Part 2: Our previous work on asset management in the health sector

District health boards’ response to asset management requirements since 2009.

2.1
In this Part, we set out the work we have reported to Parliament on DHB asset management since 2009.

2.2
This information in this Part is primarily drawn from the following reports of the Auditor-General to Parliament:

2.3
As a result of our ongoing work in the sector, we remain concerned about whether:

  • appropriate levels of service drive asset management planning;
  • asset management planning is integrated with financial and service forecasts and intentions to meet the needs of each DHB's population; and
  • asset management information is maintained and updated to reflect the current asset base (asset type, age, size, location, performance, monitoring and condition, maintenance history, and cost) and to improve the asset management life-cycle approaches when making decisions about asset management.7

From 2009 to 2011: Putting service levels at the centre of asset management planning requirements

2.4
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. At the same time, regional asset management plans were also produced.

2.5
As part of our 2008/09 and 2009/10 annual audits of DHBs, we looked at each DHB's asset management plan. Most plans met or largely met the Ministry's requirements.

2.6
However, we had concerns about whether plans were up to date and connected to the service and financial intentions of DHBs. Our auditors' recommendations to DHBs on their asset management planning included:

  • ensuring that appropriate levels of service drive asset management planning;
  • ensuring that asset management plans contain financial forecasts;
  • updating asset management plans to reflect the current asset base and planned hospital redevelopments;
  • reviewing asset information for asset type, age, size, location, performance, monitoring and condition, maintenance history, and cost; and
  • improving the asset management life-cycle approaches when making decisions about asset management.

2.7
After our 2010/11 audits, we looked for evidence that DHBs had changed their practices in response to our auditors' recommendations. There were discernible improvements in some DHBs (Auckland, MidCentral, Capital and Coast, and Hutt Valley DHBs). However, most DHBs had not improved how they plan to manage their assets.

2.8
Few DHBs documented their policy on the level of sophistication they seek for their asset management practices, in proportion to the scale and risk of their assets, to support their services effectively.

2.9
Links between asset management planning and DHBs' other service and financial planning were variable. Many still relied on planning from 2009, and the links between the assets, models of care, demand for health services, and outcomes sought were typically either not documented or out of date.

2.10
Most asset management plans provided a summary of assets owned. This typically focused on the age and a description of assets, without information about their condition and performance. The approach to managing risk or dealing with disaster was not clear.

2.11
We concluded that two factors typically hampered asset management planning:

  • DHBs held information on different assets in separate systems – for example, buildings information held separately from clinical equipment and vehicle information – making it difficult to consider asset management planning as a whole.
  • Most DHBs' data contained information about equipment that had been fully depreciated and was beyond the end of its (theoretical) useful life but that remained in use, which suggested that DHBs did not have a good knowledge of the condition of their assets.

2.12
Overall, the plans did not put intended service levels at the heart of asset management planning. They focused on capital planning rather than considering all the types of expenditure needed on the assets. Also, some plans did not set out a sustainable approach to funding the work the assets needed.

2.13
We recommended that links between asset management plans and other planning needed to be strengthened – in particular, planning cycles needed to be better aligned.

2.14
We considered that there was scope for the Ministry to:

  • encourage and support DHBs to see asset management planning as a core part of their service and financial planning, and to produce regional "joined-up" asset management plans; and
  • ensure that business cases for capital investment are fully integrated with service planning for the individual DHB, between DHBs, throughout a region, and nationally.

2.15
Amendments to the New Zealand Public Health and Disability Act 2000 in 2010 and 2011, and new regulations under the Act, brought new DHB planning requirements into force from 1 June 2011. The amendments and regulations:

  • created a National Health Board, supported by specialist advisory committees, to deal with matters such as workforce, information services, and capital investment;
  • required DHBs to plan sub-regionally or regionally;
  • required DHBs to put in place the governance and support arrangements to deliver those plans; and
  • gave the Minister of Health the power to direct DHBs on matters to do with delivering regional services.

In 2012 and 2013: District health board asset management from a health and public sector perspective

2.16
In 2012, the Capital Investment Committee asked each region to agree a list of intended capital spending for the next 10 years, based on a notional budget for each region. The Capital Investment Committee is a specialist committee that advises the Minister of Health on capital funding for all projects that cost more than $10 million, regardless of the source of funding Health. Slow progress on a National Asset Management Plan and gaps in the base information from DHBs and private health-care providers made it difficult for the Capital Investment Committee to prioritise spending.

2.17
A National Asset Management Plan has been in draft form since 2012. The Ministry told us that an annual update was now part of its work plan, but the Capital Investment Committee reported difficulty with agreeing a long-term capital plan. The Capital Investment Committee's difficulties included setting priorities for investment without a long-term service plan for health.

2.18
In June 2013, we published Managing public assets, which reported information about the asset management practices of 340 public entities (those owning assets worth more than $2 million). This included all DHBs. We gathered information about how regularly the public entities reported information about the condition of their assets to decision-makers, the extent of deferred maintenance or deferred renewals,8 and whether the entities had asset management plans.

2.19
Ninety percent of DHBs checked the condition of their buildings regularly and had documented information on their significant assets and on the maintenance and/or renewal profiles for their buildings. However, health assets had some of the lowest condition ratings in the public sector, and only 80% of DHBs were actually carrying out their planned maintenance and renewal of buildings.

2.20
We published Regional services planning in the health sector in November 2013. In that report, we said that there are big demands on capital for major repairs to buildings that are beyond their useful life, to upgrade them to meet seismic standards and support modern standards of care.

