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February 2003
ANNEXURE A
GUIDELINE ON BETTER ASSET MANAGEMENT
Contents
1.
2.
Page No
Management Control
1.1
Policy and Procedures
1.2
Asset Information
1.3
Asset Register
2
5
Asset Life Cycle Management
2.1
Asset Planning and Budgeting
2.1.1
Determining Asset Needs
2.1.2
Evaluating Existing Assets
2.1.3
Developing the Asset Strategy
2.1.4
Capital Funding and Budgeting
2.1.5
Aligning Assets with Programmes
6
7
8
10
16
2.2
2.3
2.4
18
Asset Acquisition
2.2.1
Acquisition Decisions
2.2.2
Alternatives to Asset Ownership
2.2.3
Methods of Acquisition
2.2.4
Establishing Life-Cycle costs
2.2.5
The Acquisition Plan
20
22
23
27
29
Asset Operations, Safeguarding and Maintenance
2.3.1
Operation and Maintenance Plans
2.3.2
Performance
2.3.3
Asset Maintenance
31
33
38
Asset Disposal
2.4.1
The Disposal Plan
2.4.2
The Disposal Decision
2.4.3
Assessment of Performance
2.4.4
Methods of Disposal
41
42
43
43
Planning
Disposal
Acquisition
Operation &
Maintenance
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Effective implementation of asset management principles can only be achieved within a framework of appropriate
control and monitoring by management.
INTRODUCTION
This part of the Framework focuses on the ‘what to do’ in embarking on the process of Asset Management. It
cohesively draws together the integral Asset Management elements discussed in the framework namely: five Asset
Management Principles; and eight key Asset Management Activities
1.
MANAGEMENT CONTROL
This section focuses on the policies and procedures which need to be developed and promulgated, and on
the management information which is required to make timely and informed asset management decisions.
The control structure needed within a department in relation to asset management is an essential element
of good corporate governance and is a necessary precursor to effective implementation of asset
management principles.
The Internal Control Structure
The systems, processes and procedures established within a department to ensure that management's
plans and intentions are implemented, are referred to as the internal control structure. This structure
extends beyond those matters that relate directly to financial reporting and comprises:
•
the control environment - including management's philosophy and operating style, and the
polices and procedures;
•
the information system - financial and non-financial information; and
•
control procedures - internal accounting controls, management controls and asset security.
Each element is important for effective asset management. Management must establish appropriate
policies and procedures, and adequate controls. Only then can management be assured that the
information with which it makes decisions is reliable.
1.1
Policy and Procedures
This section focuses on the policies and procedures which need to be developed and
promulgated, and on the management information which is required to make timely, informed
asset management decisions.
Asset policies extend beyond accounting policies. They should be comprehensive, covering all
phases of the asset life cycle, and should address principles of asset management.
The development and promulgation of comprehensive asset policies and procedures are important
elements of the internal control structure of a department. They reflect management's operating
philosophy and style, and the content is one indication of management’s concern with maintaining
adequate control over its resources.
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The absence of an asset policy and procedure manuals, or the existence of outdated manuals, is
generally an indicator that internal controls are less reliable and effective. The primary reason for
this is that policy and procedure statements are the principle means by which management's
intentions are communicated to staff. They are also an initial reference point for new staff. In their
absence, staff must rely on 'word of mouth' and 'on-the-job' training.
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Good policy and procedure manuals are:
•
integrated - policy statements and procedural guidance are combined;
•
consolidated - all relevant policy and procedures are located in one source;
•
cross-referenced - references to legislative requirements, government
pronouncements, and supplementary instructions are supplied; and
•
formatted for ease of update - preferably in electronic format.
policy
Asset policy and procedure manuals should include more than operational aspects, such as
recording assets, stock take and write-off procedures. They should also address strategic issues
such as planning for acquisition, accountability arrangements, maintenance and operating policies
and strategies.
A Policy and Procedure manual, which details the requirements for effective governance of
assets, is complemented by an information system, based on an asset register, which provides the
financial and non-financial information necessary to manage assets.
Success Factors
•
The policies and procedures address all aspects of the asset life-cycle; are promulgated to
all relevant staff and are updated regularly.
•
Staff involved in asset management receive appropriate training related to their
responsibilities.
•
The asset register contains data on acquisition, asset identification, accountability
information, performance, disposal and accounting.
•
The asset register is integrated with the financial and budgetary systems.
•
Asset information is readily accessible to staff who are accountable for assets.
Outcome
An effective internal control structure provides the framework within which improvements to asset
management are effected. Without it there is limited scope for informed decision-making or
implementing management's intentions.
Figure 2.1 is a checklist that has been developed to provide an indication of the contents of a
comprehensive policy and procedure manual. It is suggested that it be copied and completed as a
starting point for reviewing current instructions
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Section
Phase
Planning
Acquisition
Operation
Disposal
Accounting
•
•
•
•
•
•
•
Definition of assets
Role of assets in programme delivery
Non - asset solutions
Asset life - cycle
Life - cycle costing approaches
Accountability and responsibility
Elements of the asset strategy
•
•
•
•
Analysis of alternatives
Developing an acquisition plan
Receipt and acceptance of assets
Establishing ownership and control
•
•
•
•
•
•
•
•
Establishing performance indicators
Operation & maintenance plan
Monitoring condition and use
Maintenance scheduling
Tracking assets:
- transfers, loans, off
Safeguarding and protecting assets
Stock - take
Physical security
• Identification of surplus, obsolete & under
performing assets
• Replacement strategy
• Evaluation of disposal alternatives
• Write - off damaged or missing assets
• The disposal plan
Exists
Could be
Improved
Missing
Date Action
Completed
By
Whom
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February 2003
- site repairs
-
• Definition of assets:
Criterion of ‘control's
Capitalisation
threshold
Enhancements & upgrades
Portable, attractive assets
• Valuation of assets:
Recognition criteria
Valuation methodology
• Depreciation of Assets:
Method
Useful life
Treatment of repairs & maintenance
Recording assets on acquisition, transfer
and disposal
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Figure 2.1
1.2
Asset Information
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Information on assets is required for three main reasons:
•
To provide for the efficient management of assets;
•
To help managers to deliver a better service; and
•
To save money both through the efficient use of assets and through the disposal of surplus
assets.
The management of public assets requires sufficient records to identify the existence of assets and
the costs of holding and operating these assets. The recognition of assets in a Statement of
Financial Position (Balance Sheet) requires that governments undergo a rigorous process of
identifying all assets, verifying ownership and placing a value on assets. While the adoption of
accrual accounting is not a necessary prerequisite for this to occur, it is often the driving factor.
Financial reporting deadlines require that this process be completed within a given timeframe and
the review of this information by an external auditor provides assurance as to its reliability.
Better information regarding assets leads to better decisions on maintenance, disposal of surplus
assets and replacement of decayed or obsolete assets. These decisions are particularly important in
relation
to major physical assets such as infrastructure assets, the replacement of which could strain the
financial capacity of a government.
An adequate asset register is integral to effective asset management. It is the basis of an asset
management information system and should contain relevant data beyond that required for
financial reporting.
2.
ASSET LIFE CYCLE MANAGEMENT
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2.1 ASSET PLANNING AND BUDGETING
This section discusses the detail regarding the Asset Planning and Budgeting phase.
It is essential that managers treat assets from a life-cycle perspective.
The physical life-cycle of an asset or group of assets has four distinct phases – planning,
acquisition, operation and disposal.
As discussed in the Asset Management Framework, Asset Planning and Budgeting is the first of the four
phases through which an asset passes during its life (see diagram below). The phases are:
•
the identification of need, where the requirement for a new asset is planned for and
established;
•
the acquisition phase, where the asset is purchased, constructed or otherwise created;
•
the operation and maintenance phase, where the asset is used for its intended purpose. This
phase may be punctuated by periodic refurbishment or major repair, requiring the asset to be
taken out of service for periods of time; and
•
the disposal phase, initiated when the economic life of the asset has expired, or when the need
for the service provided by the asset has disappeared.
By incorporating asset planning into the strategic planning framework, the long term
implications of corporate level decision-making on assets can be identified and appropriate
responses developed.
Treasury regulation 5.2.2 requires the strategic plan to include details of proposed acquisitions of
fixed or movable capital assets, planned capital investments, rehabilitation and maintenance of
physical assets, and multi-year projections of the receipts from the sale of assets.
Matching the asset requirements of a department to its service delivery strategy should result in assets
with the necessary capacity and performance. Asset planning also leads to specific actions to acquire
any new assets that may be needed, to dispose of assets that are surplus and to operate and maintain
existing assets
effectively.
This section describes a model asset planning framework (illustrated in below) within which
departments are required to undertake planning and budgeting for asset acquisition, operation and
disposal.
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Determining
Evaluating
Existing
Assets
Asset Needs
Developing
The asset
Strategy
Capital
Funding
and
Budgeting
Determining Asset Needs
Asset management decisions regarding acquisition, use and disposal are to be made within an
integrated service and financial planning framework, and in the context of the Government's overall
resource allocation policies and priorities.
