Valuations

This topic covers:

• Objectives
• Purposes of Infrastructure Asset Valuations
• How Accurate Should Valuations Be?
• Choosing the Level at which Valuations will be Completed
• Valuation Methods
• Revaluations
• Original Replacement Values (Asset Creation)
• Replacement or Reproduction Value
• Other Ancillary Valuation Methods
• Valuation Techniques for Various Asset Types
• Other Major Passive Assets
• Buildings
• Plant and Equipment
• Computer Systems (Hardware/Software)
• Office Furniture and Equipment
• Internal Fittings and Fixtures
• Recurrent Expenditure Items (Consumables?)
• Heritage Assets
• Parks & Gardens
• The Value of Earthworks in the Original Capital Cost
• Information and Data
• Difficult Areas in Valuation that Require Definitions/Policies
• Asset Value Verification
• Valuing the Hole or Trench.

Objectives

Unique community infrastructure assets (and in particular the passive civil engineering type infrastructure operated by many public authorities such as road, rail, water, sewerage, drainage, parks and gardens etc) require modifications to the typical commercial valuation processes. For most public sector assets there is no "market". Where a market can be identified, then market valuations and other methods used in the commercial environment can be adopted.

It is assumed that for public sector authorities, valuation should be derived on the basis of an "on-going concern".

It is important that the valuations are based on a clear purpose for their use, eg.

• For sale or disposal
• To determine an acceptable rate of return on the assets
• To determine shares or equity in the asset values
• To assist management to more effectively manage those assets.

Purposes of Infrastructure Asset Valuations

In general terms, there are two basic reasons why infrastructure asset valuations are carried out:

• Improved managerial decision making
• Regulatory compliance such as meeting the requirements of GASB Regulatory requirements will determine the method of the valuation and the outputs required.

Valuation Outputs

With respect to the effective management of its assets, an organization needs to consider three key parameters: total value, book value (based on an overall condition index) and depreciation rate (or remaining effective life).

The total value of an asset is of interest in terms of knowing the estimated cost of its replacement or for purposes of benchmarking (eg, capital investment per customer). The book value is used for determining return on investment and as a crude measure of the condition of the asset(s). The annual depreciation rate is an important item in the organization’s profit and loss statement and provides a key input in determining rates and service charges.

Valuation Methods and Techniques

Depending on the objectives of the valuation, the methods employed by the organization are based on national or internationally accepted standards where they exist.

Techniques and principles used for the successful valuation of infrastructure assets include:

• Current Cost Replacement Value (equivalent capacity and level of service)
• Current Cost Reproduction Value (replacing an asset with exactly that which currently exists)
• Current Market Selling Price (market value)
• Recoverable Value (present value of future cash flows)
• Disposal Value (not forced sale).

Other specialist techniques can include:

• Economic Benefit Value
• Free Cash Flow Value
• Deprival Value (if deprived of the asset what would it be replaced with)
• Optimized Deprival Value
• Optimized Replacement Cost
• Hypothetical Value (other use).

Valuation Methodology

For long term sustainability it is important to recover in the revenue stream not only the operating expenditure and a return of capital invested in assets, but also a return on the use of the capital - the opportunity costs for the capital in use.

How Accurate Should Valuations Be?

There is considerable debate among stakeholders in the issues involved in infrastructure valuation as to what degree of accuracy should be used in determining the current replacement or reproduction cost.

This debate relates to the level at which valuations should be established and the relevant accuracy of those valuations.

The area in which this debate is most hotly contested is generally related to the valuation of underground assets. In this debate the issue generally revolves around whether or not average replacement rates should be used or whether detailed assessments are made of each individual asset length.

It is imperative that we recognize the unique value of each individual asset due to the various factors that would influence replacement of a similar asset in today's condition.

There is no validity in using average rates for anything more than constructing overall system macro valuations.

Accurate replacement valuations on individual assets can assist asset managers to effectively determine the appropriate management of that asset in terms of:

• Determining the appropriate condition monitoring required
• Determining optimal maintenance programs
• Determining appropriate renewal strategies (ORDM).

It is vitally important that these individual valuations are created to encourage our organizations and staff to manage the assets on an individual basis. Effective asset management of large networked asset groups that provide an infrastructure service such as water supply, sewerage, drainage, roads and electricity are best managed on this individual basis where the appropriate strategy for the entire network is developed from the aggregation of data from the multitude of individual assets that make up the network system.

