Asset Management 3.0
Municipalities are trying to manage cities of the future with accounting techniques from the past.
On March 4, 2008 the CBC reported that Winnipeg crews were investigating Osborne Village’s third watermain break in a month. On June 20 it reported a major break in central St. John’s that closed the Art Gallery of Newfoundland for a day. These aren’t rarities. In fact, the watermain break clock reports that 700 watermains break every day in Canada and the United States, costing over $8 billion to repair (since January 2000). Winnipeg’s FAQ on watermain breaks brags that it now only averages two breaks per day versus the six per day they were having ten years ago.
Nancy Conrad, Senior Vice President, Policy with the Halifax Chamber of Commerce, says, “To stimulate population growth and to attract new businesses to a city, municipalities must maintain capital assets to a point where they are capable of meeting expected service levels.” She points out a critical issue in Halifax: the transit system can’t meet growing demand, but service cannot be expanded until a new bus service garage is built.
The problem isn’t just a lack of technology or corroded pipes and harsh winter cold; it extends much deeper than watermains to the management of local community infrastructure assets.
The term asset management means different things to different people depending on perspective. Lee Harding, provincial director of the Canadian Taxpayers Federation, Saskatchewan, says, “Good asset management delivers defined standards of service with minimal expense and personnel. In all stages, it considers the operation, maintenance, refurbishment and replacement of assets. Goals, implementation and accounting practices take into account the net expenditures and quality, not just what occurs in the short term. Towards these goals, all options are on the table, including public-private partnerships.”
Ian Woodbury, president of Riva Modeling Systems Inc., says, “Asset management is the practice of getting the most out of our assets over their entire lifecycle, including the planning, purchasing, maintenance and replacement of the asset. At each phase we have to spend our money in the most efficient way to achieve the best outcomes for the community. The most effective management can vary based on the asset, sometimes it is delivering capacity, or maintaining level of service or even managing risks.”
While the recent injection of funding from the federal government will help address some infrastructure issues (when it rolls out), Woodbury points out that “there is a huge and growing problem in managing the backlog of rehabilitation and replacement work on our assets.” This backlog-the infrastructure deficit-may take decades to solve, says Woodbury, and municipalities need to understand how to choose what work to do in which year.
This isn’t just about older assets; it also includes expansion, growth and ongoing service enhancement. Conrad agrees: “It’s critical for the municipal bottom line that older assets are replaced and new assets purchased at the right time. Timing is critical-often, operational costs of aging assets far outweigh replacement costs.”
Timing is also critical because of a four-letter acronym that has become the bane of most municipal managers’ existence: PSAB. The Public Sector Accounting Board has set a January 2009 deadline for municipalities to comply with PSAB 3150. According to PSAB 3150 policies and procedures, municipalities have to report the values and depreciation charges of infrastructure assets on to their annual financial statements.
The executive director of the Ontario Good Roads Association, Joe Tiernay, says, “While PSAB valuation and depreciation won’t miraculously increase a municipality’s infrastructure capital budget, it does establish a baseline upon which to build.”
He offers up an example: personal GPS units.”They are wonderful tools to show you where you are,” says Tiernay, “but their true value is only realized when you decide where you want to go.” PSAB will show you where you are; it’s a first step. PSAB is, of course, linked to asset management. Tiernay says, “The very basis of PSAB is data collection. Doing effective asset management requires data on your assets, but generally requires more detail than is needed for PSAB compliance. Why not collect data in such a way that it can be used for asset management?”
It’s the data collection-the first step-that’s challenging some municipalities. Woodbury, whose firm sells strategic long range physical asset planning software, says, “Traditionally the biggest barrier to effective asset management has been data collection and the related costs of building an inventory. Municipalities had poor inventories of their assets and little or no condition information.” Riva has developed various management tools to help municipalities have a better understanding of what assets they own, their condition, cost to replace and life expectancy. These, he says, will help those who need to know, such as politicians and managers, get a better picture of their assets.
But do they want to know? Harding feels that reluctance amongst civic leaders (staff and politicians) to do something new is a major roadblock. She says, “There’s a strong political will to stare down the unions and do what it takes to outsource, streamline and reprioritize services.”
Tiernay says he’s heard numerous members of the engineering community say, “I don’t care what it cost to build that bridge 40 years ago, or what it’s worth now. I need to know what it’s going to cost to replace it in five years”.
“Most public works directors and engineers don’t hold the PSAB exercise in very high regard,” says Tiernay, “and I think it’s safe to say that some clerk-treasurers may also be questioning the worth-to-effort ratio of inventorying and valuing all municipal assets.”
Tiernay says that sentiment is not without merit. “Engineers work with replacement values and life cycle events; knowing the present day value of a 40-year-old structure is irrelevant from that perspective.” But he also says, “PSAB should be a corporate initiative and not a bean-counting exercise.” Bringing all departments together and working in unison to build the asset inventory with the proper data will ensure that the finance folks and auditors get what they need and the public works folks get what they need to build defensible capital plans. Tiernay comes back to the GPS metaphor of PSAB as a starting point. “It will elevate Council’s awareness of the size of a municipal operation-a municipality with $20 million worth of infrastructure assets that’s only investing $200,000 a year to maintain it will be able to tell Council their investment ratio is only one per cent. That’s a pretty compelling argument for either the public works director to make to their council, or for the Council to make to the province.”
Some cities are taking this issue very seriously, and they must, given their aging infrastructure, inevitable expansion, economic growth, the need to attract businesses, and the general dissatisfaction residents will feel with ongoing problems.
Woodbury says his company works with local governments from St. John’s to North Vancouver, and many in between including Halifax, Ottawa, Brandon and Calgary. He says Calgary is building long-range plans for managing their assets in every department. “The scale of the project is very large, but starting with transportation and now working with fire, they’re building a comprehensive and sustainable asset management practice using Riva DS.”
Harding points to the City of Regina, who hired a third party consultant to review municipal services and then hired him when the city manager retired. “[He was] given the power to implement his recommendations. The result meant millions of dollars of savings each year. Mayor Pat Fiacco has stated his goal of being the best-managed city in the country, and it remains a work in progress.”
The City of Halifax has created a Department of Infrastructure and Asset Management to deal with these issues. The City of Toronto, in a move similar to Winnipeg, has formed an independent review panel to look at overall fiscal operations. In his press release announcing the panel, Mayor David Miller said, “We know the city is run professionally and competently, and that we are constantly finding ways to do things better. But it’s also a large organization and there may be room for further improvements and efficiencies.”
It’s clear that there is movement; but is it enough?
PSAB Conflict: Engineers vs. Accountants
By Silbert Barrett
The cost of maintaining infrastructure assets often represents a significant portion of a municipality’s operating budget, so it’s important to agree on depreciation estimates. For a municipality to determine whether or not it’s financially sustainable, managers need to calculate the ratio of capital spending to annual depreciation charges.
One incentive to work things out is PSAB’s ever-nearing deadline (see page 36). But it’s unclear whether PSAB’s requirements will lead to more sustainable infrastructure management. Municipalities that use the conventional straight-line depreciation method because it’s easier and that fail to recognize the link between strategic asset management and financial accounting will just continue to argue over unfunded depreciation of our assets-the infrastructure deficit.
If the experience of Australian municipalities in meeting Accounting Standard Board (AASB 116) requirements for infrastructure accounting is any indication of how this process might play out in Canadian municipalities, there could be some difficulties ahead.
Tanya Gulliver is a freelance writer, community development consultant and university instructor in Toronto.
Silbert Barrett is with Toronto Transportation Services Department