Automation in Construction 8 1999.

689703
www.elsevier.comrlocaterautcon

Managing infrastructure for the next generation

Penny Burns
a

a,),1

, David Hope b, Jeff Roorda

Economics, Uniersity of Adelaide, Adelaide, Australia

b
Skilmar Systems Pty. Ltd., Australia
c
Jeff Roorda and Associates, Australia
Accepted 29 October 1998

Abstract
Australia has a high ratio of infrastructure to population, much of it constructed in a peak period after the end of the
Second World War. 2 This infrastructure is aging and becoming due for renewal. However the growth and easy finance
conditions that gave rise to its initial development no longer exist and the costs of renewal need to be found in a more
difficult economic climate. There is growing anecdotal evidence that some communities may face difficulty in funding
renewal of their inherited infrastructure and there is the possibility that the high ratio of infrastructure to population may, in
some cases, be unsustainable. Unfortunately, information to test this proposition does not generally exist. While Australian
governments, at all levels, are now adopting accrual accounting practices and recording assets in their balance sheets, the
attention to asset recording is of recent vintage. This has resulted in the need for large scale asset data capture exercises and
large scale investment in information technology, but these are being carried out by individual agencies with little or no
co-ordination regionally or across the whole of government. This paper reports a major exception to this pattern: an
information management and data gathering project across the whole of Victoria, which has enabled all 78 councils involved
to predict the cost and timing of their future infrastructure renewal liabilities A$23.3 billion. in time to develop corrective
planning strategies. By using independent consultants to gather data from every council in the state through a standard
survey instrument and presenting the results of the data, after extensive data validation processes, on an aggregate, grouped
and single council basis, councils now have the ability to compare themselves with others and with the general state picture.
The future renewal challenge is now seen to be a general one, reflective of the times, rather than of individual past
management practice, and as such is being tackled with greater vigor. Other States in Australia are now looking to adopt this
renewal projection method. This paper also includes reference to the major strategies that are being adopted. q 1999 Elsevier
Science B.V. All rights reserved.
Keywords: Infrastructure management; Australia; Total asset management

Corresponding author. AMQ International, PO Box 75, Salisbury 5108, Australia. E-mail: penny@amqi.com
Visiting research fellow.
2
The reasons for this high ratio relate to the vast landmass and low population of Australia. In particular, the impact of an extensive rural
industry in the hinterland; the engineering works required to divert, dam and provide water for rural and domestic purposes in the driest
continent; the extensive transport and communication networks; the infrastructure required to service the mining and extractive industries;
the quarter-acre block syndrome where most Australians live in detached housing, increasing the demand for urban infrastructure.
1

0926-5805r99r$ - see front matter q 1999 Elsevier Science B.V. All rights reserved.
PII: S 0 9 2 6 - 5 8 0 5 9 8 . 0 0 1 1 5 - 0

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P. Burns et al.r Automation in Construction 8 (1999) 689703

1. Introduction
The overall quality of infrastructure in Australia is
high. Over the past 80100 years development has
been rapid, and to some extent, unplanned. The
major growth period took place during the late 1950s,
1960s and 1970s. Growth steadied in the 1980s and
has slowed down in the 1990s. This post war growth
pattern is not dissimilar to that in the United Kingdom. Growth at this time was a reflection of the
release of pent-up demands during the war, the
impact of women entering the workforce in large
numbers, general prosperity, low interest rates and
full employment. This created both the demand for
growth and the ability to satisfy it. In Australia,
major migration, high export prices, and large-scale
foreign investment in the country further fueled this
growth in demand. All of this contributed to a situation where, between 1947 and 1967, the Australian
population grew by 50% but its stock of infrastructure and physical assets more than trebled.
Australians have become used to a high standard
of infrastructure and their expectations are that this
will continue. This is now becoming a matter for
concern as new capital works still predominate in the
public mind and the renewal of existing infrastructure is taken for granted.
Until recently, few records of public infrastructure
condition and value existed. However, in 19861987,
the South Australian Public Accounts Committee
produced a series of eight reports on the cost and
timing of replacing that states public infrastructure
w1x. This series of reports alerted all Australian governments to the need to seriously consider the management of its infrastructure if deterioration of valuable public services were to be avoided. First one
state, then the others, began to produce instruction
manuals for Total Asset Management, providing
guidelines for the production of asset registers, asset
valuation, condition analysis, risk management and
procurement and disposal. These manuals have had
the effect of changing attitudes and management
practices w2x, but data collection, whilst in many
cases tackled enthusiastically, has been largely individual and uncoordinated and has not been directed
at projecting and managing future asset liabilities.
An exception to this general pattern has been the
Victorian Infrastructure Study w3x and a similar, but

