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Infrastructure Management
Have asset management models compromised
effective asset maintenance?
Different asset management philosophies and models were developed in the 1990s, but the basic approach to their application has been the same in different market sectors. This approach may provide a long-term focus for managing assets. However, it often fails to recognise the crucial relationship between capital investment associated with maintenance on the one hand, and operational maintenance costs on the other. This paper asks –
(a) how should maintenance be dealt with as part of an asset management model?
(b) what is the relationship between operating costs and capital investment that maximises financial benefits while optimising asset performance?
MANAGEMENT MODELS
Outsourcing of maintenance grew significantly in the 1990s. Facilities management and construction companies started to take on asset maintenance contracts. At the same time asset management developed as a philosophy for the client organisations, particularly those managing infrastructure assets. For the first time in many organisations, the subject of maintenance became a boardroom topic. The attractiveness of delivering immediate financial benefits through outsourcing maintenance now needed to be matched by an understanding of how assets performed.
Asset management models help clarify the roles and responsibilities associated with firstly owning assets, secondly investing in them, and thirdly operating and maintaining them.
A typical hierarchical asset management model is shown in Figure 1.
This model sets out the four core roles that have responsibility for the assets, and the relationships between those roles.
The Asset Owner: is responsible for securing the operational expenditure requirements (OPEX) and both capital maintenance and strategic investment requirements (CAPEX), so that the Asset Manager can deliver the long-term performance required by the Asset Owner. Capital maintenance includes large repairs outside the scope of operational expenditure and minor improvement work.
The Asset Manager: must set the necessary operational performance criteria so that the Asset Operator has performance objectives and targets within the OPEX allocation. The Asset Manager is also responsible for delivering the necessary CAPEX investment to meet the long term performance objectives.
The Asset Operator: must organise his resources to meet the operational performance objectives and targets. These will apply both to the Operator’s activities and to work carried out on the assets delivered by Service Providers.
The Service Provider: delivers services to the Asset Operator through vehicles such as service level agreements (SLAs) or other forms of contractual arrangement.
Maintenance and asset management
When organisations try to fit the maintenance activity into the asset management model, they are usually determining whether it should be performed by the Asset Operator or by a Service Provider. There is a general failure to recognise that the maintenance activity is also a fundamental element of the Asset Manager’s responsibility and therefore bridges three of the core elements of the Four-Tier Model, namely: Asset Manager, Asset Operator and Service Provider. Inevitably the following questions then arise –
? Who is accountable for maintenance? Is it the Asset Manager or the Asset Operator?
? Who should hold the maintenance budget?
? Who should manage Capital Maintenance?
Many organisations fail to grasp these questions. Instead they treat maintenance simply as an OPEX activity delivered as a service to the Asset Operator. The critical part played by Capital Maintenance in improving asset performance throughout the predicted life of the asset is thereby overlooked or ignored.
In some operations it is wholly appropriate that maintenance is a pure service provision. Where the risk for asset performance sits wholly with the Asset Operator, it is his responsibility to determine the maintenance regime. Typically, these arrangements are appropriate where the quality of operation of the asset is crucial to asset performance and longevity. Elsewhere, the assets are effectively passive; there is no direct operational input that affects the performance of assets. Asset performance is wholly dependant on how well the assets are maintained, both with operational expenditure and capital maintenance funding.
Take the railways as an example. Is the performance of the infrastructure assets down to how well they are operated or how well they are maintained? Most of the railway infrastructure - including the network’s bridges and structures, the rail itself including the points, and the signalling systems - is effectively passive. Operational decision-making has little influence on the performance of the assets. How well the network is maintained is the main determinant of performance.
Re-modelling asset management
The Four-Tier Asset Management Model fails to represent maintenance and presents a picture of the Asset Manager as the custodian of the assets. Those responsible for running the assets are merely depicted as the Asset Operators, usually with ongoing short term operational performance objectives and targets to meet. These operational targets are often in conflict with maintenance needs, and generally give the operator little or no interest in the long term resilience of the assets and their overall performance.
