Part 5: Manage assets effectively

Reflections from our audits: Investment and asset management.

As the stewards of public assets, it is important that public entities have the right information, systems, and people to manage assets responsibly and to the best of their ability. Having the right information, systems, and people provides a good foundation for effectively managing assets to meet the needs of current and future generations.

When carrying out our work, we meet many people who are passionate about being good asset managers. They recognise the importance of effective asset management and the tools and resources they need to do their work.

However, public entities need to be realistic about the gaps in their information and systems. They need to understand the gaps and work hard to fill them to enable good asset management.

Good information about assets is needed for public entities to monitor the performance of assets and manage them. If done well, public entities will make decisions that optimise services to people and they will realise the most value from their investment in the assets.

Collect reliable information

Having robust information about physical assets and their condition helps public entities make effective and sustainable decisions about how their assets are managed. Public entities might not have detailed information about all of their assets, but they should have a good understanding of critical assets. Critical assets are those assets that, if they failed, would have a significant adverse effect on essential services.

If a public entity does not have a good understanding of its critical assets, particularly the condition of the assets, they could be at risk of making poor long-term decisions. Long-term planning that is based on inaccurate condition information or poorly informed assumptions could result in costly or unsustainable decisions.

Our 2013 discussion paper, Managing public assets, included a case study of Greater Wellington Regional Council's management of its rail assets. Based on the Council's experience, we noted that:

  • work on assets cannot be effectively prioritised if assets are not understood;
  • information is crucial to the planning process;
  • the time it takes to complete condition assessments should not be underestimated; and
  • the assessment methodology must be understood and data must be useable.

These factors can be almost universally applied to the management and reporting of all physical and financial assets.17

The collection, analysis, and use of robust information about critical assets needs to be an area of focus for many public entities. This includes collecting the underlying knowledge and information about assets that staff involved in the management of those assets acquire.

Since 2009, we have reported that many district health boards have weak asset management information and practices. There has been a general lack of knowledge about the condition of assets and a lack of financial planning for asset renewal and replacement. When we followed up in 2016, we noted some improvements to asset information and practices. However, there was still some way to go for many district health boards to have "joined-up" and reliable information so they could budget properly and make good decisions about their assets.18

Our 2014 report, Water and roads: Funding and managing challenges, noted that many local authorities did not have a complete understanding of the performance or condition of their assets.19 Some local authorities had low confidence in the reliability of their asset data.20 Further, when we looked at local authorities' infrastructure strategies for their 2015-25 long-term plans, we noted that more than half of them discussed the need to collect better information about assets. Underground networks posed the greatest challenge in terms of asset condition information.

Do you have the right information about assets to make good decisions?

Invest in quality systems

Having robust information is not an end in itself. The information needs to be collected in a way that makes it useable. Therefore, it is important to invest in good quality systems that make it easy to use the information to manage assets effectively.

At times, we find that systems are not in place or are not used in the best way.21 There is a risk that, in these circumstances, opportunities are missed or poor decisions are made.

In 2016, we followed-up on earlier reports that considered the effectiveness and efficiency of arrangements to repair pipes and roads in Christchurch. As the repair work was done, the Stronger Christchurch Infrastructure Rebuild Team (SCIRT) alliance collected a wealth of information about pipes and roads owned by Christchurch City Council and New Zealand Transport Agency that they could benefit from. SCIRT recorded this information in asset information systems that it set up.

We noted that Christchurch City Council could use this information to improve its understanding of the condition of its assets, which would improve its management of them. However, progress had been slow in planning for the transfer of the information from SCIRT's system to the Council's system. We noted that the Council needed to sustain momentum for the transfer of information to realise the benefits of SCIRT's work for ratepayers.22

In our report Managing the school property portfolio, we noted that information about school properties was spread throughout different systems in the Ministry of Education. Although there is enough information in these systems to make informed decisions, we did not see the information being used to produce a whole-of-portfolio view to support effective evidence-based investment decisions.

Do you have systems where the data about assets can be readily analysed and used to manage those assets?

Involve the right people

Good governance

Public entities need good governance of assets. We expect those charged with governance to ensure that there is effective planning for and management of assets, and to monitor the effectiveness of asset management.

In our report Review of public sector financial assets and how they are managed and governed, we looked at governance in 14 public entities with significant financial assets. All 14 had reasonably good structures and systems in place for managing and governing those assets.23

When we consider the governance of physical assets, there are mixed results. For example, we found limited reporting on the condition and performance of assets to governors and senior managers of district health boards. This led us to question how well positioned governors are to make decisions about the future delivery of services.24

In the absence of good reporting and information about assets, governors cannot make deliberate and informed decisions about how to invest in and manage the assets they govern. In our most recent report on the results of local authority audits, we noted our expectation that elected members of local authorities understand their critical assets in order to make good decisions about the maintenance and renewal programmes of those assets, as well as investments in new assets.