more limited study in Tasmania for transport infrastructure w4x. Both studies carried out a coordinated,
statewide program of data collection and renewal
modelling that has provided information for the
States own funding decisions and information and a
renewal modelling capability for the individual councils enabling them to project and manage future asset
liabilities. Section 2 describes the background to the
initiation of this project; Section 3 describes the
design of the model and Section 4, the data collection and verification process. The outcomes of the
study are discussed in Section 5. Section 6 considers
the range of asset management strategies that have
been developed to manage the future renewal challenge and Section 7 concludes with an analysis of
the likely future consequences from this study.
2. The Victorian Infrastructure Study
Victoria was the second State to be developed in
Australia, following New South Wales. It is the
second largest state by population in Australia with a
population of 4.5 Million. In 1993 a wide-ranging
amalgamation program began that saw the number of
councils in Victoria fall from 210 to 78. Rates were
slashed in the new councils by government direction
by up to 20% on 1993r94 levels. and then the
Local Government Act was amended to cap rates at
the consumer price index level minus one percent.
Although efficiency gains were made through the
introduction of compulsory competitive tendering it
was not known whether the degree of savings
achieved and achievable would be sufficient, with
the reduced rate levels, to sustain the renewal of
council infrastructure assets. While rates are only
one means of revenue raising, they are the major
revenue source of councils. Many councils believe
that if large increases in renewal funding are required then the funds needed would come by way of
rate increases. At the State level, the emphasis had
been on funding; for example, determining the impact on revenues and ratepayer equity of different
rate bases and encouragement for the use of user
pays pricing systems. Anecdotal evidence was
building, however, to suggest that maybe the current
level of infrastructure could be unsustainable, at least
for some councils, given their economic circumstances and the likely level of funding that could be

P. Burns et al.r Automation in Construction 8 (1999) 689703

required for renewal. The problem was that there

was no information base, nor any modelling capacity, to determine, with any degree of credibility, the
extent of future required funding, either in total for
the State or for individual councils.
The State had an interest in knowing the true
situation as the condition of local council infrastructure has impacts wider than council borders and
there had been a growing number of requests for
funding and for permission to raise rate levels. The
councils themselves had an interest in knowing in
order to plan for the future. Thus a combined State
Local Government Steering Committee was established to determine the extent of the renewal challenge, its likely cost and timing, identification of
strategies for action and of councils in serious need.
The authors of this paper were asked to design an
approach by which, with a minimum of data collection, both the State and Local Government could
achieve the information needed.
3. Model design
3.1. Infrastructure assets defined
The Victorian study addressed infrastructure assets. These are defined functionally as assets that are
not replaced as a whole but rather are renewed
piecemeal by the replacement of individual components whilst maintaining the function of the system
as a whole. Infrastructure assets have indefinite lives.
Economic lives, however, can be assigned to individual components of an infrastructure system. Examples of such infrastructure assets are major facilities
such as schools or hospitals, public housing, roads,
bridges, parks and recreation areas and utilities. 3
3.2. Renewal defined
Renewal has been chosen in preference to the
word replacement, because infrastructure assets are
never really fully replaced, only individual compo3

Other definitions that have been proposed include that of the

Public Works Association in the United States of America that
reserve the term for transportation and communication networks.
In the UK, it is common practice in the water industry to regard
below ground assets as infrastructure and above ground assets
as non-infrastructure.

691

nents. Capital renewal refers to the extension of

functionality of an infrastructure asset by piecemeal
replacement of individual components as they age or
become obsolete. Renewal differs from maintenance
mostly by degree. For the current study, the guidelines issued to councils, defined the areas most likely
to be in dispute, e.g., road re-sealing. Some councils
regarded re-sealing as maintenance, others as capital
renewal. The Infrastructure Study required all councils, for the purpose of the study, to regard it as
capital renewal. Maintenance was confined to
smaller, more frequent asset actions.

3.3. Age based modelling process

The modelling process developed by the consultants, involved establishing the major asset categories, such as buildings, roads, etc. Where certain
sub categories such as gravel roads, sealed roads,
formed roads. could be expected to have different
economic lives, these were treated separately. An
age profile, by current replacement cost in five year
blocks and based on the expected economic life was
then established for each asset category and sub-category. As is reported below, this was sometimes
rather hard for councils to do and they needed
assistance to make reliable estimates.
Using the economic lives appropriate to each
category and sub-category and the age profile, the
future renewal profile of the current asset stock was
forecast for the next one hundred years 19972007.,
in current costs terms i.e., 1997 dollar terms., using
Microsoft Excel as the vehicle for the calculations.
The default assumption was that all assets currently
held would be replaced unless there was a specific
policy decision already taken that an asset would not
be replaced.. The calculations are relatively simple,
although a number of iterations are required to ensure that each cycle of renewal is included in the
hundred year timeframe. For instance, irrigation
equipment in a park installed in 1983, with an estimated economic life of 25 years will need to be
replaced in 2008, 2033, 2058 and 2083 and the
relevant current cost included in those years in the
model. An extract of the future renewal profile for
one council is shown in Table 1.

