UPDATE ON NATIONAL ASSET MANAGEMENT INITIATIVES: FACILITATING INVESTMENT DECISION-MAKING

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1 UPDATE ON NATIONAL ASSET MANAGEMENT INITIATIVES: FACILITATING INVESTMENT DECISION-MAKING by R.S. McElroy 1 Federal Highway Administration, U.S. Department of Transportation th Street, S.W., Washington, D.C Abstract Asset Management is a systematic process of maintaining, upgrading and operating physical assets cost-effectively. It promises to provide a solid framework for optimizing the transportation system through cost-effective management, and programming and resource allocation decisions. The U.S. Department of Transportation s Federal Highway Administration has recently consolidated its disparate asset management functions into an Office of Asset Management. One of the major purposes of this Office is to develop, identify and advance analytical tools and organizational structures to assist States in making cost-effective engineering and investment decisions. This paper presents initial efforts in this regard. 1 Introduction Sustained and adequate investment in transportation is essential to achieving the Nation s social, economic and security goals. The United States highway system represents over a trillion of dollars in investment, and the ongoing costs of expanding, preserving and operating the system are extraordinary. Government agencies, at the Federal, State and local level, are pursuing more effective ways of managing and investing in their transportation systems. They are responding to funding constraints as well as to the requirements imposed by an aging system and increasing user demands. Efforts by State Departments of Transportation (DOTs) to improve their business practices also stem from public demands for: (1) transparency in government decision-making, (2) greater accountability for those decisions and (3) greater return-on-investment. Also of concern to State DOTs is the loss of senior staff due to retirement and downsizing. It has become increasingly important that systematic and reproducible approaches for managing assets and investment analysis be available to new staff. Although States have been managing assets for decades, Asset Management is a relatively new concept. It will prove a solid framework for optimizing the transportation system through costeffective management, and programming and resource allocation decisions. Asset Management may be defined as follows:... a systematic process of maintaining, upgrading and operating physical assets cost-effectively. It combines engineering principles with sound business practices 1 Regina McElroy is Team Leader for the Economic Evaluation and Investment Team in the Federal Highway Administration s Office of Asset Management. She may be reached at [email protected] or at

2 and economic theory, and it provides tools to facilitate a more organized, logical approach to decision-making. Thus, asset management provides a framework for handling both short- and long-range planing. (Asset Management, 1999) Asset Management links user-demands, technical analysis, engineering criteria and goals, and budgetary constraints. A generic description of the process follows: First, performance expectations (goals and policies), consistent with available budgets and user demands, are ascertained and used to control the decision-making framework. Second, condition information is collected and analyzed, given stated performance expectations, to provide information on future system requirements ( needs ). Third, the application of analytical tools and reproducible techniques indicate potential cost-effective strategies for allocating available budgets to satisfy user requirements, again using performance expectations as critical inputs. The program is then finalized and implemented. The entire process is continually evaluated through network-level performance monitoring. Asset Management is a logical strategic decision-making framework that is made effective by organizational integration and technological support. Organizational integration refers to communication and inter-dependency across asset classes, across functions and from the executive level to the front-line, working level. The necessary technology includes the ability to collect, process, then evaluate the data and the analytical tools required and to select the most cost-effective alternative investment strategies. An important initiative to promote the Asset Management concept is currently underway within the U.S. DOT. The U.S. DOT s FHWA has organizationally consolidated its disparate asset management functions into an Office of Asset Management. The Office assumed existing responsibility for developing and advancing tools to monitor, maintain and assess the highway system. In addition, a new team was established to focus on Asset Management implementation issues related to investment decision-making, specifically organizational coordination and the use of Engineering Economic Analysis (EEA) tools. This paper focuses on investment related activities of the new unit, the Economic Evaluation and Investment (EE&I) Team. Also provided, for context, is an overview of the newly established Office of Asset Management. 2 The Federal Highway Administration s Office of Asset Management In February 1999, the FHWA charted an Office of Asset Management as part of its reorganization. The newly organized FHWA is now structured with five Core Business Units: Infrastructure, Planning and Environment, Federal Lands, Operations and Motor Carriers and Highway Safety. The Office of Asset Management is one of four offices within the Infrastructure Core Business Unit. The Establishment of the Office of Asset Management ( the Office ) confirms the Agency s commitment to advancing Asset Management principles. Operating in partnership with 2

