Pipes installed decades ago to cope with growing populations will start failing due to inadequate materials and design. The American Society of Civil Engineers has already rated drinking water infrastructure in the U.S. a D- rating - just above failing. Gregory Baird asks whether asset management practices can help bridge the water infrastructure funding gap.
The United States is relatively young when compared to other industrialized nations. Due to the tremendous growth in the last hundred years, they now face all of the water challenges of the 21st century. One such major issue is Aging Water Infrastructure (AWI) which encompasses water, wastewater and storm drain systems which has been both out of sight and out of mind.
As the American water industry struggles with quantifying these issues and developing an overall game plan, they consistently encounter the age old problems of governance and funding which has led to delays in accepting and implementing best practices on a nation-wide basis. The concept they do comprehend best is that affordability is at the heart of the challenge and to really be sustainable, it must be affordable.
AWI in America
The aging water infrastructure problem for the U.S. has developed over time. The water infrastructure has been built over several generations and has been a key component of successful industrialisation, economic growth, and increased public health.
Underground infrastructure was mostly developed in three main time periods due to the population growth and movement in the late 1800s, Pre-WWII, and post WWII eras. Pipes constructed in each of these time periods will now all start to fail over the next couple of decades due to age, materials used, inadequate design, poor installation, soil and water content.
The life span of the materials used has also become shorter in each time period. As a result, the United States faces an avalanche of renewal and replacement costs just to maintain their critical infrastructure.
The Investment GAP
The World Economic Forum Global Risks 2010 report highlights underinvestment in critical infrastructure as one of the biggest threats facing the world today. The World Bank says global infrastructure investment needs will be $35 trillion over the next twenty years. In the United States, a leading engineers group estimates that $2.2 trillion is needed over the next five years for public infrastructure.
Specifically, a portion of the $2.2 trillion five-year estimate includes critical water and wastewater infrastructure. In the United States, there are different estimates of a 20-year need for investment in water and wastewater infrastructure. Each study has some basic methodology like a 'bottoms-up' approach from surveys or uses an analysis of financial costs. Most estimates target the "Gap" or, the investment over and above annual spending that is required to comply with existing conditions and demands.
If the required higher level of funding does not keep pace with the replacement timing and costs, the gap in the level of investment increases drastically. The investment gaps estimates have averaged around $500 billion (2000-2019) and $1 trillion if long-term financing costs (30 year tax-exempt municipal debt) are included. The dollar amount increases tremendously to $2-$4 trillion dollars, (2009-2029) if new growth and future development or regulatory changes are included (absent climate change).
In the past 10 years, the required investments have not been made and in 2009, the American Society of Civil Engineers (ASCE) gave the US drinking water infrastructure a D- rating, just above failing.
One of the difficulties of quantifying the "gap" is that each community has had a different level of growth and investment. Hot spots across the United States based on historical growth are emerging as documented by the media reports of massive destructive sinks holes and flooding from water main breaks.
Governance and Funding
The aging water infrastructure dilemma has been significantly documented by associations like the American Water Works Association (AWWA) and Water Environment Federation (WEF). Policy makers have discussed such an issue but because of the sheer size and complexity of the problem, mutually agreed upon solutions are never reached. Politicians have proposed a water or wastewater national infrastructure bank or trust, but the competition for national funding intensifies from other industry sectors like transportation.
President Barack Obama's $787 billion American Recovery Reinvestment Act of 2009 (ARRA) intended to create jobs and promote investment and consumer spending during the recession. The majority was for federal tax incentives and expansions of the unemployment benefits and social welfare programs. Total investment in infrastructure was $105.3 billion but $48.1 billion went to transportation and $18 billion to water, sewage, environment and public lands. This is not enough to make a dent in the renewal and replacement costs for water and sewer.
Even as the U.S. economy sputters in September 2010, Obama calls for new long-term investments in transportation (roads, railways, and airports) over a six year period with a $50 billion initial amount. Congressional committees continue to push for both a national transportation infrastructure bank and a water infrastructure bank. However, there is a lack of consensus over a multi-year bill and possible national tax for a government-sponsored enterprise fund subject to politics instead of decisions based on merit and financial effectiveness.
AWWA's proposed federal water infrastructure bank constitutes the best and most acceptable deficit neutral loan model. But behind the scenes, part of the reason for a breakdown on the development of a national infrastructure policy includes 1) local accountability and 2) enterprise available funding.
Municipalities own and control 85% of U.S. water systems. Council members are elected every four years with one goal in mind - getting re-elected. Their focus is trained on only making annual appropriations, improving public safety (police and fire services), maintaining above ground assets that the public complains about and not increasing taxes or utility rates. A short sighted vision does not promote long-term planning. Also, individual citizens do not want to continue a bail out scenario if communities are not willing to help themselves
Long-term U.S. government bureaucrats also understand the differences in funding transportation and water utilities enterprises. Transportation projects are funded with federal, state, and local moneys derived from federal, state and local taxes (property and sales tax) which most likely require a formal public vote of the citizens. Utilities (water, sewer and storm drain) are set up as enterprise funds acting as separate business units containing their own revenue source which includes user rate charges and developer fees requiring only City Council approval. When it comes to a debate on which needs more help, transportation always wins based on visibility and funding sources.