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P. Burns et al.r Automation in Construction 8 (1999) 689703

Table 1
Extract from a councils summary renewal profile
Five year period commencing

Pavement capital renewal

Sealrsurface capital renewal
Formed and surfacedrgravel capital renewal
Total roads
Footpath capital renewal
Timber bridges capital renewal
Concretersteel bridges capital renewal
Total bridges
Drainage pipes
Drainage pits
Community drains
Total drainage
Parks hardworks
Parks irrigation
Parks lighting
Parks play equipment
Total parks
Buildings structure
Buildings mech.relect.rhydr.
Pools and aquatic centres
Total structures
Total renewal profile

1997
000s.

2002
000s.

2007
000s.

2012
000s.

229
618
863
1710

153
64

217
30

30

1957

619
723
1957
3299

200
64

264
50

50
811

811
4424

940
1201
884
3025

200
64

264
40

40
821

821
4150

1737
2423
876
5036

55
54
109
200
64

264
40

40
1427

42
1469
6918

This renewal modelling process, basically a life

cycle replacement modelling process, can be as detailed as the situation warrants. For example, the
South Australian Public Accounts Committee Report
on Housing Asset Replacement contained 26 line
items and sub-items, together with a model variation
for pre-war housing stock w5x. The companion study
on the replacement of water supply and sewerage
disposal assets w6x contained detail for 13 different
pipe sizes and 9 sewer sizes. The Public Accounts
Committee also produced replacement models for
roads w7x, transport w8x, hospitals w9x, and schools and
further education colleges w10x. The same methodology that was initiated by the Committee has subsequently been used by other researchers, including
two studies on housing w11x and schools w12x by the
National Public Works Council Inc of Australia.
As this study was designed to establish the broad
picture of infrastructure asset renewal for later refinement, the number of categories and sub-categories was deliberately kept small. Even so, had
every single field been filled in, the study would

have produced over one hundred and ten thousand

separate pieces of information.
Councils were expected to refine the information
collection where the initial information suggested
that it would be worthwhile to do so. To this end,
each council was provided with all of its information
presented on a computer disc which provided councils with the opportunity to revise their data and
future revenuerexpenditure projections to allow
some modelling of the expected future renewal profile, based on different economic lives and revenue
streams.

4. Data collection and verification

It was recognised from the start that the data held
by councils was extremely limited. The Office of
Local Government had estimated that only about one
third of councils had 5 year forward forecasts of
their capital requirements. Infrastructure assets are
now required to be reported in balance sheets but a

P. Burns et al.r Automation in Construction 8 (1999) 689703

number of councils had only reported those infrastructure assets acquired in recent years and there had
been no attempt to adjust the acquisition cost for
subsequent inflation. Distinctions between maintenance and asset renewal for infrastructure assets
varied between councils, as did capitalisation practices.
The approach taken was to devise a survey, with
input from councils, to collect basic data needed to
forecast renewal. Initially it was intended to collect
information on a sample basis. The Office of Local
Government decided that every council should be
visited and this turned out to be extremely beneficial
for it enabled the researchers to speak with the
officers responsible for the data presentation and to
correct misunderstandings on the spot. Although five
regional meetings had been conducted in which the
survey forms were explained in detail to council
officers, it was found that additional officers were
frequently involved in the data gathering exercise. In
many instances different officers within the council
held conflicting assumptions and the infrastructure
study was often the means to better communication
between the different sections of council.
The survey design contained a number of consistency checks and there was an extensive data verification process. The researchers changed no data but
councils were advised of inconsistencies and asked
to reconsider and validate the information provided.
At the end of the exercise, all the cleaned up data
was returned to the Chief Executive Officers of
Council for confirmation before being finally accepted by the study.
Analysis of financial measures was limited to rate
revenues with other measures, e.g., debt levels, incorporated as one of the mechanisms that councils
might choose to manage their situation. It was not
considered appropriate to make recommendations on
debt levels and general pricing and recommendations
were confined to asset expenditures and asset management.
Two reference groups of experienced council officers, one on roads and one on parks and recreation,
assisted in guiding the process. The Roads Reference
Group was supplemented with an independent consultant regarded as an expert in road construction
and maintenance, and officer from the State road
authority and two persons from the Australian Road

693

Research Board. The reference groups provided the

consultants with advice on current practices, both in
local government and more broadly, advice on the
collectability of the survey data and some assistance
in the validation process. They were an important
contributor to the intellectual rigour of the process.
The survey instrument created was then pilot tested
with ten councils and further refined before being
completed by all 78 councils.
An important contributor to the success of the
study was the awareness and commitment of Chief
Executive Officers. Two meetings were held with
these officers at the beginning of the study and a
newsletter as well as word of mouth from the Steering Committee ensured that the chief executives
stayed in contact with the study throughout the period.

