USE OF ASSET VALUES IN PAVEMENT MANAGEMENT SYSTEMS B. Sc. Eng. and BA Com., Jorn R. Kristiansen Carl Bro a/s Kokbjerg 5 DK-6000 Kolding Denmark Tel: +45 / 8228 1470 / Fax: +45 / 8228 1401 E-mail: jnk@carlbro.com ABSTRACT A well-known fact, also recognised by OECD, is that Pavement Management Systems (PMS), Bridge Management Systems (BMS), etc. are natural elements of a total Asset Management System. Furthermore, it is a well-known fact that Asset values are booked as zero in public accounts within the Public Transport Sector in most countries and that many countries are planning to introduce Asset Management in order to change this. On the other hand, knowledge of how asset values are applied in a pavement management system is less common. How asset values are part of and applied as optimisation and benefit parameters in connection with a large amount of PMS implementations is also a less wellknown fact. PMS implemented in industrialised countries often use asset value as a parameter, due to the fact that in most cases the road networks of these countries are in a fairly good condition and it may thus out of calculation technical reasons be difficult to prove to local authorities (politicians, economists, etc.) the economic benefit from currently investing means in systematic road network maintenance. This paper describes how asset values expressed as e.g. road capital has been and can be applied together with or as a supplement to the normally applied PMS optimisation parameters, such as VOC, B/C, IRR, NPV, service level, scrap value, etc. The paper will also describe how asset values have since 1991 been applied and currently are being applied in connection with a number of pavement management system implementations in especially central and northern Europe. The paper will also describe, how asset values are part of the optimisation algorithms. Experiences gained from implementation of the method for road networks consisting of motorways and highways as well as of city and municipal roads will be presented. The road networks ranged from 50 km up to approximately 50,000 km. Finally, the paper will tell about, how asset values in combination with PMS have become important parameters of follow-up criteria for the authorities when outsourcing to the private sector a number of projects comprising the current maintenance (operation) of parts of the Danish road network. Typically contract periods are 15 years and all projects have due to the contract sizes and the exceeding of EU s threshold values been put up for tender under the auspices of the EU.
1 ASSET MANAGEMENT AND ROAD CAPITAL Asset Management (AM) is an expression that in free translation means control and administration of assets. Within the area of roads the assets comprise the road network and all its buildings, elements, etc - in other words everything in which investments have been or are being made in order to create an infrastructure within the road sector. To this can be added a number of elements that to a certain extent can be shared with other areas such as supply systems, development areas, etc. When talking about Asset Management, it is important to stress that AM is in itself not a system, but a process in which information from existing Pagement Mangement Systems (PMS), Bridge Management Systems (BMS), Utility Management Systems (UMS) and other systems are applied and as a total can form an Asset Management System (AMS). OECD has described AM in this way: Asset Management is not a system it is a process in which we are using existing information systems and tools developed in order to facilitate the need of society as well as the road users. Asset Management builds upon a business like approach. Asset Management focuses on the customer. Thus, an AMS is a process during which we work with information and values collected from other systems and a systematic way of combining and applying the information. An example would be the entire national, county or municipal road network. Another example is the total value of the entire building stock, supply system, and of course also the total value of the public assets. The fact that all these values in most countries are booked with a value of 0.00 - primarily due the structure of the present public accounting systems - gives foot for thought. It would thus be interesting to estimate such values, though figures alone from public accounts and/or budgets would not be of much use. In order to benefit from such estimation there should be a plan (AM) for, how the information should be applied in a relevant way. Many countries have taken the first steps towards the application of cost based accounting in stead of expenditure based accounting. One of these countries is Germany, where they have decided to register and book the values of all public assets, irrespectively of type. In other countries they have decided only to set the values of buildings, supply networks and institutions. In both cases, however, we are talking about stable investments for which resources are to be used for an as optimum as possible future operation and maintenance. If we then try to find a difference in the understanding of the importance of both cases, then this would probably be that an institution may be sold but not a road network - yet? Whether or not a road network can be sold and whether or not a value has been booked for the road network, there is no doubt that the road network is one of the most important public capital values. This holds for all three levels nation, county or municipality. Thus seen with Asset Management eyes it is important that the value of an asset is secured and treated as optimally as possible. An effective way of doing this is to let the value (often called the road capital) be part of the optimisation parameters that are applied for allocation of funds and methods for road maintenance.
