A senior economist in a State Treasury once claimed that Rail was a net cost since costs exceeded revenues. Roads, on the other hand, he said, were profit producing. I smiled and thought he was joking, but he wasn’t.
The motor vehicle licensing board was embedded within the highways department and the sum total of licence revenues, he said, exceeded road costs. Ergo, roads were profit producing. (I suspect that capital costs didn’t figure in his equation)
On this reasoning, he resisted extending the capacity of rail, despite the fact that the city roadways were excessively congested with little scope to increase road capacity and that road users benefitted when traffic was diverted to rail.
I was reminded of this when I read Milos’ comment on my earlier post “Infrastructure – damned by the language we use”. He referred to language supporting silos. And indeed it does. However, if our infrastructure decisions are to be used to support community wellbeing do we not need to move beyond silos, to take a wider, more holistic, viewpoint?
Thoughts?
The only way to get perspective is to stand back and see the big picture, to see individual problems in context, and our own problems in relation to others, as well as to history. Two states that chose to see the infrastructure challenges of their councils in such a context were Victoria and South Australia and they have led Australia in asset management activity and improvement.
Victoria
In 1997 the State department responsible for local government was faced with a problem. Three years earlier, rates had been cut by 20% and rate capping introduced. Many councils were petitioning to have the cap lifted to cope with growth and, especially, to renew ageing infrastructure. State Government officers were in a dilemma. Whilst they could recognise the need for renewal, they suspected some councils were ‘gaming’ the system – using the excuse of renewal to avoid reducing costs. They decided to go out to tender for a simple model that could tell them which councils really needed an increase, and if so, how much. Three of the largest consulting companies in Australia at the time said that they could produce such a model, but the State chose to go with a smaller concern that pointed out that the information needed for such a model to work – namely a knowledge of the age, economic life distribution, and estimated replacement cost of council asset portfolios – was simply not available. They proposed to fill this gap. Councils also needed this information to manage their assets more effectively. The result was the report ‘Facing the Renewal Challenge’ (1998, published 2000) which led and underpinned council asset management activities and State Government monitoring for over ten years.
South Australia
In the meantime, a group of large councils in South Australia who were trying to benchmark were frustrated by the lack of uniformity of data systems for asset information, accounting, valuation and condition assessment among the group. They chose to do a separate study under a common set of standards along the lines of the Victorian study and to widen their study to include all councils, small and large, urban and rural, and isolated. This study differed from the Victorian in two major ways – first, participation was voluntary (but, with a bit of persuasion, all took part!) and second, it used online information collection. With the information on the web, it then became possible for councils to do ‘what if’ analysis. (‘What if we extended the life of this set of assets, or increased the service levels of that set?’) The resulting report was ‘A Wealth of Opportunities’. The design and computer modelling undertaken then led to the development of IPWEA’s famous NAMS Plus asset management training, which is now a world wide program.
Last week in Perth, Neville Binning, WA Chapter Chair for Talking Infrastructure, and I hosted seven casual small group discussions, in which we discussed a number of infrastructure issues, the first being ‘what is the purpose of infrastructure?’ (More on this later.)
Hein Aucamp (to the right of Theodore the poodle) took part in the seventh of these sessions. Also present was Jaqueline Blenkinship, Adeyemo John Falade, Ashley McKinnon and, unfortunately obscured from view, Jacek Narozny. Curiously, Hein was the first to raise the question – what do we mean by infrastructure? Being a gentleman, he didn’t leave us guessing, but provided the following answer.
Hein Aucamp: “I used an idea from Alex Marshall’s “How Cities Work” to suggest an answer. I also realised that the answer allows us to identify whether something truly is infrastructure, or whether it merely looks like infrastructure.
This is the answer I suggested:
• Infrastructure enables transactions in the broadest sense by providing common facilities that we would not be able to afford individually.
• A transaction is where we exchange some resources for a result of greater value; infrastructure provides the framework that we don’t own to allow us to use what we do own to gain something we want.
• Infrastructure in this sense would include internet communications and even the currency in circulation in a country.
If we describe the purpose of infrastructure precisely, and we define true infrastructure as whatever serves the purpose of infrastructure, then we can know whether something actually deserves the name of infrastructure, or whether it is only apparent infrastructure created for a lesser purpose.
To adapt the words on Penny’s slide in the last post: Infrastructure… is not even infrastructure until it improves the world.”
Hein Aucamp is Director, WA Integrated Asset Management. You can reach him at hein.aucamp@waiam.com.au
OK, over to you – agree/disagree? Something to add?
We ‘invest’ in capital, but maintenance and operations are a ‘cost’.
We consider Investment to be ‘good’, so we try to increase it.
