Why asset management is not what it used to be

When children look at a playground in a public park, they think of somewhere to have fun. When David Edgerton FCPA looks at the same playground, his thought processes are very different.

Edgerton, the director of Brisbane-based APV Valuers and Asset Management, is assessing the playground’s current condition, both from a maintenance and renewal perspective, as well as its safety and potential risks.

At what point will it need maintenance, and how much will that cost? Plotted against the lifetime of the playground, is it ultimately cheaper and safer to replace all the equipment now, or try to get some more life out of it? How does the playground’s current worth compare to the cost of building it a decade ago, and how does that compare to the cost of replacing it? How much longer will the community need a playground in this location, given the area’s changing demographics?

These are just some of the considerations that come into play in the contemporary thinking around asset management, an evolving discipline that is not so much about the asset itself, as much as it is about understanding the economics and risk around the service that the asset delivers.

In making that ideological shift, says Edgerton, the idea of asset management has moved away from being the sole responsibility of engineers, to a framework where engineers intersect with accountants, and where developing global standards and data analytics are increasingly important.

“Asset management is more about the governance of the organisation that owns or leases the asset, and how they use it to deliver services in the most cost-effective way,” says Edgerton.

“It’s an unfortunate term, because when it was created it was about the physical asset, but our understanding has matured, and it’s not so much about having a “gold-plated” asset or keeping it in “as new” condition – it’s about what the asset can deliver to the community and the costs of doing that.”

Edgerton has watched the evolution in thinking around asset management at close quarters over several decades.

He has been at the “coal face”, valuing assets for public sector organisations both in Australia and overseas, and as the CPA Australia representative on the Public Assets Collaborative Group (PACoG), which has developed a new framework for asset management.

“Much of this comes back to the development of accrual accounting in the late 1980s and early 1990s,” says Edgerton.

“That’s when we began to understand that if we didn’t know what assets we had, where they were, what condition they were in and what they were worth, it was pretty hard to argue that we were doing effective management of the assets.

“That was a catalyst to implement asset management, and government – largely local governments – understood that there were huge implications for them in decisions around renewal, maintenance and replacement.”

Change drivers

Changes in accounting standards have also been drivers for change, as has the development of new standards specific to asset management.

The development of accounting standards in 2013, which introduced the concept of the current replacement cost replacing the depreciated replacement cost, had a major influence, as did the 2015 decision from the Australian Accounting Standards Board on residual value. That decision clarified that, where a component of an asset has a renewal cost less than the overall component cost, it represents a different part of the asset, and because it has a different useful life or different lifecycle, it should be depreciated separately.

“We know that, as an asset ages and deteriorates, the cost of maintenance increases exponentially,” says Edgerton. “So, from a good asset management perspective what I should be doing is understanding the condition an asset is in, what I can expect in terms of its remaining useful life, and from that make decisions that give me a better outcome for my community while also saving me money.”

 

"Asset management is pure corporate governance. If I look at what a council is supposed to be doing, you elect them to provide essential services to the community and be responsible for that."

 

Rigorous asset management practice, he says, can result in alternative strategies that might decide on a different point at which to intervene and replace or refurbish the asset.

Early intervention means less capital expenditure comparing current and future costs, while improving the condition of an asset also saves in terms of ongoing maintenance.

“Asset management is pure corporate governance,” says Edgerton. “If I look at what a council is supposed to be doing, you elect them to provide essential services to the community and be responsible for that.

“Ninety-eight per cent of the council budget goes into delivering a service using an asset, so if you say that corporate governance is about everything you do in order to achieve your objective, which is the delivery of services, then the core corporate governance responsibility of local government is to better manage the delivery of services in the most cost-effective way – and that’s what asset management is.”

In helping to develop asset management practice in Australia, Edgerton has worked closely with Professor Joseph Mathew, chief executive of the Asset Institute. Mathew is a mechanical engineer with an extensive background in academia, who in the early 2000s founded a cooperative research centre that was the forerunner to the Asset Institute, now funded by a range of corporates and industry groups.

Mathew says asset management came out of the “old maintenance philosophy that, if it ain’t broke, don’t fix it”. From maintenance, the concept moved to “condition-based assessment” and, more recently, intersected with the idea of governance, which is when asset management became multi-disciplinary and focused around management systems and, increasingly, around data.

“It started as a preventative regime, then became a predictive regime, and now it’s a prescriptive regime,” says Mathew.

“And now we are bringing in more and more data, and data-driven decision-making has increasingly become the norm.”

The framework that Mathew, Edgerton and their colleagues have developed takes a whole-of-lifecycle approach, from design and construction through to maintenance and extending an asset’s life.

“Often you keep pushing it and extracting more value out of it, and today you have technology to assist in doing that,” says Mathew. This includes predictive analytics and dashboarding systems, as well as the relatively new concept of the “digital twin”, where variables can be applied to a digital version of an asset to see how it might perform.

This can be done for all kinds of assets – from roads and bridges to pumping systems and even entire cities, such as a “digital twin” of Singapore Mathew has recently encountered at an industry conference. “It is supposed to replicate the transport network and the buildings, build some smarts around that, and the next phase is to bring in data to the visualisation model and run maintenance programs on those,” says Mathew.

There is also the emerging field of the Internet of Things, and remote sensing using low orbiting satellites, which can play into the use of data to inform better asset management.

Potential of technology

At Edgerton’s firm, his team is also using technology out in the field to assist it in its work. A cloud-based valuation tool captures the relevant data, and the valuers then apply their methodologies and conduct strategic modelling.

“If you have a centralised data repository that captures accounting methodologies, valuations and asset management key data, this produces efficiencies and absolutely leads to better results,” says Edgerton.

 

"Accountants have become increasingly involved in asset management, which is less about engineering than it ever was."

“Back in the early 1990s, our understanding of this was a bit limited. The instructions at that time were not to get too caught up in the detail – just go out and identify your assets, and we’ll put some high-level figures on them.

“That might have been fine then, but the trouble is, 20 years down the track there are a lot of organisations that have not improved their data from those early days, so their understanding of what they have got in assets hasn’t improved either.”

Accountants' role

Edgerton and Mathew both agree that asset management is a fast-moving area that is changing all the time.

Mathew’s perspective is around data analytics and technology tools, while Edgerton sees the ongoing evolution of new standards – and organisational adoption of them – as the driver.

The multi-disciplinary and global efforts have created a new family of international standards around asset management – ISO 55000 and ISO 55001 – which articulate current best practice around a strategic asset management framework.

There is also a self-assessment maturity model, which has been published recently and enables organisations to compare their practices against the standards.

“Over the years, there’s been a lot of great work done by different organisations, where the professions have come together to tackle this issue,” says Edgerton.

“Accountants have become increasingly involved in asset management, which is less about engineering than it ever was.”

Mathew welcomes the involvement of accountants, but says the big change for them is not to think in terms of the traditional Return on Investment metric, but rather of the Return on Asset.

“It’s an area for integrated thinking, and it is moving into leadership and culture and management systems,” he says.

“It is a different way of looking at things, and often a different way of quantifying success, and with the use of new technologies, it is about to have another big phase of change and move forward again.”