Search form


Become a Member Today Sign Up

Jan 2015 | Asset Management

A Step-by-step Guide to Developing Infrastructure Management Plans
PETER BIRKBECK, DELOITTE

Municipalities are under continued pressure to deliver high quality services to their constituents which are consistent with expectations of a developed economy, political commitments and the obligations of corporate officers to meet minimum health, safety and other mandatory service levels.  This pressure to deliver high quality services has created a renewed interest in asset management planning since most of the services provided by municipalities depend on the quality of the related assets, namely:

·         Roads and bridges;
·         Light rail transport;
·         Water & wastewater;
·         Solid waste management;
·         Parks and leisure facilities;
·         Headquarters and administrative buildings; and,
·         Social housing.
 
The organisational challenge is to optimise the equation of service delivery, across the asset classes involved, over time and within the politically-directed budget.  From a demand side, roads, bridges, water & wastewater and social housing are generally (and legitimately) the priorities and from a supply side, direct funding is limited to the taxation promises made by the elected jurisdiction (and whatever non-government revenue can be collected). The limitations placed on decision-making by this environment are a challenge, but there are strategies and approaches which can considerably enhance the effectiveness with which a municipality deals with the situation. This article looks at municipal asset management using the six areas illustrated.
Importantly, these strategies look at the challenge from both a demand side, namely what must be provided, and how the service should be funded, either from purely government sources, or from elsewhere.
 

i)     Getting the information for decision making - use existing data

 
Municipalities already collect data relating to their asset portfolios, as part of their mandatory reporting obligations. This data provides a good starting point for the development of an asset management plan.  The Municipal Performance Management Program (“MPMP”) and Financial Information (“FIR”) (usually submitted annually to the Ontario’s Ministry of Municipal Affairs and Housing) are good existing sources to consider.
 
i.         The MPMP provides performance related data with respect to the different services provided by the Municipality and is submitted in a centrally-directed format allowing comparison across different Municipalities in a peer group, if required; and
 
ii.        A Financial Information Return is required to meet the Municipal Government Act (sections 277 and 278) and relevant CICA accounting regulations.  It provides a bottom up financial breakdown of the Municipality’s income and expenditure account, in an excel format, which is consistent with the published financial statements.  Tangible capital assets (“TCAs"), the starting point of the Asset Management Plan, are a defined field in the FIR and are recorded according to the capital policies adopted by the Municipality. 
 
 
The Tangible Capital Asset Register, MPMP and FIR and other sources of existing information such as, for example, surveys completed under the Provincial-Municipal Roads and Bridges Review, should, in most cases, provide for an adequate source of input to a Municipality’s Asset Management Plan. The development of new protocols around data capture should not be necessary but it needs to be recognised that the starting point of the plan is knowing what the organisation has access to on its books (or provided by a third party) and the condition. 
 
Output from Stage (i)
 
·         A list of assets by class showing condition and location.
 
·         The financial value of the assets and remaining economic life, calculated in accordance with the relevant accounting rules.
 
·         Ownership and contractual terms for assets not owned by the Municipality.
 
 

ii) Development of an approach to the plan – the financial model

 
The “Currency” of the plan is dollars (not engineering or other measurements) and therefore the asset management planning approach requires a financial model.  The model needs to be able to capture information about the current asset base, establish a future state of assets to deliver service aspirations and model investment scenarios to get there.
 
The best practice approach to the development of a financial model is not to develop it in a piece meal or in an iterative way, but to generate a specification of the information required and the modelling capabilities and then create the tool to deliver against that.  The scope and capability which can be built in to a financial model is almost limitless and so the municipality will need to take a view on the type and granularity of output required and what the model needs to be able to do. The steps involved developing a financial model would comprise the following:
 
      i.        Confirm the capability required from the financial model with respect to the internal planning requirements of the municipality with the CAO and CFO.  If the municipality uses or intends to use alternative financing, this needs to be taken into account.
 
     ii.        Match the model outputs to the external reporting requirements of the municipality.  For example it may be good to match output sheets to the format in the FIR submission.
 
    iii.        Once the desired capability is understood the model can be built and populated with the current data developed in Stage (i).
 
    iv.        Stress test the financial model with real data and make sure it can look at multiple options around optimising the interplay, between expenditure to meet service levels and the projected revenue from government and other sources.
 
