3.2 Document a Capital Management Plan
A Capital Management Plan (CMP) provides an overarching document as part of the strategic asset management framework that records how an entity can allocate scarce resources to its asset base and make strategic asset decisions to support program delivery. It is a key mechanism by which management practically implements the entity's strategic goals for the asset portfolio at an individual asset level.
The CMP may be defined as a comprehensive and structured approach to the long-term management of an entity's assets portfolio to deliver services efficiently and effectively.
The CMP can only really be developed after an entity has set the strategic goals for the asset portfolio, has in place an asset management strategy, and has implemented appropriate governance measures. For practical purposes the CMP is a data repository that details both recent actual asset transaction histories as well as how the strategic goals will be put in place over the medium to long term. As an example, and depending on individual circumstances, the medium to long term may be defined as five years, 10 years or even the next 15 years in some instances. For certain entities this may extend even further in the case of specialist assets as outlined previously in Case Study 3.1.
Figure 3.7: Developing a Capital Management Plan
The process for developing a CMP is diagrammatically represented in Figure 3.7 above. The four steps in the process are:
- Project the asset portfolio. An entity, in developing a CMP, would project its asset register over a multi- year period to develop base line estimates.
- Revise projections for strategic intent. The projected base line estimates are then adjusted to reflect the entity's strategic goals for its asset portfolio, which are outlined in the asset management strategy.
- Determine the funding source. Ascertain if the assets to be acquired are new or replacement assets and if they are to be funded from a New Policy Proposal, the Departmental Capital Budget (DCB) or internal cash reserves.
- Quality assurance. Quality assure the information underlying the CMP. This is undertaken through capital investment triggers, analysis of high-value assets and an integrity check to the external estimates.
An example of this process is illustrated in Section 4.8.
a) Project the asset portfolio
The purpose of an entity projecting forward its asset register is to gain an understanding of how its current asset portfolio meets the optimal asset mix that is required to achieve its program delivery objectives of efficiency and effectiveness. The information gained by undertaking this gap analysis highlights deficiencies between the existing asset portfolio and the entity’s strategic goals, as detailed in an asset management strategy.
The primary building block for developing an entity's CMP is its asset register. Projected base line estimates are developed, based on an assumption of constant chain of replacement, and by using the useful life of individual assets. Where the projections do not accord with the entity's strategic asset goals they are removed from the base line estimates. For example, an asset that will not be replaced at the end of its useful life will not be included in the projections beyond its date of decommissioning.
For the purpose of illustrating how an entity could develop and adjust its projected base line estimates as a part of a CMP, a worked example is provided as follows.
Case Study 3.2: Development of projected base line estimates
Figure 3.8 below diagrammatically demonstrates the constant chain of replacement assumption for an item of scientific equipment that was acquired in the budget year as a result of a Cabinet decision.
This scientific equipment is valued at $210 000 and has a useful life of three years with annual operating costs of $40 000 and maintenance expenses of $20 000. The program will continue for a six-year period after which time it will lapse.
Using the constant chain of replacement assumption, new scientific equipment will be acquired in the initial year of acquisition and then replaced after three years. Accordingly, the asset would be purchased initially in Budget Year and then again in forward estimate year (FE) 3 resulting in two cash outlays of $210 000 in the respective years. The written-down value of the asset decreases each year with the accumulated depreciation and is recorded in the Balance Sheet. The depreciation expense, operational and maintenance costs are recorded in the Income Statement.
Figure 3.8: Developing projected base line asset estimates
b) Revise projections for strategic intent
Projected base line asset estimates developed from the asset register need to be adjusted to reflect the entity's strategic goals for its asset portfolio. These adjusted estimates form the data cube underlying a CMP and identify if the acquisitions are for new or replacement assets and their associated funding source.
Figure 3.9: Data cube underlying a Capital Management Plan
The entity's strategic goals, as previously discussed in Part 2, will be documented in the asset management strategy, which integrates the approach to planning over an asset's life-cycle, and comprises acquisition, disposal, operations and maintenance plans. These plans are analysed and used to consider any funding constraints that may exist in replacing assets, and then used to adjust the base line estimates so that the CMP reflects the strategic intent of the entity.
