Asset management for environmental infrastructure

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1 Sustainable Development and Planning II, Vol Asset management for environmental infrastructure A. R. Perks 1, S. Devnani 1, R. Denham 1 & M. N. Thippeswamy 2 1 R.V. Anderson Associates Limited, Ontario, Canada 2 Bangalore Water Supply and Sewerage Board, Bangalore, India Abstract New models for asset management applicable to the needs of secondary cities and towns can help achieve more sustainable public water services, operated on a sound technical and financial basis, and more responsive to customer needs. This paper describes Guidelines for Asset Management prepared by R.V. Anderson Associates Limited (RVA) with the financial assistance of the Canadian International Development Agency (CIDA). The guidelines were intended to promote pragmatic asset management practices in India, based on pioneering work carried out by RVA in Canada, coupled with the firm s planning, design and operations experience in India over the last 10 years. The approach is illustrated through an example Cost of Service determination for the City of Bangalore using readily available operating data and information. Keywords: water, asset management, cost of service, operations, maintenance, private sector, capacity building, partnership. 1 Introduction Environmental infrastructure, such as water supply, wastewater treatment and solid waste systems, is the foundation for all urban settlements. However, such infrastructure is very capital intensive, and must be developed over many decades at significant cost and investment. These investments may be implemented with development assistance loans to exacting international design standards. But once commissioned, the management capacity is often not present in the local municipalities that are now responsible for operations and maintenance in India. The result has often been rapid deterioration of physical

2 506 Sustainable Development and Planning II, Vol. 1 assets, and a downward spiral of poor service, inadequate revenues, and declining investment. Asset Management practices can help break this cycle. 2 Asset management Asset Management is essentially a planning process intended to reduce operational costs, increase operating efficiency, and maximize the service reliability of each component and the system as a whole [2, 12]. An Asset Management Plan is the first step towards operating the utility on a sustainable technical and financial basis. 2.1 Implementing asset management The initial step involves preparing an inventory or register of the assets and determining their current condition according to an appropriate rating or scale. Only then can the optimal operational costs and capital investment needed to renew the infrastructure over its entire life cycle be estimated. Initially, the approach may be limited in terms of the level of detail applied, because only aggregate data (technical and financial) is usually available at the outset. The utility operator can then prepare cost estimates to determine the replacement value of existing assets. The replacement cost method usually provides a suitable basis for evaluation. A good understanding of the general condition of the entire asset base is necessary to enable assessment of future needs for repairs, rehabilitation and replacement. Often, current condition data is not available, or is incomplete, and surrogate indicators, such as installation date and breakdown records, are needed. The accumulated data can be used to identify the type of investments required during the lifecycle of each group of assets, such as treatment plants, pump stations or distribution networks. The different investment activities required over the life of the assets may include routine O&M, rehabilitation and replacement activities. Cost of Service Life Cycle Cost Rehab Needs Condition Updated Asset Register Figure 1: Asset management. The next step is to generate a life cycle cost profile for each main component and the system as a whole. The timing of investments can be assigned on the basis of operating information and the estimated remaining life of the asset.

3 Sustainable Development and Planning II, Vol The final step is to estimate the cost of service so that this can be compared with current or projected revenues, and appropriates adjustments made to the cost or revenue base to ensure sustainability. Section 4 demonstrates this approach for the Bangalore water system. 2.2 Cost models It is important to have a good understanding of capital and operational costs when developing an asset management plan. Water supply capital costs in Asia are typically in the range of US$ per person, including treatment and distribution infrastructure. Annual operations & maintenance and routine renewal costs would be in the range of 5% per annum. This is consistent with recent North American experience [5, 7, 12], although little published information is available to calibrate this against international conditions. Rehabilitation of assets with long life spans, such as water systems, is often estimated on a straight-line depreciation basis. Therefore, assets with a 50 year lifespan would be assessed a replacement charge of 2% per annum. According to recent benchmarking studies, most utilities are still investing well below this level at the present time. Existing debt repayment obviously varies widely depending upon the history of each utility and the economic and political conditions under which it has been operated. However, most well run utilities would endeavour to keep debt charges below the level of 30% of the annual operations and maintenance costs. The above considerations provide a framework for a simple asset management model for water supply systems. This could be further broken down into purification, distribution, and administration costs (typically in the range of 30%, 30%, and 40% respectively). On this basis a typical investment of $125 per person would break down as follows. Table 1: Asset management model for water supply. Water Supply Capital Asset Value (CAV) per person $ Annual O&M 5% of CAV $6.25 Treatment and Purification 30% O&M $1.88 Distribution and Storage 30% of O&M $1.88 General and Administrative 40% of O&M $2.50 Renewal of short life 2% of CAV per annum $2.50 Debt 30% of annual O&M Cost (maximum) $1.90 Per person annual cost $10.65 Assuming a water consumption of 100 l/c/d, then these costs would be reflected in a water rate of about $.29 per cu.m. of water consumed. This is similar to many reported water O&M costs throughout Asia and Africa.

