Capturing the Effects of Sound Maintenance Practices in Highway Asset Valuation: the Replacement Cos

1
Capturing the Effects of Sound Maintenance
Practices in Highway Asset Valuation the
Replacement Cost Approach versus the Book Value
Method

• Pannapa Herabat, Ph.D.
• Adjo Amekudzi, Ph.D.
• Poovadol Sirirangsi

2
Objectives of the Study

• Explore the cost approach and the book value
  method as tools for capturing the added value of
  sound maintenance practice
• Compare the effects of decisions on the type and
  timing of maintenance actions on pavement value
  estimated by the cost approach and the book value
  method

3
Cost Approach

• Cost approach relates asset value and its
  performance.
• Concept
• Asset value (AVt) Land value (Lt) Replacement
  cost (Rt) Accrued Depreciation (Dt)

Source AIREA, 1987
4
Cost Approach-Pavement Value
5
Book Value Method

• The book value of an asset is determined based on
  the historical expenditures that are made in
  constructing and maintaining the asset, adjusted
  by its depreciation.
• Related expenditures to build an asset are
  capitalized as a gross book value when the
  construction is completed.
• It is useful for accounting records.
• There is no relationship with the actual
  condition of an asset.
• Depreciation is selected based on an organization
  accounting policy.

Source Anthony and Reece, 1989
6
Book Value Method

• The straight-line method is applied to estimate
  accrued depreciation.
• The study assumes no salvage value of pavement
  and a service life of 20 years.
• Due to the unavailability of data prior to the
  early 1990s, depreciation is calculated starting
  from the year 1996.
• For maintenance treatment, Thai Accounting
  Standard no. 32 suggests that maintenance cost be
  accounted for separately because pavements need
  to be maintained periodically, and the service
  life after maintenance should be different once
  construction has occurred.
• The service life of maintenance is assumed to be
  7 years based on the maintenance cycle for
  rehabilitation and overlay used by Thailand DOH.
• Depreciation of maintenance treatment is
  calculated proportionally using the straight-line
  method.

7
Overviews of Case Study
Pathumthani Highway District

• General Information
• Managing a network of 360 kilometers of asphaltic
  concrete highway
• Managing a network of 512 kilometers of concrete
  highway
• Eight representative sections of Route 345, 3111,
  3215 and 3309 are selected in the case study
• Four highway carries 37504, 11933, 8699 and 6318
  AADT per day respectively (year 2000)

8
Physical Characteristics of Sub-Control Sections
of Route 345, 3111, 3215 and 3309
9
Pavement Value Determination

• Scenario I different types of maintenance
  actions
• Scenario II different timing of maintenance
  actions

Scenario I
Comparison between book value and cost approach
Five different maintenance which are OL-40,
OL-50, OL-60, OL-80 and REH-AC are applied in the
same year (2000).
Scenario II
Comparison between book value and cost approach

• The overlay 40 mm (OL-40) treatment is tested in
  five different years which are 1998, 1999, 2000,
  2001 and 2002.

10
Scenario I -Different types of maintenance
actions

• examines which type of maintenance treatment
  should be applied to a pavement section in a
  particular year.
• For simplicity, the year 2000 is selected as the
  base year for this study.
• This scenario is realistic because maintenance
  treatments for all DOH routes are competitively
  selected based on multiple factors, e.g.,
  engineering factors such as the current condition
  of the roadway or its traffic volumes, and
  political factors such as the location of
  roadway.
• Five different maintenance are considered
• OL-40, OL-50, OL-60, OL-80 and REH-AC

11
Scenario I Different Types of Maintenance
Actions - Cost Approach
12
Scenario I Different Types of Maintenance
Actions - Book Value
13
Scenario I Different Types of Maintenance
Actions - Results

• The difference between between the cost approach
  and book value is that the pavement value based
  on the cost approach does not necessarily
  increase whenever the maintenance is performed.
• For the cost approach, there is added value from
  spending extra funds to implement OL-50 versus
  OL-40 for sub-section 03450100-000-01 while there
  is no added value from spending extra funds to
  implement OL-60 versus OL-80.