2.1.1
Determining Asset Needs
The need for assets is directly linked to the provision of services. Based on the first four of
the key Asset Management activities (needs analysis, economic appraisal, planning,
budgeting), the asset planning phase involves the assessment of existing assets and
planned acquisitions against service delivery requirements. Proposals for new assets must
be justified by a thorough evaluation of all service delivery options, and, as part of the
Government budgetary process, be the subject of a comprehensive appraisal or investment
evaluation.
Section 38 (1) (iv) of the PFMA requires a system for properly evaluating all major
capital projects prior to a final decision on the project.
Develop Programme Delivery Strategies
The reason why Government acquires, operates and maintains assets is to support
programme delivery. All departments are responsible for developing a service delivery
strategy within the context of their objectives and strategic plan. The strategy is based on a
needs analysis and a review of how services are currently being provided.
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•
To ensure this occurs in practice, as a first step, departments should develop programme
delivery strategies which:
define the scope, standard and level of programme services to be delivered;
•
assess the methods of delivering these services;
•
determine, where appropriate, methods of containing the demand for the services (for
example, by combining it with another service, or by dealing with the situation that causes
the service to be sought). It may also involve a review of pricing policies; and
•
identify the resources, including assets, required to deliver the services. Service options
need to be evaluated on financial, economic, social and environmental grounds. When
identifying resource requirements departments should consider 'non-asset' solutions.
Devising non-asset options should challenge traditional concepts and assumptions about
the delivery of services, and enable innovative methods to be developed. These are
solutions which eliminate, reduce or constrain the need for the department to own assets.
•
Three broad types of non-asset solutions should be considered:
re-designing the service to reduce the need for assets (e.g. home-based medical care);
•
increasing the utilisation of existing assets so that the acquisition of a new asset can be
avoided; and
•
using private sector contractors to provide parts or all of the service. Assets may still be
required for the service, but they will be controlled and operated by the contractor rather
than being controlled by the department.
2.1.2
Evaluating Existing Assets
Once the service need is determined and the service strategy devised (after considering
non-asset solutions), those services that need to be supported by an asset-based solution
can be determined, as can the performance requirements of those assets over the planning
period.
Determining
Asset Needs
Evaluating
Existing
Assets
Developing
the asset
strategy
Capital
funding and
budgeting
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Evaluating Existing Assets
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The evaluation of existing assets determines whether their performance is adequate to support the
selected service delivery strategy.
The effectiveness of existing assets in supporting programme delivery should be determined. This
process pre-supposes appropriate condition and performance standards are set for assets.
Programme evaluations are to include the evaluation of asset performance. Asset performance is
to be reviewed regularly against best practice benchmarks to identify assets that are underperforming, or costly to own or operate. It is also possible to over-invest in assets. The evaluation
should reveal assets that provide more than their required capacity, or are surplus to requirements.
Assets that have been inadequately maintained may pose potential safety or health risks, disrupt
essential services, or incur unforeseen expenditures for the correction of defects.
The results of the evaluation should be included in an integrated performance report (refer to
Section 2.2.3.2 Asset Performance)
Physical Condition
Asse
t
Functionality
Utilisatio
n
Financial
Performanc
e
Integrated
Performance report
Figure 2.7 Performance Monitoring
Evaluating asset performance
All assets currently being used to deliver the service under consideration need to be identified and
registered. How effectively these assets support service requirements also has to be determined.
As part of this process, assets should be evaluated in terms of their:
•
Physical condition: Is the asset adequately maintained? Is there a maintenance backlog
that requires attention? Are major replacements or refurbishments likely to be required
during the planning period?
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•
Functionality: How well suited is the asset to the activities and functions it supports?
•
Utilisation: How intensively is the asset used? Could it be used more productively by
extending its working hours, or by accommodating additional functions?
•
Financial performance: Are the asset's operating costs similar to those for other
comparable assets? (Use benchmarking to establish this wherever possible.) Are the
energy, cleaning and maintenance costs reasonable?
Are user charges being made, and how do they relate to the total operating costs of the asset
(including the cost of capital)? These measures for assessing asset performance are discussed in
more detail in Section 2.2.3.2 Asset Performance.
Current or committed projects
The assessment of existing assets must include those assets in the process of being acquired or that
are committed (such as facilities under construction, or those incorporated in an authorised capital
works programme). The result of evaluating existing and anticipated new assets is a statement of
the assets available, or expected to be available, to support the selected delivery strategy.
Determining
Asset Needs
Evaluating
Existing
Assets
Developing
the asset
strategy
Capital
funding and
budgeting
Developing the Asset Strategy
2.1.3
Developing the asset Strategy
Departments are to establish systems and processes to support the preparation of five-year
forward asset strategies covering acquisition, safeguarding, maintenance, refurbishment,
redeployment and disposal, together with the capital and operating costs. An integrated approach
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towards asset planning and management will enable departments to deliver quality, asset-based
services efficiently and effectively. By integrating asset planning with its overall planning processes,
a department is better able to make the most appropriate decisions about its asset profile,
particularly when responding to such factors as:
•
•
•
new or changing service delivery requirements;
different methods of service delivery; and
evolving technology.
At the strategic level, planning will provide a comparison between the assets required to support
programme delivery and those assets currently available and/or programmed for acquisition. In
this manner the department is able to identify:
•
•
•
•
existing assets that are required and are presently capable of servicing programme
delivery needs;
existing assets that are required but are below the necessary standard and need
refurbishment to meet programme delivery needs;
assets which are surplus to programme delivery needs and can be disposed of; and
assets which must be acquired to meet programme delivery needs.
Forward-looking asset management strategies are required. The planning process should
match the prospective demand for assets with the current asset supply profile to develop the
asset strategy.
Product
An Asset Strategy which complements the Information System, Human Resource and Financial
Management Strategies in the Operational or Business Plan of a department.
Success Factors
•
Asset functions are assessed against and matched with programme delivery standards or
service delivery strategies.
•
The asset Strategy time-frame equates with the strategic planning horizon, and ideally,
extends over the life of longer-lived assets.
•
The asset Strategy incorporates capital and recurrent (operating) costs which link with
budgets in the financial management strategy.
Outcome
Integration of asset strategies into operational or business plans will establish a framework for
existing and new assets to be effectively utilised and their service potential optimised.
Existing Asset Holding
Inventory and condition
assessment
Programme Delivery Strategy
Capital Works – programmed
acquisitions and commitments
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Non-Asset
Solution
Asset needs to support
strategy
Asset Supply Profile
Asset Demand Profile
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Asset good
condition
Asset Poor
Condition
Asset functional
Poor Condition
New asset
requirements
Operate and
maintain
Refurbish
Create or
acquire
Dispose
Asset management decisions should be integrated into strategic planning processes. The
asset strategy is one element of the Strategic Plan of a department which complements the
Human Resource, Information Technology and Financial Strategies.
Elements of the Asset Strategy
Following an evaluation of life-cycle costs and the benefits and risks associated with each option,
the strategy will identify the most appropriate approach for meeting programme delivery needs. The
elements which together contribute to the development of the asset strategy are listed below and
discussed in more detail hereafter:
a)
b)
c)
d)
Acquisition Plans
Operations,
Safeguarding and
maintenance Plans
Disposal Plans
Funding Plans
Funding Plans
Asset Management Plans consisting of an Acquisition Plan, Operational, Safeguarding and
Maintenance Plan, Disposal Plan, Funding Plan and Risk Management Plan;
Service Delivery Method;
Performance Monitoring; and
Procedures, Systems and Training.
Service Delivery Method
Inhouse-Outhouse
Strategic
PageAsset
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Management
Plan
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Asset
Physical Condition
Functionality
Procedures
Utilisation
Integrated
Performance
Report
Training
Financial
performance
a)
System
s
Asset Management Plans
(The “what needs to be done” element of the asset strategy)
Each stage of the life-cycle needs to be planned to identify what needs to be done to
ensure that assets effectively support programme delivery. Individual plans consider the
needs of the other stages of the life-cycle to ensure an integrated approach is achieved.
Asset Management plans are dynamic - regular reviews of asset performance should be
undertaken and the plans modified accordingly.
a.1
Acquisition plan
Assets to be acquired may be purchased (either on the open market, or from
another government department), or custom developed for their purpose. They
may also be leased or hired. The asset acquisition plan should define the type and
timing of asset requirements, and set out the proposed method of acquisition and
financing.
a.2
Operations, Safeguarding and Maintenance plan
Section 38 (1) (d) of the PFMA makes the Accounting Officer responsible for
the management, including the safeguarding and maintenance of assets.
Treasury regulation 10.1.1 requires the accounting officer to ensure that
proper control systems exist for assets and that preventative mechanisms are
in place to eliminate theft, losses, wastage and misuse.
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The operations plan defines operating policies (i.e. in respect to working hours, security,
safeguarding, cleaning, energy management and similar) and the resources required to
manage the asset. The operational management of individual assets should be assessed to
determine:
•
the total operating costs that should be considered in the funding plan; and
•
whether this function can be contracted out in whole or in part.
