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Investing for New Zealand: Insights from 2015/16

The Crown Balance Sheet and Asset Management

“Owning the right assets, managing them well, funding their maintenance sustainably, and managing risks on the Crown balance sheet, are all critical ingredients to securing the ongoing provision of high-quality, cost-effective public services that New Zealanders value.”
- Gabriel Makhlouf, Secretary to the Treasury

Government owns a diverse range of social, financial, and commercial assets which are together worth $292 billion on the Crown balance sheet.[3] Government assets have a financial value, and are used to provide benefits to New Zealanders.

The Crown Balance Sheet is made up of three distinct government asset portfolios: social, financial, and commercial.

The social asset portfolio has typically been the largest, and is held to support the delivery of core public services and to achieve government outcomes.

This portfolio includes assets such as state highways, housing stock, and the conservation estate. These of assets are typically created by the government investment projects discussed in the previous section, and as a result are the focus of the investment management system.

Financial assets, such as the New Zealand superannuation fund, and commercial assets, such as state-owned enterprises, have different governance arrangements, and so are not covered in this report.

Diagram 7: The asset portfolios on the Crown Balance Sheet
Diagram 7: The asset portfolios on the Crown Balance Sheet.

Why is asset management important?

Good management of government assets contributes to the continuity of key services, by ensuring the assets perform well and deliver the expected benefits over their useful lives, and that financial provision is made for decision makers to replace the assets.

Good management means:

  • appropriate proactive maintenance to help manage costs and sustain performance
  • risks of service reduction, interruption or failure are well-managed
  • early and considered investment proposals are made for when assets need replacing
  • smart investment choices based on past learnings
  • accurate and transparent reporting about government's assets
  • at a consolidated level, better indication of the performance of the government balance sheet.

Exploring how well the government manages its assets

In July 2015 the Government introduced a requirement for agencies to report on the performance of the assets each agency operates.[4] From the year ending 30 June 2017, and agencies will report through their individual annual financial reports.

To help agencies progress towards implementing this in their annual reports next year, the Treasury has worked with investment-intensive agencies[5]- those with the largest and/or most critical investment and asset portfolios - to collect asset performance information for the 2015/16 financial year.

Of the government's social assets, the Treasury collected data on physical assets (plant, property and equipment), intangible assets (such as software information systems), and specialised military equipment, which together make up the majority of social assets.

What is asset performance information?

Asset performance typically covers:

  1. the condition of assets
  2. the extent to which they provide what an agency needs to deliver its services in an effective way (fitness for purpose)
  3. the extent to which the assets are available (or used).

More sophisticated indicators combine financial and non-financial information to reveal the cost-effectiveness of different asset strategies.

Measures are developed and used by agencies to assess how they are performing in these areas. Each of these measures should have a target so agencies know the level of performance that is expected. For example, an agency could measure the availability of a critical business system by looking at the percentage of time it is available to users. Critical systems like email would generally have higher targets for the percentage of time they need to be available.

What information has been collected?

The Treasury collected data from 24[6] investment-intensive agencies this year. These agencies have reported 279 measures, reflecting that these agencies have a large number and range of ways of measuring how their assets are performing. This is partly because most agencies manage multiple asset portfolios, and the performance of these portfolios is measured in three key areas (condition, utilisation and functionality).

Of the 279 measures, 68% of the 279 measures had a formal target for the 2015/16 financial year, and 61% of these targets were met. Overall this means asset performance targets were met for 42% of measures. We would hope to see an improvement on this in the 2016/17 reporting.

What does this tell us about government's asset management?

This is the first collection of asset performance information. Initial findings suggest:

We have a large range of asset measures

Agencies have 3-4 measures for each asset portfolio, covering the main aspects of asset performance. In some cases agencies watch individual assets more closely (for example critical business information systems).

The quality of information is variable

Many agencies do not yet have suitable performance targets across all their asset portfolios.

Most agencies have asset types in common

Every investment-intensive agency manages both property and ICT networks. There is scope to normalise measures and targets for these portfolios.

Some agencies and sectors have specialised asset portfolios

For example, clinical equipment (District Health Boards), roads and infrastructure (New Zealand Transport Agency), and military equipment (New Zealand Defence Force). In these cases there is scope to focus on the target level of performance.

Improving government's asset management

The annual reporting requirement can help bring about changes in asset performance practices, but isn't enough to improve asset management on its own.

To maintain and lift asset management practice, each agency's capability (people, processes and information) should be appropriate for the scale and complexity of their activities, and the criticality of the services they deliver.

For this reason, asset management maturity is assessed as part of Investor Confidence Ratings (ICR), which are applied to investment-intensive agencies. More information is available about the ICR on page 30. Analysis suggests that agencies with an ICR (11 of the 24 agencies reported on here) are much more likely to have measures and targets in place than those who have not yet had an ICR assessment.

Information from this process (shown in Diagram 8) suggests that agencies have a reasonable foundation of asset management, however most have further work to do to demonstrate an appropriate level of maturity to ensure future performance.

Diagram 8: Gap between current and target levels of asset management maturity
Diagram 8: Gap between current and target levels of asset management maturity.

Notes

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