Any maintenance or asset manager knows that the longevity of assets is critically dependent on how well they are maintained. And you don’t have to be a maintenance manager to know that your car needs regular servicing. It is kind of obvious! Yet, when it comes to the important public infrastructure on which we all depend, maintenance is considered dispensable and is the first to be cut in times of financial stringency.
It is all to do with how we account for infrastructure assets. Below is the problem – and how we can overcome it using your asset management plan and condition based depreciation (CBD).
It pays to know a little history. When government departments and agencies adopted accrual accounting practices and had to bring infrastructure assets to account for the first time, (In Australia, from 1989) naturally they turned to the private sector, where this had been the practice for many years. And this is where the first problem arose since private sector assets such as plant and machinery are depreciated over their predetermined lifespan until they reach zero or some predetermned salvage value and then they are completely replaced.
Infrastructure assets are different. This does not happen with infrastructure assets which can be kept in service for an indefinite time by piecemeal, if somewhat lumpy, component renewal. What is the age of an asset which may have some components 100 years old and others that were renewed yesterday? What is the life of an asset that can be kept in service as long as you want it to? These are unanswerable questions. They go to the heart of the difference between infrastructure and non-infrastructure assets and require a different accounting approach.
However when infrastructure assets were first brought to account, there was no alternative accounting approach for infrastructure assets, so rather than account for the entire infrastructure system, it was decided to assign each component a definite life and depreciate it as if it were an independent asset. It seemed a practical solution to a difficult problem. But in the process it completely ignored the key characteristic of infrastructure assets which is the interdependence of the components, where the life of a component, and thus the need to renew, is dependent on the other components with which it interacts. In other words, the life of components is indefinite, as is the life of the system as a whole. This does not mean infinite! It just means that you cannot define a life of a component until it reaches the stage of renewal. So depreciation in this case doesn’t work.
You will also notice something else about this approach. The economic life of any asset, as we stated at the beginning, depends on how well it is maintained, and yet maintenance does not feature in this accounting process. This is what makes it so easy for organisations to cut maintenance, since cutting maintenance does not affect the life of the asset, at least not in the accounting system – only in the real world!
We need a better system, one that takes equal account of maintenance (minor and major) and renewal, i.e.everything that we need to spend to maintain the functionality of the asset. (In practice ‘maintenance’ and ‘renewal’ are really just different points on a continuum.)
Why do we depreciate assets at all? It is so that we can represent reduction in asset value in any particular period (asset value = its store of future services)
Is there a better way of doing this that recognises the distinct character of infrastructure assets? There is! What better way can there be of valuing the using up of asset services than the cost of making it good again? This is what is called Condition Based Depreciation (CBD). And it is available to any organisation that has a sound, and audited, AM plan as a costless spinoff. Put simply, the condition assessment of your assets that tells you what you need to spend over the planning period to maintain service function and that is in your AM Plan. It covers maintenance, minor and major and renewal and is the cost of making good the consumption of the asset over that period. You choose your planning period and it is updated on a rolling annual basis. The cost of ‘making good’ over the planning period is then expressed as an annuity to give you an annual cost and is the best estimate of real depreciation.
Second history lesson: When the UK water industry was being privatised in the early 1980s the argument was put forward that their assets should not be depreciated because the assets were continously maintained. This was rightly rejected by the accounting profession who said, in effect, ‘prove it’ and that is what a sound, audited AM plan does. Unfortunately some do not recognise the distinction between this and the AM plan backed CBD.
CBD was introduced in 1993 and has been well received by maintenance and asset managers and by practising accountants. It was adopted by the NSW Roads authority and by about a half of NZ’s councils for about ten years (until their accounting society called a halt). It is even provided as the ‘modified’ approach in GASB 34, the standard that introduced accrual accounting into the USA in 1999 but it was rejected by the Accounting Standards Board in 2004 and nothing much happened for the next 13-14 years!
Now it is back into contention because of problems with asset valuation giving depreciation figures that are artificially highand causing councils to be deemed non-viable. These councils are now scrambling to make cuts to their budget, eliminating services and sacking staff – and all at a time of Covid 19! So fictional figures are giving rise to real – and negative – physical effects. We can do better, much better!
Would CBD help bring your maintenance to the fore?
Ask any questions you like and I will answer all of them.
To ask questions and to find out more about a national forum to develop support for adoption of CBD, use the comments section below. (There is global interest in this subject, so we might extend it to a global forum.)
In the last post I suggested that it might be time we changed our thinking on major issues like nuclear disarmament. But perhaps it is also time we changed our ideas on how we try to convince anyone to change anything!
