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Video transcript: Asset management

Transcript for a video about Audit New Zealand’s Asset management and long-term planning report.

Title: Asset management, Martin Richardson, Director, Audit Services, Audit New Zealand

Martin Richardson

So we have this publication and it’s intended to be a resource for the public sector. It’s aimed at two audiences – it’s aimed at practitioners and it’s also aimed at senior managers and those in governance roles. I believe that there’s a copy on the tables, there’s some more hard copies available at the back of the room, and it’s also available to download from our website. If anyone’s confused as to which section of the publication they should be reading, we’ve included a handy hint – that this section (holds up publication) is for governors and senior managers and the rest of it is for practitioners.

The reason that I say it’s for both of those audiences is that it’s packed full of real-life examples that we’ve seen as we’ve gone around the country reviewing asset management planning across the public sector. And we’ve pulled out examples that we thought were interesting and that might stimulate a bit of thought. And so, as well as providing our own views, it demonstrates them through these examples.

Asset management planning is a good topic to work in because we benefit from some high-quality, good quality, and up-to-date standards and guidance. We have the international standard on asset management planning, ISO 55000 – that was introduced only in 2014. And that was followed in 2015 by an update of the International Infrastructure Management Manual, which is produced in this country by the NAMS organisation (National Asset Management Support).

So what constitutes good practice is quite well known and well established. As auditors we don’t set these standards, but our reviews are informed by the standards. We don’t necessarily require compliance with any of those standards, but we do carry out our reviews against those principles of best practise. So, it’s against those principles that the rest of the things that I’ll say this morning are structured.

When we carry out our audit work, it’s directed and informed by an assessment of risk. So, how do we think about risk and why does it matter? Well, we think about risk from two angles. If you can see the scatterplot on the screens, across the horizontal axis we think about the systems and processes that are employed to carry out a particular task – in this case, asset management. And we think about a range of factors that might constitute a good asset management set of systems and processes, and we answer a few questions and allocate some risk scores to each of those elements.

And then we also think about: what’s the inherent nature of the risk or issue that each of our clients is facing, and that’s influenced by things like the complexity of the organisation, the degree of stability or change, the criticality of services, interdependencies, reliance of third parties, etc.

And we can apply a similar approach where we grade the significance of those things and we can graph those in the vertical axis. We use this simple three-by-three risk matrix – each square being either low, medium, or high inherent risk or systems or process-type risk. And that enables us to map each of our audited bodies onto that graph there. So each of the blue squares is a local government entity, each of the orange circles is a health sector client, and at the bottom there’s a few tertiaries as well.

And what we can see from this graph is that the significance of asset management in the local government sector is perhaps higher than it is in the tertiary sector for some of those reasons that I’ve just alluded to – the complexity, the sheer volume of assets under management. But what we can also see is – looking at the spread across the horizontal access – there’s quite a wide range of practices, so you get organisations with ostensibly the same level of inherent risks, so the same, broadly, value of assets under management, the same degree of complexity or change, the same criticality. Having very divergent approaches to managing those risks, even within that hoop that I’ve chucked around the local government cluster, you’ll see that diversity of practice. So, that kind of analysis led us to wonder: why is there that diversity of approaches and is it appropriate?

To start thinking about that we can drill down into the actual questions that we asked to drive the result. If you turn to the book or grab a copy on your way out you’ll see this diagram in there and it takes all of the questions that we asked about systems and processes, and shows how many risk-points we gave to that particular question or at least to the answers that were generating. You probably can’t read that on the screen so I thought we’ll perhaps zoom in on some of those that I’ve categorised as red and amber.

So we felt that the biggest weakness we were seeing was a lack of third-party review of planning. Why does that matter, you might think. Well, we believe that third-party review is valuable for a number of reasons. Firstly, it reduces our risk as auditors because there’s somebody else’s review of your planning that we can place some reliance on. But more fundamentally, it challenges your own planning by bringing a different perspective to bear, and also, it enables the limited and specialist resources that we have in the country to be accessed by some of the smaller organisations because often you can get a specialist to come in and review an element of planning where you may not have that specialism in-house. So we’re quite keen on third-party review.

