AWA Asset Management Special Interest Group

(AMSIG)

Demystifying Financial
Management
24th April 2001

Presentation Outline
Part 1 - Financial Management (Chris Adam)
Overview of Financial Management
Coming to terms with Financial Management:
The Big picture.
Investment analysis.

Part 2 - Depreciation of Infrastructure Assets (Dr John Sing)

Overview and Options
How is Noosa Council dealing with the issue

What is Financial Management?

Financial management is the process of balancing the
commercial needs of the business against the technical
requirements and service standards:
Service
Stds
Technical
Reqts

Financial
M.ment
Business Activities (eg, O&M, Capex)

Service standards drive capital works planning (new and replacement) which
then have to be tempered by funding restrictions.

Fin. M.ment Concepts

Financial Management incorporates the following:
Financial Planning - Establishing a Strategic Direction

Infrastructure/CapX planning
Pricing Strategy (OpX Revenue/Expenses)
Links to Service Standards
Link to Corporate Plan
Better Decision Making/Corporate Management

Financial Management - Control Mechanisms

Modeling future Revenue and Expenses (Cap X and O&M)

Improved Performance Measurement
Internal Control (Budgeting)
Auditing
Costing

Why is Financial Management

Important?
Increasing pressure on efficiency and
financial accountability.
Increasing awareness of problems and
future liabilities (ie, limited funds and aging
infrastructure).
Water Service Providers are now
measured in terms of financial (not just
technical) performance.

What is Driving the Process?

Statutory/regulatory
Statutory/regulatory NCP/QCA/NCC/COAG
NCP/QCA/NCC/COAG
requirements

Water
requirements
WaterAct
Act2000
2000
Owners
Owners
Customers
Customers

Competitors
Competitors

Increased
Increasedemphasis
emphasison
on
commercial
issues
commercial issues

Increased
Increasedexpectations
expectationsofofanan
efficient/quality
efficient/qualityservice
service
Increased
globalisation
Increased globalisationpressure
pressure
on
downstream
industries
on downstream industries
Benchmarking
Benchmarking
Competition
Competitionfor
forcapital
capitalfunds
funds

Your
Your
Water
Water
Services
Services
Business
Business

What do we want to get out of

Financial Management?
Act as a Long Range Radar to identify potential
problems.
Demonstrate that the business will remain viable in
the short and long term.
Keep the process SIMPLE without compromising the
integrity of the results.
Get the technical and financial functions working
together.
Customer requirements are met (value for money).
Managers have financial information to allow them to
manage their business more efficiently.

Coming to Terms with Financial

Management
Financial management in an organisational sense:
How do we make our business more effective?
Statement of Cashflow
Operating Statement
Balance Sheet

Financial management at the coal face:

Investment Analysis
Where do we spend our limited $

Financial Management - the Big

Picture
Statement of Cashflows:
Are we cashflow positive? (ie, do we have enough money to pay
bills as and when they fall due?)
Are significant revenue increases required to fund capital works?

Operating Statement:
Does the organisation generate enough revenue to meet its long
term requirements (ie, does it sufficiently cover depreciation)?
Is the organisation profitable?

Balance Sheet:
Does the net value of assets increase over time?
Are our borrowing's manageable?

4,617.0

6,355.4

50

Movement in year

2,269.6

408.8

1,148.6

790.0

1,738.4

1,865.7

1999/00

2000/01

2001/2

2002/3

2003/4

2004/5

51

Balance C/F

2,269.6

2,678.4

3,827.0

4,617.0

6,355.4

8,221.1

$'000

$'000

$'000

$'000

$'000

$'000

949.2

1,911.9

2,876.3

2,876.3

2,876.3

2,876.3

0.0

0.0

0.0

0.0

0.0

0.0

1.01
1.00
1.00
1.00
1.00
280 $
283 $
283 $
283 $
283 $
283
3,574.3
3,512.9
3,530.4
3,548.1
3,565.8
3,583.7
19.7
20.0
0.0
0.0
0.0
0.0
0
12.5
12.75
13.005
13.2651 13.530402
31.0
17.6
28.0
4.0
0.0
0.0
1,314.4
646.0
40.0
40.0
40.0
40.0
75.0
75.0
75.0
75.0
75.0
75.0
326.9
503.1
327.0
327.0
327.0
327.0
5,621.3
5,069.9
4,296.0
4,289.9
4,303.9
4,322.0
883.0
589.0
0.0
568.4
25.4
949.2
0.0
3,015.0
2,606.3

