epa 9 determine funding strategy
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Fundamentals of asset managementTRANSCRIPT
Fundamentals of Asset Management
Step 9. Determine Funding Strategy
A Hands-On Approach
Fundamentals of Asset Management 2
Tom‘s bad day…
Fundamentals of Asset Management 3
Fifth of 5 core questions
5. What is my best long-term funding strategy?
Fundamentals of Asset Management 4
Renewal
Annuity
AM plan 10-step process
Develop
Asset
Registry
Assess
Performance,
Failure Modes
Determine
Residual
Life
Determine
Life Cycle &
Replacement
Costs
Set Target
Levels of
Service (LOS)
Determine
Business Risk
(“Criticality”)
Optimize
O&M
Investment
Optimize
Capital
Investment
Determine
Funding
Strategy
Build AM
Plan
5. What is my best long-term funding strategy?
Fundamentals of Asset Management 5
Asset management investment planning elements
Capital investment
• Renewal (repair, refurbish, replace)
• Augmentation (capacity, functionality)
Maintenance investment
• Planned
• Preventive
• Predictive
• Corrective
• Unplanned
Operations investment
Operations cost trends
Life-cycle projected costs
From the strategic AM funding perspective
From a strategic AM funding perspective, two separate
fundamental management questions:
• How many/when – how many assets of a particular class are
likely to fail within a specific timeframe? (used to build the
―nessie curve – a projection of future expected costs)
• Which/when – which specific assets are likely to fail in a given
timeframe? (used to build the detailed CIP budget)
Advanced Concepts and Techniques in Infrastructure Asset
Management 6
Advanced Concepts and Techniques in Infrastructure Asset
Management 7
30 Year Infrastructure Plan - Full Requirement
0
100,000,000
200,000,000
300,000,000
400,000,000
500,000,000
600,000,000
700,000,000
800,000,000
2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
2031
2033
2035
2037
Inv
est
men
t ($
)
Water Reconstruction Program Sewer Reconstruction Program Facilities
Projects Non-Rate Impact - Funded Projects
Strategic level - how many assets in timeframe
period and at what cost each (this sets funding
framework)
Fundamentals of Asset Management 8
Renewal programs V
alu
e, $ M
illio
ns
2
4
6
8
10
2000 2005 2010 2015 2020 2025
Time
Renewal cash requirements
Average annual annuity—existing assets
Existing assets
Average annual annuity—new assets
or services (new LOS)
New work
Average annual annuity—total assets
Fundamentals of Asset Management 9
Rolling annuities – 10 year example
Renew
al valu
e, $
Time, years 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Fundamentals of Asset Management 10
Renewal - Collection OCSD Expenditure - Predicted Future Renewal of the Collection System
0
20
40
60
80
100
120
20
06
20
09
20
12
20
15
20
18
20
21
20
24
20
27
20
30
20
33
20
36
20
39
20
42
20
45
20
48
20
51
20
54
20
57
20
60
20
63
20
66
20
69
20
72
20
75
20
78
20
81
20
84
20
87
20
90
20
93
20
96
20
99
21
02
21
05
Year
Exp
en
dit
ure
- $
M (
Cu
rren
t D
ollars
)
Replacements - Collection System
Rehabilitation - Collection System
Fundamentals of Asset Management 11
Renewal – Treatment Plants
OCSD Expenditure - Predicted Future Renewal of Plants
0
50
100
150
200
250
300
350
20
06
20
09
20
12
20
15
20
18
20
21
20
24
20
27
20
30
20
33
20
36
20
39
20
42
20
45
20
48
20
51
20
54
20
57
20
60
20
63
20
66
20
69
20
72
20
75
20
78
20
81
20
84
20
87
20
90
20
93
20
96
20
99
21
02
21
05
Year
Exp
en
dit
ure
- $
M (
Cu
rren
t D
ollars
)
Replacements - Plants
