type title of paper
ROADS ALLIANCE VALUATION PROJECT “SHARING THE SAME ROAD” Graham Jordan mailto:[email protected] Director Lemmah Pty Ltd, Queensland, Australia
Abstract Valuation to meet statutory requirements is a major driver of asset management for Queensland local governments and can be quite a costly and time consuming process. Research by the QAO has shown wide variations in the critical assumptions used by local governments in their road valuation process. Valuation outputs are widely utilised as part of local government reporting requirements so it is important that they be based on reliable and consistently applied data. The Road Alliance Road Valuation Project extends current TMR methodology to local government type roads. Outputs from the project include: • Road component replacement unit rates which accommodate variations by region, climate, soil type and terrain across Queensland •
Rehabilitation unit rates for common treatments
•
Guidance on calculation of residual values
•
Guidance on useful lives
The project outcomes are guided by an expert panel drawn from Local Governments and State Government agencies. The project has attracted widespread support from IPWEA and other professionals and is an example of how engineering communities within state and local governments can explore, engage and educate each other on valuation information, technology and processes.
Take home message: Road Alliance Valuation Project: reduced costs; shared resources, consistent and transparent outcomes
Introduction Valuation to meet statutory requirements is a major regulatory driver for Queensland local governments. The Local Government (Finance, Plans and Reporting) Regulation (2012) requires that non-current assets are valued on a “fair value” basis. For road assets this is effectively depreciated replacement cost. It can be quite a costly and
time consuming process. Research by the Queensland Audit Office (QAO) has shown wide variations in the critical assumptions used by local governments in their road valuation process. In the QAO 2012-13 report to the Queensland Parliament on the results of local government audits, the QAO stated:
“The valuation of infrastructure assets also remains the most significant financial reporting issue for the sector with high levels of volatility in valuations experienced across councils from one year to the next”.
Why does it matter? Valuation outputs are widely utilised as part of local government reporting requirements so it is important that they be based on reliable and consistently applied data. Specifically valuation outputs are used in Financial Sustainability Measures required by the Local Government Regulation 2012 (Qld) and audited by QAO. Inconsistent valuation outputs can distort local government performance measures which can lead to incorrect conclusions on a local government’s sustainability.
What are the specific issues for road asset valuations? In 2012, a survey was undertaken of Queensland local governments seeking comments on issues and challenges associated with road asset valuations. The issues and challenges identified include: 1
Accounting for flood damage 1 Access to reliable unit rates Ensuring that each new valuation accurately reflects all new capital work undertaken. Cost of valuation Inconsistency in methodology and unit rates between valuations and valuers Inconsistency between condition surveys Data completeness and quality Residual value and useful lives Size of network, condition assessment Council resourcing Remote location Unit rate verification by auditors
Issues “bolded” are addressed by the RAVP.
Variation of unit rates across large LG areas Lack of historical construction dates and estimating remaining useful life
Large ranges were reported in the survey with respect to component unit rates.(Refer Table 1, Table 2, and Figure 1) The challenging part is that all of these rates could be correct because the variation ranges are within the normal range found in tendered rates. With respect to residual values, current local government industry valuation practice is to estimate residual value utilising expert opinion on what residual percentage could be expected. However, as shown by the local government survey, (Refer Table 3) in practice major variations are occurring between local governments in estimates of residual values for similar assets. Useful life of road assets can be estimated using a number of methodologies drawn from the organisations documented experience, and current and proposed asset management strategies. AASB116 draws attention to “the asset management policy of the entity” and requires that assets are actively managed and that policy decisions are taken into account when financial reports are prepared. The Local Government survey showed wide variations. (Table 4) A common error with the adoption of useful lives is to use intervention targets rather than what intervention ages are actually being achieved. Surveys have shown that what is actually being achieved is often higher than the targets adopted (In Asset Management Plans Levels of Service). The use of targets will lead to an over estimation of depreciation.
Roads Alliance Valuation Project Background and Aim Transport and Main Roads have developed since 2008-09 a very robust road valuation approach which accommodates varying climatic, terrain and soil type and is applied consistently across Queensland. The methodology and process has been
supported by the Queensland Audit Office. The process is updated annually. The Road Alliance Road Valuation Project (RAVP) extends the TMR methodology to the LG road network with the addition of additional stereotypes for LG type roads. (Refer Table 5) The Aim of the Roads Alliance Valuation Project is to provide inputs to the valuation of road assets which are consistent with the Australian Accounting Standards requirements, promote consistency (between local governments and between successive valuations) and transparency (key assumptions, inputs and methodologies).
What this project will provide to participating local governments? The Roads Alliance Valuation Project will provide: Road component unit rates which accommodate variations by region, climate, soil type and terrain across Queensland (Refer Table 6, Figure 1) Rehabilitation rates by component Guidance on useful lives Queensland regional road price indices The methodology is based on allocating standard valuation stereotypes to each road segment in the network. The six local government stereotypes have been adapted from the thirteen stereotypes used by TMR.