The maintenance plan defines maintenance standards, describes how the work is to be
carried out, and forecasts the necessary maintenance expenditure for the planning period.
Modifications or enhancements are work that is required because of a change in the use of
the asset, or a need to improve its functional performance. Works of this nature normally
increase or extend the service potential of the asset beyond the originally assessed
standard, and are then treated as capital expenditure.
Safeguarding
To be managed effectively, assets must be protected against theft or fraudulent use and
other
hazards such as fire. The consequences of not having the asset available for service
delivery must be carefully considered. Assets must therefore be adequately insured to
minimise financial loss to the Government.
a.3
Disposal plan
Disposal options include transfer for alternate use, rental, sale and/or lease-back,
and demolition.
a.4
Funding plan
Departments controlling assets should consider the options available for funding
both capital and operating expenditures for assets. New assets may be funded in
whole or in part:
•
from the disposal of unused assets;
•
by leasing or other form of private investment; or
•
from borrowings, including appropriated funds.
Revenues to support borrowing or leasing charges, or to supplement operating
expenses, may be obtained from user charges or levies.
The funding plan should be based on an analysis of all available possibilities,
including utilising private sector funding wherever appropriate.
a.5
Risk Management plan
Section 38 (1) (a) (i) of the PFMA requires the Accounting Officer to ensure
that the department maintains effective, efficient and transparent systems of
financial and risk management and internal control. Risk management is
also appropriate to assets.
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Asset management related risks may include risks related to the method of
acquisition asset failure due to inadequate maintenance or operation , and lack of
safeguarding of assets.The nature of certain assets making them most susceptible
to fraud or misuse should also specifically be considered.
It should be noted that the state does not normally insure its assets, which
strengthens the need for an effective risk management plan.
Treasury regulation 12.1.1 states that subject to any other legislation or
agreement, the state will bear its own damages and accident risks and be
responsible for all claims and losses of state property where these arise from
state activities by an official who is liable in law and who is or was employed
by an institution.
Departments should therefore prepare a risk management plan which describes
the risk management strategies and actions to be implemented for the assets
under their control. They are to be:
•
•
•
aimed at effective and timely outcomes;
geared to meeting the quality standards of industry; and
determined in line with best practice.
Departments must continue to monitor and evaluate the effectiveness of their risk
management measures. If necessary, these measures should be redefined.
b)
The Service Delivery Method
(The “how it will be done” element of the asset strategy)
The service delivery method provides the mechanism for delivering the asset management
plans. It is based on a needs analysis and an examination of how the plans are currently
being delivered; and is reviewed against relevant financial, socio-economic and
environmental factors.
The two major options for service delivery are 'in-house' and 'out-sourcing'. Various
combinations of these options are available.
c)
Performance Monitoring
(The “How well assets meet programme needs” element of the asset strategy)
Periodic reviews of asset performance are an essential element of the asset management
framework. They aim to provide factual and quantitative information on the performance
of the asset in meeting programme delivery needs. Performance monitoring forms the
basis of management of the asset throughout its life. It facilitates adjustments to the
various plans, ensuring programme delivery needs are met and providing increased
efficiencies.
d)
Procedures, Systems and Training
(The “with what requirements" element of the asset strategy)
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Procedures support consistent application of definitions, standards and efficient work
practices. It is essential they are disseminated throughout the department. The
management information system is more than an asset register. It should support
budgeting, planning and management of assets and provide an effective means of
reporting asset performance.
Training programmes need to be tailored to the needs of staff. Accounting Officers require
an understanding of the principles of asset management and the associated budgeting and
accounting processes. Staff with responsibility for operation, maintenance and disposal
require more in-depth training.
2.1.4
Capital Funding and Budgeting
The budget sector capital works process enables the Government to consider asset acquisition and
enhancement options effectively and to establish priorities. Capital funds can then be applied to
new projects and investments to satisfy government objectives, and to obtain best value for money
for the State.
Section 27 (3) (d) of the PFMA requires estimates of capital expenditure ... and the projected
financial implications of that expenditure for future financial years to be included in the
annual budget information, and section 28 (1) (b) dealing with multi year budget projections
requires the estimated expenditure to be incurred during each year of the multi period,
differentiating between capital and current expenditure. Sources of capital funding
If it is determined that public sector capital funding is appropriate for an asset, funds are obtained
from a range of sources, such as those referred to below:
State dedicated funds
Some capital investment projects are funded from State dedicated funds.
Annual capital works allocations
All investment proposals not eligible for State dedicated funding are considered for commitment
against the normal annual allocations estimated to be available for future capital works.
Determining
Asset Needs
Evaluating
Existing Assets
Developing the
asset strategy
Capital funding
and budgeting
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Securing funding for an asset
All proposals to acquire new assets, enhance existing assets or develop increased private sector
capacity to provide public services, must be evaluated in accordance with evaluation guidelines and
methodologies endorsed by the appropriate Procurement committee, and must identify:
•
the full costs associated with the proposal – including future operational and maintenance
costs;
•
all impacts on future budget supported expenditure and receipts;
•
the net impacts on service delivery capacity, quality, range and efficiency; and
•
the arrangements and timetable proposed for implementation.
Where asset plans involve capital expenditure (for either new projects, or enhancements to an
existing asset), an investment proposal for each individual proposal must be prepared for
consideration by the appropriate Procurement committee.
Requirements of each investment proposal
Soundly based investment proposals demonstrate clearly that their benefits exceed their costs.
They will be based on the asset strategy and will detail the links between the proposal and both the
service delivery strategy and the department's strategic plan. They will also show that relevant
asset and non-asset based service options have been considered.
Proposals must address the evaluation criteria, indicate the preferred funding source and set out
the full costs, benefits and risks. Proposals must also address the ongoing operating and
maintenance cost implications, and identify the recurrent funding needed for this purpose. This
information should be used by the department to support the logic underpinning the ranking of
proposals.
Ranking and evaluation of investment proposals
In ranking and prioritising investment proposals, departments must take into account the role that
the proposed assets will play in service delivery, and the relative importance of the services
themselves.
The department must then submit its proposals, in ranked order, to the appropriate Procurement
committee, irrespective of the proposed source of funds. (Projects to be supported from dedicated
and external fund sources must also be fully evaluated and prioritised according to the particular
processes that apply to those funds sources.)
The appropriate Procurement committee will assess investment proposals lodged by each
department, and apply “across Government” criteria. This will result in the proposals being ranked
in a whole-of-government context (e.g. the first three proposals ranked by one department may be
deemed to have a higher priority than the proposal ranked first by another department).
The criteria considered by the appropriate Procurement committee should include:
•
the impact on service delivery and productivity;
•
the financial effects, including costs, savings, revenues and offsets;
•
the economic costs, benefits and risks (including environmental and social effects);
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•
•
other risks to Government that might be involved; and
the capability of the department to implement the proposal successfully.
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2.1.5
Aligning Assets with programmes
It is important that assets be aligned to a department's programmes to the extent practical. This allows
the full cost of programme delivery to be more readily determined. The process also provides the
opportunity whereby programme delivery needs and outcomes are able to be compared with the
assets currently used in delivery of that programme.
The outcomes of this process include:
•
•
•
identifying assets that do not have the necessary capacity or functionality to adequately address
programme delivery standards;
identifying assets that have capacity or functionality in excess of programme delivery standards;
and
identifying assets that do not support programme objectives and should be disposed of.
Difficulties encountered when undertaking the process of alignment generally result from:
•
conflict between department structure and programme structure;
•
centralised control and ownership of 'corporate' assets such as buildings, major IT equipment, fitout and furnishings; and
•
assets being used by more than one programme.
There may be sound management reasons for the above approaches. It was noted that a number of
departments retain centralised control of Information Technology (IT) equipment to ensure uniformity
in purchasing. It is acknowledged (and encouraged) that there should be some form of central
oversight, particularly in a decentralised or highly devolved department. However, this should not be
held out as an obstacle to correctly aligning assets with programmes.
The process of alignment of assets with programmes may be undertaken concurrently with the
allocation of capital and recurrent budgets for assets to programme areas, and/or the allocation or
attribution of 'corporate' costs to programmes (if these have not already been done).
Cost attribution is an effective means of retaining central control or responsibility for assets and at the
same time aligning these assets with programmes. This is particularly effective for assets employed by a
number of programmes (for example, a headquarters building).
2.2.
ASSET ACQUISITION
This section outlines the practices that departments are to follow to acquire assets once planning phase is
complete. Section 38(1)(a) (iv) of the PFMA makes the Accounting Officer responsible for an
appropriate procurement and provisioning system which is fair, equitable, transparent and cost
effective.
Asset acquisition decisions are to be made within an integrated service and financial planning
framework.The acquisition of assets is a key asset management activity. It is imperative, therefore, that
acquisition decisions be taken within an integrated planning framework that takes account of service
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delivery needs, corporate objectives, financial and budgetary constraints, and the Government's overall
resource allocation objectives.
