Pipeline Assets: Life Cycle Management and Economic Life

This report was produced for the Urban Water Research Association of Australia, a now discontinued research program.

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Report No UWRAA 17

November 1990


Pipeline Assets: Life Cycle Management and Economic Life

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

In managing assets there are two key objectives, firstly to minimise the overall cost to the community of creating, maintaining and replacing the assets, and secondly to achieve inter-generation equity through a planned approach to the eventual replacement of the assets. Formulation and selection of strategies to achieve these sometimes conflicting objectives requires consideration of many issues, including the risk of service failures, the associated environmental and community impacts, and the timing and concentration of demand for funding and other resources.

An asset management system has been developed by the Study Team to determine the most appropriate strategy for managing a class of assets and to provide a rational basis for determining what specific management action should be taken for a particular single asset when it next fails to meet service standards. The component 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 and replacement); and
  • A set of decision rules based on the output from the economic model and the anticipated funding budgets.

The Study Team applied the asset management system to the rehabilitation of 482 kilometres of 150 mm and 225 mm diameter ageing concrete sewers in metropolitan Melbourne. The best replacement strategy for the 150 mm sewers, selected by considering replacement rates, cash flows, overall present values and predicted failure patterns, is one which ensures units of sewer (manhole lengths) do not fail more than twice (corresponding to an average economic life of 88 years and an average residual life in 1990 of 26 years). In comparison, a strategy of restricting failures to one before replacing individual manhole lengths of sewer has a higher net present value (NPV) of future costs ($28 million compared with $25 million), shorter economic and residual lives (81/19 years respectively) and requires a greater percentage of NPV of future costs to be spent in the next 20 years (78% compared with 44%). Other strategies including a constant replacement rate, and a replacement rate which kept future failure rates within the capability of the available emergency repair workforce were also considered.

For the 225 mm sewers the best replacement strategy is less clear, but it is considered that a similar strategy should be adopted (this would give an average economic life of 87 years and an average residual life of 16 years). The recommended overall long term programmed replacements for this class of sewer in Melbourne should be about 30 km/year; initially at 7.5 km/year. This compares with current replacement rates of 2-3 km/year.

The report stresses the need for adequate asset identification, performance reporting and statistical forecasting and recommends the development of Asset Management Plans for managing the life cycle of existing and new assets.

The Appendices give details of the case study and also provide an outline of the theoretical concepts underlying the statistical analyses.

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