060202 - Asset Valuation Guide

Roads Liaison Group

Guidance Document for Highway Infrastructure Asset Valuation County Surveyors Society/TAG Asset Management Working Group

2005 Edition

TSO: London

July 2005

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Foreword by the President of the County Surveyors’ Society The Framework for Highway Asset Management, published by the CSS in 2004, provided an excellent introduction to a subject which is manifestly growing in importance. As authorities throughout the UK have begun to embrace this new approach to highway management, there has been a clear and urgent need for advice and guidance on the valuation of highway assets. I am delighted that, once again, the CSS and its partner organisations have risen to the challenge. I extend my thanks to all who have helped to develop this guidance, and I would especially like to acknowledge Transport for London who have contributed generously to the project. I also want to mention the involvement of government departments: the Office of the Deputy Prime Minister, Her Majesty’s Treasury, and the Department for Transport, whose support for this work makes it all the more authoritative. The aim has been to deliver guidance which will enlighten and assist both highway engineers and accountants and bring about mutual understanding and closer working relationships. I believe this document achieves that objective, and I commend it to you.

ALASTAIR JEFFORD May 2005

3

Preface It is widely accepted that Asset Management provides the framework and principles for good highway management. In 2004 the County Surveyors Society (CSS) produced the Framework for Highway Asset Management to assist Local Highway Authorities in the development and implementation of Asset Management. Central to Asset Management is the development of cost effective long term plans, and the importance of these has also been recognised by the Government: Transport is vital to the economy and the way we live. Decisions we make now will have an impact for decades to come. It is essential that we take the long-term view. The Future for Transport: A Network for 2030 White Paper, Department for Transport, 2004 A fundamental component of long term planning is to ensure the asset base is preserved and replenished in a sustainable way without imposing an undue financial burden on future generations. The preservation of the asset base can be measured and monitored over time using a robust asset valuation procedure that provides a true and fair value of the assets. WHAT IS ASSET VALUATION? Asset valuation is the calculation of the current monetary value of an authority’s assets. The current monetary value is evaluated as the Depreciated Replacement Cost (DRC) of an authority’s highway infrastructure assets, where: DRC = Gross Replacement Cost – Accumulated Consumption The Gross Replacement Cost (GRC) for the highway infrastructure is determined from a bottom up calculation using a standardised procedure involving standardised Unit Rates and GRC models which represent the cost of replacing an existing asset with a Modern Equivalent Asset. Assets are consumed during service due to ageing, usage, deterioration, damage, a fall in the Level of Service (assessed through appropriate Performance Measures) and obsolescence. DRIVERS FOR ASSET VALUATION The key drivers for highway infrastructure asset valuation are: 1. To emphasise the need to preserve the highway infrastructure by placing a monetary value on highway infrastructure assets. 2. To demonstrate asset stewardship by monitoring the Asset Value over time. 3. To support Whole of Government Accounts and promote greater accountability, transparency and improved stewardship of public finances. 4. To support Highway Asset Management – Asset Valuation provides one facet of the robust financial framework that Asset Management should operate within.

4

PURPOSE OF THE GUIDANCE DOCUMENT The purpose of this Guidance Document is to provide a common framework for the discussion, development and implementation of highway infrastructure asset valuation by Local Highway Authorities in the UK. The general procedure to be used for asset valuation is described; however, some of the detailed work, such as derivation of Unit Rates and establishing asset service lives, will need to be undertaken by Local Highway Authorities. It is recommended that regional groups are set up for this purpose to pool the data and share the experience and learning. SCOPE OF THE GUIDANCE The guidance document describes a generic procedure for calculating the asset value of highway infrastructure assets. Specific guidance is provided for roads, segregated footpaths and cycle routes, structures, highway lighting, street furniture, traffic management systems, off-highway drainage and land (associated with the highway). If required, the generic procedure can be used to value other highway infrastructure assets that are not covered explicitly by the document. STATUS OF THE GUIDANCE DOCUMENT The Guidance Document is a companion to the CSS Framework for Highway Asset Management. The recommendations of the Guidance Document are not explicitly mandatory on authorities. The term ‘should’ associated with an action is used to denote a recommendation, except where clearly relating to a statutory requirement. The Guidance Document is endorsed by the Treasury, the Office of the Deputy Prime Minister (ODPM), the Department for Transport (DfT), the County Surveyors Society (CSS), the Local Government Technical Advisors Group (TAG) and the Society of Chief Officers of Transportation in Scotland (SCOTS). Implementation The following timeframe is recommended for the implementation of highway infrastructure asset valuation to support Asset Management and Whole of Government Accounts: •

interim valuation of a sample of assets in Financial Year 2005-06.

•

benchmark valuation in Financial Year 2006-07 (provides opening book value for 2007-08).

•

calculate in-year movements (e.g. depreciation) in Financial Year 2007-08.

Guidance is provided on the valuation regime, systems, data and resource requirements that should be considered by Local Highway Authorities when planning the implementation of asset valuation.

5

Contents Glossary

8

Abbreviations

12

1.

Introduction

13

2.

Asset Valuation Requirements

17

3.

Overview of Highway Asset Valuation Procedure

21

4.

Valuation Principles, Basis and Rules

24

5.

Asset Inventory

32

6.

Unit Rates

40

7.

Gross Replacement Cost

46

8.

Depreciation

49

9.

Impairment

57

10.

Depreciated Replacement Cost

64

11.

Asset Preservation Measures and Valuation Report

67

12.

Roads

70

13.

Segregated Footpaths & Cycle Routes

75

14.

Structures

79

15.

Highway Lighting and High Mast Lighting

86

16.

Land associated with the Highway

92

17.

Other Highway Assets

94

18.

Implementation and Recommendations

96

19.

References

99

APPENDIX A

Asset Valuation Explanatory Examples

101

APPENDIX B

Depreciated Replacement Cost Example

103

APPENDIX C

Renewals Accounting Example

110

Acknowledgements

6

113

LIST OF TABLES Table 5.1

Classification of Highway Assets

37

Table 5.2

Asset Valuation Data for each Asset

39

Table 6.1

Recommended Units for Measuring Asset Quantities

43

Table 14.1

Gross Replacement Cost Models and Unit Rates for Structures

82

Table 14.2

Additional Cost Factors on “New-Build” Unit Rates

84

Table 18.1

Key Recommendations

98

LIST OF FIGURES Figure 3.1

Overview of the Procedure for Highway Infrastructure Asset Valuation

22

Figure 3.2

Detailed Steps in Highway Infrastructure Asset Valuation Procedure

23

Figure 5.1

Asset Classification

34

Figure 8.1

Straight Line Depreciation of Finite Life Asset

51

Figure 8.2

Straight Line Depreciation and Residual Value

52

Figure 8.3

Treatment of Reduction in Remaining Service Life

53

Figure 9.1

Calculating Impairment

61

Figure 9.2

Grouping of Assets by Age Bands

62

Figure 9.3

Performance Measure and Restoration Cost Factor

63

Figure 11.1 Accumulated Asset Consumption Measure

68

Figure 11.2 In-year Asset Consumption and Renewal Measures

69

Figure 15.1 GRC and Component Replacement Cost

89

7

Glossary

8

Accruals Accounting

a method of recording expenditure as it is incurred and assets as they are consumed, regardless of when the cash is received or paid out.

Admissible Costs

costs that are directly attributable to bringing the asset into a working condition for its intended use.

Asset

in the context of this guidance an asset is an integral feature of the highway infrastructure, e.g. roads, structures, lighting and traffic management systems.

Asset Consumption

measured in terms of depreciation and impairment of assets.

Asset Management

a strategic approach that identifies the optimal allocation of resources for the management, operation, preservation and enhancement of the highway infrastructure to meet the needs of current and future customers.

Asset Management Plan (AMP)

a plan for managing the asset base over a period of time in order to deliver the agreed Levels of Service and Performance Targets in the most cost effective way. This may be referred to as a Highway Asset Management Plan (HAMP) or Transport Asset Management Plan (TAMP) in other guidance documents and codes of practice.

Asset Management System

the hardware and software that supports Asset Management practices and processes and stores the asset data and information.

Asset Valuation

the procedure used to calculate the asset value.

Asset Value

the calculated current monetary value of an asset or group of assets. It should be correctly referred to as the Net Asset Value, however it is normally shortened to Asset Value. Where the term Asset Value is used in this Guidance Document it should be interpreted as the Net Asset Value. Asset Value in this document is synonymous with Depreciated Replacement Cost and Net Book Value.

Authority

used in this document to mean a Local Highway Authority, this covers all forms of Local Highway Authority having responsibility for highway maintenance as defined in Section 1 of the Highways Act 1980 amended.

Balance Sheet

a financial statement showing the assets and liabilities of an authority.

Glossary

Benchmark Valuation

a full valuation that includes a review of the valuation basis and calculation of the Unit Rates, Gross Replacement Cost and Depreciated Replacement Cost, typically undertaken once every 5 years.

Carriageway

the part of the highway laid out for use by motor vehicles.

Current Performance

see Performance.

Cycle Route

a way constituting or comprised in a highway, being a way over which the public have a right of way on pedal cycles (other than pedal cycles which are motor vehicles within the meaning of the Road Traffic Act 1972) with or without a right of way on foot [Section 329(1) Highways Act 1980]. The words in brackets were inserted by section 1 of the Cycle Tracks Act 1984.

Depreciation

the systematic consumption of economic benefits embodied in an asset over its service life arising from use, ageing, deterioration or obsolescence.

Depreciated Replacement Cost/ Net Asset Value

the calculated current monetary value of an asset or group of assets, normally calculated as the Gross Replacement Cost minus accumulated depreciation and impairment. This is synonymous with Net Book Value.

Footway

a way comprised in a highway, which also comprises a carriageway, being a way over which the public has a right of way on foot only [Section 329(1) Highways Act 1980]. Footways are the pedestrian paths alongside a carriageway.

Footpath

a highway over which the public have a right of way on foot only, not being a footway [Section 329(1) Highways Act 1980].

Generally Accepted Accounting Practice

an international accounting convention for preparing financial reports by private companies. These are customised in each country to comply with the national accounting standards.

Gross Replacement Cost/Gross Asset Value

the total admissible cost of replacing a highway asset as part of the existing highway network.

Heritage Asset

a listed asset or an asset that, due to its construction form or character, is considered to be important to the heritage and/or character of an area.

Highway

collective term for publicly maintained facilities laid out for all types of user, and for the purpose of this guidance includes, but is not restricted to, roads, streets, footways, footpaths and cycle routes.

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Highway Infrastructure Asset

an authority’s portfolio of highway assets including roads, segregated footpaths and cycle routes, structures, lighting, traffic management systems, etc. Together they function as a system or network which as a whole is intended to be maintained at a specified Level of Service (assessed through Performance Measures) by the continuing replacement and refurbishment of its assets and elements.

Impairment

a reduction in Net Asset Value due to a sudden or unforeseen decrease in condition and/or performance of an asset, compared to the previously assessed level, which has not been recognised through depreciation.

Initial Measurement

determining a monetary value of a newly constructed, re-constructed or improved asset.

Levels of Service

a statement of the performance of the asset in terms that the customers can understand. Levels of Service typically cover condition, availability, accessibility, capacity, amenity, safety, environmental impact and social equity. They cover the condition of the asset and non-condition related demand aspirations, i.e. a representation of how the asset is performing in terms of both delivering the service to customers and maintaining its physical integrity at an appropriate level.

Modern Equivalent Asset

an asset which provides the same Potential Performance as the existing asset, but takes account of up-to-date technology.

Net Book Value

the amount at which fixed assets are included in the balance sheet, i.e. the Net Asset Value.

Network

the highway network inclusive of all its elements, e.g. roads, segregated footpaths and cycle routes, structures and lighting.

Performance

three aspects of performance should be recognised as defined below:

Current Performance

the performance and/or condition currently provided by an asset. The Current Performance is likely to be lower than the Potential Performance due to usage, ageing and deterioration. The Current Performance may also be different from the Required Performance.

Potential Performance

the maximum or full performance that an asset can provide if it is in an “as new” condition. This may be greater than the Current Performance.

Glossary

Required Performance

the performance and/or condition currently required of an asset. This may be different from the Current Performance and Potential Performance due to changes in demand or changes in statutory/ regulatory requirements or standards.

Performance Measure

a generic term used to describe a measure or indicator that reflects the condition and/or performance of an asset, e.g. Best Value Performance Indicators (BVPI) and other Performance Indicators (PIs).

Potential Performance

see Performance.

Renewals Accounting

a technique for estimating depreciation that allows the level of annual expenditure required to maintain the Level of Service to be treated as the depreciation charged for that period and deducted from the current asset value. The expenditure required should be identified from an Asset Management Plan and the Level of Service is assessed through Performance Measures.

Required Performance

see Performance.

Resource Accounting and Budgeting

an accounting procedure adopted by Central Government in 2001 that aims to produce a set of accounts in a style similar to the private sector following Generally Accepted Accounting Practice.

Special Structures

structures that due to a combination of their size, construction, and character are not suitable to be valued using standardised Unit Rates and Gross Replacement Cost models.

Statement of Accounts

a set of financial statements which present the financial performance and position of an authority during the accounting period covering its assets, liabilities, income and expenditure, the cash flow, and any provisions for the future.

Unit Rates

the cost per unit measure (number/length/area/volume) to replace an asset or part of an asset.

Valuation Report

a report which summarises the results of valuation and provides supporting information relating to an authority’s highway infrastructure assets.

Whole of Government Accounts

a central Government initiative to produce a comprehensive set of accounts from 2006-07 for the whole of the public sector covering central government departments, local government, agencies, NHS trusts and other public bodies in a style similar to the private sector, following Generally Accepted Accounting Practice. 11

Abbreviations

12

AAC

Accumulated Asset Consumption

ADF

Adjustment factor

AMP

Asset Management Plan

AMS

Asset Management System

BVPI

Best Value Performance Indicator

CSS

County Surveyors Society

CIPFA

Chartered Institute of Public Finance and Accountancy

DfT

Department for Transport

DRC

Depreciated Replacement Cost

FRS

Financial Reporting Standard

GAAP

Generally Accepted Accounting Practice

GRC

Gross Replacement Cost

HMT

Her Majesty’s Treasury

IAC

In-year Asset Consumption

IAR

In-year Asset Renewal

LASAAC

Local Authority Scotland Accounting Advisory Committee

MEA

Modern Equivalent Asset

NBV

Net Book Value

ODPM

Office of the Deputy Prime Minister

PI

Performance Indicator

PROW

Public Rights of Way

RAB

Resource Accounting and Budgeting

RAM

Resource Accounting Manual

RCPI

Road Construction Price Index

RCTPI

Road Construction Tender Price Index

RV

Residual Value

SCOTS

Society of Chief Officers of Transportation in Scotland

SL

Service Life

SORP

Standard of Recognised Practice

TAG

The Local Government Technical Advisors Group

UR

Unit Rate

WGA

Whole of Government Accounts

Section 1 Introduction 1.1

WHAT IS ASSET VALUATION?

1.1.1

Asset valuation is the calculation of the current monetary value of an organisation’s assets. The value is reported annually in the organisation’s Balance Sheet and is one of the key components supporting Whole of Government Accounts (WGA) and public sector financial management.

1.1.2

Asset valuation is an important mechanism for demonstrating proper stewardship of public assets. It provides a means for quantifying the capital employed in the assets and the cost of use of the assets in delivering services to the public.

1.1.3

The methodology used to calculate the current monetary value depends on the asset under consideration. This Guidance Document has been produced specifically for the valuation of highway infrastructure assets.

1.2

DRIVERS FOR ASSET VALUATION To Emphasise the Need to Preserve the Highway Infrastructure

1.2.1

Placing a monetary value on highway assets emphasises their importance and hence the need to maintain them. Monitoring how the asset value is changing with time can indicate if costs are being unduly passed to future generations, and can provide compelling arguments for investing in the preservation of the asset base.

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1.2.2

Experience in other countries (Finland, New Zealand, Australia, US, Canada) has shown that implementing financial reporting of asset values for infrastructure assets has a significant impact on how maintenance and renewal work is funded and utilised. This has generally resulted in an improvement in the maintenance of assets.

1.2.3

It is, however, important to recognise that asset value represents only the monetary value or capital value of the assets and not the service provided or the “worth” of the assets to society. To Support Improved Asset Management

1.2.4

Authorities are implementing improved highway Asset Management practices, as described in the CSS Framework for Highway Asset Management [Ref. 1] and the respective Codes of Practice for roads, structures and lighting [Ref. 2, 3 & 4]. A key component of Asset Management is to value the assets and demonstrate that the forward work volumes, defined in the Asset Management Plan, will sustain and, where appropriate, enhance the value of the asset.

1.2.5

Asset valuation, in the context of Asset Management, acts as an important indicator of good asset stewardship. However, asset valuation should not be used in isolation, but should be used in combination with other recognised Performance Measures such as Best Value Performance Indicators (BVPIs) and other Performance Indicators (PIs), and with processes such as value management, whole life costing, risk management and optimisation. To Support the Whole of Government Accounts

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1.2.6

The UK Government introduced new Resource Accounting and Budgeting (RAB) [Ref. 5] procedures for all Government Departments from 2001-02. Whole of Government Accounts (WGA) extends the RAB agenda by developing a consolidated standard and processes for the whole of the public sector in one set of accounts.

1.2.7

WGA uses accruals accounting methods in line with the Generally Accepted Accounting Practice (GAAP) and brings public sector accounting in line with that of the private sector. By relying on proper accounting practice this builds on the prudential system for local government finance and the Resource Accounting procedures for central government.

1.2.8

The objectives of WGA and RAB are to promote greater accountability, transparency and improved stewardship of public finances. Resource accounting is intended to provide a systematic link between an authority’s objectives, resources consumed and outcomes delivered. Under RAB an authority is required to report in its accounts the resources, including physical assets, invested and consumed in the delivery of public services. The benefits of RAB are stated as including [Ref. 6]: 1.

Enhancing the fiscal framework by distinguishing more clearly between consumption and investment.

2.

Providing better information on costs, assets and liabilities to assist resource management.

3.

Linking resource allocation and capital spending to the delivery of services.

Section 1 – Introduction

4.

Measuring the full costs of activities (whether or not there is a cash element) and recording costs when they are incurred rather than when they are paid.

5.

Apportioning assets over the years in which they are consumed in the provision of services.

1.2.9

The central objectives and intentions of RAB and consolidation through WGA align closely with those of good Asset Management.

1.3

PURPOSE OF THIS GUIDANCE DOCUMENT

1.3.1

The purpose of this Guidance Document is to provide guidance on asset valuation of highway infrastructure assets that aligns with financial reporting and Asset Management requirements. The guidance is presented in the form of a step by step procedure covering asset classification, data requirements, calculation of Gross Replacement Cost, calculation of depreciation and impairment, and the reporting and monitoring of asset value. Examples are provided in the appendices to illustrate the application of the methods.

1.3.2

The guidance provides a common framework for the discussion, development and implementation of highway infrastructure asset valuation by authorities in the UK. It is recommended that authorities work together, possibly at regional level, to develop some of the inputs for asset valuation, e.g. Unit Rates, Gross Replacement Cost models and service lives.

1.4

SCOPE

1.4.1

This Guidance Document covers all fixed assets that form an essential part of the highway network, for example the earthworks, pavement, drainage, verges, fencing, structures, lighting, street furniture, traffic management and communication assets. Assets such as vehicles, plant and equipment, and depots are excluded from the scope.

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1.5

STATUS OF THE GUIDANCE DOCUMENT

1.5.1

This Guidance Document is a companion to the CSS Framework for Highway Asset Management [Ref. 1]. The recommendations of this Guidance Document are not explicitly mandatory on authorities. The term ‘should’ associated with an action is used to denote a recommendation, except where clearly relating to a statutory or mandatory requirement.

1.5.2

However, authorities who elect, in the light of local circumstances, to deviate from the recommendations given here should identify these in their Valuation Report together with the reasons for the departure.

1.5.3

The guidance is endorsed by the Treasury, the Office of the Deputy Prime Minister (ODPM), the Department for Transport (DfT), the County Surveyors Society (CSS), the Local Government Technical Advisors Group (TAG) and the Society of Chief Officers of Transportation in Scotland (SCOTS).

1.6

KEY RECOMMENDATIONS

1.6.1

1.7

IMPLEMENTATION OF ASSET VALUATION

1.7.1

The following timeframe is recommended for the implementation of highway infrastructure asset valuation in order to support Asset Management and WGA:

1.7.2

16

Key recommendations are boxed, like this paragraph, when they appear in the text. They are also summarised in Section 18.4.

•

Interim valuation of a sample of assets in Financial Year 2005-06.

•

Benchmark valuation in Financial Year 2006-07 (provides opening book value for 2007-08).

•

Calculate in-year movements (e.g. depreciation) in Financial Year 2007-08.

An implementation plan is proposed in Section 18.1.

Section 2 Asset Valuation Requirements 2.1

FINANCIAL REPORTING REQUIREMENTS

2.1.1

Asset valuation for highway infrastructure assets should comply with the financial reporting requirements summarised below. The asset valuation procedure described in this Guidance Document enables authorities to comply with these requirements. Compliance with Standards

2.1.2

The methodology adopted for calculating asset values for an authority’s statutory accounts should comply with the SORP [Ref. 7]. The methodology should also be consistent with Financial Reporting Standards 15 and 11 [Ref. 8 & 9]. Consistency with Treasury’s Resource Accounting Manual [Ref. 10] is also desirable for the preparation of the Whole of Government Accounts.