As stated previously even if the decision to determine valuation is made at a parent asset level, it is important that sufficient samples of assets are developed at a lower level and aggregated to provide an accurate weighted average effective life that could not be used for the asset as a whole.

Extraordinary Issues

Modern technology often allows us to rehabilitate or renew assets at significantly lower costs that a replacement program; in these instances valuing the asset and determining an appropriate effective life becomes quite complex. This is best explained by two examples of modern system renewal techniques.

In renewing older gas distribution systems we have been able to use the properties of high density polyethylene pipe and the fact that it can take higher pressures to establish insertion programs. This insertion program enables us to insert a smaller HDPE pipe into the older deteriorated cast iron pipe without trenching or opening the ground in its significant costs in terms of surface restoration etc. The only surface disturbance required involves the reconnection of house connections from the old pipe to the new polyethylene pipe. In this instance we are effectively restoring a greater level of service at a significantly lower cost than the replacement value of the original pipeline due to the value of the “hole in the ground” or the value of the trench that would need to be completed to replace this asset.

In the telecommunications area we are now capable of taking an existing cable and by injecting oxygen we are able to burn out the old paper insulated fibers and remove these from the original cable surround; we can then insert fiber optic cable which can have up to 1 000 times the capacity of the original asset. As with example 1, this alleviates the need for trenching and surface restoration activities and therefore enables us to replace the asset at a significantly lower cost.

These two examples show clearly the potential conflict between an asset valuation based on original cost and the cost to renew an exiting asset system. This is becoming a significant conflict for all those involved in infrastructure asset valuation.

Degree of Accuracy

The degree of accuracy required in the final valuation figure will largely depend on its materiality to the organization and what the organization's management is prepared to tolerate. The materiality of an asset value should be directly related to the annual depreciation rate, which depends on replacement value and expected life.

Choosing the Level at which Valuations will be Completed

The further we break assets down into their components and value these as though they may be replaced individually the higher the overall valuation for a facility or a major asset will become. eg. Building or pump station.

It is therefore important that each organization determines an appropriate level at which they will complete their main asset valuation calculations.

The key output required by our current cost valuations is an accurate impression of the true depreciation or consumption of the assets concerned.

The most appropriate method of asset depreciation has proved to be the renewal accounting method; however, until organizations have appropriate asset management information systems and detailed asset management plans, it is unlikely that regulatory authorities will approve this method of depreciation.

Therefore, in the interim, it would be desirable for the organization to determine an asset hierarchical breakdown that would give an accurate impression of both the replacement value and the book value for the assets concerned.

For collection assets the most appropriate and accurate method of valuation involves the construction of a database relating to each asset unit. By breaking assets down to this classification authorities are able to easily determine an accurate replacement value; by the application of appropriate effective lives the reasonable figure for consumption or depreciation can be derived.

In the case of major facilities or other assets it is desirable that the asset is broken down into its significant components and that appropriate effective lives are applied to each of these components.

They should not be treated as individual components at this time but in fact should be the overall valuation for the facility as a whole, broken up into its individual component share as a percentage of the overall facility. In other words we should really use the original schedule of rates or bid information and break up the total project cost, remembering to ensure that appropriate overhead is applied to this total valuation.

EXAMPLE FIRST CUT VALUATION - MINOR SEWERAGE PUMPING STATION

Construction Date: 1989

Construction Cost: $140 K Bid and Overhead

Site Purchase: $ 35 K

Valuation Methods

Current Market Selling Price of an Asset

This approach uses the current cost determined by reference to net market value of an asset. It applies where there is an active market for the product. Typical examples include fixed plant and motor vehicles.

Current Reproduction Cost

This approach estimates the current cost by reference to the cost per unit of productive capacity of reproducing the asset. It applies where a similar asset would replace the asset being valued. This approach is not appropriate where technology has changed significantly. Authorities should value all their major assets by this method, and then compare this to replacement cost where the asset will be replaced by a different unit.

Current Replacement Cost

This approach estimates the current cost as the cost per unit of productive capacity of the most appropriate modern replacement facility. It applies where the asset being valued would be replaced by a different asset (in terms of scale and/or technology) having a similar productive capacity. Authorities should calculate this value for their assets that would be replaced not reproduced.