Clear roles and responsibilities

Good governance requires a distinction between the role of governors and managers. In our report Reflections from our audits: Governance and accountability, we noted that improvements are needed to clarify roles and responsibilities for governors and managers at an organisational level and project level.25

In our audit of the Auckland Manukau Eastern Transport Initiative programme, we found that a change in the arrangements for the Programme Control Group led to the same person acting as the chairperson, programme sponsor, manager for the delivery of the programme, and the line manager of the programme director. Too much responsibility in the hands of one person reduced the effectiveness of the advice from the Programme Control Group.26 This was not in the best interests of such a significant project.

Capable staff

Good asset management relies on entities having the right people to carry it out. Recruiting and retaining competent people is important, as is the engagement of external advisors where sensible to do so.

We looked at how well Crown Fibre Holdings Limited (Crown Fibre) was managing its work to build an ultra-fast broadband network throughout the country. Crown Fibre employed capable people who could negotiate and manage relationships in a tough commercial setting. This was a critical component of Crown Fibre's operations.27

Public entities may not always have the expertise internally to manage their assets. If so, they will need to seek external expertise. We looked at how three electricity distribution businesses were managing their resources. They had resourcing strategies that included using contractors where there were skill gaps. They also recognised that there will be a need in the future for more specialist skills, such as data technicians and business analysts, to continue to manage their distribution networks effectively.28

We expect the demand for specialised skills in many aspects of asset management to continue to increase. Because New Zealand is a relatively small country, finding specialised staff will be a challenge, and it is a risk that needs to be managed.

Independent advice

If public entities have new or complex financial or physical assets and do not have the experience or expertise internally to govern or manage them, independent external advice should be sought. This could include seeking a second opinion or referring business cases to an audit and risk committee.

Some of our previous inquiries work shows that peer review, independent expertise, additional due diligence, or specialist tendering or contracting support would have helped avoid or reduce the risk of investment or project breakdowns.

In our report Review of public sector financial assets and how they are managed and governed, we made the point that investment portfolios of financial assets can be complex. That complexity may require governors to be supported by independent expertise, or to think innovatively and combine financial assets with others to obtain greater efficiencies and expertise, and better structures.29

In our report on Crown Fibre, we noted that in its approach for selecting commercial partners Crown Fibre got independent advice and assurance on procurement from several credible sources. This advice and assurance was positive. Crown Fibre's actions were consistent with its policies and with legal and probity principles for procurement.30

Have you involved the right people in the decisions about assets?

Manage assets over their entire life

The public sector has a lot of physical assets that provide core services to New Zealanders. It is important to maintain these assets so that essential community services will continue to be delivered now and for future generations. Public entities need to have a mind-set of service delivery in perpetuity. If assets are allowed to run down, future generations will either not receive the same level of services or have to pay disproportionally more for them.

In our 2013 discussion paper Managing public assets, we took stock of how physical assets that deliver services to the public are managed. Public entities did not know whether there was any deferred maintenance or renewals for nearly 40% of assets. Understanding deferrals is important for assessing risk to services. Public entities in the education and health sectors had the most deferrals.

During our recent audits of local authorities, we reported a trend that local authorities continue to report a low level of capital expenditure on renewals31 compared to the amount they set aside for depreciation.32 Local authorities have also been carrying out substantially less capital work than they had budgeted for.

Where renewals expenditure is equal to depreciation over time, it usually indicates that reinvestment in the asset is enough to meet what is "used up". We have been considering this trend in local authorities for some time.

In our work on local authorities' 2012-22 long-term plans, the ratio of forecast renewals expenditure to depreciation showed a downward trend in asset reinvestment. If actual spending trends continue to match those forecast, we estimated that, by 2022, the gap between asset renewals expenditure and depreciation in local government could be between $6 billion and $7 billion.

In local authorities 2015-25 long-term plans, we found an increase in the level of renewal and replacement spending to depreciation in 2015. However, from 2019 onwards the level is forecast to return to the level forecast in previous long-term plans.

Each local authority's circumstances are unique. Infrastructure assets typically have at least 50 years of useful life, so we cannot draw firm conclusions about asset sustainability trends based on 10-year forecast information. However, this trend, together with weaknesses in asset knowledge, indicates that local authorities might be underinvesting in their assets.

We have encouraged all local authorities to better understand the condition and performance of their assets, and to consider whether they are underinvesting.33

The work we have carried out in the health and tertiary education sectors shows that they too grapple with these issues.

Monitor asset performance

Appropriate monitoring of the performance of assets is needed to ensure that services are being provided as intended. Information about the performance of assets needs to be available for managers and decision-makers to scrutinise and inform asset development and management.

Performance monitoring needs to be appropriate to the nature of the asset, with measurable and relevant performance measures. Scrutiny of the performance will occur at different levels and the right information needs to be provided to the right level – short-term or long-term, locally focused or country-wide.

The New Zealand Transport Agency manages the state highway network. The network is one of the country's most important assets. In 2014, the network was almost 11,000 kilometres long, had a value of around $28 billion, and $500 million was spent on its upkeep and development annually.

