Infrastructure Financial Management

Australian Infrastructure Financial
Management Guidelines
Chris Champion
Institute of Public Works Engineering Australia
cchampion@ipwea.org.au
Vancouver, October 2009

Work within 
a na,onal  Provide the  Add some 
framework  tools  drivers! 
Sustainable
Communities
3 KEY ELEMENTS
1.  Stewardship:
Role of Elected Members
2.  Managing existing

as well as new:
Asset Management Planning
3.  Essential part of

Business:
Long Term Financial Planning
3
Sustainable
Communities
NAMS.AU FRAMEWORK
1.  Stewardship:
1.  Stewardship:
4
International Sustainable
Infrastructure Communities
A FRAMEWORK
Management
1.  Stewardship:
Manual Role of Elected Members
> National consistency 2.  Managing existing

as well as new:

Business:
Australian Sustainable
Infrastructure Communities
A FRAMEWORK
Financial
1.  Stewardship:
Management Role of Elected Members
Guidelines
2.  Managing existing
> National consistency as well as new:

Business:
Need for Financial Guidelines
  Decline in infrastructure
  National Financial
Sustainability Study
  National renewal backlog $14.6b
  Underspend on renewals
$2.2b ($3.1m /council)
  35% of councils not financially
sustainable
  Deficiencies in service, AM and
long-term financial planning &
reporting
Author Team
John Howard Jim Dixon John Comrie

Asset Management Accounting & Audit Financial Management
Integrating the technical & financial

National Steering Committee
  National Steering Committee

  Professionals
  Engineers (NAMS.AU) , Accountants (NLGFM Forum)
  Local Government Associations
  State Governments
  Tas Audit Office
  NSW, Vic Local Government Department
  Qld Treasury
  Valuer-General Victoria
  Australian Government
  Dept of Finance and Deregulation
  Dept of Infrastructure, Transport, Regional Development & LG
Guidelines Structure
  Part A Introduction
  Background
  Part B Planning
  Service, asset and financial
management
  Part C Regulatory Framework
  Financial reporting & auditing
  Part D Application
  Valuation, accounting for
infrastructure & implementation
[14 Sections]
Quick Guide
AIFMG Part 1 Introduction
  Sec 1 Introduction
  Deficiencies & inconsistencies in financial
reporting
  NSW Local Road Position ($M/yr)
2004-05 2007/08
  Life cycle renewal cost $1,106 $1,092
  Depreciation expense $450 $579
  Life cycle renewal exp. $388 $484
  Future services ?
12
AIFMG Part 1 Introduction
  Sec 2 Sustainability
  Maintaining infrastructure and
financial capital over the long-
term
“Avoiding unexpected financial

shocks in future periods
without having to introduce
substantial and economically
significant or socially
destabilising revenue or
expenditure adjustments”
13
Financial Sustainability Indicators
1.  Operating surplus

2.  Operating surplus ratio
3.  Net financial liabilities
4.  Net financial liabilities ratio
5.  Interest cover ratio
6.  Asset sustainability ratio
7.  Asset consumption ratio
8.  Asset renewal funding ratio
AIFMG Part 2 Planning
Sec 5
AIFMG Part 3
Regulatory Framework
  Sec 7 Financial Reporting Framework

  Sec 8 Principles of Disclosure in
Financial Statements
  Sec 9 Accounting for Property, Plant &
Equipment (AASB 116)
  Sec 10 Accounting for Impairment
(AASB 136)
  Sec 11 Auditing
16
AIFMG Part 4 Application
  Sec 12 Accounting for Infrastructure

  Sec 13 Administration & Implementation
  Sec 14 Appendices
17
Sustainability in Providing Services
$$$
18
Managing Assets
Typical View of Asset Performance
Accountant’s View
Asset Recognition
Accountant’s View
Asset Consumption Phase 1
Accountant’s View
Accountant’s View
My 4 Key Points
  We need to tell a true

and consistent story about
infrastructure
  This can only be achieved
through financial
statements
  Use the AMP and LTFP
process to improve your
asset register and
financial statements
  Guidelines give direction
and guidance to do this
Key Accounting Requirements
  Recognition
  Asset identified at component level
  Measurement after recognition
  Asset is revalued at ‘fair value’ option
  Depreciable
Amount of an asset is to be
allocated over asset’s useful life in a
manner reflecting the pattern of
consumption of future economic benefits
26
AIFMG Valuation Methodology
  Define valuation component level

  Develop standard replacement costs
  Assess residual value
  Assess remaining and useful lives
  Calculate accumulated depreciation, fair
value and depreciation
  Test for impairment and calculate
impairment loss
  Sum component values
27
Assets and Components
  Component is unit of account

  has defined life
  Segmentation
  Componentisation
Assets and Components
  Assets recognised at
component level
  Simple analysis
  Assets recognised at
multi-component level
  Complex analysis
Current Replacement Cost
Current cost to replace

the component's
service potential
Depends on entity’s
replacement policies
30
Asset Replacement Policies
eg Kerb & Gutter
Replacement Cost
Case 1
  Case 2
 