4 508 Sustainable Development and Planning II, Vol. 1 In terms of O&M costs, the data available [1, 3, 4, 6, 8, 9, 11, 13] included several recent benchmarking documents for Asia and Africa, supplemented by RVA project files. These generally reported typical O&M costs of $.15-$.45 per cubic metre of water sold. In order to take the wide variability of the data into account, special attention was given to utilities reporting an operating ratio close to 1.0 as being indicative of those agencies in which O&M costs and revenues would be roughly in balance. One of the lessons learned from this assessment is that the basic O&M cost for water service seems to be affordable in most instances. However, rehabilitation and replacement costs, as well as debt servicing costs, can drive up water service costs significantly. 3 Best management practices Some other Best Practices should be kept in mind when developing an Asset Management Plan. Specific examples and illustrations have been drawn from typical Canadian and/or international guidelines and case studies [1, 2, 6, 10]. 3.1 Level of service A better understanding of the level of service to be provided can then be applied to building customer awareness, monitoring performance against key indicators, and developing asset management strategies for improved service delivery. Important technical and functional performance indicators may include water quality and quantity, O&M program, capital and operational cost, health and safety, and customer service. It is usually preferable to adopt a few simple, measurable indicators rather than a complex matrix of factors. 3.2 Demand forecasting and management Because of the level of investment and the lengthy planning-design-construction cycles involved, year planning horizons are usually used for environmental infrastructure. In the past, it was usually sufficient to extrapolate past water consumption trends or use established guidelines, and this may still be appropriate for small systems. However, due to rapidly changing economic factors and increasing emphasis on conservation and demand management, some type of modelling or analysis is now usually required. A related activity is Demand Management, which seeks to actually modify water use and consumption patterns in order to optimise the performance of existing facilities, reduce or delay the need for new facilities, and generally deliver a more sustainable service. The main options for implementing Demand Management include customer education, resource substitution, operations improvements, usage regulations, or conservation incentives. Often, a combination of these techniques in a program approach works best. An aggressive demand management program, for example, can reduce revenues faster than costs, creating a financial crisis for the utility.

5 Sustainable Development and Planning II, Vol Condition assessment A good understanding of the current condition of a utility s assets and their performance characteristics is important to decisions about maintenance, rehabilitation and replacement needs, and avoiding premature replacement and high lifecycle costs. Regular condition assessment activities using a variety of tools and techniques are the preferred method of collecting data, assigning priorities and building a database upon which to develop maintenance strategies. This may be used to predict, even in an approximate manner, the effective remaining life of each major component of the system. 3.4 Risk management Risk management procedures are increasingly being applied to identify and evaluate the types of risks and failures that the agency faces, and to develop a risk management plan that establishes the critical risks, the consequences of failure, and steps to avoid or reduce those risks. Specific types of risks that may be considered on a corporate or departmental basis might include health and safety, competitiveness in the market, financial, investment, public liability, and life cycle risks related to specific assets. 3.5 Maintenance management Maintenance management systems are intended to manage those maintenance activities necessary to keep the assets close to their original condition and capacities. The development of new monitoring and control technologies has enabled many utilities to move away from unplanned, corrective maintenance and adopt a planned, programmed approach. The cost savings and performance improvement of a planned, preventative approach can be dramatic, and this represents one of the best management practices in the industry worldwide. 4 Cost of service This section provides an example of a cost of service assessment prepared as part of an asset management program for the water distribution system of Bangalore, India [1,9]. The intent was to identify the investment needs and costs to rehabilitate or replace portions of the water distribution system over the next years, as well as to help identify other considerations that should be employed to minimize the life cycle costs and operational risks. Figure 2 shows the rapid growth experienced by the City. It is apparent that Bangalore experienced early significant growth in the decades between 1935 and 1955, 1965 and 1975 and most recently between 1985 and The population growth of this last decade seems to be continuing into the 21 st century at unprecedented rates. In fact, the population has doubled from 3 million to 6 million over the 20-year period from 1981 to While some