3 AASHTO, the Office provides tools, techniques, training and consultative services to the States as they work to adopt a comprehensive, fully-integrated Asset Management program. The Federal government is uniquely suited to provide leadership in areas from which all 50 States can benefit. Although the States own and operate the assets targeted by Asset Management, State officials look to FHWA to provide overarching guidance, research and development, and training because of the expense and requirements for staff expertise associated with these activities. The Office is composed of a multi-disciplinary staff drawn from engineering, policy, planning and technology assessment. Three teams make up the new Office: (1) Construction and System Preservation, (2) System Management and Monitoring and (3) Economic Evaluation and Investment. The teams work together on overlapping activities. 2.1 Construction and System Preservation Team The Construction and System Preservation Team is responsible for construction and maintenance policy, technical support and outreach, quality management, pavement smoothness and system preservation. FHWA has placed a special emphasis on preservation as the Agency s mission has shifted from system expansion to preservation of infrastructure assets. The National Quality Initiative (NQI), a partnership between AASHTO, FHWA, and related industry associations, is housed on this team. The NQI objective is to focus attention on continuous quality improvement within the highway industry. New team initiatives include the establishment of a joint AASHTO/Industry/FHWA agreement for Optimizing Highway Performance. 2.2 System Management and Monitoring Team The System Management and Monitoring Team is charged with developing, refining and advancing pavement and bridge management systems. Pavement performance support is another critical area that falls under this team s umbrella. New initiatives include the establishment of an Asset Management/Superpave Pilot State Study and implementing recent AASHTO provisional standards on Pavement Management Systems (PMS). In addition, team members initiate and lead the development of new asset management systems, such as for tunnels and hardware. 2.3 Economic Evaluation and Investment Team The EE&I Team s portfolio includes outreach activities designed to explain and promote Asset Management. It also has the lead in developing, recommending and/or and advancing investment analysis tools and organizational structures. In May 1999, the EE&I Team developed a strategic business plan for achieving its short- and long-term objectives. A major component of that plan included initiatives to facilitate Asset Management principle-centered strategic investment decisions. Two primary tracks were identified: (1) Identification and development of procedures to facilitate horizontal and vertical integration and (2) Development and promotion of an array of procedures for inclusion in an EEA toolbox. The remainder of this paper presents initial work on these two tracks. 3

4 3 Strategic Investment Decisions 3.1 Introduction In those agencies that do not have the fundamental Asset Management components, such as Life Cycle Cost Analysis (LCCA) and management systems, the transportation investment and maintenance decisions are based on personal experience, anecdotal data, and in some cases intuitive judgement rather than information derived from the systematic application of analytical tools. If these States were to include more complete and objective information in their decision-making process the result would likely be better strategies for allocating resources and optimizing available assets. Ideally, guiding principles reflecting the demands and concerns of system users would be imbedded in a State s investment decision-making process. Also present, as previously discussed, would be effective horizontal and vertical communication channels. Importantly, appropriate analytical techniques would be available to identify and evaluate alternative policies, program structures and project design options. These tools would have a multiyear orientation. They would draw from economics as well as engineering. Alternative investment and maintenance options would be evaluated in a context consistent with long-range plans, policies and goals. Trade-offs would be made between funding transportation versus other programs, between assets and with individual asset program areas. The following sections present FHWA plans for facilitating the improvement of horizontal and vertical coordination within State DOTs and expanding the use of economic-based investment analysis tools. 4 Integration 4.1 Description Central to the concept of Asset Management is effective horizontal, crosscutting communication across functions and modes. Asset Management is concerned with the entire portfolio of transportation assets and therefore needs to bring together diverse modal and functional perspectives. A comprehensive approach that recognizes the full range of options, standards, information and perspectives is essential. Vertical integration also is an important feature of a fully functioning, comprehensive Asset Management system. It implies that various levels of the decision-making process are cognizant of information from other levels. This means that, decisions and/or recommendations arising from the working level become part of the information set available to senior management. For example, current and projected condition and performance data would rise to the top of the organizational structure. Similarly, operational managers would understand goals and policies. Vertical integration implies communication between the State DOTs and their legislatures. 4.2 State Implementation Issues The prevailing approach to State asset management is largely driven by single-asset operations. This stovepipe approach results from management systems that were developed asset class by asset class. For instance, bridge management systems were developed by bridge engineers 4