5. Outcomes
As a result of the study, the Office of Local
Government now has a database of broad asset information across local government in Victoria, collected
on a comparable basis. The complete database includes asset age profiles, condition profiles, economic lives and replacement costs for major asset
groupings. Councils have already used this information to refine their own assessments of economic life
and appropriate service standards. The database includes a self-assessment of the state of asset management practices within councils on a range of asset
activities. Individual data has been returned to councils on a computer disc with a modelling capability
to enable them to examine the impacts on their
future renewal requirements of changing age profile,
economic life, andror replacement cost assumptions.
The study revealed that infrastructure in Victorian
Councils was worth around A$23.3 billion in current
replacement terms, or approximately A$13,000 per
household. Councils in Victoria have responsibility
for roads, drainage, social services including libraries, parks and recreation facilities but not education or housing which are the responsibility of the
state level of government.
The outcomes from the study have been grouped
in five categories, namely asset renewal issues, organisationalrmanagement issues, accountingrfinan-

694

P. Burns et al.r Automation in Construction 8 (1999) 689703

Fig. 1.

cial issues, engineeringrtechnical issues, and community issues.

5.1. Asset renewal issues
5.1.1. The rate of asset consumption
It was important to establish a broad measure of
asset consumption and the study calculated a longterm average of asset consumption based on how
quickly assets were being consumed. If an asset
has an expected economic life of 50 years, it is being
consumed at an average rate of 2% per annum.
Similarly an asset with an expected economic life of
40 years is being consumed at an average rate of
2.5% per annum. 4 The infrastructure study calculated the rate of asset consumption for each asset
class e.g., roads. and subclasses e.g., gravel roads.
separately. Each rate was applied to the total replacement cost for that asset group and all asset groups
were aggregated. This showed that Victorias infras-

4
The use of average rates of decay is a modelling assumption
many factors, not the least of which are asset usage and
maintenance and renewal regimes, play a significant role in how
an asset declines in value and it is not intended to suggest that
asset decay is linearit is not!

tructure asset base of A$23.3 billion was being used

up, or consumed, at an average rate of A$488 million per annum, or an annual average overall of just
over 2% per annum. This is a long-term average and
does not imply that this is the amount that has to be
spent immediately on asset renewal. However, to the
extent that current levels of required renewal are
lower than the average, there will be periods in
future years, when the annual required amount is
higher.

5.1.2. Renewal projection

In the following bar chart Fig. 1. the total amount
of projected infrastructure renewal for all Victorian
councils combined is shown in five year blocks,
determined by adding together the renewal profiles
derived for each asset and sub-asset category for
each council as discussed above in Section 3Age
based modelling process. The lower horizontal line
represents the current level of capital expenditure on
renewal and the upper horizontal line is the long
term average level of capital expenditure that will be
required if all of the infrastructure assets are to be
sustained indefinitely calculated as discussed in Section 5.1..

P. Burns et al.r Automation in Construction 8 (1999) 689703

5.1.3. A ten year planning horizon

As can be seen from the bar chart, the long term
average level of renewal is approximately twice the
actual current level. This represents a very large
change in capital expenditures if the existing infrastructure is to be sustained. Fortunately, forecast capital expenditure on renewal is expected to remain at
or below the current level for the next ten years for
councils in general. This provides most councils with
a ten year planning horizon before expenditures need
to increase. This is ten years in which they can
rationalise their current holdings, rethink their attitudes to new capital acquisitions and develop ways
of reducing costs by life extension, and choosing
more appropriate standards, better maintenance and
management. This does not, however, apply to all
councils and some councils will have large near-term
renewal. They have been identified in the study.
5.1.4. Rising leels of renewal required
At the present time a large amount of infrastructure held by councils is still in its original form and
has not yet been renewed or replaced. However,
many councils grew rapidly in the 1960s, 1970s and
even into the 1980s, and as the assets provided
during this period age and require renewal, the
amount of renewal expenditures can naturally be

695

expected to rise. Many councils are currently renewing the much smaller cohort of assets that were
added pre war and just after the war. The asset
cohorts increase in size as the echoes of the growth
period arise, some 30 years and more after the initial
development.
5.1.5. Growth-replacement funding link broken
In the past, councils have paid for assets needing
renewal from the increased revenues that have come
by way of population growth. But growth has slowed
down and the rate of renewal is about to increase.
The link between growth revenues and renewal needs
has therefore been broken. New strategies are now
needed to cope with renewal funding.
5.1.6. The picture for indiidual councils: period-toperiod fluctuations
The previous bar chart reflects the renewal situation for the State of Victoria as a whole. It has
ironed out a lot of the fluctuations that individual
councils face. The following two line graphs Figs. 2
and 3. indicates the period-to-period fluctuation that
councils need to manage.
Fig. 3 shows that, in addition to period-to-period
fluctuations, this council has serious near-term renewal requirements. This has been identified as a

Fig. 2. Council Aa council that does not have much increase in renewal for the next ten years.

696

P. Burns et al.r Automation in Construction 8 (1999) 689703

Fig. 3. Council Ba council that has serious near term renewal requirements.

council in need. Such councils must urgently re-examine and improve the quality of their near-term
data, the service standards they are adopting and
their financial practices.

potentially very large swings between the different

asset classes needing renewal as the following three
pie charts taken from the study clearly indicate.
Large swings in the renewal requirements of buildings and roads are very evident. The pie charts are an
all-council aggregate and even greater fluctuations
may occur in individual councils Figs. 46..
A fundamental reason why a corporate approach
is essential is that future renewal will not impact
each asset unit in the same way. Large swings in

5.2. Organisationalr management issues

5.2.1. Large period-to-period fluctuations between
asset groups
Councils do not only experience fluctuations in
period to period asset renewal, they also experience

Fig. 4.

