Targeting Assets For Rationalization

Each organization needs to review their asset stocks and target those assets that may be suitable for rationalization or disposal. In general the targeting process needs to focus on the following types of assets:

• Non Core Assets
• Low Utilization Assets
• Assets with Low Returns
• High Risk Assets
• Changes in Customer Needs.

Non Core Assets

In many cases organizations have retained assets that were originally required to construct and commission their systems but are no longer essential for the organization's successful operation.

Examples include roads, access tracks, bridges and culverts which were built to service a water supply system but are now only required for intermittent operations or maintenance activities.

These assets may now be used extensively by the public (in some cases as part of major tourist infrastructure) and wherever possible these assets should be transferred to a more relevant authority, such as the main roads department.

An example of the change in utilization of these assets can be seen in the following diagram, which shows the situation for a water supply scheme built some 30 years ago. A transfer of the road asset to the relevant main roads department meant the long-term liabilities and ongoing maintenance and operation costs have been taken off the water authority's balance sheet.

Other examples of assets of this type include:

• Property acquired to create the assets, but is no longer required for operation or maintenance
• Sites such as quarries or land fills that may have been part of the original construction of works. These assets may be suitable for restoration and sale or transfer to another, more appropriate, organization
• Construction villages that were developed as part of the original project and may still be required for operation and maintenance. These assets can be transferred from the organization's control to private ownership. Surplus assets can then be sold.

Some options for disposing of non-core assets include:

• Subdivision development and the transfer of infrastructure from the organization's responsibility to the local municipality or to the relevant service utility or authority
• Immediate sale of assets that can fetch an appropriate price
• Sale of assets that pose a significant long-term liability.

It may be necessary to invest considerable funds in the asset prior to sale to return it to a marketable standard.

Low Utilization Assets (High unit costs)

Whenever the utilization of any asset falls below 50% of its design capacity, the relevant unit cost in terms of capital use, depreciation and maintenance represents twice the cost that would be incurred if the asset were used to its full capacity.

Some assets can never be fully utilized, due to normal deviations induced by weather or demand.

For example, drainage systems will only be used to accommodate peak capacity during storms that have a theoretical probability of 1 occurrence every 25 years.

However, the resultant damage of such a storm if the assets were not of sufficient capacity easily justifies the low utilization and high capital investment involved.

In the case of buildings and many infrastructure assets, low utilization does represent a high unit cost.

Where users are prepared to meet this cost, the organization can justify retaining the assets.

In many cases, however, once the unit cost is known and passed on to the end users, those users will be unwilling to absorb such increases unless service level improvements or other benefits are delivered.

Assets with Low Returns

By properly assessing the true economic cost of owning and operating individual assets and comparing this with the income or benefits derived, many organizations have identified considerable losses that are being incurred by a minority of like assets throughout the organization.

When these organizations have properly assessed their asset portfolios and have identified the future expenditure required to sustain the required service levels of their assets (ie. they have developed 15 or 20 year asset management plans), they can then see the impact of these future costs against the predicted demand and likely income that can be derived.

Where the Net Present Value (NPV) of future cash flows represents a significant loss, key stakeholders can be informed of the issues via an appropriate disposal consultation program that aims to gain approval for the ultimate outcome.

When calculating an asset's worth to the organization, the key assessment criteria should include:

• Level of service standards to users
• Overall utilization
• Maintenance and operational costs
• Need for renewal or upgrade in the near future
• Business risk exposure, eg in terms of fire or structural failure.

Rationalizing assets with low returns can:

• Reduce future costs
• Reduce business risk exposure significantly
• Provide customers with a higher level of service
• Develop new assets through the income generated by the disposal of the abandoned assets.

High Risk Assets

Organizations should identify those assets that are in poor condition and represent significant risks to public or staff, the environment, corporate image or corporate viability.

In many cases, organizations have retained heritage assets because of their historical significance, but allowed them to deteriorate to such a degree that they now represent significant business risk exposures.

Examples include:

• Historic homesteads and private dwellings
• Historic wharves and jetties
• Historic railways
• Significant rail and road bridges
• Utility assets such as old sewerage pump stations and treatment plants.

If the community values these historic assets, and sufficient funds are provided to maintain their integrity and limit risk to an acceptable level, then the assets can be retained and utilized.

However, often assets of this type have not been maintained for many years, and have fallen into disrepair, resulting in significant risks to the general public and the responsible organization.

Organizations have often hoped to relieve themselves of this liability by putting the asset under the control of a local management committee.

Unless the committee takes legal ownership of the asset, this will not mitigate any liability of the parent organization should the asset suffer a significant failure or cause injury.

Occasionally high-class assets have been handed to management committees without due overview and accountability. These assets have been neglected to the point where they represent a significant loss in value while incurring considerable liability in terms of backlog maintenance and renewal costs.

It is vital that organizations complete annual reviews of such assets to ensure that the committee is carrying out its due care and responsibility functions.

Changes in Customer Needs

Assets may have been built to serve customers whose distribution or configuration has changed considerably since the services were initially provided.

An example is irrigation water supply to service farms, whose boundaries had since changed. Not only has amalgamation represented a significant change in the number of service outlets provided from the irrigation channel, but also the farms themselves have been significantly re-configured.

To comply with modern irrigation practice and to reduce salinity caused by flood irrigation, the farms have been significantly regraded and leveled using laser grading technology.

The irrigation authority worked with the farmers in designing the regrading, thereby reducing the number of outlets and meters that were required to service the properties. They were also able to abandon several channels totally.

The irrigation authority was also able to convince the farmers to take over the maintenance of the branch channel that served their farms.

The authority constructed a single outlet and meter to the branch channel, thereby reducing its future administration, maintenance and renewal commitments even further.

The key success factors in this asset transfer program were:

• Understanding the true cost of retaining the asset
• Understanding the likely future income stream
• Understanding the average cost of service provision throughout the system
• Showing the future cost of water without asset rationalization programs
• Showing the future cost of water, and the potential savings to all users, with the rationalization programs in place
• Convincing local users that transferring responsibility for the maintenance of the assets to them was in their best interests
• Developing a suitable policy that enabled a fair sharing of the future liabilities and savings between all parties.