I am indebted to Kerry McGovern for the following idea. She spoke of a friend who had argued that when introducing a new and controversial idea, 3% of the population are already of this opinion and do not need you to tell them, 7% are almost there and can be easily convinced, and about 30% recognise that they don’t know enough but are prepared to find out, the next 30% are too busy doing other things, and the last 30% are going to oppose you no matter what. Her advice is forget that bottom 60% and concentrate first on networking with the 3%, bringing in the 7% and then, as a group addressing the next 30%. I don’t know the source of the figures but the general idea is attractive. Moreover, working on these figures, once we have captured the 37%, assuming that the middle ‘busy’ 30% are neutral, we now have a majority on our side!
So often, we focus on the bottom 60% and see the issue as an ‘us and them’ antagonistic confrontation. But what if we were to look instead at the top 40% and see the issue as one of collaboration? Would not that be generally happier and more productive?
Last year I took part in a ‘Ban the Bomb’ march. Many organisations were involved, including WILPF (The Women’s International League for Peace and Freedom), and the photo above is thanks to the keen eye of WILPF’s International Treasurer, Kerry McGovern, who noticed it in an Instagram feed of hundreds of photos to celebrate the fact that the UN had reached the milestone of the 50th ratification of the UN Global Nuclear Weapons Ban Treaty.
Here’s the situation
With the Honduras, 50 countries have now ratified the UN Global Nuclear Weapons Ban Treaty and there was much celebration. There are 84 signatories, so 34 are still to ratify. None of the 84 have nuclear weapons. Meanwhile countries that do, like the USA, Russia, the UK, France and China, India, Pakistan and North Korea (and likely Israel) have not signed. Australia also has not signed. It does not have nuclear weapons but it does possess the uranium which makes them possible. So effectively those that have signed, even if they haven’t yet ratified, are those who have everything to gain and nothing to lose.
We are now just a few months away from the end of the ten year agreement between the USA and Russia to limit nuclear research and testing.
No wonder the world is getting nervous!
But is treating nuclear disarmament as a moral issue the most effective way forward?
It certainly is a moral issue, and ‘Ban the Bomb’ marches such as the one that I took part in last year, keep the issue in the public mind, but is this the most effective way to bring about change?
When we look at the issue clear eyed we can see that it is those who have nuclear weapons who are the most at risk, both physically and morally. They are the ones who have the difficult decisions to make, not the 84 signatories from the non-nuclear countries. And after the experience of Ukraine, a country that did have nuclear weapons but ceded them to Russia in the breakup of the USSR and then suffered the consequences, it is not surprising that those who currently possess nuclear arms are in no hurry to dispossess themselves.
So is it not time to invert our thinking?
Instead of collecting masses of signatories from non-nuclear nations, which only serves to make us feel we are doing something, when we really aren’t, perhaps we would be more effective if world organisations thought about how they could make things safer for nuclear weapons countries to dispossess, particularly for Russia and the USA.
I realise that thinking of nuclear armed nations as needing protection, rather than us being protected from them, is not the normal way of looking at the problem. But this ‘inverted’ thinking might serve us well in all of our encounters with others. It puts us all on the same side, rather than in ‘us v. them’ opposition. This idea can be used everywhere.
On January 22, 2021 Treaty on the Prohibition of Nuclear Weapons will enter into force. It was negotiated without Russia or other nuclear-weapon states. (We regret) this development for the following reasons:
We don’t see any legal gaps in disarmament process for #TPNW to fill in. It was negotiated w/out taking into account fundamental principles of #NPT. Those principles should be applied consecutively and w/out distortion
#Disarmament should be addressed only through consensus of all parties, including nuclear-weapon-states as per #NPT. #TPNW conceptual framework is unacceptable. It ignored strategic context & addressed #disarmament separately from existing international security environment.
(We stand) for stands for nuclear weapons-free world & respects those sharing this view. But this process can’t be forced. We reaffirm our individual & collective #NPT commitments, but #TPNW is a mistake. It creates a rift btw states & harms #NPT. We won’t support, sign or ratify it.
Photo from commons.wikimedia.org, Escaping the jaws of a Banzai Pipeline wave
In the third part of our audio series on the Waves of Asset Management, we move on to talking about time.
Because effective Asset Management practitioners are time travellers, working with past, present and future: understanding where we are now, using historical experiences and data, in order to model the future.
What can Asset Management bring to better future planning? What must we bring? And what tools do we need to do this?