5 and pavement management systems were produced by pavement engineers. These systems frustrate coordination across asset classes. Despite notable advancements in management system capabilities such as decision support features, and hardware and software improvements there is virtually no data exchange between or within asset systems. Further, because there is no standard among the asset systems with respect to investment decision procedures they are generally incompatible. Further, they generally fail to support coordination between functional areas. While their content is for the most part accepted by the engineering community, they have typically not been bought into by managers in other disciplines such as program development and finance. Consequently, these individuals will often ignore management system decision-support prioritization and budgeting routines, opting for their own procedures. 4.3 Short-Term Initiatives In cooperation with AASHTO, the FHWA is sponsoring a National Cooperative Highway Research Program (NCHRP) effort to develop Asset Management Guidance for Transportation Agencies [NCHRP Project 20-24(11)]. The objective of this project is to provide: a first generation Asset Management Guide for use by AASHTO member agencies which will offer advice on how to effectively apply Asset Management principles to their unique organizations; a synthesis of current practices and available tools; a framework for an asset management system; and recommended research for filling gaps in existing knowledge and developing tools for the next generation of the Guide. This work will lay the foundation for defining initiatives to advance integration efforts within State DOTs. Upon completion of the NCHRP activity in 2001, in consultation with AASHTO, the FHWA will determine the appropriate next steps to assist the States in establishing effective horizontal and vertical integration within their organizations. 4.4 Engineering-Economic Analysis Tools Few States use economic-based tools to assess the relative merits of alternative investment strategies, either within asset classes (e.g., one highway facility versus another based on relative costs and benefits) or for particular project design options (e.g., choosing between reconstruction and resurfacing based on comparative life-cycle costs). Fewer still evaluate investment trade-offs at the system level between asset classes such as pavements, bridges and transit. The current approach to asset management in general and resource allocation and investment analysis, in particular, is more tactical rather than strategic. One reason this is the case is that the procedures, as well as the underlying data and assumptions, fail to produce conclusions defensible enough to replace well-established decisionmaking traditions. Another reason is that many States lack appropriately trained analysts with the ability to implement the available tools and/or to translate the results of complex analytical processes into conclusions readily understood by executive decision-makers. Elected officials recognize the importance of being able to economically justify expenditures funded by their constituents. The American public demands assurance that they are getting the best 5

6 possible return on resources invested. EEA tools can establish an effective platform for communicating with the public (as well as between asset classes and decision-makers at all levels of the organization) as they provide a framework for organizing information and defending recommended alternatives. They highlight the relevant benefits and costs of competing investment options as well as demonstrate the functional and economic roles of highway activities. The EE&I Team is interested in establishing a toolbox of economic-based decision support tools that are practical and credible to State DOTs. This paper presents two such tools: the Highway Economic Requirements System (HERS) and LCCA. 5 Highway Economics Requirements System 5.1 Background The biennial Status of the Nation s Surface Transportation System: Conditions and Performance Report (C&P Report) to Congress, provides information on current system condition and performance and future capital investment requirements to achieve specified system performances levels. The Report also provides an assessment of the relationship between investment requirements and current spending. The investment requirements presented in the report are generated by a simulation model, HERS, which assumes the application of economic principles in programming highway dollars. The results, as presented in the C&P Report series, establish useful benchmark measures of highway investment estimates. The model supports program and budget development by reporting the cost to achieve and maintain, at the National level, a highway system that is economically efficient. HERS uses marginal benefit/cost analysis to optimize highway investment. HERS addresses highway deficiencies by quantifying the agency and user costs of various types and combinations of improvements, each subjected to a rigorous benefit/cost analysis that considers vehicle operating, travel time, and safety costs. A recent improvement to HERS includes the incorporation of emissions into the decision-making process. Within the HERS process, State travel forecasts are analyzed to predict future pavement and capacity deterioration. Using a set of user-defined standards, generally based on good engineering practice, the future demand is translated into pavement and capacity deficiencies. HERS selects the best set of highway improvements to satisfy economically sound highway performance objectives. When funding is not available to achieve optimal spending levels, HERS will prioritize economically worthwhile potential improvement options according to relative merit (that is, net contribution to social welfare) and select the best set of projects. Given funding constraints or user-specified performance objectives, the system minimizes the expenditure of public funds while simultaneously maximizing highway user benefits. HERS extends the traditional engineering-based means of considering infrastructure investment strategies by evaluating the impact of highway condition and performance on highway users, as well as the impact of users on highway performance. 5.2 State Implementation Issues HERS is recognized as an important advancement in integrating economic considerations into transportation investment decision-making. HERS provides useful information regarding the economically optimal mix of improvements under a constrained budget. Further, while HERS was not designed to provide definitive program allocation answers, it is a potentially powerful analytical 6

