PG Funding and PG Funding and Management StrategiesManagement Strategies

Asset Management and Asset Management and task M7task M7

4th meeting 4th meeting

Thursday, 19 April 2007Thursday, 19 April 2007

Paris La DéfenseParis La Défense

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SubjectSubject

Task M7: Develop a best practice Task M7: Develop a best practice guide for the cost manangement for guide for the cost manangement for long-term investmentlong-term investment

What is Cost management (CM)?What is Cost management (CM)? What is Asset management (AM)?What is Asset management (AM)? Why Asset mangagement (AM)?Why Asset mangagement (AM)? Asset valuationAsset valuation Benefits of Asset managementBenefits of Asset management

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M7: Develop a best practice M7: Develop a best practice guide for the cost manangement guide for the cost manangement for long-term investmentfor long-term investment

Goal: Goal: The objective of this work shall be to get The objective of this work shall be to get value for money through efficient comprehensive value for money through efficient comprehensive asset managementasset management..

Strategy: Strategy: The project group for this task shall:The project group for this task shall:define the concept of long-term cost managementdefine the concept of long-term cost management while distinguishing while distinguishing between the types of cost that must be taken into account and the duration between the types of cost that must be taken into account and the duration of the life cycle under consideration;of the life cycle under consideration;

– examine the influence of the various types of organisation (direct examine the influence of the various types of organisation (direct management , delegated management, long-term performance management , delegated management, long-term performance contracts, etc.) on the possibility of optimising the following cycle: contracts, etc.) on the possibility of optimising the following cycle: initial investment, supplementary investment, major repairs, ongoing initial investment, supplementary investment, major repairs, ongoing maintenance;maintenance;

– determine the conditions for calculating global costs (discount rate, determine the conditions for calculating global costs (discount rate, financial restrictions, risks of insufficient maintenance etc.) without financial restrictions, risks of insufficient maintenance etc.) without forgetting any of the actors involved: public authorities, operators, forgetting any of the actors involved: public authorities, operators, users, residents, etc.users, residents, etc.

Expected outputExpected output– Summary report on the effective management of long-Summary report on the effective management of long-

term investments;term investments;– Guide to best practices in Europe.Guide to best practices in Europe.

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What is Cost What is Cost Management (CM)?Management (CM)? CM generally describes the CM generally describes the

approaches and activities of approaches and activities of managers in short run and long run managers in short run and long run planning and control decisions that planning and control decisions that increase value for customers and increase value for customers and lower costs of products and services. lower costs of products and services. For example, managers make decisions regarding the amount and kind of For example, managers make decisions regarding the amount and kind of material being used, changes of plant processes, and changes in product material being used, changes of plant processes, and changes in product designs. Information from accounting systems helps managers make such designs. Information from accounting systems helps managers make such decisions, but the information and the accounting systems themselves are decisions, but the information and the accounting systems themselves are not cost management not cost management

CM for long-term investment product CM for long-term investment product or fixed asset => Asset managementor fixed asset => Asset management

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What is Asset What is Asset management (AM)?management (AM)? A definition (OECD and Piarc) of AM

that is appropriate for the roads sector is:– “A systematic process of maintaining,

upgrading and operating assets, combining engineering principles with sound business practice and economic rationale, and providing tools to facilitate a more organised and flexible approach to making the decisions necessary to achieve the public’s expectations”

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What is Asset What is Asset management? (cont.)management? (cont.) AM is a business-like approach to

managing infrastructure– Looking at projects as investment for

specific customers (road users)– Monitoring asset performance and value

in order to trade-off project alternatives and investment.

– Developing competive short and long-run investment strategies for current and future asset.

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Why Asset Why Asset mangagement?mangagement? In most countries, the road network constitutes one of the

largest community assets mostly state owned. Those responsible for the infrastructure must maintain, operate,

improve, replace and preserve the asset. At the same time, the financial and human resources needed to achieve the performance objectives of the road network are often scarce, and must be managed carefully.

