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Developing an Optimized Asset Management Strategy for Buried ...

  1. 1. DEVELOPING AN OPTIMIZED ASSET MANAGEMENT STRATEGY FOR BURIED INFRASTRUCTURE Blair Troutman1, P.E. ABSTRACT This paper reviews current trends in asset management initiatives and discusses the general framework for a process to support the development of an asset management program. This process begins with establishing a baseline of critical asset information, including asset inventory, condition assessment, effectiveness of past maintenance and renewal/replacement practices, and historic funding levels. Based on this information, general asset management goals and a strategy for meeting those goals is developed. This process necessarily considers the financial impact of re-aligning asset management strategy for long-term optimization. In addition, this paper reviews recent changes in accounting standards and proposed EPA CMOM regulations as they potentially affect the design of an asset management program. The re-alignment of an asset management strategy around long-term optimization as well as changes in accounting standards and EPA regulations provide substantial opportunities to leverage trenchless rehabilitation techniques in a long-term asset management program. Keywords: asset management program, capital investment, GASB 34, EPA CMOM regulation, trenchless rehabilitation 1 Senior Associate, Malcolm Pirnie, Inc., White Plains, NY 10608. Phone: (914) 641-2697. Email:
  2. 2. INTRODUCTION Sustainable economic development requires a strong and well-developed infrastructure. To support this development, countries have spent trillions of dollars in developing complex transportation and communication networks, water and sewer systems, and other public infrastructure. These systems are not only capital intensive to construct, but also require substantial annual spending for maintenance. Due to the nature of these systems, there is a tendency to under- fund on-going maintenance and renewal/replacement activities. Recent studies on the condition of infrastructure in the United States confirm that much of the infrastructure placed in service in the 20th century has not been adequately maintained. As these systems continue to age, system performance will continue to decline and failures will be more likely to occur. With the projected price tag of public infrastructure rehabilitation skyrocketing, there is a significant impetus to develop effective asset management programs and implement appropriate rehabilitation techniques to cost effectively meet the future challenge of infrastructure management. WATER AND WASTEWATER INFRASTRUCTURE Water and wastewater infrastructure is a particularly critical element of public infrastructure as public health and safety is directly dependent on the vitality of these systems. To address health and safety concerns throughout the 20th century, the federal government funded the majority of the construction of these infrastructure assets. In contrast, local entities have generally been responsible for operating water and wastewater utilities, including funding the maintenance and renewal/replacement of system assets. Several fundamental characteristics of the water and wastewater utility industry make establishing and maintaining appropriate funding levels for these systems difficult, including the following: • With the long service lives of assets, impacts of improper maintenance and renewal/replacement policies are not immediately apparent. • A high percentage of assets are below ground or in locations where asset condition cannot be readily established and easily monitored. • The concept of depreciation accounting does not inherently support total asset cost management. • Increased costs resulting from degraded asset conditions are difficult to quantify and assign to specific assets. • The current competitive environment results in substantial pressures to reduce operating and maintenance (O&M) costs. There is growing concern in the United States that this has resulted in a substantial under-funding of asset maintenance and renewal/replacement. This concern, combined with the fact that a high percentage of water and wastewater assets are approaching or are beyond their average service life, suggests that substantial investments will soon be required for water and wastewater systems.
  3. 3. The Water Infrastructure Network (WIN), a coalition of water and wastewater governmental authorities, engineering groups, and environmental groups, has conducted detailed analyses of capital and O&M expenditures in the water and wastewater utility industry. In the report Clean & Safe Water for the 21st Century, the WIN documents two trends critically impacting water and wastewater utilities. First, while O&M funding has more than doubled from 1980 to 1994, capital expenditures have remained largely unchanged, as shown in Figure 1. This suggests that capital funding levels for major rehabilitation and replacement projects at water and wastewater utilities have not increased as assets continue to age. To appropriately support capital requirements, the WIN has projected that roughly $1 trillion in capital investment will be required over the next 20 years for water and wastewater plants, water distribution systems, and wastewater collection systems.1 35 30 25 20 Billion $ 15 O&M Capital 10 5 0 1980 1982 1984 1986 1988 1990 1992 1994 Year Figure 1: Historic water and wastewater funding requirements1 Secondly, federal support of capital projects has declined substantially over this period, as shown in Figure 2. As a result, local entities have had to substantially increase their spending levels. This shift in funding sources has increasingly placed pressure on local entities’ abilities to maintain historic capital expenditure levels. Further, the WIN recognizes three trends that will place additional pressure on local entities: increasing federal regulations, increasing unit costs of regulatory compliance, and historic under-recognition of infrastructure management costs.