2 ROAD CAPITAL INTEGRATED WITH PMS HAS BECOME A PRECURSOR Already in 1991 RoSy PMS as one of the first systems in the world - allowed optimisation of the road maintenance taking the asset value (road capital) into account. At the same time the application of this term was introduced in almost all industrialised countries, where the system was applied. One of the reasons for introducing the application of asset values as one of the optimisation parameters should be seen in the light of the fact that the optimisation parameters (user costs) that originally came in connection with the development of the first PMS were in general only applicable in the development countries. The standard of road networks in most industrial countries was of a quality that meant that the user costs, as a function of roughness and traffic density (apart from queues and accidents), in calculations will be at such a low level that any specific economy in maintaining roads could not be proven!? This means that it is not possible to use the calculation basis for development countries for industrial countries and visa versa. An example is that in the industrial countries we have to work with the concept of inflation as a cost. This rarely happens in the development countries, as funds are here granted by donors (e.g. the World Bank). This means that the local inflation will hardly have any influence on the selection of a solution. Finally, the standard, value and costs for repair etc. of the users vehicles in industrial countries differ considerably from those in the development countries. As compensation for the problems with user costs, some systems have introduced technical limit values (e.g. PSI, RDI, IRI, warning levels, maximum levels, etc.) for when a road should be maintained. The problem about such limit values is, however, that even if these values are almost always set by "experts", then the values are set subjectively and solely based on a feeling of "this will not do any longer". A signal that e.g. the political level in the individual road agencies finds difficult to relate to. The introduction of the parameter road capital and thus the possibility of calculating the loss of value resulting from non-maintenance, means that contrary to a subjective technical optimisation it has been possible to make a clean economically objective benefit/cost optimisation (EUR for EUR). It should, however, be mentioned that user costs can then irrespective of the minimal influence still be considered if these costs apart from the normal user costs (fuel, repairs, tires, etc) also include accidents and queues, which will for major roads give a measurable effect even in industrialized countries.
A. Agency Cost B. User Cost C. Loss of Value of Road Capital D. Total Transport Costs Costs Low Road condition High Fig. 1: Relation between service level and cost elements Figure 1 shows, how user costs and loss of road capital depend on the maintenance effort. The user costs in the figure are indicated to run through a considerable change in value, which hold for very poor roads in e.g. development countries. In principle only municipal roads are in most European countries of a standard that results in considerably increased costs for the users. On the other hand the traffic density on most municipal roads is so low that the total increased user costs will be minimal in any case. If we take a look at the loss of the road capital value that the road agencies may experience over a given period of time, then the loss on the municipal roads will probably be relatively larger than on e.g. motorways. This may be traced back to the various road structures. In other words: In connection with clean economic optimisations with an AMS, user costs have - leaving queues and accidents out of account only limited effect, whereas loss of value, if nothing is done, will have a considerably larger effect. Just as when you do not maintain your car. 3 THE TERM MINIMUM COST LEVEL The value of assets (road capital) may thus be applied with advantage as an optimisation parameter, when the kind of measures to be taken on the road network is decided. Applying of this method also means that it is possible to determine, which condition is the economically optimum to maintain on a road network. A too low (poor) condition results in heavy maintenance costs and heavy losses of road capital, whereas a too high (good) condition looses practically no capital value, but spends too much money on new pavements. Somewhere in between the minimum cost level the optimum service level may be found seen from a solely economically optimum point of view. See figure 2. However, the fact that this service level is not always selected is another matter. It is though a fact that irrespective of the choice is a higher or a lower standard for the service level than the depth peak, this choice will always be more expensive from an economic point of view.
Furthermore, the minimum cost level is not static. The location of the point on the X-axis varies individually from road section to road section depending on the current condition and structure, the present and future load of the section and not least the price of the various maintenance methods, etc. Relationship between D. Totale service omkostninger level and maintenance costs Costs Economic optimum level Increasing of economic backlog Service level too high from an economical pointofview Low Condition (Service level) High Fig. 2: Determination of the economically optimum service level 4 ASSET MANAGEMENT IS MORE THAN ROAD CAPITAL As appears from the above, AM is more than application of road capital as an optimisation parameter in a PMS. The application of AM methods in a PMS is only - from a pure economic point of view - an optimum way of securing an optimum application of the operation equipment and maintenance funds. The fact that it is in principle possible to earn money (avoid loss of value on assets) by using money (on maintenance of assets) is a well-known and widespread view within the private sector. The public sector also approves this view, but includes, as it is a known fact, a number of other values than the pure economic values. Here the fact should be accepted that even if the asset values (road capital) is a parameter in the decision of which measures should be carried out on the roads and thus also have influence on the value obtained afterwards, the value (and change of value) is still not being booked in the old budget systems. In other words, the value adding (or the opposite) consequence of actions will subsequently not appear from the public accounts. Another well-known consequence of this condition is that within the financial area it is and has been very difficult to set up objective competition models allowing comparison of, whether the public or the private sector is better at solving a given service or maintenance task.
