Arriving at Depreciated Replacement Cost. Supported by HAMFIG

Transcription

1 Arriving at Depreciated Replacement Cost Supported by HAMFIG

2 What is DRC? a method of valuation which provides the current cost of replacing an asset with its modern equivalent asset less deductions for all physical deterioration and all relevant forms of obsolescence and optimisation.

3 Key terminology Depreciation: Systematic allocation of the depreciable amount over the useful life. Each significant component should be depreciated separately Depreciable Amount: Asset cost less residual value Useful Life: Period that the asset is expected to be available for use by the authority

4 What is a significant component? Does NOT mean breaking an asset down to the smallest element DOES mean breaking asset down into sensible and significant parts, so that they can be depreciated separately Two types of component: 1. Finite life (Typically yrs, but some shorter, and some longer) 2. Infinite life a.those requiring capital maintenance to achieve expected life b.those NOT requiring capital maintenance to achieve expected life

5 Lighting TMS Components with a Finite Life Street Furniture Surface layers of Carriageway, Footways and Cycleways Some occasions underlying layers of the above Some components of Structures

6 Components with a Indefinite Life Majority of underlying road layers Some components to structures

7 Calculating Depreciation the aggregate cost of all the capital replacements/treatments needed to maintain/restore its service potential over the life cycle, spread over the estimated number of years in the cycle This requires 2 things: 1. Capital costs 2. Estimated lives Rates generated by applying the financial model (Chapter 5) should provide these figures as they are net of residual value Depreciation is calculated on a straight line basis over the Estimated Service Life (ESL)

8 Service Life of Surface Treatments ADEPT and RSTA May 2011

9 Work undertaken by a joint working group of ADEPT and RSTA Agreed baseline of values Definitive values to use unless specific performance data is available to justify alternative figures:

10 Principal Calculations GRC Accumulated Depreciation = DRC DRC Years of Life Remaining = Annual Depreciation

11 Principal Calculations STEP 1: Calculate Accumulated Depreciation STEP 2: Deduct Accumulated Depreciation from GRC to give DRC STEP 3: Divide DRC by # years remaining life to give Annual Depreciation figure

12 What will you need to get started?

13 What is needed to calculate the DRC? Good quality inventory data Condition data Age of each component Where each component is in its life cycle

14 Asset Classification Level 1 1. Carriageways 2. Footways 3. Linear items 4. Structures 5. Highway lighting 6. Street Furniture 7. Traffic Management Systems

15 Calculating DRC Source: Table 2.1 The Code

16 Let s look at the simple examples first 5. Highway Lighting 6. Street Furniture 7. Traffic Management Systems

17 Why these first? Less complex Componentisation more straightforward All assets and components have finite lives Generally Authorities have good inventory data at least for lighting and TMS!

18 On a straight line basis Annual Depreciation See Chapter 7 for general approach to calculating annual depreciation See Chapter 5 for how this fits within the financial model

19 Initial DRC Relies on availability of: Inventory Asset / component age If you do not have age data then best estimate will be needed ESL should be based on YOUR experience, rather than industry standards Rule of Thumb for checking out estimates (see )

20 Lighting/TMS & Street Furniture The graph below is representative of typical lighting/tms renewal cycle i.e. end of life systematic renewal This form of lifecycle renewal and deterioration leads to a straight line relationship over a given ESL. AD = Cost / Time Source: Figure 10.2 The Code

21 Lighting/TMS & Street Furniture Age profile is limited and based upon bulk installation assumed by material type provides a crude and simplistic platform where gaps can be overcome with time To calculate DRC Age profile Straight line deprecation Agreed ESL of asset Unit rate for capital replacement / maintenance

22 Lighting Network Example

23 Principal Calculations STEP 1: Calculate Accumulated Depreciation STEP 2: Deduct Accumulated Depreciation from GRC to give DRC STEP 3: Divide DRC by # years remaining life to give Annual Depreciation figure

24 STEP 1: Unit Rate Calculation Cost Element GRC DRC Column Luminaire Cabling / Ducting Surface reinstatement Removal of old column?

25 STEP 1: Age Profiling Best estimate of age profile, using age bands You can decide your own age bands Top of the age bands determined by your local ESLs Recommend you work on average age basis A column by column basis would take much longer!