Rehabilitation - Plants
Fundamentals of Asset Management 12
Total projected renewal costs – ―legacy costs‖
OCSD Expenditure - Predicted Future Renewal of Existing Assets
0
100
200
300
400
500
600
20
06
20
09
20
12
20
15
20
18
20
21
20
24
20
27
20
30
20
33
20
36
20
39
20
42
20
45
20
48
20
51
20
54
20
57
20
60
20
63
20
66
20
69
20
72
20
75
20
78
20
81
20
84
20
87
20
90
20
93
20
96
20
99
21
02
21
05
Year
Exp
en
dit
ure
- $
M (
Cu
rren
t D
ollars
)
CIP - Current
Replacements - Total
Rehabilitation - Total
Predicted future renewal of all existing assets
Fundamentals of Asset Management 13
Future Growth and LOS OCSD Expenditure - Predicted Future Capital for New Levels of Service and Growth
0
50
100
150
200
250
20
06
20
09
20
12
20
15
20
18
20
21
20
24
20
27
20
30
20
33
20
36
20
39
20
42
20
45
20
48
20
51
20
54
20
57
20
60
20
63
20
66
20
69
20
72
20
75
20
78
20
81
20
84
20
87
20
90
20
93
20
96
20
99
21
02
21
05
Year
Ex
pe
nd
itu
re -
$M
(C
urr
en
t D
olla
rs)
Renew - Future Los/Growth
CIP - Future LoS
CIP - Future Growth
Fundamentals of Asset Management 14
Operations and Maintenance
OCSD Expenditure - Predicted Future Operations and Maintenance
0
50
100
150
200
250
300
350
400
20
06
20
09
20
12
20
15
20
18
20
21
20
24
20
27
20
30
20
33
20
36
20
39
20
42
20
45
20
48
20
51
20
54
20
57
20
60
20
63
20
66
20
69
20
72
20
75
20
78
20
81
20
84
20
87
20
90
20
93
20
96
20
99
21
02
21
05
Year
Exp
en
dit
ure
- $
M (
Cu
rren
t D
oll
ars
)
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
Asset
Valu
es -
$M
Maintenance
Operations
Overhead
Book Value
Replace Value
Fundamentals of Asset Management 15
Total projected (optimized) costs OCSD Expenditure - Total Future Predicted Cash Flows
0
100
200
300
400
500
600
2006
2009
2012
2015
2018
2021
2024
2027
2030
2033
2036
2039
2042
2045
2048
2051
2054
2057
2060
2063
2066
2069
2072
2075
2078
2081
2084
2087
2090
2093
2096
2099
2102
2105
Year
Ex
pe
nd
itu
re -
$M
(C
urr
en
t D
olla
rs)
0
2,000
4,000
6,000
8,000
10,000
12,000
As
se
t V
alu
es
- $
M
CIP Existing - Current ProgramCIP New - Future GrowthCIP New - Future Levels of ServiceCIP - Future Rehab and Replace (New Levels of Service / Growth)CIP - Future Rehab and Replace (Plants)CIP - Future Rehab and Replace (Collections)Operations (Operations)Operations (Maintenance)Operations (Overhead)Book ValueReplace ValueAverage Expenditure
OCSD Expenditure - Total Future Predicted Cash Flows
0
100
200
300
400
500
600
2006
2009
2012
2015
2018
2021
2024
2027
2030
2033
2036
2039
2042
2045
2048
2051
2054
2057
2060
2063
2066
2069
2072
2075
2078
2081
2084
2087
2090
2093
2096
2099
2102
2105
Year
Ex
pe
nd
itu
re -
$M
(C
urr
en
t D
olla
rs)
0
2,000
4,000
6,000
8,000
10,000
12,000
As
se
t V
alu
es
- $
M
CIP Existing - Current ProgramCIP New - Future GrowthCIP New - Future Levels of ServiceCIP - Future Rehab and Replace (New Levels of Service / Growth)CIP - Future Rehab and Replace (Plants)CIP - Future Rehab and Replace (Collections)Operations (Operations)Operations (Maintenance)Operations (Overhead)Book ValueReplace ValueAverage Expenditure
Estimated Long Term Pipe Rehabilitation Costs
Long Term Rehabilitation Costs
0
20,000,000
40,000,000
60,000,000
80,000,000
100,000,000
120,000,000
140,000,000
160,000,000
180,000,000
Spo
tRep
air_
2010
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
2031
2033
2035
2037
2039
2041
2043
2045
2047
2049
2051
2053
2055
2057
2059
Year
Re
pa
ir C
os
t, $
20 Year Planning Horrizon
10 Year Avg.
= $20.1 Million
10-20 Year Avg.