Replacement with road Replacement in isolation
pavement
Replacement cost Replacement cost
$50/m K&G $80/m
Restoration $30/m
$110/m
31
Depreciable Amount
Depreciable amount =
current replacement cost –
residual value
32
Examples where Residual Value
may be applied
  Pipeline lining
  Road pavement recycling

Determining Depreciable Amount
  Cost to replace 300mm dia RCP $270/m

  Cost to reline pipe* $170/m
  Residual value $100/m
  Depreciable amount = $170/m
Note * restores service potential of pipeline
Source: Kennedy & McPherson, 2005, cited in AIFMG, 2009, p 12.52

Assess Useful Life
Period that the asset provides

the required level of service
(until replacement/disposal
appears in works program)
Assessing Useful Life
  Use best information available
  Experience with similar assets
  When will replacement/disposal appear in the

works program?
Assessing Useful Life
  Consider many factors

  Condition/Functional suitability
  Capacity and utilisation
  Cost and efficiency
  Safety and compliance
  Location
  Obsolescence,
  Availability of funding, etc
37
Depreciation Method
Calculate Accumulated
Depreciation
Calculate
Depreciated Replacement Cost
= Fair Value
Calculate
Annual Depreciation Expense
Test for Impairment and Calculate
Impairment Loss
Impairment Indicators
  General indicators
  Prolonged periods of
drought
  Specific indicators
  Fire in a facility
  Damage to buildings
  Damage to infrastructure
from storm/ cyclone, floods
or fire
Sum the Components
  Currentreplacement cost
  Depreciated replacement cost less
impairment = fair value
  Depreciation
  Document the process to provide

substantiation and justification for audit
44
Managing the Service and Assets
  Useful Life of stormwater pipes
  Asset Management Plan options

  Reline at 125 years or
  Replace at 140 years
Source: Logan City Council Qld, Kennedy & McPherson, 2005

Accounting for the Options
Current Cost $270/ m Current Cost $270/ m

Residual Value $100/ m Residual Value $0/ m
Depreciable Amount $170/ m Depreciable Amount $270/ m
Useful life 125 yrs Useful life 140 yrs
Depreciation Expense $1.36/ m /yr Depreciation Expense $1.93/ m/yr
AIFMG Benefits
  Improving
knowledge of how assets are
performing in service and managing
replacement options will improve
  Financial reporting at Fair Value
  Reflects
how assets are managed and are
performing
  Asset management planning, and
  Financial planning
47
Asset Renewal Planning
Dimension x
unit rates
Annual Audit
of Asset
Register
48
Use this Data for
What do you
need to spend? $$
When you need

to spend it?
Now
Use this Data for
What do you
need to spend?
$$
When you need
to spend it?
Asset Renewals
Sample Council
Keys to Optimal Asset Management
AIFMG advocates & explains how to;

  Determine Affordable Service Levels
  Set & Manage to Appropriate Accrual
Accounting Based Financial Targets
  Responsibly Use Debt
  Maintain a Soundly Based Long-term
Financial Plan
Linking Expenditure and Revenue
AIFMG Outcome
Takes IIMM to the next level

  Integrates technical and financial management
  Delivery of financially sustainable services
  Improved financial reporting
  National consistency
in financial reporting
  Improved services to
the community
54
4 Key Points
  We need to tell a true and

consistent story about
infrastructure
  This can only be achieved
through financial statements
  Use the AMP and LTFP process
to improve your asset register
and financial statements
  AIFM Guidelines give direction
and guidance to do this
AIFMG puts you in the
drivers seat
Guidance for optimising asset
management & financial
sustainability

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Australian Infrastructure Financial

Vancouver, October 2009

2. Managing existing

3. Essential part of

> National consistency 2. Managing existing

3. Essential part of

3. Essential part of

John Howard Jim Dixon John Comrie

Integrating the technical & financial

 National Steering Committee

“Avoiding unexpected financial

1. Operating surplus

 Sec 7 Financial Reporting Framework

 Sec 12 Accounting for Infrastructure

 We need to tell a true

 Define valuation component level

 Component is unit of account

Current cost to replace

 Road pavement recycling

 Cost to replace 300mm dia RCP $270/m

 Depreciable amount = $170/m

Note * restores service potential of pipeline

Source: Kennedy & McPherson, 2005, cited in AIFMG, 2009, p 12.52

Period that the asset provides

 When will replacement/disposal appear in the

 Consider many factors

 Document the process to provide

 Asset Management Plan options

Source: Logan City Council Qld, Kennedy & McPherson, 2005

Current Cost $270/ m Current Cost $270/ m

When you need

AIFMG advocates & explains how to;

Takes IIMM to the next level

 We need to tell a true and

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2.  Managing existing

3.  Essential part of

> National consistency 2.  Managing existing

3.  Essential part of

3.  Essential part of

  National Steering Committee

1.  Operating surplus

  Sec 7 Financial Reporting Framework

  Sec 12 Accounting for Infrastructure

  We need to tell a true

  Define valuation component level

  Component is unit of account

  Road pavement recycling

  Cost to replace 300mm dia RCP $270/m

  Depreciable amount = $170/m

  When will replacement/disposal appear in the

  Consider many factors

  Document the process to provide

  Asset Management Plan options

  We need to tell a true and