Local Government Assets: Asset Management and Compliance

Tabled: 23 May 2019

1 Audit context

1.1 Background

One way in which local councils deliver services to the community is through effective use of their assets. Council assets typically include roads, bridges, footpaths, drains, libraries, town halls and recreational centres, and may include other specialised facilities such as airports and landfills. The 79 Victorian councils control more than $102.1 billion in assets and infrastructure, including more than $26.5 billion in roads and bridges and $8.7 billion in drains, as shown in Figure 1A.

Figure 1A
Victorian local government assets ($ billions), 2017–18

In addition to the information stipulated above the infograph also shows that $48.17 billion is in land, $10.57 billion is in building, plant and equipment, $8.73 billion is in drainage, $3.8 billion is in parks and footpaths, $3.55 billion is in other infrastructure assets and $0.81 billion is attributed to other.

Note: 'Other infrastructure assets' includes works in progress, waste management, recreational facilities, aerodromes, and car parks.
Note: 'Other' includes investment property and other intangible and financial assets.
Source: VAGO, based on council annual reports.

To ensure they realise maximum value from their assets, councils need to manage and utilise them effectively. Asset management is the systematic process that guides the planning, acquisition, operations, maintenance, and eventual replacement or disposal of assets. Its purpose is to ensure councils' assets allow them to deliver services that meet community standards and needs efficiently, while managing risks.

Effective asset management includes collecting appropriate information and using it to make decisions on planning and managing assets. The types of information for councils to collect include asset value, cost to operate and maintain, condition, maintenance, performance, risk, and utilisation.

1.2 Roles and responsibilities

Multiple government agencies and associations provide information and guidance to the local government sector to support councils' asset management activities.

Local Government Victoria

Local Government Victoria (LGV)—a division of the Department of Environment, Land, Water and Planning (DELWP)—provides advice and support to councils to improve their business and governance practices, including asset management. Its objectives include the development and implementation of evidence-based policy and projects that strengthen councils' capacity to meet the needs of Victorian communities.

Guidelines released to support better asset management practice include:

  • Local Government Asset Management: Better Practice Guide (2015)
  • Good Practice Guide for Asset Protection Permits in Local Government (2013)
  • Local Government Asset Investment Guidelines (2006)
  • Guidelines for Measuring and Reporting the Condition of Road Assets (2006)
  • Guidelines for Developing an Asset Management Policy, Strategy and Plan (2004)
  • Sustaining Local Assets: Local Government Asset Management Policy Statement (2003).
Municipal Association of Victoria

The Municipal Association of Victoria (MAV) runs the STEP Asset Management and Financial Sustainability Program, which it has designed to help councils improve their asset management processes with support from asset management consultants. The STEP program uses the National Asset Management Assessment Framework (NAMAF) (discussed in 1.4) as a basis for assessing councils' asset management performance.

Victoria Grants Commission

Victoria Grants Commission (VGC), supported by DELWP, allocates financial assistance grants from the Australian Government to Victorian councils.

It collects data on a range of asset-related matters, including capital assets and outlays, valuations, and road inventory expenditure.

1.3 Legislation

Section 140(2) of the Local Government Act 1989 (LG Act) requires councils to ensure they have adequate control over their assets. Further, section 136 of the LG Act requires councils to manage their financial risks prudently, having regard to economic circumstances, including the management and maintenance of assets. Unlike the Financial Management Act 1994, which does not apply to councils, there is no explicit obligation under the LG Act for councils to maintain an asset register.

The previous government introduced the Local Government Bill 2018 in the Parliament in May 2018. If enacted, it would have replaced the current LG Act. The Bill proposed a requirement for a 10‐year AMP as well as a 10‐year financial plan and a four‐year budget. These changes aimed to encourage councils to consider short, medium, and longer‐term approaches to asset management and resource planning. In the lead up to the 2018 state election, the Bill lapsed, leaving the LG Act as the legal framework for Victorian local government.

A range of applicable legislation covers aspects concerning council-owned assets. Some of these include:

  • Road Management Act 2004—local roads are one of the most significant asset classes that councils own, representing more than a quarter of the total value of Victorian council assets. Under the RM Act, councils must maintain a register of all public roads for which they are the coordinating road authority.
  • Occupational Health and Safety Act 2004—promotes improved standards for occupational health, safety, and welfare. It places obligations on councils to provide a safe working environment for their employees and to ensure that councils maintain their plant and equipment in a manner that is safe and fit for purpose.
  • Building Regulations 2018—as owners of public buildings, councils must keep records of maintenance checks, service and repair works for essential safety measures (such as fire alarms and emergency lighting).

1.4 Frameworks and guidance

Councils can access guidance on asset management and asset information from a range of sources.

National Asset Management Assessment Framework

Since 2010, Victorian councils have self-assessed against NAMAF, developed by the Australian Centre of Excellence for Local Government. The NAMAF consists of 11 key asset management elements, including councils' asset data and systems.