  4. 4. DEVELOPING AN ASSET MANAGEMENT PROGRAM Water and wastewater utilities beginning to evaluate their operations in light of these projections are realizing that comprehensive changes will be required to utility operations, management, and funding. To effectively address asset management issues, utilities will need to address a wide range of policies and procedures, including capital 20 15 B i l li o n $ 1 0 F ede ra l L oc al Tot al 5 0 19 80 198 2 198 4 198 6 1988 1 990 19 92 19 94 Ye a r Figure 2: Shifts In capital funding sources for water and wastewater systems1 planning, maintenance, renewal/replacement, accounting and finance, and general management. To support this comprehensive and fundamental change in operating philosophy, many utilities are developing or strengthening formal asset management programs, designed to be an integral element of the utility’s broader strategic management plan. The development of a formal asset management program has several distinct benefits. First, it communicates the utility’s up-front commitment to optimizing asset management. This communication is critical for creating the ownership of affected stakeholders, including employees, customers, politicians, and the financial community, and for developing support of a long-term management strategy. Secondly, it provides a framework for the development of optimal long- term asset management practices and policies. This framework supports, for example, asset preservation policies that may increase short-term cost but that result in substantial long-term cost benefits. Under the current competitive pressures, these policies are critical for the long-term viability of the utility. Thirdly, it creates an opportunity to examine alternative technologies that may result in a lower long-term asset management cost. Increased funding
  5. 5. commitments for annual renewal and replacement activities, for example, would provide sufficient funding to support a programmatic rehabilitation of lines using trenchless technologies. The process of developing and implementing an effective asset management program can be illustrated as an iterative process, as shown in Figure 3. Develop Goals and Strategy Implement Establish Management Baseline Analyze Plan Impacts Monitor Figure 3: Process for the development of an asset management program. The goal of establishing an asset management baseline is to develop the critical information required to support future asset management decision-making. This generally entails evaluating the effectiveness of historic and current maintenance and renewal/replacement policies and practices, funding levels, and management practices as reflected by the condition of the assets. The evaluation typically requires developing or refining an existing asset inventory, characterizing the condition of those assets, and collecting asset-specific data concerning the effectiveness of past maintenance and renewal/replacement policies if available. Once the baseline has been established, general asset management goals can be developed. These goals are typically established on a short, medium, and long-term and necessarily reflect the increased commitment of the utility to asset management. The goals are focused on increasingly supporting the objective of providing sufficient maintenance and renewal and replacement activities to manage system assets in the most cost-effective manner. An example of representative asset management goals for a large wastewater utility in the Northeastern United States is presented in Table 1. A critical first step in developing a strategy to support these goals is analyzing the impacts of re-aligning asset management practices around this objective. A number of different tools are available to estimate the future costs and cash flow
  6. 6. requirements for system assets. These tools vary widely in their approach and amount of data required to support capital cost estimations. “Bottom up” approaches are based on a detailed consideration of asset inventory, average service life, and actual condition assessment to project future capital requirements. In contrast, “top down” approaches, such as the Nessie ModelTM, consider the effects of asset preservation efforts upfront on the economic life of system assets. Projected capital requirements are based on the year place in service, the replacement cost, and the observed economic life of assets. Table 1: Representative Asset Management Goals Measure Element Short-Term Medium-Term Long-Term Optimize life cycle Increase Increase Evaluate life cycle cost of general preventative preventative cost data to assets. maintenance maintenance optimize funding by 10 funding by 20 preventative percent. percent. maintenance funding. Preserve asset Discretionary Committed annual Committed annual value through annual funding of funding based on funding based on renewal and $ 5 million. original asset cost. asset replacement replacement cost. funding. Rehabilitate Rehabilitate 10 Committed annual Evaluate collection system. miles of pipe funding of $ 7.5 cost/benefit of annually. million. system rehabilitation. Once required capital investments are projected, the asset management strategy must address modifications to asset management procedures, policies, and funding levels to reflect the revised asset management support needs. In addition, the asset management strategy must address changes required in accounting and finance policies as they affect future asset management policies. This review is particularly important now because of recent changes in public accounting standards discussed below. The development of asset management strategy, goals, and objectives into a supporting plan is critical for reasons previously discussed. The plan should be flexible and dynamic, to fully support the asset management program as it develops. It should also includes provisions for monitoring the development of the program, so that the development process remains dynamic and incorporates critical feedback. Further, it should integrate into the utility’s other management
  7. 7. plans including facility plans, business plans, and the strategic utility management plan. CHANGES IN ACCOUNTING STANDARDS AND REGULATORY REQUIREMENTS In June 2000, the Government Accounting Standards Board issued GASB Statement No. 34 (GASB 34) in June 2000 to fundamentally change the financial reporting model for governments. GASB's general intent is to require disclosure of more comprehensive information about the cost of providing public services. This change is designed to allow stakeholders, including citizen and taxpayer groups, government managers, and the financial community, to better assess the performance of responsible entities. Most governmental entities are in the process of actively modifying accounting procedures and reporting practices to comply with the tiered GASB 34 compliance requirements. In addition to mandatory requirements, GASB 34 features an alternative reporting approach, termed the modified approach for reporting infrastructure assets (Modified Approach). The Modified Approach recognizes that some utilities conduct sufficient preventative maintenance so that the condition of the asset does not appreciably deteriorate on an annual basis. To reward asset management on this “preservation basis”, the Modified Approach allows annual reporting of maintenance expense in lieu of depreciation expense. The difference between conventional management and Modified Approach management of system assets is illustrated in Figures 4 and 5 respectively. Under the conventional management approach, the condition index of the $10 million of assets placed in service in Year 1 degrades rapidly until rehabilitated in Year 13. This rehabilitation re-establishes the condition index at 82, which then degrades through Year 19, when the assets must be entirely replaced. From an accounting standpoint, depreciation expense is reported for the assets on an annual basis. In contrast, preventative maintenance activities are used to preserve asset condition under the Modified Approach. Through appropriate preventative maintenance, the condition index is maintained above the minimum through Year 19, when rehabilitation is used to re-establish the condition index above the minimum. From an accounting standpoint, preventative maintenance expense is reported for the assets on an annual basis.