Part 3 of a discussion between Penny Burns, Ruth Wallsgrove, and Lou Cripps, in our new Thinking Infrastructure Aloud series. Please let us know what you think!
The wonderful ‘Big Picture’ animation from the Institute of Asset Management ends on a fascinating note:
Once we have optimised all our asset decisions to deliver our organisational goals – we can move on to asking about “the very reasons for the organisation’s existence”.
In part 2 of our audio series on the Waves of Asset Management, we explore alignment, a core principle of the Second Wave, or, Strategic Asset Management.
Hard as alignment is to achieve in practice – all those 1000s of asset decisions that have to add up in a co-ordinated, integrated way, now and into the future – it can raise an even bigger challenge for Asset Management practitioners. What are we aligning to?
What is the real purpose of my organisation?
And how can Asset Management help define it?
Part 2 of a discussion between Penny Burns, Ruth Wallsgrove, and Lou Cripps, in our new Thinking Infrastructure Aloud series – enjoy!
In 2018 Penny Burns and Jeff Roorda suggested we describe our history in revolutions; a month ago, Penny proposed the history of Asset Management is more like Waves.
The First Wave of AM was to establish an asset inventory. We needed to know what we had to manage before we felt we could do anything else.
The Second Wave was to do something useful with this information: Strategic Asset Management, or better decisions to get a better answer in terms of cost, risk and performance. Of course, once we started actually using the data, we became much more aware of data quality and coverage. The need for good information didn’t go away. The best Asset Management practitioners are mostly still in Wave 2 – but already looking beyond it, for example in response to Covid-19.
The coming Third Wave is what Talking Infrastructure is all about.How to use what we have learned – all that data, sure, but more what’s involved in making better asset decisions – and look ‘up and out’ to the questions of what infrastructure our communities really need now, and into the uncertain future?
In March this year, after lockdown began, three of us – Penny Burns, Ruth Wallsgrove, and Lou Cripps of Denver Area transit agency RTD, across three continents – took the framework of the Three Waves and explored what this means to us in practice. Talking Infrastructure is happy here to deliver Part 1 of the recording, the first in an on-going series called Thinking Infrastructure Aloud that we intend not merely as audio downloads but public podcasts.
You get to be the pilot for this, and so: it is even more vital that you comment, and give us feedback on our move into sound!
it is how we advance. We seek patterns to find meaning. Me, I look for patterns in AM development. I seek the characteristics of the different stages (that I now think of as waves rather than as revolutions, as explained in the last post) and how each builds on the one before and takes us further. This helps me to see not only where we have been but also where we can go. Each wave has its own focus, viewpoint, key players and sources of support as well as constraints. Below is a table illustrating some of the characteristics of the first three waves that I see. What do you think?
Where we have been and where we are
Waves 1 and 2 you will readily recognise, for they reflect where we have been and where we are. Wave 3 is where we need to go next. This is the visioning stage where asset management teams, use their appreciation of ‘line of sight’ or the necessity for asset actions to support organisational objectives to guide decisions on both new and existing infrastructure. This is where AM teams need to anticipate, communicate, and prepare for the inevitable shifts in attitudes, governance and demand, that are now occurring and will continue to occur as demographics, climate and technology change. Turning around large infrastructure portfolios is not an overnight task. It takes intelligent planning and communication. This is Wave 3.
Where we are going
Communication, anticipation, action. In Wave 3 AM teams help their corporate managements to explicitly recognise that the asset portfolios and management practices they have now are a reflection of the past, and that the future will be very different from the past and will involve new thinking. This may seem obvious, but it is not necessarily happening at the moment. Sometimes it seems that it is easier to assume that nothing will change very quickly so we can continue doing what we have always done. And sometimes the lure of the new and shiny leads to adoption of the new without sufficient examination.
The Wave 3 challenge is not to jump straight into the new and exciting, but rather to determine how best to reduce the twin dangers of changing too early, and of moving too late.
The biggest change will require us to ask what changing circumstances and future communities will DEMAND of us, what the new needs will be, and not to look at new technology as merely an opportunity to change the way we SUPPLY the current needs of our customers and community.
From Supply to Demand. In the past most of the information we have needed for our decision making in asset management has been internally generated and recorded in our Asset Information Systems. This has been solely supply side information. We still need our supply side information. But this will not suffice. Knowing what we CAN do is not enough. We need also to look at what we MUST do. For this, we will increasingly require the ability to understand and anticipate future demand change. This is why our our asset management teams will need to expand to include the talents of many other professionals, as I have suggested in the table above.
Is your Asset Management Team prepared?