P. Burns et al.r Automation in Construction 8 (1999) 689703

697

Fig. 5.

financing are very difficult to budget for without

well established plans that can predict changing needs
sufficiently ahead of time to enable the re-allocations
to take place.

the work is now outsourced, councils will have to

contend with discontent at the least! In practice large
shifts are very difficult to manage, because of the
silo nature of organisations. They are almost impossible to manage if they are not foreseen in time to
forewarn and prepare staff. Furthermore they are
almost impossible to manage if asset renewal is not
managed on a corporate level. Left to manage their
own funding, individual departments will find that
their renewal funding is alternately largely in credit
or in debit. When surpluses occur, it was found that
councils were unlikely to reserve them, instead the
temptation was to spend them on new assets, thus
exacerbating the renewal problem.

5.2.2. A corporate leel approach is essential

If monies are to be correctly allocated, this means
that over the fifteen year period the buildings departments are going to have to cut back on their previous
funding levels at the same time as the roads departments need to increase their funding, both in percentage and absolute terms. This presents councils with
serious organisational problems. Even where large
shifts of personnel are not required because much of

Fig. 6.

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P. Burns et al.r Automation in Construction 8 (1999) 689703

5.2.3. A sustainable leel of infrastructure

The study discovered that there was little by way
of strategic asset management planning in most
councils and sometimes little by way of benefit:cost
analysis of new capital acquisitions. Even councils
with very large near term renewal requirements were
found not to be using their current revenues to
prepare for their future asset liabilities but rather
continued to spend on new assets. The concept of a
sustainable level of infrastructure was not understood. Put simply, this means that if a council is
willing to spend A$100 million a year in capital
renewal and the average asset consumption rate is
2%, it can sustain a total asset stock of 50 times
A$100 million, or A$5 billionand no more. It is
suspected that some councils have already exceeded
their likely sustainable levels, given the rate revenues
that their ratepayers are willing to, or able to, provide.
5.2.4. Infrastructure and non-infrastructure assets
The Victorian Infrastructure Study looked only at
infrastructure assets roads, drains, footpaths, parks
and gardens and buildings. and not at other physical
assets such as furniture, equipment, plant and vehicles. The renewal of non-infrastructure assets needs
also to be considered by councils. These assets generally have much shorter economic lives and thus a
larger renewal impact from the same total replacement value. It was noticed that some councils were
rationalising their infrastructure assets, but then
spending the proceeds on non-infrastructure assets.
Although not recorded in the Infrastructure Study,
this would have had the effect of increasing councils future asset liabilities. Councils, in general, did
not have good institutional processes for the management of financial reserves and there was a tendency
to spend rather than to save for future need.
5.3. Accountingr financial issues
5.3.1. Traditional accounting does not meet the needs
of infrastructure assets
There has been a lot of debate in the accounting
literature concerning infrastructure and a lot of spurious reasons given for why it is, or is not, different
from non-infrastructure assets. 5 The results of the
5

Many of these are cited in Ref. w13x.

Infrastructure Study showed that infrastructure is

different in one very important respect, namely infrastructure is not allowed to run down to a zero or
salvage value before it is completely replaced. In
fact, infrastructure is hardly ever replaced, instead,
its service potential is continually renewed by the
replacement of individual items or components,
which allows the system to continue in service indefinitely.
Engineers know that insufficient maintenance can
dramatically reduce the life of an asset and, conversely, that good maintenance can ensure that service life potential is extended as far as possible
before renewal is eventually needed. Yet it was
found in the councils examined, that maintenance
was often the first item to be cut when the budget
was stressed. This was because maintenance showed
up in the accounts as a cost, yet the extended life
did not show up as a corresponding accrued benefit.
Depreciation, although based on an understanding
often not stated. of a given level of maintenance,
was not adjusted when this maintenance was not
forthcoming. This encouraged councils to undermaintain and thus unnecessarily bring forward eventual renewal.
It was noted that there is now a method of
depreciation for infrastructure assets that does take
maintenance into account. It is called Condition
Based Depreciation CBD. w14,15x. CBD starts from
the premise that an asset is a store of future service
potential and thus its value is the net present value of
that store of potential. Because infrastructure assets
are continuously renewed by the piecemeal replacement of components, as described above, it could be
said that the service potential is, in general, maintained indefinitely and that infrastructure assets thus
do not wear out or depreciate. In fact, it could
reasonably be argued that the ongoing renewal is
equivalent to depreciation. The CBD method is based
on a forward renewal plan that has been cost justified to maintain a given overall standard. It takes the
cost of maintaining the current standard of service
potential over that forward period as the amount in
lieu of deterioration or depreciation. Expressed as an
annuity over the period the result is the amount of
condition based depreciation.
Using the CBD depreciation method, councils that
cut back on maintenance to make a short term