How will local governments implement the results? To implement the results, local governments will need to:
Modify their road asset registers to incorporate terrain and environment for each segment. Review and assign unit rates and residual values to individual road segments on the local government network based on the most appropriate stereotype (road type, terrain and environment). Review and assign component useful lives to individual road segments on the local government network. Calculate remaining useful life for each component for each road segment on the local government network based on age/condition. Local governments will need to continue to undertake condition assessments on their road networks. Calculate remaining useful life for each component for each road segment on the local government network based on age/condition. Local governments will need to continue to undertake condition assessments on their road networks.
Conclusion The Roads Alliance Valuation Project will reduce the cost and variability of local government road valuations by providing standardised valuation inputs across Queensland. In conjunction with the Transport and Main Roads process, all outputs will be updated each year. The project has attracted widespread support from IPWEA and other professionals and is an example of how engineering communities within state and local governments can explore, engage and educate each other on valuation information, technology and processes.
Appendix A Table 1: Variation In Replacement Cost Unit Rates ($/m2)
Rural
Urban
Seal Pavement Earthworks Seal Pavement Earthworks
$ $ $ $ $ $
LG Min 5.86 8.50 3.41 7.00 8.50 4.00
LG Max $ 10.00 $ 29.10 $ 31.82 $ 18.10 $ 29.60 $ 56.47
Source: Queensland Local Government Survey 2012
Table 2: Variation in Contract Treatment Rates ($/m2)
Figure 1: Variation in Contract Treatment Rates Source: QRA (Queensland Reconstruction Authority),RAVP (Roads Alliance Valuation Project). Contract Rates: Lockyer Valley Regional Council flood restoration contracts
Table 3: Variation in Valuation Component Residual Values
Source: Queensland Local Government Survey 2012
Table 4: Variation in Component Useful Lives
Source: Queensland Local Government Survey 2012
Table 5: RAVP Local Government Valuation Stereotypes
Table 6: RAVP Valuation Model Variables Cost Regions
Environmental Zones
Figure 2: RAVP Variation of Pavement Rate by Environmental Zone
Terrain Categories
Author Biography Graham Jordan has extensive experience in Australian infrastructure management. He has qualifications in civil engineering, economics and obtained a Master of Business Administration in 1992. Graham’s professional experience includes state and local government and the private sector.
Within local government, Graham was at the forefront of the implementation of Asset Management to improve the delivery of infrastructure services. Since 1996, Graham has worked as an independent consultant assisting clients to gain asset management skills through recent assignments for in Queensland and interstate. As part of the Queensland Roads Alliance project team, Graham has assisted with the establishment of Regional Road Groups, the development of asset management and program development initiatives for the Road Alliance. Postal Address: Graham Jordan, 45 Freesia Street, MacGregor, Queensland , 4109 E-mail: [email protected]
Abstract Valuation to meet statutory requirements is a major driver of asset management for Queensland local governments and can be quite a costly and time consuming process. Research by the QAO has shown wide variations in the critical assumptions used by local governments in their road valuation process. Valuation outputs are widely utilised as part of local government reporting requirements so it is important that they be based on reliable and consistently applied data. The Road Alliance Road Valuation Project extends current TMR methodology to local government type roads. Outputs from the project include: • Road component replacement unit rates which accommodate variations by region, climate, soil type and terrain across Queensland •
Rehabilitation unit rates for common treatments
•
Guidance on calculation of residual values
•
Guidance on useful lives
The project outcomes are guided by an expert panel drawn from Local Governments and State Government agencies. The project has attracted widespread support from IPWEA and other professionals and is an example of how engineering communities within state and local governments can explore, engage and educate each other on valuation information, technology and processes.
Take home message: Road Alliance Valuation Project: reduced costs; shared resources, consistent and transparent outcomes
Introduction Valuation to meet statutory requirements is a major regulatory driver for Queensland local governments. The Local Government (Finance, Plans and Reporting) Regulation (2012) requires that non-current assets are valued on a “fair value” basis. For road assets this is effectively depreciated replacement cost. It can be quite a costly and
time consuming process. Research by the Queensland Audit Office (QAO) has shown wide variations in the critical assumptions used by local governments in their road valuation process. In the QAO 2012-13 report to the Queensland Parliament on the results of local government audits, the QAO stated:
“The valuation of infrastructure assets also remains the most significant financial reporting issue for the sector with high levels of volatility in valuations experienced across councils from one year to the next”.
Why does it matter? Valuation outputs are widely utilised as part of local government reporting requirements so it is important that they be based on reliable and consistently applied data. Specifically valuation outputs are used in Financial Sustainability Measures required by the Local Government Regulation 2012 (Qld) and audited by QAO. Inconsistent valuation outputs can distort local government performance measures which can lead to incorrect conclusions on a local government’s sustainability.
What are the specific issues for road asset valuations? In 2012, a survey was undertaken of Queensland local governments seeking comments on issues and challenges associated with road asset valuations. The issues and challenges identified include: 1
Accounting for flood damage 1 Access to reliable unit rates Ensuring that each new valuation accurately reflects all new capital work undertaken. Cost of valuation Inconsistency in methodology and unit rates between valuations and valuers Inconsistency between condition surveys Data completeness and quality Residual value and useful lives Size of network, condition assessment Council resourcing Remote location Unit rate verification by auditors
Issues “bolded” are addressed by the RAVP.