2.21
We reported that capital investment in buildings based on regional services planning was at an early stage. Capital expenditure planning often took place before service planning. We saw and were told of tensions between getting on with these repairs and waiting to decide the best use of assets arising from new ways of working (based on clinical pathways and new models of care).

2.22
The regional capital committees were beginning to understand the full range of assets held throughout their regions. However, the links to capital planning were not clear, and the committees were not yet influencing or setting priorities for major investment in buildings based on regional services planning. Occasionally, the regions agreed collective priorities, but, in our view, the regional lists looked more like a summation of the separate DHB plans.

2.23
We concluded that, overall, meeting the needs of all agencies involved in preparing and approving business cases is difficult and that the needs of decision-makers are not always well met. Too few people have the skills for preparing robust business cases, and the unpredictable availability of capital funding makes it difficult to set up core capacity. This means that decision-makers rely heavily on consultants, advisors, and experts.

2.24
National capital funding cuts across regions, complicating the process of making regional decisions. There were concerns that DHBs could not afford their share of the capital needed for all these projects and initiatives, and that regional plans did not always reflect the effects of the national initiatives.

From 2012 to 2015: Asset management from the perspective of financial statement information

2.25
As part of our annual audits for 2011/12, we followed up on our recommendations (see paragraph 2.6) to individual DHBs. We reported that nine DHBs still needed to update their asset management plans. We recommended that three other DHBs improve their asset management plans.

2.26
We also looked at DHB asset management through the lens of financial statement results. We reported the total deficit, for all DHBs, from 2006/07 to 2011/12, including a breakdown by the four regions. The Central and South Island Regions had increasing deficit levels.

2.27
During this period, the Canterbury earthquakes affected Canterbury DHB, damaging facilities and disrupting services, displacing sections of the population, and affecting residents' health needs. Canterbury DHB recognised in its financial statements impairments of its buildings and equipment of $33.8 million in 2010/11 and $14.3 million in 2011/12. The DHB also identified $28.9 million of specific additional costs as a result of the earthquakes.

2.28
Other DHB buildings were recorded as impaired or potentially impaired after DHBs considered their compliance with building codes and the seismic strength of their buildings. Examples included:

  • Hutt Valley DHB – a potential impairment of $21 million, with uncertainties about the carrying value of certain buildings because of seismic-strengthening issues;
  • Nelson Marlborough DHB – $6.4 million impairment, mainly because of low seismic-strength assessment; and
  • West Coast DHB – impairment of $2.6 million for buildings that are earthquake-prone.

2.29
We noted trends of increasing total assets, liabilities, and debt accompanied by consistently negative levels of retained earnings. As a result, we concluded that some indications of risk might warrant further consideration. These indications included:

  • the negative levels of retained earnings as a result of deficits incurred in previous years;
  • some DHBs' (apparently) limited financial ability to respond to unexpected events in the medium term by using their own financial resources – for example, on average, current assets cover only 59% of current liabilities;
  • the consistent underspending against budget for capital expenditure; and
  • the reasonably high variability of results throughout the health sector, suggesting inconsistency in the financial ability of some DHBs to manage potential short-, medium-, and longer-term financial risks.

2.30
With increasing and repeated evidence of a range of issues in asset management in the health sector since 2009, we repeated our financial analysis in our reporting on the results of our 2012/13 audits.9 We have updated this analysis for this report so that it covers the seven-year period from 2008/09 to 2014/15.

2.31
For all the seven years we reviewed, fewer than half of the DHBs had indicators at levels that would represent good financial and asset management. There are sizeable over-budgeting or underspending of capital, low levels of working capital, and moderate to high liabilities compared to assets.

2.32
Depreciation is an accounting estimate of the consumption of, or the cost of using up, an asset. We looked at whether DHBs were likely to be underinvesting in their assets by comparing capital expenditure to depreciation. Because there had been significant capital investment in recent years, with several hospital redevelopments, we expected a result of more than 100% (of capital expenditure over depreciation). Capital expenditure includes not only replacing existing assets but also spending on new assets, and the health sector has high capital needs.

2.33
The comparison resulted in an average of 100% to 150%, indicating a low to moderate risk of underinvestment in DHBs' capital assets. However, without good information about the split between capital expenditure on renewals and on new capital assets, the extent of underinvestment in replacement capital expenditure is clouded.

2.34
Our auditors also reported that many DHBs still did not have up-to-date asset management plans and that more than half of the DHBs needed to update or improve their asset management practices. Some were delaying carrying out this work until regional asset management plans and a national asset management plan had been developed.

2.35
In reporting our 2012/13 audits, we said that DHBs were working to improve their financial performance and to "live within their means" by focusing on delivering short-term results, particularly in planning and budgeting for operational activities. However, we warned that many of the longer-term results also suggested that the adequacy and alignment of financial resources might limit the ability of DHBs to respond to unexpected events or exploit future opportunities without recourse to the Crown.

2.36
The sector trends we noted in 2010/11 of increasing total assets, liabilities, and debt have continued during the time that DHBs have been required to have asset management plans. There have also been consistently negative levels of retained earnings, suggesting there is little money available from operating surpluses to reinvest in DHB assets.

7: The International Infrastructure Management Manual (2011 edition) defines life-cycle as "the time interval that commences with the identification of the need for an asset and terminates with the decommissioning of the asset or any liabilities thereafter". It defines life-cycle asset management as encompassing "all asset management strategies and practices associated with an asset or group of assets that result in the lowest life cycle cost".

8: Renewals is the replacement or refurbishment of existing assets.

9: Controller and Auditor-General (2014), Health sector: Results of the 2012/13 audits, Part 4.