7 device that provides decision-makers with important investment/performance benchmarks. The model could be useful in providing analytical support in determining the increment of State resources that could be efficiently allocated to highway programs. FHWA hypothesizes that the States might find value in using HERS to conduct a needs assessment for State highway pavement and capacity requirements. HERS uses the Highway Performance Monitoring System (HPMS) database to obtain information on current conditions and performance as well as estimates of the future travel demand. States collect the HPMS to submit to the FHWA as well as to support their own PMS. Therefore, there exists an important data link between a given State s PMS and HERS. Although, the PMS demands far more information (data elements) than does HERS. For example, HERS makes pavement improvement decisions based on a facility s International Roughness Index, a measure of smoothness. HERS does not consider cracking and rutting -- two information items critical to the PMS. 5.3 Short-Term FHWA Initiatives The FHWA Office of Asset Management is, at present, in the process of launching a feasibility study to assess the demand for State-level application of HERS. This first step will be to introduce the general HERS concept to as many States as possible through briefings, miniworkshops, and overview literature. Next, the States will be invited to volunteer to serve as a pilot test State to work with the model over a period of months to assess its appropriateness for State use. These States will provide their final assessment and/or recommendations for future revisions. Assuming a role for HERS, FHWA will organize a series of educational forums for using the model. In addition, the EE&I Team will lead efforts to revise the Federal version of the model and identify and address impediments for application. This process provides a model for introducing new tools to the States. First, opportunities to build on existing tools and procedures will always be the first option. Both HERS and LCCA initiatives (see below) are examples of activities with excellent foundations that can potentially provide short-term successes while at the same time allow the Agency to leverage limited resource funds. A second observation is that activities originating from the EE&I Team in particular, and the Office of Asset Management in general, will always seek State input early in the process. Finally, the Office of Asset Management is committed to undertaking activities of broad influence that will potentially benefit all State agencies. In this way, States are not put in the position of duplicating efforts and expending valuable resources to reinvent a wheel already built by another State. 6 Life-Cycle Cost Analysis 6.1 Background LCCA is defined as:... a process for evaluating the total economic worth of a usable project segment by analyzing initial costs and discounted future cost, such as maintenance, user, reconstruction, rehabilitation, restoring, and resurfacing costs, over the life of the project segment (Act, 1995). 7

8 Simply stated, LCCA is an analysis of agency and user costs incurred over the life of a project. By adopting a long-term view of the transportation system, LCCA promotes consideration of total cost, to include maintenance and operation expenditures. It may be more cost-effective to invest relatively more money up-front during the construction phase so as to reduce total costs over the life of the project. Comprehensive LCCA includes all the economic variables essential to the evaluation: user costs such as delay and safety costs associated with maintenance and rehabilitation induced delays, agency capital cost, and life-cycle maintenance costs. 6.2 State Implementation Issues Almost all States use LCCA in some capacity. However, State application of LCCA is highly diversified. In some cases, the underlying assumptions are derived through intuition. In other cases, a number of the parameters considered essential for a classic, systematic textbook approach are not considered. For example, only about one-quarter of the States include user costs in their LCCAs. While LCCA procedures and methods have application for program and policy analysis, those Sates currently using LCCA do so primarily in the context of pavement management, most typically at the project level. Further, most of the States that use LCCA do so for pavement type selection and design specification (for new construction, reconstruction and major rehabilitation). Few States use the technique to evaluate alternative pavement projects. LCCA is used infrequently for bridge project decisions. The fact that LCCA is applied narrowly (e.g., mostly for pavement design) and incompletely (e.g., not including user costs) is not surprising given the limits on the availability of critical data and limited theoretical understanding of the relevant concepts and techniques. The main concerns surrounding implementation of LCCA by States focus on the following technical issues: Selecting an appropriate discount rate Questions about whether to incorporate and how to quantify non-agency costs such as user costs (e.g., value of travel time and environmental externalities) Securing credible supporting data, to include traffic data Projecting costs and travel demand throughout the analysis period Estimating salvage value and useful life Estimating maintenance costs and effectiveness Modeling asset deterioration Predicting impact of uncertain future events such as technology and those driving fuel costs Beyond the technical hurdles, State practitioners are faced with the significant challenge of reconciling the long-term view required by LCCA with budget cycles and political realities. State budgets generally cover time horizons from one to two years. Therefore, predicting available funds over the long-term is difficult. The short budget cycle combined with uncertain future funding levels creates pressure to select the alternative with the lower initial cost, regardless of total life-cycle costs. In other words, the cost-efficient solution may not be the most politically practical solution. A further complication is that elected and appointed officials with only a few years remaining in their terms often find the long-term perspective politically untenable. 8