2.1.3

The valuation principles, basis and rules established for highway infrastructure asset valuation are presented in Section 4. The principles, basis and rules comply with the aforementioned standards where appropriate.

2.1.4

The guidance recommends the use of Renewals Accounting for roads, segregated footpaths and cycle routes, and structures because they form an integral part of the highway network and meet the requirements set down in FRS 15 [Ref. 8]. It is recognised that FRED 29 [Ref. 11], following on from IAS 16 [Ref. 12], does not refer to Renewals Accounting. However, in the opinion of those endorsing this guidance (Section 1.5.3), Renewals Accounting is a robust and systematic basis for estimating the consumption of the aforementioned parts of the highway network.

2.1.5

The inclusion of highway infrastructure asset values derived in accordance with this guidance into the statutory accounts is dependent on agreement of the procedure with CIPFA/LASAAC and necessary amendments to the SORP [Ref. 7]. It is recognised that the 2004 publication of the SORP guidance [Ref. 7] requires highway infrastructure assets to be reported in the Balance Sheet at historical cost and a current valuation of these assets is not required. At the time of publication of this Guidance Document, discussions between CIPFA/LASAAC, HMT, ODPM, DfT and CSS/TAG were assessing the suitability of historical cost for highway assets and the practicality of moving towards a (re)valuation regime based on current value. This Guidance Document has been prepared on the assumption that highway infrastructure assets will be required to be valued on the basis of current value. True and Fair Value

2.1.6

An authority should provide a true and fair current value of the highway infrastructure assets for reporting in the Balance Sheet. The asset value is intended to represent the current value of the capital employed by the authority in delivering its services.

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Depreciation and Impairment

18

2.1.7

Depreciation of assets should be calculated annually and recognised as a cost, with appropriate in year phasing for financial management purposes. Depreciation represents the consumption of assets in delivering services to the public, and should be allocated on a systematic basis over the useful service life of an asset. In addition, any drop in value of assets due to a sudden reduction in their condition/performance should be recognised as impairment.

2.1.8

The accumulated depreciation and impairment are deducted from the Gross Replacement Cost to give the Depreciated Replacement Cost.

2.2

HIGHWAY ASSET MANAGEMENT REQUIREMENTS

2.2.1

Key objectives of highway Asset Management, as with RAB, are to promote greater accountability and improved stewardship of public assets, and to systematically link resources to the delivery of an authority’s objectives. This translates into two categories of work for highway infrastructure assets:

1.

A programme of improvement works to cater for increases in demand or to improve Levels of Service (e.g. safety, environmental, accessibility, condition, also see Ref. 1); and

2.

A programme of routine, programmed and reactive maintenance and renewal to preserve or restore the condition/performance of existing assets.

2.2.2

These programmes of work influence the asset value, i.e. the work programme may maintain or increase the asset value or, if it is not adequate, then the asset value may decrease. Monitoring asset value over time can therefore be used to demonstrate stewardship of assets. This information provides an important input to a business case for investing in the maintenance and upkeep of public assets.

2.2.3

To enable effective use of asset valuation within highway Asset Management, the valuation procedure should meet the following specific requirements: 1.

Treat the assets in the “right way”, reflecting that they are part of a highway network and operate together to provide the specified Levels of Service for the network. This integrated approach to asset management should be reflected, where appropriate, in the procedure used for highway infrastructure asset valuation.

2.

Reflect good engineering practice and support the right investment choices for maintenance, renewal and improvement works.

3.

Be sensitive to works that add or protect asset value.

Section 2 – Asset Valuation Requirements

2.3 2.3.1

4.

Be consistent with, and be a component of, the suite of processes used in highway Asset Management such as Performance Measures, prioritisation, value management and whole life costing.

5.

Support decision making and long term investment planning by forming an important element of the business case for funding in the upkeep of condition and performance of the assets.

6.

Be relatively straightforward and operate on data that is readily available or can be collected with marginal effort.

VALUATION REGIME An authority should establish a valuation regime for their highway infrastructure. It is recommended that, as a minimum, a benchmark valuation is performed every five years with annual adjustments to take account of changes to the stock and fluctuations in construction prices.

2.3.2

It is recognised that the robustness and reliability of valuation are likely to improve with time as Asset Management Systems (AMS) progress and the quality of data about asset inventory, condition and performance improves. Also, as authorities develop and populate their AMS they can expect to improve the level of detail used in asset valuation and to streamline the procedure. If suitable advances are made in AMS, then asset valuation may become largely, or completely, automated and it may become feasible to align annual adjustments more closely with the tasks undertaken in a benchmark valuation.

2.3.3

An authority should review the scope of the benchmark valuation and annual adjustments described below and, based on the characteristics of its highway stock, the availability of data and the functionality of its AMS, adopt a suitable valuation regime. An authority should also consider how their data and systems are likely to change over time, as identified from the Asset Management gap analysis [Ref. 1], and assess the impact this may have on the asset valuation regime. Benchmark Asset Valuation

2.3.4

As a minimum, the asset valuation regime should include a full benchmark valuation every five years. The benchmark valuation should comprise: 1.

A review of the valuation basis, rules and algorithms, and making any necessary amendments if this results in a fairer valuation.

2.

Determination or updating of the Unit Rates using a representative sample of construction/replacement schemes that cover specific asset types and groups.

3.

Determination and/or updating of the service lives used to depreciate finite life assets or elements.

4.

Collation of up-to-date data on all assets, including recent additions/deletions, information on dimensions, condition and performance of each asset.

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5.

2.3.5

Calculation of Gross Replacement Cost, depreciation, impairment and Depreciated Replacement Cost for individual assets and groups of assets, as appropriate, based on the valuation and depreciation methodology applied.

A benchmark valuation should be undertaken before the five year milestone, if there is reason to believe the current value is materially different from a true and fair value. Annual Adjustments

2.3.6

20

Asset valuation should include annual adjustments to reflect any in-year changes compared to the previous year and, if appropriate, adjust the asset value. The adjustments should take account of: 1.

Changes in asset condition and performance, i.e. in-year depreciation and impairment.

2.

Changes in construction prices. These should be assessed using suitable indices, e.g. Baxter Indices.

2.3.7

Changes to the stock resulting from improvements, detrunking, retrunking, highway adoptions, decommissioning etc., should be recognised immediately rather than at year end.

2.3.8

Capitalisation of subsequent expenditure (Section 4.5) also influences asset value. However these costs should be applied when incurred rather than at year end.

2.3.9

If an authority wishes to accrue in-year depreciation, e.g. quarterly or monthly, this should be done by phasing the annual depreciation charge equally across the in-year accounting periods.

Section 3 Overview of Highway Asset Valuation Procedure 3.1

OVERVIEW

3.1.1

The general procedure for the valuation of highway infrastructure assets consists of the following steps and is illustrated in Figure 3.1. 1.

Establish the principles, basis and rules for asset valuation (Section 4). These should comply with the valuation requirements given in Section 2.

2.

Compile an Asset Inventory that provides the base data for calculating asset values for all highway infrastructure assets owned by an authority (Section 5). The assets should be appropriately classified and grouped. Also see Section 2 of the CSS Framework for Highway Asset Management [Ref. 1].

3.

Produce the initial value of the highway infrastructure assets. This involves:

4.

5.

6.

a.

Deriving appropriate Unit Rates for the different asset groups and sub-groups (Section 6).

b.

Calculating the Gross Replacement Cost for each asset within a group or sub-group (Section 7).

Calculate the consumption of the assets, which involves: a.

Calculating in-year depreciation (Section 8); and

b.

Assessing for in-year impairment and calculating loss in value where required (Section 9).

Calculate the Depreciated Replacement Cost (Section 10) which involves: a.

On the introduction of the asset valuation regime, calculating the DRC (which is the opening Net Book Value) by reducing the Gross Replacement Cost to reflect the current age, condition and performance of assets; and

b.

Annual adjustments to the asset value to account for in-year depreciation and impairment.

Prepare the Valuation Report (Section 11).

3.1.2

Sections 4 to 11 apply to all highway infrastructure assets, except where explicitly stated. Guidance specific to each asset type is provided in Sections 12 to 17.

3.2

DETAILED PROCEDURE

3.2.1

The specific tasks involved in steps 2 to 5 above are shown in Figure 3.2 and described in detail in Sections 5 to 10. The relevant sections are cross referenced in Figure 3.2.

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3.2.2

Several tasks in the procedure are interrelated and may need to be carried out in a different order, depending on whether the valuation is being undertaken for the first time or whether it is a benchmark valuation or annual adjustment. Figure 3.2 shows some of the relationships between tasks as appropriate for initial implementation of asset valuation.

Financial Reporting Requirements (Section 2.1)

Asset Valuation Regime (Section 2.3)

Asset Management Requirements (Section 2.2)

Valuation Principles, Basis and Rules (Section 4)

Asset Inventory (Section 5)

INITIAL VALUE Unit Rates (Section 6)

Gross Replacement Cost (Section 7)

CONSUMPTION

Depreciation (Section 8)

Impairment (Section 9)

Depreciated Replacement Cost (Section 10)

Valuation Report (Section 11)

Figure 3.1 Overview of the Procedure for Highway Infrastructure Asset Valuation

22

Section 3 – Overview of Highway Asset Valuation Procedure

ASSET INVENTORY (Section 5) Review asset inventory requirements (Section 5.2)

Establish asset classification (Section 5.4)

Identify key cost drivers (Section 5.3)

Establish sub-groups & adjustment factors (Section 5.5)

Compile asset valuation data (Section 5.6)

Derive Unit Rates (Section 6.4)

Derive adjustment factors (Section 6.5)

UNIT RATES (Section 6) Select schemes (Section 6.2)

GROSS REPLACEMENT COST (Section 7)

Establish unit of measurement (Section 6.3)

Develop Gross Replacement Cost model (Section 7.2)

Calculate Gross Replacement Cost (Section 7.3)

DEPRECIATION (Section 8) Adopt Conventional Method (Section 8.2)

Classify assets & components (Paragraph 8.2.2)

Determine service lives & depreciation (Paragraph 8.2.4)

Calculate depreciation charge (Paragraph 8.2.10)

Adopt Renewals Accounting (Section 8.3)

Determine AMP funding requirements (Paragraph 8.3.4)

Determine actual expenditure (Paragraph 8.3.9)

Calculate depreciation charge (Paragraph 8.3.10)

Assess for impairment (Section 9.2)

Calculate impairment (Section 9.3)

Calculate initial DRC (Section 10.3)

Calculate annual adjustments to DRC (Section 10.4)

IMPAIRMENT (Section 9)

DEPRECIATED REPLACEMENT COST (Section 10)

Determine condition & performance (Section 10.2)

Figure 3.2 Detailed Steps in Highway Infrastructure Asset Valuation Procedure

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Section 4 Valuation Principles, Basis and Rules 4.1 4.1.1

GENERAL Before carrying out valuation it is important that the principles, basis and rules are set down and agreed by the authority with its auditors, as they have a significant impact on the calculated asset values. The principles, basis and rules presented below provide an appropriate basis for the valuation of highway infrastructure assets and are strongly recommended for adoption by all authorities. They underpin the asset valuation procedure and guidance presented in this document.

4.1.2

It is important that authorities do not deviate from the principles, basis and rules described below unless there is a good reason to do so. This is necessary to ensure consistency in the asset values and the related asset preservation measures produced by different authorities. If an authority deviates from the following rules they should fully document the reasons for the deviation in their Valuation Report (Section 11.2).

4.1.3

The principles, basis and rules for highway infrastructure asset valuation are described under the following headings: 1.

Accounting principles (Section 4.2)

2.

Valuation basis (Section 4.3)

3.

Admissible costs (Section 4.4)

4.

Capitalisation of subsequent expenditure (Section 4.5)

5.

Indexation of costs (Section 4.6)

6.

Modern Equivalent Asset (Section 4.7)

7.

Assets under construction (Section 4.8)

8.

Assets under a PFI Scheme (Section 4.9)

9.

Special structures (Section 4.10)

10.

Heritage assets (Section 4.11).

4.2

ACCOUNTING PRINCIPLES

4.2.1

Highway infrastructure asset valuation and its annual reporting should follow the established principles of financial accounting; in particular: 1.

24

Reliability – the information contained can be depended upon for the stated purpose; it is free from deliberate or systematic bias; it is free from material error; and a prudent approach has been taken in dealing with uncertainty.

Section 4 – Valuation Principles, Basis and Rules

2.

Comparability – the information provided can be compared with similar information about the organisation for previous accounting periods and with other similar organisations. Comparability depends on consistency in valuation between like items, such as pavement and structures, and between accounting periods, and recognising that changes may be appropriate if they would result in a fairer valuation.

3.

Materiality – all information is included that might be expected to have an influence on the purpose for which the financial statements are used. Materiality depends on the size and nature of the item considered and should be judged on the circumstances of the case.

4.3

VALUATION BASIS

4.3.1

Highway assets are largely publicly owned and have rarely if ever been sold on the open market. They are not created to produce revenue and therefore do not have a defined revenue stream, although revenue may be associated with them in certain cases (e.g. congestion charging, tolls and parking charges). Hence the ‘market value’ or ‘revenue stream’-based valuation methods are not appropriate for highway assets.

4.3.2

4.3.3

The Resource Accounting Manual (RAM) [Ref. 10], based on the requirements of FRS 15 [Ref. 8], recommends that highway infrastructure assets are valued on the basis of Depreciated Replacement Cost (DRC). (NB: at the time of publication of this document the SORP Guidance [Ref. 7] required historical cost to be used for the valuation of highway infrastructure assets; but the SORP requirement has not been followed, for the reasons given in paragraph 2.1.5). The Depreciated Replacement Cost is evaluated as: Depreciated Replacement Cost = Gross Replacement Cost – (Accumulated Depreciation & Impairment) Equation 1 Where:

4.3.4

•

Depreciation is the systematic consumption of economic benefits embodied in an asset over its service life arising from use, ageing, deterioration or obsolescence; and

•

Impairment is a reduction in Net Asset Value due to a sudden or unforeseen decrease in condition and/or performance of an asset compared to the previously assessed level which is not already recognised through depreciation.

This Guidance Document describes the approaches that should be used to calculate depreciation and impairment. Guidance on the accounting treatment of depreciation and impairment in the Statement of Accounts is beyond the scope of this document, and for this purpose authorities should refer to the SORP [Ref. 7].

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4.3.5

When an asset is constructed, reconstructed or improved within the current financial year, the asset could initially be valued at cost. At the next valuation (i.e. annual adjustment or benchmark valuation) these assets should be revalued based on the DRC approach using the standard procedure. Since valuation may not give the same monetary value as the actual construction cost, this could result in writing down the asset value soon after an asset enters into service. To avoid this fluctuation in asset value an authority may choose to value such new assets using the standard procedure for valuation and include the asset in the Balance Sheet at the re-valued amount rather than at cost. This may lead to an immediate “write-down” of capital costs which should be treated according to established capitalisation (Section 4.5) and accounting procedures [Ref. 7].

4.4

ADMISSIBLE COSTS

4.4.1

In valuing and revaluing highway infrastructure assets it is important to clearly establish the costs that are admissible. The same applies to (re)constructed assets and costs incurred when carrying out maintenance.

4.4.2

FRS 15 [Ref. 8] states that “Costs, but only those costs that are directly attributable to bringing the asset into working condition for its intended use, should be included in its measurement”.

4.4.3

Directly attributable costs for highway infrastructure assets are all costs incurred by the authority when constructing the asset, e.g. labour, plant, material, site preparation, traffic management and professional fees. However, certain costs such as utility service diversion/disruption, pre-feasibility costs, the authority’s overall programme management, monitoring and overhead costs not directly attributable to a specific asset or scheme, are not admissible. Any abortive costs including those related to design errors, industrial disputes, idle capacity, wasted resources and production delays are also not admissible.

4.4.4

The actual outturn costs incurred in constructing a highway asset can be broadly grouped under the following cost elements:

Section 4 – Valuation Principles, Basis and Rules

4.4.5

1.

Direct cost of material, labour, plant and equipment including site clearance and preparation costs, including contractor’s profit margin and finance costs.

2.

Project management and supervision costs including scheme design.

3.

Costs of authority’s own staff time.

4.

Cost of demolishing or breaking out of the existing assets and their disposal.

5.

Cost of temporary works, e.g. diversions and temporary bridging.

6.

Temporary traffic management costs, e.g. coning, traffic lights and signage.

7.

Possession costs for assets over, or that impact on, railway lines, canals, etc.

The majority of highway infrastructure assets can be considered as ‘mature’ assets. The admissible costs for mature highway infrastructure assets should include all costs incurred in the current location, subject to the rules above. These costs should be taken into account in the derivation of Unit Rates and the calculation of Gross Replacement Cost. Utility Diversion Costs

4.4.6

It is recognised that the diversion of utility services (e.g. gas, water, telephones and cables) during asset replacement or renewal work and their subsequent reinstatement can contribute a significant proportion to project costs. However, these costs are uncertain and difficult to estimate and should therefore be written off when incurred (except for highway lighting, and similar assets, as explained in paragraph 15.3.1).

4.5

CAPITALISATION OF SUBSEQUENT EXPENDITURE

4.5.1

The valuation procedure should preferably align with the capitalisation procedures used for accounting for subsequent expenditure on assets in their maintenance, renewal and enhancement. Guidance for this is provided in the SORP [Ref. 7].

4.5.2

Authorities should establish proper policies and procedures, in agreement with their auditors, for the capitalisation of costs and their classification into admissible and non-admissible costs for valuation purposes. In doing so, due consideration should be given to the approach adopted for depreciation because this has an influence on how the subsequent expenditure is capitalised [Ref. 8]. The recommended approaches for depreciation are described in Section 8.

4.6

INDEXATION OF COSTS

4.6.1

Valuation is carried out using standardised Unit Rates (Section 6) for each asset group or sub-group. The Unit Rates are derived from outturn costs from a representative sample of previously completed highway (re)construction schemes. The Unit Rates need to be adjusted, using an appropriate price index, to represent present day prices. 27

Highway Infrastructure Asset Valuation Guide – County Surveyors Society/TAG Asset Management Working Group

4.6.2

4.6.3

4.6.4

Authorities should adopt an index that best reflects the increases in road construction prices in their authority. The indices widely used by authorities in the UK are: 1.

Baxter Indices – published by the Department for Trade and Industry (DTI).

2.

Road Construction Price Index (RCPI) – published by Department for Transport until 1995.

3.

Road Construction Tender Price Index (RCTPI) – published by Department for Transport since 1995.

It is recommended that a price index based on a basket of appropriately weighted Baxter Indices are used for highway infrastructure asset valuation because these are more stable compared to the other indices. Further details on the Baxter Indices are provided below. If an authority uses an alternative price index, then they may adopt this for asset valuation provided the authority and their auditors are satisfied with its suitability for highway infrastructure assets. Baxter Indices

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4.6.5

Baxter Indices were developed in order to apply Price Adjustment Formulae to construction contracts to allow for variations in contractors’ costs over the duration of a contract. Whilst they are published by the DTI on a monthly basis [Ref. 13], there is a working group, which has a wide representation from all sides of the construction industry, that is responsible for reviewing the indices and deciding issues arising in the compilation of the indices. Indices are published as provisional in the first instance and are subsequently changed to firm values.

4.6.6

Two sets of indices are published; one for building work and one for specialist and civil engineering works. The latter should be used for highway infrastructure asset valuation and consists of 14 indices for different components of labour, plant and materials: 1.

Labour and supervision in civil engineering

2.

Plant and road vehicles: provision and maintenance

3.

Aggregates

4.

Bricks and clay products

5.

Cements

6.

Cast iron products

7.

Coated roadstone for road pavements and bituminous products

8.

DERV fuel

9.

Gas oil fuel

Section 4 – Valuation Principles, Basis and Rules

10.

Timber

11A. Steel for reinforcement 11B. Metal sections 12.

Fabricated structural steel

13.

Labour and supervision in fabricating and erecting steelwork

4.6.7

In order to adjust the Unit Rates (Section 6), it is necessary to use a basket of indices weighted based on the proportion the above components contribute to the Unit Rate under consideration. Whilst this can be done separately for each Unit Rate an authority may decide to produce a weighted basket appropriate to each Level 1 asset type (Section 5.4) and use this combined index for all asset groups and sub-groups within the category. Similarly this could be done at Level 2, for example, for a concrete bridge one would use indices 1, 2, 3, 5, 10 & 11A as their movement would affect the Unit Rate significantly.

4.7

MODERN EQUIVALENT ASSET

4.7.1

The concept of Modern Equivalent Asset (MEA) is used to determine the standardised Unit Rates (Section 6) and Gross Replacement Cost (Section 7) when valuing existing assets of technologically obsolete construction form, e.g. the modern equivalent of a masonry arch bridge may be a composite beam and slab bridge.

4.7.2

The MEA is defined as one which provides the same Potential Performance as the existing asset, but takes account of up-to-date technology. If the construction form of an existing asset is no longer considered appropriate as a replacement, or when existing assets can be replaced more economically by new construction forms to provide a similar function, then this should be reflected in asset valuation by using the MEA instead of the existing construction form.