We consider Costs to be ‘bad’ so we try to reduce them.
The result is that we end up with infrastructure that we under-maintain and where operations are compromised by insufficient training and funding.
Because of the language we use!
Solutions?
In the last post Jim Kennedy, Asset Management Council, looked at what it took to construct a ‘defensible budget’. He argued that stakeholders (customers, community, government, employees) are everything but he wondered whether organisations really understood what they were promising. In other words were they really clear about the consequences of their decisions and promises made?
Capability to deliver
For example, had they turned these promises into the capability to deliver (technology, plans, people, facilities, information systems, logistics, support systems).
This has two aspects: there is an ‘enabling or inherent capability’ and an ‘organisational design, or organisational capability’. In other words, the equipment may be able to deliver, but has the organisation the right people in place?
Studies have shown that where someone was sent in to fix a problem who did not know what needed to be done, was not familiar with the asset or problem, or was not fully competent to do it, the level of competence was only 50% . This led to the job needing to be done 5 (!) times more often than if a competent knowledgeable person had done the job initially with 100% competence.
But what is the organisational implication of this? To ensure that you have the right level of competence ready when needed, you have to have highly competent (and thus well rewarded) people under-occupied so as to be available when needed. As we cut back on training because it is expensive, and aim to have everyone fully engaged all the time in order to ‘achieve efficiencies’ – what is the real cost? If we cannot demonstrate the benefits of organisational capability in a ‘defensible budget’, costs will increase and quality decline.
Comment?
We often take pride in our ability to ‘make do’ when the situation is not as we would have liked. This particularly applies to those occasions when we do not get the budget we requested. We grizzle – but we ‘make do’. But what message does this send? Jim Kennedy, speaking at an Asset Management Council Chapter Meeting in Adelaide warned of the dangers of this ‘make do – can do’ culture. When we ‘make do’ (usually by cutting corners, or deferring activity that results in larger costs later) we are telling the finance section that our budget request was overblown. When Finance subsequently provides less than requested (working on the basis that the initial request was ‘gold plated’) and the recipients subsequently ‘make do’, that does more than confirm the initial Finance suspicion, it creates a lack of trust on both sides. Budget proposals are now ‘boosted’ to allow for the inevitable cuts. Finance reduces the budget request and as it goes on, budgets lose their informational, decision-making, value.
Jim proposes that the value proposition for Asset Managers should be “How to protect your leader against political opposition” and his answer to this question is a ‘defensible budget’.
So what is a ‘defensible budget’? Jim describes it as follows:
- Fact and Risk Based
- Fully traceable to the asset’s output requirements.
He reckons these two are really sufficient but could be bolstered by showing that the budget is
- demonstrably good practice and in accord with national standards; *compliant with statutory and regulatory imperatives;
- implemented by competent (certified) staff;
- supported by verified technology (information decision systems);
- transparently and verifiably costed (which builds up trust between the technicians and finance; and
- deliverable in the agreed time frame (don’t promise what you cannot deliver).
Good stuff! – but, and here’s the rub – developing good practice, ensuring competent (certified) staff, establishing sound information decision systems, demonstrating transparency and ensuring deliverability does not happen overnight. It takes years of consistent management attention and good leadership.
Question this week: Do you know where your organisation stands on each of these facilitators of sound and defensible budgets? Is there a program to improve it? Comment?
Editor: You can find earlier posts on budgets, by using the search function, and all posts by Mark by selecting his name.
Further to my earlier posts about asset budgets, I couldn’t help but want to have another go at this by asking a slightly different set of questions. These relate to the principle of transparency.
By transparency I mean:
Is there a clear and documented basis for the estimates upon which the asset budget has been based?
- Are the estimates based on ‘simple’ or ‘averaged’ projections of expenditure rather than ‘modelled’ projections that emulate realistic timings and patterns of expenditure for the nature of the works involved and how they will be procured?
- Is it based on estimates for all assets over the full period that the budget is meant to address? By all I really mean a schedule that lists all of the assets, including those for which a $NIL expenditure is forecast for the relevant period. (I ask this as a check that all assets have been given consideration.)
- Are the underlying assumptions documented and made clear to those being asked to approve the budget – especially the reliability / sensitivity of rates used and associated finance costs?
- Are the priorities inherent and sequencing / pace of the proposed works also made clear and demonstrably aligned with corporate business and services priorities for the forecast period? How does this align with projected cashflow requirements and funding availability? (A projection showing a skewed acceleration of expenditure towards the final quarter must raise concerns – not only about reliability of delivery, but also in relation to business and services priorities being effectively supported, and in relation to getting value for money from what is going to be spent.)