How often, no matter what sector of industry you may work in, do Production or Operations show an active interest in the long-term benefits of planned preventive maintenance? There still is, in many sectors, an ‘if it ain’t broke don’t fix it’ mentality born of a drive to maximise productive output. The Four-Tier Asset Management Model reinforces the thinking of the Asset Operator to continue operation without regard to the consequences of failure, as ownership of maintenance is not their responsibility.
The only way to get the Production/Operations function to start taking ownership of the long-term performance of the assets is to remove the Asset Manager role and integrate it into the Production/Operations function. Production/Operations then have full responsibility not just for the ongoing performance of the assets but for the whole life performance. No longer should they be judged simply on performance and financial targets associated with OPEX; they must now take a longer term view matching performance criteria with Capital Maintenance investment. This approach ensures that pro-active initiatives such as planned preventive maintenance are taken on board by Production/Operations functions to deliver longer term operational performance and cost benefits.
The asset management model must now be redesigned to reflect this changing role. There is no longer a requirement for a separate role of Asset Operator. In effect, the Production/Operations function is taking on the role of the Asset Manager and so becomes the custodian of the assets throughout their predicted life. Further, they are responsible for managing all externally delivered activities - usually those related to maintenance - that impact on the assets. Their service provision arrangements must reflect the risk and accountability that the Service Providers impart when working on the assets.
The remainder of the Asset Manager’s responsibility; namely the development of existing assets beyond their predicted life, together with new investment, forms a separate function reporting to the Asset Owner. Asset development and investment focuses on delivery of capital projects, whether for infrastructure enhancement or renewal, or new build. The result is the Infrastructure Management Model as shown in Figure 2.
FINANCIAL APPROACH TO MAINTENANCE
The financial distinction between OPEX and CAPEX has driven how organisations structure themselves as well as how they present their accounts. Investment is viewed as financing new requirements and not as a vital requirement for cost-effective operation of existing assets. Therefore, although maintenance has a foot in both camps, it is usually placed in the ‘OPEX’ part of the organisation. The result? – the CAPEX element of maintenance gets neglected. CAPEX, however, however has a major impact on long-term OPEX – a point which tends to be overlooked by financial functions.
The need to drive down OPEX continuously, to deliver ‘efficiencies’ causes many organisations to bend their investment rules so as to appear to achieve their OPEX objectives. I have found that in a number of infrastructure organisations a significant and growing proportion of CAPEX is in reality the capitalisation of unpredicted, costly failures. What is really OPEX appears in the accounts as CAPEX. In some market sectors, and particularly in regulated businesses, there is a drive to maximise potential CAPEX in order to create sufficient resources to cope with unpredicted operating failure.
I have worked with a number of organisations which are struggling to deliver their predicted capital programme because of pressures on the CAPEX budget arising from unpredicted failures. It is now clear to me that a much more strategic approach needs to be taken to the financial management of existing assets. It is no longer appropriate to squeeze the OPEX funds to meet short-term shareholder expectations and expect CAPEX to bail out when there are crises.
I propose the following as key features of an improved approach to infrastructure management —
? Those responsible for managing the assets on a day to day basis should also be responsible for the long term resilience of the assets within their predicted life.
? Appropriate funding must be provided in order that CAPEX is targeted for maintenance investment purposes. Planned and strategic shut down of plant to carry out refurbishment is a CAPEX activity and not routine OPEX.
? CAPEX should be separated out into capital maintenance (CAPMAINT) and strategic investment (CAPSTRAT), with CAPMAINT being managed and controlled by the Production/Operations function alongside their OPEX budget. The key components of CAPMAINT and CAPSTRAT are shown in Figure 3.
Further explanation follows using the water industry’s water supply and sewerage networks as examples.