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4.7.3

MEA should reflect current good practice and should therefore implicitly account for the latest construction techniques, delivering minimum whole life costs, and meeting sustainability and environmental requirements. The MEA should be identified, where required, for the asset groups and sub-groups described in Section 5 and a replacement Unit Rate derived for each. The MEA can be readily identified by reviewing recent construction practice.

4.7.4

In some cases the Potential Performance provided by an existing asset cannot be replicated by a MEA, e.g. the Potential Performance of an existing bridge may be 10 tonne however a MEA would be designed to provide 40 tonne capacity. In such cases the GRC should be evaluated as the cost of a MEA that meets the Current Performance, even if it provides an improvement on the existing Potential Performance, provided the GRC of the MEA is considered to be representative. If the GRC of the MEA is considered to be unrepresentative of the cost of replacing the existing asset, with an asset that provides the same Potential Performance, then the costs should be factored accordingly. A factor should be applied when the GRC for the existing asset is considered to be more than ±10% of the GRC of the MEA.

4.7.5

Appendix A provides some examples of how to use MEA. The examples explain the appropriate treatment of impairment (Section 9).

4.8

ASSETS UNDER CONSTRUCTION

4.8.1

Schemes which have not reached the ‘open for traffic’ stage but are in progress at the valuation date are classed as ‘assets under construction’. These assets should be included in the accounts either at cost or a proportion of the value of the complete asset evaluated using the standard procedure. The proportion of the value considered should be based on the progress of the work or spend to-date compared to the full asset when completed.

4.9

ASSETS UNDER A PFI SCHEME

4.9.1

Assets which are managed under a Private Finance Initiative (PFI) scheme as “off the Balance Sheet assets” should not be included in the valuation. Where this is not the case a proportion of the full asset value (evaluated using the standard procedure), based on the elapsed period of the PFI concession relative to the total concession period, should be included in the Balance Sheet. For example, if the total asset value of lighting assets in an authority is £20 million and the total period of the PFI concession is 20 years with 15 years elapsed, then the asset value to be included in the Balance Sheet is £15 million.

4.10

SPECIAL STRUCTURES

4.10.1

Highway infrastructure assets are classified into groups and sub-groups (Section 5) to enable standardised Unit Rates (Section 6) and GRC models (Section 7) to be determined. However, Special Structures are those that due to a combination of their size, construction and/or character are not suitable to be valued using standardised Unit Rates and GRC models, for example, the Jubilee Bridge.

4.10.2

Special Structures should be valued individually using the principles given in this Guidance Document, including the concept of Modern Equivalent Asset. Specific guidance on the treatment of Special Structures is provided in Section 14.

Section 4 – Valuation Principles, Basis and Rules

4.11

HERITAGE ASSETS

4.11.1

Many authorities have a significant number of heritage and/or listed highway assets, principally bridges, e.g. Tower Bridge, but they may also include other assets that are deemed to be important to the character of the area, e.g. ornate lighting columns and cobbled streets. It would not be appropriate to value these assets using the Modern Equivalent Asset (MEA) approach because this would not reflect the true costs incurred by the authority in maintaining and/or replacing the existing asset. That is, a heritage asset would be expected to be replaced with a ‘like for like’ or ‘nearly as like as is feasible’ asset. This is likely to result in a significantly higher cost compared to replacing it with a MEA. Therefore, the standardised Unit Rates derived for MEA groups, or sub-groups, should not be used to calculate the asset value for heritage assets.

4.11.2

Unit Rates and Gross Replacement Cost models may be determined for individual heritage assets or groups/sub-groups of heritage assets. The approach adopted depends on the type and number of heritage assets in the authority, or in the region if the authority is working with other authorities.

4.11.3

The Unit Rates and Gross Replacement Cost models should be based on an optimised replacement cost that provides the required appearance and function but seeks to make cost savings and efficiencies where appropriate. Examples include:

4.11.4

•

Lighting Column – an existing cast iron lighting column with decorative features that reflects the character of the area has been classified as a heritage asset. The column should be valued by assuming it will be replaced by a lighting column that looks the same and provides the same service, although a modern material (steel) may be used to optimise the cost.

•

Pavement – a cobbled street is deemed to reflect the character of the area and is an important aspect of tourism. The pavement should be valued by assuming it will be replaced by structural layers of appropriate modern materials and standards but the surface layer will be cobbled stone.

If sufficient (re)construction cost data is not available from within the authority or other similar authorities then engineering judgement and experience should be used in valuing Special Structures and Heritage Assets. If necessary, advice may also be sought from a Quantity Surveyor.

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Section 5 Asset Inventory 5.1

GENERAL

ASSET INVENTORY Review asset inventory requirements (Section 5.2)

Identify key cost drivers (Section 5.3)

Establish sub-groups & adjustment factors (Section 5.5)

Compile asset valuation data (Section 5.6)

5.1.1

The asset inventory provides the base data required for asset valuation. This section describes the asset inventory requirements, asset classification (and the key cost drivers to be considered when classifying the assets), asset subgroups and adjustment factors. The data required for asset valuation is also summarised.

5.2

ASSET INVENTORY REQUIREMENTS

5.2.1

5.2.2

5.2.3

32

Establish asset classification (Section 5.4)

It is recommended that authorities develop an asset inventory for Asset Management that also covers the needs of asset valuation. Guidance on developing an inventory for Asset Management is provided in the CSS Framework for Highway Asset Management [Ref. 1] and the relevant Codes of Practice [Ref. 2, 3, & 4]. The data needs for asset valuation are described in the following. In order to support asset valuation the asset inventory should contain the following: 1.

Asset Register – a listing of each individual asset owned by the authority. The assets should be appropriately classified into types, groups and sub-groups to ensure valuation, depreciation and impairment are correctly applied.

2.

Valuation Data – the data for each asset required to calculate asset values, e.g. dimensions, material type, age and useful service life.

The refinement of the asset register directly influences the accuracy and reliability of valuation. Greater refinement is likely to increase the quantity of data required to support asset valuation thereby increasing the storage requirements and the resources needed to keep it up-to-date and accurate. It is recommended that authorities identify the asset classifications required for good Asset Management and seek to align asset valuation with these. A classification that is suitable for asset valuation is presented in Section 5.4.

Section 5 – Asset Inventory

5.2.4

To expedite asset valuation it is desirable that the asset inventory and the valuation procedure are automated using a computerised system. Section 18.2 provides further guidance on the functionality of asset valuation systems.

5.3

KEY COST DRIVERS

5.3.1

Asset valuation requires a true and fair monetary value to be placed on the highway assets. The standardised Unit Rates and Gross Replacement Cost models should take account of the factors that have a significant influence on replacement cost. The key cost drivers should therefore be identified and used to inform asset classification.

5.3.2

The key cost drivers that influence the GRC of a highway asset include: 1.

Asset type, e.g. road, structure and lighting.

2.

Construction form, e.g. bridge, retaining wall and culvert.

3.

Usage, e.g. single or dual carriageway.

4.

Location, e.g. urban or rural.

5.3.3

Sections 12 to 17 present a range of key cost drivers for each asset type; the asset classification presented in Section 5.4 takes account of these key cost drivers.

5.4

ASSET CLASSIFICATION

5.4.1

The entire highway infrastructure is defined as an asset class. The highway infrastructure operates as a single network and is managed and maintained in a manner that reflects the interaction and inter-dependence between the individual assets that comprise the network. However, for the purpose of asset valuation it is necessary to distinguish between assets of different function and form in order to derive appropriate Unit Rates and GRC.

5.4.2

The highway infrastructure asset class is divided into asset types, asset groups, asset sub-groups and components. This helps to: 1.

Distinguish assets by key cost drivers (e.g. function, form and material) that influence their replacement cost; and

2.

Distinguish between assets and components with different useful lives and deterioration characteristics which could be treated separately for depreciation and impairment calculations.

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5.4.3

The proposed classification for asset valuation has three levels, shown in Figure 5.1. The three levels are defined as: Level 1: Asset Types – broad categories based on the general function of the assets. They divide the asset base into categories that may be suitable for reporting in the financial statement and provide an appropriate basis for high level management information. Level 2: Asset Groups – used to distinguish between assets that have a similar function and form. The asset groups should distinguish between assets that are likely to require different Unit Rates (Section 6) and Gross Replacement Cost models (Section 7). Each asset group may need to be further divided into sub-groups if the Unit Rates are likely to vary significantly between assets in a group. Level 3: Components – distinguishes between components that are likely to require different depreciation and impairment models, e.g. different service lives and/or rates of deterioration. [NB: it is not necessary to explicitly identify all components for asset types depreciated under Renewals Accounting (Section 8)].

Level 1: Asset Types

Broad categories based on the general function of the assets Increasing level of asset information required

Level 2: Asset Groups and Sub-Groups

Assets of similar function and form which provide suitable detail for calculating Unit Rates and Gross Replacement Costs (GRC)

Level 3: Component

Components that are likely to have different deterioration rates and/or service lives and should therefore be treated separately for depreciation and impairment

Figure 5.1 – Asset Classification

34

Note: Level 3 assets and components are explicitly identified for depreciation when the Conventional Method is used.

Section 5 – Asset Inventory

5.4.4

5.4.5

The disaggregation required for asset valuation depends on the accounting approach used for depreciation. Section 8 describes the depreciation approaches suitable for highway infrastructure assets and recommends the approaches to be used for each asset type. The choice of the depreciation method influences asset disaggregation as follows: 1.

Asset types such as lighting, street furniture, traffic management systems, and off-highway drainage that are assessed individually or at component level for depreciation, using the Conventional Method (Section 8.2), require Levels 1, 2 and 3 of the classification to be explicitly defined and used within asset valuation.

2.

Asset Types such as roads, segregated footpaths and cycle routes, and structures that are assessed at group or type level for depreciation, using Renewals Accounting (Section 8.3), require Levels 1 and 2 to be explicitly defined and used within asset valuation. Whilst the Level 3 components are not explicitly identified for depreciation they are likely to be needed in the development of the Asset Management Plan that supports Renewals Accounting.

An asset classification that is appropriate for asset valuation is shown in Table 5.1. The table is not exhaustive and should be taken as a general framework. If these asset types and groups do not provide adequate coverage then an authority may extend this scheme to make it appropriate for its network. Where possible the asset disaggreagtion should align with that used for Asset Management.

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Highway Infrastructure Asset Valuation Guide – County Surveyors Society/TAG Asset Management Working Group

Level 1 Asset Type

Level 2 Asset Group

Level 3: Components that Level 2 implicitly covers in valuation

Road

• Flexible pavements

• Pavement layers (formation, roadbase, binder course, surface course)

• Flexible composite pavements • Rigid concrete pavements • Rigid composite pavements

• Other surface types e.g. paved • Hard strip/shoulder • Footway/cycleway attached to road • Central reservation, roundabout, lay-by etc. • Markings • Kerbs • Earthworks (embankments & cuttings) • Vegetation • Drainage • Safety fences • Boundary fences and hedges • Verges

Segregated footpaths and cycle routes*

• Footpath (including PROW)

• Binder course and surface course

• Bridleways (including PROW)

• Formation

• Off road cycle routes • Pedestrian areas

Structures

• Bridges (includes subways) • Culverts (span < 1.5m)

All elements identified on the CSS inspection pro forma [Ref. 14 and 15].

• Retaining walls • Sign/signal gantries and cantilever road signs Other assets included in this group: • Tunnels • Structural earthworks, e.g. strengthened/reinforced soils • Fords and causeways

Should include all components considered in the maintenance and management of these assets. Smaller water carrying structures are considered as road drainage.

• Cattle grids Highway lighting and high mast lighting

• Lighting columns

• Column and foundations

• Lighting unit attached to wall

• Bracket

• High mast lighting

• Luminaire (or other fixtures, e.g. CCTV) • Control gear, switching and internal wiring cabling (may depend on ownership)

* These assets are only included in highway infrastructure asset valuation where they are maintained as part of the highway infrastructure asset, e.g. surfaced PROW.

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Section 5 – Asset Inventory

Table 5.1 Classification of Highway Assets Level 1 Asset Type

Level 2 Asset Group

Level 3: Components that Level 2 implicitly covers in valuation

Street furniture

• Town/city centre street/road

• Bus Shelters

• Suburban/village street/road

• Seating

• Rural road

• Bins • Bollards • Marker Posts • Street name plates • Tree protection etc.

Traffic management systems

• Traffic signals

• Signal, column and foundation

• Pedestrian signals

• Control equipment and cables • Bulbs

• Illuminated traffic signs

• Sign, column and foundation

• Non-illuminated traffic signs

• Control equipment and cables

• Illuminated pedestrian signs • Non-illuminated pedestrian signs • Traffic calming

• Speed bumps • Speed cameras

Off-highway drainage

• Communication systems

• All components

• Sustainable Urban Drainage Systems (SUDS)

All components

• Soakaways • Pumping stations Land

• Freehold land • Rights land

Features on the land are not taken into account in the valuation

5.5

ASSET SUB-GROUPS AND ADJUSTMENT FACTORS

5.5.1

The asset groups (Level 2) shown in Table 5.1 may be used as the basis for deriving standardised Unit Rates (Section 6). However, in some cases these groups may not provide the required degree of refinement. Further refinement can be achieved by identifying sub-groups within a group or by the use of adjustment factors to account for certain cost-influencing factors. Guidance on the choice between the two options is given below. Sections 12 to 17 recommend asset sub-groups and adjustment factors for each asset type. Asset Sub-Groups

5.5.2

An asset sub-group is an identifiable set of assets, within an asset group, that are influenced by the same key cost driver(s) in a similar way. It may therefore be appropriate to derive a separate Unit Rate for the sub-group. Examples of asset sub-groups are: 1.

The flexible pavement asset group may be divided into sub-groups: urban single, urban dual, rural single, rural dual and rural single track. 37

Highway Infrastructure Asset Valuation Guide – County Surveyors Society/TAG Asset Management Working Group

2. 5.5.3

The bridges asset group may be divided into sub-groups, e.g. road bridge, subway and footbridge.

The asset inventory should enable the asset sub-groups to be readily identified based on the data held against each asset. Adjustment Factors

38

5.5.4

The Unit Rate for an individual asset may in some cases differ significantly from the standardised Unit Rate determined for the group or sub-group. This is likely to occur when a key cost driver only influences one asset or a small number of assets in the group/sub-group. The same key cost driver may also influence a small number of assets in other groups/sub-groups. In such cases an adjustment factor should be derived and this can be applied to the appropriate assets when calculating the GRC.

5.5.5

Adjustment factors should take account of significant key cost drivers that are not already covered by the group or sub-group attributes. Criteria that may be considered as appropriate for adjustment factors include: 1.

Location – different factors may be applied for assets in rural and urban areas, or in relation to location generally.

2.

Size – the replacement cost may vary according to overall size for certain asset types reflecting economy of scale in construction.

3.

Access – the replacement cost for assets with difficult access may be higher, for example bridges over a motorway, railway line, canal or river.

4.

Earthworks – the volume of earthworks required and the ground conditions, e.g. embankments, cuttings, marshy or rocky ground conditions.

5.5.6

The adjustment factors are applied to the calculated Gross Replacement Cost as shown in Section 7.

5.5.7

Where adjustment factors are used the asset inventory should hold relevant attributes against individual assets to enable appropriate factors to be applied.

5.6

ASSET VALUATION DATA

5.6.1

The specific data requirements depend on the characteristics of the asset group, or sub-group, and the associated format of the Unit Rate, Gross Replacement Cost, depreciation and impairment models. The general data required for different steps within asset valuation are summarised below: 1.

Determination of Unit Rates (Section 6) – the Unit Rates are based on the outturn costs from a representative sample of recently completed (re)construction schemes for each asset group or sub-group. The scheme details and dimensions, and the quantities of individual assets within each scheme, are required.

2.

Calculation of Gross Replacement Cost (Section 7) – the GRC is calculated for individual assets within each group and sub-group. The data held against each asset should include dimensions and the

Section 5 – Asset Inventory

characteristics necessary to identify the appropriate group, sub-group and adjustment factors. 3.

5.6.2

Calculation of Depreciation and Impairment (Sections 8 and 9) – requires data on the condition/performance of the asset, the cost of maintenance work required to restore to as new condition, and, where appropriate, asset/component service lives. The cost of maintenance work should be taken from the AMP where appropriate.

The categories of data shown in Table 5.2 should be held against each asset for the purpose of asset valuation. The list is not exhaustive and authorities are advised to assess the completeness of the list for specific asset types, groups and sub-groups, against the full asset valuation procedure described in the following sections.

Table 5.2 Asset Valuation data for each asset Inventory Data 1

Asset type, group (and sub-group if appropriate)

2

Attributes relevant to adjustment factors

3

Attributes relevant to Unit Rates (replacement)

4

Dimensions relevant to GRC calculations

5

Date of installation (where appropriate)

6

Remaining life or replacement date (where appropriate)

Additional Supporting Data 1

Current condition and performance

2

Required maintenance work

3

Attributes relevant to maintenance unit rates

5.6.3

All of the data shown in Table 5.2 is required for good Asset Management and authorities are already likely to hold much of this data or are in the process of compiling it. However, as a matter of course, authorities should review their existing data against the list and identify any gaps in relation to the data required for asset valuation. The review should assess completeness and accuracy of the data, and the suitability of the data format and storage medium. Where necessary, a prioritised programme for data cleansing and collection should be put in place before implementing the asset valuation regime. This programme should meet the timeframe identified in Section 1.7 and where possible be part of the data collection programme for Asset Management.

39

Section 6 Unit Rates 6.1

GENERAL

UNIT RATES Select schemes (Section 6.2)

40

Establish unit of measurement (Section 6.3)

Derive Unit Rates (Section 6.4)

Derive adjustment factors (Section 6.5)

6.1.1

The Unit Rates are those relevant to the replacement of a highway asset, e.g. road replacement, bridge replacement and lighting column replacement. The Unit Rates are not derived for each individual asset; instead standardised Unit Rates are derived for asset groups/sub-groups (Section 5). The Unit Rates are then used with appropriate dimensional data for individual assets to calculate the Gross Replacement Cost (Section 7).

6.1.2

The Unit Rates should be derived using outturn or tender costs from a representative sample of recently completed highway (re)construction schemes. The Unit Rates should relate to an appropriate unit of measurement and should be indexed to represent present day prices. Adjustment factors should be derived to take account of Unit Rate variations within an asset group or sub-group.

6.2

SELECTION OF SCHEMES

6.2.1

Highway (re)construction schemes normally include a range of works and these may include several of the asset types, groups and sub-groups described in Section 5. Ideally the scheme information should enable the individual assets and their associated quantities to be identified and allow outturn costs to be carefully screened, classified and apportioned to the relevant asset(s). This allows the quantities and costs to be linked to an asset group/sub-group for the derivation of Unit Rates. Careful screening of the costs is required because only those costs that are directly attributable to bringing the assets into working condition are admissible for deriving Unit Rates (Section 4.4).

6.2.2

The number of assets in each asset group or sub-group will differ considerably within and between authorities. The quantity of (re)construction data available for deriving Unit Rates is likely to vary with the group/sub-group size. Where possible, authorities should adopt the following recommendations for deriving Unit Rates: •

Group or sub-group with less than 50 assets – the Unit Rates should be based on (re)construction costs from not less than three representative assets.

•

Group or sub-group with 50 to 100 assets – the Unit Rates should be based on (re)construction costs from not less than five representative assets.

Section 6 – Unit Rates

•

Group or sub-group with 100 to 200 assets – the Unit Rates should be based on (re)construction costs from not less than 10 representative assets.

•

Group or sub-group with > 200 assets – the Unit Rates should be based on (re)construction costs from not less than 20 representative assets.

6.2.3

Authorities should consider working with other authorities who have similar highway networks in order to meet the above minimum requirements and to utilise larger sample sizes that will produce more robust Unit Rates. It is recommended that authorities seek to form regional working groups, possibly split between urban, semi-urban, and rural areas, for this purpose. If regional working groups are unable to provide a sufficient number of schemes then estimates based on engineering judgement or from bills of quantities may be used.

6.2.4

The following criteria should be considered when identifying sample schemes: 1.

Scheme Date – the scheme should have been completed in the last 10 years.

2.

Scheme Type – the scheme should include one or more of the following types of work: construction (new build), re-construction, partial reconstruction or major improvement.

3.

Scheme Size – the size of the scheme, in terms of value and number of assets, should be typical of highway construction schemes carried out by the authority.

4.

Scheme Information – appropriate cost (outturn and/or tender), quantities and other relevant data should be available for the scheme.

Scheme Date 6.2.5

It is recommended that only schemes completed in the last 10 years are used to derive Unit Rates because the construction techniques and procurement practices used should be reasonably representative of current practices, i.e. they represent Modern Equivalent Assets (Section 4.7). The selected schemes should preferably be post 1999 to align with the Rethinking Construction initiative [Ref. 16]. The scheme costs should be indexed to represent present day prices (Section 4.6). Scheme Type

6.2.6

The scheme types considered appropriate for deriving Unit Rates include: 1.

Construction (New Build) – where a new asset is constructed, i.e. a highway did not previously exist on the site, e.g. road bypass. New build costs should be appropriately factored to represent a replacement on the live network.

2.

Re-construction – where the existing highway asset is replaced by a new asset that serves the same purpose and provides the same performance as the original, e.g. lighting column replacement, bridge replacement. 41

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3.

4.

