Strategic Asset Investment Planning for Municipalities and Avoiding a Looming Crisis
As a result of the infrastructure boom that happened in the 1950s, an enormous amount of infrastructure was built in a relatively short period of time. Back then, the goal was to build as quickly as possible in order to serve a rapidly growing population.
Today, municipal infrastructure challenges have evolved considerably. While the population of course continues to grow, and new infrastructure is built, there remains a massive infrastructure core that was built decades ago. And much of that core, regrettably, is failing or will fail in the years to come – hence the ‘looming crisis’. Municipalities and state/provincial governments need to carefully balance new infrastructure investments versus the refurbishment of those existing assets.
We’ve all seen the news reports of bridges collapsing and water mains breaking in the US. One website, watermainbreakclock.com, estimates that there have been over 5 million water breaks since the year 2000, at total cost of over $58 billion to repair! Canada certainly has its fair share of issues with road networks, watermains and bridges as well. The Trump organization has pledged to overhaul the US infrastructure with a massive spending plan, and Canada will invest hundreds of billions in the coming years.
Clearly infrastructure investment is a high priority for government and its citizens. We are at a critical point in time where there is a massive influx of funds to renew infrastructure and it will be up to government organizations, academic and business communities to determine how to spend it in the most effective way possible for the benefit of future generations.
It is not an easy thing to solve. Municipalities have many competing investment interests and determining the best strategy can be elusive. There are thousands of variables to consider if you think of each road, bridge, watermain and other asset type that exists in a city, each with its own lifespan. Prioritizing and timing investments to maximize taxpayer dollars, while guaranteeing the sustainability of the asset network over the long term is a real challenge.
THE DIGITIZATION EFFECT
Cities have become much better at digitizing their asset data over the years. However, having access to data versus having a clear picture of the data are separate and distinct. Governing bodies and city councils want answers to specific investment questions that, on the surface may appear simple, but in reality, are extremely complex to answer. What would be the impact on the asset network if we increase investment in a specific area by 5%? What would be the state of our asset network if we gradually lower investments over a time period? What happens if we lower our tolerance for risk for an asset failure? What will be the impact of our investment decisions today, in 15 or 20 years? Can we see the impact of failure of one asset class on another?
Obtaining the answers to these questions goes far beyond what a standard Excel spreadsheet or asset prioritization software tool can handle. It’s synonymous with trying to use a hand shovel to dig a ten-kilometer tunnel– theoretically feasible, but completely impractical and inefficient. The analysis is most certainly beyond human ability without computer-aided help.
In order to do a proper infrastructure investment analysis, the technology must be able to do what is referred to as ‘stochastic modeling’ which adds an element of randomness and variability to the calculations. Most applications in the market today do not use this approach, opting instead for a simpler ‘deterministic approach’. Deterministic analysis means that there is no randomness or uncertainty involved in the calculations. There is only one “right” answer. For example, you are using a deterministic approach if you assume the calculation of the useful life of a PVC water main is 50 years. In this deterministic example the water main will need to be replaced in exactly 50 years. In the real world, the life of a PVC watermain may be 50 years and may even exceed 100 years in some cases.
STOCHASTIC MODELING EXPLAINED
The only way to accurately capture this variability in asset planning models is to use a stochastic approach. This approach takes uncertain variables into consideration and can accommodate multiple end-state scenarios. The output of the stochastic approach more accurately reflects the reality that many pipes will last significantly longer than 50 years.
Deterministic analysis is a fine approach to support a discrete asset replacement policy, however it is lacking in sophistication and flexibility to support a multi-department, strategic, cross-asset planning process. Standard deterministic investment plans are not nearly as precise and because they do not reflect the reality of a 50-100+ year lifecycle. Some assets are repaired too early, others are repaired and then soon after replaced again to fix other assets. In some cases, complete replacements are done when a refurbishment would have sufficed. Different asset replacement plans for one asset type are often oblivious to the policies of others.
Municipalities that are leveraging stochastic computational power to do their asset investment planning have discovered a new and more agile reality. They can better understand and make predictions about the future, as well as fully understand the variability and uncertainty of their plans. Armed with this insight, municipalities can be better prepared for the future. If there is the possibility of a crisis in the upcoming years, the right modeling approach can help them to understand when and where to expect the crisis.
There are also financial benefits to using a stochastic approach. For example, one of our clients saved over $200 million over the course of their asset renewal project, a reduction in infrastructure spending. This result was achieved using a stochastic approach combined with other techniques.
DIREXYON has been working with several municipalities, helping them better leverage their asset data and to take better investment decisions. If you’re in asset management or finance within a municipality and feel there could be efficiencies gained by looking at DIREXYON’s solutions, we would love to hear from you.