Options for acquiring assets include purchasing (buy), purpose-design and construction (build) or
financial leasing (lease). As part of the acquisition process, a department needs to consider:
•
the nature of the assets to be acquired (i.e. whether they are specialised assets or common items);
•
the market conditions and the implications for the acquisition cost (i.e. whether it is a buyers' or a
sellers' market);
•
the industry capacity (i.e. the number of potential contractors or suppliers – based both locally and
overseas – capable of supplying the assets);
•
the industry standard (i.e. how the assets are normally procured in the industry); and
•
the suitability of contractors or suppliers (i.e. whether the suppliers engaged need government
endorsement).
Minimising the exposure to risk
Acquisition decisions require thorough examination and economic appraisal. Any potential risks as well as
the consequences of acquiring an asset should be examined before any action is taken.
The involvement of the private sector in the acquisition process should also be considered, where
appropriate. This is described in section 3.2.3 in further detail. This approach is consistent with the
Government’s drive towards a more commercial focus in the management of its departments.
In accounting for private involvement in public investment, however, the department should arrange for an
appropriate sharing of risk. This approach is consistent with the Government’s drive towards a more
commercial focus in the management of its departments. Legal expertise should be engaged to assist in
preparing contracts to minimise exposure to risk. Some of the issues which may be applicable and need to
be considered and clarified in contracts with contractors and suppliers include:
•
•
•
•
•
•
•
the type of contract;
ownership and control;
performance criteria to be met;
rights over the intellectual property developed as a result of the contract;
responsibility for maintenance;
responsibility for testing, inspection and installation; and
responsibility for post-completion testing.
Purchasing ethics and principles
Officers involved in purchasing and supply management in the public sector shall maintain the highest
ethical standards, and seek the best value for money. The following principles should be observed:
•
Public money should be spent efficiently and effectively, and in accordance with Government
statutes, regulations and policies, including the Procurement policies and the Minister with the
portfolio responsible for building and construction matters;
•
Confidentiality is to be maintained at all times;
•
Gifts or favours from current or potential contractors or suppliers that might compromise their
integrity as a delivery/purchasing agent should not be accepted;
•
Purchasing should be carried out without favour or prejudice;
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•
Purchase orders for identical goods or services must not be split in order to circumvent established
procurement delegation limits; and
•
All potential contractors and suppliers are to be provided with adequate and identical information
on which to base their tender, proposal or quotation.
Procedures are to be established and maintained to ensure that:
•
fair and equal consideration is given to each tender or quotation received; and
•
selection is based on fitness for purpose and on the cost effectiveness.
The decision to acquire an asset is made after consideration of the alternatives to asset ownership. It
is based on a comparison of the life-cycle costs, risks and benefits of each alternative. The
alternatives include both 'non-asset solutions' and the various methods by which assets may be
acquired
While assets may be needed to deliver programmes, it is not essential that a department own these assets.
Use of the private sector for service delivery is one means by which the risk of ownership may be
transferred. Redesign of the delivery strategy may also eliminate or reduce the need for assets. Another
possibility is to moderate the demand for the programme where this is appropriate.
Life-cycle costing is a process which recognises the connected nature of capital and recurrent costs. There
is little scope to avoid operating costs once an asset is acquired if programme delivery standards are to be
met. Avoiding or deferring operating costs such as maintenance may run-down an asset, shorten its
working life and/or reduce its output (refer to Section 2.2.3 Asset Operations, Safeguarding and
Maintenance). However, there are often trade-offs that can be made between the capital cost of an asset
and its operating costs. Life-cycle costing is used to evaluate these choices.
The principal choice in 'general' government is whether to lease or buy an asset. Leasing presents a choice
between 'operating' and 'finance' leases. The latter option substantially transferring the risks and benefits
of ownership to the department, the former providing greater flexibility.
The above processes and considerations should be documented in an acquisition plan, as part of the
accountability framework.
2.2.2
Alternatives to Asset Ownership
An integral part of effective asset management is consideration of programme delivery
options which reduce the need for ownership of assets by Government. Successful 'non-asset'
solutions can reduce or defer the requirement for new assets with advantages in terms of reduced
management effort and the release of capital funds. The consideration of non-asset solutions is
becoming increasingly important as:
•
the current stock of Government assets is growing and steadily ageing;
•
changing expectations and technologies can prompt proposals for new assets where
existing assets could continue in service unchanged;
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•
asset requirements change over time with changing programme requirements; and
•
expenditure on fixed assets constrains expenditure in other areas.
These trends have encouraged a number of public and private sector departments to divest
themselves of assets, moving to less asset intensive styles of operation. This approach provides
greater flexibility in the face of change.
Considerations in the search for non-asset solutions include;
•
contracting-out the function to a service provider which will provide the assets itself;
•
redesign the service to reduce demand on assets - for example, use of telephone-based
services;
•
reduce demand for the service itself - for example, by implementing user-charging
regimes; and
•
increase the utilisation of existing assets - for example, sharing facilities between
programmes and departments.
A department must have a clear understanding of the strategic significance of its assets for
its service delivery obligations prior to considering 'non-asset' solutions.
Treasury Regulation 16 deals with private public partnerships (PPP) in detail and should however be
adhered to. Notably, it requires that only the Accounting Officer can enter into a PPP on behalf of
the institution, and only after written approval of the appropriate treasury. The relevant treasury
may give such approval only if it is satisfied that the proposed PPP agreement will –
•
provide value for money;
•
be affordable for the institution; and
•
transfer appropriate technical, operational and financial risk to the private party.
Furthermore, the Accounting Officer must undertake a feasibility study, the content should include
broadly:
•
explains the strategic and operational benefits of the PPP agreement for the institution in
terms of the institution’s strategic objectives and government policy;
•
describes in specific terms the extent to which the function, both legally and by nature,
can be performed by a private party in terms of a PPP agreement; and what other forms of
PPP agreement were considered;
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2.2.3
•
provide information to assist the relevant treasury to assesses whether the agreement will
provide value for money; be affordable for the institution; and transfer appropriate
technical, operational and financial risk to the private party.
•
explains the capacity of the institution to effectively enforce the agreement, including to
monitor and regulate implementation of and performance in terms of the agreement.
Methods of Acquisition
Once it has been determined that an asset is required, the three basic options are to buy, build or lease.
Variations on this theme, for infrastructure and large construction projects, include 'build, own, operate
and transfer' (BOOT) schemes. It should be noted, however, that not all these options apply to all classes
of assets, or are available to all departments. It should also be noted that savings in an amount
appropriated for capital expenditure is not necessarily authorised in order to defray current expenditure
(refer to PFMA section 43 (4) (c)), and unspent funds on capital expenditure may only be rolled over to
finalise projects still in progress. (Treasury Regulation 6.4.1 (a))
a)
Asset Purchasing (Buy)
Acquisition of land
Land, for the purposes of this publication, encompasses both improved and unimproved land. It
generally also includes all improvements of a permanent nature constructed on it. Legislation
governing the acquisition of land by departments for public purposes is contained in various Acts
of Parliament. Generally, a department acquires land either by agreement or by compulsory
acquisition:
•
Purchase by agreement can be achieved by negotiation and entering into a common law
contract of sale.
•
Where necessary, the acquiring department is empowered under legislation to acquire land
compulsorily. If agreement on the compensation to be paid cannot be reached, the matter
is determined by the courts.
Departments uncertain about whether or not they have the capacity to enter a contract for the
sale/purchase of land are encouraged to seek further legal advice.
Acquisition of other assets
The acquisition by departments of assets other than land and those that are constructed is
governed by the Public Finance Management Act 1999 .
b)
Asset Purpose-Design and Construction (Build)
Contracting methods
Choosing an appropriate contract method is fundamental to the feasibility, development and
ultimate success of the procurement. Departments are responsible for choosing the most
appropriate method on a project-by-project basis and for identifying, assessing and allocating
potential risks to optimise investment return.
The method used to acquire assets should enable:
•
appropriate allocation of risks and obligations to relevant parties;
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•
•
definition of the respective roles of the various parties involved; and
definition of the required outcomes of the acquisition process.
The choice of a method is made by considering costs, financial benefits, funding options, risks,
delivery times and the period for which the asset is needed.
Lump sum contracts
Lump sum contracts involve the design and documentation of the project. Tenderers’ are then
invited and a contractor appointed to construct the works as documented in return for an agreed
lump sum payment, paid as the work progresses. A project manager undertakes the management
role for the delivery of the project within the specified time, and to meet specified cost and quality
targets. The project manager may be an architect or other building professional.
Design and construct contracts
A design and construct contract involves a single supplier or contractor undertaking both the
design and construction processes. The contractor engages consultants to design and document
the project, generally with the close involvement of the customer.