6 510 Sustainable Development and Planning II, Vol. 1 components of the system are new or have been recently replaced, there are many parts of the water system that are approaching the end of their service life, or have already been abandoned. 7,000,000 2,000,000 6,000,000 Population Growth Per Decade Population 1,800,000 1,600,000 POPULATION 5,000,000 4,000,000 3,000,000 2,000,000 1,400,000 1,200,000 1,000, , ,000 POPULATION GROWTH PER DECADE 1,000, , , DECADE / YEAR 0 Figure 2: Bangalore population. Table 2: Replacement costs. Item Quantity Unit Replacement Cost (million Rs) % Water Plants 5 Total 2,640 3 Transmission P S's 3 no. 6,130 6 Distribution P S's 56 no Transmission Mains 373 Km's 6,040 6 Internal Transmission Mains 808 Km's 7,850 8 Feeder/Dist'n Mains 24,340 Km's 68, Overhead Tanks 51 no Ground Level Reservoirs 40 no. 7,620 7 Valves 16,774 no Connections & Meters 307,900 no. 2,520 2 Bore wells 3,120 no Stand posts 13,510 no ,

7 Sustainable Development and Planning II, Vol Inventory and replacement value Bangalore gets its water from the relatively newly constructed Cauvery system. This system is comprised of the Cauvery Water Treatment Plant, Stages I to IV, as well as the smaller Arkavathy system. The Bangalore Water Supply and Sewerage Board (BWSSB) operates 3 sets of booster pumping stations and over 373 kilometres of transmission main to bring the water to Bangalore. Within the City of Bangalore, there are 51 elevated tanks; 40 in-ground reservoirs; and 56 water pumping stations. In addition, the water distribution system is comprised of 808 kilometres of internal transmission lines, 24,340 kilometres of feeder and distribution mains, 16,774 valves and 307,900 water services and meters. Figure 3 summarizes the inventory of the BWSSB water system. Table 2 shows that the total replacement cost of the water system is approximately Rs 103,153 million. The internal transmission, feeder and distribution mains constitute almost 70 percent of the total replacement cost of the entire water system. Since the current population in Bangalore over 6 million, the replacement cost of the water system is considered to be approximately Rs 17,200 per capita. 4.2 Renewal requirements Figure 3 illustrates the projected replacement costs for the water system over the next 100 years based on the age, remaining service life and replacement cost for the components. Assumptions regarding the rate of replacement for the electrical and mechanical components of the systems, and the water distribution networks, were discussed with the BWSSB staff prior to calculations. Figure 3: Replacement cost. Figure 3 also indicates that at least Rs 17,510 million should be invested in the water system over the next 10 years (approximately Rs 1,751 million per

8 512 Sustainable Development and Planning II, Vol. 1 year). It should be noted that the projected costs over the next 20 years are somewhat less than the average requirement, however, expenditures that will be required over the third, fourth and fifth decades of this century are relatively high since significant elements of the system will reach the end their service lives and will require replacement. There however may well be a significant backlog in renewal of the many of the water distribution system components constructed prior to 1950 that have not yet been replaced, and therefore will need to be replaced. This may result in a significant increase in investment required in the first and second decades ( ). This can be ascertained after a detailed condition assessment of these assets is carried out. The BWSSB therefore needs to extend the service life of the existing water infrastructure by implementing both a pro-active maintenance system and an aggressive rehabilitation program, and establish a Water Replacement Reserve Fund, in order to establish the funding that will be necessary to undertake this work. All of this highlights the need to level out the spending needs. An aggressive rehabilitation program could successfully extend the useful life of infrastructure components and help to reduce the capital investment needs over the medium and long term. Figure 4: Life cycle costs. 4.3 Life cycle costs Figure 4 illustrates the life cycle costs for the water system as the sum of the O&M costs, rehabilitation costs (where appropriate) and replacement costs. The average annual cost over the next 100 years is estimated to be Rs 49,110 million per decade, Rs 4,911 million annually, for the water system. It has been assumed that the O & M expenditures for the existing components will remain fixed over this period at the current level of Rs 3,160 million annually with revenues at Rs 3,120 million annually. Total annual costs are expected to