In e.g. Germany, but also in other European countries the first steps on the road towards more transparency and the possibility of an increased public/private competition have been taken. One of the tools is e.g. to value all public assets and thus also include all road network related assets in the public accounting systems. A spin-off of this is that many countries are now heading for the application of AM in the actual sense of the word. 5 ASSET MANAGEMENT IN NORTH AND CENTRAL EUROPE (ESPECIALLY IN GERMANY) Road capital as a possible optimisation parameter on equal terms with user costs (VOC, etc.) was introduced in RoSy PMS in 1991. Since then approx. 300 road agencies are in nine out of the 19 countries, in which the system is in use today,e using this facility. Especially the industrial countries have seen the advantages of this. The road capital value is an inseparably part of the AM way of thinking, which without doubt has pushed this process. Figure 3 shows the countries in Europe that apply road capital as an optimisation parameter. Fig. 3: Countries in Europe and the number of road authorities applying road capital as a calculation parameter. Germany has, as mentioned earlier, decided to introduce budget systems (so-called cost budgets) and in principle also laid the foundation stone of a real AM for the entire public sector and active consideration of the value of the invested road capital. This is due to not least Germany s decision to value the infrastructure in the public accounts (something that some countries still refuse to do). This has in many ways made Germany a pioneer as regards the introduction of the AM concept within the road sector. Below we will illustrate, how they apply road capital and AM asawholeingermany. The logical connection between the road network and the future maintenance of assets (road capital) based on the AM concept is generated on the basis on the German decision to introduce by Statute Neues Kommunales Finanzmanagement (NKF) or Doppischer Kommunalhaushalt in all Bundesländer.
The principles are indirectly based on the experience that Germany gained in connection with the annexation of the earlier GDR. The annexation meant that they had to value all assets and construct interim accounting systems in order to have a survey and a basis for decisions for the integration. The considerable difference (see figure 4) in relation to many existing accounting and budget systems is that both assets and liabilities are activated and a cost based accounting system is introduced in stead of an expenditure based accounting system. With this accounting system it will in future not only be possible to compare the public and private sectors but also, which is even as important, to create a possibility for the public sector to work with depreciations in connection with both assets and liabilities. As the asset side will cover all assets irrespective of type, a basis for a different planning and way of thinking in the future Germany has indeed been created and all parties involved are anticipating result with excitement. RoSy PMS - Einbindung im NKF-Modell Bestandsdaten Bestandsdaten Zustandsdaten Durchgeführte Maßnahmen: Daten aktualisieren RoSy Software Datenverwaltung Maßnahmenkataloge NKF 3SäulenModell Auswertung Finanzrechnung Einzahlungen./. Auszahlungen Liquiditätssaldo Bilanz Ergebnisrechnung Aktiva Passiva Vermögen Eigenkapital Erträge./. Aufwändungen Liquide Mittel Fremdkapital Ergebnissaldo z.b. Übergabe an ERP-Tool Priorität nach Nutzen- Kosten-Faktoren RoSy PMS Eröffnungsbilanz jährl. Ergebnisrechnung Objektive Entscheidungsgrundlage Wirtschafts- und Budgetpläne Fig. 4: The new German NKF accounting system where assets and liabilities are activated. At the moment Carl Bro is via its German subsidiary GSA, Gesellschaft für Strassenanalyse mbh involved in a comprehensive number of projects with the intention to secure and deliver the correct value of the opening balance (replacement cost) and secure a current control of, whether the depreciated values in the accounts will in future correspond to the actually realised values on road network. Something that is very difficult to do without the application of a PMS where road capital is one of the active optimisation parameters. The RoSy systems are applied as a tool for provision of such values and the current control as a natural consequence of large extension of the system in Germany. See figure 5.
Fig. 5: RoSy extension in Germany As a method for valuation of the assets they have decided to apply the method(s) for valuation, depreciation, etc. applied for determination of e.g. the above-mentioned road capital value. In this case it is not only the value of the carriageways and roadside area elements, but also the value of all other elements connected to a road network. This results in a rather large number of items in the assets in the new accounting system. 4.2.4.5 Valuation and assessment of streets, roads, spaces and intelligent traffic systems A total preparation with group assessment is not allowed, not even as an interim solution. Such a mixing of different system components as regards value will not allow a later structuring and detailing - especially as regards the preservation of additions and disposals of assets. Fig. 6: Translation of the German condition for valuation of the road network. It is of special importance to mention that it is fairly simple to evaluate e.g. buildings by means of the public evaluations for e.g. a school, a hospital or a similar building, whereas a road network is a far more dynamically sensitive asset. This led to a decision that roads cannot be evaluated and depreciated as a block item road by road. In stead the road network should be evaluated per section and individually taking their initial value, condition, load, structure, remaining lives, etc. into account. Furthermore, these values include, as mentioned earlier, footpaths, plantings, lightning, signs, etc. See also figure 6.
