207 – Mills, mines, refineries and networks – what do they have to do with local government asset management?

Posted by Lancing Farrell                                                                          1000 words

disruption

I was talking to a colleague who recently attended a well organised and highly informative national conference on asset management. It was a pity that only three people of the three hundred attending came from local government. The rest were from sugar refineries, steel mills, manufacturing, energy supply, defence, food production, mining, ports, railways, airlines, telephony and numerous other organisations from across Australia. Apparently there was a lot to be learned. So why was local government absent?

Part of the explanation lies in the competing asset management conference run annually by the sector in Victoria. It is well attended by staff from many councils as part of their professional development and to support a sector initiative. I suppose councils don’t see any value in sending staff to a conference that doesn’t focus specifically on local government assets or the way councils have chosen to manage their assets.

A conference theme was disruption. Often it is outsiders who create disruption because they see things differently.  Sometimes it happens when insiders are frustrated by the status quo and they venture outside the organisation’s comfort zone.  Unfortunately, many organisations and industries are incapable of disrupting themselves.  Attending conferences run by your industry is much more comfortable.

It was interesting to hear from my colleague about how other industries view their assets and what they expect from them in the way they are managed. One key difference is that private sector has productive assets that are owned and managed to create shareholder value (i.e. make profits). The value created by those assets is captured by the organisation that owns them. It is different for most public sector assets.

Roads, parks, public buildings and other assets owned by councils are made available for use by others for to create value for them. Roads enable residents to commute efficiently to work and for freight to be delivered to businesses. Parks improve the mental and physical health of residents. Schools, pools and public transport increase property value. In each example, the value created by council assets is captured by others.

Councils also have productive assets, for example fleet and equipment and software. The performance of these assets should be measured by their return on investment. The management task is to ensure they are maintained according to need so that they are ready for use to deliver services to meet demands as they present.   The productivity of these assets is the key measure.

In contrast, for council owned assets where value accrues to others, the key measures are condition and availability. Is the condition suitable for their use? Are they reliably available for use? The challenge is to predict changes in the condition of assets being used by others who are outside your control and to ensure those assets are effectively maintained and then renewed in a timely way. Of course, this needs to be done at the lowest life cost to the council.

After listening to my colleague discussing the various presentations, it occurred to me that councils are not always being strategic in how they manage assets. Local government needs to redefine asset management. At the moment the asset management activity is the domain of the functional area creating and caring for most council assets. The emphasis is on quality engineering to make and maintain the best possible assets.

Too often the condition and availability of assets determines the service they can deliver, not visa versa. Some assets are constructed with a greater capacity than is required to meet demands in their service life. Maintenance is frequently too focussed and preserving assets, not just making sure the assets can be safely used for their intended purpose. It is not just about having nice assets – the assets must be able to deliver services to the community.

In addition, renewal of assets is heavily influenced by fashion and politics. Often assets are replaced because they are not seen to be fit for purpose by the users of services delivered using the assets. For example, roads are reconstructed because there are visual defects but it is safe and serviceable. Buildings are replaced because they look old or don’t have a functionality now required. Sometimes the services delivered using assets have changed without consideration for the changes then required in assets to support delivery.

In the private sector asset management is focussed on deriving the greatest value for the organisation and its shareholders from the assets. The management of assets is linked directly to organisational goals and strategy. The business is not run according to what assets are available – the assets are run according to what the business needs. It is about the productivity that the assets enable the organisation to achieve.

There is currently a big push in local government to develop service catalogues, strategies and plans to drive the requirement for assets. This effort to align asset ownership and use to organisational service objectives is seen as ‘advanced’ asset management. Rather than supplying assets and hoping they allow the organisation to meets its objectives and that they have the capacity needed to meet demand now and in the future, greater effort is being put into understanding services demands and planning for them.

Thinking about assets the way other industries do could be useful to ensure that councils get the most from their assets. After all, the major service provided by councils is to own and care for the assets of the community.

The value of council assets may be low compared to other industries but it is a significant part of the council business. Road assets alone can be worth over $2 billion for a metropolitan council. Then there are buildings, parks, drains, IT, artworks, etc. Almost half of the annual council budget is allocated for activities associated with asset planning, management, creation or acquisition, maintenance and renewal or replacement. Depreciation has become one of the largest single expenses.

In the last decade asset management by local government has focussed on self-assessed compliance with industry standards. The emphasis has been on establishing a system to manage assets, rather than really thinking about and understanding the value generated by assets for the community and how to optimise that value.

Maybe a little disruption is in order.

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