THE MANAGEMENT AND REPORTING ON CAPITAL ASSETS

PULSE 2013

Presenter: HESTER HERMUS | DIRECTOR TECHNICAL SUPPORT - AM, OAG, National Treasury | 10 09 2013

Purpose of the presentation

Legislative requirements:Financial ManagementAsset ManagementReporting

Principles for Asset Management

Integrated Approach: IDP to AFS

GRAP 17 reporting vs. asset management

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Legislation – Financial Management

o Municipal Finance Management Act, 2003 (MFMA)o Municipal Systems Act, 2000 (MSA)o Property Rates Act, o Municipal Fiscal and Functions Act

Objective of the legislationo Transparency o Accountability Evaluation of decisions takeno Optimum use (effective, efficient, economical (not cheap!))o Measurement of performance (resources vs services delivered)

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Legislation – AM an Obligation Constitution of SA (S152)

Prime mandate – sustainable service delivery (requires assets)

MSA (S 4 (2) (d))Duty to provide services – financially and environmentally sustainable

MFMA (S 63)MM duties for AM include – safeguard, maintain, valuation per GRAP, systems (information: accounting, management; internal control; register)

MFMA (S 19 and 46 (2))Evaluate capital projects and budget appropriately for life-cycle

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Legislation - Financial Reporting

Financial reporting should demonstrate the accountability of the government entity for the financial affairs and resourcesentrusted to it, and provide information useful for decision making purposes.

To achieve this objective the financial statements should be prepared in accordance with a suite of standards aimed at providing relevant, understandable, comparable and reliable information.

The information must reflect the underlying truth of all the activities that occur in the entity, it must be fairly presented.

GRAP compliance ensures fair presentation 5

AM defined

Asset management

The process of guiding the acquisition, use, safeguarding and disposal of assets to make the most of their service delivery potential and manage the related risks and costs over their entire life.

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Strategic role of assets

The role of assets is to enable the delivery of government services to the public

Assets should exist to enable programme delivery

The key starting point is to establish a link between programme delivery and assets

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Role of AM Maximise service potential of an asset

Optimise life-cycle costs

Reduce need for new assets

Consider non-asset solutions

Level of service can be defined

Risks mitigated – id critical assets

Integrated planning and budgeting

Tariff setting based on reliable cost information

FACILITATE SUSTAINABLE SERVICE DELIVERY

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5 Principles

Asset Management

Policy Framework

Informed Decision-making

An integrated approach to planning and management

Accountability and Responsibility

A focus on service delivery

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Motivation for Life-cycle Approach

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Municipal planning and budgeting

process

AnnualFinancialStatements

IDP

Budget

SDBIP

In-year reporting

Annual report

Five-year strategy

Three-year budget

Annual implementation plan

• Organisational structure aligned to basic services• Sound municipal policies, processes and procedures • Standard chart of accounts for municipalities

Implementation monitoring

Accountability reporting

Oversight report

Accuracy of information depends on: 11

Missing LinkThere should be a direct and obvious link between:

Municipal Strategy – AM Strategy – Budget – IDP

And then covering all above in one :

The Annual Report – measurement of performance

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Integrated Approach

•Government Policy•Corporate Plan•Environment

Strategic/Business Plan

Programme Strategy/Outputs

Non asset solutions:• Demand management • Or• Alternative use

Acquisition Plan

Disposal Plan

Standard & level of

Maintenance Plan

Entity

Budgets

Systems

Operation & Maintenance Plan

Information System StrategyHuman Resource StrategyFinancial Strategy

Asset Strategy

Capital and Recurrent Funding Plan 13

Developing an asset strategyExisting Assets Capital Projects Committed Service Delivery Strategy

On AR andcondition assessed

Programmes and asset needs

Asset Needs ProfileAsset Availability Profile

Non Asset Solutions

Asset Condition Poor

Dispose

New Assets Required

Asset ‘No Fit’ and/ or Bad Condition

Renew Operate and Maintain

Procure and /or Construct

Asset Plans

Decision based on Matching

Asset Condition Good

Acquisition Operation Maintenance

Disposal Risk Mitigation and Safeguarding

Funding

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Presented SAICE Findings

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AcknowledgementPrevious slide as result of a study done by SAICE in GP province and compiled by A Lawless and E Jakuszko.

It is quite feasible that similar results will be obtained for the other provinces considering a general backlog in maintenance exists in RSA

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Problem Statement

Established:o Legislative Framework is clear and knowno Concept of AM understood, includingo Principles of life-cycle management

Analysed the audit outcomes based on above knowledge o Why then do we have problems

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Audit Outcomes

2009/2010 2010/2011 - Issues Changes Noticed8 Provinces:70-100% qual1 Province: 50%REASONS:

1 Province available Valuation Completeness Existence

Indicators reveal no significant change

Leadership: Lack understanding

(Importance of AM) Not setting right tone

Quality of submissions: Misstatements (mat) Lack of skills High vacancy Use of consultants

Lack of appropriate leadershipstill a problem –not controlling quality and appoint skills Repeat use of consultants no skills trf ensured

Management issues: Control environment

lacking (AC,IA,RM) Record keeping (doc’s) Implement GRAP (late) Skills/capacity in finance

Asset areas: PPE (include infra) Investment prop Heritage

GRAP 17

Lack of source documentationControl environment Dedicated practitionersLack strategy to implement GRAP

Outflow:AR not updatedReconciliation not done IT system lack infoCommunication lack

Concerns: IT Governance User access control Security and control enviro Service continuity planning

AR not updated (process)No/ few reconciliation (control)Safeguarding IT information (control) 18

Audit outcomes (cont.)