Asset Management Accountability Framework

The Department of Treasury and Finance's (DTF) Asset Management Accountability Framework (AMAF)—applicable to Victorian Government agencies—outlines requirements over four key stages of the asset management lifecycle, from planning, acquisition, operation, and maintenance, to disposal.

The AMAF, although not compulsory for Victorian councils, provides useful guidance on how councils can manage their asset information. The AMAF sets out that agencies must maintain asset information—both financial and non- financial—to support asset planning, and performance monitoring and reporting.

ISO 55000 Asset Management

The International Organization for Standardization's ISO 55000:2014 Asset Management (ISO 55000) provides a global guide to better practice in asset management, including asset information management.

ISO 55000 specifies that entities should align information requirements to asset management needs and risks, along with requirements for collecting, managing, evaluating, and ensuring consistency and availability of information for asset management decision-making.

ISO 55000 identifies several requirements for sound asset information. These are summarised in Figure 1B.

Figure 1B
Elements of sound asset information

Element

Description

Information governance

Define roles and responsibilities for managing asset information and processes to ensure asset information is suitable to achieve council objectives.

Information requirements

Identify the asset information needed to support:

  • asset management functions
  • asset management systems
  • the council's objectives
  • legal and regulatory requirements.

Better practice is to capture this in a strategy, including actions to improve the asset information over time.

Information management

Formalise processes for managing asset information. The processes should ensure that information is available and suitable for councils' needs. They will describe how councils collect, analyse and evaluate information. Asset information should have appropriate coverage and accuracy, and be consistent with other data held by councils.

Information systems

Ensure capability to store, manage, access, analyse and share information for asset management, planning and decision-making purposes. Councils make continual improvements for ongoing adequacy and effectiveness.

Source: VAGO, based on ISO 55001:2014.

Institute of Public Works Engineering Australasia

The Institute of Public Works Engineering Australasia has released materials since 1994 designed to support asset management processes and AMP development. These materials, which provide guidance on asset management information and its use in planning, include:

  • International Infrastructure Management Manual (IIMM)
  • Australian Infrastructure Financial Management Manual.

1.5 Using asset information

There are three key types of asset information, as shown in Figure 1C.

Figure 1C
Types of asset information

The three key types of asset information include basic asset information, asset lifecycle information and advanced asset information.

Source: VAGO.

Asset management and planning

Asset information, including the asset's condition, is essential to support a range of important council decisions. Councils should use their asset information in developing their long-term strategic and financial plans.

A 2016 Queensland Audit Office report found that, due to inaccurate and incomplete asset condition data, councils were undertaking asset renewals in an unstructured and reactive manner. The report noted that this limited their understanding of the level at which to set council rates and charges and how to optimise the life of the assets.

Similarly, a 2017 report by the Controller and Auditor-General of New Zealand highlighted that high-quality asset information improved councils' longer-term planning.

Figure 1D shows the Victorian local government sector's renewal gap—the difference between what a council spends on renewing, restoring or replacing existing assets and its depreciation costs—over the past four years.

Figure 1D
Asset renewal expenditure as percentage of depreciation, 2014–15 to 2017–18

Figure 1D displays the asset renewal expenditure as a percentage of depreciation, 2014-15 to 2017-18

Source: VAGO, based on LGV Local Government Performance Reporting Framework.

Interface councils refers to a group of 10 municipalities that form a ring around metropolitan Melbourne.

Due to considerable population growth, interface councils spend a much larger proportion of their budget on new assets compared with the other council cohorts, and less on asset renewal. Interface councils have the lowest ratio of asset renewals, at about 50 per cent, while metropolitan councils have improved in the past few years.

Natural disasters and asset information

The Australian Government provides funding to the states and territories for up to 75 per cent of their relief and recovery costs following a natural disaster.

Councils can receive financial support for costs associated with the restoration and replacement of essential public assets such as roads and bridges, public hospitals, schools, local government offices and stormwater infrastructure that are a direct result of damages due to a natural disaster.

On 1 November 2018, the DRFA replaced the former Natural Disaster Relief and Recovery Arrangements (NDRRA). Councils can submit claims for reimbursement to DTF, which administers the arrangements in Victoria.

Under the DRFA, the Australian Government will give funding only to restore an asset to its pre-disaster function. This means that if a natural disaster destroys an asset, the Australian Government will not cover the cost of improving it. The DRFA sets out the Essential Public Asset Function Framework, which state and local governments must use to decide the pre-disaster function of assets.

Under the DRFA, to make a claim for reimbursement for the restoration or replacement of an essential public asset, state and local governments must be able to provide supporting evidence of the pre-disaster condition and function of their assets. This needs comprehensive and up-to-date asset information management. Examples of this include asset information for condition, asset maintenance, and visual and geospatial data.

Councils also must prepare and maintain Municipal Emergency Management Plans under the Emergency Management Act 1986. Under this legislation, councils play a role in the provision of relief and recovery services and in supporting emergency response operations. Reliable asset information is important for implementing Municipal Emergency Management Plans.