9 6.3 Short-Term FHWA Initiatives LCCA is not a new area of interest for FHWA. For example, over the past five years activities have included a December 1994 LCCA Symposium which was jointly sponsored with AASHTO. Also in 1994, FHWA published a LCCA Policy Statement in the Federal Register. Most recently, since 1997, FHWA developed LCCA technical guidance and has been conducting a formal training and technical assistance program for LCCA as it pertains to pavement design. It is also noteworthy that the Executive Branch issued, in 1994, Executive Order 12893, Principles of Federal Infrastructure Investments which requires the benefits and costs of infrastructure investment be measured and appropriately discounted over the full life cycle of each project. At the same time, many States have been working on developing and/or refining their LCCA tools and approach. With the establishment of the EE&I Team, FHWA has made LCCA a priority initiative. Two LCCA tracks have been identified: One will focus on refining, developing and distributing LCCA tools and techniques for State use. The other will concentrate on identifying and addressing impediments to implementing LCCA. The objective is simple: to expand the use and technical completeness of LCCA by State DOTs. The EE&I Team has identified work in the following areas to address these issues. First, research will be directed at the development and refinement of analytical tools and techniques. This will include addressing knowledge gaps in critical areas such as (1) the valuation and appropriateness of including user, social and environmental costs; (2) analysis period, discount rates and salvage values; (3) asset performance prediction techniques; and (4) data acquisition techniques. Work in this area will also include development of software for a generic comprehensive LCCA approach. This model will include a module for analyzing uncertainty through risk analysis. Finally, in terms of research, a minimum theoretically acceptable level of LCCA will be defined. The second task area involves providing technical assistance in the implementation of LCCA. Activities will include the preparation and distribution of information via technical advisories and manuals. Such material will articulate LCCA principles and will include recommendations on overall LCCA techniques. Also covered will be specific issues such as the appropriate value to be used for critical factors in LCCA such as for user costs, discount rates, salvage values and useful lives. Another part of providing technical assistance is educating States as to best practices from other States, defining the state-of-the-art and benchmarking the state-ofthe-practice. Finally, the team is charged with training. Training efforts will include expanding the number and scope of LCCA related training courses so that the above discussed research and information may be applied in practice. Training activities will also include demonstrations of working examples of existing processes from lead States. 7 Conclusion Underlying all activities of the Office of Asset Management is knowledge-sharing. This includes disseminating information and guidance to State practitioners and executives as well as educating those outside of highway transportation as to what the States are attempting to accomplish with Asset Management. As indicated earlier, it is imperative that legislators as well as stakeholders gain an appreciation of what this new discipline has to offer. In the spirit of knowledge sharing, the Office will publish an executive-level primer on Asset Management. The primer will describe Asset Management, provide an overview of how 9

10 infrastructure assets are presently managed, and then lay out, in general terms, the components of a fully functional and integrated Asset Management system. The primer will give readers a sense of where we are today with asset management, where we would like to be, and how we might move in that direction. Another important outreach activity will be the third major seminar on Asset Management in Transportation. The seminar, planned for December 1999, will be a peer exchange between State representatives in which they will share their experiences in implementing Asset Management in their organizations. FHWA is co-sponsoring the event with AASHTO. The first two conferences were very successful and provided useful information on the current-state-of- practice with respect to Asset Management in the private sector as well as the transportation sector. A major goal of the second conference was to formulate a strategy for advancing a National Asset Management initiative. This was achieved with the establishment of an AASHTO Asset Management Task Force and Strategic Plan and, of course, organization of the Office of Asset Management by the FHWA. 8 References Act. (1995). National Highway System Designation Act of 1995, modified by the Transportation Equity Act of the 21 st Century. Asset Management. (1996). Asset Management: Advancing the State of the Art into the 21 st Century Through Public-Private Dialogue, Federal Highway Administration (FHWA)/American Association of State Highway and Transportation Officials (AASHTO) Sponsored Workshop, September. 10