But some of the other things that we noted as weaknesses, or having scope for improvement as we like to say, were: reporting against plans – typically see an asset management plan being developed but never really treated as a plan that then gets reported against in terms of progress towards its objectives. And then a number of weaknesses around asset data. So, the accuracy of that data, the availability of that data on asset condition, and the ability to reconcile that data with data in other systems, such as the financial management system.

We think of asset management as a pyramid. So, a number of functions comprise this topic of asset management and they have a relationship between each other. At the absolute foot and the basis of all asset management planning, we believe, is asset data or knowledge of the asset base is key. So that sits at the base of the pyramid and everything on top of it is rooted on that. So building up the pyramid we an assessment of demand, what services are these assets intended to deliver, what is the demand out there and how is that changing over time, and then moving up again, how can that be turned into a definition of something tangible and manageable that we can deliver. Having determined that, what are the whole-of-life strategies that we can apply to our assets so that they deliver those levels of service, and finally at the top of the pyramid – how does that translate into resource needs or financial forecasts to support that work on the asset base.

Too often, in our reviews, we find the initial decisions being taken at the top of the pyramid and then everything else being squeezed to fit within that financial decision. And we think that it needs a more holistic view, built up from asset knowledge. We also point to three enablers alongside that pyramid. Firstly, policy that determines what we should be doing and to what level. Secondly, risk. Inevitably there are risks inherent in managing assets, best to be clear about those and how they’re being mitigated.

And finally, continuous improvement. Asset management is not a topic that stays still, and indeed what would’ve been seen as a good and appropriate asset in the past may no longer be fit for purpose, so it’s always a topic that’s moving forward.

As I said, the publication is full of examples that we’ve picked up from around the country. There was a very nice article in this month’s Local Government magazine talking about our publication, and it said that we’d identified the best asset management organisations across the country. Well, if you’re one of the ones that is named in there, yes, it’s the best. But if you’re not, it’s not really. They were just ones that we thought had some interesting practices associated with them. And this is one thing, on the screen now, that we particularly liked. You might be surprised by this because we are auditors after all, so we do like financial data that is set out in spreadsheets, we quite like graphs – but Hamilton City Council decided to go with a picture to exemplify what their pipeline of projects would be. And to me that’s quite engaging because it shows a number of work streams if you like, so the yellow-ish projects across the top, they’re all transport related, the green ones going through the middle, they’re all parks and gardens related, the blue ones at the bottom are all water related. And that immediately jumps out at you from the diagram. And then the size of the little pictograms reflects the relative size of the projects and the position on the diagram reflects the relative position in the timeline. So we thought that that was quite a neat way of communicating something that’s quite dry to senior management and governance audience, and indeed their stakeholders in the wider community such that they could understand what their future pipeline of projects was.

Effective asset management planning takes a team. It’s a discipline that draws on a range of specialisms from across the organisation – so, engineering, financial planning, economics, corporate strategic planning, performance management and monitoring, risk management, and political decision-making all have a part to play. Again, an example from Hamilton City Council – they have made explicit the teams within their organisation that needed to come together to be part of their planning system. And they defined that at three different levels and to make it work in practice, they put in place a centre of excellence – very small, just one and a half full-time equivalents – but to drive those teams, which are essentially virtual teams across the organisation, to work well together. And that team-based approach meant that they had all of those different disciplines well co-ordinated and all contributing towards the same goal: an integrated suite of asset management plans.

