Sustainable Infrastructure Management

Submitted by Silbert on Tue, 07/22/2008 - 19:08. RenewCanada Infrastructure Magazine
www.brittenwoods.com

If the experience of Australian Accounting Standard Board (AASB 116: Property, Plant and Equipment) in the implementation of infrastructure accounting is any indication of how this process might play out in Canada, municipalities are in trouble.

Audit results out of local Australian governments, particularly in Queensland and Victoria, have been studied in current and past financial reporting periods. In most cases the audits found that inaccurate definition and methodology were used in valuing and depreciating infrastructure assets. More importantly, they give no significant supporting evidence to justify key assumptions in the valuation processes, particularly road pavements. These audit results show that some local Australian governments are not correctly defining fair value and are applying the simplified straight-line depreciation method to infrastructure assets.

In the absence of cash inflows and an active market for infrastructure assets such as roads and bridges, the most reliable estimate of future economic benefit or service potential is condition-based depreciation—and not the stable condition state method being used in the United States. The condition-based valuation method is more likely to produce a lower annual depreciation rate than the simplified straight-line method. What’s needed is an asset consumption model that can predict the effective age of successive capital improvements on a declining balance ratio (or factor) correlated to an assessed condition index.

The cost of maintaining infrastructure assets often represents a significant portion of a municipality’s operating budget, so it’s important to agree on depreciation estimates. For a municipality to determine whether or not it’s financially sustainable, managers need to calculate the ratio of capital spending to annual depreciation charges. Both sides of the equation are affected by the state and condition of municipal assets like roads and bridges. Equally important in this equation is the public’s expectation of service levels within the context of current social, economic, political and environmental realities. These are the dynamics in the infrastructure investment gap that are causing disagreement between engineers and accountants. Asset management and financial accounting are out of sync.

One incentive to work things out is the Public Sector Accounting Board’s (PSAB 3150) ever-nearing deadline (see page 36). But it’s unclear whether PSAB’s requirements will lead to more sustainable infrastructure management. Municipalities that use the conventional straight-line depreciation method because it’s easier and that fail to recognize the link between strategic asset management and financial accounting will just continue to argue over unfunded depreciation of our assets—the infrastructure deficit. Canadian cities like Hamilton and Edmonton are less likely to make significant material misstatements in their financial reporting because their managers recognize that asset management is a corporate, not just technical, responsibility. They’ve taken the necessary steps to integrate asset accounting with financial reporting. Those who don’t will end up like some Australian towns, where the absence of a strategic framework for valuing and measuring depreciation expenses has led to a huge deficit.

  —Silbert Barrett
 These are the author’s personal opinions and do not reflect those of his employer. Nor is the author making inferences about how infrastructure assets are managed. The author bases his opinions on his involvement in the pilot implementation of capital asset accounting as a project manager for the City of Hamilton and the Ontario Benchmarking Initiatives (OMBI).