Applying this adjustment process to the Case Study example would result in the following changes:
Case Study 3.2 (cont'd): Adjusted Base line estimates
If it was found the item of scientific equipment would not be fit for purpose as a replacement asset, then the entity's Asset Management Strategy would need to detail this in its acquisition plan.
The acquisition plan has identified that new technology will be available in FE3 for $150 000 (rather than the amount paid for the existing asset that was acquired for $210 000 in the budget year) with a useful life of three years, annual operating costs of $30 000 and maintenance expenses of $15 000. If the executive have approved this alternative replacement asset then it would form the basis of an adjustment to the projected base line estimates. Accordingly, the replacement asset would be purchased in FE3 and the above adjustments would be included in the CMP.
Figure 3.10: Adjusting projected base line asset estimates to formulate a Capital Management Plan
c) Determine the funding source
Each asset to be acquired in the adjusted base line asset estimates is flagged as to whether it is a new asset or a replacement asset and if it is to be funded from either a New Policy Proposal, or the Departmental Capital Budget (DCB)/ internal cash reserves.3
Changes to the appropriations framework introduced by the Government in 2010, under Operation Sunlight, reduce the range of expenses that are funded in the year that the expense is incurred, and instead provide the appropriation when payments are expected to be made. Under the new arrangements:
- ongoing funding for depreciation, amortisation and make-good expenses will be replaced by DCB for departmental and administered assets for which funding for depreciation expenses was previously provided. This will enable entities to meet the costs associated with the replacement of minor assets, valued at $10 million or less or to fund the annual capital component of finance lease charges, as well as costs that are eligible to be capitalised.
- the funding of make-good expenses will only be provided at the time an entity is required to return assets to their (near) original state prior to relinquishing use of those assets.
These changes apply to FMA Act entities in the general government sector that receive funding from annual appropriations directly or via a special account and the collecting institutions (such as the National Gallery of Australia). Commonwealth Authorities and Companies Act bodies that are not designated Collecting Institutions are excluded from the new arrangement.
The DCB allows FMA Act entities to meet the costs associated with replacement of minor assets (assets valued at $10 million or less) and costs that are eligible to be capitalised. For assets valued at more than $10 million, FMA Act entities are required to come forward with a New Policy Proposal consistent with the internally funded threshold in the Budget Process Operational Rules.
Determining whether new or replacement assets
The following definitions provide a basis for determining if an acquisition constitutes a new or replacement asset, in order to ascertain the appropriate funding source.
Table 3.1: Determining if an acquisition constitutes a new or replacement asset
|Asset type||Asset definition|
|New asset||A new asset is one that creates, or changes, existing policy, for example by expanding existing service capacity.*|
A replacement asset is one that replaces an existing asset or is expenditure on an existing asset that is to be capitalised, such as conservation, restoration, preservation or renovation where the outcome is either to extend the life of the asset or enhance the asset in some way. Different types of expenditure that could be capitalised include:
* Further guidance on what is included from time to time within this definition is available from the Department of Finance and Deregulation's annual Budget Process Operational Rules or Finance Minsters Orders (FMO).
Determining the asset funding source
The decision matrix in Figure 3.11 below can be used to establish the primary funding source of new or replacement assets.
The matrix shows that, for an FMA Act entity, only replacement assets of $10 million dollars or less are to be funded from the DCB/internal reserves. All other acquisitions are funded through a New Policy Proposal. Further guidance on the definition of what expenditure constitutes a New Policy Proposal, or funding from internal reserves are contained in the Department of Finance and Deregulation's annual Budget Process Operational Rules.
Figure 3.11: Asset funding matrix
Case Study 3.2 (cont'd): Determining the funding source
As noted previously the scientific equipment was acquired in the budget year through a New Policy Proposal. The equipment is subsequently replaced in FE3 when the asset reaches the end of its useful life and is funded through the DCB. The differing source of funding for these assets is reflected below in Table 3.2.