Is your Asset Management team prepared to tackle the third wave? If you are not sure, then a good place to start would be with “Building an Asset Management Team” by Ruth Wallsgrove and Lou Cripps. This will help you recognise not only requirements but also the many new possibilities. Here is a short excerpt “What kind of people does an AM team require?”
Note: When you buy “Building an Asset Management Team” you not only get the very latest thinking in AM teamwork, but you pave the way for future developments, for Ruth and Lou are donating all their proceeds (ALL, not just profits) to Talking Infrastructure.
So go ahead, click this link to get your copy. You can get a Kindle version for less than $10. In this case value greatly exceeds cost. It’s priced low to maximise the number of teams that can gain access. Spread the word!
I was wrong. Movement from maintenance to asset management, to strategic asset management is NOT a revolution. Why not?
In 2018, for the IPWEA’s online journal, Jeff Roorda and I sketched out what we saw as the general pattern of these individual journeys and what this suggested about where we would go next. At the time there was a lot of discussion about the third (and for some) the fourth industrial revolution. We needed a sexy title for our paper so we called it ‘The third AM Revolution’.
We saw AM moving from the pre-AM stage of maintenance only to the first stage of data collection, or ‘asset inventory’, to the second stage of performance and alignment, or what we call ’Strategic asset management’ – the stage we believe most of Australia is now in – to a new third stage, our ‘third revolution’ that we are calling ‘infrastructure decision support’.
We now see that ‘revolution’ was the wrong word.
Revolutions have connotations of what was previously important getting the chop – quite literally in the French Revolution! Although each of the three stages we identified are still important because they represent different mindsets and approaches, different groups of players and different techniques, they do not discard what went before. Instead they increase our understanding of their value and make them stronger.
Let’s see how that works.
0. Before AM there was maintenance. Maintenance specialists firmly believed in the value of their work, and they were right. Unfortunately they were unable to convince others, especially finance. When AM came along it provided a framework to demonstrate that not only was maintenance able to fix what was currently broken – it could also help prevent more breaking down in the future. That is why so many maintenance engineers were keen to see AM adopted by their organisations.
1. The first stage of AM, naturally, was to establish an asset inventory. We needed to know what we had to manage.
2.With enough basic data we were enabled to take the next step use the data collected for performance improvement. When we did this, we became much more aware of data quality and coverage. That first stage of data collection did not get the chop, now we wanted more. Instead of data being required simply for a mandated balance sheet (e.g. a storage location) it was increasingly seen as necessary, indeed essential for progress, and so demand for more data, and for data of a higher quality with greater coverage has continued.
3.The coming third stage is what will bring all of these stages – maintenance, data collection and performance improvement or strategic asset management – together, for it is at this third stage that asset managers finally reach the stage that they have desired for a long time. Asset management is able to get (and worth a) place at the board table!
So not a revolution. But what?
We could simply call them ‘three stages’ and be done with it. This, however, would not show the connection between them, how each builds on what went previously, so we are calling them waves, for like waves they build on each other and get stronger.
Why is this important?
Because now that it is so easy to access detailed information about the second wave of strategic asset management or performance improvement (IIMM, PAS55, ISO 55,000) there is a temptation is to dive in at this level. But without attention to the first wave of data collection and without strengthening the pre-AM stage of maintenance, such attempts lead to failure. Under-developed countries wanting, and needing, to do fast catch up with the developed world are at particular risk.
They are being pressured ‘to do asset management’ in order to get the strategic asset management, second wave, benefits but the importance of funding and training at the earlier stages, particularly maintenance is not being recognised and dealt with. Every stage – maintenance/pre-AM, data collection/asset inventory, and strategic asset management/performance improvement or alignment – requires a different focus, different tools, different groups of players.
I will talk about Wave 3 – where we go next – in a later post.
Q: Does this development pattern make sense to you?
Can you recognise it in your own organisation or others? Is it obvious, or do you see an alternative pattern to your own asset management journey?
Coming Next:The Three Waves
Why understanding them can help you move closer to your ultimate goal.
Ten years ago, on LinkedIn’s Asset Management History Forum, I asked “Why bother with history?” It was the most animated discussion on the forum. Now, with ten more years of history behind us, have we learnt more or do you agree with Jan Korek’s view that history is irrelevant?
This was Jan Korek’s opening statement:
“I have never subscribed to the suggestion that you need to know where you’ve been, to know where you’re going! History, to me, is little more than a badly-drawn representation of the past, based on an exaggerated impression of successes….. and an amnesia of the failures.