6 ASSET MANAGEMENT, ROAD CAPITAL AND ALGORITHMS As it appears from the above sections the evaluation of road networks should be done carefully and not with a rough grouping of the individual road elements, road sections, etc. which would prevent a later individual depreciation of the individual road sections. A composition by groups would make it impossible to make an effective future optimisation of the road network in accordance with the AM concept. Each individual condition/maintenance section must therefore be evaluated individually. Furthermore, the individual elements of the individual sections must also be evaluated individually. The wearing course of a given road section will often have a shorter depreciation period and thus loose value faster than the base course. Likewise the value of kerbs, footpaths, etc. will partly depend on the measures that are made on the road (due to a need for a minimum kerb height). To this comes that certain roads may have bearing capacity problems, which means that a newly laid wearing course looses its value faster than it normally would. In RoSy the following equations are among other things applied to describe the values of the individual elements on a given road section: Kapitalværdi= Kap NegKap + KapØvrig Kap = Areal AntalLag = l 1 ( Pris() l ( FktVD( l) )) (1) effrbt ( l) FktVD( l) = (1 F( l) x(1 effrbt ( l) / DimPeriode( l) x(1-minvd(l))+minvd(l) MinVD(l)= Minimum value factor of the layer in question. Areal= AntalLag= The total area in m 2 of the carriageway of the maintenance section in question Number of layers (L) in the road structure being representative for the maintenance section Pris(l)= F(l)= The calculation technical initial value for the layer in question (l) in the road structure being representative for the maintenance section Capital depreciation factor for the layer in question (l) in the road structure being representative for the maintenance section Dim Periode(l)=Design period for the individual layer in the road structure effrbt(l)= Effective remaining service life in years for the layer in question (l) in the road structure expressed as effrbt ( l) = egenrbt( l) + egenrbt( l 1) uacc( l) + egenrbt( l + 1) lacc( l) uacc(l)= Factor for correction of own remaining service life (egenrbt) provided that layers above have reached an own remaining
lacc(l)= egenrbt(l)= service life (egenrbt) of 0 (nil) years or has become negative. Factor for correction of own remaining service life (egenrbt) provided that layers below have reached an own remaining service life (egenrbt) of 0 (nil) years or has become negative. Own remaining service life of the layer in question (l) in the road structure is determined as follows: EgenRBT(l)= Restbrugstid + DimPeriode(l) DimPeriode(1) LagMed 0år R () ( 1 F1( l ) NegKap = Areal RemP l ) Areal= 1 The total area in m 2 of the carriageway of the maintenance section in question (2) LagMed 0 år= RemP(l)= F1(l)= Number of layers (l) with own remaining service life (egenrbt) = 0 or negative in the road structure being representative for the maintenance section Scrap cost Factor (adjustable) R= egenrbt(l) KapØvrig= KapKantsten + KapFortov + KapRabat + KapGrøft KapRabat = 0 KapGrøft= 0 KapKantsten = KapFortov = AntalStrk S = 1 AntalStrk S = 1 (( Kværdi) x( AktFriH MinFriH ) /( NyFriH MinFriH )) xlgd( S) (( Fværdi) x( AktFriH MinFriH ) /( NyFriH MinFriH )) xlgd( S) xfbr( S) KVærdi = Factor FVærdi= Factor FBr(S)= Width of footpath on section S AktFriH= Actual free height in mm for kerb MinFriH= Minimum allowable free height in mm for kerb NyFriH= Required free height in mm for kerb in connection with new construction (rehabilitation of kerb/footpath) AntalStrk= Number of part sections within the individual maintenance section having the actual free height S= Part section where actual free height is the same for the entire part section Lgd= Total length of S in metres
7 ASSET MANAGEMENT AND POLITICAL USE IN CONNECTION WITH PREPARATION OF TARGET AND STRATEGY An often returning problem regarding the application of PMS in connection with budgeting and procurement of funds for the current road network maintenance is to make the approving authorities (often the politicians) understand reasons and effects. Earlier, where funds were sufficient, this was not a problem but already at the beginning of the 90ties the financial situation started to tighten almost all over the world resulting in even tighter road budgets. It became clear that technical key figures, which very often made no sense to the politicians, were of now value any longer as argumentation to be granted more funds or just maintain the funds for road network maintenance. Not only a better communication between the strategic, tactic and operative levels was required both also another communication language. The "Money for money" model (Asset Management) through activation of the road capital as a concept turned out to be an intelligible language. Another advantage was that suddenly it was also possible on the basis of the same money for money model (Asset management) to calculate for all even persons with no road technical skills intelligible consequence analyses of requirements to a service level on the road network. In this way with politicians as a part of the