P. Burns et al.r Automation in Construction 8 (1999) 689703

saving, will also have to record increased depreciation resulting from early renewal and a resultant
reduction in asset value.
The study pointed out that the Road Traffic Authority in New South Wales was known to use this
method for its road assets and that the Council of
Australian Governments was considering adopting
the method for all water agencies. New Zealand uses
a similar system for its council infrastructure depreciation. It was recommended that CBD, as well as
the asset management plans, which are the foundation for CBD, also be adopted by Victorian councils.
5.3.2. Distinguishing different capital expenditure
types
The second major accountingrfinance issue was
the way in which capital expenditure was recorded.
The study required councils to differentiate between
capital expenditure that was designed to renew existing services, called renewal capital; capital expenditure designed to extend the same level of services
enjoyed by existing ratepayers to newly developing
areas, called expansion capital; and capital expenditure designed to increase or upgrade the level of
services received by ratepayers called upgrade capital. Professional and technical staff may have a
different view of renewal, upgrade and expansion
expenditure but the study carefully used the above
definitions as the corporate perspective of capital
expenditure, because of the impacts shown in Table
2.
The impact of any amount of capital spending on
councils future renewal liability, as well as on its
maintenance and operations spending and on its revenues, depends on how capital spending is allocated
between these three categories.
The Infrastructure Study required councils to allocate their capital spending for the past two historic
years, the current budget year, and for two forward

699

planning years, according to the three categories

above. This caused the councils considerable difficulty, for their accounting records had not traditionally made these distinctions. The task was made
more difficult than it strictly needed to be by the fact
that most councils referred it to technical staff to
make the distinction, rather than to corporate staff.
From a technical point of view, the construction
of an asset may look much the same whether it is a
renewal of an existing service renewal. an increased service level to existing ratepayers upgrade. or an extension of a basic service level to
growth areas of council expansion.. The reason for
this is that it is the function the capital asset provides
that counts, not the technical work that needs to be
done to acquire it. As an example, consider the
construction of a new swimming pool. If it replaces
an old one providing the same level of service, that
would be renewal. If there had been no previous
pool, this would have represented an additional service, so it would be an upgrade of council services.
If it was extending swimming services to a new area
of council that had not previously had access, although other areas of council did, then it would be
expansion capital. Another example may be taken
from roads. A reseal is a renewal. If the road is
widened at the same time, then the cost of the road
widening part of the exercise would be upgrade. If
the seal was not a reseal but the seal on a new road
linking a new subdivision to the rest of the council
area, it would be expansion capital. Officers in the
field are not likely to record these distinctions, again
they are corporate level distinctions.
The reason why these distinctions are so important for corporate asset management is that the future
implications for expenditures and revenues are very
different for the different capital categories. For example, renewal of aging infrastructure will generally
decrease the level of maintenance required whereas

Table 2
Impact of capital expenditure categories on future maintenance, operations, revenue and renewal costs
Impactrcapital type

Maintenance impact

Operations impact

Revenue impact

Renewal impact

Renewal
Upgrade
Expansion

Decrease
Increase
Increase

May decrease
Increase or decrease
Increase

Nil
Nil
Increase

Nil
Increase
Increase

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P. Burns et al.r Automation in Construction 8 (1999) 689703

any type of growth asset expenditure, either extension or upgrade will increase it as well as increasing
the level of future renewal liabilities.
The differential impacts of the various capital
expenditure categories are summarised in Table 2.
5.4. Engineeringr technical issues
5.4.1. Condition assessments not sufficient
The Infrastructure Study found that for those
councils that had carried out condition assessments,
they formed the only information for future asset
planning. Condition assessments, however, are limited to near-term renewal requirements; they can
generally only discern those assets in need of attention within the next two to three years. Looking
further forward than that with a condition assessment
is not possible. For longer term projections, a modelling capacity is required as discussed in Section 3
Age based modelling process. Modelling renewal
requires the projection of the economic lives of
assets, as was carried out in the Infrastructure Study
over-ridden where necessary for the early years of
the projections where the more specific condition
information is available..
5.4.2. Economic lies and asset age data
Renewal modelling is necessary for strategic asset
planning and this requires sound knowledge of economic lives and the ages of assets. Many councils
had difficulty assessing the ages of their assets.
During the verification phase, as described in Section
4 above, one of the major tasks was to correlate the
age, economic life and condition of asset data provided by councils. Whilst few councils had directly
recorded the age of assets, many were able to make
reasonable estimates based on one of two methods.
Method One was to estimate residual life by a
condition assessment and then to use appropriate
economic lives to estimate the likely age. Method
Two was to use whatever knowledge was available
on the periods of growth and information on related
asset ages e.g., roads and drains were constructed at
the same time. to make educated guesses as to the
age profile of assets. More work can be done by both
methods to refine the information initially provided
by councils and one of the results of the study is that