Recoverable Amount

This approach estimates the current cost by reference to the Net Present Value of future cash flow expected from the proceeds from the sale of an asset. This method of valuation is applied to assets not in use where it is lower than other valuation method. It is only applicable for those assets for which a competitive "market" exists. It is generally used to value an entire organization unit or facility, eg. sale of digital mapping contract.

Asset Valuation Approaches

The following table summarizes the four approaches to Asset Valuation.

Revaluations

Asset owners need to implement an ongoing activity for updating of asset registers to ensure that the information they are producing is accurate and up to date.

One of those items is cost estimates. These estimates can be updated on an annual basis by the use of CPI index figures for the various different asset categories such as below ground concrete structures, pipelines, electrical controls, mechanical equipment, etc.

In some cases other factors may need to be taken into account, such as:

The "greenfields" effect

This is the change in the asset replacement cost resulting from changes that may have taken place around that asset. For example, a pipeline may have been laid down the edge of a road, and over the period the road has been widened such that the pipeline is now down the road. Although the actual replacement of the pipeline itself may not have changed, it will cost a lot more to replace it because of the changes that have taken place in its environment.

Increased expectations of customers and levels of service

In some instances the component or asset will be replaced with a similar asset that provides a higher level of service. The required reliability or regulations may require upgrading of the asset and the update needs to allow for the increased value. For example, a building may require the lifts to be of a new standard.

New technology

In cases where assets would be replaced with newer technology, the valuations or the quantities involved need to reflect this change in the basic assumptions that make up the valuation.

Original Replacement Values (Asset Creation)

Confusion often exists regarding costs to be used in the creation of major assets that take considerable time to construct, e.g. dams, hydroelectric schemes etc. The best way to look at this is in real costs at "today’s" values.

If a project takes 5 years to construct and is built in a series of stages such that the end product represents an "Historical Cost", including the inflation that occurred during the construction period, the options are:

• To take this "total cost" (historical) as being the "Current Replacement Value" or
• To take the historical cost of each years works and multiply these by relevant construction cost indices to derive the value for each subsequent year until the asset is fully commissioned. The final accumulated total then forms the "Current Replacement Value".

The latter option is recommended for projects that extend over 2 years.

For the purposes of determining the Current Replacement Valuation for assets over 30 years old then it is quite acceptable to use the final total "historical cost" of the asset at commissioning, especially if inflation was often negligible at the time of construction. In many cases, the revaluation will be done using the original schedule of quantities, and applying current construction cost estimates, so this problem is eliminated anyway.

Replacement or Reproduction Value

One of the most difficult areas in asset valuation involves deciding on which form of the current cost valuation should be used, reproduction or replacement. Both methods are essential for the effective management of assets, however it is important that each organization ensures that they understand the purpose of each valuation.

In general, the reproduction valuation should be used for:

• Effective management and decision making in relation to the current cost of our existing assets
• Determination of appropriate maintenance and renewal strategies to maintain these existing assets at an appropriate level of service
• Determination of the true depreciation of their existing assets.

On the other hand, the replacement valuation is used to determine the:

• Relationship of their existing assets to that standard of asset with which they would replace it
• Future replacement or major renewal programs for the setting of appropriate depreciation levels
• Future standard of asset required.

Asset managers, both financial and technical, need to fully appreciate the implications of both methods of valuation. It should be realized that by using replacement valuation on a grossly degraded asset base, will result in significantly greater levels of depreciation than if current cost reproduction is derived.

It is important that each organization has a clear picture of what their current depreciation is and the impact that will have on their ratepayers before moving into the area of asset enhancement that is implied in using replacement valuations.

It is vitally important for asset owners to get an appreciation of their existing assets and to adopt advanced asset management techniques on these assets before starting to get too involved in setting the replacement standards and therefore the replacement valuations.

It is essential that asset managers have both the reproduction and replacement value on their assets to enable both an appreciation of the current standard of their assets, their depreciation while carrying out the most appropriate maintenance and renewal on their existing assets.

In most cases only minor differences exist between the reproduction and replacement issues except where:

• The asset is very old and would never be constructed in the same manner, e.g.
  • Bridges
  • Some roads
• Where the asset needs to be substantially upgraded due to augmentation or growth in demand for the service it provides, e.g.
  • Intersection improvements
  • Road widening
  • Drainage system increases
  • Treatment plant expansions.

Many of these examples involve a change in the level of the service provided by the asset due to:

• Rise in community expectations
• Condition of our road infrastructure
• Improved sewerage discharge quality

Failures of assets are brought about by increases in demand and the need for greater capacity rather than the age or the condition of the infrastructure.

