Investment and Asset Management Workshop 11 November 2015

1. Investment and Asset Management Workshop 11 November 2015 Capital Intentions Plans and CAM Assessments Michael David

2. Presentation covers feedback on… Capital Intentions Plans submitted Data provided by TEIs in May 2015 for the period 2014 – 2024. What can we do better? Capital Asset Management (CAM) Capability Assessments Independent assessments completed and submitted by TEIs in 2015 – management of capital assets and evaluation of the underlying systems and processes supporting the long-term management of the physical built environment. What can we do better?

3. What are our capital intentions in the sector? • Little over $8.9bn over the next 10 years, an average of $814m p.a. • 51% ($4.6bn) of that is non-accommodation buildings, 16% ($1.4bn) for plant & equipment and 16% ($1.4bn) for IT & Library. • High w-i-p in next 3 years indicate spend on major projects. • Spending peaks of 2016/2017 followed by a gradual decline.

4. How has the spending profile changed over the years?

5. Where does this capital spend occur? • Largely in the University sector ($7.1bn), ITPs ($1.7bn). • University sector – Routine capex is 1.5x major projects spend. ITPs spend similar amounts on both categories. • Wānangas are relatively low consumers of capital. • Routine capex dominates the capex profile (59% - $5.2bn).

6. How do we expect to fund our capital intentions? • Many sources, but mainly through internal cash flows and debt. • Debt is expected to peak at $714m in 2017 before declining. • Next 3-4 years sees a steep rise in capital spending, eats up cash. • Debt falls as capital spending decreases.

7. How important is debt for our capital plans? • Funds 53% of our capital intentions • 73% of debt in the University sector, rest in ITPs. • Recently, is more willingness to take on debt by TEIs. • Word of caution - Debt needs servicing and repayment even during down turns, so needs strong, steady, sustainable operating cash flows.

8. What is the driver for this high spend? • Spend mostly on replacements and refurbishments, especially routine capex. • Replacements and refurbishments also significant for major projects. • But, this spend as % is declining.

9. How has our capex spending patterns changed in the past few years? • Routine capital spend patterns change very little over the years. • Major Project spend - information is suspect and inconsistent. We cannot fully rely on the submissions, needs re-work and adjustments.

10. What are the shortcomings in Capital Intention Plan submissions! • Routine Capex and Major Projects not separated out – included as one or the other. • Routine Capex and Major Projects wrongly classified. • Major Projects information incomplete (9) - does not extend to the full 10 years or not filled in. • Routine Capex information incomplete (4) - does not extend to the full 10 years or not filled in. • Known spending of Major Projects not included in the plans. “Hence accuracy and credibility suffers” – not getting the full picture. • Requires adjustments to get a reasonably credible profile. • Adjustments done using what we know, based on past trends, business cases to hand and correcting obvious errors. “In future – return submissions for correction and completion” .

11. What we will look for in the future… • Better quality and completeness in 10-year plan submissions. • More connection with strategic plans, investment plans and business cases. • Avoiding surprises – ensuring significant major projects’ spend does not suddenly appear in plans (unless unexpected e.g. earthquake effects, urgent compliance requirements etc.). • Better effort to provide complete 10-year plans. Something positive – TEI are using Treasury’s “Better Business Case Framework” for most of their major projects and for all borrowing applications. Satisfies Cabinet’s expectation that agencies must develop all significant investment proposals in accordance with published Treasury business case guidance.

12. Some further information..….. • Overall balance decreases slightly by $225m over this period. • Non-accommodation buildings increases by $402m. Q – What contributes to this? Q - Are we investing in the right places?

13. Summary of Asset Performance Metrics • The new Cabinet circular CO (15)5 Investment Management and Asset Performance in State Services requires reporting on asset performance indicators in annual reports. • The indicators are yet to be decided. • A renewed focus on how we manage our asset portfolio – are the current metrics useful and informative? Can we do better?

14. Capital Asset Management Asset performance management is a vital part of any organization’s success and it should have high-level sponsorship and ownership, and that it needs to be a total company philosophy. Asset performance management is a program that looks at the business requirements and functional requirements of a company’s assets and ties the two together. So how have we embraced this as a sector?

