The Infrastructure Deficit (Liability) – Time for a Change?
Note to Readers:
The initial capital cost of infrastructure is about 20% of the life-cycle cost; the other 80% largely represents a future unfunded liability. Heightened awareness of “the 20/80 rule”, in particular the implications for financial sustainability, is a driver for a change in the way local governments plan, finance, implement and over time replace infrastructure.
Asset managers now realize that they need to get involved in evaluating the life cycle costs of new planned developments. The time to shape future life cycle costs is at the infrastructure planning ‘front-end’. This is the key message in an article published in February 2011 by Dr. Penny Burns. Extracts are presented below in order to set the scene for Sustainable Service Delivery.
In British Columbia, the term Sustainable Service Delivery describes a new way of thinking about infrastructure needs and how to pay for those needs over time. The link between asset management and the protection of a community’s natural resources is emerging as an important piece in Sustainable Service Delivery.
Good Asset Management is Not Enough
“Every developed country is now facing the same problem – ageing assets in need of renewal and new infrastructure to meet the demands of increasing and changing populations. We have talked about this now for several decades. But talk wonʼt do it,” writes Dr. Penny Burns in the February 2011 issue of her Strategic Asset Management newsletter. Based in Australia, Dr. Burns is an internationally recognized economist; and is acknowledged as the first person to write about asset management (in 1984).
“And doing what we have always done in terms of infrastructure – and then scrambling for the funds – wonʼt do it either. We simply do not have enough money to solve all our problems this way.”
A Light-Bulb Moment
In her newsletter, Penny Burns describes the epiphany that she had while visiting Canada to participate in a workshop organized by Asset Management BC. She states that:
- “I have always had faith that good asset management could solve the Renewal Gap or Infrastructure Deficit problem. I no longer do.”
- “I clung to the notion that working to achieve appropriate, affordable, service levels; disposing of assets that no longer provide value for money; increasing utilisation to avoid having to increase the asset stock; and extending asset life by well chosen maintenance would reduce the size of the problem to a level that we could afford. I no longer do.”
- “Whilst essential, it is now clear to me that good asset management, is simply not enough.”
Penny Burns then reaches this conclusion: “I believe that we have been looking at the problem of renewal – the infrastructure deficit – from the wrong angle.”
Life-Cycle Costs and Life Cycle Revenues!
“A conversation with Frank Blues, Prince George City Council in British Columbia, alerted me to the idea of measuring not only the life cycle costs of new developments (and by extension all infrastructure) but also the life cycle revenues,” continues Penny Burns. She then presents her epiphany in terms of these three defining thoughts:
- “First Thought:Within Asset Management we speak of the costs of infrastructure, but seldom give equal attention to the revenues. No wonder we are facing problems of financial sustainability!”
- “Second Thought:I started to toy with the idea of evaluating new developments according to how financially self-sustainable they were. Perhaps if new developments were only accepted when they could demonstrate that their life cycle costs would be covered by life cycle revenues or if the local community voted to subsidise the new development through increased rates, there would then be more encouragement to design sustainable developments?”
- “Third Thought: How many asset managers get involved in evaluating the life cycle costs of new planned developments? If we don’t get involved at this up front stage, we have no opportunity to shape future life cycle costs. And we all know that life cycle costs are most easily and effectively managed at the conception and design stage.”
Penny Burns ties these three thoughts together as follows: “The focus so far – from all governments – has been to try to find someone else to shoulder the burden….This ‘pass the parcel’ approach solves nothing. Moreover it diverts us all from what should be our main focus – reducing the COST itself to a level that we can manage.”
The Challenge: Seek Out Infrastructure Alternatives
Penny Burns then lays out her logic for a new way of doing business: “In the past we have thought of the Infrastructure Deficit as a funding problem…Once we look at it as a Challenge to Seek out Infrastructure Alternatives then we can see that there are a number of disciplines that we have previously not done much to include in our deliberations.” Her framework for a paradigm-shift is captured as follows:
- “We need to stop thinking about the infrastructure Deficit as a funding problem. We need to see it as a Design Challenge!”
- “We need to stop thinking about infrastructure as a cost – and start thinking about how to ensure it is adding value.”
- “We need to stop thinking of ASSET Replacement and start thinking what FUNCTION OR SERVICE is really needed.”
“The Infrastructure Deficit is measured by the cost of doing things the way we have always done them. So what if we don’t? What if we do things differently?”, challenges Penny Burns in wrapping up the article.
To Learn More:
To read the complete article written by Dr. Penny Burns after her visit to Canada to participate in a workshop organized by Asset Management BC in January 2011, click on The Infrastructure Deficit – Time for a Change?
Also, click on Sustainable Service Delivery Links Land Use Planning, Watershed Health and ‘Infrastructure Liability’ — “Local governments can develop a truly integrated Asset Management Strategy that views the watershed and the strategy through an environmental lens. This outcome can be achieved through a front-end effort that connects with the community and gets the watershed vision right. Then create a blueprint to implement green infrastructure,” concludes Glen Brown, Executive Director with the Ministry of Community, Sport and Cultural Development .
Links to YouTube Videos:
To watch Glen Brown explain Sustainable Service Delivery at the first seminar in the 2011 Comox Valley Learning Lunch Series, click on these links to video clips posted on YouTube:
So, What is Sustainable Service Delivery? (2:35 minutes)
About Asset Management
Infrastructure Asset Management is a term often used to clarify that the topic is the asset management of physical, rather than financial assets. Sometimes the term ‘infrastructure management’ is used to mean the same thing. Where there is no problem of confusion, the term ‘Asset Management’ is more widely used.
According to Wikipedia, the first published use of the term ‘asset management’ to refer to physical assets is not known for sure. The earliest adopter known for certain is Dr Penny Burns in 1984 – see her website amqi.com for her AM History Project for more information on how people took up the concept. The New Zealand Infrastructure Asset Management Manual, published in 1996, is an early use of the specific term ‘infrastructure asset management’.
Posted April 2011