974.0
650.0
0.0
606.7
40.3
962.7
1,530.0
4,763.7
306.2

974.0
650.0
0.0
606.7
53.5
967.9

974.0
650.0
0.0
606.7
72.1
980.8

108.6
650.0
0.0
606.7
86.7
993.3

120.6
650.0
0.0
606.7
96.2
1,002.3

3,252.1
1,043.9

3,283.6
1,006.3

2,445.3
1,858.6

2,475.8
1,846.2

0.0

APPROPRIATIONS
To Capital Account:
17

(Revenue used for capital purposes)

0.0

0.0

0.0

0.0

0.0

18

(Capital subsidies & grants)

(31.0)

(17.6)

(28.0)

(4.0)

0.0

0.0

19

(Donated assets)

(75.0)

(75.0)

(75.0)

(75.0)

(75.0)

(75.0)

20

Unfunded depreciation

0.0

0.0

0.0

0.0

0.0

0.0

21

(Repayment of internal loans)

22

Total transfer to Capital Account

0.0

0.0

0.0

0.0

0.0

0.0

(106.0)

(92.6)

(103.0)

(79.0)

(75.0)

(75.0)

To Reserve Accounts:
23

(Constrained Works Reserve re infrastructure charges)

24

(Other reserve)

25

26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45

SURPLUS / (DEFICIENCY)

CAPITAL FUNDING DECISIONS.

New capital works constructed
Donated assets
Total
Funded by:
1. Subsidies & grants in relation to these works
2. Constrained Works Reserve
3. Donated assets
4. Other reserves for the purpose AND CASH
5. Loans raised
6. Internal loans
7. Revenue from current year used for capital purposes
TOTAL
Replacement capital works. (see definition)
Loan redemption's
Total
Funded by:
1. Subsidies & grants in relation to these works
2. Disposal proceeds from non-current assets
3. Depreciation funds from current & previous years
4. Constrained Works Reserve
5. Other reserves for the purpose AND CASH
6. Loans raised

0.0

0.0

0.0

0.0

0.0

0.0

2,500.3

213.6

940.9

927.3

1,783.6

1,771.2

1,378.3
(75.0)
1,303.3

720.0
(75.0)
645.0

261.0
(75.0)
186.0

645.0
(75.0)
570.0

622.0
(75.0)
547.0

450.0
(75.0)
375.0

31.0
1,314.4
75.0
0.0
254.5
0.0
0.0
1,674.9
270.0
21.0
291.0

17.6
646.0
75.0
(144.1)
125.5
0.0
0.0
720.0
380.0
36.5
416.5

28.0
40.0
75.0
86.4
31.6
0.0
0.0
261.0
820.0
52.9
872.9

4.0
40.0
75.0
412.8
113.2
0.0
0.0
645.0
830.0
76.3
906.3

0.0
40.0
75.0
397.6
109.4
0.0
0.0
622.0
720.0
99.9
819.9

0.0
40.0
75.0
260.0
75.0
0.0
0.0
450.0
700.0
122.8
822.8

0.0
0.0
0.0
0.0
237.0
54.0

0.0
0.0
0.0
0.0
340.5
76.0

0.0
0.0
3.5
0.0
705.4
164.0

0.0
0.0
980.8
0.0
(240.5)
166.0

0.0
0.0
993.3
0.0
(317.4)
144.0

0.0
0.0
1,002.3
0.0
(319.5)
140.0

Balance B/F

RECONCILIATION OF CASH
52

Unspent depreciation funds

0.0

Deduct internal loans

53

Constrained Works Reserve

(1,314.4)

(1,960.4)

(2,000.4)

(2,040.4)

(2,080.4)

(2,120.4)

54

Other reserves

(237.0)

(433.5)

(1,225.3)

(1,397.5)

(1,477.7)

(1,418.2)

55

Total should balance to cash

(602.2)

(482.0)

(349.3)

(561.6)

(681.8)

(662.3)

BALANCE SHEET. As at end of year.

56
57
57A

Non-current assets at current replacement cost

Accumulated depreciation
Net book value

64,898.0
31,600.0
33,298.0

64,898.0
31,600.0
33,298.0

65,543.0
32,182.7
33,360.3

65,729.0
32,330.6
33,398.4

66,299.0
32,481.4
33,817.6

66,846.0
32,754.7
34,091.3

67,221.0
33,057.0
34,164.0

58
59
60
61
62

Cash & investments

Internal loans (Asset)
( Internal loans (Liability) )
Net other current assets/(current liabilities)
Total assets less current liabilities