This type of contract may include warranted or guaranteed maximum price, subject to allocation of
risks.
c)
Build-own-operate-transfer (BOOT)
The BOOT process involves private construction of a public asset at the expense of the private
owner in return for the right to operate the facility and charge users a fee. At the end of the
contract period, the facility reverts to the State. This process can be modified to suit particular
needs (e.g. Build-own-transfer), depending on the requirements for ownership and operation.
d)
Lease versus Buy
The decision to lease or buy an asset is an issue where the market can provide generic assets to
meet departments service needs. There are two principal types of lease available to departments the 'finance' and the 'operating' lease.
As the name implies, the former is effectively a vehicle for financing the purchase of an asset. The
lessee takes on most, if not all, the risks and benefits of ownership of the asset. From this viewpoint
the use of a finance lease is not significantly different to ownership. The major point of distinction
between outright purchase of an asset and the use of a finance lease to 'acquire' the asset is that
the finance cost is able to be spread out over time. This is argued as a benefit of the finance lease.
For budget-funded departments there are two arguments against this 'benefit':
•
the implicit interest cost in the finance lease will generally be higher than the cost of funds
to the Government – the use of a finance lease may therefore have adverse value-formoney consequences; and
•
departments are able to use the running costs arrangements to spread the cost of large
capital outlays over a number of years by borrowing against future appropriations or
accumulating savings prior to acquisition.
Where a lease is used, it is necessary to record the details in an appropriate register. In the case of
a finance lease, this is the asset register. Additional details which should also be recorded include:
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•
•
•
•
•
lease start and completion dates;
first instalment date;
asset fair value on acquisition;
implicit interest rate; and
present value of lease payments.
Operating leases also have an implicit interest cost. The main benefit of these types of leases is
that the lessor retains the risks of ownership.
In summary, the advantages of leasing include:
•
increased flexibility to change 'asset solutions';
•
reduced need for large, lumpy capital outlays; and
•
isolation from short-term fluctuations in market supply and values.
These advantages have a flip-side:
•
penalty clauses for early termination of finance leases;
•
higher implicit interest costs in leases compared to cost of funds to the South African
Government; and
•
dependence on the market to supply assets may lead to long-term exposure to market
cycles and values.
Assuming control of assets
A department is deemed to control an asset if it:
•
has the capacity to benefit from the asset in pursuing its objectives;
•
is able to deny or regulate the access of others to that benefit; and
•
has the ability to secure the service potential or the future economic benefit.
The following scenarios and assumptions regarding asset control is made:
•
Acquisition with funds from appropriations
An asset that is purchased, constructed or developed by a department using appropriation
funds is controlled by that department, unless it explicitly does so on behalf of another
department and an agreement between the departments specifies this.
•
Acquisition with funds from non-appropriation sources
An asset that is purchased, constructed or developed by a department using funds from
non-appropriation sources (e.g. user charges, grants, revenues, proceeds of sale of other
assets) is controlled by that department, unless it explicitly does so on behalf of another
department and an agreement between the departments specifies this.
•
Acquisition with Government funds
An asset that is purchased, constructed or developed by a department with Government
funds is deemed to be controlled by that department unless the funding agreement
specifies otherwise.
•
Acquisition by finance lease
Departments that lease assets under a finance lease are deemed to control those assets.
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•
Transfer
An asset that is transferred from another department is deemed to be controlled by the
department to which it is transferred.
•
Vesting
An asset that is vested in a department is deemed to be controlled by that department.
•
Acquisition by joint venture
An asset that is purchased, constructed or developed as part of a joint venture (e.g. private
sector investment in public infrastructure and/or contracting-out arrangements) is deemed
to be under the control of the department or departments accountable for the venture,
unless an agreement between the joint ventures specifies otherwise.
Internationally, the IFAC (International Federation of Accountants) Public Sector Committee
issued an accounting standard dealing with joint ventures. It is expected that the
Accounting Standards Board will consider issuing a similar standard locally.
Furthermore, the International Accounting Standards Board has issued a draft
interpretation SIC-D29 on Disclosure - Service Concession Arrangements, that requires
additional disclosure when entering into these types of transactions. The Accounting
Standards Board is likely to require similar disclosure when considering the local standard.
•
Consignment of control
A department will assume control of Government land through a system of consignment,
which will ratify existing control of the land and will be used for the future transfer of
control of Government land. Departments that currently control Government land will
need to ensure that the terms and conditions of their control are evidenced in writing in
the instrument of consignment.
•
Donation / gift / bequest
An asset that is donated, given or bequeathed to a department is deemed to be controlled
by that
department unless any restrictions exist that prevent the department having control of it.
•
Seizure
Some departments have control over, and are accountable for, the collection of revenues
on behalf of the Government. Assets seized by those departments where customers
default on payment are deemed to be controlled by the department.
•
Contingent control
Some arrangements, such as private sector investment in infrastructure, afford a
department the right to take control of an asset.
Compulsory acquisition
Some Acts afford a department the right, on behalf of the Government, to take control of
an asset.
•
Good Practice on asset acquisition and stock take
Good practice on acquisition includes:
•
nominated office responsible for acceptance;
•
central delivery point: secure and segregated from assets in-use;
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•
•
•
assets bar-coded by supplier and computerised listing supplied (for large
volume/value purchases);
condition of assets inspected prior to acceptance; and
assets tagged after acceptance.
Good practice for stock-take includes:
•
cyclical coverage of assets based on their risk profiles and degree of physical
security; and
•
automated stock-take of IT equipment attached to a Local Area or other Network.
2.2.4
Establishing Life-Cycle Costs
Life cycle costing is a logical, systematic process for establishing the total cost of an asset
from its conception to its disposal. Better practice has shown that life-cycle costing should
include an assessment of the cost of:
•
Asset planning;
•
Asset acquisition;
•
Asset operation & maintenance; and
•
Asset disposal.
Life-cycle costing should blend all of the known costs over an asset's life into a coherent view of the
true overall cost of the asset to the department. Actual costs should be continually measured. This
will provide a baseline to estimate costs for future acquisition projects and also provides the data
with which to analyse the performance of existing assets against predicted life-cycle costs.
It should be noted that the total asset life cycle cost, is not necessarily the cost/value reflected in
the financial statements.
Asset Cost, ZAR
Planning
Costs
Acquisition Costs
Operation and Maintenance
Costs
Disposal
Costs
Lifecycle
Midlife refurbishment
Cost
Asset Life Cycle,
Years
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scale
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Life-cycle costing provides a profile against which alternatives, including non-asset solutions, can be
examined.
Planning Costs
The costs associated with developing the asset solution to a stage ready for acquisition. These may include
elements such as:
•
scientific studies;
•
environmental impact statements; and
•
feasibility studies.
Acquisition Costs
The costs associated with the initial acquisition of the asset and may include:
•
building or construction costs;
•
commissioning costs; and
•
installation and delivery costs.
Operational and Maintenance Costs
Recurrent expenditure on the day-to-day operation of equipment. In addition to energy, safeguarding,
cleaning and maintenance costs, they may include the cost of specialist staff required to operate the asset.
Disposal Costs
May include the financial loss on an asset disposed of prior to expiration of its expected useful life due to
circumstances beyond the department's control, such as becoming environmentally unacceptable.
Conversely, they may take into account the potential gain on sale of assets such as land or artworks.
2.2.5
The Acquisition Plan
For major acquisitions better practice is to establish an 'acquisition history register' which
details major decisions, times met and not met, cost targets met/overrun, and so on.
The acquisition plan is developed during the planning phase and prior to actual acquisition of the
asset. As a minimum it should address:
•
the programme delivery requirements - including service strategies and standards;
•
the non-asset solutions considered - including utilisation of existing assets;
•
an analysis of the alternative methods of acquisition - using discounted cash flow
techniques where appropriate;
•
the personnel involved with acquisition and their responsibilities;
•
the time-frame for the acquisition process; and
•
the timing and amount of capital outlays.
The plan will encompass all major asset acquisitions (including replacement of existing assets)
anticipated over the strategic planning period.
The extent and depth of documentation and analysis in the acquisition plan will depend critically on
the importance of the assets in programme delivery. One measure of this is the relative value of
the assets to the total asset values held by the department. Asset values may also be compared
with the programme expenditure, although a more appropriate base in this case would be the
'annualised' whole-of-life costs of ownership.
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History
Funding
Timeline
Personnel
Analysis
Rationale
Acquisition Plan
Effective asset planning frameworks incorporate evaluation of the alternatives to the
acquisition of new assets and to the replacement of existing assets. The evaluation includes
a comparison of life-cycle costs.
Product
An acquisition plan which details the rationale for acquisition or replacement of assets. It
documents the consideration of alternatives and life-cycle costs. Where appropriate, it includes the
method of acquisition and timing, amount of capital flows and financing. Assets to be acquired
may be purchased (either from the open market or from another government department), or
custom-developed for their purpose. They may also be leased or hired.
Success Factors
•
Management has established that existing assets are fully utilised, meet functional
requirements and perform at optimal levels.
•
Genuine consideration of 'non-asset' solutions such as use of the private sector or 'demand
management'.