Table 3.2: Determining the funding source
|Year||New asset $'000||Replacement asset $'000|
|$10m or less||Greater than $10m|
|Funding source||New Policy Proposal||Departmental capital budget||New Policy Proposal|
d) Quality assurance
The final step in developing a CMP is to undertake quality assurance on the adjusted estimates that populate the data cube (Figure 3.12). This will assist the executive in its understanding of the alignment between the CMP and the strategic goals that have been outlined for the asset portfolio. The process of applying quality assurance to a CMP is reflected in the steps below.
Figure 3.12: Quality-assuring the data cube
Consideration of capital investment triggers
The CMP can be used by an entity as an early warning system regarding future capital investment decisions. By using the replacement date of assets less a predetermined lead time period as a trigger point, an entity can ensure that the replacement of specified assets has been considered in relation to the strategic goals for the asset portfolio. The predetermined lead time period would be developed by the entity and would be dependent on the age, complexity and likely funding source of the asset.
Analysis of high-value assets
For entities with large asset holdings it may not be cost effective to quality assure individual assets or even asset groups. In such circumstances it may be more efficient for entities to take a risk-based approach to quality assurance. One method for doing this is use of the Pareto Principle, or the 80/20 Rule as it is sometimes called. The 80/20 Rule means that most effects (80 percent) come from a few causes (20 percent). This approach can be directly applied to quality assuring the assets of an entity. As many of the asset management practices will be common for an entity, quality assuring a few high-value assets will help determine the quality of the data cube.
Integrity check against approved estimates
A CMP can provide an integrity check with respect to the approved external estimates that relate to non- financial assets. The funding sources may not exceed what has been approved by the Department of Finance and Deregulation for the DCB and by the Australian Government for New Policy Proposals. If the CMP exceeds these approved amounts, it needs to be referred back to the executive team for further consideration to allow re- profiling of asset requirements or reassessment of the entity's funding prioritisation. This will enable the strategic goals to be revisited so the asset management strategy and CMP are maintained within approved funding limits.
The final step in the development of a CMP is for the executive to sign-off that it is in accordance with the strategic goals of the asset portfolio and within approved funding limits set for the DCB and for New Policy Proposals requiring approval as part of the budget process by the Australian Government.
An example of how one entity, the Civil Aviation Safety Authority, has integrated the principles of a CMP with its internal governance framework is outlined below in Case Study 3.3.
The role of the Strategic Priorities Committee is to propose the priorities for CASA's strategic program. It performs a key governance role overseeing the management and performance of the program of work. The Capital Budget Plan enables decision- makers to establish priorities and planning for all capital including new, replacement and operational components.
Case study 3.3: Civil Aviation Safety Authority's (CASA) Capital Budget Plan
CASA's Capital Budget Plan enables it to consolidate the initiatives, objectives and strategies underlying the current and future management of its asset portfolio. The Capital Budget Plan is linked into CASA's executive leadership group's decision-making processes through the Strategic Priorities Committee which ensures that available capital funding and resources are directed towards initiatives that best align with CASA's strategic goals. Ultimately, CASA uses the Capital Budget Plan as a tool for the prioritisation of resources in the current and forward years to ensure asset decisions are prioritised against proposed projects and bids for increased operating expenditure. The Capital Budget Plan enables decision-makers to establish priorities and planning for all capital including new, replacement and operational components.
The Capital Budget Plan has a 15-year outlook as it has been found necessary to consider a longer-term view for monitoring and benchmarking asset performance, as well as funding of major refurbishment and replacements.
Figure 3.13: CASA's Capital Budget Plan
The Capital Budget Plan provides CASA with the ability to strategically manage their asset portfolio through providing:
- a forecasting model that links capital projections to objectives set by the Chief Executive;
- capital projects;
- the ability to prioritise new capital acquisitions according to entity objectives;
- an integrated budget statement of comprehensive income, balance sheet and cash flow projections that are used in developing robust published estimates (the Capital Budget Plan directly populates the non-financial asset estimates (including depreciation) in the Portfolio Budget Statements and Portfolio Additional Estimate Statements);
- scenario analysis, funding forecasts, life-cycle costing for capital replacements and new initiatives;
- optimising service delivery through asset performance indicators; and
- strengthening corporate governance around asset management, including internal business case assessments.
- This decision will be determined by reference to the Department of Finance and Deregulation’s annual Budget Process Operational Rules.