Funding asset management

Under the LG Act, councils have the power to levy rates and charges to fund and deliver essential community infrastructure and services. The delivery of many of these services depends on asset performance.

Fair Go Rates System

In 2015, the Victorian Government introduced the Fair Go Rates System, which enables the Minister for Local Government to establish a yearly rate cap that limits councils' ability to increase their rates and municipal charges each year. This acts as a constraint on how councils have previously raised revenue. To increase rates beyond the cap, councils must apply to the Essential Services Commission.

Under section 185E of the LG Act, councils applying for a higher cap must demonstrate a range of factors, including:

  • how councils have considered the views of ratepayers and the community in proposing the higher cap
  • how the higher cap is an efficient use of council resources and is value for money
  • whether the council has considered re-prioritising proposed expenditure and alternative funding options and why those options are not adequate.

The Essential Services Commission has advised that councils seeking a higher rate cap must establish a long‐term funding need. The council needs to demonstrate this through a rigorous approach to long‐term financial planning, which can include:

  • service reviews—service planning and service prioritisation—leading to affordable services and service levels, informed by community engagement
  • asset management planning that identifies cost‐effective outlays and is based on properly considered and documented risk-management practices
  • rigorous and well‐documented financial strategies and practices.

Under the Fair Go Rates System, a key challenge for councils is to become more efficient while continuing to deliver services, maintain infrastructure, and renew assets that meet the needs of their communities.

The effectiveness of asset management processes, the quality and appropriateness of AIMS data and integration with council planning process are key elements to addressing this challenge.

Strategic and financial planning

The current LG Act requires councils to develop strategic and financial plans, including:

  • a four‐year council plan that outlines the council's strategic objectives and strategies for achieving these
  • a four‐year strategic resource plan that details the resources needed to achieve the council's strategic objectives
  • an annual budget that outlines how the council will deliver specific services and initiatives.

The quality of these plans is heavily dependent on the maturity of a council's asset management processes, and the quality of their asset information.

Councils should integrate asset management and planning with their strategic and financial planning processes. Ideally, the AMPs for essential infrastructure asset classes should outline the current asset management strategy, use asset information to detail current condition and risk, and make funding recommendations for both capital requirements and operational programs.

1.6 Why this audit is important

Our audits of councils' asset management practices over the past 15 years have found persistent weaknesses and recommended that councils improve their asset management frameworks and their related policies, strategies, and plans.

Our 2014 audit Asset Management and Maintenance by Councils found problems with councils' asset management frameworks and strategies, and that asset management information systems at councils were underdeveloped.

More recently, results of our 2016–17 financial audits of local government show that councils are experiencing a gradual decline in asset renewal and maintenance indicators and are forecasting reduced spending in this area.

We also found issues with councils' asset information management practice. In 2016–17, 29 councils identified $175.3 million in found assets—assets that they had not known about or previously recorded. Assets that are not recorded are not subject to regular maintenance and may continue to deteriorate, resulting in considerable long-term costs. We found that although councils have improved their asset registers through technological advances, including global positioning systems, councils need further work to reduce the number of found assets across the sector.

1.7 What this audit examined and how

In this audit, we looked at whether councils have comprehensive and accurate information about assets and whether councils use asset information to support effective evidence-based asset management and planning.

We did not look at large specialised assets—such as airports and landfills—as these are generally operated as separate business units and council asset teams do not manage them.

We audited a mix of councils to provide a view across the state and across council categories, as shown in Figure 1E.

Figure 1E
Audited councils and council categories

Audited Council

Council category

Colac Otway

Large shire

Darebin

Metropolitan

Hindmarsh

Small shire

Mildura

Regional city

Nillumbik

Interface

Source: VAGO.

The methods we adopted for this audit included:

  • discussions and formal interviews with staff at audited councils
  • assessment of councils' asset management systems and processes
  • assessment of the comprehensiveness and accuracy of the asset data
  • testing of actual council assets and plans against council asset registers and other asset data
  • case studies of asset information management practices at the audited councils.

The audit did not undertake a full review of councils' NAMAF self-assessments. However, we did test whether councils have accurately assessed themselves in areas that this audit examined, as discussed in section 3.5.

Audit assessment tools

Drawing on available better practice material, we developed a tool to assess councils' asset management practices against a scale of asset management maturity. We initially assessed councils in a one-day workshop with council staff, and agreed on scores against the maturity scale. We later adjusted these scores based on documentary evidence that the councils provided. This formed the basis of our audit findings, a summary of which is available in Appendix B.

We also developed a tool to assess the completeness of councils' asset information, as well their confidence in it. Councils self-assessed this using our tool. We then moderated these results based on further documentation and by reviewing a sample of assets and asset records. Section 2.5 outlines the results of this assessment.

We conducted our audit in accordance with section 15 of the Audit Act 1994 and the Australian Auditing and Assurance Standards. The cost of this audit was $320 000.

1.8 Report structure

This report is set out as follows:

  • Part 2 examines the information councils collect and maintain about their assets.
  • Part 3 examines how councils use that information to support effective evidence-based asset management and planning.

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