All of this must be accomplished under the close scrutiny of the public who pay for this element of the country’s transport system, are regular users of it, and who increasingly demand improved levels of quality in terms of safety, reliability and ride.

Road networks are also physical assets that are powerful generators of economic wealth and social equity. They need much financial support. As a result, governments are placing ever greater pressures on Road Administrations to improve the efficiency of, and accountability for, the management of the community’s asset.

=> AM

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Why AM (cont.)?Why AM (cont.)?

Examples of general oranizational needs– Complete invetory of all assets– Current data that reflects the condition of the assets – Performance measures that consistently, efficiently and

accurately describe infrastucture requirements, support funding request

– Monitor and preserve a substantial investment in transportation assets, ensuring that their value is being properly maintained and not being driven to reconstruction or replacement

– Support economic development and manage traffic growth, and to minimise adverse land use and environmental impacts

– Ensure that capital and operational funding provides the best outcomes for customers

– Improve the speed and efficiency of carrying out investment analyses

– Appropriate long term assessment of future capital and revenue funding needs

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Why AM (cont.)?Why AM (cont.)?

Examples of key decision-makers needs – direct and timely access to accurate and consistent

data and information in order to make defensible investment decisions make choices on investment trade-offs promote the needs of the organisation compete for funding and staffing of these needs pursue alternative sources of funding and partnerships inform customers on performance, programmes and

projects carry out continuous review of programmes and core

activities market the organisation's effectiveness and efficiency

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Why AM (cont.)?Why AM (cont.)?

Examples of what key decision-makers needs– an executive support tool that merges all asset and investment

data and information, enabling them to make strategic trade-offs and to respond to queries from politicians, customers, communities, special interest groups etc. How well is the organisation meeting its responsibilities,

objectives and performance expectations? Are road users getting value for money? How much has been invested in a particular area? What is the organisation planning to do in a particular

area,when? What is the current status of all your projects? Why is a project required, why now, and what are the benefits? What impact will a given project have on the overall network

condition? What are the road user impacts, environmental impacts? What are the costs, what are the benefits? How long will construction delays last?

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Asset valuationAsset valuation

Asset valuation means the determination of the monetary value of an asset.

The road assets usually contain – roads (road substructures, running surfaces,

equipment and accessories, etc.)– bridges– tunnels– land areas (road areas, rest areas, parking areas

and loading areas)– drainage system– unfinished project and structure

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Asset valuationAsset valuation

Monetary value of fixed assets can be determinend in many different ways:– Book value is usually based on the original acquisition cost, which

has been adjusted for depreciation, or by any other increase or decrease in value.

– Replacement price is the present market price of a similar asset to replace an old asset.

– Market value is the current market price of an asset, i.e. the sum of money that could be obtained for an asset if it was sold in the market at a certain time.

– Present value is considered to be the present value of payments made at a later date. Thus the future payments are discounted into the present.

– Nominal value is the purchase value of an asset on the purchase date.

– Taxable value is the monetary value of an asset determined for taxation purposes.

– Utility value represents the quantitative or qualitative benefit of an asset for the user. The utility value can vary depending on the user.

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Value to Road AssetValue to Road Asset

Value of Road Asset = Book value adjusted by the depreciation or by increase or decrease in value– Depreciation depends on economical

lifetime 20-50 years for road substructures 10-20 years for running surface 50-100 years for bridges 5-20 years for equipment and accessoires

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Benefits of AMBenefits of AMconclusion from the OECD conclusion from the OECD groupgroup Improved budget analysis and decision making which

provides a higher level of service to the community. Increased operational efficiencies arising from easier

interpretation of data and better analysis tools. Increased strategic planning within budget constraints. Increased productivity of the Road Administration due to

reduced information fragmentation and better access to higher quality and more consistent data.

Determination of funding levels required to maintain assets at specified levels of service.

Improved allocation of expenditure between individual assets to give the best value for the overall asset.

Improved prioritisation of work requirements and funding allocations to achieve the goals and objectives of the Road Administration.

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Next steps on task M7Next steps on task M7

Choose a project leader