Examples of Conflict

Roads

A municipality has a road pavement 4 m wide that has a very old construction history and has a basic subgrade consisting of less than 150 mm of subgrade and base coarse. The road is not perfect but does fall within the condition-based criteria set by their customers for pavements of this category.

Based on the traffic loading and the category of the road, under current standards the council would require an 8 m wide pavement with a 275 mm base coarse construction.

In this instance the council has a variety of options in valuing this road pavement in current cost terms, namely:

• Value the pavement as a current reproduction of what exists;
• Value the pavement for a 4 m width constructed to 275 mm depth; or
• Value the pavement based on an 8 m wide pavement at 275 mm depth.

Each of these will have a substantially different current cost valuation together with various book valuations. The depreciation determined by each of these examples will be significantly different, however the key to all of these examples is not what is an appropriate depreciation but in fact what money needs to be spent on each on these options from a life cycle perspective to deliver the level of service required by their customers.

The organization needs to look at these issues as a whole and determine the most appropriate technique for them.

Bridges

Throughout this municipal shire, there are over 250 wooden bridges of different spans, widths and load capacities.

If the bridges were to be based on current standard loadings and replacement values, then a significantly greater depreciation cost would be allocated to these assets.

In the circumstances for this municipality there is no way that these costs can be incurred or recovered and therefore an appropriate asset strategy would be to:

• Retain appropriate asset load capacity inline with the category of road and the demands required of it
• Develop maintenance and renewal plans that ensure these bridges can perform the tasks required safely and effectively over the next 25 years.

In many cases, the cash flow required for these maintenance and renewal plans will justify the replacement of some of the wooden structures with concrete structures due to the fact that this is the cheapest life cycle cost option rather than because of an accrual accounting regulation that required replacement costs to be determined.

The role of replacement valuations in assessing the condition of the organization's assets in respect to appropriate levels and standards of service, however we draw people's attention to the need for our asset management activities to provide the most cost effective way in which that service provision can be achieved.

Other Ancillary Valuation Methods

Historic Cost Values

The historic cost of the assets gives some feeling for the capital investments that have been made in the past.

Free Cash Flow Value

Free cash flow is a derivative of market valuation, applicable to public infrastructure. Analysis of the future liabilities of the organization together with operating, maintenance and administration costs, and the likely future incomes for the organization enables the difference between the two values expressed as net present value to be calculated. This indicates the current market value for that asset, or free cash flow.

Optimized Depreciated Replacement Cost Value

This valuation is derived as the greater of the present value of depreciated replacement cost and disposal value. This method of valuation is only used where a minimum valuation figure for equity purposes is required.

Deprival Value

This is the cost to replace the asset assuming that the organization is deprived of the use of the existing asset or assets. This is really replacement valuation, but has been used to ensure that the organization is not overvalued by determining the current replacement cost of every asset, for example, if the organization owns a series of assets with reasonable capacity but a single asset could be used to replace same eg: transmission lines, power generation stations with multiple turbines that could be upgraded from 10 x 50 MW to 1 x 500 MW unit. A railway line that runs almost parallel and could be consolidated to one is another example.

This method is primarily used to ensure that over-valuations do not affect the viability of the organization. It also takes into account the fact that many assets may never reach their full utilization level. It enables the valuation to be determined on the basis of constructing an asset to have 100% utilization and the resultant economies of scale.

This valuation method could be used to determine Government equity prior to the privatization or corporatization of a public sector utility.

Valuation Techniques for Various Asset Types

Major Civil Assets

Major civil engineering assets, where an existing statement of quantities or schedule of items exists, are easily updated using current rates to estimate current reproduction cost.

If no original schedule of quantities exists then a schedule of quantities can be prepared, and the evaluation completed by using current construction rates.

Where the existing asset would not be reproduced, but replaced with a different type of asset that would deliver an equivalent level of service, then a schedule of items based on the intended replacement asset would be prepared, and current rates used to determine the asset value.

If assets are split into their various components that require different maintenance management techniques, or have different life cycles, then not only is the valuation of assets determined but also full life cycle and maintenance management aspects can start to be addressed. This has significant benefits in the ultimate cost of implementing the full systems needed to achieve all the outputs for Current Cost/ Accrual Accounting.