9 Sustainable Development and Planning II, Vol decrease initially and then increase dramatically over the period from 2020 to 2050 due to the fact that a large percentage of the existing system will reach the end of its service life during this time. This cycle is repeated again before the end of the century. 4.4 Financial impacts The information generated identifies the projected shortfall in funding, and establishes that the funding increase required will be in the magnitude of 157%. It can easily be seen that revenues are significantly less than the long-term financial requirement for operations and replacement cost for the water system estimated to be Rs 4,911 million per year. 4.5 Potential impact on water rates Currently, Bangalore almost recovers its current capital and operating costs, with a slight deficit in most years. The current water revenues (Rs 3,120 million) would have to be increased by 52% (excluding inflation) in order to cover the projected cost for maintenance, rehabilitation and replacement of the water system over the next 100 years (Rs 4,911 million per year on average). The total revenue stream, and all its components, should be reviewed in light of the apparent need for a significant increase in water rates. 4.6 Other findings and recommendations This preliminary assessment powerfully illustrates the gap that can exist between the water revenues and the total annual cost of operations and replacement of the infrastructure. In order to meet the needs of the water users of Bangalore in the future, it will be necessary to deal with this funding gap through implementation of an increase in water rates, a reduction in operational and replacement costs, or a combination of the these strategies. Other technical and managerial suggestions to help level out infrastructure spending include; rationalization of water rate structures; a proactive meter replacement program; a maintenance management system; an unaccounted for water reduction program; and a review of current design standards. 5 Summary The guidelines described in this paper can assist municipalities and public utilities to prepare a program of asset management that will help achieve sustainable costs and revenues for their water system. The tools and techniques presented can be implemented by operations staff relying upon commonly available data and information. The procedures for preparing an asset management program and a cost of service assessment to help ensure sustainable service delivery were demonstrated for the Bangalore water system. It is expected that many municipal agencies elsewhere in India, and throughout Asia, have similar needs and could benefit

10 514 Sustainable Development and Planning II, Vol. 1 from the same approach as discussed herein, requiring about 8-12 weeks of specialist input. Even using relatively basic data and information for Bangalore, it is apparent that water rates must be increased significantly in order to cover the life cycle costs of the system components and maintain an acceptable level of service. Water rate increases will be a function of the ability of a municipality to implement the programs outlined above. The more successful these programs are in extending the service life of the infrastructure, reducing losses and thereby reducing costs, the less the rates will have to be increased. References [1] R.V. Anderson Associates Limited, Asset Management for Environmental Infrastructure, prepared for Karnataka Urban Development Corporation and Bangalore Water Board, CIDA, Ottawa, November [2] R.V. Anderson Associates Limited, Ahead of the Wave: A Guide to Sustainable Asset Management for Canadian Municipalities, prepared for the Federation of Canadian Municipalities, February [3] Asian Development Bank, Second Water Utilities Data Book Asian and Pacific Region, Arthur McIntosh, Cesar E. Yniguez, ed., Manila, October [4] Department for International Development, SPBNet Africa Water Utility Partnership: Report of Performance Indicators, Stephen Ramsey, Peter Mobbs, WRC plc, Wiltshire, December [5] Ontario Water Works Association, Survey of Municipal Water Rates and Operations Benchmarking in Ontario, [6] Asian Development Bank, Philippines: Water Supply and Sanitation Sector Profile, Philippines, November [7] Halifax Regional Water Commission, Accountability, Sixth Annual Report, Halifax Regional Municipality, Halifax, March [8] World Bank, Returns to Scale in Water Systems in Developing Countries, Some Econometric Evidence, Nicola Tynan, August 2003 [9] Bangalore Water Supply and Sewerage Board, Handbook of Statistics & , 2000 [10] International Infrastructure Management Manual Version 1, Institute of Public Works of Australia, Sydney. [11] World Bank Institute, Water Tariffs and Subsidies in South Asia Paper 3 Tariff Structures in Six South Asian Cities, December [12] Canadian Civil Engineer, Asset Management: Moving from Concept to Reality, Vol. 19 No. 5, Montreal, December 2002/January [13] R.V. Anderson Associates Limited, International Price of Water, a paper prepared for the World Bank, Washington, D.C., 2004.