26 STEP 1: Assumptions ESL is 45 years for all column types GRC rate (MEA basis) is 800 per column Unit rate cost of replacement is 1,000 per column, on average The above are purely assumptions not default figures

27 STEP 1: Accumulated Depreciation Average Age Unit Rate (assumed 1,000 average) ESL (assumed 45 years for all columns) Accumulated Depreciation per column ( 1,000 / ESL x Average Age) Number of Units Accumulated Depreciation per age band 5 1, yrs , , , yrs ,018 42,232, , yrs ,893 7,144, , yrs ,893 9,343, , yrs 1, ,893 9,893,000

28 STEP 2: DRC Average Age Number of Units GRC Unit Rate (assumed 800 per column) Accumulated Depreciation per age band DRC 5 7,350 5,880, ,659 5,063, ,018 60,814,400 42,232,560 18,581, ,893 7,914,400 7,144, , ,893 7,914,400 9,343, ,893 7,914,400 9,893,000 0

29 STEP 3: Annual Depreciation Average Age DRC ESL remaining Annual Depreciation 5 5,063, , ,581, , , ,

30 The ESL issue Can we have lighting columns still in working order and providing a service, that in terms of the Code have reached the end of their ESL? DISCUSS..

31 The ESL issue Surely if the lighting columns are providing a service, then they have a value Maybe we should re-visit our ESL?

32 Graphic Outputs from Detailed Model

33 Component Approach If you have the data, you might consider breaking down into components and depreciating these separately For example Source: Table 4.1 The Code

34 4. Structures

35 Structures Atkins have been commissioned to produce a new specific toolkit The Toolkit will be available in time for 2011 / 2012 returns

36 Carriageways

37 Carriageways DRC DRC represents the net current value of the asset i.e. GRC less depreciation and impairment Annual Depreciation is the aggregated cost of all capital replacement/treatments needed to maintain/restore the assets service potential over the life cycle, spread over the estimated number of years of the cycle.

38 Carriageways DRC Carriageways have two main components Pavement (top 100mm) Requires maintenance treatments and is classed as having a finite life. Underlying layers (base construction layers) No maintenance required and is (generally) defined as having an indefinite life and therefore it does not depreciate. An allowance is made for small repairs to these underlying layers within the C/W renewal rate.

39 Carriageways DRC How is DRC calculated? Condition data is taken from CVI, DVI and scanner surveys and is ran through UKPMS Inventory breakdown is still required for DRC and is based upon the same break down as per the GRC calculation. Road hierarchy, Speed, U/R split, Road type

40 Carriageways DRC Example breakdown based upon the GRC C/W road classification: Road Classification M Urban A Urban A Rural B Urban B Rural C Urban C Rural U/C Urban U/C Rural Each of these road classifications have similar treatment options and therefore DRC can be calculated for each sub-group. Reconstruction Rehabilitation Partial Depth Reconstruction Inlay Overlay Micro surfacing Surface Dressing

41 Carriageways DRC Simple Life Cycle Plan Total Useful Life (T TUL ) Renewal outweighs maintenance (economic sense) Renewal Rate /m 2 Local rates based on works (includes an allowance for lower layer works) Deterioration Initiation point (T INI ) Measurable deterioration point. C/W may not show deterioration for a period of time even though it is not in an as new condition Width data UKPMS can calculate average width from your inventory data and/or standard UKPMS default values You can override these with the HAMFIG default values used for GRC calculation Use of default values not allowed from 2011 / 2012

42 Carriageways DRC Simple Life Cycle Plan Source: Table 8.1 The Code This is an example only and does not represent default values!

43 Calculation DRC - Carriageways UKPMS calculates the overall condition for each section UKPMS converts condition value into depreciation value Depreciation value is shown via a depreciation curve and line (See Technical Note 46 for detailed explanation of methodology) Source: Figure 8.1 The Code

44 Carriageways DRC: The Future Use of default Carriageway width values not allowed from 2011 / 2012 Authorities expected to start collecting carriageway age data as a basis for calculating DRC need to start recording this as and when capital work is undertaken However, long life surface treatments for many unclassified roads means that condition will remain a proxy for some considerable time to come

45 Annual Depreciation Carriageways Two levels: Interim version (8.5) using data inputs (other than deterioration initiation) Aspirational version (8.7) using deterioration modelling and UKPMS data to refine inputs

46 Annual Depreciation Carriageways Interim version for section data within UKPMS and based upon standard attribute data such as: Road Hierarchy Urban or Rural Speed Limit Road Type Classification with Well Maintained Highways Annual Depreciation = Total network area (m2) x renewal unit rate Total Useful Life

47 Annual Depreciation Carriageways Annual Depreciation is calculated by creating a life cycle plan for the asset Expected life of maintenance cycle/treatment lives Trigger points Condition data and deterioration modelling Cost There should be some allowance for sub layer works arising from external factors, such as: Utility company openings Poor underlying ground conditions Heavy goods vehicle traffic This might be a simple % addition based on historic trends?

48 Carriageway Life Cycle Planning Detailed Approach Will need a substantial amount of data to be workable and useful You need to develop a data strategy in order to move towards detailed life cycle planning, identifying: What you need to collect Critical gaps in current data

49 Footways

50 Footway DRC: What s in and what s out? Includes: Footpaths part of the highway network Cyclepaths Paved highway verges Excludes: Cycle lanes (within carriageway calculations) Grey areas: Shared surfaces: You could include these within carriageways? Pedestrian areas: Could include this within footway?

