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National Audit Office’s Annual Report to Parliament 2020

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Investments should be examined in terms of their entire lifecycle

The number of assets should be adjusted according to their maintenance need and the funds available. It is extremely important to consider this already when investments are prepared. The costs of investments should be estimated in terms of their entire lifecycle, and the estimates should be presented clearly to the decision makers.

Investments should be given more consideration in the planning of central government finances

Central government assets are given rather little consideration in the planning and monitoring of central government finances. In the most important financial planning document, the state budget, assets are mentioned mainly in proposals on authorizations and appropriations for new investments. Concerning the monitoring of central government finances, assets are presented in the central government balance sheet and total calculations of central government finances. However, their main focus is usually on the amount of central government debt; much less consideration is given to central government assets.

Uncertainties related to the costs and benefits of investments should be clearly presented to decision makers.

Central government real assets should be used efficiently, profitably and effectively, and investments should improve the cost-effectiveness of the state’s financial management. Investments should therefore be given more consideration in financial planning, and their economic impacts should be more clearly presented to decision makers.

Under the regulations on budget drafting, working documents should itemize the costs of investments and the operating costs for the coming years. However, the guidelines are very general, and such itemization has not always been made. The impact of investments on a government agency’s operating expenses should be given more detailed consideration in the preparatory phase. This is particularly important in the case of investments in transport infrastructure, which lead to the construction of very long-lasting structures. An investment decision also ties appropriations to the management and maintenance of the infrastructure for its entire lifecycle.

The operating expenses of central government machinery and equipment have been estimated relatively well. In turn, the estimated price of the actual investment has sometimes been significantly lower than the actual final price. When an investment is planned, it is important to provide the decision makers with clear information about any uncertainties related to the estimated costs and benefits. The more uncertain the assessments are, the more careful further planning the decision makers can require before committing themselves to the final investment.

Planning major investments takes years. The basic time span in the planning of central government finances is four years. This is the period covered by the General Government Fiscal Plan, and the operational and financial plans of the administrative branches. However, it may be too short a period for planning major investments. When planning their operations and finances, government agencies should also make longer-term investment plans. Such long-term investment planning has been started in the national transport system plan, which includes a 12-year action plan for developing the transport network.

Parliament decides on investments in the budget by granting appropriations or authorizations by which a government agency can commit itself to future expenses.  The budget proposal has not always clearly disclosed the total costs of an investment, or the share of the investment that remains to be paid. Items may have included several investments that have not been clearly distinguished, and authorizations have been granted for programmes including several significant investments that have not been specified.

Visualization: Central government’s fixed asset balance sheet values

Figure: Central government’s fixed asset balance sheet values (sources: Government’s annual report for 2019 (Appendix 2 Final accounts: Total calculations of central government finances) and National Accounts).

The repair backlog can be managed better if maintenance costs are taken into account when investments are made

The transport network, i.e. roads, railways and waterways, is central government’s most significant fixed asset item: in the balance sheet, the book value of the transport network amounted to more than EUR 18 billion. In recent years, central government has invested about EUR 400–500 million per year in the transport network and spent about EUR 1.4 billion per year in maintaining the basic transport infrastructure, i.e. maintaining and repairing the transport network.

When making investments, central government should ensure that it can afford to maintain the functionality of the transport network.

The repair backlog of the transport infrastructure assets has been estimated to amount to EUR 2.7 billion.  This refers to the amount of money that would be needed to place the state-owned roads, railways and waterways in a good condition in view of the present needs. The repair backlog is the result of central government investments made in new transport infrastructure without sufficient consideration of the maintenance the infrastructure needs during its lifecycle. Optimal lifecycle management of transport infrastructure would require the investment and maintenance operations to be closely linked. New investments would then also have an impact on the level of maintenance funding.