Reasons for qualifications, disclaimers and adverse opinions: • Lack of documentation (reliability of information impacted)• Inadequate asset registers (completeness – info and population)• Skills and capacity (appoint without skill, frequent turnover)• Historical issues regarding assets (prior yr. issues not cleared)• GRAP non – compliance (finance leases, disclosure, impairment)

Areas impacting on AM• Internal control weakness (recons, document control)• Lack senior management involvement in on-going activities (recon)• Lack of leadership (unsigned policies/ inadequate policies)• ‘Incompetent’ consultants / CFO lack understanding of GRAP

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BUZZ Word – ‘GRAP Compliant AR’

The AR is not needed because of financial reporting requirements (word ‘register’ not in ’ GRAP17’)

GRAP a reporting standard that facilitates reporting on assets in a ‘fair presentation’ manner. Management decisions can be measured and analysed

GRAP Compliant AR does not = Management of assetsBUT without a complete and reliable AR one cannot manage

assets – it’s an essential toolAR needs more information than GRAP requires i.e. service

levels required, risk ratings, capacity, etc. ‘Asset accounting’ - financial accounting exercise?Key to recording information on assets is to enable future

planning for improved management of the assets

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GRAP 17

Requirements0 Reporting011 Asset Management linkCost of asset (capital outlay) or FV at date of acquisition

Overall investment in assets Setting of tariffs and future planning estimates

Day to day running cost not ‘cost’ of asset

Cost of upkeep of investment Monitoring life-cycle estimates and future planning/budgeting

Major inspection costs id Reflect value in use and cost Strategy and planning

Revaluation to FV Choice not demand Facilitate future budget planning – can be outside AR

Classification into classes and categories

Summarised reporting usercan assess investment

Control over populationManage like items alike (policy)

Depreciation ( & method review)

Use of asset during year deterioration in value

Future planning for maintenance / replacement

Useful life and review Period of expected use Test estimates and wearupdate future planning

Impairment Investment diluted not throughuse – can be as result of management decisions (accountability)

Impact due to exterior or internal issues i.e. market or lack of maintenance 21

GRAP 17

Requirements09/2010 Reporting 010/2011 Asset Management linkUse of Residual value(only where material)

Calculation of depreciation Future planning and budgeting

Disclosure of movement Beginning of year status vs end of year status (investment)

Reliability of AR and success of AM policies and strategy

Components Influences depreciation ID where management is required (form, function)

Above analysis reflects that where an AR is utilised for management the information required by the reporting standard will be available and included. It is thus imperative that the management of assets be seen as central to service delivery on a sustainable basis and that a reliable AR be seen as the tool to achieve management (not reporting) through critical information at hand and an enabler to planning and budgeting. Without information on assets the planning and budgeting will always be skewed and ineffective.

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AM not GRAP 17

Requirements09/2010 Reporting 010/2011 Asset Management linkAsset Register Facilitate summary of

informationTool for management

Reconciliations Check and balances on financial information

Reliability of AR (Completeness and accuracy)

Condition assessment (howdoes it perform)

Planning and monitoring –action

Policies on management (how should it be done)

Best value from investment

Strategy for management (how to do)

Link to corporate plan and mandate

Levels of service (desired outcome)

Inform Strategy

Safeguarding Preserve investment (legisl) ensure available for use

Location (where is it) Where utilised towards mandate and service delivery

Custodian (who is using it) Who may use asset 23

Infrastructure Challenges Identification of assets in network

• Use of estimates (base on norms)• Knowledge of residents• Documenting• Testing on random basis

Unbundling and level of componentising• Engage engineering expertise not finance function• Define risk and criticality linked to required level of service

Valuation of assets• Apply actual cost to CRC ratio on component basis• Determine CRC per component and determine DRC based

on condition

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Challenges

Repeated use of consultants but still audit issueso Reasons can be:

• Contracts not ‘demanding enough’• Skills transfer not taking place• Keeping of information not systematic (filing system)

o Remedies can include:• Collect info that will enable AM for AR not just financial for ‘GRAP’• Include skills must be transferred BUT provide the bodies• Drafting of AM policies and strategies for implementation • Set-up of AM unit TOR – multi disciplinary and include monitoring• Core training on update of AR during year and standard recon• Identify components to manage (lack of engineering in muni)

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Challenges (cont)

Municipalities without ARo Reasons can be:

• No ‘system’ and/ or affordability• Skills to compile not in place• Information not available/ available but lack skill to analyse

o Remedies can include:• The AR can be on Excel/ Manual– need controls and processes in place• Identify and train – nobody is ‘un-trainable’ need willing mind• Design process flow for AM and policies and procedures to implement• Set-up core AM unit include technical (no more ‘them’ and ‘us’ integrate)• Awareness training on AM and benefits thereof• Training on the job through regular monitoring• Analyse technical data available, could form basis for register• Planned verification; asset class by class or location by location• Movable assets normally by location Immovable by class/network• Capture current transactions as happens 26

Challenges (cont)

Monitoring municipal AM activities:o Is there dedicated team / unit for AM?o Where is the reporting point - high enough or too low i.e. AM on MM Agenda? o Are policies in place and signed off?o Are there processes in place for continuous update of AR?o Is AR reconciled and agreed to control accounts at least monthly?o Is a review process in place to sign –off on reconciliation done? o Is life-cycle management of assets practiced?o Where is the information for the budget and IDP generated?o Are AM capacitated through training?o Is information regarding assets (documentation) readily available?o Is attention paid to audit issues e.g. a plan to rectify o What is the basis for tariff setting - life-cycle costs?o Set up of AM forum for district - facilitate on-going training and solutions for

AMo An improvement plan for implementation and for monitoring per muni

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Informed Decision-making

Accountability&

ResponsibilityIntegrated Planning &

Management Approach

Service Delivery

Business Imperative for AM

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THANK YOU

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