51 Footway DRC Footways are very similar to carriageways and there is scope for calculating the DRC using UKPMS A new Footway Network Survey (FNS) technique is being introduced to UKPMS

52 Footway DRC For demonstration purposes DVI information already obtained will be aggregated across the footway network to demonstrate the DRC calculation. Primarily concerns Footway surface bound layers that are depreciable i.e. top mm There should be some allowance for sub layer works arising from external factors, such as: Utility company openings Tree roots Vehicle over-running

53 Footway DRC Steps for calculating the accumulated depreciation Divide the footway network into sub categories i.e. hierarchy Further sub-divide by construction type as to group footways that require similar treatment types and can be assumed to have similar deterioration assumptions made. Calculate a square meterage for each sub group made Evaluate %age for each network sub-group in relation to condition banding; red, amber, yellow and green. These bandings are mapped to specific treatments Evaluate typical treatments for each band together with unit costs (taken from current contract/maintenance works) Green band assume 50% of yellow banding cost

54 Footway DRC Footway Network Step 1 Hierarchy Group 1 Hierarchy Group 2 Hierarchy Group 3 Step 2 Construction Type 1 m 2 Construction Type 2 m 2 Construction Type 1 m 2 Construction Type 2 m 2 Construction Type 1 m 2 Construction Type 2 m 2 % Area Red % Area Red % Area Red % Area Red % Area Red % Area Red Step 3 % Area Amber % Area Yellow % Area Amber % Area Yellow % Area Amber % Area Yellow % Area Amber % Area Yellow % Area Amber % Area Yellow % Area Amber % Area Yellow % Area Green % Area Green % Area Green % Area Green % Area Green % Area Green Step 4: Evaluate a typical treatment type for each condition band Step 5: Calculate a typical cost for each treatment type for each condition band

55 Footway Condition Bands Condition Band RED AMBER YELLOW GREEN Required Treatment Structural Resurfacing Surface or localised None

56 Footway DRC Green x Appropriate Rate (i.e. applicable treatment cost for band) Yellow x Appropriate Rate (i.e. applicable treatment cost for band) Amber x Appropriate Rate (i.e. applicable treatment cost for band) Red x Appropriate Rate (i.e. applicable treatment cost for band) = Accumulated Depreciation i.e. how much of the asset has used up GRC Accumulated Depreciation = DRC

57 Footway DRC DRC is calculated by rating each footway section and applying a set unit cost. Total area within footway category Cost of Treatment Cost Condition Bitmac Flag Bitmac Flag Bitmac Flag Bitmac Flag Green 10% 0% 110,000 35, k 158k Yellow 35% 2% 3,900, , m 2m Amber 25% 3% 2,750, , m 11.9m Red 20% 5% 2,700, , m 47.7 Total accumulated depreciation for F/W = 366,000,000 Therefore the DRC = GRC - 366m

58 F/W Annual Depreciation This value is based upon the F/W LCP which is similar to the C/W example as previously shown. The LCP needs to develop a method to determine the most effective way of maintaining the footway asset. AD = [ 2 Unit Rate/ m for all treatments within the lifecycle] [ Area] Number of years in the lifecycle

59 Footways DRC: The Future? Use of default footway width values not allowed from 2011 / 2012 Authorities expected to start collecting carriageway age data as a basis for calculating DRC need to start recording this as and when capital work is undertaken

60 Impairment

61 Impairment: General Reduction in net value of an asset due to sudden or unforeseen decrease in previously measured condition and/or performance that is not accounted for through depreciation, e.g., Unanticipated early replacement Catastrophic flooding, landslide, earthquake or other adverse weather events If you are undertaking your calculations at year end anyway, impairment may be limited Also includes temporary but long term loss of an asset, e.g., long term bridge or road closure

62 Lighting, TMS, Barriers etc Experience may tell you to expect a certain number to be damaged or destroyed by external events each year Could build this into life cycle plans If actual experience differs from expectation then impairment would be needed

63 Carriageways As depreciation is based on condition, difficult to distinguish between depreciation and impairment Therefore not likely to be a major factor If your allowance for damage to underlying layers proved to be insufficient then could be some impairment here You could make allowance with your life cycle plan for a certain frequency of sever weather events, therefore allowing for this within your depreciation calculation If actual experience differs from expectation then impairment would be needed

64 Footways As depreciation is based on condition, difficult to distinguish between depreciation and impairment Therefore not likely to be a major factor If your allowance for damage to underlying layers proved to be insufficient then could be some impairment here

65 QUESTIONS?