Building & Infrastructure Renewal Ratio

[Sherrill]

Following the recent additon to the GPFRs of the building and infrastructure ratio and the inclusion of 2 asset management ratios in the draft IPART Report into Local Government staff are struggling to determine exactly what constitutes capital renewal expenditure. Council has been using the IPWEA definitions, but this has led to producing a ratio result well under 50% and as low as sub-10%.

The code defines renewals as being replacement of existing assets with equivalent capacity or performance as opposed to the acquisition of new assets. It would appear that a a lot of times when an asset is replaced it is a combination of renewal and upgrade.

Examples for comment.
Council has an existing timber bridge but replaces it with a new concrete bridge
Council resheets/reseals an existing gravel/sealed road
Council puts a bitumen pavement over an existing gravel road.

What definition are other Councils using for renewal?

I also have an issue with coming up with a definition of infrastructure - the Collins dictionary defines it as a "the stock of fixed capital equipment in country, including factories, roads, schools, etc considered as a determinant of economic growth".

So what exactly is Council infrastructure?

[ken]

Some specific examples in the Code regarding Capital Renewals versus Capital Upgrades would (I agree) certainly help!!

Maybe a few submissions to the DLG in this regard pre the release of the Draft Code Update 18 might get things moving in the right direction.

If you promise to make a submission, I will too!!

I am not sure but I think I can recollect (but cannot find a copy) of a DLG Data Return Councils fill out each year re. Roads!! (It may have been the Grants Commission Return). Can anyone help with my memory!?

Regardless of who it was, in it I am sure I saw some good definitions re. Renewals versus New Capital Expenditure. Maybe you can ask your Engineering area about any annual DLG or Grants Commission Data Return on roads and take a look at the definitions therein.

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Anyway, in our humble opinion, Capital Renewal Expenditure is:

(i) expenditure incurred on existing assets that either;

(ii)(a) returns the asset to its original life (or replenishes the asset somewhat to its original life) or

(ii)(b) returns it to its existing service capacity/potential.

The contra to this is of course that that any increase to the assets original life or any increase in who or how many can use the asset beyond it’s original capacity/potential would have to be broken up between part Renewal and part Upgrade.

Capital Renewal Expenditure could be seen as being similar to the concept of current replacement cost under AIFRS.

Current Replacement Cost is defined in AASB 136 (Aus 32.2) as:

“The current replacement cost of an asset is its cost measured by reference to the lowest cost at which the gross future economic benefits of that asset could currently be obtained in the normal course of business”

Local Gov. - Victoria in it’s publication “Guidelines for Measuring and Reporting the condition of Road Assets” (May 2006) states in relation to Current Replacement Cost that it is:

“The cost is measured by reference to the lowest cost at which the gross future economic benefits could be obtained in the normal course of business or the minimum it would cost, to replace the existing asset with a technologically modern equivalent new asset (not a second hand one) with the same economic benefits (gross service potential) allowing for any differences in the quantity and quality of output and in operating costs”.

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Regarding your specific examples:

1. Council has an existing timber bridge but replaces it with a new concrete bridge

>> I would argue this is 100% Capital Renewal Exp. as it is replacing an existing asset and returning the same service potential, assuming it is the same width, no. of lanes & can carry the same types of vehicles. <<

2. Council resheets/reseals an existing gravel/sealed road

>>The re-sheet of a Gravel Road would (I think) fall under Capital Renewal - it is work on an existing asset and it retains the assets original service potential. <<

>>The re-seal of a Sealed Road would also (I think) fall under Capital Renewal - it is work on an existing asset and it retains the assets original service potential. <<

3. Council puts a bitumen pavement over an existing gravel road.

>>Where Council expended money that changed a Gravel Road to a Sealed Road, the Exp. should probably be split up between Capital Renewal & Capital Upgrade. The difference between what a re-sheet of the gravel road would have cost and the total exp. Council incurred to convert the gravel road to a sealed road would be the Upgrade Component. The Renewal Component would have been what Council would have spent to just do the Re-Sheet. Both amounts of course should add up to the total actual expenditure. <<

The Jeff Roorda & Associates report on Infrastructure commissioned by the NSW Local Govt. Financial Sustainability Inquiry indicated that certain Capex could & should be split up between Renewal & Upgrade under certain situations:

“Capital Renewal Expenditure

Expenditure on an existing asset which increases asset service potential of an existing asset. This may to the same or a lower level than initially provided (partial renewal). It is periodically required expenditure, relatively large (i.e. material) in value compared with the value of the asset or asset component being renewed.

As it reinstates existing service potential, it has no impact on revenue but may reduce future operating and maintenance expenditure if completed at the optimum time (e.g. resurfacing a sealed road, resheeting an unsealed road, replacing a drainage pipeline with pipes of the same capacity, relining of an existing drainage pipeline, replacing bridge decking or resurfacing an oval).

Where renewal works include a significant upgrade, the renewal and upgrade components should be separately identified (e.g. if a swimming pool with a replacement cost of $3M is replaced with a $15M leisure centre, then $3M is identified as renewal and $12M as upgrade)”.

Another way to look at the categorisation of Upgrade versus Renewal expenditure on assets is to compare (a) the current replacement cost of the asset with (b) the actual cost incurred by council on the asset. One assumes that if (b) > (a), there must be some element of Upgrade involved which must be excluded from that component of the expenditure which is classified as Renewal.

In terms of the term Infrastructure, the Jeff Roorda & Associates report on Infrastructure commissioned by the NSW Local Govt. Financial Sustainability Inquiry defines Infrastructure as:

“Infrastructure Assets

These are typically large, interconnected networks of or portfolios of composite assets such as roads, drainage and recreational facilities. They are generally comprised of components and sub-components that are usually renewed or replaced individually to continue to provide the required level of service from the network. These assets are generally long lived, are fixed in place and often have no market value”.