Having been deeply fascinated by Asset Management for a score or more years, and am still working at the blunt edge of the process, I have had to change, adapt, forget much and learn more along the way. So what do practitioners, or the process, gain from a knowledge of when (or why) some obscure government department became notionally interested in the stewardship of infrastructure assets? I would suggest very little.
Anyone who has been in Asset Management for a period of time will have grown their own unique history based on any number of influences. So what is to be achieved in distilling each individual story into an homogenised, badly-drawn fiction? Experience shows that we even fail to avoid the mistakes of the past, even when we know the history involved. The news, each day, is full of such examples.
What seems more important is the future, “Where are we now”, and “Where to from here”? Or to put it another way, you need to know where you are now, to know where your going.”
A compelling set of arguments.
Opening for the other side was John Hardwick.
What a start to the year you go away for a couple of days and a great discussion begins. I can only say that everything i have implemented has come from others.
I have implemented knowing what worked and what didn’t. I have used this to significantly change the way my organisation does Asset Management. I am only new in comparison to many of you but it is your collective knowledge i have used.
Also I have used your history and stories that have helped many other companies not make the same mistakes. I am a strong believer that we learn from our mistakes and not to make them again.
If this is the case it is critical for new organisations implementing Asset Management to have access to some of the good the bad and the failures.
I have given more then 20 organisations access to my staff and myself over the last twelve months to learn from what we have done and the mistakes we made. The best part is I learnt so much in return it has been amazing.
History allows us to tell stories that help others conceptualise their path to hopefully a more successful future.
Also acompelling set of arguments.
What’s your view?
How has your understanding of AM history enabled you to be a better asset manager?
We are moving into a “perfect storm”where our natural and built assets move into states of uncertainty and instability. We must rapidly build an understanding of the integration between our ecology and built infrastructure because rapid changes will increasingly challenge or capacity to foresee and manage risks. We are already seeing the initial evidence or these risks in major fire and flood events and likely pandemic events.
Growth boom infrastructure is approaching end of life, ageing population requires infrastructure realignment, climate, environment and virus risk changes start to move from debated possibility to clear and present dangers. Technology is the wild card with the potential to provide new solutions or exacerbate existing problems. Where we allocate our resources is more important than ever before.
The decisions made by this generation will determine the quality of life of future generations. A future that could be bleak and fearful or exciting, prosperous and filled with hope. Our current decision-making framework and decision support processes, systems and assumptions need rapid overhaul to support our current leaders guide us to the future we want and the following generations deserve. We can avoid reacting to preventable or manageable disasters by developing integrated rather than fragmented strategic plans.
What do we want for our future?
Talking Infrastructure’s Visionis a world in which decision makers understandand care about the cumulative consequences of their decisions and their constituencies understand the trade-offs involved in those decisions.
What do we have to stop doing?
We need to stop thinking of ‘infrastructure’ as a panacea for all economic ills, but rather to consider individual infrastructure projects and their individual contributions to general wellbeing – economic, social, and environmental. What questions do we need to ask of all projects to make sure that we are ‘future friendly’? What do we need to know about the relationship between future change and infrastructure? What changes do we need to make to current decision processes to achieve this goal? Could these resources be better allocated to prepare for future foreseeable risks.
We want to avoid infrastructure waste. Stranded assets are assets that are now obsolete or non-performing and recorded in corporate books as a loss of profit. Current estimates vary but run into the many trillions of dollars. Climate, technological and demographic changes all contribute to this problem. But so do we – when we construct infrastructure better suited for the 20th than the 21st century. Every year we use up valuable resources and add to environmental damage and often social damage, constructing long-living assets destined to end on the stranded assets scrap pile. Resources that could be used to mitigate more urgent foreseeable risks.
We believe we can do better
In the past, governments have tended to see infrastructure as an expenditure ‘blob’ – useful for soaking up unused corporate savings to ‘kickstart’ the economy or as a generic ‘source of jobs’. These are the attitudes that have got us where we are now. We believe that if we focus on ‘future friendly’ projects, that takes future change into account and specifically designs for it, we can avoid unnecessary waste and manage future risks.
This requires us not to think of ‘infrastructure’ as a panacea for all economic ills, but rather to consider individual projects and their individual contributions to general wellbeing – economic, social, and environmental. What questions do we need to ask of all projects to make sure that we are ‘future friendly’? What do we need to know about the relationship between future change and infrastructure? What changes do we need to make to current decision processes to achieve this goal?
This is what Talking Infrastructure is about!
Do you also believe we can do better?
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