Maximizing the Value of Infrastructure

To realize the most long-term value, governments must take a sensible approach to asset management.
by | March 5, 2013
 

For many years now, the conversation about infrastructure has frequently turned into a debate that really is about other issues: What should be privatized? Should we use design-build and/or build-operate? Will public employees be displaced? Can the future value of the asset be diverted to other needs?

A debate that really is about infrastructure and not draped with other provocative issues would concentrate on the straightforward question of whether a public entity's infrastructure balance sheet is improving or declining. A government should understand its current inventory, its rate of depreciation and the cost of maintaining it in good repair. It also should also have a clear strategic plan that identifies critical additional infrastructure needed and the timing for its completion. A jurisdiction can then evaluate its options in a straightforward fashion, aiming to best operate its existing infrastructure and build new infrastructure in an affordable way that contributes to the economy and quality of life.

A sensible approach to asset management would reject both the older models that look at infrastructure as a way to maintain a public workforce and newer models that look to quickly capitalize previous investments. Officials must find ways to unlock the value of infrastructure by improving efficiency and leveraging revenue streams while providing needed services. They must undertake rigorous fiscal analysis designed to maximize the value of their investments--past and future. Decisions about new infrastructure should consider efficiency options including such areas as integrated design, construction and operation, and life-cycle costing; otherwise, building cheaply can produce the most expensive solution for the long run. And without thorough value engineering, over-designing one project may come at the price of not repairing another. The Governmental Accounting Standards Board's Rule 34, requiring more reporting from public entities about their infrastructure, is a step in the right direction.

At the same time, we must find innovative ownership, management and maintenance approaches tailored for specific existing infrastructure. The success of the asset-management approach to public infrastructure is all in the details. There may be instances where private management of a public asset unlocks enough value to facilitate building new projects or repairing others that but for the operational breakthroughs would never have happened. In other places, sales of future infrastructure revenues to plug operating holes, without new value created, can be a very bad idea.

For instance, if we take a look at cities utilizing their metered street parking as an asset to optimize revenue generation, we find successes and failures. In Indianapolis, the city partnered with a company headed by Xerox and complemented by local partners to modernize metering and provide better service to citizens. The contract is expected to net the city $600 million over its lifetime through revenue sharing while also relieving the city of financial risk and the expense of operations and management. The city has the opportunity to exit the contract once every 10 years, and technological updates are planned and integrated into the length of the contract.

Things have not worked out so well for Chicago. The city leased its parking meters to a consortium led by Morgan Stanley in 2008, receiving a one-time payment of $1.15 billion. That windfall helped the city patch vital holes in its budget, but it turned a capital resource into now-depleted operating funds. Moreover, aggressive parking-rate increases have produced revenues for the vendor that are running at triple what the city had been collecting. To the frustration of the city, the contract runs for 75 years.

Many local governments and even states have jumped at the opportunity to sell off assets such as parking, office buildings, airports, utilities and water supplies--one-time exploitations that will hollow out budgets in the coming years. Meanwhile, other governments are innovating to unlock the full value of their assets to build long-term revenue streams.

For example, New York City has been expanding its construction, through public-private partnerships, of electricity co-generation facilities to turn waste heat into electricity. A number of wastewater-treatment plants have been outfitted over the past 25 years with co-generation fuel cells to meet much of the plants' power needs. The city also has been embarking on more-experimental projects, such as a partnership between the city's water utility and a power utility to produce natural gas from anaerobic digester gas produced as a byproduct at a wastewater plant.

For New York City, the result is that what was once a greenhouse gas being released into the atmosphere is becoming a valuable resource: The project is expected to produce sufficient fuel to heat 2,500 homes a year. Clearly, looking at the infrastructure balance sheet with an eye toward maximizing the value of these assets can produce great long-term benefit for governments.

Ben Weinryb Grohsgal contributed to the research and writing for this column. He is a research assistant at the Ash Center for Democratic Governance and Innovation and a student in the master's in public policy program at the Harvard Kennedy School.

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