Words by: Penny Burns and Jeff Roorda, www.TalkingInfrastructure.com
We are on the brink of a new phase in asset management.
To understand what the Third Asset Management Revolution is, why it is important, and where we are going, it is necessary to understand the First Asset Management Revolution (where we were) and the Second Asset Management Revolution (where we are now).
The First Asset Management Revolution: Data collection
Asset management was first introduced in the late 1980s to 1990s. Up until this time, the word was ‘maintenance’ and it focused on asset functionality. It was purely technical and centered on the individual asset. ‘Asset management’ introduced the notion of combining engineering, financial and planning decisions with respect to assets, for the purpose of better services or corporate outcomes. It was centered on the asset portfolio.
It all started when we became concerned that we were not spending enough on maintenance.
As early as the 1970s, studies in the US, such as The Decaying American Campus: A Ticking Time Bomb described in detail the infrastructure decay problems being experienced by tertiary education institutions. Then, there were the well-documented infrastructure maintenance problems of New York in the mid 1970s where stories started to emerge of pieces of the Manhattan Bridge rusting and falling into the water and potholes in New York’s cement roads being covered over with metal plates, causing havoc for the city’s bus service.
This culminated in a major federal study of infrastructure requirements in the US, called Fragile Foundations. The size of the problem caused a stir in government and professional circles, but it did not lead to action, because it wasn’t ‘action oriented’. The only solution to come out of the report was to spend more money. But governments then – as now – did not want to spend the many billions, now trillions, of dollars the report suggested. At around the same time, the Australian Federal Government produced the Langmore Report, arguing for large amounts to be spent on infrastructure. Few remember those reports today. The US study merged the need to repair existing infrastructure with wish lists of expansion and improvement, but there was no indication of where the extra funds were to be spent, on what, and with what results. Nor was there any indication of how the costs could be managed. The Australian Langmore Report was similarly vague and general and spoke only of the generalised benefits of infrastructure spending. Neither were actionable.
Then in 1986–1987, the South Australian Parliamentary Public Accounts Committee tabled in Parliament eight reports on infrastructure asset renewal. These reports differed from other studies in several ways: they were not vague and general but specific and detailed; the reports modelled the infrastructure holdings of the major infrastructure owning agencies in the state and all the figures were supplied; the recommendations were based on analysis of the data and the current financial, engineering and planning management practices of the agencies; and importantly, they were not ‘spend more money’, but rather ‘better management’ recommendations.
It called for better management information, and the reports detailed the information required and provided tools for using the data once collected in the form of the, now universal, lifecycle cost and renewal models.
It is hard now, in 2018, to imagine the situation that applied 30 years ago. It was not only agencies with buried assets that did not know where their assets were. Many councils found they had been maintaining assets that weren’t theirs, and failing to maintain assets that were, simply because they didn’t know. The key questions that everyone was asking then were “What do we have?”, “Where is it?”, “What condition is it in?”, “How old is it?”, “What is its economic life?”, and “What is its value?” – basic questions.
The First Asset Management Revolution was a revolution in data.
The Second Asset Management Revolution: Strategic asset management
The First Asset Management Revolution was driven from the top, by the Auditors-General across the country calling for asset registers, as well as by the interest of CEOs who gathered in large numbers at information breakfasts to hear what was possible for better management of their agencies. It was also given great impetus by a change in the public sector accounting practices: the move from cash to accrual accounting. The first move in this direction was the Exposure Draft 50, issued for Local Government in 1989. Because local government engineers were quick to realise how the requirement of their agencies to document all their assets could be deployed to assist the introduction of asset management, it is often thought that the move to accrual accounting preceded asset management. It was, in fact, the reverse. Accrual accounting was adopted by the Public Sector Standards Board only after they recognised its importance in achieving the goals of asset management.
The First Asset Management Revolution was led by external effects such as the requirement for asset registers, and the introduction of accrual accounting. By contrast, The Second Asset Management Revolution, (the move to strategic asset management, going beyond merely reporting data to using it to improve organisational performance) was almost entirely internal and generated by practitioners themselves. It coincided with the establishment of asset management groups and associations. Because of gradual takeup it is difficult to put a date on the beginning of the second revolution, but personally we place it around the turn of this century, from about 2000 on, although some may have started a little earlier.