6.2.7

Partial Re-construction – where the existing highway asset is partially replaced, e.g. a new pavement structure is laid on the existing foundation and embankment. The use of these costs depends on the form of the GRC model: a.

If the GRC model uses separate Unit Rates for constituent parts of the asset then, if appropriate, the partial re-construction costs may be used to derive these Unit Rates directly.

b.

If the GRC model uses a composite Unit Rate for the whole asset then the costs for replacement of other parts of the asset should be estimated, or derived from other schemes, and combined with the partial re-construction scheme costs to derive a suitable Unit Rate.

Improvement – where the existing highway asset is replaced or modified to provide improved performance compared to the original, e.g. road widening, interchange upgrade, street scene improvements. Improvement data should be applied in the same manner as the partial re-construction data.

The cost data from the above schemes should be used, and combined where appropriate, in a manner that is representative of the common practice used for renewing or replacing the assets in a group/sub-group, in whole or in parts, to maintain the highway network at a specified Level of Service. The Unit Rates derived from these schemes should implicitly include all the admissible cost elements normally incurred by the authority (Section 4.4). Scheme Information

6.2.8

42

The scheme information required to determine Unit Rates typically includes: 1.

The general information required to identify individual assets within the scheme and assign them to the respective asset group or sub-group.

2.

The scheme outturn costs or, if unavailable, the scheme tender costs. The costs should be apportioned to the respective assets within the scheme. Some or all of the cost elements described in Section 4.4 may be incurred in completing a scheme and the relative proportions of the different cost elements will vary from one scheme to another. Only those costs admissible for asset valuation should be used. If a representative sample of highway schemes is used then they should provide an appropriate mix of the cost elements in the Unit Rates.

3.

The scheme construction date (month and year) to allow indexation of the costs to the valuation date using appropriate indices (Section 4.6).

4.

The quantity of work performed for each asset group, e.g. 10,000m2 of single carriageway road, three span bridge of 125m2 deck area each, 35 lighting columns of height 12m (Section 6.3).

6.3

UNIT OF MEASUREMENT

6.3.1

The Unit Rates should be derived based on an appropriate unit of measurement. The unit of measurement depends on the asset type/group and the format of the Gross Replacement Cost model.

Section 6 – Unit Rates

6.3.2

The recommended units of measurement for different asset types/groups are shown in Table 6.1. Specific guidance for each asset type is provided in Sections 12 to 17.

Table 6.1 Recommended Units for Measuring Asset Quantities Level 1 Asset Type

Level 2 Asset Group

Unit of Measurement

Road

• All pavements

• Area (m2)

Segregated footpaths and cycle routes

• All segregated footpaths and cycle routes

• Area (m2)

Structures

• Bridges (includes subways)

• Deck area (m2)

• Culverts

• Internal surface area (m2)

• Retaining walls

• Retained area (m2)

• Sign/signal gantries

• Span length (m)

• Tunnels

• Length (m)

• Structural earthworks

• Length (m)

• Fords and causeways

• Length (m)

• Cattle grids

• Number or length (m)

• Lighting columns

• Number

• Lighting unit attached to wall

• Number

• High masts (>20m)

• Number

Street furniture

• All street types

• Number

Traffic management systems

• All traffic management systems

• Number

Off-highway drainage

• All off-highway drainage

• Length and/or number

Land

• All land

• Area (hectares)

Highway lighting and high masts

6.4

DERIVING UNIT RATES

6.4.1

The Unit Rate for an asset group or sub-group should be evaluated as the summation of the indexed outturn or tender costs (Section 4.6) divided by the summation of the relevant quantities, where the costs and quantities are compiled from the representative sample of (re)construction schemes (Section 6.2). When deriving Unit Rates the following approach is suggested: 1.

Compile scheme costs and quantities and apportion them to individual assets.

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2.

Review the gross costs for an individual asset and, where possible, exclude those costs that are not representative of the group or subgroup. These costs should be used to calculate the adjustment factors (Section 6.5).

3.

Calculate the Unit Rate for the asset group/sub-group as follows: n

Unit Rate for asset group/sub-group =

( Gross cost of Asset i i &1 n

( Quantity of Asset i i &1

Equation 2

Where

n = number of assets used to derive Unit Rate i = asset i of n Quantity may be in m2, number, etc. (Section 6.3) Gross Cost = gross admissible outturn cost for asset i

6.4.2

The above procedure should be repeated for each asset group and sub-group.

6.5

DERIVING ADJUSTMENT FACTORS

6.5.1

Section 5.5 provides guidance on when to use asset sub-groups and when to use adjustment factors. An adjustment factor may be derived using either of the equations shown below. Equation 3a evaluates the adjustment factor relative to the influence of a key cost driver on an individual asset, while Equation 3b evaluates the adjustment factor relative to the Unit Rate of the respective asset group or sub-group. adjustment factor (ADF) =

GCINC GC EXC

Equation 3a ) GC INC / ** 0 Quantity 01 + adjustment factor (ADF) = Unit Rate

Equation 3b

Where GCINC = gross cost of the asset including the influence of a key cost driver GCEXC = gross cost of the asset excluding the influence of a key cost driver Quantity = corresponding quantity of the asset Unit Rate = the rate derived for the asset group or sub-group (Section 6.4). The adjustment factor should be applied to individual assets at the time of calculating the Gross Replacement Cost (Section 7). 44

Section 6 – Unit Rates

6.5.2

If scheme costs are not recorded in a manner to allow easy identification of the influence of different key cost drivers then engineering judgement and/or advice from a Quantity Surveyor may be used to apportion the costs.

45

Section 7 Gross Replacement Cost 7.1

GENERAL

7.1.1

The objective of the Gross Replacement Cost (GRC) is to provide a true and fair estimate of the current cost of replacing an asset using a standardised procedure. The replacement asset should have a Potential Performance broadly similar to the existing asset, but take account of up-to-date technology, i.e. a Modern Equivalent Asset (Section 4.7), except for assets classified as heritage assets (Section 4.11). GROSS REPLACEMENT COST Develop Gross Replacement Cost model (Section 7.2)

46

Calculate Gross Replacement Cost (Section 7.3)

7.1.2

A GRC model should be developed for each asset type, group or sub-group as appropriate. The GRC models are then applied to individual assets and aggregated to evaluate the total GRC for the highway infrastructure using a bottom up approach.

7.2

GROSS REPLACEMENT COST MODEL

7.2.1

The format of the GRC model should be carefully selected for each asset type, or group/sub-group where appropriate, based on an understanding of the key cost drivers (Section 5.3) which influence the replacement cost for the asset.

Section 7 – Gross Replacement Cost

7.2.2

Individual assets within an asset group or sub-group are broadly similar in terms of their functionality, composition and the key cost drivers that influence them. In general, it may therefore be adequate to base the GRC model on one or two key dimensional parameters of the asset or its constituent components, which have the dominant influence on the overall cost of the asset. For example, the road asset contains a range of constituent components (Table 5.1) but the GRC may be modelled in terms of the road area, pavement type and associated Unit Rate.

7.2.3

Given the above, the GRC model typically includes appropriate dimensional data, the Unit Rate for the asset group or sub-group and relevant adjustment factors e.g. GRC = f(asset dimensions, group/sub-group Unit Rate, relevant adjustment factors) Equation 4

7.2.4

Where the replacement cost cannot be accurately modelled in terms of one or two key dimensions, it may be appropriate to divide an asset into major component parts and develop a GRC model for each part. The replacement costs of individual parts can then be aggregated to produce the overall GRC for the asset. For example, the GRC for a bridge could be evaluated as a summation of the GRCs for deck, sub-structure and foundation.

7.2.5

Guidance on the development of a GRC model for each asset type is provided in Sections 12 to 17.

7.3

CALCULATING GROSS REPLACEMENT COST

7.3.1

The GRC reported in an authority’s Balance Sheet may consist of one entry for the whole highway infrastructure class, or possibly one entry for each asset type (Section 5.4). These GRCs are built up from the GRC of each individual asset, or where appropriate the component parts.

7.3.2

In order to calculate the GRC, it is necessary to hold relevant dimensional data against each individual asset in the asset inventory (Section 5.6) and additionally relevant attributes to enable the choice of appropriate Unit Rates and adjustment factors.

7.3.3

The GRC calculation should become a largely automated procedure once the GRC models are implemented into a computerised Asset Management System or Asset Valuation System.

7.4

SENSITIVITY ANALYSIS AND VERIFICATION Sensitivity Analysis

7.4.1

Where possible, the sensitivity of Unit Rates and GRC models should be analysed. The analysis should investigate the influence of key cost drivers and the required refinement of the GRC. Sensitivity analysis should also be carried out to assess other parts of the asset valuation procedure, for example, asset service life and degree of refinement used for Level 3 components (Table 5.1).

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Verification 7.4.2

48

The accuracy of derived Unit Rates and the output from GRC models should be verified against an independent sample of data. Authorities should define the degree of accuracy expected in the verification process. The following tolerances are suggested: 1.

Calculated value of no more than 50% of the independent sample falls outside ±10% of the actual value.

2.

Calculated value of no more than 10% of the independent sample falls outside ±25% of the actual value.

Section 8 Depreciation 8.1

GENERAL

DEPRECIATION Adopt Conventional Method (Section 8.2)

Classify assets & components (Paragraph 8.2.2)

Determine service lives & depreciation (Paragraph 8.2.4)

Calculate depreciation charge (Paragraph 8.2.10)

Adopt Renewals Accounting (Section 8.3)

Determine AMP funding requirements (Paragraph 8.3.4)

Determine actual expenditure (Paragraph 8.3.9)

Calculate depreciation charge (Paragraph 8.3.10)

Definition 8.1.1

Depreciation is defined as the systematic consumption of the economic benefits embodied in an asset over its service life arising from use, ageing, deterioration or obsolescence (although it is recognised that obsolescence may not be relevant for some highway asset types). Two different approaches can be used to depreciate highway infrastructure assets, the Conventional Method and Renewals Accounting.

8.1.2

The Conventional Method is used to depreciate individual assets or components over their service life, normally using straight line depreciation.

8.1.3

Renewals Accounting is used to depreciate groups of assets, e.g. the infrastructure network. The depreciation charge under Renewals Accounting is defined as the level of annual expenditure required to maintain the infrastructure network at a specified Level of Service, where the Level of Service is assessed through Performance Measures. Objective

8.1.4

The objective of depreciation is to reflect the amount of economic benefits consumed in a period, i.e. in one financial year, and to allocate the depreciable amount of an asset over its service life using a systematic approach.

8.1.5

Depreciation should be charged even if the asset has risen in value or been re-valued. Methodology

8.1.6

It is recommended that the two depreciation methods defined above are applied to highway infrastructure assets as follows: •

Conventional Method (Section 8.2) – applied to highway lighting, street furniture, off-highway drainage, traffic management systems and land.

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•

Renewals Accounting (Section 8.3) – applied to roads, segregated footpaths and cycle routes, and structures.

8.1.7

The following sections explain why the asset types were classified as above and describe the two depreciation methods.

8.2

CONVENTIONAL METHOD

8.2.1

The Conventional Method should be used for asset types which do not qualify for the use of the Renewals Accounting method, or if appropriate Performance Measures are not available to monitor their performance at the asset type or group level. This method is most appropriate where individual assets/components have readily identifiable service lives and are routinely replaced at the end of their life, for example lighting columns. In this approach each individual asset, or its components, is treated separately for calculating depreciation. Classify Assets and Components

8.2.2

8.2.3

The asset, or components of the asset, should be classified into one of three types – finite life, indefinite life and variable life, where these are defined as: 1.

Finite Life – an asset/component that has a definable finite service life and needs to be replaced at the end of its life, e.g. lighting column. Finite life assets/components are depreciated over their service life on a systematic basis. Straight line depreciation is recommended; see the section on Service Lives and Depreciation below.

2.

Indefinite Life – an asset/component that has a remaining service life of greater than 50 years, an example may be a pumping station building. No depreciation charge is made, on the grounds that it would be immaterial, but the asset/component is regularly checked for impairment using appropriate condition and performance data [Ref. 8]. Section 9 provides guidance on calculating impairment.

3.

Variable Life – an asset/component that in some cases may need to be replaced or upgraded based on economic and/or functional considerations, e.g. speed bumps. It is recommended that a variable life asset/component is treated as a finite life asset/component if its remaining life is assessed to be less than 50 years, and as an indefinite life asset/component if its remaining life is assessed to be greater than 50 years. The remaining life could be estimated either by engineering judgement or, preferably, through a whole life cost analysis.

The level of refinement used to divide an asset into its components should be chosen on grounds of materiality and should broadly align with that appropriate for Asset Management. A greater level of refinement should not be used solely for asset valuation purposes. Service Lives & Depreciation Profile

8.2.4

Finite life assets/components require realistic service lives to be established and appropriate depreciation profiles applied. The service lives of finite life assets should be based on one, or more, of the following: 1.

50

historical data from the authority or similar authorities;

Section 8 – Depreciation

8.2.5

8.2.6

2.

technical reports and manufacturer’s data; or

3.

engineering judgement.

It is recommended that depreciation of finite life assets is calculated using the straight line method shown in Figure 8.1. It is recognised that straight line depreciation may not be an accurate representation of the consumption of economic benefits for some asset types, in these circumstances authorities may use alternative profiles provided they meet the requirements of FRS 15 [8]. In doing so it is important to be aware that the rate of depreciation should reflect the consumption of economic benefits or loss in Level of Service, and not the rate of physical deterioration. Some highway assets have faster rates of deterioration towards the end of their service life. FRS 15 [8] states that the method chosen should result in a depreciation charge throughout the asset’s life and not just towards the end of its service life. Also, where the pattern of consumption of an asset’s economic benefits are uncertain a straight line method of deprecation should be adopted. Service Life (yrs), SL

Gross Replacement Cost, GRC

DRC Age (yrs), A

Zero Residual Value

TIME

Time of installation or replacement

End of Service Life (replacement)

Figure 8.1 – Straight Line Depreciation of Finite Life Asset 8.2.7

Based on the straight line depreciation profile shown in Figure 8.1 the DRC, at a given time in the asset’s life, is evaluated as: ) SL % A / DRC t & GRC ' * 0 + SL 1

but not less than 0 Equation 5

Where

DRCt = Depreciated Replacement Cost at time t (£) SL = asset or component service life (years) A = current age of the asset or component (years)

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8.2.8

If the asset has a residual value, RV, this should be taken into account in the depreciation profile, see Figure 8.2, and the DRC at a given time should be evaluated as:

Service Life (yrs), SL

GRC

Age (yrs), A

DRC

Residual Value, RV 0

TIME

Time of installation

End of Service Life

Figure 8.2 – Straight Line Depreciation and Residual Value 8.2.9

52

The remaining service life of an asset should be periodically reviewed, as a minimum at each benchmark valuation (Section 2.3), but also when new information becomes available that suggests a different service life is more appropriate. The remaining service life should be revised if the review, or new information, identifies any significant difference compared to the previous estimate. The remaining service life may have changed as a result of deterioration in condition, or the need to replace or upgrade the asset for economic or other reasons. The depreciation profile should be amended using one of the following approaches to reflect the revised service life: 1.

An amended rate of depreciation over the revised remaining service life, see Figure 8.3 for an accelerated rate of depreciation. (NB: a reduced rate of depreciation would be applied if the revised service life was greater than the previous estimate).

2.

A one-off impairment charge applied at the time of the new information, see Figure 8.3. Section 9 describes how to calculate impairment. Depreciation in the subsequent period can continue at the original depreciation rate until the end of revised service life.

Section 8 – Depreciation

Initial Service Life Revised Service Life

GRC

Initial rate of depreciation

DRC

Impairment Accelerated depreciation

0

TIME

Time of installation

New information

End of revised service life

End of initial service life

Figure 8.3 – Treatment of reduction in remaining service life Depreciation Charge 8.2.10

The in-year and accumulated depreciation charge for an individual finite life asset or component after t years in service are evaluated as shown below. In-year depreciation charge = DRCt-1 - DRCt Equation 7a Accumulated deprecation charge after t years =

t

( "DRC i &1

i

% DRC i %1 # Equation 7b

Where

DRCt-1 = the DRC at the start of the current financial year DRCt = the DRC at the end of the current financial year

8.2.11

The total in-year depreciation charge for the finite life assets is the summation of the individual in-year depreciations.

8.3

RENEWALS ACCOUNTING

8.3.1

Renewals Accounting may be used to estimate depreciation in the following circumstances: 1.

The infrastructure asset is a system or network that, as a whole, is intended to be maintained at a specified Level of Service by the continuing replacement and refurbishment of its components; and

2.

The level of annual expenditure required to maintain the Level of Service of the infrastructure asset is calculated from an Asset Management Plan that is certified by a person who is appropriately qualified; and

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3.

The system or network is in a mature or steady state (although Renewals Accounting can still be used if the network is in an improving, deteriorating or marginal state, provided the depreciation charge is correctly applied and the Levels of Service are appropriately monitored through Performance Measures).

8.3.2

Under Renewals Accounting the level of annual expenditure required to maintain the Level of Service of the highway infrastructure, as identified in the Highway Asset Management Plan (AMP), is treated as the depreciation charge. The estimated annual expenditure from the AMP is deducted from the current value of the asset while the actual expenditure is capitalised as incurred. Therefore, provided the expenditure estimated in the AMP is spent as planned, there will be no change in the Net Book Value.

8.3.3

Renewals Accounting requires all definable major assets or components with identifiable finite lives to be treated separately for depreciation using the Conventional Method. Special Structures (Section 4.10) are excluded from Renewals Accounting because the Conventional Method is regarded to be more representative of the specific management plans normally developed for these structures. AMP Funding Requirements

8.3.4

To support Renewals Accounting the AMP should identify the work volumes and associated funding at asset type and asset group level and clearly distinguish between: 1.

The level of funding required to maintain the current Level of Service; and

2.

The level of funding required for improving the Level of Service to meet specified targets in the AMP.

8.3.5

The above distinction is required because the in-year depreciation charge under Renewals Accounting is calculated as the estimated annual expenditure required for maintaining the current Level of Service of the asset type/group, as assessed through Performance Measures.

8.3.6

An AMP provides the work volumes and phasing that an authority plans to undertake in order to maintain, or improve, the highway infrastructure and many of the work items may not be linked to a specific year. The annual AMP funding requirements, and hence the depreciation charge, should therefore be estimated as:

Annual AMP Funding Requirement =

Total AMP Funding Required AMP Time Period

Depreciation Charge = Annual AMP Funding Requirement Equation 8

Where the Total AMP Funding Required refers to the funding required to maintain the current Level of Service and the AMP Time Period is the number of years the AMP covers, normally 5 or 10 years.

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Section 8 – Depreciation

8.3.7

All work types that are required to maintain the Level of Service of the network, should be identified in the AMP, e.g. reactive, programmed and routine. The roads and structures Codes of Practice [Ref. 2 & 3] should be consulted for the appropriate classification of work types.

8.3.8

Good Asset Management practice requires an authority to assess the service lives, replacement cycles, inspection and maintenance needs of all assets, normally at the group and/or component level shown in Table 5.1. Renewals Accounting is therefore based on a similar level of detail and knowledge to the Conventional Method, although under Renewals Accounting such data is not explicitly required for valuation purposes. Actual Expenditure

8.3.9

The actual annual expenditure is capitalised (as part of the cost of the asset) as incurred. Actual expenditure should be tracked and recorded at a level that supports Asset Management. This level of detail should be adequate for Renewals Accounting, however authorities should ensure that the expenditure considered is admissible for asset valuation (Section 4.4). Depreciation Charge

8.3.10

The net change in asset value (Net Book Value) under Renewals Accounting can be calculated as:

Change in Asset Value = Depreciation Charge based on AMP requirement – Actual annual expenditure on maintenance Equation 9

8.3.11

Provided the Levels of Service are maintained, as assessed through the Performance Measures, then if the actual annual expenditure is equal to the depreciation charge there will be no change in asset value (Net Book Value). However, if the actual annual expenditure is less than the depreciation charge then the asset value, Net Book Value, decreases. Additional expenditure incurred in improving the Level of Service above the current Level of Service should be treated as an enhancement of the asset base and will result in an increase in the DRC, and may also result in an increase to the GRC. Appendix C provides an example of applying depreciation under Renewals Accounting.

8.3.12

Renewals Accounting also requires appropriate Performance Measures (e.g. BVPIs and PIs) that are based on competent and reliable inspection of the assets to demonstrate that the highway network as a whole is maintained at a specified Level of Service. If the Level of Service, as assessed through the Performance Measures, of the infrastructure asset drops in any year/period it is treated as impairment (Section 9) of the asset base.

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8.4

RECOMMENDED APPROACH

8.4.1

The Renewals Accounting method is proposed for estimating depreciation for roads, segregated footpaths and cycle routes, and structures, as these assets are typically maintained in perpetuity and meet the three requirements in paragraph 8.3.1. However, it is recognised that some authorities are in the process of developing AMPs and may therefore require an interim solution to estimate depreciation. Modified Renewals Accounting provides an alternative approach for estimating depreciation and should be used as an interim solution pending the development of AMPs (see below).

