by David Ballantyne, Integrated Infrastructure Partner, PwC.
For a more sustainable future, demand for the ‘new’ needs to be balanced with better use of the ‘old’.
In the context of Australian infrastructure, maximising the useful life of aging assets will require an adequate proportion of infrastructure spending to be directed into preventative maintenance and life cycle replacements.
But how much will be enough?
Over the past decade, Australia’s infrastructure boom has seen significant capital investment, with public funding alone reaching approximately $470 billion, according to Infrastructure Partnerships Australia (IPA). Over the same period, the ABS estimates that $1,177 billion of engineering work has been carried out on Australian infrastructure across the public and private sectors.
Although high levels of expenditure are projected to continue for the next few years, with a forecast of $248 billion over the current four-year cycle to 2024/25, the sustainability of current spending is uncertain. COVID-19 has also disrupted projected infrastructure demands across some sectors.
Infrastructure Australia has already identified the need for governments to make better use of existing assets rather than simply funding additional supply. However, while funding and expenditure projections encompass asset growth and expansion, they often exclude funding for maintenance and renewals that will be vital to the viability of these assets.
This is again shown in the 2022-23 Federal Budget, which includes significant capital expenditure but lacks maintenance funding for new infrastructure assets.
Deferring maintenance activities or investing beneath industry benchmark levels comes back to bite later. According to the Building Owners and Managers Association, a lack of preventative maintenance shortens the asset life cycle by as much as a third, and every $1 saved in deferred maintenance results in $4 of additional capital expenditure later.
Although maintenance requirements vary among sectors, the percentage spend of asset replacement value (ARV) is often used as an industry comparison. Whilst this can vary from 1-4 per cent across different sectors, applying an average benchmark of 2 per cent ARV will require annual maintenance expenditure of $9.4 billion to maintain government assets built over the last decade at their optimal level.
Most of this will be considered operational expenditure (opex) for maintenance activities, but some elements will also require capital expenditure (capex) for life cycle replacement and renewal of asset components.
But, of course, most asset owners need to maintain a mix of older and new assets, not limited to the capital projects funded in the last 10 years. Within these mixed portfolios, there is growing evidence and industry knowledge that maintenance expenditure is often not meeting industry benchmarks.
Infrastructure Australia has reported that there is a maintenance funding backlog across infrastructure sectors due to a combination of historical underspending on preventative maintenance, short budgetary and funding cycles, a lack of data and incentives, and inadequate reporting.
Although state asset management policies are generally in line with ISO 55000, maintenance funding models are not consistent.
Funding that does not keep pace with benchmarks increases a range of risks, such as decreased service delivery, more unplanned and reactive maintenance, the development of a maintenance backlog, assets failing before their proposed design life, and, ultimately, asset write-downs and impacts on the balance sheet.
A recommended approach is to develop maintenance funding scenario analyses demonstrating the link between cost and risk, which can be considered at any stage in the asset life cycle. This approach enables asset owners to present the case for opex and capex funding requirements that are linked to their organisational risk appetite.
Asset owners and government agencies need to enhance their approaches to asset management in order to quantify and communicate the risks and impacts of not funding to benchmark levels, and demonstrate a case for funding that applies consistent terminology for maintenance.
To prevent misunderstandings, it is essential the industry applies shared definitions of concepts such as ‘maintenance activities’ (opex), ‘maintenance backlog’, ‘life cycle replacement’ (capex), ‘sustaining capital’ (capex) and ‘enhancing capital’ (capex).
Increased use of these concepts will better enable asset owners to provision future capital across both new projects and life cycle replacements for existing assets.
As infrastructure agencies mature in their approaches to asset management, more data will become available to further evaluate expenditure benchmarks and the relationship between limited funding and deteriorating asset condition.
With increased asset information and condition data, there are great opportunities for asset investment programs across specific asset classes to generate higher cost-benefit ratios and promote asset renewals and refurbishments.
Often, small projects that enhance efficiency have higher returns on investment than larger capital projects. Of the projects submitted to Infrastructure Australia for assessment between 2016 and 2018, those with the highest benefit-to-cost ratios were also the cheapest.
For Australia’s older assets to continue to be productive, safe, reliable and fit to deliver the services communities need, we recommend that asset owners and agencies commit 1 per cent to 4 per cent of ARV per annum for maintenance activities, and continue to develop sophisticated, risk-based and data-driven approaches to asset management.