Another difference is that the first revolution was driven by an increasing recognition of the problems of deferred maintenance and the increasing need for infrastructure renewal – that is, a physical requirement. The second revolution was supported by a major administrative change. This was the government push to outsourcing, corporitisation and privatisation. Back in the mid-1980s, all major infrastructure assets were both owned and managed by the public sector and the notion was ‘stewardship’. One would often hear the term ‘good stewardship’ being applied to the management of assets. But stewardship implies taking care of the asset. Throughout the 1990s and into the 21st Century, we have seen a movement away from stewardship, which is a passive approach, to a more active managerial approach. We have also seen a move to private sector ownership and management. These two movements are not unrelated.
The key words that have dominated strategic asset management have been sustainability and risk management.
Sustainability was originally used with reference to environmental sustainability, where the focus was to avoid degradation of the environment. It was easily transposed to asset management, for we had the tools to address it. Life-cycle costing models enabled agencies to ensure the continuing functioning of their asset portfolios, such as avoiding degradation. But to guarantee we did not ensure today’s portfolios at the expense of greater damage later, practitioners developed more and more rigorous tools of risk management. Measures of sustainability and risk management are now enshrined in the ISO 55000 series.
Both of these measures draw on information that can be gleaned from the asset information system. That is, they relate to our existing configurations of assets. The next asset management revolution is going to require the most serious mind shift yet.
The history of asset management has been one of addition and continuous improvement.
Before considering the coming third revolution, notice that maintenance did not cease to exist after we introduced asset management. On the contrary; maintenance has continued to develop, to refine and develop its tools and is today even more relevant than it was, and this is because of its importance to asset management.
Similarly, with the move to strategic asset management, the need for data collection ( the focus of the first revolution) did not cease. It, too, has become even more important. As strategists realised the relevance of data to their performance, the quality of data collection has improved.
Whatever is coming next in the Third Asset Management Revolution, we can be confident that maintenance, data collection and strategic management of existing portfolios will continue to be important, and, in fact, will grow in importance. A new revolution does not displace what precedes it – it changes and amplifies it.
With that reassurance, let us consider what this third revolution needs to accomplish.
The Third Asset Management Revolution: Infrastructure decision making
This third revolution will be characterised by:
Future orientation
As asset managers, we have often prided ourselves on being future-oriented, because our life-cycle cost models extend for the next 10, 20 or more years. But these models only show us how to sustain what we have. They are not designed to determine new infrastructure decisions when those decisions have to take account of radical change.
Complexity
Then again, our current tools have enabled us to deal with cost efficiency but, increasingly the demand, going forward, is for tools to manage effectiveness. This is, inevitably, going to mean an increase in the number of players. When maintenance was the focus, it was sufficient for decisions to be made by engineers alone. As we moved into asset management, we had to include the requirements of accountants and then of planners. But, social and environmental effectiveness are going to greatly widen the necessary pool of players.
Adaptability
Sustainability has, in practice, been interpreted as longevity and our life-cycle cost models have enabled us to make the right decisions. But now we need to consider the ability of our infrastructure to adapt to changes not yet foreseen (and thus not built into our models). This means asking different questions. If we wish to avoid adding to the great pile of ‘stranded assets’ already in existence, we need to ask ourselves questions such as what assets should we absolutely not build if we want our infrastructure to be future friendly? (This is the subject of a Talking Infrastructure workshop to be held in Sydney mid-November.)
Uncertainty
The key to future success is going to be the ability to manage under uncertainty. Our probabilistic risk management tools will not suffice here. Scenario development, once left to planners and futurologists, is now going to become part of the asset manager’s toolbox for coping with the future.
Tackling these issues is what makes the Third Asset Management Revolution so very exciting. At the moment, most of the tools that we will eventually use are still to be developed. The information required for these tools is yet to be discovered. When asset management was introduced, it was leading maintenance practitioners who took up the challenge; when strategic asset management developed, it was leading first revolution practitioners. It will be leading strategic asset managers (along with other disciplines currently new to the field) that will recognise and address the new challenges now involved.
The big picture
Asset management arrived roughly in the middle of the second industrial revolution. Jeremy Rifkin, author of The Third Industrial Revolution, looks at what is next to come.
“In the end, the economy may no longer be controlled by a small group of centralised, global, vertically integrated companies. The first and second industrial revolution infrastructures were centralised, proprietary, and vertically scaled because the communication, energy, and transport technologies worked best that way,” Rifkin writes.
The same may be said for public sector infrastructure.
“Fortunately, the third industrial revolution is based on post-carbon technology. Moreover, it’s inclined toward a highly diverse and distributed infrastructure. The more diverse, redundant, and distributed the networks and systems are, the more resilient the infrastructure is, and the less vulnerable it is to cybercrime, cyberterrorism, or natural disasters from climate change.”
There certainly are exciting challenges ahead.
This story was first published in the April edition of inspire magazine. Read the original here.