The individualist "John Wayne" attitude still remains - that aging water infrastructure projects should be funded through user rates (those who used the system) at the local level (where the service occurred) and investment gaps need to be estimated and dealt with at the state, regional and local levels.
Developing an AWI Game Plan and Implementing Asset Management Best Practices
In the United States, the aging water infrastructure issue has mostly been defined by engineers with attempts to have politicians understand the problem and take action. With a focus on affordability (a real marketplace and political concern), the issue transforms from an engineering issue into a financial "funding" dilemma. The hard question for policy makers and utility managers is whether their customers can afford the higher level of rates necessary to renew and replace the existing infrastructure.
If a utility will not choose to incrementally increase rates and gradually address the issue, then the investment gap widens, projects will be deferred, maintenance and project costs will increase, and a larger future liability and inevitable crisis will be created for the U.S. ratepayers. Either way, the finance officers and the financial community need to be involved as part of the shared responsibility and solution as a best practice.
#1 Engage the Finance Community
Dave Roy, vice-president of international business development for Pure Technologies/PPIC (Pressure Pipe Inspection Company – recently acquired by Pure) in Canada, realised why there was a lack of political acceptance from the U.S. when engaging in social assessment and monitoring technologies for large diameter pipes. It was a lack of understanding of the financial benefits. PPIC partnered with individuals in the U.S water finance community and as a result, beginning in 2009, all of the municipal finance directors for the United States and Canada are being educated on condition assessment and asset management cost saving practices as part of their annual conferences with the Government Finance Officers Association (GFOA).
#2 Know your Cost-of Service
Customers will continue to ask the question, "What does it really cost to serve me?" Knowing what it really costs to serve your residential customers, separate from your commercial customers is the first step to promote acceptance of your user rates. In America, the responsibly ultimately lies with the local utility to increase their rates necessary to cover the costs of maintaining and replacing their systems. Other forms of funding result in shared risk and ownership (public-private partnerships) or a redistribution of wealth through higher taxes.
#3 Know your Assets
A fundamental step in understanding the potential liability a utility faces is to know where and what your assets are. This is really the first step on the path of asset management. Utilities are some of the most capital intensive industries and therefore are asset driven. The focus of optimising the use of their assets for their business purposes makes utilities "asset-centric" by nature. Assets require geographical location, interconnectivity, graphical representation and proximity information. GIS is a mission critical tool and its powerful geodatabase makes it the best place for cataloging and maintaining an inventory of all assets.
Many US utilities have adopted ESRI GIS as the Asset Registry. The U.S. Environmental Protection Agency (USEPA) recently received comments on its new "holistic" approach on "Coming Together for Clean Water" in which it was suggested to create a National Environmental Asset Registry by watershed on the common ESRI GIS foundation. As an agency accepts this approach, they become a GIS-centric organisation for their critical information needs.
#4 Replace your Assets based on the Work History and the Condition of your Assets
In the US, 60% of the estimated replacement cost of water infrastructure includes transmission and distribution pipes. Knowing the condition of large and critical pipes should be the first investment of a conservation program. A small leak in a large diameter pipe can make up 40% of a utilities total water loss. Also, an asset should never be replaced just because of age.
A capital budget should never be funded that is only calculated by the age of the assets. In order to strategically renew or replace an asset before failure in a cost effective manner requires different forms of condition assessment. Therefore, the critical component of making good capital investment decisions when allocating limited funding is knowing the condition of each asset.
USEPA defines Enterprise Asset Management (EAM) as a Computerised Maintenance Management System (CMMS) focused on maintenance work orders and maintenance performance. This is combined with an Asset Registry focused on an asset's performance over its life cycle and on the aggregate performance of asset groups. A CMMS and Asset Registry is the core to any asset management program.
A solid CMMS is the critical component for managing assets. An elaborate asset management application will not make up for a weak CMMS. Only a small percentage of the high cost critical assets will require inspections and advanced condition assessment techniques. The low cost condition assessment takes place by leveraging the work history of a GIS-centric CMMS.
Such a CMMS has also been used to identify buried and destroyed assets with the aftermath of Hurricane Katrina on the U.S. Gulf Coast to expedite reconstruction and federal funding.
#5 Think Long-term Planning and Life-Cycle Costs
In order to fully adopt asset management ideals, adjustments in the U.S. municipal procurement practices are required. The Water and Wastewater Equipment Manufacturers Association (WWEMA) advocates U.S. municipal utilities to make bids and selections based on reducing life-cycle costs versus just selecting the upfront low bid price, which may have a higher total cost of ownership.
Moving forward, the United States will continue to face infrastructure funding issues. While there is some movement to understand how to leverage GIS and Computerised Maintenance Management Systems and implement low cost renewal and replacement strategies, local communities are still expected to step up and "Carry On".
Author's note: Gregory Baird is managing director/CFO of AWI Consulting. He served as the chief financial officer of Colorado's third largest utility and the finance officer of California's 14th largest city. He can be contacted at: [email protected].
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