•
All costs, express and implied, are included in consideration of 'life-cycle' costs. Implicit
costs may include, for example, a notional interest cost on funds used to acquire assets.
Express costs will include direct and indirect operating costs.
Outcome
A more economic, efficient and cost-effective asset acquisition framework which will reduce
demand for new assets, lower programme costs and improved delivery of services or products.
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2.2.3
ASSET OPERATION SAFEGUARDING AND MAINTENANCE
This section explores mechanisms by which financial and performance accountability may be established. It
also provides practical guidance on implementing appropriate condition assessment and performance
monitoring regimes.
Service delivery needs, as defined in the acquisition plan, are recognised as being fundamental in guiding
asset practices and decisions. This section focuses on the performance of assets in meeting these needs
and the role that operation and maintenance – the third key stage in the asset life cycle – plays in sustaining
performance levels.
Recent reforms in the public sector have been directed at establishing accountability, with responsibility, on
the Accounting Officer level. Section 38 (1) (b) PFMA makes the Accounting Officer responsible for the
effective, efficient economical and transparent use of the resources of the department. Obviously such
resources include assets discussed in the scope of this discussion paper and the PFMA also imposes specific
requirements related to the managing and safeguarding of assets on the Accounting Officer. Further more,
Treasury regulation 10.1.1 notes that the accounting officer of an institution must take full responsibility
and ensure that proper control systems exist for assets and that preventative mechanisms are in place to
eliminate theft, losses, wastage and misuse.
Difficulties are encountered when treating the costs associated with the use of assets on a programme
basis. Some of these costs are not apparent (for example, the 'finance' cost discussed in the previous
section); some are not recognised as the asset's service potential is consumed (for example depreciation
and provisions for maintenance); and generally, total capital and recurrent costs are not fully allocated or
attributed at the programme level.
It would be very informative if the backlog in maintenance plans is disclosed in the financial statements.
The separate bidding for recurrent funds on an annual basis ignores the concomitant nature of capital and
operating costs. It also provides the opportunity to defer necessary maintenance expenditure, as the
impact of such a decision is not felt until later in the asset's life.
To ensure effective utilisation of assets, it is important that Accounting Officers are made responsible both
for the cost of using assets in programme delivery and for the performance of those assets in achieving
programme objectives.
Effective accountability frameworks identify those responsible for assets. This responsibility
encompasses all phases of the life-cycle. Mechanisms establish ownership, control and responsibility
for use, security, condition and performance of assets.
2.3.1
Operation and Maintenance Plan
Defines the approaches to be used, and what needs to be done, to optimise performance and
asset life. The objective of operational and maintenance plans is to ensure assets remain
appropriate to programme requirements, are efficiently utilised, and are maintained in the
necessary condition to support programme delivery at the lowest possible long-term cost. Both the
operation and maintenance plans are dynamic and should be reviewed regularly to ensure they
remain appropriate to programme delivery needs.
Product
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An operation and a maintenance plan establishes standards for the level of use, condition,
maintenance and performance of assets.
Operational plans establish the means to ensure that assets are efficiently and effectively utilised in
supporting programme delivery. Under-utilisation will increase the unit cost of programme
delivery and may prompt the purchase of new assets when they are not required. Over-utilisation
can have adverse affects in terms of deterioration in asset performance and condition, shortening
productive life and increasing recurrent operating and maintenance costs. The operational
management of individual assets should be assessed to determine whether this function can be
contracted out in whole or in part.
The operational plan should cover:
•
resources required to operate and maintain assets;
•
responsibility for, control of, access to, and security of the asset;
•
operating policies (i.e. working hours, security, cleaning, energy management and the like);
•
the level and standard of performance required of the asset;
•
arrangements for collecting, monitoring and reporting performance data;
•
training staff in use of the asset; and
•
estimates of operating costs.
In developing a maintenance plan, an initial assessment of the condition of existing assets against
the desired standard is undertaken. This establishes the corrective maintenance
necessary to meet the standard and defines a base-line for determining the adequacy and
effectiveness of future maintenance.
The maintenance plan should:
•
define maintenance standards;
•
allow for the rectification of existing defects;
•
describe how the work is to be carried out; and
•
forecast the necessary maintenance, major repairs and preventative maintenance
expenditure for the planning period. Works to modify or enhance an asset (due to the
change of use of the asset or to improve its functional performance) normally increase the
service potential of the asset and are then treated as capital expenditure.
Success Factors
Control of, and accountability for, assets is established at the programme level;
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•
•
Financial responsibility for assets is established through the budget process and by cost
allocation / attribution;
Condition, use and performance measures are established; and
•
The standard of performance of assets is an input to the next planning cycle.
Outcome
Effective accountability mechanisms will establish a culture where assets are adequately maintained
and protected and, through optimisation of performance, maximise their output or service
potential.
Better practice suggests programme managers be made responsible for the physical
condition, use, functionality and financial performance of the assets they consume in
delivering programmes. According to the PFMA this responsibility lies with the Accounting
Officers.
2.3.2
Asset Performance
Departments should establish and maintain management processes to regularly monitor and assess
the assets under their control. A useful reporting format is the Integrated Performance Report
which captures and consolidates this information by type or class of asset. Protecting service
delivery potential and addressing health and safety concerns are priorities when making decisions
about asset use and maintenance. It is very important, therefore, that asset performance be
appropriately reviewed and evaluated to verify that required outcomes are being achieved.
The results of any performance assessment need to be reported to management to:
•
identify any actions to be taken; and
•
comply with the ongoing reporting requirements of Government, as well as with those
forming part of the corporate, business and asset planning processes.
In addition to observing the reporting requirements covered elsewhere in this part, the department
shall comply with the requirements of any legislation that may apply specifically to its operations.
Specifically to note is the requirement of section 40 (3) (a) of the PFMA that requires the annual
report and financial statements to fairly present its performance against pre-determined objectives.
Regulation 18.3.1 requires that the accounting officer must include in the annual report, after 1
April 2002, information about the institution’s efficiency, economy, and effectiveness in delivering
programmes and achieving its objectives and outcomes against the measures and indicators set
out in any strategic plan for the year under consideration.
Treasury regulation 10.1.2 also requires that the accounting officer ensures that processes
(whether manual or electronic) and procedures are in place for the effective, efficient, economical
and transparent use of the institution’s assets.
Assets can play a major role in achieving department wide objectives, and therefore asset
performance also needs to be determined and measured.
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Better practice suggests programme managers be made responsible for the physical
condition, use, functionality and financial performance of the assets they consume in
delivering programmes. According to the PFMA this responsibility lies with the Accounting
Officers.
There are a number of measures used to assess asset performance: the asset’s physical condition, its
functionality, its utilisation and its financial performance. These measures are described next (also
see Section 2.2.1.2 Evaluating Existing Assets).
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Physical Condition
Physical Condition
Functionality
Functionality
Asset
Asset
Utilisation
Utilisation
Financial
Financial
performance
performance
Integrated
Performan
ce Report
Integrated
performance report
a)
Requires regular inspection
and assessment of required
maintenance costs.
Physical condition
Physical
Condition
Asset
Functionality
Utilisation
Financial
performance
Integrated
performance report
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An asset should be able to be used safely and effectively. This means that assets needs to
be maintained in a condition that is adequate for the purpose for which it is intended, and
that it complies with the relevant health and safety standards. If this is not the case, the
asset's ability to deliver services to the level and standard required will be compromised.
A proper condition assessment of an asset will involve:
•setting the required condition of the asset relative to its service delivery requirements and
value (criteria should include those relating to operational efficiency, public health
and safety, and amenity);
•
inspecting the asset and comparing its condition with that required; and
•
forecasting the future condition of the asset.
Condition assessments provide important inputs for compliance with legislation and in
planning for asset maintenance.
b)
Functionality
The functionality of an asset is a measure of the effectiveness of the asset in supporting the
activities to be carried out. To monitor and assess functionality, the department needs to
determine:
•
the role that the asset plays in achieving service delivery outcomes; and
•
the functional characteristics required of the asset to support the specified
activities (for example, the functional brief requirements prepared for constructed
assets).
The functionality of assets should be regularly reviewed. This will enable any significant
impacts on services to be identified. It will also allow timely changes to be made to
improve both service delivery and functional standards. Furthermore, the results of regular
functionality reviews are used in the formulation of asset strategies.
How effective is the asset?
Indicators include user
Satisfaction and level of
Availability when
required.
Physical
Condition
Asse
t
Functionality
Utilisatio
n
Financial
Satisfaction
,
Integrated
performance
report
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c)
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Utilisation
Asset utilisation is a measure of how intensively an asset is being used to meet the
department's service delivery objectives, in relation to the asset's potential capacity.
Physical Condition
Asse
t
Functionality
Utilisatio
n
How intensively is the
asset used? Hours of
operation, kilometers
traveled, floor space
occupied, are examples.
Financial
performance
Integrated
performance report
The utilisation criteria should be based, wherever appropriate, on best practice data as well
as on the results of analyses undertaken either by the department or elsewhere in the
private and public sectors.