8.4.2

Lighting assets, street furniture and traffic management systems typically have finite lives and are replaced at the end of their service life. These assets should be treated separately and depreciated using the Conventional Method. Off-highway drainage assets should also be treated using the Conventional Method as they do not form an integral part of the highway, and appropriate Performance Measures are currently not available to monitor their performance at a group level. Modified Renewals Accounting

56

8.4.3

Modified Renewals Accounting is specific to some infrastructure organisations and is an exception to the standard interpretation of Renewals Accounting. This method is recognised by the Treasury Resource Accounting Manual [Ref. 10], however it is not recognised by SORP [Ref. 7] or FRS 15 [Ref. 8].

8.4.4

In this approach the “infrastructure asset” is treated as a system or network that as a whole is intended to be maintained at a specified Level of Service by the continuing maintenance, replacement and refurbishment of its components. The Level of Service of highway assets can be assessed through appropriate Performance Measures.

8.4.5

Following initial valuation, the Level of Service and DRC of the asset is established. If the Level of Service is maintained (within defined limits) in steady state over a year, the actual maintenance and renewal expenditure is treated as a proxy for depreciation but is not deducted from the asset value. If the Level of Service drops in a year, it is recognised as an impairment of the asset base (Section 9). The Level of Service is assessed through Performance Measures.

Section 9 Impairment 9.1

GENERAL Definition

9.1.1

Impairment is a reduction in Net Asset Value due to a sudden or unforeseen decrease in the condition and/or performance of an asset compared to the previously assessed level that has not already been accounted for through depreciation. Examples of impairment include damage of highway assets due to natural phenomenon such as flooding or landslide. IMPAIRMENT Assess for Impairment (Section 9.2)

Calculate Impairment (Section 9.3)

Objective 9.1.2

When the Level of Service of an asset drops below the previously assessed level (outside defined limits), impairment should be recognised and the asset value reduced accordingly. The Level of Service may be assessed individually or at the asset type or group level through appropriate Performance Measures or performance/condition surveys.

9.1.3

Impairment is considered as a consumption of the asset and is taken as a cost.

9.1.4

When the Level of Service (or performance) of an asset rises above the previously assessed level (as a result of maintenance works) it should be recognised as impairment reversal, revaluation gain or fixed asset formation, depending on the reason, and the expenditure treated according to established capitalisation principles [Ref. 7]. Methodology

9.1.5

The approach used for assessing for impairment should align with the approach adopted for applying depreciation, i.e.: 1.

Conventional Method – impairment is assessed on individual assets. This method is applied for lighting assets, street furniture and traffic management systems.

2.

Renewals Accounting – the highway infrastructure is treated as a single asset and Performance Measures are used to assess impairment at the asset type or asset group level. This method is applied for roads, segregated footpaths and cycle routes, and structures assets.

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9.1.6

Although the impairment is assessed at different levels between the two methods, impairment is calculated using a bottom-up approach on individual assets in both the methods. The two methods are therefore discussed concurrently in the following.

9.2

ASSESSING FOR IMPAIRMENT Frequency of Assessment

9.2.1

Provided highway assets are adequately maintained and depreciated in an appropriate manner (Section 8), then they are unlikely to become materially impaired unless events or changes in circumstances cause a sudden and unforeseen reduction in the performance.

9.2.2

Finite life assets/components which are treated using the Conventional Method are depreciated on a systematic basis through their service life. The service lives of these assets should be assessed, and revised if necessary, at the time of each benchmark valuation or when new information becomes available which suggests a revision of service lives. A reduction in the remaining service life of an asset/component could be treated using accelerated depreciation as discussed in paragraph 8.2.9, or alternatively impairment is calculated as discussed in paragraph 9.3.3.

9.2.3

Indefinite life assets/components treated using the Conventional Method should be assessed for impairment as part of a benchmark valuation or when there are indications of impairment (discussed below).

9.2.4

Assets treated using the Renewals Accounting method should be assessed for impairment annually at the asset type or asset group level using appropriate Performance Measures.

9.2.5

When impairment occurs, the adjustment in asset value and recognition of impairment should take place immediately. Indications of Impairment

9.2.6

Appropriate indications of impairment should be established for each asset type and asset group, and consistently used to monitor for impairment.

9.2.7

Sections 12 to 17 provide suggestions on appropriate Performance Measures that can be used to monitor for impairment. Some examples include:

9.2.8

58

1.

An appropriate pavement BVPI may be used as a proxy for the entire road asset at the asset group level.

2.

The Condition PI (also know as the Bridge Condition Indicator) may be used for highway structures at the asset group level.

3.

Data from a condition survey on an individual lighting column may be suitable for assessing for impairment.

Impairment should be recognised when the asset condition and/or performance exceeds acceptable limits (see paragraph 9.2.12).

Section 9 – Impairment

9.2.9

When assessing for impairment, it is important to distinguish between the Current Performance provided by an asset, the Potential Performance the asset can be expected to provide in an as-new condition and the Required Performance placed on the asset. Depending on the situation the impairment should be considered as below: 1.

If the Current Performance provided by an asset is below its Potential Performance (and this has not been previously recognised through depreciation or impairment), then the asset value should be impaired.

2.

If the Required Performance is greater than the Potential Performance of an existing asset (i.e. the asset is functionally obsolete), this is not considered as an impairment of the asset. Instead, the required enhancement is identified in the AMP and the GRC and DRC are amended accordingly after the enhancement takes place (see examples in Appendix A).

9.2.10

The above two cases do not consider the possibility of the Potential Performance being greater than the Required Performance. Whilst a valid consideration for many non-highway assets, e.g. plant and machinery, this is not considered to be relevant for the majority of highway assets.

9.2.11

Appendix A provides examples for roads, structures and street lighting and discusses the relationship between the Required Performance and Potential Performance. The examples include scenarios where impairment should and should not be recognised. Acceptable Limits

9.2.12

It is likely that Performance Measures will show some fluctuation each year but these could be ignored on grounds of materiality if they do not exceed defined limits. It is proposed that impairment is recognised based on the following limits: 1.

In-year change should not exceed 2.5 points on a scale of 0 to 100.

2.

Five year change should not exceed 5 points on a scale of 0 to 100.

9.2.13

These limits represent a provisional suggestion and have not been tested. The suitability of these limits should be tested using sensitivity studies to identify limits that provide a materially correct valuation for each asset type. Any sensitivity studies should be fully documented.

9.3

CALCULATING IMPAIRMENT

9.3.1

The approach used for calculating impairment should be established and consistently applied. After an approach is established, if it is identified that a change in the approach would provide a fairer valuation, then this should be applied at the next benchmark valuation and described in the Valuation Report.

9.3.2

The approach recommended below is based on the typical maintenance and management practices used for different highway assets. The approach is described under the following headings: 1.

Finite Life Assets and Components (under the Conventional Method).

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2.

All other assets and components (indefinite life assets under the Conventional Method and all assets treated using the Renewals Accounting Method) – sub-divided into two categories: a.

Condition Based Maintenance – where condition or performance data can be used to estimate the consumption of the asset and the maintenance expenditure required to restore it to the as new condition.

b.

Time Based Maintenance – where the asset consumption is more appropriately reflected by the age of the asset than condition, for example, a bridge bearing is replaced at the end of its service life.

Finite Life Assets and Components 9.3.3

A reduction in remaining service life of a finite life asset/component, based on new information, is normally treated under the Conventional Approach using accelerated depreciation as described in paragraph 8.2.9. However, if an authority wishes to recognise the full decrease in asset value at the time the new information becomes available, then impairment should be applied (also discussed in paragraph 8.2.9). Impairment should be calculated using the equation below. ) SL % SLR Impairment & GRC ' ** I SLI +

/ 00 1

Equation 10

Where

SLI = the initial service life of the asset (yrs) SLR = the revised service life of the asset (yrs)

All other Asset Types and Components 9.3.4

60

The impairment, for individual assets or asset types/groups, should be estimated as the full cost of the work (maintenance, repair, renewal etc.) required to restore the asset(s) to the previously assessed level of condition/performance, see Figure 9.1: 1.

At time t1 the asset(s) has a Depreciated Replacement Cost, DRC(t1).

2.

Between time t1 and t2 there was no change in asset value, i.e. the Net Book Value remained the same.

3.

At time t2 the Performance Measures identified impairment; this was recognised to give the revised DRC (t2).

Section 9 – Impairment

GRC Cost to restore at time t1 DRC(t1)

Cost to restore at time t2

Impairment

DRC(t2)

TIME t1

t2

Figure 9.1 – Calculating Impairment 9.3.5

The impairment is the difference between DRC(t1) and DRC(t2) as shown in Figure 9.1. It would generally be difficult to evaluate directly the work required to bring the asset(s) back to their condition/performance at the time t1. Instead, it is more convenient to calculate the cost of the work required to restore an asset to the as new condition. The impairment should be calculated using the full cost of restoration at time t2 minus the cost of restoration at time t1 as below. Impairment = (cost to restore at time t2) – (cost to restore at time t1) Equation 11

9.3.6

Impairment should be calculated on individual assets, although this may be simplified in some cases by grouping together assets in similar condition with similar maintenance needs and applying generic maintenance unit rates. Condition Based Maintenance

9.3.7

The value of the maintenance work is evaluated directly based on the condition or performance data for the individual assets or components. The effort involved in this task can be greatly reduced if rule sets are defined that link generic maintenance types and average maintenance costs to typical defect types and/or condition ratings/indices.

9.3.8

Examples of condition based assets/components include pavement, earthworks, footways, bridge beams/abutments/foundations, retaining walls, culverts etc. Time Based Maintenance

9.3.9

The economic consumption of some assets/components (e.g. bridge bearings) is more appropriately reflected by age than condition or performance. In this case the DRC(t) at time t and impairment between periods t1 and t2 are calculated as below:

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Highway Infrastructure Asset Valuation Guide – County Surveyors Society/TAG Asset Management Working Group

[

DRC(t) = GRC ×

( )] SL − t SL

Equation 12(a)

[

Impairment (t1, t2) = GRC ×

( )] t 2 − t1 SL

Equation 12(b)

where 9.3.10

SL = estimated service life

The calculation may be simplified by categorising assets/components into bands based on their age and evaluating the proportion of the assets in each band. Figure 9.2 shows how assets/components may be assigned to five age bands, where: 1.

Network A – age of assets/components are spread evenly across the bands.

2.

Network B – greater proportion of assets/components are of older age.

3.

Network C – greater proportion of assets/components are of younger age.

20%

20%

20%

20%

20%

Network A

26%

30%

20% Network B

10%

30%

14%

26% 20%

Network C

14%

0–5 yrs

5–10 yrs

10–15 yrs

15–20 yrs

10%

20–25 yrs

Asset Age Bands

Figure 9.2 – Grouping of assets by age bands 9.3.11

62

The DRC for the whole asset group can be evaluated as shown in the equation below based on the proportion of assets in each age band.

Section 9 – Impairment

DRC %

GRC & SL

k

( "RL i %1

i

& p Bi

# Equation 13

Where

SL

= estimated average service life

RLi

= average remaining life for the band i

pBi

= proportion of assets in band i

k

= number of age bands

Simplified Approach 9.3.12

As a simplification of the aforementioned condition and time-based maintenance approaches (paragraphs 9.3.7 and 9.3.9 respectively) the impairment for some asset types may be calculated using a standardised relationship between a Performance Measure and a Restoration Cost Factor as illustrated in Figure 9.3. In this case the Restoration Cost is evaluated as Restoration Cost = GRC & Restoration Cost Factor Equation 14

Best

Performance Measure

Worst 0

Restoration Cost Factor

1.0

Figure 9.3 – Performance Measure and Restoration Cost Factor 9.3.13

Relationships between Performance Measure and Restoration Cost Factor are not provided in this guidance document and should be developed by authorities, should they wish to use this approach for some assets/components.

63

Section 10 Depreciated Replacement Cost 10.1

GENERAL DEPRECIATED REPLACEMENT COST Determine condition & performance (Section 10.2)

10.1.1

Calculate initial DRC (Section 10.3)

Calculate annual adjustments to DRC (Section 10.4)

The Depreciated Replacement Cost (DRC) is the Gross Replacement Cost (GRC) appropriately reduced to reflect the current age, condition and performance of the asset. In this Guidance Document DRC is also referred to as the Net Book Value, Net Asset Value and Asset Value. The DRC can be defined as: DRC = GRC – Accumulated Depreciation and Impairment Equation 15

64

10.1.2

It is normal for the DRC of highway infrastructure assets to be less than the GRC. This is due to systematic consumption of finite life assets and the inevitable ageing and deterioration of other assets that causes their current condition to be below the as new condition. If an asset valuation regime is in place from the time of original construction, or installation, of the asset then the accumulated depreciation and impairment are built up over time through the recognition of annual (in-year) depreciation and impairment. However, such a regime has hitherto not been required for Local Highway Authorities. Therefore, on the introduction of asset valuation authorities need to establish the initial DRC (Net Book Value), and in subsequent years calculate the in-year depreciation and impairment.

10.2

CONDITION AND PERFORMANCE

10.2.1

To calculate the initial DRC it is necessary to know the current condition and performance of highway infrastructure assets. The condition and performance data are used to assess the cost of work required to restore the assets to the full performance or as new condition (Section 10.3).

10.2.2

Knowledge of the current condition and performance of highway assets is an essential requirement of Asset Management [Ref. 1]. The condition and performance data compiled for Asset Management should be adequate for calculating the DRC, but it is essential that the data covers all the asset types included in asset valuation.

Section 10 – Depreciated Replacement Cost

10.3

CALCULATE INITIAL DRC

10.3.1

The approaches described for assessing depreciation and impairment should be used to evaluate the DRC on the introduction of the asset valuation regime. The initial DRC should be evaluated as follows: 1.

Finite life assets/components (identified from the Conventional Method) – the straight line depreciation method (Figure 8.2 in Section 8.2) should be used to evaluate the current DRC of each individual asset, e.g. lighting columns.

2.

All other assets/components (indefinite life assets treated using the Conventional Method and all assets treated using the Renewals Accounting Method) – these should be divided into two types to evaluate the DRC: a.

Condition based maintenance (paragraph 9.3.7) – where condition or performance data can be used to estimate the consumption of the asset and the maintenance expenditure required to restore it to as new condition, e.g. pavement and the majority of structures assets/components. The DRC is then equal to the GRC minus the cost of the condition based maintenance.

b.

Time based maintenance (paragraph 9.3.9) – where the asset consumption is more appropriately reflected by the age of the asset than condition, e.g. bridge bearings and expansion joints. The DRC is based on the ratio of the remaining life (RL) to service life (SL), i.e. DRC = (RL/SL) x GRC. This approach is the same as that used to recognise the initial DRC for finite life components, however subsequent depreciation and impairment of “time based maintenance” elements is recognised through the AMP under Renewals Accounting.

10.3.2

A worked example on the calculation of the initial DRC, on a hypothetical network, is provided in Appendix B.

10.3.3

On the introduction of asset valuation an authority should establish how the change from historical cost, as required by the SORP [Ref. 7], to DRC should be treated in the Statement of Accounts.

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10.4

ANNUAL ADJUSTMENTS TO DRC

10.4.1

After the initial DRC has been evaluated it forms the basis for applying subsequent in-year depreciation and impairment as follows:

Conventional Method (for individual assets)

DRCt = DRCt-1 + (in-year admissible capitalised expenditure) - (in-year depreciation) – (in-year impairment) Equation 16a Renewals Accounting (for asset type or asset group)

DRCt = DRCt-1 + (in-year expenditure) – (annual AMP Estimate) – (in-year impairment) Equation 16b Modified Renewals Accounting (for asset type or asset group)

DRCt = DRCt-1 – (in year impairment) Equation 16c

Where

DRCt = represents the closing NBV for the financial year DRCt-1 = represents the opening NBV for the financial year in-year = occurs in the financial year

10.4.2 The DRC should be re-evaluated at each benchmark valuation (Section 2.3) rather than continuing with the application of annual adjustments to the original DRC over a longer period.

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Section 11 Asset Preservation Measures and Valuation Report 11.1

Asset Preservation Measures

11.1.1

The following three measures are provided for monitoring the preservation of assets over time: •

Accumulated Asset Consumption (AAC) – measures the proportion of the gross asset value that has been consumed to date;

•

In-year Asset Consumption (IAC) – measures the proportion of asset value consumed during the accounting period;

•

In-year Asset Renewal (IAR) – measures the proportion of asset value restored/renewed during the accounting period.

11.1.2 Authorities are recommended to calculate these three measures annually and include them in the Valuation Report. Accumulated Asset Consumption (AAC) 11.1.3

This should be evaluated as:

Accumulated Asset Consumption = )*1 $ DRC ,- & 100 +

GRC .

expressed as a % Equation 17

11.1.4

The Accumulated Asset Consumption should be monitored over time and presented in the Valuation Report. In-year change in the measure is unlikely to appear significant on this scale, but the time dependent plot should enable an authority to assess the trend over time, i.e. is the measure increasing, decreasing or is the asset base being preserved at a constant level (see the example in Appendix C).

11.1.5

In the future it may be useful to determine the optimum value for the Accumulated Asset Consumption measure based on the optimum amount of maintenance, renewal and enhancement work identified in an Asset Management Plan. This would require quantifying the impact of the work proposed in the AMP on the asset value of the highway infrastructure asset.

11.1.6

The actual Accumulated Asset Consumption and the optimum value implied by an AMP can then be plotted on a graph, as shown in Figure 11.1, to illustrate the gap. Also, it can be argued that the value of work required to bridge this gap is the current maintenance backlog.

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Optimum Accumulated Asset Consumption value

Possible AAC profiles

Measure (%)

Time

Figure 11.1 – Accumulated Asset Consumption Measure In-year Asset Consumption (IAC) 11.1.7

The In-year Asset Consumption measure should be evaluated as: In-year Asset Consumption =

[(

) ]

In - year Depreciation & Impairment ×100 DRC

Equation18 18 Equation

In-year Asset Renewal (IAR) 11.1.8

The In-year Asset Renewal should be evaluated as:

In-year Asset Renewal =

[(

) ]

In - year Maintenance and Renewal Expenditure ×100 DRC

Equation 19 Equation 19

11.1.9

68

The IAC and IAR measures should be presented on the same time dependent plot. If the IAR is less than the IAC this indicates a shortfall in maintenance expenditure, depreciation in asset value and an increasing maintenance backlog. For example, Figure 11.2 schematically shows the difference between the two measures to be gradually increasing because maintenance is under funded.

Section 11 – Asset Preservation Measures and Valuation Report

Increasing due to short fall in funding, therefore increasing backlog

In-year Asset Consumption (IAC) In-year Asset Renewal (IAR)

Measure

Annual expenditure below needs

Time

Figure 11.2 – In-year Asset Consumption and Renewal Measures 11.2

VALUATION REPORT

11.2.1 The Valuation Report should be a stand alone document that presents the results of valuation with supporting information. The Valuation Report should act as the key supporting document to the highway infrastructure asset values reported in the Balance Sheet. It is recommended that the Valuation Report is produced annually. 11.2.2

The Valuation Report should include, as a minimum: 1.

A summary of the valuation procedure and principles (with appropriate references to this Guidance Document and the SORP).

2.

Assumptions made in producing the asset values and an indication of the accuracy or confidence in the valuation numbers.

3.

The number/quantity of highway assets included in asset valuation, subdivided by type, group and sub-group, and presented in a tabular or graphical format. Explanation should be provided for any highway assets excluded.

4.

A summary of in-year movements to the asset stock – additions and deletions.

5.

A summary of the standardised Unit Rates and service lives used in asset valuation.

6.

A summary of current Levels of Service and the associated Performance Measures by asset type and group. This may include a description of current and desired Levels of Service [Ref. 1].

7.

The GRC, DRC, depreciation and impairment values by asset type and group, presented in a tabular format. Including identification and explanation of any significant changes compared to the previous valuation.

8.

Asset Preservation Measures including graphical plots of trends with time, and where possible, a comparison of these against other similar authorities. 69

Section 12 Roads 12.1

GENERAL

12.1.1

This section provides specific guidance on the valuation, depreciation and impairment of roads and their associated assets/components. Reference should also be made to the asset valuation examples for roads in Appendix A, B and C.

12.2

ASSET COMPOSITION

12.2.1

The road asset consists of the following components (see Table 5.1):

12.2.2

70

•

Pavement (formation, road base, binder course, surface course)

•

Hard strip/shoulder

•

Footway/cycleway attached to road

•

Central reservation, roundabout, lay-by etc.

•

Markings

•

Kerbs

•

Earthworks (embankments and cuttings)

•

Vegetation

•

Drainage

•

Safety fences

•

Boundary fences and hedges (if managed as part of the highway infrastructure).

The above list is not exhaustive and should be reviewed to identify any additional components that make up the road asset and would result in a fairer valuation. If additional components are identified they should be checked against the other asset types (Table 5.1) to ensure they are not covered elsewhere.

Section 12 – Roads

12.3

KEY COST DRIVERS

12.3.1

The following factors are considered to have a significant influence on the replacement cost of a road: 1.

Pavement type – rigid, flexible or composite.

2.

Type of carriageway – single or dual carriageways differ in terms of the central reservation, kerbs and safety fences.

3.

Road hierarchy – influences the design specifications (construction form and road layout), the materials used and traffic management costs.

4.

Number of lanes – this influences the width of the carriageway and may therefore impact on the Unit Rate per m2 due to economies of scale in construction.

5.

Location – the composition of the road asset may be different between rural and urban areas, and the construction costs incurred are likely to have a different composition, e.g. site access and traffic management.

