Popularity can be the death of a good idea.
Make a term, or an idea, popular and any number of people will latch onto it and attach it to their own agenda – and it doesn’t matter if their agenda is diametrically opposed to yours. In fact, it might serve them better if it is.
For example, I have seen instances of the term ‘asset management’ taken over by developers, applied to office cleaning, and, of course, to maintenance itself. The one I really objected to was the developers. Figuring that their own term had come into disrepute this particular group had decided to take ours!
We see what we want to see
Another problem with communication of ideas is that we tend to see what we want to see.
Years ago the Public Accounts Committee produced a report showing how much would need to be spent on hospital infrastructure renewal IF nothing was done by way of better maintenance, accounting and planning practices (ie without better asset management). A few days later the Minister for Health, completely ignoring the intent of the ‘if’ statement (as people are sadly inclined to do) profusely thanked the PAC Chairman since this ‘proved’ he needed a larger budget!
On another occasion, I was walking in the city when the State Treasurer dashed across a busy main road to tell me enthusiastically that it was thanks to me that the State had kept its triple A credit rating! What?! I had looked at our asset base and saw a future renewal problem that threatened to dwarf the state’s budget, however the credit agencies had looked at the dollar value of our assets – which we had made visible for the first time – and, ignoring the budgetary impact of restoring the deterioration that had already occurred and would need to be attended to, saw only billions of dollars in assets. We are all subject to this restricted vision. We see what we want to see.
All of this is by way of saying that the term I used almost 30 years ago for accounting for infrastructure has long since been hijacked, and by so many, that it is unwise to continue using it. So, I want to start again with greater neutrality.
First: let us be clear about the task – namely to develop financial metrics that drive good infrastructure management and meet the need for financial responsibility and accountability. This requires genuine dialogue between two disciplines – and a listening ear.
Let’s start with a thought experiment
There may be lots of things you like about the current way in which we account for infrastructure, but what don’t you like? Are there problems that it creates for you or your organisation?
Why there is a serious flaw in using long term sustainability indices based on depreciation or annual life cycle cost – the timber bridge example.
The 2019 NSW IPWEA Timber Bridge Management Report complements the Road Management Report of the same year with a focus on the status and needs of timber bridges. The report shows that a serious timber bridge renewal problem remains in coastal and tableland regions of NSW even though annual renewal exceeded depreciation since 2008. It is clear that there is no relationship between the “resourcing strategy funding gap” and the financial funding gap based on depreciation because depreciation is a very long-term average bearing no relationship to expenditure needed in any given 10 year period in an asset’s lifecycle for long life infrastructure assets.
The asset sustainability ratio for NSW timber bridges (Annual Renewal/Depreciation) has steadily decreased from 542% in 2008 to 147% in 2019. Although this is a significant reduction, it represents a relatively high level of capital renewal investment for timber bridges compared to the long-term average renewal need (i.e. depreciation). . This will only be exacerbated with a recent unprecedented drought and fire season combined with several extreme weather events across NSW that will have affected many the state’s timber bridges. The 2017 Road Management Report identified that while the overall renewal gap for roads and bridges was improving, bridges in fair condition are continuing to deteriorate to poor condition even though expenditure has increased to rectify the most critical bridge assets. This trend is likely to continue, and asset and risk management plans must be updated annually to manage and report risk. The decline in asset and risk management capacity and systems was identified in the companion road management report and highlighted in this report.
This report shows the fundamental flaw in using long term sustainability indices based on depreciation or annual life cycle cost when a large cohort of assets reach end of life and require expenditure far in-excess of the long-term average. Asset and risk management plans that look at all expenditure needs (operating, maintenance, renewal and upgrade) are the only reliable way to manage and report on infrastructure sustainability.
Using depreciation for annual sustainability reporting is at best irrelevant, at worst, a material mis-statement in the annual reports.
Well argued, Jeff. It is an indictment on economic and accounting executives and managers and, more importantly, auditors-general that such rubbish (and I make no apology for the use of that word) is published. People tend to go with numbers that are easy to calculate rather than meaningful numbers. It is well-known that capital renewal is ‘lumpy’ and the meaningful indicator needs to be the link between planned renewal expenditure and actual renewal expenditure. And any measure that looks at a single year is also flawed, because of the impact of the lumpiness of the expenditure, the reality that useful life is an estimate and not a given and the revenue and borrowing capacities of the relevant organization.
Extrapolating your example more broadly, nearly every item listed in an organization’s financial statements is an accounting estimate, with varying degrees of accuracy. This gives us a hint that relying on point estimates may be misleading. We need to pay more attention to trend information and explaining how the length of the trend time interval affects the data and any inflationary impact. No, it is not easy. But, yes, it is possible. Some may argue that such data, indicators and measures have the potential to be subjective. Well drafted (and well audited) notes could overcome this potential.
We need to provide better information for stakeholders.
In the words of Eliyahu Goldratt “…every situation, no matter how complex it initially looks, is exceedingly simple.”
I’ll try to snap out of my academic chains and pretend we are a couple of beers in after a long day of fighting the good fight:
Both Finance and Engineering continuously and without success attempt to apply the exact practice of asset management from the private sector to the public sector.
For example: “What does a large manufacturing company do with its buildings, roads, and other infrastructure which allow it to make product? They depreciate them! Aha, I will depreciate my public infrastructure!”
What would Goldratt’s angle be on this? Probably: “But is public infrastructure not a product that you provide to the public? Yes, of course it is. Well, does the manufacturing company depreciate its product?”
Of course, Finance does not just pull out depreciation rates or Estimated Service Lives from thin air, they ask for them from their Best Friend – Engineering. What Estimated Service Lives are thought in Engineering schools? Once in 50, 75, 100 years event (stress load) which the piece of infrastructure must survive!
Engineering example: “My Best Friend needs to report on depreciated value of a building so that future expenditure can be planned. I have to provide the Estimated Service Life (ESL), ESL…ESL…ESL…aha, of course, as thought to me in school, buildings are designed to survive minimum a 50 year stress load event (i.e. storm) so let’s go with 50 years!”
Goldratt: “Are you planning funding for the building’s structural failure once it reaches age of 50?”
I need another beer ( ;