councils can now see why it is important to get this

information right.
5.5. Community issues
5.5.1. Aoiding Inter-Generational Inequities
An annual asset consumption of A$488 million
compared with a current renewal expenditure of only
just over half of this amount, at A$266 million,
suggests that the current generation of Victorian
council ratepayers are not paying their way. That
is, they are consuming more assets than they are
currently paying for, which is generating a debt for
future generations. Admittedly, ratepayers are contributing to loan redemption but even with this, there
is still a shortfall between current asset usage and
current asset contributions. The size of the differential is such that it is unlikely that cost efficiencies
alone such as may be the result of competitive
tendering. will solve the problem. More radical
measures will be necessary, including a major re-examination of standards, rationalisation of assets and a
re-direction of some of the funds currently being
used for asset growth.
5.5.2. Community consultation
The question of re-examination of standards needs
to involve the whole community. Many of todays
standards were determined not by users but by service providers and professionals interested in doing
the best job possible whether or not this was
needed by service recipients. Service standards need
revision, with an eye to what needs to be traded
off. In Christchurch, New Zealand, for example, the
council thought that the community was deeply concerned about the condition of footpaths. The councils
estimate of what it would cost to replace and renew
faulty footpaths was high. So the community was
asked what they really wanted, given that there were
many possible things on which money could be
spent and only so many funds available. The community told the council that, whilst they were concerned about footpaths, their major concern was
general safety. If the council would only increase the
level of street lighting, not only would they be able
to negotiate the worst stretches of footpath in safety
but they would be protected against other dangers as

P. Burns et al.r Automation in Construction 8 (1999) 689703

well. The lighting solution cost the council less and

provided the community with more w16x. Such issues
are now being seriously addressed by Victorian
councils.

701

assets. One method of increasing utilisation used by

councils has been resource sharing whereby neighbouring councils agree to share an asset. Some councils are now sharing the development costs of new
assets, particularly new information technology assets.

6. Strategies for action

6.1. Better information

6.5. Life extension

The introduction of accrual accounting standards

in Australian councils and the need to value assets
for the balance sheet has resulted in many large scale
and costly data collection and information technology projects being initiated. Unfortunately, most of
the information collection has been geared towards
compliance rather than management. One of the
results of the Infrastructure Study has been to make
councils aware of this difference and to encourage
consideration of what information is management
worthy.

For the most part, councils have not given much

consideration to the ways and means of life extension. This is reflected in the fact that many of them
did not have good economic life information for
their assets. Earlier studies w59x had shown that, at
the State level of Government, many agencies were
replacing and renewing assets automatically, without a careful cost consideration. Nor was any effort
being made to defer the time of renewal.

6.2. Rationalisation

General guidelines have been available to councils for a number of years on how to evaluate
projects and carry out benefitcost analysis, but the
indications were that, even where the guidelines
were said to be in use, the project evaluation itself
needed to be vastly improved.

Many Victorian councils had already addressed

the issue of determining core assets, but this had
been done without knowing the cost consequences of
their decisions. It is now clear that much more needs
to be done to ensure that the benefits ratepayers
receiveand are willing to pay forare equal to, or
greater than the costs.
6.3. Standards need to be re-examined
Many rural and shire councils have a large number of heavily underutilised roads that absorb much
of council funding to maintain. Councils need to
reconsider the necessity for their road portfolio and
the standards at which they are maintained. This
problem has been exacerbated by the fact that councils often inherited these roads from a higher level
of government that constructed them during the boom
construction years but now do not wish to maintain
them..
6.4. Utilisation
Greater utilisation of existing assets is a way to
increase service without incurring the costs of more

6.6. More extensie benefit cost analysis

6.7. Use of alue management techniques

Value Management is a powerful tool for examining real need and generating a wide range of options
for examination. It is gradually coming into use at
the council level of government. It has been extensively used at the state level, particularly in New
South Wales.

7. Conclusions
The results of the study indicate that the initial
hypothesis that Local Government is likely to have
difficulty sustaining current infrastructure is likely to
be correct. Furthermore, the results are consistent
with a major expansion of infrastructure following
World War 2 and therefore the future replacement is
likely to be very uneven with a sharp peak in 10 to