14
Scenario I different types of maintenance
actions - Results

• According to the cost approach, an increase in
  pavement value depends on improved physical
  condition due to maintenance treatment and may
  not be equal to its maintenance cost.
• The book value captures maintenance actions by
  simply adding on the maintenance cost to the
  asset value.
• Therefore, the pavement value based on the book
  value increases associated with the incremental
  cost of maintenance activity when the maintenance
  treatment is performed.

15
Scenario II different timing of maintenance
actions

• The second scenario focuses on capturing the
  impacts of the maintenance timing based on a
  fixed type of maintenance.
• This scenario may occur if the district has to
  decide which route(s) must be maintained as a
  high priority under a specified type of
  maintenance with available resources, which are
  usually limited.
• By keeping the maintenance treatment constant,
  this scenario may provide district engineers or
  politicians with an overview of the impacts of
  deferred or accelerated maintenance on pavement
  value.

16
Scenario II Different Timing of Maintenance
Actions - Cost Approach
17
Scenario II Different Timing of Maintenance
Actions - Book Value
18
Scenario II Different Timing of Maintenance
Actions-Results

• The book value technique captures a steady
  decline in pavement value over time.
• The cost approach shows that replacement value
  does not proportionately decay with time in the
  absence of maintenance since the cost approach
  captures the loss of value as a function of
  deterioration.
• According to the previous figure, the cost
  approach shows the suitable time for maintenance
  to avoid a loss in the asset value.

19
Return on Investment (ROI)

• Return on Investment (ROI) is used to rank the
  relative priority of both scenarios.
• The ROI is calculated based on the change of
  pavement value that is divided by its cost.
• The best alternative for the cost approach is
  determined from the highest return on ROI.
• Only the ROI based on the cost approach is
  calculated since there are no differences among
  the ROI of different maintenance alternatives of
  the book value technique.

20
Scenario I Different Types of Maintenance
Actions ROI Ranking
Note Total Cost Opportunity Cost Maintenance
Cost
21
Scenario I Different Types Maintenance Actions -
ROI Ranking
Note Efficiency of maintenance management
Change in pavement value/total cost
22
Scenario I Different Types of Maintenance
Actions - Results of ROI Ranking

• The best alternatives are OL-50 for sub-section
  03450100-000-01 and OL-40 for the other
  sub-sections.
• Sub-section 03450100-000-01 has 4.27 m/km of IRI
  value and carries traffic volume over 37,540
  vehicles per day while the other sub-sections has
  4.27 m/km of IRI value and carries traffic volume
  less than 12,000 vehicles per day.
• It is consistent with the fact that rougher road
  with high traffic volume requires a more
  aggressive type of maintenance in order to
  maintain a pavement at the same level of service.
  

23
Scenario II Different timing of Maintenance
Actions - ROI Rankings
24
Scenario II Different timing of Maintenance
Actions - ROIs Ranking
Note Efficiency of maintenance management
Change in pavement value/total cost
25
Scenario II Different Timing of Maintenance
Actions - Results of ROI Ranking

• The previous figure illustrates that the best
  year for applying OL-40 treatment for sub-section
  03450100- 000 -01 is 1998.
• This is earlier than the best years of the other
  sub-sections due to the fact that this
  sub-section have a highest IRI and traffic
  volume.
• It is consistent with the fact that rougher road
  with high traffic volume requires earlier time of
  maintenance in order to maintain at the same
  level of service.

26
Conclusions

• Capturing the effects of sound maintenance
  practices between the cost approach and the book
  value method
• Two Scenarios different types of maintenance
  actions and different timing of maintenance
  actions
• The results of the study indicate that the cost
  approach can provide useful information on the
  more cost-effective treatments to preserve the
  replacement value of the assets, as well as the
  critical times to apply maintenance treatments to
  avoid losses in the replacement value of the
  asset.
• These results indicate that the cost approach can
  be used as a decision support tool for evaluating
  maintenance practices.