CAPMAINT is made up of two key elements –
1. Failure capitalisation involving the repair/replacement of failed assets falling outside the OPEX maintenance criteria. These are generally unpredictable failures requiring significant expenditure that has not been budgeted for. A capital block allocation is made to cover for such eventualities usually based on historical experience. Typical CAPMAINT expenditure would involve repairs to a burst strategic water main or repairing a collapsed trunk sewer. The cost of such repairs would usually be a five figure sum.
2. Minor capital repair/improvement involving repair/replacement of failing assets outside the OPEX maintenance criteria. Planned preventive maintenance is the key source for identifying this form of investment together with the necessary routine refurbishments associated with planned shut down activities. Typical minor capital expenditure would involve replacing a section of water main prone to excessive leakage, or a section of sewer which frequently blocks due to a partial collapse. Again, the cost of repairs would be in the order of a five figure sum.
CAPSTRAT is also made up of two key elements –
1. Capital infrastructure involving planned investment to extend existing assets beyond their predicted life. The water industry spends significant sums on rehabilitation of its water supply and sewerage networks. This includes major relining or replacement – for example of trunk water mains, trunk sewers, water supply zones, or sewer catchment networks. Capital infrastructure projects are generally of the order of six figure sums, with some projects running into the millions.
2. Capital enhancement involving new development to achieve quality and/or volume demands. The first ten years of water privatisation saw significant investment in improved water treatment processes to achieve high quality standards in the supply of potable water. Sewage treatment facilities were upgraded where they existed and new facilities built, particularly on coastal outfalls to meet EU bathing water standards. The majority of these schemes were multi-million pound civil and mechanical/electrical projects.
Any planned expenditure of CAPMAINT should demonstrate, through cost-benefit analysis, the impact on the OPEX budget as a result of this investment, with the necessary adjustments to OPEX for future years. In this way, reductions in future OPEX are carried out in a structured way rather than being driven by fixed financial objectives. This naturally leads to a focus on asset performance, planned investment to resolve issues and reduced OPEX as an outcome.
THE FUTURE
Asset Management has made its first tentative steps into promoting the needs of the assets as the foundations underpinning an organisation’s business model, but has made mistakes in applying generic business models in all situations.
There is, in my view, a case for developing a specific business model for infrastructure management organisations whether they be rail, water, gas or electricity. The drivers and principles are similar. There has to be a shift from the OPEX/CAPEX mentality to (OPEX + CAPMAINT)/CAPSTRAT and the development of the Infrastructure Management Business Model which will deliver a much more robust and long-term solution to the operation and maintenance of physical assets.
Can the financial systems cope with such a change? If financial markets can provide investment funding for ‘not for profit’ mutual organisations then PLCs should be able to determine shareholder returns based on a mixed OPEX and CAPMAINT approach to running their infrastructure assets.
SUMMARY
Regulated infrastructure organisations are attempting to apply long term thinking through asset management in a short term environment which continuously drives down operating costs. The maintenance activity is caught in the middle – expected to contribute OPEX benefit while achieving improved performance and reliability in the long-term.
Asset Management Models are often applied generically, but for companies managing infrastructure assets an Infrastructure Management Model is required that recognises the importance of the asset operations function in the long term management of infrastructure assets.
Infrastructure Management changes financial management from an OPEX/CAPEX relationship to (OPEX + CAPMAINT)/CAPSTRAT.
Building an infrastructure organisation based on the ‘needs of the assets’ is the key to ensuring the long term-viability of assets. Genuine reductions in OPEX and capitalised failure costs then become possible and profitable operation is secured for the future.
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Gary Stubbs is also an award winner, having been voted Maintenance Professional of the Year in 2005. Gary’s career however began before Alice was born, starting out as an Electro-Mechanical and Pneumatics Trainee Apprentice in September 1980. From those early days in Kent and Sussex he has worked in a variety of maintenance positions in the UK and abroad and he is now in charge of maintenance for the Postal Service in Australia.
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