0.0
0.0
0.0
0.0
33,298.0

2,269.6
0.0
0.0
0.0
35,567.6

2,678.4
0.0
0.0
0.0
36,038.7

3,827.0
0.0
0.0
0.0
37,225.3

4,617.0
0.0
0.0
0.0
38,434.5

6,355.4
0.0
0.0
0.0
40,446.7

8,221.1
0.0
0.0
0.0
42,385.1

63
64
65
66
67
68
69

Capital account
Accumulated surplus /(deficiency)
Constrained Works Reserve
Other reserves

29,968.2
0.0
0.0
0.0
29,968.2
0.0
29,968.2

30,074.2
2,500.3
(1,314.4)
(237.0)
31,023.0
287.4
31,310.5

30,507.3
2,713.8
(1,960.4)
(433.5)
30,827.3
452.4
31,279.6

31,315.7
3,654.7
(2,000.4)
(1,225.3)
31,744.8
595.1
32,339.9

31,154.2
4,582.0
(2,040.4)
(1,397.5)
32,298.2
798.0
33,096.3

30,911.8
6,365.6
(2,080.4)
(1,477.7)
33,719.2
951.6
34,670.8

30,667.3
8,136.8
(2,120.4)
(1,418.2)
35,265.4
1,043.8
36,309.2

Equity
Loans from external lenders
Total equity and loans

DATA AND PERFORMANCEINDICATORS

1999/00

2000/01

2001/2

2002/3

2003/4

2004/5

$'000

$'000

$'000

$'000

$'000

$'000

Projections for:
Population
Percentage of population served
Number of assessments
Volume of water supplied (ML/annum)

26,200

26,331

26,463

26,595

26,728

26,862

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

12,360

12,422

12,484

12,546

12,609

12,672

4,234

4,255

4,276

4,298

4,319

4,341

Performance indicators:
Average rates & charges per assessment

$289

$283

$283

$283

$283

$283

Average rates & charges per head of population served

$136

$133

$133

$133

$133

$133

Volume per assessment (kL/annum)

342.6

342.6

342.6

342.6

342.6

342.6

Cost per ML

$712

$1,120

$760

$764

$566

$570

Administration costs per assessment

Rate of return on physical assets (%)

$46
6.7%

$49
-0.2%

$49
2.0%

$48
1.9%

$48
4.4%

$48
4.4%

Balance Sheet

16

3,827.0

K ey Performance Indicators

12
13
14
15

Total Revenue
EXPENDITURE
Operating costs
Maintenance
TMP initiatives (not included elsewhere)
Administration
Loan interest
Depreciation
Other operating expenses (specify by way of note)
Total Expenditure
OPERATING SURPLUS/(DEFICIENCY)

2,678.4

O perating Statement

10
11

2,269.6

Appropriation Statement

1
2
3
4
9

OPERATIONS
REVENUE
Base Charge per Property
Rates and charges
Interest earned
Non-capital grants & subsidies
Capital subsidies & grants
Infrastructure charges
Donated assets
Other revenue

0.0

Capital F unding Statement

Line

CASH AND INVESTMENTS

49

Cashflow

Water Service Provider 1 Financial Model

WATER PROGRAM

Myths and Misconceptions

Level of Accuracy:
Model are models.
Any forward forecasts are estimates only, not an exact science.
Look for general trends, not precise answers.

Depreciation Funding:
It is not necessary to fully fund depreciation in order to have a
viable business (in terms of cashflow). (Dr John Sing to
explain)

Taxation Equivalents and Dividend Payments:

Larger (commercial) WSPs need to take into account the
payment of taxation equivalents and dividends to the parent
group (typically Council).
Payment of dividends is discretionary - a dividend payout ratio
of 0% is acceptable.

strategic/corporate objectives
OrganisationWide Issues

business level strategy

(system performance)

System-Wide Issues

Facilities

functional level strategy

(capital and maintenance activity)

Individual Assets and

Components

Investment Analysis - Making a

Contribution to the Business
How do we decide where to spend the limited
Capital Works Budget?
Discounted Cash Flow Analysis (NPV)
Risk Issues:
Commercial risk (what if planned development does
not eventuate?)
Social/technical risk (what if we DO NOT do these
works?)