  8. 8. 16 100% 14 90% 12 Mil lion $ 10 80% Condition 8 Index 70% 6 4 60% 2 0 50% O&M 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Capital Figure 4: Conventional management of system assets $12 100% $10 90% $8 Mil lion 80% Condition $6 Index 70% $4 Minimum 60% $2 O&M $0 50% Capital 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Preventative
  9. 9. Figure 5: Modified approach management of system assets To qualify for reporting under the Modified Approach, minimum requirements, summarized in Figure 5, must be met. These requirements include the following: • Initial data collection o An asset inventory and valuation must be established. • System characterization and monitoring development. o An initial condition assessment must be conducted. o Minimum asset conditions and performance measures must be defined. o System maintenance requirements must be developed. o An asset management system must be deployed. • Maintenance o Preventative maintenance must be conducted. • Asset Management Assessment o The effectiveness of maintenance activities must be evaluated. • Reporting o Asset condition must be disclosed. o The budgeted versus actual maintenance must be reported. o If assets were maintained at or above the minimal condition level, preventative maintenance expense can be reported in lieu of depreciation expense. Although these requirements appear to be lengthy, many utilities consider the Modified Approach requirements to be industry best practices and appropriate for implementation. In addition, the Modified Approach provides utilities with significant choices in
  10. 10. Initial Data System Characterization and Monitoring Maintenance Asset Management Reporting Collection Assessment Development Conventional Reporting Traditional Asset Depreciation Inventory and Expense Valuation. Maintenance Modified Approach Initial Preventative Revised Asset Inventory and Condition Valuation. Condition Asset Condition Assessment Maintenance Assessment Maintenance Expense Maintenance Maintenance Requirements Effectiveness Budget vs. and Program Evaluation Actual Performance Measures and Minimum Conditions Asset Management System Figure 5: Summary of requirements- conventional reporting and GASB 34 modified approach reporting
  11. 11. developing an asset management strategy. For example, an entity can report any or all of its assets under the Modified Approach and there are no implementation deadlines. Because of these factors, utilities should carefully consider incorporating the Modified Approach in the overall development of their asset management strategy. In addition to GASB 34, utilities will be required to comply with EPA’s proposed Capacity, Management, Operation, and Maintenance (CMOM) regulations in several years. These regulations require the development of a CMOM Plan, comprised of general wastewater collection system management plans. Specific to asset management considerations, CMOM will require the following information for the collection system: • An inventory of system assets. • Procedures for determining the condition of assets and the documentation of condition. • Procedures for identifying repair and upgrade needs and the documentation of planned work compared to completed work. • Summary of asset rehabilitation and replacement needs and a plan for financial commitment. Although CMOM regulations are not expected to take effect for several years, this asset management information is closely related to the information required by GASB 34’s Modified Approach. These requirements should be carefully considered during the general development of an asset management program and specifically when considering reporting under the Modified Approach. CONCLUSION Trenchless technologies have been used for many years by progressive utilities as a cost-effective approach to repairing and rehabilitating system infrastructure. While the benefits of these technologies are readily apparent, the general lack of urgency to develop proactive asset management programs has limited the extent to which proactive repair and rehabilitation have been conducted. With impending changes in management, accounting, and regulatory policies, most water and wastewater utilities in the United States will begin to develop and implement more proactive asset management policies and procedures. Because standards and proposed regulations do not specify asset management process, procedures, or policies, utilities will have considerable discretion in developing and implementing asset management programs as they see appropriate. Trenchless rehabilitation technologies, particularly those recognized as reliable and cost-effective, will be increasingly utilized in support of optimizing asset management of buried infrastructure. REFERENCES [1] The Water Infrastructure Network. (2000). “Clean and Safe Water for the 21st Century”, April 2000.