The objective is to optimise services, over the life of the asset portfolio within the affordability envelope (in each year).  The best asset management plans will typically not involve large, one off investments, which are inefficient, in the long-term.  Access to an effective tool for evaluation of multiple service scenarios will avoid significant dips in condition and therefore quality of services, as illustrated below:
 
Output from Stage (ii)
 
·         Separate input fields (which correspond to the municipality’s existing budget lines).
 
·         Calculation sheets to develop the required outputs, in accordance with the relevant accounting rules, for example component depreciation.
 
·         Scenario and sensitivity analysis, to help understand the implications of future alternatives for investment, from different sources.
 

iii) Tailor priorities to the specific community

 
Different municipalities will have different priorities, driven by political promises but also the ongoing expectations of service users.  It is important that forward planning takes account of priorities and a business case process for prioritisation exists.  Where there are competing cases, some form of portfolio management will be necessary. So for example, the municipality may have investment objectives around:
 
      i.        Essential investment of $2B in the Water & Wastewater systems, to address safety concerns;
 
     ii.        Clearance of $500M backlog maintenance and enhancement of service levels on 20,000 units of social housing;
 
    iii.        A new $50M convention centre; and,
 
    iv.        The $1B extension of a Light Rail System.
 
Some decisions about whether each is an immediate, medium-term or long-term priority will need to be made.  One way to look at the prioritisation is using a “stakeholder map”, where the relative importance to key stakeholders (in this case probably the voting public) is assessed against the cost to the municipality.  For the projects identified the results may look as follows:
 
Where there is an urgent requirement for significant investment, Public Private Partnerships (or PPP) and other forms of alternative delivery can make upfront capital available quickly and there is funding available from the PPP Canada and New Building Canada Fund of up to 25% of the capital cost.
 
Output from Stage (iii)
 
·         Establish a business case and governance structure for prioritisation.
 
·         Explore priorities with key stakeholders such as the public.
 
·         Use the financial model to look at the different feasible combinations for investment.
 

iv) Deliver to the appropriate service levels

 
The quality to which assets are maintained depends mainly on the levels of service which the municipality delivers. It is important that the services meet but do not exceed the expectations of the public. If the same levels are designated across all of the assets in a municipality, it is likely that there will be over-performance in some areas and under performance in others. The levels of services should be revisited to make sure that performance matches expectations, as precisely as possible, in each area and asset class. A recommended approach would be to:
 
      i.        Make sure the services are defined as “Outputs” rather than an “Inputs”, for example (in the case of water & wastewater assets):
 
·         “X” breaks per 100 km of watermain per year are acceptable;
 
·         Watermain breaks will be repaired within “X” hours of initiation of repair, 95 percent of the time;
 
·         Customer complaints will be responded to within 24 hours; and
 
·         Service meets all regulatory requirements.
 
     ii.        Discuss any external trends or issues that may affect expected levels of service or the municipality’s ability to meet them (e.g. new accessibility standards, climate change impacts).
 
    iii.        Show current performance relative to the targets set out. This is often supplied in a table of targeted performance against indicators (such as response time) related to actual performance.
 
 
Output from Stage (iv)
 
·         A bottom up revisit of the service levels related to each asset class, by geography, or specific usage within the municipality.
 
·         Resetting of the service levels to the specific use of the public’s requirements.
 
