are prepared to pay for, in the most cost-effective way", NAMS (2007), see www.nams.org.nz.

28: See Part 2 of Office of the Auditor-General (December 2011), Central government: Results of the 2010/11 audits (Volume 1).

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