Investment Analysis (Multicriteria) Models

WATER MAIN REPLACEMENT ASSESSMENT MODEL
WATER MAIN INFRASTRUCTURE DETAILS

Age (years)
Material (Steel or other)
Number of Previous Failures
Years since Previous Failure
Operating Pressure (kPa)
Useful Life (years)
Estimated Residual Life (years)
Condition rating
Augmentation proposed in next 10 yrs?
Approx No. of Customers Supplied by Main

Likelihood
(Probability)
Age of Main
No. of Previous Failures per 100 m
Condition of Main
Operating Pressure
Traffic Loading
Soil Characteristics

Consequence
(if failure occurs)
No. of Customers Supplied
Social/Political
Workplace & Public Safety
Commercial (i.e lost revenue)
Environmental
Legislation/Legal

COST ANALYSIS RESULTS

:
:
:
:
:
:

:
:
:
:
:
:
:
:
:

Ipswich WSZ 3
East St
Node 7 to Node 8
450
500
1
1 Easy access
2 Average access constraints
3 Difficult access constraints
101
Steel
3
2
350
100
-1
1
No
8000

Rating
Weight
0=Low
0=Low
5=High
5=High
5
5
3
5
1
3
2
3
3
2
4
2
TOTAL PROBABILITY SCORE

Probability
Score
(RxW)
25
15
3
6
6
8
63

Rating
Weight
Consequence
0=Low
0=Low
Score
5=High
5=High
(RxW)
5
4
20
3
4
12
3
3
9
2
3
6
4
3
12
3
3
9
TOTAL CONSEQUENCE SCORE
68
DECISION MATRIX ZONE
POSSIBILITY x MATRIX SCORE

MODEL RECOMMENDATION

OPTION

Capital

NPV

NPV

Cost

5%

10%

-$33,868.25

-$22,990.57

$152,630.00

-$106,610.29

-$134,480.02

Do Nothing
Replace Main

DECISION MATRIX ZONES

1.

= Replace main

2.

= Replace main if NPV (5%) of replacement > NPV (5%) for "Do Nothing"

3.

= Replace main if NPV (10%) of replacement > NPV (10%) for "Do Nothing"

4.

= Do nothing

Decision Matrix
100

80

Consequence

Water Supply Zone

Street
Main
Diameter (mm)
Length (m)
Locality Code

60

40

20

4284

20

40

60

Probability

Replace Main
COMMENTS:

80

100

Summary
Financial Management should be:
SIMPLE
Focus on CASHFLOW
Look for General Direction (not exact)

Investment Analysis Should consider:

How will this project add value to the organisation?
BUT take a wider frame of reference than just $

Questions?

DEPRECIATION OF
INFRASTRUCTURE ASSETS
& Resource Allocation Decision
Making

Dr John Sing
Director Corporate Services
Noosa Council

OBJECTIVES
General:
To determine the purpose of accounting for
the depreciation of IAs

OBJECTIVES Cont
Specific:
1) Review fin. accounting requirements
2) Consider the need to depreciate
3) Develop a framework for IA depreciation
4) Examine the conflict/problem faced by
accountants, engineers & asset managers
5) Offer a solution to the conflict/problem

1) FIN. ACCOUNTING REQUIREMENTS

External requirements

IA Accounting
Pol. & Proc.

Internal requirements

IA Accounting
Information

Resource providers
Recipients of G&S
Osight/review gps
Management

2) DEPRECIATION
REQUIREMENT(S)
Mandatory
Aust Accounting standards
Prescribe traditional methods
Systematic allocation of cost concept
Relies on:
estimating useful life & residual
value of the IA
Prescribe backward looking focus

MANDATORY REQUIREMENTS
Issue

Financial Accounting

Requirement

AAS4

Method

S/L, R/B, U/U, S/D

Concept

Allocation of Cost

IAS DEFINED
According to supply & demand
characteristics ie:
a) composite asset where life extended by
replacement of components and;
b) demand for the service makes it desirable

Implies maintenance of infrastructure to

ensure service provision

ALTERNATIVE PURPOSE(S) FOR

CHARGING DEPRECIATION
Asset management
Full cost pricing & recovery
Therefore essential to determine:
The funding required to support
renewal/reinstatement of any loss in service
potential?

MANAGEMENT REQUIREMENTS
Adopting a method that:
Tracks more closely the pattern of
consumption
Views depreciation as a measure of
consumption
Is arguably more relevant and reliable for
allocation decisions
Is forward looking

$000s

Estimated Renewals Expenditure

4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500

19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13

Ren.
Exp
Annu

ALTERNATIVE APPROACH
Function of advanced asset management program
Based on life-cycle cost analysis
Not just a wish list for maintenance
ie Produce an optimised list of renewal activities
Subject to engineering audit

3) IA DEPRECIATION
FRAMEWORK
PURPOSE
Requirement

Objective

CONCEPT
Consumption Allocation of
or loss in
cost
service pot.
Cell 2
Cell 1

Full Cost Pricing

#

Internal
Asset Man.