The Governments of Marin, Rinne and Sipilä have all striven to reduce the repair backlog. Sipilä’s Government increased appropriations for the maintenance of the basic transport infrastructure by almost EUR 1 billion in four years. According to Rinne’s, and later Marin’s, Government Programme, the appropriations for the maintenance of the basic transport infrastructure were increased by EUR 300 million. These measures succeeded in halting the growth of the repair backlog. Nevertheless, the repair backlog programme of Sipilä’s Government also had its problems: as the programme was drawn up quickly, there was no time to select the projects sufficiently carefully, and appropriations were also used for purposes other than reducing the repair backlog. The level of appropriations should be foreseeable to make it possible to reduce the repair backlog in a controlled and efficient manner.

The management of the transport network has been developed to enable the transport administration to examine the transport network increasingly as a whole and as one asset item. This makes it also possible to examine the service level and effectiveness of the network as a whole, allocate resources more effectively to the network and apply lifecycle thinking to the management of the network. However, the comprehensive management of the transport network is not fully supported by the decentralization of road maintenance to the Finnish Transport Infrastructure Agency and the ELY Centres (Centres for Economic Development, Transport and the Environment).

As a result of the coronavirus crisis, the Government has decided to make significant new investments in the transport network. As the state is building new transport infrastructure, the need for future maintenance appropriations will grow. In the construction of new transport infrastructure, it is therefore important to consider the lifecycle costs. When making investments, central government should ensure that it can afford to maintain the functionality of the transport network in the future as well.

Lifecycle management is strongly present in the preparation of major defence purchases, but cost estimates are surrounded by uncertainties

The strategic capability projects refer to the HX Fighter and Squadron 2020 projects for replacing and developing the Air Force and Navy capabilities to be phased out after the mid-2020s. The HX procurement budget is EUR 10 billion. The annual operating and maintenance costs are capped at 10 per cent of the military defence budget, which is EUR 270 million at the 2020 cost level. In the procurement decisions related to Squadron 2020, central government has committed itself to costs of about EUR 1.3 billion.

The HX Fighter project aims for the best possible capabilities within the cost limits set.

In building its capabilities, the Finnish Defence Forces examine the entire lifecycle of the defence materiel from needs analysis and planning to phase-out. As a rule, this practice has also been followed in the HX Fighter and Squadron 2020 projects. In these projects, approximately half the lifecycle costs are acquisition costs, while the other half consists of operating, maintenance and midlife upgrading costs.

The preparation of the HX procurement is steered by the project’s decision-making model, which aims for the best possible military capabilities. The preparation of the procurement has been thorough. A key challenge has been the significant uncertainties involved in both the issues described in the decision-making model and the estimated lifecycle costs. The uncertainty of the cost estimate should be taken into account in the further preparation of the project.

Squadron 2020 consists of different subprojects coordinated by the Finnish Defence Forces. The project has been prepared carefully, and risks have been prepared for, but the risks may still be realized: the costs may be higher than expected. The cost estimate committed to in the procurement decision was about EUR 100 million higher than the original budget. In turn, the estimated operating and maintenance costs seem realistic, because they are based on the experience gained from old vessels. The announced total costs of the project do not include every separately purchased subsystem, which is not optimal for transparency.  

Government agencies need asset management expertise

Central government assets should be used profitably, and they should therefore be maintained in an optimal condition. The purchase, maintenance and repair of assets can require in-depth expertise from government agencies. Central government has tried to ensure sufficient expertise in the maintenance of its assets by centralizing its asset management. The management of transport infrastructure assets, for example, has been concentrated in the Finnish Transport Infrastructure Agency, and the management of building assets in Senate Properties.

Thus far, the government agencies responsible for asset management have had little cooperation.

Central government still has financially significant asset items even in individual government agencies. In our audits, we have paid attention to situations where the audited organizations have lacked sufficient resources or expertise for good asset management. It is understandable that organizations with particularly scarce resources focus primarily on their core operations. However, it is difficult to achieve sufficient asset management competence if these duties are performed in addition to the regular ones. 

Central government has issued few guidelines and descriptions about good asset management, and the agencies responsible for asset management have not been cooperating particularly closely. From the perspective of comprehensive asset management, central government should consider creating a common good asset management practice independent of the asset type to steer government agencies towards good and appropriate asset management.

Further information

Lassi Perkinen
Director for Performance Audit