15. Our response as a sector ….mixed Following Cabinet Office Circular CO(10)2 Capital asset Management in Departments and Crown Entities: Expectations, issued in 2010. • A CAM Monitoring Framework was introduced in 2012. • A CAM capability assessment tool was developed. • A time-table for CAM Independent-Assessments and Self-Assessments was established. Doesn’t happen as a matter of course - seem to be getting out of this habit! Assessments are required by 31 May each year.

16. Cabinet and Treasury expectations • Cabinet expects The Treasury to periodically commission independent assessments of each capital-intensive agency’s asset management practices (this includes TEIs). • The TEC has obtained agreement from The Treasury that the tertiary sector is able to determine the nature of these independent assessments. • We have a high degree of independence and autonomy unlike other capital-intensive agencies and sectors. • Not ensuring that these requirements are met would mean that the undertaking the TEC has given to the Treasury becomes questionable. • Only by ensuring that we are conforming to established undertakings can the TEC ensure that more onerous monitoring requirements are not imposed on the tertiary sector.

17. Asset Management scores since 2012 Results are encouraging – showing steady improvement, but…

18. CAM Independent Assessment results As a sector we seem to be doing adequately, but we have room to improve. We cannot be complacent.

19. 2015 – University sub-sector scores • Doing better than sector average, but still significant gaps exists. • Total score has increased from 50 in 2012 to 60. However the gap to target has also increased slightly from 15 to 17. • Largest gaps in – • Asset register data (28); • Information systems (28); • Improvement planning (26). • Smallest gaps in - • Decision making (1); • Asset management teams (8); • Capex strategies, Demand f/casting (8).

20. 2015 – ITP sub-sector scores • Doing slightly worse than sector average but doing better than sub-sector target. • Total score has increased from 48 in 2012 to 56 (target has reduced from 61 to 54). • Largest gaps in • Service and Perf Management (6); • Asset management plans (6). • Smallest gaps in – • Risk Management (-16); • Decision Making (-13); • Capex strategies (-11).

21. 2015 – Wānanga sub-sector scores • Doing slightly worse than sector average and far below sub-sector target. • Total score has shown big improvement. from 42 in 2012 to 56 (target has increased from 60 to 71). • Largest gaps in – • Asset management plans (23); • Asset register data, maintenance planning; capex, financial & funding strategies (20). • Smallest gaps in • Improvement planning (8); • Risk management (5); • Service delivery models (5).

22. So what are the priority areas to improve? • Universities • Understanding and defining requirements; • Asset management enablers. • ITPs • Understanding and defining requirements; • Asset management enablers. • Wānanga • Understanding and defining requirements; • Asset management enablers; • Developing asset management life-cycle strategies. There are some common themes here. We can improve internally, but we can also learn from our peers. There are some very good exemplars across the sector.

23. What are the shortcomings identified in the Capability Assessments? • They all don’t get done – affects the sub-sector and sector asset performance scores. • The capability assessments are done out of sync i.e. self assessments done instead of independent assessments – • affects sector, sub-sector performance scores; • affects consistency of assessments (SAs tend to be more optimistic and scores are more generous). • They don’t get done in time . “Nothing has changed” is not a excuse for not doing your assessments (especially independent assessments). Can affect the perception of how asset management in the TEI sector is being implemented.

24. Recap on the new Cabinet circular • Treasury, recognizing TEC’s monitoring role has placed TEC (on behalf of the TEI sector) as a Tier 2 investment intensive agency. Classifications will be reviewed at least every 2 years. • Going forward Treasury will consult with TEC to determine its status in Tier 2. • Investment intensive agencies in Tiers 1 and 2 will be required to produce long-term investment plans (LTIP) of at least 10 years. • Asset Performance Indicators may require publishing in 2016 annual reports. • An Investor Confidence Rating (ICR) is being introduced, to recognise the capacity and capability of an agency to successfully deliver and manage existing and proposed investments and assets over time– like a credit rating, a sort of expression of confidence. To be ready for budget 2017. Treasury has no plans to undertake an ICR on TEC, or the TEIs at this stage. • Treasury is creating new tools for agencies to use to assist in better investment and asset management.