Cell 3
External

AAS4

Cell 4
#

4) CONFLICT/PROBLEM
Fin. Accounting requires accounting for
what has happened in the past
Man. Accounting requires forecasting what
is to happen in the future
Therefore:
Determining 2 depreciation measures on
the one IA

5) WHAT WE NEED
A tool that enables the 2 measures to be
determined (easily)
Use this tool as the basis for comparing
backward measure with forward measure
(ie. S/L V Renewals annuity)
The ability to objectively determine the
amount of depreciation to be
funded/unfunded.

NSC Example
AIM 21 is a microsoft based application
that provides Noosa Council with a unique
solution for dealing with this conflict.

Overview
AIM 21 solution:
Based on asset class and catchment basis
Draws engineering and accounting
information together
Produces a comparison of book deprn. with
renewal annuity based concept
Enables level of funding/unfunding of depn.
to be objectively determined

Asset Enquiry Graphical

Conclusion
Given that:
depn. means different things to different economic
decision makers

As accountants we need to be mindful of these

differences
Expected to produce relevant and reliable
information
Ultimate aim is to ensure IAs are appropriately: Managed in an operational sense and;
Monitored in a financial sense.

Questions and further discussion

TTWSB Draft Financial Plan

Inputs Sheet
N a vig a tio n P a ne l
Go to Fina ncial Plan

Go to Graphs

Go to Cap X Prog ram

Go to Lo ans Sche dule

Go to "T ax"

"Solve" Butto n
Ca se Be ing M o d e lle d

Pop ula tion Gro wth

Me dium

High = 1; Med ium = 2; Low =3

Consumptio n Growth Rate

Me dium

High = 1; Med ium = 2; Low =3

G lo b a l Inp uts
CPI (Indexat ion)

W a te r D e ma nd Inp uts
CP I

2%

Current Equivalent Pop ulat ion (EP) - Townsville

St art ing Year for Analy sis

Y E AR

2000/01

Current Equivalent Pop ulat ion (EP) - Townsville

Weight ed Average Cost of Cap it al

W ACC

9.0%

T _LO W P O P 1 -4

0%

0%

0%

D E R AT IO

100%

T _M E D P O P 1 -4

1.5%

1.5%

1.5%

T _H IG H P O P 1-4

3%

3%

3%

Forecast Debt /Equity Rat io

Dividend Pay out Rat io (Years 5 onward)

LO AN BAL

Interest on Current Loans

LO AN IN T

Current Loan T erm (Years)

65%

DPR

Current Loan Balance

90,413

T OW N S P OP

2000-05

2005-10

2010-15

8,782,284
6.40%

Current Equivalent Pop ulat ion (EP) - Townsville

Current Equivalent Pop ulat ion (EP) - Townsville

50,000

T hP O P

T ERM

11

N E W IN T E R E S T

8.00%

T h_LO W P O P 1- 4

1%

1%

1%

Loan T erm (New Loans)

N EW T ER M

20

T h_M E D P O P 1- 4

2.5%

2.5%

2.5%

Subsidy on New Works (DAM )

S U BS ID Y 1

50%

T h_ H IG H P O P 1 -4

3%

3%

3%

S U BS ID Y

40%

Interest on NEW Loans

Subsidy on New Works (OT HER)

Subsidy on Rep lacement Works
Interest on Cash and Invest mant s (Revenue)
% Dep reciation Funded
Tot al Lengt h of M ains (km)

S U BS ID Y O LD

2005-10

2010-15

0%

IN T E R E S T R E V

3%

D E P R E CIAT IO N

100%

Assumed Consump t ionm (L/EP/day ) - T ownsville

S U R P LU S

3%

T AX1

36%

Effect ive Tax Rat e (2000-01)

T AX2

34%

Effect ive Tax Rat e (2001- )

T AX3

30%

2000-05
600

LO W G R O 1 -4
-

M AIN S

Effect ive Tax Rat e (1999-2000)

Interest on surp lus cash

2000-05

912

M E D G R O 1- 4

1000

H IG H G R O 1 -4
Assumed Consump t ionm (L/EP/day ) - T huringowa

2000-05
500

T hLO W G R O 1 -4

588

2005-10

2010-15

600

600

870

870

1000

1000

2005-10

2010-15

500

500

625

625

750

750

750

Ye ar

0
Yr 2000

0
2001-05

1
2005-10

Forecast Growth in Charges

NA

T hM E D G R O 1- 4
T hH IG H G R O 1 -4
V a ria b le Inp uts

Results
Internal rate of return (20 yea rs)

5.0%

0.0%

0.0%

2.0%

2.0%

2.0%

3.0%

3.0%

12.7%
Growt h in Ot her Revenue (rent als et c)
Growt h in Communit y Service Obligations

10.39392

Growt h in Exp enses

0.0%
NA
5.6%