6.

Traffic Loading – has an influence on the design and materials.

7.

Earthworks – the volume of earthworks required and the ground conditions, e.g. embankments, cuttings, marshy or rocky ground conditions.

8.

Footway/cycleway – whether or not the road has an attached footway and/or cycleway.

9.

Local Policies – may influence the construction practices, e.g. recycling.

12.3.2

The above list is not comprehensive and authorities are advised to identify other key cost drivers, relevant to their road asset, that have a significant impact on replacement cost.

12.4

ASSET GROUPS, ASSET SUB-GROUPS AND ADJUSTMENT FACTORS

12.4.1

Suggested asset groups, sub-groups and adjustment factors are presented below. Also refer to Sections 5.4 and 5.5 for generic guidance and the distinction between the use of sub-groups and adjustment factors. Asset Groups

12.4.2

The pavement type is the dominant cost driver for the majority of road assets. It is recommended that the road asset is divided into the following asset groups based on pavement type: 1.

Flexible pavement

2.

Flexible composite pavement

3.

Rigid concrete pavement

4.

Rigid composite pavement

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Highway Infrastructure Asset Valuation Guide – County Surveyors Society/TAG Asset Management Working Group

12.4.3

The above four groups may not provide a sufficient degree of refinement for deriving appropriate Unit Rates. If required the above groups should be further divided into asset sub-groups. Asset Sub-Groups

12.4.4

12.4.5

The key cost drivers should be used to identify the asset sub-groups. It is suggested that the carriageway type and location are used to define the following asset sub-groups within each asset group. 1.

Urban single carriageway

2.

Urban dual carriageway

3.

Rural single carriageway

4.

Rural dual carriageway

5.

Rural single track

If suitable data is available, and if required, the above list of sub-groups may be extended to take account of other key cost drivers, e.g. road hierarchy. It may be more appropriate to account for some of the key cost drivers through adjustment factors. Adjustment Factors

12.4.6

Section 5.5 provides guidance on when to use sub-groups and adjustment factors, and Section 6.5 provides guidance on deriving adjustment factors. The influence of key cost drivers, which are not explicitly covered by groups/subgroups, on Unit Rates should be assessed and adjustment factors derived where appropriate.

12.5

GROSS REPLACEMENT COST MODEL

12.5.1

The road asset within a group or sub-group should be relatively homogeneous in terms of its components. It is assumed that any local variations, not explicitly accounted for through a group/sub-group or adjustment factor, are likely to be averaged out over the asset stock. Based on this assumption, it is suggested that the GRC of the road asset is estimated using a Unit Rate for each asset group/sub-group, the associated dimensions of the carriageway and the relevant adjustment factor as shown below.

Gross Replacement Cost of Road = [Carriageway length (m) & Carriageway width (m)] & [Unit Rate (£/m2) & ADF] Equation 20

Where

72

ADF = adjustment factor

Section 12 – Roads

12.5.2

The asset inventory should hold the carriageway length and width, and other required data (i.e. characteristics, features, attributes), against each road asset to enable appropriate Unit Rate and adjustment factors to be applied and the GRC calculated. Where there are two clearly defined carriageways (i.e. dual carriageway) then the carriageway width is equal to the sum of the two carriageway widths.

12.6

UNIT RATES

12.6.1

Given the format of the GRC model above, the Unit Rate should be evaluated separately for each asset sub-group in terms of £ per m2 of the carriageway. The Unit Rate is therefore a composite rate which combines the replacement cost of all the relevant components listed under Section 12.2.

12.6.2

The derivation of Unit Rates should follow the general procedure given in Section 6. In selecting the highway schemes for each asset group/sub-group, care should be taken to ensure that the schemes provide a representative mix of the different components, e.g. embankments, cuttings, safety fences and footways, so the Unit Rates and adjustment factors represent average costs for all assets within that sub-group. The Unit Rates for roads should be evaluated as: n

Unit Rate %

( "Admissible Costs# i %1

i

n

( "Carriageway length & width# i %1

i

Equation 21

Where

n = number of assets used to derive Unit Rate for this group/subgroup i = asset i for which cost and dimensional data are known

This equation should also be used to establish appropriate adjustment factors (ADF), see Section 6.5. 12.7

DEPRECIATION, IMPAIRMENT AND DRC Depreciation

12.7.1

The road asset should be assessed for depreciation using the Renewals Accounting method, described in Section 8.3 (an example is provided in Appendix C). Authorities who are in the process of developing an Asset Management Plan may use Modified Renewals Accounting to estimate depreciation in the interim period. Impairment

12.7.2

The road asset should be assessed for impairment annually using appropriate Performance Measures at asset type or group level.

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12.7.3

It is not necessary for the Performance Measures to cover all components of the road asset described in Section 12.2. Instead, a balanced set of Performance Measures should be used that covers the majority of the road asset. Performance Measures for roads are available [see Ref. 2] primarily for the pavement component and since the pavement cost dominates the value of the road it may be sufficient to use the pavement condition/performance as a proxy for the entire road asset.

12.7.4

Impairment should be calculated as described in Section 9.3. Depreciated Replacement Cost

12.7.5

74

The DRC should be evaluated as described in Section 10.

Section 13 Segregated Footpaths & Cycle Routes GENERAL

13.1.1

This section provides specific guidance on the valuation, depreciation and impairment of segregated footpaths and cycle routes. Footpath and cycle route assets are only included in highway infrastructure asset valuation where they are maintained as part of the highway infrastructure asset, e.g. surfaced PROW.

13.2

ASSET COMPOSITION

13.2.1

Footpaths and cycle routes, for the purpose of asset valuation, are considered to consist of the following components (see Table 5.1):

Morguefile.com

13.1

•

Binder course and surface course

•

Formation

•

Kerbs

13.2.2

The above list may be extended to provide more comprehensive coverage of footpath and cycle route assets if this would result in a fairer asset value. The list should only be extended if the available asset inventory (Section 5) and construction scheme data (Section 6.2) support a more refined calculation of Unit Rates, GRC and DRC.

13.3

KEY COST DRIVERS

13.3.1

The following factors are considered to have a significant influence on the replacement cost of segregated footpaths and cycle routes: 1.

Usage and footpath hierarchy

2.

Construction form

3.

Location and associated access

4.

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13.3.2

The above list should be reviewed to identify other key cost drivers relevant to the footpath and cycle route network in an authority.

13.4

ASSET GROUPS, ASSET SUB-GROUPS AND ADJUSTMENT FACTORS

13.4.1

Suggested asset groups, sub-groups and adjustment factors are presented below. Also refer to Sections 5.4 and 5.5 for generic guidance on the distinction between the use of sub-groups and adjustment factors. Asset Groups

13.4.2

It is suggested that footpaths and cycle routes are classified into the following groups: 1.

Footpath (including surfaced PROW)

2.

Bridleway (including surfaced PROW)

3.

Off road cycle routes

4.

Pedestrian areas

Asset Sub-Groups 13.4.3

If there are considerable differences in the replacement Unit Rates between assets in the footpath group, this may be divided into the following sub-groups based on the widely recognised categories [Ref. 2]: 1.

Category 1a – Prestige Walking Zone

2.

Category 1 – Primary Walking Route

3.

Category 2 – Secondary Walking Route

4.

Category 3 – Link Footway

5.

Category 4 – Local Access Footway.

Adjustment Factors

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13.4.4

Section 5.5 provides guidance on when to use sub-groups and adjustment factors. The influence of key cost drivers which are not explicitly covered by groups/sub-groups on Unit Rates should be assessed and adjustment factors derived where appropriate.

13.5

GROSS REPLACEMENT COST MODEL

13.5.1

The footpath/cycle route assets within a group or sub-group should be relatively homogeneous in terms of its components. It is assumed that any local variations not explicitly accounted for within a group/sub-group or adjustment factors, are likely to average out over the asset stock. Based on this assumption, it is suggested that the GRC is estimated using a Unit Rate for each asset group/sub-group, the associated dimensions of the footpath/cycle route and the relevant adjustment factor as shown below.

Section 13 – Segregated Footpaths & Cycle Routes

Gross Replacement Cost = [Footpath/cycle route length (m) % width (m)] % [Unit Rate (£/m2) % ADF] Equation 22

Where

ADF = adjustment factor width = width of paved/surfaced part of the footway/cycle route

13.5.2

The asset inventory should hold the footpath/cycle route length and width, and other required data (i.e. characteristics, features, attributes), against each footpath or cycle route asset to enable appropriate Unit Rate and adjustment factors to be applied, and the GRC calculated. The “other” data enable the appropriate Unit Rate and adjustment factors to be applied to the asset during asset valuation.

13.6

UNIT RATES

13.6.1

Given the format of the GRC model above, the Unit Rate should be evaluated separately for each asset group or sub-group in terms of £ per m2 of the footpath/cycle route. The Unit Rate is therefore a composite rate which combines the replacement cost of all the relevant components listed under Section 13.2.

13.6.2

The derivation of Unit Rates should follow the general procedure given in Section 6. The Unit Rates for footpath/cycle routes should be evaluated as: n

Unit Rate $

& "Admissible Costs# i$1

i

n

& "Footpath/cycle route length % width# i $1

i

Equation 23

Where

n = number of assets used to derive Unit Rate for this group/sub-group i = asset i for which cost and dimensional data are known

This equation should also be used to establish appropriate adjustment factors (ADF), see Section 6.5. 13.7

DEPRECIATION, IMPAIRMENT AND DRC Depreciation

13.7.1

The footpath/cycle route asset should be assessed for depreciation using the Renewals Accounting method, described in Section 8.3. Authorities who are in the process of developing an Asset Management Plan may use Modified Renewals Accounting to estimate depreciation in the interim period.

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Impairment 13.7.2

Footway/cycle route assets should be assessed for impairment annually using appropriate Performance Measures at asset type or group level.

13.7.3

It is not necessary for the Performance Measures to cover all components of the asset described in Section 13.2. Available footpath condition indicators are considered to be appropriate for this purpose. Where appropriate condition indicators are not available they should be established.

13.7.4

Impairment should be calculated as described in Section 9.3. Depreciated Replacement Cost

13.7.5

78

The DRC should be evaluated as described in Section 10.

Section 14 Structures 14.1

GENERAL

14.1.1

This section provides specific guidance on the valuation, depreciation and impairment of the main structure types and their associated assets/components, i.e. bridges, culverts, retaining walls and sign/signal gantries. Other structure types listed in Table 5.1, but not explicitly covered below, should be treated using a similar procedure to that described here. Reference should also be made to the examples for structures provided in Appendix A and B.

14.2

ASSET COMPOSITION

14.2.1

Highway structures should be categorised into groups as in Table 5.1. Although structures are integral to the network performance they may be treated as discrete assets for deriving the GRC as they are normally well delineated from the highway network. The main components of each structure are well identified for inspection purposes and the inspection pro-forma given in the CSS Guidance Notes [Ref. 14 & 15] should be referred to for this purpose. In particular, it should be noted that the surfacing on a bridge deck and approach embankments are components of the road asset and not those of the bridge.

14.3

KEY COST DRIVERS

14.3.1

Definitions for the following assets are provided in the Code of Practice for Highway Structures [3]. Bridges

14.3.2

The replacement cost of a bridge is influenced by the type of deck, abutment, intermediate support and foundation.

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1.

Deck – the deck cost is governed by the area of the deck and maximum span of the bridge. Reinforced Concrete (RC) slab, pre-stressed concrete beam and RC slab, and composite steel/RC slab deck forms are the most commonly used modern construction forms (see Section 4.7 on Modern Equivalent Assets); the choice being dictated by span and other location specific factors. The Unit Rates between these construction forms do not seem to vary significantly.

2.

Abutment – the cost of an abutment depends on whether it is a normal full-height abutment or a bank-seat abutment.

3.

Intermediate Support – the cost of an intermediate support depends on whether it is a pier or a column support, and in the case of the latter, the cost is a function of the number of columns.

4.

Foundation – the foundation cost varies significantly for spread footings and piled foundation and the associated ground conditions. The form of the existing asset foundations may be used to inform the choice of the Modern Equivalent Asset. If the current form of the foundation is unknown, or if it is not piled or spread footing, then the form of the MEA foundation should be chosen based on engineering judgement.

Culverts 14.3.3

The Unit Rate of culverts normally does not vary significantly between the different shapes of culverts such as pipe, box or slab, and between different construction forms such as corrugated steel, reinforced concrete or pre-cast concrete. The key parameters influencing costs are span, height, depth of ground cover, and ground conditions. Retaining Walls

14.3.4

The Unit Rate of retaining wall per metre area is strongly influenced by the structural form and retained height of the earth. Actual height is more commonly recorded than retained height. The retained height may be approximated by adding 0.6m to the actual height. Sign/Signal Gantries

14.3.5

The cost of gantries varies significantly between cantilever and portal gantries. The cost of portal gantries depends on the span, and to a lesser extent, on column height.

14.4

ASSET GROUPS, ASSET SUB-GROUPS AND ADJUSTMENT FACTORS

14.4.1

Suggested asset groups, sub-groups and adjustment factors are presented below. Also refer to Sections 5.4 and 5.5 for the generic guidance and the distinction between sub-groups and adjustment factors. Asset Groups

14.4.2

Highway structures should be categorised into the following groups (see Table 5.1): 1.

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Bridges (including subways)

Section 14 – Structures

14.4.3

2.

Culverts

3.

Retaining walls

4.

Sign/signal gantries

Other asset groups that may be reported under the structures category include tunnels, structural earthworks, fords and causeways, and cattle grids. Asset Sub-Groups

14.4.4

It is not considered necessary to sub-divide each group into sub-groups. However, if an authority has a large number of subways (e.g. a Metropolitan Borough) it would be beneficial to treat these as a separate asset group using the principles given for culverts. It may also be suitable to identify footbridges as a separate sub-group. Adjustment Factors

14.4.5

The need for adjustment factors should be assessed as described in Section 5.5. The number of adjustment factors required for bridges depends on the level of refinement adopted for the GRC model (Section 14.5). A more refined model is likely to require fewer adjustment factors because variations would have already been taken into account in deriving the Unit Rates.

14.5

GROSS REPLACEMENT COST MODEL

14.5.1

Based on an understanding of the key cost drivers influencing the replacement cost of each asset group, the Gross Replacement Cost models are recommended as given in Table 14.1, subject to the proviso in 14.6.

14.5.2

Bridges generally form the largest component of the structures asset value and it may be appropriate to use a more refined approach for asset valuation, given the range of shapes and sizes they can take. Two approaches are suggested for highway bridges: 1.

Basic Approach – the GRC of the bridge is evaluated in terms of a composite Unit Rate per square metre of the deck area.

2.

Refined Approach – the GRC is evaluated as the summation of the GRC of the major constituent parts of the bridge, namely the deck, parapet, supports and foundation. Unit Rates and dimensions specific to each constituent part are used to calculate the GRC.

14.5.3

The refined approach may provide a more accurate value of the GRC and should be used where the necessary information to support this is available. If the required asset data is not available then the basic approach should be used.

14.5.4

Many authorities have a considerable number of listed or heritage structures (Section 4.11). The generic asset valuation procedure applies to heritage structures, however, the GRC should be calculated on the basis of a like for like, or nearly as like as is feasible, replacement instead of a MEA. Some additional guidance is provided in Section 14.8.

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14.5.5

There are normally few highway tunnels managed by Local Highway Authorities and hence these should be treated as Special Structures (Section 14.9) and valued individually based on the replacement cost of major component parts. There is no need to derive standardised replacement Unit Rates for these assets.

Table 14.1 Gross Replacement Cost Models and Unit Rates for Structures Model Name

GRC Model

Unit Rate

Bridge (Basic)

CBridge= Deck Area x URBridge x ADF

URBridge is expressed in £/m2 of total deck area and is likely to be a function of bridge maximum span. It is a composite Unit Rate for the whole bridge

Bridge (Refined)

CBridge= CDeck+CParapet+CEnd-Sup+ CInt-Sup+CPiling+CFooting

Unit Rates derived for each major constituent part of the bridge

Deck

CDeck= Deck Area x URDeck x ADF

URDeck is expressed in £/m2 of total deck area as a function of bridge maximum span

Parapet

CParapet= Length of Bridge URParapet x ADF

URParapet is given in £/m length of bridge for different containment levels

End-Support

Total cost of two abutments including wing walls, backfill, etc: CEnd-Sup= End Support Length x UREnd-Sup x ADF

UREnd-Sup is expressed as £/m length of support for normal and bank-seat abutments

Int.-Support

CInt-Sup= Deck Width NInt-Sup x URInt-Sup x ADF NInt-Sup = number of internal supports

URInt-Sup is given in £/m width of deck per intermediate support, measured along centreline of support

Foundation

CFooting = Deck Width x URFooting x ADF CPiling= Deck Area x URPiling x ADF

URFooting is given in £/m of deck width URPiling is given in £/m2 of deck area

Culvert

CCulvert= Culvert Internal Surface Area x URCulvert x ADF

URCulvert is given in £/m2 of internal surface area of culvert

Retaining Wall

CRet.Wall= Retained Height x Length x URRet.Wall x ADF

URRet.Wall is given in £/m2 of retained area

Gantry

CGantry= Gantry Length x URGantry x ADF

URGantry is given in £/m length of gantry or £ per cantilever

Where Deck Area = (Overall Width) x (centreline to centreline of end supports); or Deck Area = (Overall Width) x (distance between end support faces + 0.6m) Deck Width = Overall width measured from outside edge to outside edge

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Section 14 – Structures

Retained Height = as recorded or (actual height + 0.6m) Gantry Length = centreline to centreline of end supports Culvert Internal Surface Area = base, sides and soffit (as appropriate) ADF = adjustment factor 14.6

UNIT RATES

14.6.1

The format of the Unit Rates for the main structure groups are summarised in Table 14.1 and guidance on their derivation is given in the following. Bridges

14.6.2

The replacement cost of a bridge may be evaluated using the basic or refined approach. The basic approach uses a composite Unit Rate (£/m2 of the deck area) for the bridge, that includes all components of the bridge. The basic approach should be used when adequate data is not available from (re)construction schemes (Section 6.2) to derive a Unit Rate for each constituent part. Under the basic approach the Unit Rate should preferably be derived as a function of maximum span length while adjustment factors should be used to account for other cost drivers.

14.6.3

The refined approach uses a summation of the cost of deck, parapets, end supports, intermediate supports and foundation as explained below. 1.

Bridge Deck costs including finishes but excluding parapets can be expressed as £/m2 of total deck area where the rate is related to the maximum span length.

2.

Parapet costs can be given as £/metre length of bridge.

3.

Substructure – End Supports: abutments including wing-walls; total cost of two abutments can be expressed as £/metre length of abutment. Where information is available a separate Unit Rate may be derived for bank seat abutments.

4.

Substructure – Intermediate Support: £/m length of support for piers and £/column for column supports. If information on support type and number of columns is not available, then a single Unit Rate expressed as £/m width of deck per intermediate support may be derived.

5.

Foundation Costs – Unit Rate for spread footings can be expressed as £/m width of deck for each support. The total piling cost can be expressed as £/m2 of deck area as a function of depth of piling. Where detailed information on foundation type and depth are not available for each bridge, a single rate, expressed as £/m2 of deck area, can be derived as a simplification assuming piled foundation.

Culverts 14.6.4

The Unit Rate for culverts could be expressed as £/m2 of internal surface area of the culvert for all construction forms.

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Retaining Walls 14.6.5

The Unit Rate of retaining walls including finishes can be expressed as £/m2 of retained area. Where information on retained height is not available, the actual height of the wall plus 0.6m may be used as a simplification. Where the differences in Unit Rates are significant, retaining walls may be divided into two MEA sub-groups: (i) Reinforced Concrete Inverted-T, and (ii) Embedded Pile. Sign Gantries

14.6.6

The Unit Rate of portal gantries can be expressed as £/m length of the gantry where the rate is a function of the maximum span. The Unit Rate for cantilever gantries can be expressed as £/gantry. Additional Cost Elements

14.6.7

The Unit Rates for each asset group should preferably be derived from recently completed reconstruction schemes (Section 6.2) and should include all admissible costs.

14.6.8

Where the number of schemes is limited, the Unit Rate for each group could be derived from “new-build” schemes. These Unit Rates should include the direct plant, material, and labour costs with allowances made for site preliminaries and project management and supervision costs. The Unit Rates should then be multiplied by the cost factors given in Table 14.2, where appropriate, to fully reflect the additional costs involved in replacing an existing structure on the live network as opposed to building a new structure off line.

Table 14.2 Additional Cost Factors on “New-Build” Unit Rates Cost Element

Range of additional costs

Cost Factor

Demolition Cost of Existing Asset

5% – 15%

1.1

Temporary Works Costs, e.g. diversions and temporary bridging (if relevant)

10% – 50%

1.3

Traffic Management Costs

5% – 35%

1.2

Possession Costs (if relevant)

5% – 15%

1.1

14.7

DEPRECIATION, IMPAIRMENT AND DRC Depreciation

14.7.1

Structures should be treated for depreciation using the Renewals Accounting method, described in Section 8.3. Authorities who are in the process of developing an Asset Management Plan may use Modified Renewals Accounting to estimate depreciation in the interim period. Section 8.3 provides guidance on the application of Renewals Accounting for depreciation. Impairment

14.7.2

84

Structures should be assessed for impairment annually using appropriate Performance Measures at asset type or group level.