An important part of the Transport Agency's work is monitoring the performance of contractors doing work on the network. This includes using contract management boards to review contract progress and a value assurance committee to review key result areas nationally. In our review of the Transport Agency's work, we stressed the importance of monitoring and benchmarking contractor performance consistently throughout the country and reporting on the results to contractors.34

Are you receiving the information needed to monitor how effectively assets are managed?

Determine whether benefits have been realised

The benefits obtained from investments in assets can be realised over an extended period. It is common for the benefits from major capital infrastructure projects to be realised over 30 years or more. Tracking and measuring benefits needs to be carried out, and regularly reported on, over the long term.

When carrying out some of our asset management work, we have looked for whether productivity increased by doing either more for the same cost or the same for less cost. We also looked for whether New Zealanders experienced an improvement in services through increased reliability or accessibility.

Overall, our work showed that the state of benefits measurement and realisation in public entities is immature.

In 2016, we reviewed the use of the Gateway process in capital-intensive agencies in central government.35 The Gateway process reviews significant capital projects at various stages of the project, based on risk factors identified by research into common causes of project failure.

We found that reviews were not carried out when the project was complete and benefits should start to be realised from the asset. Once the project was complete, the project team disbanded without first establishing processes to embed benefits realisation.

In our 2016 report District health boards' response to asset management requirements since 2009, we considered the 2016 health strategy. Two independent reviews carried out as part of the update of the strategy noted that:

There is a lack of visibility of results that makes it hard to prioritise funding or take into account long term, cross-sectoral benefits from investment.36

Some public sector projects can take many years to become a reality. In such projects, it is important to revisit the business case for the project or programme to check that the benefit assumptions are still valid, wanted, and achievable. Priorities can change over long periods, and organisational memories can fade as staff and governors change.

The Inland Revenue Department has a business transformation programme that will take about seven years. We carried out some work during the initial period of the programme, and found it to be well governed. But we also commented:

There is a challenge with a long-term programme of this nature to determine when the main benefits of the programme will be delivered. This is because the uncertainties and length of the programme mean that prescription of those benefits and when they will be delivered is necessarily difficult early in the programme and will become clearer as the programme progresses. In our view, management of the realisation of the benefits needs to be in place from the beginning of a programme.

We recommended a continued focus on risks, including the risk of the programme not being able to provide enough certainty or clarity about when benefits will be realised. Inland Revenue intends to continually assess and manage risks to benefit realisation.

17: Office of the Auditor-General (2013), Managing public assets, pages 20-21.

18: Office of the Auditor-General (2016), District health boards' response to asset management requirements since 2009, pages 3-5, 12.

19: Office of the Auditor-General (2014), Water and roads: Funding and managing challenges, pages 4-5.

20: Office of the Auditor-General (2015), Matters arising from the 2015-25 local authority long-term plans, pages 39-40.

21: Office of the Auditor-General (2014), Reflections from our audits: Our future needs – is the public sector ready?, page 24.

22: Office of the Auditor-General (2016), Effectiveness and efficiency of arrangements to repair pipes and roads in Christchurch – follow-up audit, pages 31-37.

23: Office of the Auditor-General (2016), A review of public sector financial assets and how they are managed and governed.

24: Office of the Auditor-General (2016), District health boards' response to asset management requirements since 2009, pages 4, 23, and 54.

25: Office of the Auditor-General (2016), Reflections from our audits: Governance and accountability, page 3.

26: Office of the Auditor-General (2015), Reviewing aspects of the Auckland Manukau Eastern Transport Initiative, pages 40-41.

27: Office of the Auditor-General (2016), Crown Fibre Holdings Limited: Managing the first phase of rolling out ultra-fast broadband, page 3.

28: Office of the Auditor-General (2017), Managing the assets that distribute electricity, pages 18-19.

29: Office of the Auditor-General (2016), A review of public sector financial assets and how they are managed and governed, page 4.

30: Office of the Auditor-General (2016), Crown Fibre Holdings Limited: Managing the first phase of rolling out ultra-fast broadband, page 15.

31: Renewals expenditure is the money an asset-intensive organisation needs to reinvest to maintain its service capacity and capability. It means re-investing in the assets when components reach the end of their useful life and need to be replaced.

32: Depreciation is an estimate of the consumption of the entity's assets during the reporting period. Over the life of an asset, depreciation represents the amount of the service potential in the asset used by the entity. Normally, assets are fully depreciated before they are replaced.

33: Office of the Auditor-General (2017), Local government: Results of the 2015/16 audits, page 3.

34: Office of the Auditor-General (2014), New Zealand Transport Agency: Maintaining and renewing the state highway network – follow-up report, pages 3-8, 26-30.

35: Office of the Auditor-General (2016), Using Gateway reviews to support public sector projects.

36: Office of the Auditor-General (2016), District health boards' response to asset management requirements since 2009, page 44.