decision process a number of approving authorities have through their own personal participation in and determination of targets and strategies for the road network a share in securing the capital invested in the road network as economically optimum as possible. Completely in accordance with the thoughts behind AM. 8 ASSET MANAGEMENT AND OUTSOURCING Outsourcing is a new way of maintenance that is spreading more and more. In connection with traditional outsourcing specific requirements are set up for composition and e.g. compaction of the applied products. In connection with outsourcing the asphalt contractor can decide on his own which products and methods he prefers to apply as long as he is complying with the functional requirements. Such requirements could be e.g. roughness, rutting and friction and especially at the time of expiry of the contract a sufficient bearing capacity and minimum capital value in relation to the initial value. Thus an important parameter for the road agency is that the road authority prior to the quotation has decided on the function that it wishes for the future service level. However, knowledge to the required future service level on the road network gives the road authority a possibility of calculating what the future costs will be for the agency to live up to the functional requirements and requirements as to value of capital in a traditional way. If some of this information is lacking in connection with outsourcing, it will be very difficult for the road authority to compare the received bids and make it almost impossible to determine, whether there is any gain at all from entering into an outsourcing contract with a given asphalt contractor. In order to carry though an outsourcing process the road authority will have to go through a phase, where the service level required for the road network is defined and determined (target for service level). A process that may often mean a political decision process, as determination of targets is most often a task for the politicians. This holds not least for the outsourcing contracts, which very often binds the road agency to one asphalt contractor for the next 15 years.
When the target for the service level (functional requirements) has been determined, one or more calculations (selection of strategy) is/are made showing what the financial consequences will be for the road authority when carrying out the future tasks by means of a traditional tendering procedure. Simultaneously, a calculation of lowest bids to be expected from the bidders is made, if an authority would like to invite for tenders on the road network maintenance with the determined functional requirements including requirements to road capital in an outsourcing contract. The purpose of this is to make the road authority able to assess, whether the funds will be sufficient for an outsourcing contract with the desirable functional requirements (service level) before any decisions are made on outsourcing. If it turns out that funds are not sufficient, the road authority should reduce its requirements as to service level in advance or maybe not carry through the tendering procedure. In Denmark outsourcing contacts on maintenance of a total of approx. 2000 km road network and a total amount of EUR 100 mill. have so far been entered. The contract period of these is typically 14-16 years. 9 EXPERIENCES AND RECOMMENDATIONS The application of the value of the invested road capital for determination of the service level that would be optimum from an economic point of view to maintain a road network has been applied in a number of European countries since 1991. In Central and Northern Europe this amounts to more than 300 road authorities through the application of RoSy. At the same time this method has, from an economic point of view, meant optimum suggestions for maintenance solutions for the current road maintenance. Asset Management values and way of thinking has turned out to be very beneficial as a basis for the maintenance of roads. The introduction of cost based accounting systems in the public sector in Germany means that the asset values from road systems now can and will be entered the opposite way. This has formed a good basis for the starting of an actual Asset Management within the individual authorities. The same could happen in many other countries concurrently with the political approval of this concept. REFERENCES OECD (2001). Asset Management for the Road Sector. OECD, Paris KRISTIANSEN JORN (2001). Why a PMS Implemented in 1989 is Still a Success and Continuously Used, Fifth International Conference on Managing Pavements, Seattle, USA EKDAHL PETER, (2000). Deterioration Models and Road Capital as Tools in Performance Contracts for Pavement Maintenance, Doctor Thesis, Lund Institute of Technology, Sweden. ISSN 1404-4331 MITZ JÜRGEN, FIPPINGER FRANZ, (2000) Practical Experiences of Applying GSA PMS in the City of Bremen, 1 st European Pavement Management Systems Conference, Budapest KRISTIANSEN JORN, (1995) Use of PM System to Optimize Choice of Right Maintenance Strategy, Second International Conference on Road & Airfield Pavement Technology, Singapore. OECD (1994), Road Maintenance and Rehabilitation: Funding and Allocation of Strategies, OECD, Paris