Under-utilised assets should be identified, and the reasons for this examined. It may be, for
example, that the asset is no longer effective in performing the activities required of it or
that it is in less than optimum condition. It may also be that the need for the services it
delivers or supports has reduced.
The following examples illustrate some of the reasons for under-utilisation:
•
physical constraints, such as poor lighting for night-time use;
•
technological obsolescence; and
•
management constraints, such as the hours worked by security or care-taking staff.
Action should be taken either to improve the asset’s utilisation or to re-deploy it (provided
that service delivery needs can be met by alternative means). Where asset utilisation is
low, departments should consider whether the cost of holding the asset exceeds the cost of
transferring the services it delivers, and whether there is a more economical way of
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delivering the services. Alternative or additional uses of assets should also be considered
(e.g. an under-utilised group of classrooms may appropriately house a health clinic). The
utilisation of each asset should be reviewed annually.
The utilisation criteria should be based, wherever appropriate, on best practice data as well
as on the results of analyses undertaken either by the department or elsewhere in the
private and public sectors. Under-utilised assets should be identified, and the reasons for
this examined. It may be, for example, that the asset is no longer effective in performing
the activities required of it or that it is in less than optimum condition. It may also be that
the need for the services it delivers or supports has reduced.
The following examples illustrate some of the reasons for under-utilisation:

physical constraints, such as poor lighting for night-time use;
•
technological obsolescence; and
•
management constraints, such as the hours worked by security or care-taking staff.
Action should be taken either to improve the asset’s utilisation or to re-deploy it (provided
that service delivery needs can be met by alternative means). Where asset utilisation is low,
departments should consider whether the cost of holding the asset exceeds the cost of
transferring the services it delivers, and whether there is a more economical way of
delivering the services. Alternative or additional uses of assets should also be considered
(e.g. an under-utilised group of classrooms may appropriately house a health clinic).
The utilisation of each asset should be reviewed annually.
e)
Financial performance
The financial performance of an asset must be evaluated to determine whether or not it is
providing economically viable services. To do this, the department needs to monitor and
assess:
•
operating expenses; and
•
current and projected cash flows, including capital expenditures.
This information is then used to determine the current and projected economic
return of the asset or portfolio. Discounted Cash Flow analysis can be used to
provide a measure of the Net Present Value and the internal rate of return for
assets. Another important aspect of an asset's financial performance which must
be assessed is the maintenance of equity. This measure provides a basis for
evaluating the performance of both assets and departments. It is also a major
consideration in establishing approaches to service pricing and revenue.
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Physical Condition
Asse
t
Functionality
Indicators may include the cost of operating
The asset, or of maintenance,as a ratio of
capacity (e.g. R/km or R/km 2
Utilisation
Financial
performance
Integrated
performance
report
2.3.3
Asset Maintenance
The usefulness of an asset depends on how effectively it meets its purpose. For many
types of assets, this may depend on the regularity and appropriateness of its maintenance.
Regular maintenance may also help to preserve an asset’s value.
Planning for asset maintenance enables targeted action to be taken in a timely and costeffective manner. Records of maintenance costs allow managers to budget for these costs
and to determine the best time to replace assets. This, in turn, helps to ensure that the
department’s asset portfolio can remain appropriate and productive for the lowest possible
long-term cost.
As a first step, the department must determine which of its assets need to be maintained
(i.e. it must assess the materiality of its assets). By recognising the decline in asset values
through use and obsolescence, managers are encouraged to consider the costs of holding
and using fixed assets. Managers are then able to manage those costs, and to make
informed decision such as lease or buy decisions.
Some assets may, for example, have low or little value and have a relatively short expected
life; others may be of a type that normally requires little or no regular maintenance effort
(e.g. furniture). Departments controlling such assets may elect to exclude these from the
formal maintenance planning process, and rely on regular condition assessments or
inspections (e.g. in conjunction with stock takes). For each of those assets or groups of
assets that are to be regularly maintained, the department should develop a maintenance
strategy.
Maintenance strategy
A maintenance strategy is a comprehensive plan that:
•
defines the asset, the performance required of it, and the level to which it is to be
maintained;
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•
describes the systems and procedures to be used to plan and manage the
maintenance work;
•
specifies the types of maintenance to be carried out, and why;
•
nominates the means of resourcing and implementing maintenance;
•
indicates any requirements for in-house plant, equipment or spare parts; and
•
outlines the projected costs of routine (and corrective/preventive) maintenance, as
well as
forecasting major replacements for the next 5–10 years.
In developing a maintenance strategy, two considerations are particularly important: the
level of maintenance required for the asset, and maintenance priorities.
Level of maintenance: The level of maintenance required for an asset, and the
performance expected of it, should be clearly established. The level set should:
•
be consistent with the role that the asset will play in the delivery of services,
relative to other like assets in the portfolio of the department;
•
reflect obligations for compliance with statutory requirements for occupational
health and safety, fire, environmental management and the like;
•
be realistically attainable, given the age, condition and expected life of the asset;
•
be capable of being achieved within planned resource availability; and
•
be agreed with the users of the asset.
The level of maintenance should specify the extent to which the performance of the asset is
operationally critical and to which visual appearance is important. It should also stipulate
the necessary response times in the event of failure.
Maintenance priorities: Higher priority maintenance tasks (such as those that affect health
and safety or that are operationally critical) should be identified in the maintenance
strategy. This will enable
maintenance effort to be focused on these areas if resources fall below the planned levels.
Maintenance plan
Once a maintenance strategy has been developed for an asset, it must be translated into
annual maintenance plans that set out, in detail, the maintenance tasks to be performed
each year.
The maintenance plan provides a basis for managing the work and for monitoring
maintenance performance. It should set out the maintenance requirements of assets,
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broken down into individual components, systems or elements when necessary. It should
also include a statement of resources, which details such information as:
•
the resources required to undertake the maintenance function, including its
planning and management;
•
the expected number and type of maintenance contracts and suppliers; and
•
the expected funds sources for both capital and recurrent costs over the period
(sources of funds could include recoveries from user charges and other sources as
well as funds appropriated in the budget).
Maintenance data need to be captured as work is performed, with records being kept of
maintenance history for planning purposes. As appropriate, such data should also be used
to prepare the annual maintenance plan.
Criteria for assessing maintenance performance
The outcomes of effective asset maintenance include:
•
a long-term reduction in life cycle costs;
•
better asset performance and service;
•
the optimisation of asset life; and
•
improved public perception of the asset’s service and safety standards.
These outcomes can generally be monitored and reported through the use of performance
measures.
Typical indicators can be derived from such measures as the asset’s availability, its
operational
performance in relation to service delivery, its energy consumption, its operating costs, and
user
satisfaction. Many of these indicators can be benchmarked against other like assets.
Maintenance Policies
The maintenance policy derives from consideration of several factors relating to the needs of
the department and the risk and consequences of asset failure. The significant policy
questions which need to be answered include:
• what are the maintenance standards (the desired condition of the asset)?
• what is the appropriate mix of approaches?
• is management of maintenance to be devolved? and
• how will the service be delivered (in-house or out-sourced)?
The maintenance policy provides the basis for determining why an asset is maintained in a
particular way. It has direct linkages to, and underpins, the maintenance strategy. The policy
will address necessary maintenance standards, which should be performance based, and
which define the desired condition of the asset with respect to its functionality, level of
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amenity, compliance with legislative requirements, and economic performance. Selection of
a maintenance strategy involves consideration of the appropriate mix of procedures and the
capacity to undertake minor modifications and enhancements when required. It is unlikely
that any one approach will be suitable. The main approaches are:
• corrective - no maintenance is undertaken unless, or until, the asset no longer functions to
the required standard; and
• preventive - undertake programmed maintenance to reduce the likelihood of failure to an
acceptable level.
An important consideration is the nature of the asset itself. Certain categories of assets
require little or no regular maintenance (furniture and fittings for example). It is valid to
exclude such assets from a formal maintenance programme and rely instead on regular,
periodic inspection of condition. This could be undertaken in conjunction with the stock-take
programme.
Risk is also an important consideration in determining appropriate maintenance policies.
Risks
associated with the operation of the asset in terms of occupational health and safety
standards need to be considered. The risk and consequence of failure of the asset is also an
important consideration.
2.4
ASSET DISPOSAL
This section will draw out some key points in relation to the disposal of assets, and highlight
various alternatives to asset disposal.
Decisions to dispose of an asset require thorough examination and economic appraisal. Like
acquisition decisions, they must be taken within an integrated planning framework that takes
account of service delivery needs, corporate objectives, financial and budgetary constraints and the
Government's overall resource allocation objectives.
Disposal options, which include alternative use, rental, sale, or sale and lease-back, should be
considered as part of the acquisition strategy.
Asset disposal terminates control of a particular asset, but may generate the need for a
replacement to support the continuing delivery of services.
Disposal is therefore a crucial component of the asset management life cycle.
Reasons for disposal action are generally well understood (surplus, under-performing and
unserviceable assets are examples). The methods of disposal, their pros and cons, are not as well
comprehended.