Variation of unit rates across large LG areas Lack of historical construction dates and estimating remaining useful life
Large ranges were reported in the survey with respect to component unit rates.(Refer Table 1, Table 2, and Figure 1) The challenging part is that all of these rates could be correct because the variation ranges are within the normal range found in tendered rates. With respect to residual values, current local government industry valuation practice is to estimate residual value utilising expert opinion on what residual percentage could be expected. However, as shown by the local government survey, (Refer Table 3) in practice major variations are occurring between local governments in estimates of residual values for similar assets. Useful life of road assets can be estimated using a number of methodologies drawn from the organisations documented experience, and current and proposed asset management strategies. AASB116 draws attention to “the asset management policy of the entity” and requires that assets are actively managed and that policy decisions are taken into account when financial reports are prepared. The Local Government survey showed wide variations. (Table 4) A common error with the adoption of useful lives is to use intervention targets rather than what intervention ages are actually being achieved. Surveys have shown that what is actually being achieved is often higher than the targets adopted (In Asset Management Plans Levels of Service). The use of targets will lead to an over estimation of depreciation.
Roads Alliance Valuation Project Background and Aim Transport and Main Roads have developed since 2008-09 a very robust road valuation approach which accommodates varying climatic, terrain and soil type and is applied consistently across Queensland. The methodology and process has been
supported by the Queensland Audit Office. The process is updated annually. The Road Alliance Road Valuation Project (RAVP) extends the TMR methodology to the LG road network with the addition of additional stereotypes for LG type roads. (Refer Table 5) The Aim of the Roads Alliance Valuation Project is to provide inputs to the valuation of road assets which are consistent with the Australian Accounting Standards requirements, promote consistency (between local governments and between successive valuations) and transparency (key assumptions, inputs and methodologies).
What this project will provide to participating local governments? The Roads Alliance Valuation Project will provide: Road component unit rates which accommodate variations by region, climate, soil type and terrain across Queensland (Refer Table 6, Figure 1) Rehabilitation rates by component Guidance on useful lives Queensland regional road price indices The methodology is based on allocating standard valuation stereotypes to each road segment in the network. The six local government stereotypes have been adapted from the thirteen stereotypes used by TMR.
How will local governments implement the results? To implement the results, local governments will need to:
Modify their road asset registers to incorporate terrain and environment for each segment. Review and assign unit rates and residual values to individual road segments on the local government network based on the most appropriate stereotype (road type, terrain and environment). Review and assign component useful lives to individual road segments on the local government network. Calculate remaining useful life for each component for each road segment on the local government network based on age/condition. Local governments will need to continue to undertake condition assessments on their road networks. Calculate remaining useful life for each component for each road segment on the local government network based on age/condition. Local governments will need to continue to undertake condition assessments on their road networks.
Conclusion The Roads Alliance Valuation Project will reduce the cost and variability of local government road valuations by providing standardised valuation inputs across Queensland. In conjunction with the Transport and Main Roads process, all outputs will be updated each year. The project has attracted widespread support from IPWEA and other professionals and is an example of how engineering communities within state and local governments can explore, engage and educate each other on valuation information, technology and processes.
Appendix A Table 1: Variation In Replacement Cost Unit Rates ($/m2)
Rural
Urban
Seal Pavement Earthworks Seal Pavement Earthworks
$ $ $ $ $ $
LG Min 5.86 8.50 3.41 7.00 8.50 4.00
LG Max $ 10.00 $ 29.10 $ 31.82 $ 18.10 $ 29.60 $ 56.47
Source: Queensland Local Government Survey 2012
Table 2: Variation in Contract Treatment Rates ($/m2)
Figure 1: Variation in Contract Treatment Rates Source: QRA (Queensland Reconstruction Authority),RAVP (Roads Alliance Valuation Project). Contract Rates: Lockyer Valley Regional Council flood restoration contracts
Table 3: Variation in Valuation Component Residual Values
Source: Queensland Local Government Survey 2012
Table 4: Variation in Component Useful Lives
Source: Queensland Local Government Survey 2012
Table 5: RAVP Local Government Valuation Stereotypes
Table 6: RAVP Valuation Model Variables Cost Regions
Environmental Zones
Figure 2: RAVP Variation of Pavement Rate by Environmental Zone
Terrain Categories
Author Biography Graham Jordan has extensive experience in Australian infrastructure management. He has qualifications in civil engineering, economics and obtained a Master of Business Administration in 1992. Graham’s professional experience includes state and local government and the private sector.
Within local government, Graham was at the forefront of the implementation of Asset Management to improve the delivery of infrastructure services. Since 1996, Graham has worked as an independent consultant assisting clients to gain asset management skills through recent assignments for in Queensland and interstate. As part of the Queensland Roads Alliance project team, Graham has assisted with the establishment of Regional Road Groups, the development of asset management and program development initiatives for the Road Alliance. Postal Address: Graham Jordan, 45 Freesia Street, MacGregor, Queensland , 4109 E-mail: [email protected]