Section 14 – Structures

14.7.3

It is not necessary for the Performance Measures to cover all aspects of the asset described in Section 14.1. A condition indicator [Ref. 17, 18 and 19] may be sufficient for this purpose, although other indicators should be considered, e.g. Reliability and Availability [Ref. 17]. Authorities are recommended to use currently available Performance Measures [Ref. 17] for this purpose.

14.7.4

Impairment should be calculated as described in Section 9.3. Depreciated Replacement Cost

14.7.5

The DRC should be evaluated as described in Section 10.

14.8

HERITAGE STRUCTURES

14.8.1

The asset value of heritage structures (Section 4.11) should be calculated using the same procedure described for other structure types except that the GRC is not based on a Modern Equivalent Asset (Section 4.7). Instead, the GRC of a heritage structure is calculated based on a like for like replacement, or a nearly as like as is feasible. This should be interpreted as the replacement structure providing the same look and feel as the original, but modern techniques may be used to optimise the “like for like” replacement where possible. For example, cast iron elements could be replaced with steel elements that look the same but represent a more cost efficient and structurally effective solution than installing a new cast iron element.

14.8.2

Some structures may be deemed important to the character and environment of an area but they may not be listed structures. In these cases the replacement, while looking the same, may be able to deviate more from the original compared to a listed structure. For example, the replacement could use a non-structural façade that replicates the look and feel of the original and masks a MEA underneath. In this case the GRC should be for the MEA plus the cost of the façade.

14.9

SPECIAL STRUCTURES

14.9.1

Guidance on special structures is provided in Section 4.10. In undertaking asset valuation of special structures the following should be considered: 1.

The form of the MEA – is this the same as the existing asset or is a new structural form more appropriate? If a MEA is not acceptable as a replacement then the special structure should be treated as a heritage asset.

2.

The need to derive Unit Rates – if the structure is unique then it may not be necessary to derive Unit Rates. Instead the actual cost data may be used, being appropriately amended by adjustment factors and indexation.

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Section 15 Highway Lighting and High Mast Lighting GENERAL

15.1.1

This section provides specific guidance on the valuation, depreciation and impairment of highway lighting and high mast lighting assets. Reference should also be made to the examples for lighting provided in Appendix A and B.

15.2

ASSET COMPOSITION

15.2.1

Highway lighting assets are taken to consist of the following key components (as shown in Table 5.1):

Morguefile.com

15.1

86

1.

Column and foundation

2.

Bracket

3.

Luminaire (and initial lamp)

4.

Control gear, switching and internal wiring.

15.2.2

A comprehensive inventory is recommended by the Code of Practice for Highway Lighting [Ref. 4] for Asset Management purposes. However, the above components are considered to be adequate for calculating the Gross Replacement Cost (GRC), depreciation and impairment.

15.2.3

The cost of the initial lamp is included with the luminaire in the above list. Subsequent lamp changes are excluded from the above list because expenditure is likely to be Operational rather than Capital and therefore may not be admissible (Section 4.5) for asset valuation under the Conventional Method. If an authority considers lamp depreciation and expenditure as admissible, they should assess the practicality and benefits of dealing with this in asset valuation. Lamps normally have short service lives and lower up-keep costs relative to the remainder of the lighting column unit and therefore could be treated in a simplified way.

Section 15 – Highway Lighting and High Mast Lighting

15.2.4

Energy consumption costs are not included for asset valuation.

15.3

KEY COST DRIVERS

15.3.1

The following factors are considered to have a significant influence on the cost of replacing a lighting unit: 1.

Service connections (private cabling or Distribution Network Operator (DNO) supply) – these should be included for lighting columns as these are integral to the function and are not the same as STATS diversions (paragraph 4.4.6). Although the service connection is not a physical component, such as those listed in Section 15.2, some authorities may wish to identify it as such if it represents a significant and identifiable cost.

2.

Column type, e.g. cross sectional characteristics, material (steel, aluminium, FRP etc, provided it reflects the MEA), manufacturer and decorative features.

3.

Column height – suitable categories should be established.

4.

Foundation type, e.g. planted root, bolted flange plate.

5.

Bracket type, e.g. column top, projection and projection length.

6.

Number of brackets.

7.

Luminaire type and/or manufacturer.

8.

Type of control gear, switching and internal wiring – and whether or not the authority is responsible for their maintenance.

9.

Local Policy – in relation to lighting levels and types, e.g. white light.

15.3.2

The inventory list in the Code of Practice for Highway Lighting [Ref. 4] should be consulted to identify additional key cost drivers that may be appropriate.

15.4

ASSET GROUPS, ASSET SUB-GROUPS AND ADJUSTMENT FACTORS

15.4.1

Suggested asset groups, sub-groups and adjustment factors are presented below. Also refer to Sections 5.4 and 5.5 for generic guidance and the distinction between the use of sub-groups and adjustment factors. Asset Groups

15.4.2

It is recommended that highway lighting is divided into the following asset groups: 1.

Highway lighting columns – planted root

2.

Highway lighting columns – bolted flange plate

3.

Highway lighting unit attached to wall

4.

High mast (>20m).

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15.4.3

Groups 1 and 2 above may be combined if the foundation type does not make a significant difference to the Unit Rate. Asset Sub-Group

15.4.4

15.4.5

Based on the key cost drivers identified in Section 15.3, together with other key cost drivers identified by the authority, appropriate sub-groups should be identified. It is suggested that sub-groups for lighting columns are identified based on total height, for example: 1.

Less than 6m.

2.

6m to less than 8m

3.

8m to less than 10m

4.

10m to less than 15m

5.

15m to less than 20m

6.

20m and above are classified as high mast lighting.

Authorities are recommended to review their lighting data and identify an appropriate degree of refinement for asset valuation sub-groups. Adjustment Factors

15.4.6

It is recommended that the influence of column type, bracket type and number of brackets on the Unit Rate is investigated (Section 7.4). If they have a significant impact then appropriate adjustment factors should be derived (Section 6.5).

15.5

GROSS REPLACEMENT COST

15.5.1

The Gross Replacement Cost (GRC) for individual lighting units may be evaluated using a composite Unit Rate or a Unit Rate for each component, for example:

GRC of Individual Lighting Unit = URLU % ADF-LU Equation 24a

GRC of Individual Lighting Unit = (URCol)%ADF-Col + &[(URF-Brac)%ADF-Brac] + &[(URLum)%ADF-Lum] + &[(URCon)%ADF-Con] Equation 24b

Where

UR

= Unit Rate determined for that lighting unit or lighting component

ADF = adjustment factor applied to Unit Rates

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LU

= Lighting Unit

Col

= Column and foundation

Section 15 – Highway Lighting and High Mast Lighting

Brac = Bracket Lum = Luminaire Con = Control gear and cabling 15.5.2

The summation symbols (Σ) are included where there may be more than one component per lighting unit.

15.5.3

The sum of the GRC of the components should be equal to the GRC of the asset as shown in Figure 15.1. The proportions shown in Figure 15.1 should be derived from replacement cost data where available. The proportions are therefore produced when Equation 24b is used but not when Equation 24a is used. The proportions may need to be established using limited cost data and/or engineering judgement when Equation 24a is used.

Luminaire – x1% of GRC Bracket – x2% of GRC Gross Replacement Cost

Control – x3% of GRC

Column – x4% of GRC

Where the percentages for x1, x2, x3 and x4 should be calculated from available partial replacement cost data or, in lieu of this data, based on engineering judgement. Note: some authorities may wish to include Service Connection as a separate proportion of the GRC if this is considered to be a significant and identifiable cost.

Figure 15.1 – GRC and Component Replacement Cost 15.6

UNIT RATES

15.6.1

The Unit Rates, for each asset group or sub-group, should be determined from a representative sample of lighting unit construction, replacement and partial replacement schemes (Section 6.4). All admissible costs incurred during the replacement (including removal and disposal of the previous unit or component) should be included (Section 4.4). The Unit Rate should be evaluated as: n

Unit Rate $

& Admissible Costs i$1

n Equation 25

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Where

n = number of assets/components used to derive the Unit Rate i = asset i for which the admissible costs are known

15.6.2

The above equation may be used to derive a composite Unit Rate for the replacement of the whole lighting unit, or a separate Unit Rate for each component of the lighting unit. The former approach may be more suitable for the majority of authorities, particularly if replacement cost data is captured at lighting unit or scheme level. If information on individual components (paragraph 15.2.1) is available, then it may be appropriate to derive Unit Rates for each component type.

15.7

DEPRECIATION, IMPAIRMENT AND DRC Depreciation

15.7.1

Lighting units should be depreciated using the Conventional Method as described in Section 8.2. Authorities should determine the following for each asset group or sub-group: 1.

The proportion of the replacement cost contributed by each component (as shown in Figure 15.1); and

2.

The service life of each component type.

15.7.2

The value of each component is depreciated, using the straight line method shown in Figure 8.1 in Section 8.2, over its service life. It is recognised that the condition deterioration profile for lighting columns may not be straight line, however financial depreciation and condition deterioration are different concepts, and the former represents how the economic benefits are consumed over the service life (also see paragraph 8.2.6). Service lives should be estimated from engineering judgement, manufacturer’s data or preferably, from historical replacement cycles (Section 8.2).

15.7.3

The service life and replacement costs should be monitored and, as a minimum, updated at each benchmark valuation (Section 2.3) or when new information becomes available. If significant changes occur to service lives between valuation periods, then the depreciation should be amended accordingly, i.e. a new service life is reflected in a revised rate of depreciation, see Figure 8.3 in Section 8.2, or impairment is applied (see below).

15.7.4

Guidance on the relationship between the CSS lighting column Condition Indicator and remaining service life is provided in Ref. 20. This may be used to assign remaining service lives to individual lighting columns. Impairment

15.7.5

90

Lighting assets should be assessed for impairment using appropriate Performance Measures, for example the CSS Condition Indicator [Ref. 20]. If appropriate Performance Measures, or condition data, is not available then authorities should seek to establish the processes. Lighting assets should only be assessed for impairment when there are indications of impairment (Section 9.2).

Section 15 – Highway Lighting and High Mast Lighting

15.7.6

Impairment should be calculated as described in Section 9.3. Depreciated Replacement Cost

15.7.7

The DRC should be evaluated as described in Section 10.

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Section 16 Land Associated with the Highway

92

16.1

GENERAL

16.1.1

The following approach is proposed for the treatment of land associated with the highway infrastructure. Land associated with the highway may be reported in the accounts with the highway infrastructure or with land in general. The Valuation Report should identify which approach an authority has adopted.

16.1.2

Land is a component in the DRC valuation although in itself land can usually be valued by reference to comparable open market transactions. It is however recognised that when valuing a specialised property the land element is included within the overall DRC approach.

16.1.3

An authority should be satisfied that Depreciated Replacement Cost (DRC) is the appropriate approach for valuing land associated with the highway.

16.1.4

The land should include the entire land holding associated with the highway, and in identifying the extent of the land to be included in the valuation, consideration should be given to the following: 1.

Land that may be suitable for disposal without affecting the use or stability of the highway, in which case that land should be treated as surplus to requirements and reported separately at its market value.

2.

Land that may be currently unused but is being kept for possible future use, or has been expressly acquired for a future road scheme, may be included as part of the highway asset.

3.

Land that may be surplus to requirements but, due to its physical location, could not be sold, such as land surrounded by motorways where that land could not incorporate the necessary access and exit roads, due to its size or shape.

16.2

ASSET COMPOSITION

16.2.1

The land asset should only comprise the land associated with the highway. Features on the land are not taken into account in the valuation of land.

16.3

KEY COST DRIVERS

16.3.1

The value placed on the land may present difficulties since, by definition, the highway has no open market. Conversely, if it were not for the highway, the surrounding uses may well be substantially different, e.g. the highway giving either a positive impact (due to access) or a negative impact (due to noise, loss of outlook).

16.3.2

It is considered that although the valuation must always be of the actual land, it is appropriate to assess that value by reference to the cost of acquiring a notional replacement site in the same locality that would be equally suitable. Thus there is a requirement to look at values of land in the locality.

Section 16 – Land Associated with the Highway

16.4

ASSET GROUPS AND SUB-GROUPS

16.4.1

Land should be classified as freehold or rights. Rights land may be further subdivided into “time based rights” and “rights in perpetuity” (i.e. freehold). In addition, a straightforward, but suitable, approach would be to distinguish between rural and urban land by region.

16.5

VALUATION

16.5.1

From a practical point of view, it is suggested that the authority considers a standard approach to land valuation. It is not considered necessary to undertake a detailed assessment of every individual portion of the highway network; this is likely to take an unjustified amount of time.

16.5.2

Where a road is currently being, or has recently been, constructed there should be relevant land acquisition costs available and these can be utilised as the land value. It must be realised, however, that the total compensation paid will have included injurious affection – the compensation to cover the effect of the new road on the remainder of the property owned by the vendor, as well as other costs incurred, and so the valuation will need to establish the agreed element of the land value.

16.5.3

It is recognised that a new road opening can result in claims for compensation under the Land Compensation Act 1973. It is suggested that the value impact of any such claims should be ignored for the DRC valuation – or else that figure would alter year on year, based on the value of the surrounding housing, and not relate to the cost of the asset itself.

16.6

DEPRECIATION AND IMPAIRMENT

16.6.1

Unless expressly notified to the contrary it should be assumed that land associated with the road is held freehold with a clean title, and so the land value is not required to be written down (depreciated or impaired). If for any reason (such as a time limited concession being in place) the authority does not have the freehold for the land, then it may be appropriate to discount the land value accordingly, reflecting the period of ownership remaining, i.e. the land is depreciated over the concession (rights) period.

16.6.2

The Conventional Method should be used to depreciate land (Section 8.2) where appropriate, although by its nature freehold land would be assessed as indefinite life (paragraph 8.2.2) and therefore no depreciation would be charged on the grounds of immateriality, however the land would be reviewed for impairment.

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Section 17 Other Highway Assets 17.1

STREET FURNITURE General

94

17.1.1

Street furniture can constitute a significant asset for some authorities and, in such cases, should be included as a separate asset category in asset valuation. Street furniture should be valued according to the generic guidance provided and depreciated using the Conventional Method (Section 8.2). Some street furniture assets are similar to highway lighting therefore the guidance in Section 15 should be considered as appropriate.

17.1.2

Authorities may not wish to identify street furniture as a separate asset type if the inventory data is not readily available. In this case the street furniture may be included as a constituent component of the road or footpath asset type, i.e. they are included within the composite Unit Rate derived for the road or footpath asset.

Section 17 – Other Highway Assets

Asset Composition 17.1.3

The asset composition should include the following assets if they are managed as part of the highway network: bus shelter, seating, bins, bollards, marker posts, street name plates and tree protection. The list is not comprehensive and authorities may add additional street furniture components relevant to their network. Asset Groups

17.1.4

17.1.5

The following asset groups may be sufficient to evaluate GRC for street furniture: 1.

Town/city centre street/road

2.

Suburban/village street/road; and

3.

Rural road.

It is not necessary to build up the GRC from the individual street furniture units, instead a composite GRC, relevant to the above street classifications may be considered adequate. If authorities hold a detailed inventory of street furniture then they may wish to establish a more refined approach for evaluating the GRC. Depreciation, Impairment and DRC

17.1.6

Depreciation should be applied using the Conventional Method (Section 8.2), therefore each asset should be depreciated separately. However, assets may be grouped together for depreciation if this is more representative of the inventory data.

17.1.7

Street furniture should be treated for impairment using condition/performance survey data as described in Section 9. Condition survey data (or related condition indicators) may be appropriate for identifying impairment. Where condition data is not available, authorities should seek to establish appropriate condition measures.

17.1.8

The DRC should be evaluated as described in Section 10.

17.2

TRAFFIC MANAGEMENT SYSTEMS

17.2.1

Many of the assets listed in Table 5.1 under Traffic Management Systems are similar in nature to highway lighting (Section 15) and should be treated similarly for asset valuation.

17.3

OFF-HIGHWAY DRAINAGE

17.3.1

An authority should establish if this asset type is relevant to the valuation of their highway network. Off-highway drainage should be valued in accordance with the generic guidance provided and the Conventional Method should be used for calculating depreciation and impairment.

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Section 18 Implementation and Recommendations 18.1

IMPLEMENTATION PLAN

18.1.1

The following implementation plan is suggested for highway infrastructure asset valuation: 1.

2.

3.

Year 1 – Interim asset valuation which may include the following activities: a.

Set up regional working groups to collaborate on asset valuation.

b.

Assess how current asset inventory/data and systems align with the needs of asset valuation. Integrate asset valuation needs with those identified from the Asset Management gap analysis [Ref. 1].

c.

Identify asset groups, sub-groups and adjustment factors.

d.

Compile scheme data, determine Unit Rates and develop GRC models.

e.

Trial the asset valuation procedure on a sample of highway assets.

Year 2 – undertake a benchmark valuation and this should include the following activities: a.

Refine the asset valuation procedure based on experience from Year 1.

b.

Check the Asset Management System (or Asset Valuation System)

c.

Extend the procedure to cover all highway assets.

d.

Calculate the GRC and initial DRC for the end of this financial year. This should be used as the opening Net Book Value for Year 3.

Year 3 – calculate in-year movements including, where appropriate, depreciation, impairment, indexation, additions (disposals), Asset Preservation Measures, etc. A Valuation Report should be produced for the end of year 3.

18.1.2 Authorities should work together on the development and implementation of highway infrastructure asset valuation for the purpose of pooling data and sharing experience and learning. This can be achieved by setting up Regional Working Groups involving rural, semi-urban and urban areas.

96

Section 18 – Implementation and Recommendations

ASSET VALUATION SYSTEMS

18.2.1

Asset Valuation can become an involved and complex procedure, requiring considerable resource inputs, if appropriate IT systems are not in place. Authorities should seek to automate the asset valuation procedure through an appropriate software system that draws the basic data from a complete and accurate asset inventory.

18.2.2

Authorities should identify how their current system(s) should be configured to deal with highway infrastructure asset valuation, considering options such as:

Morguefile.com

18.2

18.2.3

1.

Perform asset valuation within the engineering Asset Management System (AMS), passing the key results to the Finance System.

2.

Perform asset valuation within the Finance System, drawing the appropriate base asset data from the engineering AMS.

3.

A separate Asset Valuation System which interfaces with the AMS and the Finance system.

Option 1 above may be the most suitable approach for many authorities because they already hold the base asset data in the engineering AMS for management purposes. The asset valuation capability may be added to an existing AMS by: 1.

Developing bespoke functionality within the existing system.

2.

Purchasing a commercial “bolt-on” for the existing system.

3.

Receiving an upgrade of the current AMS if commercial providers update their systems to provide asset valuation functionality.

18.2.4

If an authority is currently in the process of procuring an AMS, or upgrading their existing system, they should consider the needs of asset valuation.

18.3

RESOURCE REQUIREMENTS

18.3.1

The following resource needs should be determined for the implementation and running of asset valuation: 1.

Hardware and software needs.

2.

Data collection, entry, storage and upkeep.

3.

Staff training.

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4.

18.3.2

Some of the above resource needs may align with those identified in the Asset Management gap analysis [Ref. 1]. Authorities should seek to coordinate the various initiatives and avoid duplicating the effort.

18.4

RECOMMENDATIONS

18.4.1

The key recommendations, and associated sections, from the Guidance Document are summarised in Table 18.1.

Table 18.1 No.

98

Staff time required to develop Unit Rates, GRC, DRC, depreciation and impairment, attend Regional Working Groups and prepare the Valuation Report.

Key Recommendations

Asset Type

Section

1

Undertake a benchmark valuation at a minimum interval of five years and apply annual adjustments. Re-evaluate the DRC at each benchmark valuation.

2.3 & 10.4

2

Adopt the principles, basis and rules set down in the Guidance Document

4.1

3

Use Depreciated Replacement Cost as the basis for valuation

4.3

4

Use the Baxter Indices for indexation of costs (unless an authority currently uses a different index which is suitable).

4. 6

5

Classify the asset base and align the asset valuation inventory with the Asset Management inventory

5.2

6

Use schemes completed within the last 10 years to derive replacement Unit Rates

6.2

7

Apply straight line depreciation to finite life assets

8.2

8

Use Renewals Accounting for depreciation and impairment of roads, segregated footpaths and cycle routes, and structures

8.4

9

Use the Conventional Method for depreciation of lighting, traffic management systems, street furniture, off-highway drainage and land assets

8.4

10

Produce an annual Valuation Report

11.2

11

Calculate the three asset preservation measures annually and include in the Valuation Report

11.1

12

Form Regional Asset Valuation Working Groups

18.1

Section 19 References 1.

Framework for Highway Asset Management, CSS, April 2004.

2.

Well Maintained Roads, Code of Practice for Highway Maintenance, UK Roads Board, TSO, 2005.

3.

Management of Highway Structures, A Code of Practice, UK Bridges Board, TSO, 2005.

4.

Well-lit Highways, Code of Practice for Highway Lighting Management, UK Lighting Board, TSO, 2004.

5.

Managing Resources: Analysing Resources Accounts: User Guide, HM Treasury, 2001.

6.

Managing Resources: Implementing resource based financial management, HM Treasury, September 2002.

7.

Code of Practice on Local Authority Accounting in the United Kingdom 2004, A Statement of Recommended Practice, CIPFA/LASAAC.