= $9.3 Million
Monitoring by
Inspection Spot
Repair Whole Pipe
Replacement
0
2
4
6
8
10
12
2011 2031 2051 2071 2091 2111
An
nu
al R
ep
lacem
en
t R
ate
(m
iles)
Others
Galvanized
Ductile iron
CI unknown
CI 1940+
CI <1940
Projected service line replacement need Estimate of a sustainable level of
pipeline replacement
Advanced Concepts and Techniques in Infrastructure Asset
Management 18
Tactical level – which assets within a CIP cycle
(list of capital projects)
ID District Facility Process Area Involved AssetsBRE of
AssetDescription of Project Source
DISTRICTS 1, 4 AND 5
1 1 Collection System Various Collection System I/I Rehabiliation Existing CIP
2 1 Pump Station Industrial Parkway Ind Pkwy PS - Below Ground Structure 63
Perform vibration analysis, pumping
evaluation, design new pumps,
replace pumps, evaluate control
system
At-Risk Assets
Pump Station Cayuga Cayuga PS - HVAC 45 Replace Wet well Roof AHU
Pump Station Industrial Parkway Ind Pkwy PS - HVAC 45 Replace Wet and Dry Well Roof AHU
1 Pump Station Cayuga Wet Well Chain Pull 50Redesign wet well chain pull to
remove comminutors
Pump Station Depew Cranes 21 Redesign crane system
Pump Station Vanderbilt Cranes 30 Redesign crane system
Pump Station Broadway East Cranes Redesign crane system
ORF Chlorine Chamber/Gates 30 Add additional gates to drain CCT
ORF Washwater Fill Pump Station 30Redo submersible pump station and
creek intake
ORF Washwater Pumps 21 Replace ORF washwater pump
Flow meters/Force Main Ball Valve 30
Remove and replace valve stem,
repair flow meter, modify valve
chamber so valve can be easily lifted
out
Flow Meters/ORF Ball Valve 30
Repair flow meter, modify valve
chamber so valve can be easily lifted
out
6 4 Pump Station Bowmansville Wastewater Pumps 20Evaluate pumps and piping and
replace as necessaryAt-Risk Assets
7 4 Pump Station Vanderbilt Pumping System/Force Main Evaluation 40Evaluate capacity of pumping
system, resize pumps if necessary.At-Risk Assets
8 4 Pump Stations Aurora N/Aurora S Pump Stations Various Improvements Existing CIP
9 5 Pump Station Eastern Hills EHPS - Below Ground Structures 81Replace below-ground steel
structures with FRPAt-Risk Assets
10 5 Collection System Transit Road Collection System Replacement of ACP Existing CIP
11 5 Collection System Goodrich Road Collection System Various Improvements Existing CIP
12 5 Collection System Spaulding Lakes Collection System Various Improvements Existing CIP
At-Risk Assets
At-Risk Assets
At-Risk Assets
Pump Station Depew
4
4
3
5
1
4
Fundamentals of Asset Management 19
Financing strategies
―Pay as you go‖ – current revenues
• Dedicated reserve account (‗hands off‖)
• Replacement/renewal recovery fee embedded in rate structure
―Pay as you use‖ – debt service
• ―slice of debt service‖
• ―intergenerational equity‖
• Interest as an expense that reduces available capital
Renewal funding
Depreciation is not a funding source unless it is
specifically appropriated in the operating budget and
assigned as a revenue source to a specific fund
A more adequate renewal fund level mechanism
should be based on replacement cost, ideally
condition based replacement cost
Renewal funds are a major council/commission/board
target in tough budget times
Fundamentals of Asset Management 20
Fundamentals of Asset Management 21
Deriving the CIP investment program – a best practice
model
1.The strategic CIP “Business Plan”
• What are we going to do and why?
• What will it cost?
• How will it be funded?
• Life-cycle impact on LOS, rates, and financial
condition
2. On time and on budget
• Managing costs
• Managing schedules and deliverables
• Managing contracts and changes
3. Integration into the portfolio of assets
• Registry
• Start-up, shake-down, burn-in, commissioning
• Manuals, spares, and service
• Initiating the maintenance regimen
Identification
Validation
Prioritization
Financing
Execution
Control
Handover 3
2
1
Project
Fundamentals of Asset Management 22
The strategic CIP financial planning model
Traditional process
CIP/budget
Static financial projection
CIP tactical “championing”
CIP wish list
Improved process
CIP strategic business plan
Strategic plan workshops
Dynamic
Financial
model
CIP
strategic
validation
process
Fundamentals of Asset Management 23
Cash impact by scenario
Available NOI to Fund CIP
50
40
30
20
10
0
10
20
30
40
2001
2002
2003
2004
2005
2006
2007
2008
2009
Year
Millio
n D
olla
rs
No Rate Increase
Full $600 Million CIP
Staged Debt Service
Without CIP
Available annual cash to fund CIP
Fundamentals of Asset Management 24
Projected rates over time by financing scenario
0
200
400
600
800
1000
1200
1400
1600
01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11
Year
Rate
s (
$A
nn
ual)
Fundamentals of Asset Management 25
Key points from this session
Key Points:
―Full economic cost‖ is the
foundation concept from which
effective financial decision-making is
made.
Replacement and refurbishment
cost, not historic depreciation, is key
to good financial decision-making
―Long-term Annualized Renewal
Annuity‖ provides the baseline
funding for sustained performance.
Telling the asset consumption ―story‖
in simple, effective, big-picture terms
sets the stage for LOS discussion
and business risk based decision-
making.
Associated Techniques:
Valuation techniques
Net Present Value
Optimized replacement cost tables
Optimized portfolio-wide, life-cycle
financial projections
Capital investment strategies
Telling the story with confidence
What is my best long term funding strategy?
Fundamentals of Asset Management 26
Tom‘s spreadsheet