·         Consolidation of the revised service levels into specifications and conversion into the level of investment required
 

v) Explore the potential for “Alternative Delivery Models”

 
The term “Alternative Delivery Model” relates to using non-traditional financing and procurement routes to access capital from outside government and transfer commercial risk to the private sector.  The best example is a Public Private Partnership  These are particularly useful for services which are highly capital intensive such as water and wastewater, light rail and bridges, because the municipality may not be able to find the capital from its own resources.  Public Private Partnerships can also benefit from a subsidy of up to 25% of capital from the PPP Canada Fund and the New Building Canada Fund, given a compliant and strong business case (and within applicable asset classes).  There are other models which involve parties outside government, which may be appropriate, depending on:
 
      i.        Whether the regulations and authority standing orders allow contracting under the proposed arrangements.
 
     ii.        The level of control which the municipality wants to retain.
 
    iii.        How much risk needs to be transferred to the private sector, and
 
    iv.        Whether capital and expertise is needed from another party.
 
 
Output from Stage (v)
·         Identify the capital and timing for investment required by the first portfolio of projects for investment.
 
·         Consider advantages of PPP funding (including greater democracy as payment would normally be spread over more than one administration).
 
·         Prepare business cases for PPP Canada and the New Building Canada funding.
 
·         Enter PPP scenarios in the financial model.
 

vi) Make those who use the most pay the most and explore funding from outside government

 
On the supply side of the equation, it is reasonable to look at who pays for the services through taxation or direct charging.  Where there is a reasonable case for collecting higher subsidies from identified service users, this should be explored.  The ability for the service user to pay would also need to be considered, particularly if they are a private citizen.  Some examples are supplied below:
 
Asset Class
Service User
Basis for Direct Payment
Type of Direct Payment
Arterial Road
Heavy Good Vehicles delivering to a specific construction site
Sole user of road with heavy wear and tear
Quarterly payment of a toll for duration of the works
Light Rail
Passengers (without senior or youth privileges)
There could be a level of subsidy at least from PPP Canada or the New Building Canada Fund of up to 25% of capital.  The additional funding would need to be met from those who use it, or the municipality, or a mixture of both with respect to a subsidised service
Fares and season tickets from passengers
Bridge
All vehicles
There could be a level of subsidy from PPP Canada, or the New Building Canada Fund of up to 25% of capital.  The additional funding would need to be met from those who use it, or government sources including the municipality.
Tolls on vehicles calculated to take account of the relative levels of wear and tear
Conference Centre
Users other than the municipality
The service users would be accepting of a level of charging consistent with the market and quality of the facility.
Room or facility rental.  Charging for catering and hotel services (if applicable)
Library
Library users of internet and computer services
These are services which are generally charged for by other providers
Single payment for one period of daily access
Parking
Vehicles parked in municipal areas of high congestion
An incentive not to drive into area of high congestion (given adequate public transport)
Charging by elapsed time
 
Output from Stage (vi)
 
·         Identify the justifiable additional income on top of direct subsidy from taxes.
 
·         Establish the optimum level or “sweet spot” for additional charging which does not depress demand and make the funding solution uneconomic.
 
·         Explore demand and non-taxation sources of funding in the financial model.
 
·         Develop specifications for the services taking account of viable, direct charging.
 

vii) Review

 
Effective asset planning is one of the key responsibilities of good municipal management. The process of optimisation of expenditure against the local priorities is essential but depends upon the collection of reliable input data and a robust methodology for modelling a variety of future scenarios. Where the access to capital is restricted beyond what is acceptable in the replacement cycle, Alternative Delivery Models should be explored. This is not difficult to do and should look at the viability of a PPP, in terms of whether enough risk can be transferred and whether there is market interest. A quantitative value for money analysis can be undertaken to confirm financial viability against traditional procurement. It is important to consider sources of funding from outside the Municipality’s resources, from the New Building Canada Fund, the PPP Canada Fund and also direct charging of service users. Scenarios for future investment should include different assumptions about all of these variables, so that the CAO and CFO can make informed and effective decisions.
 
Based in Ottawa, PETER BIRKBECK, Senior Manager, is with Deloitte’s Infrastructure Advisory & Project Finance practice. He can be reached at pebirkbeck [at] deloitte [dot] ca.