Integrating capital planning and capital asset accounting whereby governments develop long-term financial forecasts with a clear picture of the long-term infrastructure funding needs and opportunities for revenue capture in order to match service levels to operational planning and asset renewals needs.

1. E
ngineers and accountants have spilled a lot of ink
trying to put together a sustainable framework for
infrastructure management. Public finance and
economics are issues for every country. In Australia, the
entrenched political culture of municipal governance has made
it hard for decision-makers to effectively manage public assets.
Consultant Leo Gohier says the same type of political culture
exists in Canada.
“It’smostlyfuelledbytheshort-termviewofconstituentsandthe
relatively short term that officials are in office,” says Gohier. “This
makes it difficult for society as a whole to make proper decisions on
long-term infrastructure within a four-year context.”
While the situation in Australia is ever-changing, and by no
means disastrous, it can teach Canadian managers a lesson in
what not to do.
It’s important to take steps to avoid forcing future
generations to pay for services current taxpayers are
using—something reflected in the new accounting standards
emerging from the International Financial Reporting
Standards (IFRS) for the public sector. The IFRS states, “The
depreciation basis must reflect the pattern of consumption
of future economic benefits or service potential embodied
in the asset. Not all assets lose their service potential in a
Sometimes the fastest way from one
point to another is not a straight line.
LEARNING CURVE
By Silbert Barrett
The
Construction
Industry Voice
For more information please contact
RCCAO’s executive director, Andy Manahan, at
manahan@rccao.com or by calling 905-760-7777
RCCAO is an alliance composed of
management and labour groups that represent
all facets of the construction industry. Our goal
is to work in cooperation with governments
and related stakeholders to offer realistic
solutions to a variety of challenges. RCCAO
has commissioned a number of reports on
promoting greater infrastructure investment.
For more information,
please visit www.rccao.com.
The RCCAO is an alliance of:
• Heavy Construction Association of Toronto
• Greater Toronto Sewer and Watermain
Contractors Association
• Joint Residential Construction Council
• Residential Low-rise Forming Contractors
Association of Metro Toronto & Vicinity
• LIUNA Local 183
• Residential Carpentry Contractors Association
• Carpenters’ Union
• Ontario Concrete & Drain Contractors Association
• Toronto and Area Road Builders Association
RCCAO
25 North Rivermede Road, Unit 13
Vaughan, Ontario L4K 5V4
How 50 per cent
can equal 75 per cent
Accountants use the X-axis and straight-line depreciation while
engineers use the Y-axis and the degradation curve. Accountants
measure useful remaining life and engineers measure condition.
75%
50%Life
Condition
Degradation Curve
SL Depreciation
36 ReNew Canada September/October 2008 www.renewcanada.net

2. uniform (straight-line) way.” In fact,
very few assets, if any, actually physically
deteriorate in a straight line. (It should be
noted that we are only talking about the
physical life of an asset at this point. The
useful life of an asset does deteriorate in a
linear fashion, while the economic life of
an asset does not. It’s important to clearly
identify what “life” is being measured
and why.)
To avoid unfunded depreciation and
its ripple effect into future generations,
Canadian accountants need to embrace
asset management-based accounting for
infrastructure as practised in Australia
and, to a greater extent, New Zealand, with
accounting guidance from IFRS. Right
now, they’re treating major economic assets
like office furniture, when they really need
to apply decision-making tools like risk
analysis, data trending and forecasting,
discounted cash flow analysis and life-cycle
cost analysis. There’s a lack of accountability
and nowhere near enough corporatization
(not privatization) of key asset management
functions.They can also incorporate tools
like Private Finance Initiatives (PFIs),
another form of public-private partnerships
(P3s) where local governments use private
sector management and expertise to deliver
public infrastructure and other services.
The Australian Accounting Standard
Board (AASB 116) has adopted many of
these standards. But they’re not following
through properly. Audit results for 2006-
2007 out of local Australian governments,
particularly the Auditor General’s offices in
Queensland and Victoria, show that, in some
cases, the definition and methodology used
in valuing and depreciating infrastructure
assets were incorrect.
More importantly, no significant
supporting evidence is given to justify key
assumptions in the valuation processes, in
particular road pavements. However, it must
be recognized that this is a complex issue;
it’s difficult to use science to predict the
future since infrastructure assets are long
lived—no data can be collected on the future
because it hasn’t happened yet. That said,
conducting regular condition assessments
on major economic assets such roads, water
and sewers, and setting service levels will
give managers a better chance at achieving
sustainability. Those local Australian
governments that aren’t working with a
correct definition of “fair value” and are
applying an overly simplified straight-line
depreciation method to infrastructure assets
may not be collecting the correct data.
Leo Gohier says, “The counter-argument
is that the start-point and end-point are the
same, in that the start point is when the
asset is new and the end-point is when the
asset has no residual value.” He says that, in
terms of intergenerational fairness, it could
Those local Australian
governments that aren’t
working with a correct
definition of “fair value”
and are applying an
overly simplified straight-
line depreciation method
to infrastructure assets
may not be collecting the
correct data.
September/October 2008 ReNew Canada 37www.renewcanada.net

3. These are the author’s personal
opinions and do not reflect those of his
employer. Nor is the author making
inferences about how infrastructure
assets are managed. The author bases
his opinions on his involvement in the
pilot implementation of capital asset
accounting as a project manager for
the City of Hamilton and the Ontario
Benchmarking Initiatives (OMBI).
be argued that straight-line depreciation is
fine if the asset’s useful life is one generation
or less. “However,” adds Gohier, “that’s
rarely the case, so it is better to use a more
reasonable assumption than a straight line
for a deterioration curve.”
The stable condition state method—also
beingusedintheUnitedStates—isnotthemost
reliable estimate of future economic benefit or
service potential. In the absence of cash inflows
and an active market for assets like roads and
bridges, condition-based depreciation is the
best approach. It’s more likely to produce
a lower annual depreciation rate than the
simplified straight-line method in the early
stages in an asset’s life, while the depreciation
rate rapidly increases in the latter half of the
asset’s life. Also the depreciable amount is
reduced by the residual value which is easier
to forecast based on the asset condition state.
What’s needed is an asset consumption model
that can predict the effective age of successive
capital improvements on a declining balance
ratio (or factor) correlated to an assessed
condition index.
Since condition assessment is the only basis
from which to determine service potential, it
limits the risk of asset impairment when used
as a factor to discount current replacement
cost. It’s therefore a valuable tool for the public
sectorassettouseindeterminingtheircarrying
amounts for financial reporting. This will no
doubtcreateastrategiccontextinwhichtheroles
of both accountants and engineers are clearly
defined, each profession providing the checks
and balances needed to ensure sustainable
management of community infrastructure—
and delivering data to accurately inform and
educate policy makers.
Silbert Barrett is working as a research
analyst with the City of Toronto,
Transportation Services, while pursuing a
graduate degree in Engineering and Public
Policy(MEPP) at McMaster University.
38 ReNew Canada September/October 2008 www.renewcanada.net