So I think I’ve made the point that data is fundamental to asset management planning. Here’s an example from KiwiRail. It’s their asset management data dashboard. And what this shows is a number of dimensions – ten in all – that they’ve determined as comprising their asset data universe. And then each of these little dials is a sort of speedometer on how far they’ve got towards having what they believe to be the ideal amount of data in each of those dimensions. If we just zoom in on that slightly. So a couple of the dimensions that they’ve got on that dashboard – firstly asset criticality. So they believe that they’re 75% away towards having the data that they need on the criticality of their assets. Whereas in asset condition, having commissioned some fundamental asset condition surveys, they believe that they are now 95% of the way towards having the level of data that they need on asset condition. Just going back to the earlier slide, across the bottom, there’s a bar running from 0% to 100% and the yellow line indicates that over all of those dimensions they around 65% of the way towards where they want to be. And although you can’t read it very well on the screen, you’ll see some of those lower dashboard elements are perhaps not at the high levels that asset condition was – for example, they are only 10% of the way towards documenting the technical maintenance plans that they believe they should have in place. So we like that not because they’re 90% through their asset condition data or because it tells us that they’re only 10% of the way towards having technical maintenance plans, we like it because it shows the importance of asset data and it make the level of asset data that they’ve got very, very clear and easy to communicate to senior management on their board, which has led to them, financially constrained as they are, investing in getting that asset data replaced.

So I’m sure you’ll all recognise this famous face. Not somebody that’s appeared at Eden Park I suggest, so I’m at least one grade above someone – this is the famous economist John Maynard Keynes. Why have I put a picture of him on the screen? Well, asset management has a lot of uncertainty related to it. And uncertainty needs to be dealt with through assumptions so that, as John Maynard Keynes famously said, “When the facts change, I change my mind. What do you do?” So an assumption makes explicit what we currently think, but if that no longer holds then we need to change our plans, that’s changing our minds. John Maynard Keynes, when I was looking for this quote – he had some quite interesting things to say about uncertainty.

Here’s another one: “There’s nothing that a government hates more than being well-informed. It makes the process of arriving at decisions much more complicated and difficult.” [laughter] Here’s another one: “It is better to be roughly right than precisely wrong. There is no harm in being sometimes wrong, especially if one is promptly found out.” Interestingly, he did have something to say about certainty as well: “In the long-run, we’re all dead.” [laughter]

Assumptions are needed in asset management planning. My reports and communications advisor said that that wasn’t a terribly good slide, hence the attractive figure of Mr Keynes making it onto the previous one. But the point of this slide is really that these assumptions need to be made explicit and documented. This is an example from a document that the Greater Wellington Regional Council put together. And it ran to ten pages of things that they had made assumptions about and the level of uncertainty that were inherent in those assumptions. And having done that, they were then well-placed to know when they would have to change their mind because things had changed.

So the publication ends with ten questions that we think every senior manager and member of a governing body of an organisation that has significant asset holdings or relies on assets to support service delivery needs to know the answer to. The publication sets out all of these questions and a little bit of detail about each of them. We hope that those questions can be used in two ways.

Firstly, people on these governing bodies and senior management teams can use them as a conversation with their asset management planning and other staff, but equally they can be used by those planning staff to engage the senior management and the governing bodies in some of the things that the asset managers themselves are wrestling with. And they vary from pretty high-level questions – Have you got a strategy for the long-term sustainability of your assets? Have you set a policy? Have you got good-quality, up-to-date asset management plans? Do you have the appropriate skills and experience in your organisation? Do you know the reliability of your own asset information? – to some more detailed questions – What’s the approach to assessing the condition and the performance of your assets? Have you got clearly defined, comprehensive service levels that are supposed to be supported by these assets so that you know what you’re aiming to deliver? How well do you forecast future demand for the services? Do you report and get reports on achievement of your asset management plans? And lastly, Do you have a backlog of repairs, maintenance, and asset renewals, and if so – what are you doing about it?

So that’s it from me. A quick introduction to our publication Asset management and long-term planning, a resource for all of you – some thoughts from us and some examples that might be worthy of thinking about. It finishes off with ten questions – we think that they represent a great starting point for any organisation reviewing its approach to planning.

Title: For more information and to download presentations, visit www.auditnz.govt.nz

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