702

P. Burns et al.r Automation in Construction 8 (1999) 689703

20 years for most Councils. This is partly because of

the long economic life and partly because the results
indicate that little or no replacement of infrastructure
has occurred since initial construction.
The generally poor quality of asset management
information reflects the past philosophy of build
and forget for infrastructure. The poor quality of
information and lack of detailed analysis indicates
that little analysis has occurred to measure the long
term consequences of a past public policy emphasising growth and expansion with no detailed long term
life cycle cost analysis.
The major findings and conclusions of the Study
are:
Infrastructure in Victorian Councils was calculated to be worth around A$23.3 billion in current
replacement terms, or approximately A$13,000
per household.
Infrastructure assets were being used up at an
average rate of just over 2% per annum.
The annual rate of renewal is rising rapidly as
more aged asset cohorts move into their renewal
phase and projected renewal is expected to more
than double over the next 20 years.
However, because councils are currently spending
more than the forecast amount on renewal, most
councils have up to ten years for improving their
asset planning before projected renewal equals
the current actual level.
Councils can use this planning time to reduce
their asset stocks and improve their maintenance
and management procedures.
Planning time is needed as asset renewal will
require large funding shifts between asset groups
within councils.
Condition assessments used to guide short term
maintenance programs are not sufficient for longer
term forward asset planning; for this purpose it is
necessary to use modelling techniques using projected lives.
The need for better information within councils
on age profiles, economic lives and replacement
costs was identified, as was the need for more
appropriate accounting measures that could be
used in asset management.
Failure to fully provide for current capital usage
was seen to contribute to inter-generational inequities as well as to put the infrastructure at risk.

The timing of renewal is a function of the economic life and this is, in turn, a function of the
asset standards that the community set. Costs can
be reduced by choosing asset standards more
appropriate to community requirements.
7.1. Continuing interest
The Victorian Grants Commission has already
established an interest in using the data for the
allocation of State grant funds to councils and is
arranging for an annual update of certain elements of
the information base. The Study has provided the
State Government with asset management performance indicators to add to its suite of indicators for
assessing council performance.
Other State Governments are interested in adopting the model and data collection procedures to
establish their own databases for future asset planning, management of renewal costs and proper
charging.
The study has emphasised that whilst lack of
compliance may be costly, compliance itself may be
even more costly if it diverts resources from management-worthy information to mere data collections
for external reporting. There is some indication, from
current professional literature w17x, that a changed
focus on internal management data is beginning to
take place. The Infrastructure Study is a good example of provision of information for both management
and accountability purposes.

References
w1x 53rd Report, Summary Report on Asset Replacement, Report
to Parliament by the South Australian Public Accounts Committee, Government Printer, Adelaide, 1987.
w2x P. Burns, Using Assets Effectively: Lessons from Australia
and New Zealand A report produced by the Local Government Management Board, London, 1998.
w3x P. Burns, D. Hope, J. Roorda, Facing the Renewal Challenge, A report to the Office of Local Government, the
Department of Infrastructure, Victoria, May 1998.
w4x J. Roorda, Capitalisation and Reporting of Road Assets in
Tasmania, in: G. Priestly Ed.., Auditor-General Special
Report No 26, Parliament of Tasmania, Government Printer,
Tasmania. ISBN 0 7246 7200-1, 1998.
w5x 44th Report. Housing Asset Replacement, Report to Parliament by the South Australian Public Accounts Committee,
Government Printer, Adelaide, 1986.

P. Burns et al.r Automation in Construction 8 (1999) 689703

w6x 41st Report. Water Supply and Sewerage Disposal Asset
Replacement, Report to Parliament by the South Australian
Public Accounts Committee, Government Printer, Adelaide,
1987.
w7x 48th Report. Highways Asset Replacement, Report to Parliament by the South Australian Public Accounts Committee,
Government Printer, Adelaide, 1986.
w8x 50th Report. Transport Asset Replacement, Report to Parliament by the South Australian Public Accounts Committee,
Government Printer, Adelaide, 1987.
w9x 47th Report. Hospitals Asset Replacement, Report to Parliament by the South Australian Public Accounts Committee,
Government Printer, Adelaide, 1986.
w10x 52nd Report. Education Schools and TAFE Colleges Asset
Replacement, Report to Parliament by the South Australian
Public Accounts Committee, Government Printer, Adelaide,
1987.
w11x Predicting Housing Maintenance Costs, National Public
Works Council Asset Management Series AM-1-93, Canberra, Note renewal capital is referred to as maintenance
in this report and the report on School Maintenance Costs,
1993.

703

w12x Predicting School Maintenance Costs National Public Works

Council Asset Management Series AM-2-93, Canberra.
w13x T.R. Rowles Ed.., Financial Reporting of Infrastructure and
Heritage Assets by Public Sector Entities, Australian Accounting Research Foundation. Discussion Paper Number 17.
Shannon Press, Victoria, 1992.
w14x P. Burns, Condition Based Depreciation for Infrastructure
Assets, Readings in Accounting Developments in the Public
Sector 199293. Australian Society of Certified Practicing
Accountants Public Sector Accounting Centre of Excellence,
Melbourne, 1993.
w15x D. Hope, Condition-Based Depreciation for Infrastructure
AssetsAn Accounting and Auditing Perspective, Proceedings of the National Committee for Rationalised Buildings,
Melbourne, 1995.
w16x Notes of interview of Christchurch City Council by Dr. P.
Burns, April 1997.
w17x J. Roorda, Managing Buildings for the Next Generation:
Asset Management Using Spatial Information Systems, in:
D.A. Langford, A. Retik Eds.., The Organisation and Management of Construction: Shaping theory and practice, Vol.
3, E&F Spon. ISBN 0 419 22250 2, 1996.