- Are the risks that are inherent to the portfolio and the proposed program delivery made clear and ‘current’ for the immediate and forecast context of the program and its delivery?
If these aspects are not transparent to the decision-makers then there is greater risk that the program will not be delivered and the budget will be nowhere near accurate
Edward de Bono wrote much. His book, Simplicity, I think is very appropriate to apply to asset management and KPI decision making. The part that resonated with me is the difference between simple and simplistic.
In Infrastructure decision making a simple model is a great thing, a simplistic model is a destructive and dangerous thing. This is true in all fields, engineering, economic and social included. Simplistic by definition is overly simple. Unfortunately many of out decision makers have a simplistic understanding of both the English language and the role of infrastructure. You will hear many people calling for a more simplistic solution or approach. They mean “simple”, but one doubts whether the inability to differentiate between simplistic and simple translates into the making of sound decisions.
Regardless, satisfaction surveys, mandated bureaucratic KPIs, single-digit comparisons to like organisations and other such endeavors are simplistic management techniques. They have been over-simplified and are as a consequence of no value.
Simplicity before understanding is simplistic; simplicity after understanding is simple.
– Edward De Bono
Simplistic decisions are tolerated and often demanded by our populations. I believe this is because the general public has little understanding of the complexities of the modern world, and no desire to embrace that understanding. While the situations and decisions can be presented simply by our leaders, there is no political advantage in straying from binary arguments, right and wrong, black and white. The issue here is to help people understand that complex arguments about infrastructure can be presented simply, and be debated on their merits. With this understanding, the people can call for rational debate, not simplistic decision making. As professionals in our fields we can assist by presenting our work as simply as possible and resisting pressure to make our work simplistic.
Question for the day:
What techniques do you use, or know of, that help you to determine whether your reasoning is ‘simple’ or ‘simplistic’?
A hole in your budget needn’t be the end of the road!
In the previous post we looked at a city council’s response to a sudden $60m hole in its budget – and the consequent media storm. Could this have been treated differently?
Put yourself in the City Council’s situation. Faced with a sudden $60m hole in your budget through external circumstances, what are your options?
- You can cut back on services (but these are services that the community want and that you have already prioritised into your budget)
- You can borrow (and borrowing might be a short term option to maintain service continuation but only if there were expectations that the external cut would be reversed in the near future or that other revenue increases could be anticipated)
- OR, and this is the option that the City adopted, you could withdraw the funds from your fully owned subsidiary – in this case BC Hydro – in exchange for a city asset portfolio (city street lighting).
BC Hydro now needs to make a return on the assets it has bought and so it engages in a forward contract to maintain, operate and supply street lighting services to the council.
Bear in mind, that any profit made by BC Hydro reverts to its shareholder – the City Council. If the costs of the contract are greater than the costs that would have been incurred by the City if it had retained ownership of the assets, then this will be reflected in a larger profit made by BC Hydro. Conversely if the contract costs are less than the City would have otherwise paid, it saves on ratepayer funds but (unless BC Hydro can run the streetlighting more cost effectively) it will receive a lower return on its BC Hydro shareholder funds.
OK, so these are the financial facts. The transaction enables the City to continue providing all the services that its ratepayers want and expect in the face of a sudden hole in its budget caused by the withdrawal of provincial funding. Out of one pocket into another but the same city coat! This being the case, why did the question of how much that was paid for the contract become the major story?
I would suggest that there are a number of lessons to be learnt here:
- The City could have sold this as a smart solution to the problem of continuing needed community service in the face of sudden withdrawal of funding by the Provincial Government. It could have promoted the idea of BC Hydro being in a better position to cost effectively manage street lighting given its expertise in lighting and power generally. It could have used this problem to market the value of its ownership of BC Hydro. In other words, on a PR basis, it could have got out in front of the story. But it didn’t. Instead it hid the contract details for 5 years before eventually acceding to Freedom of Information requests. Whatever the facts of the case, this action itself makes the council guilty in the eyes of the public.
- The public generally have very little understanding of the ratio of ongoing operations and maintenance costs to the initial capital costs. If we don’t tell them – in ways that they can understand – their natural reaction is to see the annual payments in the light of (exhorbitant) interest payments.
- The time to generate this greater understanding is BEFORE you need to use it to substantiate council decisions
- In all likelihood, the councillors (and perhaps senior staff members) did not understand the full import of operations and maintenance costs either. Their reaction in hiding the costs from public view suggests that they did not believe they were defencible.
Lesson 1 may not apply to you now, but Lessons 2-4 will always apply.
Comment: What are you doing to ensure this level of understanding of O&M is generated in your council and staff (or in your senior management and board)
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