Rationalization and Disposal Options
Having identified those assets that may warrant rationalization or disposal, the organization needs to consider the options available to it in terms of the disposal process.
The rationalization options fall into two main categories, namely:
- Hold and secure
- Dispose or transfer.
The critical questions are:
- Which strategy provides the best means of achieving the organization's disposal objectives?
- Which strategy best achieves objectives of allocation for most appropriate use etc?
- Which strategy provides the biggest return for the least effort?
- Which strategy requires least capital investment to prepare for the asset disposal?
- Which strategy has the least disruption to service delivery?
- Which strategy is a pre-requisite for another asset project?
- Has the organization set any disposal targets that will impact on the number and scope of asset disposals?
The following options are available:
Cannibalize
In some instances, surplus assets can be effectively retained and used for spare parts, potentially reducing downtime and inventory purchasing and holding costs.
Significant savings can be generated if abandoned assets are retained as spare parts for similar in-service equipment.
This is a secondary form of disposal.
Remove / Transfer or Shift
In cases where the demand for an asset has significantly diminished and utilization has reached unacceptably low levels, it may be possible to shift or transfer the asset to another site where demand is still prevalent.
A good example of this type of rationalization is public housing stocks, where transfer of existing housing may meet the demand being generated in a different area.
This is a purely market driven activity, where the costs and benefits can be readily identified (ie. the cost of transferring the house to a new area can be balanced against the predicted rental income).
This option offers several benefits to the organization, especially if:
- The asset to be transferred is old and does not suit the demand in the area in which it is located
- The cost of transfer and re-commissioning is reasonable
- The demand and future income stream can be met from relatively cheap land available to the organization
- The organization is able to realize the high market value of the vacated land or it can construct a future asset on the site that will meet the demand profile available in the area (eg new two bedroom units).
Secure and Hold
This option involves a number of strategies.
Abandon
In this instance, the asset is totally abandoned. In most cases, this applies to assets that have no physical or environmental impact and can be abandoned without any long-term liability.
This may involve:
- Gravel roadways
- Water mains
- Sewers
- Gas mains
- Other similar assets.
It should be noted, however, that in some instances the assets may have a future liability. For instance, old gas mains that have used coal gas or town gas may have residual coal tar in their inverts that may later prove to be a carcinogen.
A future liability may involve the removal of these assets to permit new construction works.
Shut Down Asset
In this instance, the asset is shut down and secured against private or public access.
Power and other critical services are also isolated.
Secure Asset and Site
In cases where the organization cannot successfully secure the asset itself, it may be possible to secure the site.
This is achieved with security fencing and warning signs.
Mothball Asset
Mothballing is used when the organization is unsure of the future worth and/or potential of the asset. In some cases, the asset may have a high potential future market value, however in present economic circumstances the organization will not gain the most appropriate return on its disposal.
Mothballing aims to sustain the asset in a serviceable condition by securing it in such as way that it is protected from the weather and other factors that may reduce its value.
Mothballing is also suitable for assets which have no immediate use, but which have the potential to produce income in the long term.
In general, the cost of maintaining the asset in its mothballed condition should be significantly less than the probable future income stream should the asset be utilized in the future or should its market value return to expected levels.
This approach can be taken with:
- Buildings and properties that are likely to appreciate significantly if they are kept for a further short period (eg. 1-5 years)
- Emergency water supply systems designed to overcome drought.
Exchange the Asset
This option involves the exchange of an asset between separate business units within an organization.
Although there may be no formal sale, the legal responsibility for the asset is transferred, together with nominal values being paid or recognized in the operating statements.
This option can also be applied to the private sector where exchanges can be made between business units under the control of a common holding company.
Transfer / Divest Assets
This rationalization option is an extension of the previous exchange option, in that it involves transferring the asset to an entity outside the current owner's organization, but not by using the sale process.
In most cases, this involves the transfer of assets that do not have a long-term market value, but may represent a future liability or operating cost.
Examples include:
- Public road reserves on which no road has ever been built. A utility may be responsible for the maintenance of any fire hazard associated with the land. If this land is not required for their road service responsibilities, then the reserve is best transferred to a local land owner who may be able to make better use of the area.
- An earthen irrigation channel following the contours around rolling hills and requiring significant remedial embankment works. The channel ran within an easement cutting across or adjacent to the boundary of multiple rural properties. The cost of leveling the embankment and rendering it safe far exceeded the cost of providing a modern engineering alternative. Further, the adjacent land-owners saw some value in taking over the land for grazing purposes. The irrigation authority involved was able to replace the channel with a pipeline along a different route, and breach the embankment in strategic locations to ensure that no water hazard remained. The land was then transferred free of cost to the adjacent landowners.
Sell Assets
This option is usually restricted to assets that have a clear market value and for which there is a competitive market demand.
In these instances, the organization can dispose of the assets through normal sale arrangements.
In all cases, the sale process needs to be truly competitive, transparent and in accordance with all relevant statutory requirements.
Examples of the type of assets, for which this may be applicable, are:
- Vehicles
- Specialized plant and equipment
- Computer systems
- Land and property
- Buildings
- Houses
- Used materials (eg railway line and sleepers).
The key processes by which these assets can be sold are generally:
Public Auction
This process is used where the asset has broad appeal and demand from the public, and it generally ensures that the income received represents the true competitive market value.
Invited Tenderers
Where the asset may have a specialized application and therefore limited demand, this approach may be more appropriate.
The seller will generally engage a property or marketing group that will identify suitable prospective buyers (ie those that are likely to pay the highest price) and will prepare the asset for sale.
Donation
This process is used for assets that have no long-term value (apart from community service benefits) and for which no real market exists.
The asset will usually be donated to a charity or not-for-profit profit organization.
This organization assumes all future liabilities for the asset.
Some examples are
- A heritage house transferred to the National Trust
- A community hall to the Scouting movement
- A community hall to a religious group or society.