8.

Financial Reporting Standard (FRS) 15 – Tangible Fixed Assets, Accounting Standards Board, ISBN 1 85712 079 5, 1999.

9.

Financial Reporting Standard (FRS) 11 – Impairment of Fixed Assets and Goodwill, Accounting Standards Board, ISBN 1 85712 068 X, 1998.

10.

HM Treasury: Resource Accounting Manual, www.resource-accounting.gov.uk

11.

Financial Reporting Exposure Draft (FRED) 29 – Property, Plant and Equipment Borrowing Costs, September 2002.

12.

International Accounting Standard (IAS) 16 – Property, Plant and Equipment, December 2003.

13.

Price Adjustment Formulae for Construction Contracts: Monthly Bulletin of Indices, Department of Trade and Industry (DTI), TSO, ISSN 0964 4575.

14.

Bridge Condition Indicators: Volume 2: Guidance Note on Bridge Inspection Reporting, CSS Bridges Group, April 2002.

15.

Addendum to Bridge Condition Indicators: Volume 2: Guidance Note on Bridge Inspection Reporting, CSS Bridges Group, August 2004.

16.

Rethinking Construction: The Report of the Construction Task Force (Egan Report), ODPM, 1998.

17.

Guidance Document for Performance Measurement of Highway Structures, Draft Working Document, Version 1.3, February 2005.

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100

18.

Bridge Condition Indicators: Volume 3: Guidance Note on Evaluation of Bridge Condition Indicators, CSS Bridges Group, April 2002.

19.

Addendum to Bridge Condition Indicators: Volume 3: Guidance Note on Evaluation of Bridge Condition Indicators, CSS Bridges Group, August 2004.

20.

Lighting Columns: Review of Risk Assessment Strategy and Production of a Condition Indicator, TRL Report on behalf of the CSS, UPR/ISS/029/05.

Appendix A Asset Valuation Explanatory Examples Purpose of Examples The purpose of these examples is to explain some of the typical situations that may arise during valuation, and how these should be addressed. Example 1 – Two Lane Road The existing asset is a two lane Classified B road with appropriate formation and structural layers. The GRC is based on a MEA which represents the current construction techniques for this class of road and the appropriate cross sectional profile (i.e. formation and structural layers). For simplicity it is assumed that condition is assessed through only one condition index. This section of road has a score 50 (on a scale of 0 to 100) for the condition indicator. Therefore, the DRC is calculated as (Section 10): DRC = GRC – Cost of work to restore the condition score to 100 Alternative Consideration 1.1 – The road has been built up over time and the actual make-up of the formation and structural layers is unknown. The MEA is taken as the typical construction techniques that would be used now to provide the same performance (or Level of Service) for a Class B road. Alternative Consideration 1.2 – Traffic surveys indicate that the road does not provide the required traffic capacity, i.e. it needs to be widened. This has no influence on the asset value calculation. This is identified as an enhancement in the Asset Management Plan. When the enhancement is carried out, then the GRC and DRC of the asset are amended accordingly. Example 2 – Highway Bridge The existing asset is a masonry arch bridge. The bridge is 120 years old but is not classified as a Heritage Asset (Section 4.11). The GRC is based on the replacement cost of a MEA which is taken as a reinforced concrete/steel composite bridge with appropriate foundations. The bridge has a Condition Indicator score of 75 out of 100. Therefore, the DRC is calculated as (Section 10): DRC = GRC – Cost of work to restore the Condition Indicator to 100 Alternative Consideration 2.1 – In the assessment programme the bridge was found to have a Potential Performance (load carrying capacity) of 10 tonne. However, data would not be available on the construction cost of a bridge with 10 tonne capacity because modern bridges are designed for 40 tonne trucks, therefore the following approach may be used (also see paragraph 4.7.4):

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1.

If the increase in cost of constructing a bridge with 40 tonne capacity is within 10% of constructing a bridge with 10 tonne capacity then the MEA described as above should be used to evaluate the GRC.

2.

If the increase in cost is more than 10%, then the MEA described above should be used for calculating the GRC, but this value should be factored down to account for the difference in costs between constructing a 10 tonne and 40 tonne bridge.

Alternative Consideration 2.2 – In the assessment programme the bridge was found to have a full Potential Performance (load carrying capacity) of 40 tonne. However, the bridge is currently only providing 10 tonne capacity due to poor condition. In this case the 40 tonne MEA is used to calculate the GRC, and the cost of work required to restore the Potential Performance (40 tonne capacity) is deducted from the GRC when evaluating the initial DRC (Section 10). Alternative Consideration 2.3 – The Potential Performance is 10 tonne but the authority has decided it wants 40 tonne capacity. The GRC is evaluated as described in Alternative Consideration 2.1 above. The shortfall in structural capacity below the defined Required Performance has no influence on the asset value. If the enhancement is carried out, then the GRC and DRC of the asset are calculated accordingly. Example 3 – Street Lighting The existing asset is a steel lighting column with a luminaire that provides the required lighting levels. The GRC is based on the replacement cost of a MEA which is assumed to be a steel lighting column (to the latest specification) with a luminaire of the same output as the current luminaire (but to modern specification). For simplicity, the whole unit is assumed to have a service life of 40 years and it is currently 20 years old. It is in the condition expected for its age and is providing the expected performance. Applying straight line depreciation the DRC is evaluated as (Section 8.2): DRC = GRC x [(40years-20years)/40years] = GRC x 0.5 Alternative Consideration 3.1 – The Required Performance has been redefined by the authority and the Potential Performance of the existing asset is unable to meet this standard. This has no influence on the asset value calculation. This is identified as an enhancement in the Asset Management Plan. When the enhancement is carried out the GRC and DRC of the asset are calculated accordingly. Alternative Consideration 3.2 – The current condition or performance is worse than that predicted by the condition profiles. The residual service life is revised down to reflect the current condition/performance. In this case the depreciation and/or impairment are calculated as described in paragraph 8.2.9.

102

Appendix B Depreciated Replacement Cost Example Hypothetical Network A hypothetical network shown in Figure B1 below is considered for this worked example. The example shows how the network assets should be grouped and the Gross Replacement Cost and initial Depreciated Replacement Cost calculated. Only roads, bridges and lighting columns are considered. The calculations are for illustration only and therefore do not represent the values and level of accuracy that would be used in practice. 12.5km

37.5km

25km

12.5km

100km

Embankment

Single carriageway

Dual carriageway 100km

KEY

Single carriageway

Bridge

Double carriageway

Urban area

River

Embankment

Figure B1 – Hypothetical Network 103

Highway Infrastructure Asset Valuation Guide – County Surveyors Society/TAG Asset Management Working Group

Network Data, Unit Rates and GRC Roads The network statistics and data are summarised in the table below. Urban roads have footways attached and the Unit Rate has been factored by an adjustment factor to reflect this. Also, the Unit Rate for the 75km of dual rural carriageway with embankment has been adjusted to reflect this. Table B1

Roads Data Width

Length

Unit Rate per m2

ID

Asset type/group

GRC

1

Dual urban carriageway (inc. footway)

18.6m

241.4km

£120

£538,804,800

2

Dual rural carriageway

18.6m

366.4km

£100

£681,504,000

3

Dual rural carriageway (with embankment)

18.6m

75km

£180

£251,100,000

4

Single urban carriageway (incl. footway)

9.3m

250km

£130

£302,250,000

5

Single rural carriageway

9.3m

350km

£110

£358,050,000

Total =

1282.8km

–

£2,131,708,800

NB: the width is the carriageway; attached footways are accounted for by different Unit Rates. Bridges The road type has a limited influence on the bridges Unit Rate for this network. All bridges are one span, of length 20m, and the overall deck width for single carriageway is 10m, and 20m for dual carriageway bridges. In addition to the bridges shown on the network it is assumed there is also a bridge for every 25km of network. Table B2

104

Bridges Data Number

Deck Area

Unit Rate per m2

ID

Asset type/group

GRC

1

Road over river (urban)

5

1400m2

£1000

£1,400,000

2

Road over river (rural)

6

1800m2

£850

£1,530,000

3

Road over road (rural)

4

1600m2

£950

£1,520,000

4

Other (urban)

20

6000m2

£900

£5,400,000

5

Other (rural)

32

10000m2

£750

£7,500,000

Total =

20800m2

–

£17,350,000

Appendix B – Depreciated Replacement Cost Example

Lighting There are lighting columns on all urban routes at 25m spacing; there are no lighting columns on rural routes. The lighting columns have been divided into two groups based on overall height. Table B3

Lighting Data

ID

Asset type/group

Road Length

No. of columns

Unit Rate per unit

1

Dual carriageway (urban) – 12m high

241.4km

9656

£1500

£14,484,000

2

Single carriageway (urban) – 6m high

250km

10,000

£1000

£10,000,000

Total =

19,656

–

£24,484,000

GRC

Network Gross Replacement Cost The Gross Replacement Cost of the network is therefore: Network GRC = GRCRoads + GRCBridges + GRCLighting Network GRC = £2,131,708,800 + £17,350,000 + £24,484,000 Network GRC = £2,173,542,800 Initial Depreciated Replacement Cost The initial DRC is evaluated as described in Section 10. The DRC is evaluated using the principles of depreciation and impairment, described in Sections 8 and 9 respectively, applied to the relevant assets/components. The assets/components should be divided into two broad categories: 1.

Condition based maintenance (paragraph 9.3.7) – the maintenance required on an asset group, or individual asset/component, can be estimated from condition data. This approach is applied to Indefinite Life assets treated under the Conventional Method and to the majority of assets treated using Renewals Accounting.

2.

Time based maintenance (paragraph 9.3.9) – asset consumption is more readily defined by asset age than condition or performance. This approach is applied to Finite Life assets from the Conventional Method and to relevant assets/components from Renewals Accounting, e.g. bridge bearings.

The roads, bridges and lighting assets/components are classified in this manner below to evaluate the initial DRC. Roads The road asset is made up of the Level 3 assets and components shown in Table 5.1 (Section 5.4). The DRC should therefore be based on the GRC minus the cost of maintenance required to restore these assets to as new condition.

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All the significant maintenance needs on the road asset relate to “condition based maintenance”. Therefore, the calculation can be streamlined by excluding asset or component types that only contribute a small proportion of the maintenance needs. This approach is considered to provide a suitable degree of accuracy for evaluating the initial DRC for roads. The DRC is therefore evaluated as GRC minus the summation of maintenance work required on the different assets or components. This may be evaluated based on an average maintenance rate linked to a condition band, for example see the condition bands shown in Table B4 (NB: the relationship between condition bands and maintenance costs shown in Table B4 is hypothetical and for illustrative purposes only, and therefore should not be used for asset valuation. However, authorities may wish to derive such relationships for asset valuation purposes). Table B4

Example Condition Bands for carriageway Condition Band (e.g. a BVPI)

Average value of maintenance per m2 of carriageway

0 – 20

£0

20 – 40

£10

40 – 60

£25

60 – 80

£75

80 – 100

£150

The value of the maintenance work can therefore be evaluated by identifying the quantity of the carriageway that falls into each condition category. A more refined approach is to base the calculation on the condition, maintenance work needed and the associated costs of each individual asset/component, e.g. each section of carriageway. Authorities should adopt the approach that best reflects their asset data. The major maintenance needs on the hypothetical network are as shown in Table B5. The maintenance needs of the carriageway are likely to dominate the road maintenance needs in most cases. Table B5

Cost of “condition based maintenance” on roads Asset or component Carriageway and footway

£250,000,000

Drainage

£30,000,000

Earthworks

£10,000,000

Safety fences

£10,000,000

Verges

£10,000,000

Total Value of Maintenance =

106

Value of maintenance work

£310,000,000

Appendix B – Depreciated Replacement Cost Example

The DRC of the road asset is therefore evaluated as: DRCRoads = GRCRoads – (Condition based maintenance) DRCRoads = £2,131,708,800 – £310,000,000 DRCRoads = £1,821,708,800 Bridges The total volume of work required to restore the bridges to as new condition is evaluated from the current inspection and assessment data. The value of the work should be calculated using the general approach described in Section 10, i.e. distinguish between “condition based maintenance” and “time based maintenance”. The major highway bridge elements that require “time based maintenance” are expansion joints and bearings (and possibly painting). The maintenance on all other components can be treated as condition based. The total cost of “condition based maintenance” on bridges for the hypothetical network is taken to be £2.5million. The DRC of “time based maintenance” elements should be evaluated as described in Section 10.3, i.e. establish remaining service life directly from installation date and service life data. This may be applied to individual assets or asset groups; the latter approach is used here. If the asset ages are spread evenly across the service life then the DRC is equal to (GRC x 0.5). However, for this example the age profile is not spread evenly across the asset service life, therefore a more refined approach is required where the assets are grouped into age bands. For simplicity, the expansion joints and bearings are assumed to have the same service life (30 years) however the age profile is spread as shown in Table B6. Table B6

Age of bearings and expansion joints Age Band

Average Remaining Life (years)

Proportion of elements in age band

1

25

0.10

2

20

0.14

3

15

0.20

4

10

0.26

5

5

0.30

The DRC of each age band is then evaluated as (paragraph 9.3.11):

[

DRC = GRC ×

( )] RL SL

× (Proportion of asset in age band) Equation B1

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Where

SL = assumed service life RL = remaining life

The GRC of the “time based maintenance” elements is estimated to be 10% of the total GRC of the bridges in this example = £17,350,000 x 0.1 = £1,735,000. The DRC of “time based maintenance” elements is therefore evaluated as shown in Table B7. Table B7

DRC of “time based maintenance” on bridges

Age Band

Average Remaining Life

Proportion of elements in band

(RL)/SL

DRC

1

25

0.10

0.83

£144,583

2

20

0.14

0.67

£161,933

3

15

0.20

0.50

£173,500

4

10

0.26

0.33

£150,367

5

5

0.30

0.17

£86,750

DRC of “time based maintenance” elements =

£717,133

The DRC of the structure assets is: DRCBridges = GRC – (Condition Based Maintenance) – GRCTime + DRCTime DRCBridges = £17,350,000 – £2,500,000 – £1,735,000 + £717,133 DRCBridges = £13,832,133 Where

GRCTime = GRC for time based elements DRCTime = DRC for time based elements

Lighting The DRC of the lighting assets is evaluated using the “time based maintenance” approach for the whole asset. It is assumed that all parts of a lighting unit are replaced after 25 years. However, the ages of lighting columns in the stock are not spread evenly. The age profile of the lighting units is shown in Table B8.

108

Appendix B – Depreciated Replacement Cost Example

Table B8

DRC of “time based maintenance” on lighting

Age Band

Average Remaining Life

Proportion of elements in band

(RL)/SL

1

20

0.10

0.8

£1,958,720

2

15

0.20

0.6

£2,938,080

3

10

0.30

0.4

£2,938,080

4

5

0.40

0.2

£1,958,720

DRC of lighting =

£9,793,600

DRC

The DRC of lighting is therefore calculated directly and gives: DRCLighting = £9,793,600 Network DRC The DRC for the hypothetical network is then evaluated as: DRCNetwork = DRCRoads + DRCBridges + DRCLighting DRCNetwork = £1,821,708,800 + £13,832,133 + £9,793,600 DRCNetwork = £1,845,334,533 Accumulated Asset Consumption The Accumulated Asset Consumption (AAC), from Section 11.1, for the network is: AAC

= [1- (DRC/GRC)] x 100

AAC

= 15.1%.

109

Appendix C Renewals Accounting Example Purpose of Example The purpose of this example is to explain how the cost estimates from an Asset Management Plan (AMP) and the actual in year expenditure should be used to apply the depreciation charge under Renewals Accounting (Section 8.3). Hypothetical Network The hypothetical network from Appendix B will be used in this example. For simplicity this example only presents Renewals Accounting in relation to the road asset from Appendix B; the relevant details from Appendix B are shown in Table C1. Table C1

Network Information

Asset Type Roads

GRC

DRC (or NBV)

£2,131,708,800

£1,821,708,800

AAC

Condition Indicator Score (or BVPI)

14.5%

20 (on a scale of 0 to 100)

The AMP identifies the following for the road asset: 1.

Approximately £50million should be spent each year to maintain the Condition Score of the road asset at 20.

2.

An additional spend of £15million per year (for a five year period) would improve the Condition Score to 15.

Scenario 1 – Maintain Condition Under this scenario the authority provides the annual £50million to sustain the condition of the road asset. The adjustment made to the Net Book Value (NBV) in one financial year is as shown in Table C2 (NB: NBV = DRC). Table C2

NBV Annual Adjustments

First Financial Year Renewals Accounting Depreciation Charge Actual Maintenance Expenditure (cash)

Debit

Credit

£50,000,000 £50,000,000

NBV brought forward (opening book value)

£1,821,708,800

NBV carried forward (closing book value) = £1,821,708,800 – £50,000,000 + £50,000,000

£1,821,708,800

Under this scenario the estimated cost of maintenance is spent each year, therefore the NBV is maintained at £1,821,708,800. The Condition Indicator is monitored to check that it does not exceed the acceptable limits (paragraph 9.2.12). 110

Appendix C – Renewals Accounting Example

Scenario 2 – Improving Condition Under this scenario the authority spends £65million per annum to improve the condition of the road asset from 20 to 15. The adjustment made to the NBV in one financial year is as shown in Table C3. Table C3

NBV Annual Adjustment

First Financial Year Renewals Accounting Depreciation Charge

Debit

Credit

£50,000,000

Actual Maintenance Expenditure (cash)

£65,000,000

NBV brought forward (opening book value)

£1,821,708,800

NBV carried forward (closing book value) = £1,821,708,800 – £50,000,000 + £65,000,000

£1,836,708,800

Assuming the £65million funding continues for a five year period then the values in the fifth year would be as shown in Table C4. Table C4

NBV Annual Adjustment

Fifth Financial Year Renewals Accounting Depreciation Charge Actual Maintenance Expenditure (cash)

Debit

Credit

£50,000,000 £65,000,000

NBV brought forward (opening book value)

£1,881,708,800

NBV carried forward (closing book value) = £1,881,708,800 – £50,000,000 + £65,000,000

£1,896,708,800

Therefore, the Accumulated Asset Consumption (AAC), described in Section 11.1 and shown in Table C1, has decreased from 14.5% to 11.0%. The five year change in the Condition Score should be approximately 5 points, i.e. from 20 to 15 as identified in the AMP. Therefore, based on the guidelines proposed in paragraph 9.2.12, it was not necessary to calculate impairment (or the impairment reversal) during the five year period (i.e. between benchmark valuations). Instead, adding £15million per annum to the NBV is assumed to be a robust estimation of the changing volume of maintenance work required on the road network, and hence the change in DRC (see Section 10). Scenario 3 – Falling Condition Under this scenario the authority is unable to spend £50million per year due to financial constraints. Instead, £25million per annum is provided to carry out maintenance on the road asset. The adjustment made to the Net Book Value (NBV) in one financial year is as shown in Table C5.

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Table C5

NBV Annual Adjustments

First Financial Year Renewals Accounting Depreciation Charge

Debit

Credit

£50,000,000

Actual Maintenance Expenditure (cash)

£25,000,000

NBV brought forward (opening book value)

£1,821,708,800

NBV carried forward (closing book value) = £1,821,708,800 – £50,000,000 + £25,000,000

£1,796,708,800

Assuming the £25million funding continues for a five year period then the values in the fifth year would be as shown in Table C6. Table C6

NBV Annual Adjustment

Fifth Financial Year Renewals Accounting Depreciation Charge Actual Maintenance Expenditure (cash)

Debit

Credit

£50,000,000 £25,000,000

NBV brought forward (opening book value)

£1,721,708,800

NBV carried forward (closing book value) = £1,721,708,800 – £50,000,000 + £25,000,000

£1,696,708,800

Therefore, the Accumulated Asset Consumption (AAC), described in Section 11.1 and shown in Table C1, has increased from 14.5% to 20.4%. The change in the Condition Score may exceed the guidelines proposed in paragraph 9.2.12 and it may therefore be necessary to calculate impairment during the five year period (i.e. between benchmark valuations) rather than relying on the annual deductions based on the difference between AMP requirements and actual expenditure.

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Acknowledgements Steering Group Matthew Lugg (Chair)

Cambridgeshire County Council

David Baker (Project Manager)

Transport for London

Alan Armson

Hertfordshire Highways

Robert Biggs

Derbyshire County Council

Paul Fearon

St Helens Council

Chris Walker

East Sussex County Council

Alex Ramage

Scottish Executive

Kieran Rix

HM Treasury

Ian Holmes

Department for Transport

Technical Advisors Dr Garry Sterritt

Atkins

Dr Navil Shetty

Atkins

Lila Tachtsi

Atkins

Alan Taggart

Atkins

Dr Roger Cole

Atkins

Malcolm Dennett

PKF

Disclaimer The CSS/TAG Asset Management Working Group, the Steering Group and the Technical Advisors who produced this guidance document have endeavoured to ensure the accuracy of the contents. However, the guidance, recommendations and information given should always be reviewed by those using them in the light of the facts of their particular case and specialist advice be obtained as necessary. No liability for loss or damage that may be suffered by any person or organisation as a result of the use of any of the information contained here, or as the result of any errors or emissions in the information contained here, is accepted by the CSS/TAG Asset Management Working Group, the Steering Group, the Technical Advisors, and any agents or publishers working on their behalf.

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