Asset Management: The newest new thing or same-old, same-old?

 

Andrew C. Lemer, Ph.D.

President, The MATRIX Group, LLC

Chair, Asset Management Subcommittee

 

The term “asset management” has been attracting increasing attention among public works professionals.

 

The Federal Highway Administration, for example, has established an Asset Management Office, and the American Association of State Highway and Transportation Officials has created a special task force to explore what the term means in practical terms. Policy and education sessions on the topic at several past APWA’s annual Congresses have attracted substantial audiences. And for the last year, I have been heading up a group under the APWA’s Leadership and Management Committee, working to decide what should be the association’s policy on asset management and what, if anything, we should do to advance its practice.

 

What is “asset management”?

Imagine that your rich uncle has just died and left you a million dollars (after estate taxes). You decide to invest it in mutual funds. Would you look for funds with the lowest annual management fees, or would you search out those that will give you the highest annual income and gains after management fees have been deducted? Personally, I would prefer the latter.

 

This kind of question is at the core of discussions about asset management. Depending on your perspective, such discussions represent either the beginning of an exciting new era for public works professionals; refinement of management tools and strategies developed over the past several decades; or simply a new term for carrying on with business as usual.

 

So what is asset management, and why should APWA members care? Answers to these questions are works in progress.

 

A subcommittee of the Leadership and Management Committee has proposed that “public works asset management refers to the activities of deciding how to use society’s resources to develop, operate, and maintain our infrastructure to achieve the highest possible returns.” This means getting the greatest economic, environmental, and social benefits from the public’s investment of tax money, land, and other resources that go into building in operating our public works.

 

Others, however, have different definitions. Background materials for a recent workshop organized by the Civil Engineering Research Foundation define asset management as “a process for extending infrastructure life at the lowest possible cost.” Consultants conducting an ongoing project under the National Cooperative Highway Research Program say that asset management is essentially “a strategic approach to managing infrastructure.” Of course, the term is widely used in real estate, finance, and other areas of private industry to refer generally to the work of managing investments that are more easily bought and sold or otherwise convertible into money than is the case with highways, sewer systems, and other public works infrastructure. The Government Accounting Standards Board (GASB) recently adopted changes to the annual financial statements that will bring infrastructure assets into the forefront in local government.

 

Why GASB Statement 34 is important to public works professionals

Struggling with definitions might seem academic but has become more urgent because of new accounting rules adopted last June in Statement Number 34, requiring that state and local governments include infrastructure in their financial statements and either depreciate these assets (e.g. using historical costs), or establish a condition management system to assure that adequate maintenance expenditures are made periodically to protect the public’s infrastructure investment. I have spoken with many public works directors who seem to feel that responding to these new requirements is a job best left to their financial colleagues.

 

That attitude could be a big mistake. What cannot be measured is tremendously difficult to manage well, and few things are so poorly measured as the benefits and costs of public works infrastructure. For example, based on my experience, most local governments in metropolitan areas have an infrastructure investment worth between $15,000 and $35,000 per resident of the jurisdiction, using current replacement costs and exclusive of real estate value of land. The historic costs of most public infrastructure, the expenditures when constructed, are almost always substantially lower than the replacement cost; it is no surprise that most people do not recognize the real value of the infrastructure. Letting the finance officer simply put historic costs on the balance sheet and depreciate them as a measure of the jurisdiction’s infrastructure expenses will not help the public works director, the finance officer, public administrators, or elected officials do a better management job.

 

“So what?” you might say, the money has been spent; now we simply have to keep everything in good working condition. A few years ago, a study committee at the National Research Council advised that annual maintenance spending for public facilities should generally be at least two percent of current replacement cost simply to keep up with the deterioration caused by normal use and aging. In my experience, public works maintenance spending is typically well below the two-percent level, and we end up spending extra to make big repairs. Sensible valuation and comprehensive performance monitoring systems will help public works directors make a stronger case for adequate maintenance budgets.

 

Looking toward the big picture

Now look at the bigger picture: How much investment should we make in public works infrastructure, and how should that investment be distributed among sewers, water supply, public buildings, roads, and the rest? This is what “asset management” is really all about.

 

Economists estimate that infrastructure investment yields measurable economic returns—for example, increased productivity for businesses in the region—at rates comparable to what governments pay to borrow money. However, these analyses neglect substantial benefits such as health and safety improvements, environmental protection, and the amenity values of parks and green space. Increasingly, we are learning to estimate and even create markets for these neglected outputs of infrastructure operations; pollution emissions can now be trades among large corporations, for example. Suppose the public works department could reduce water- and air-pollution emissions from, say, runoff and traffic on local roads, and then turn those reductions into cash revenue for the local government?

 

Road rights-of-way have become valuable as locations for new telecommunications systems. Clean parks and streams increase the value of nearby real estate. Good infrastructure helps attract business. Suppose we could account explicitly for these effects and make budgetary decisions accordingly?

 

This is the promise of asset management as a new set of tools for public works professionals. GASB’s Statement 34 can be an important first step toward making it possible for public works professionals to practice true asset management, but only if these professionals work for its effective application.  Making asset management truly useful in public works is the ultimate goal of the Leadership and Management Committee’s task force.

 

Moving ahead

We are working toward this goal from several angles. We have drafted a proposed policy statement on asset management for consideration by the APWA’s Governing Board, and hope to have this adopted at the annual Congress in Louisville. We are exploring strategic partnerships to develop databases and analysis tools for public works asset management. We are welcoming members who want to participate in setting the APWA’s asset management agenda. We are continuing to participate in discussions with other organizations that have interest in public works asset management, to assure that APWA members’ interests are understood as these others set their own strategies.

 

We are especially interested in keeping track of what is being done by those jurisdictions that are setting up and using performance monitoring systems. At present, much of the progress has been restricted to single functional types of public works, such as highway bridges or pavements. However, effective asset management will require that we learn to manage all infrastructure within a common framework, and to recognize the interactions among investments in roads, schools, sewers, parks, and the other elements for which a public works director is responsible. When we come to understand the real value of the inheritance that is our infrastructure, to be passed on from one generation to the next and invested for the benefit of our own and our children’s future, then we will become effective asset managers.

 

For more information, contact Andrew Lemer at (410) 235-3307 or alemer@ecostructure.com.