An area which is given less attention is the alternatives to disposal. This section will draw out some
key points in relation to the above issues together with some additional matters for consideration.
2.4.1
The Disposal Plan
Effective asset disposal frameworks incorporate consideration of alternatives for the
disposal of surplus, obsolete, under-performing or unserviceable assets. Alternatives
should be evaluated in cost-benefit terms.
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Product
A disposal plan which establishes the rationale for, the anticipated time and method of,
and the expected proceeds on, disposal. The plan is reviewed and refined, if necessary,
prior to disposal, to take account of the market and physical condition of the asset.
Disposal options include transfer for alternate use, rental, sale and/or lease-back, and
demolition.
Success Factors
•
Under-utilised and under-performing assets are identified as part of a regular,
systematic review process;
•
The reasons for under-utilisation or poor performance are critically examined and
corrective action taken to remedy the situation, or a disposal decision is made;
•
Analysis of disposal methods has regard to potential market or other intrinsic
values; the location and volume of assets to be disposed of; the ability to support
other government programmes; and environmental implications; and
•
Regular evaluation of disposal performance is undertaken.
Outcome
Effective management of the disposal process will minimise holdings of surplus and underperforming assets and will maximise the return to the Government on such assets.
2.4.2
The Disposal Decision
The disposal decision cannot be taken in isolation. Asset disposal decisions are to be made
within an integrated service and financial planning framework. While disposal is viewed as
the final stage in asset management, it is common for disposal action to trigger the
acquisition of a new asset or a replacement asset.
Departments are to:
•
evaluate the effectiveness of their redeployment/disposal strategies in maintaining
an asset portfolio that best meets service needs; and
•
establish arrangements for the decommissioning of assets and for underperforming or surplus assets as efficiently as possible, prior to redeployment or
disposal.
The underlying assumption is that management has the necessary information to be able to
determine which assets need to be disposed of, and when.
The asset register is a starting point for this analysis as it records the useful lives of the
class of assets and is able to provide an indication of the timing of major replacements in
the normal course of business. It is self-evident that, to be used in such a way, the
assessments of useful life must be as realistic as possible.
The actual life of individual assets will vary from the 'average' life established for that class
of asset in the asset register. Therefore, it is important that condition monitoring and
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performance assessment are undertaken, with the results linked to an appropriate
management information system.
The following guidelines are provided to help departments dispose of their assets in an
accountable manner. Departments should:
2.4.3
•
establish and maintain an asset information system, which records all relevant
information, to assist in asset planning and management;
•
prepare and evaluate proper costing to support the selection of the most costeffective disposal methods;
•
identify those areas most susceptible to fraud or risks, and introduce appropriate
preventive measures;
•
staff;
identify and communicate the preferred arrangements for disposals to relevant
•
engage experts to develop the terms of contract and to assist in preparing the
contract (particularly for complex and non-standard disposals) to minimise the
exposure to risk;

provide clear instructions to the agent engaged to undertake the disposal;
and
•
monitor and evaluate disposal performance regularly for achievement, fair dealing,
cost-effective choice of disposal methods and for compliance with the
Government’s disposal policies and objectives.
Assessment of Performance
The whole-of-life approach to asset management and effective strategic asset planning
requires that the outcomes and outputs of each phase of the asset life-cycle become inputs
to the next planning cycle. While more attention is being given to operation and
maintenance, it is still uncommon for departments to evaluate their disposal performance.
At the very least, a comparison of the actual timing and proceeds on disposal should be
made with the standard established for the class in the departments accounting policies.
This is a means of confirming that the useful life, estimated proceeds, and therefore the
depreciation rates used, are valid. It also provides the opportunity to identify causes where
assets are routinely not meeting the service life expectations or their estimated proceeds
on disposal.
A higher level review also needs to be undertaken at regular intervals to ensure that the
Government's disposal goals and aims, are being met.
Better practice suggests, in addition to undertaking the cost-benefit analysis of the methods
of disposal, asset managers be required to compare actual life at disposal with the expected
useful life and to explain significant variations.
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2.4.4
Methods of Disposal
The primary methods of disposal include sale by public auction or tender, sale by private
treaty, trade-in and write-off, and letting. One method which is often overlooked is the
sale or transfer of assets to other government departments.
Whatever method is chosen it is important, not least for accountability and transparency,
that a properly-costed evaluation of relevant disposal options is prepared. This should take
into account both the costs associated with each method of disposal and the likely benefits
(including possible proceeds). Different disposal methods will be needed for different types
of assets. Auctions, for example, may not be appropriate to dispose of some classes of
assets.
Before deciding on a particular disposal method, the following matters should be
considered:
•
the nature of the asset (i.e. a specialised asset or a common item);
•
its potential market value;
•
other intrinsic value of the asset (i.e. cultural/heritage aspects etc.);
•
its location (with respect to its transportation or access);
•
its volume;
•
its trade-in value;
•
its ability to support wider Government programmes;
•
environmental considerations;
•
market conditions; and
•
the asset’s life.
Appropriate means of disposal may include:
•
public auction;
•
public tender;
•
transfer to another department;
•
sale to another department;
•
letting to another department
•
sale to staff;
•
trade-in; and
•
controlled dumping (for items that have a low value or are unhygienic).
Professional valuations play an important role in asset disposal. They can help managers to
select the most appropriate selling method. They also help to set realistic expectations for
the sale. If they are required, valuations must be obtained from experienced agents who
have a knowledge of the type of asset(s) for sale and the current market trends.
Disposal of land
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Land includes all improvements of a permanent nature (i.e. buildings, infrastructure etc.)
constructed on the land. Laws and procedures relating to the disposal of land will
therefore also cover the disposal of such improvements.
Other land (freehold land)
Land, other than Government land, must be sold in accordance with the relevant legislative
requirements. Equity in any land improvements established under such arrangements as
joint venture, licence or lease must be considered when disposing of land. For example,
the following issues may be applicable:
·Joint venture: The partner’s costs may need to be reimbursed.
·Licence: The licensee may be required to remove all improvements.
·Lease: The lessee may have to make good or restore the site to its pre-leased state.
Relinquishing control of an asset
A department ceases to be responsible for managing an asset when it relinquishes control
of that asset. This may occur in a number of ways:
•
in some instances, a department may elect to do so; and
•
in others, it is unable to exercise any discretion in the matter.
For example, a department may choose to sell or transfer the asset or to give it away. On
the other hand, an asset may be lost or stolen, accidentally destroyed (e.g. in a fire),
forfeited, or resumed by the Government. Not all of these means of relinquishing control
of an asset apply to all classes of assets, or are available to all departments.
Alternatives to Disposal
Where assets have been identified as under-performing, or no longer functionally suited to
programme delivery needs, thought should be given to the possible alternatives to
disposal.
A factor to consider is whether utilisation can be increased by adapting the asset to
another function or using it in another programme. In large, for devolved or
decentralised departments it may be worthwhile circulating lists of assets flagged for
disposal to other programme heads prior to commencing disposal action. For assets such
as property or large IT installations, consideration may be given to renting or leasing
surplus capacity to other departments.
Refurbishment or an upgrade of the asset may also be viable. The cost and benefit of
such alternatives should be included in the disposal plan.
Relevant legislation and sub-ordinate legislation should also be considered:
•
Treasury regulation 10.2 requires that disposal of movable assets must be at
market-related value or by tender or auction, whichever is most advantageous to
the state, unless determined otherwise by the relevant treasury. It also requires
that any sale of immovable state property be at market-related value, unless the
relevant treasury approves otherwise.
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•
Treasury Regulation 10.2.3 requires that the letting of immovable state property
(excluding state housing for officials and political office bearers) must be at
market-related tariffs, unless the relevant treasury approves otherwise. No state
property may be let free of charge without the prior approval of the relevant
treasury.
•
Treasury Regulation 10.2.4 requires that the accounting officer must review, at
least annually when finalising the budget, all fees, charges, rates, tariffs or scales of
fees or other charges relating to the letting of state property to ensure sound
financial planning and management.
•
Treasury Regulation 19.6 states that when dealing with the disposal of assets of
trading departments requires that when assets are disposed of other than in the
ordinary course of the business of the trading department, the relevant treasury
must approve the transaction.
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Summary of Asset Management
Asset Management
Principles
1. Asset Management
decisions integrated with
strategic planning
Key Asset Management
Activities
1. Needs Analysis
Asset Life
Planning
2. Economic Appraisal
3. Planning
4. Budgeting
2. Asset Management
planning and acquisition
decisions based on
evaluation of alternatives
which consider the lifecycle costs, benefits and
risks of ownership.
5. Acquisition and Disposal
Acquisition Disposal
3. Disposal decisions are
based on methods which
will achieve the best
available net return.
4. Accountability is
established for asset
condition, use and
performance.
6. Management in Use
5. An effective control
structure is established
for Asset Management
7.
Pricing
8. Recording, Valuation and
Reporting
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Operation and Maintenance