PipelineAssets: Life Cycle Management and Economic Life

ReportNo WSAA 17

November 1990

SYNOPSIS

Estimationof the economic life of water supply and sewerage assets is of considerableimportance in the financial planning of water authorities, particularly inrespect to depreciation allowances and rates of return on investment. However,the actual estimate of economic life (the age of the asset when it becomes morecost effective to create a new asset than to maintain the existing asset) isonly one aspect of asset management and is itself the end result of themanagement process rather than an operative factor in that process.

Inmanaging assets there are two key objectives, firstly to minimise the overallcost to the community of creating, maintaining and replacing the assets, andsecondly to achieve inter-generation equity through a planned approach to theeventual replacement of the assets. Formulation and selection of strategies toachieve these sometimes conflicting objectives requires consideration of manyissues, including the risk of service failures, the associated environmentaland community impacts, and the timing and concentration of demand for fundingand other resources.

Anasset management system has been developed by the Study Team to determine themost appropriate strategy for managing a class of assets and to provide arational basis for determining what specific management action should be takenfor a particular single asset when it next fails to meet service standards. Thecomponent modules of this system comprise:

-              A data base on the performance of assets being considered;

-              A forecasting model and rule system for estimating future performance;

-              Models to estimate direct costs (such as repair and replacement costs)and intangible and indirect costs;

-              An economic model to determine the expected net present values (ENPV)of alternative management strategies (such as maintenance, repair andreplacement); and

-              A set of decision rules based on the output from the economic model andthe anticipated funding budgets.

TheStudy Team applied the asset management system to the rehabilitation of 482kilometres of 150 mm and 225 mm diameter ageing concrete sewers in metropolitanMelbourne. The best replacement strategy for the 150 mm sewers, selected byconsidering replacement rates, cash flows, overall present values and predictedfailure patterns, is one which ensures units of sewer (manhole lengths) do notfail more than twice (corresponding to an average economic life of 88 years andan average residual life in 1990 of 26 years). In comparison, a strategy ofrestricting failures to one before replacing individual manhole lengths ofsewer has a higher net present value (NPV) of future costs ($28 millioncompared with $25 million), shorter economic and residual lives (81/19 yearsrespectively) and requires a greater percentage of NPV of future costs to bespent in the next 20 years (78% compared with 44%). Other strategies includinga constant replacement rate, and a replacement rate which kept future failurerates within the capability of the available emergency repair workforce werealso considered.

Forthe 225 mm sewers the best replacement strategy is less clear, but it isconsidered that a similar strategy should be adopted (this would give an averageeconomic life of 87 years and an average residual life of 16 years). Therecommended overall long term programmed replacements for this class of sewerin Melbourne should be about 30 km/year; initially at 7.5 km/year. Thiscompares with current replacement rates of 2-3 km/year.

Thereport stresses the need for adequate asset identification, performancereporting and statistical forecasting and recommends the development of AssetManagement Plans for managing the life cycle of existing and new assets.

TheAppendices give details of the case study and also provide an outline of thetheoretical concepts underlying the statistical analyses.

Copies of the Report areavailable from WSAA, price $A50. Orders may be placed through the Bookshop at www.wsaa.asn.au or by email toinfo@wsaa.asn.au.