Other Major Passive Assets

Road and Pavement Assets

The most logical basis for valuing roads and pavements is related to the type or structure of pavement that has been constructed, and to its various components, such as:

• Subgrade
• Base course
• Intermediate courses
• Pavement (seal).

Using established unit prices for the construction of pavement is the easiest way is to determine an overall cost per square meter.

Of course there are features other than the paved area itself and these may include:

• Shoulders
• Kerb and channel or other road edge
• Underdrains or other subgrade drainage
• Road side drainage.

These are all components related to the asset and should be valued separately or as a function of the price of the road area, depending on how the asset has been recorded in the inventory.

Sidewalks

The other major road reserve assets are sidewalks. These should be valued as current replacement cost based on area and proposed type of replacement sidewalks under current policies and target levels of service.

Street Trees

In the initial phase of asset valuation, the recording of street trees or other miscellaneous furniture is not a cost effective exercise. However the valuation could be recorded as a single component item for each road segment. The value of street trees can be estimated by the simple recording of the total number and placing a uniform value on a typical street tree e.g. 75 street trees x $720 = $54 000.

Underground Pipeline Systems

Examples include:

• Water supply collection
• Sewerage collection systems
• Drainage collection systems
• Gas distribution systems.

The current replacement value for pipeline assets is dependent upon several factors:

• Ground conditions in which they have been constructed
• Location and proximity to other services and obstructions
• Surface restoration required after construction
• Type of asset that would replace the installation.

Buildings

Buildings and land are more difficult to value in that real market value for their asset may be derived. In most cases this is applicable to office buildings, workshops and depots, etc. However it must also be considered whether the sale of the building would meet planning scheme requirements in private or commercial ownership. Therefore market valuation is a significant task even for qualified valuers.

Building valuation can be affected by the following factors:

• The building may have a single use for the rest of its functional life and cannot be considered as available for resale at any time. For example, this would apply to telephone exchanges.
• Buildings classified by the National Trust, in which case the owner must retain the building in its original condition under the planning scheme, and would find it very difficult to sell.

In many cases there is little chance the authority could dispose of the building to another owner (other than another public authority) for anything close to its true market value.

Plant and Equipment

Because of the short life of plant and equipment the real issue here is to value the equipment at its disposal value. This is quite easy as in most cases equipment is turned over within a five-year period.

In this instance the changeover value is more important, and the committed capital required to maintain plant and equipment to meet current levels of service is the important figure.

Computer Systems (Hardware/Software)

The method outlined for plant and equipment is also suitable for items such as computer systems, software and other similar assets where the effect of technology change results in short lives. Equipment, sophistication and capability changes rapidly and the asset owner needs to update at regular intervals to benefit from the new technology.

Software assets are dynamic assets and should be reviewed and renewed (enhanced) at regular intervals to get the best out of original investments. Keep improving software until a hardware upgrade is justified. Don't let the whole system age prematurely.

Office Furniture and Equipment

Office furniture and equipment occupies a unique place in asset management systems because it is owned by the many departments that make up an organization.

In most cases office equipment and furniture will fall into two main categories:

• Corporate Systems
• Departmental Systems.

These systems need to be looked after by the relevant department that has the main use of the facilities with corporate facilities being looked after under the corporate umbrella. Alternatively the complete responsibility could be delegated to a sub-contractor, such as EDP section for the computer facilities etc. The filing systems, technical libraries etc. could be under the control of the administration section.

Internal Fittings and Fixtures

Internal fittings and fixtures should be recorded and managed by the relevant groups. For example, the EDP section, Finance Group, and Engineering Design Group etc. should be responsible for the inventory of their office partitioning, carpet and other features that make up their office space.

As with building infrastructure and office furniture etc. the corporate organization will have an overview role and set guidelines. This is of course very dependent on the size of the organization concerned.

Recurrent Expenditure Items (Consumables?)

There will always be debate as to what is a normal recurrent expenditure item (consumable) and what is a long term planning or works item (non-consumable). Many people will argue that miscellaneous assets that have very short lives should be included in the former category.

A decision needs to be made on the valuation level at which assets do not need to be included on the asset register system. These are described as "consumables" i.e. assets are consumed quickly eg. writing materials, computer paper etc. It is intended to cover assets of low value that have a short life.

Heritage Assets

In many cases organizations may have responsibility for the management of heritage assets. These may be assets that have a national significance and could be classified under the National Trust Act.

These heritage assets constitute a special management problem for the organizations concerned. In many cases the assets may be well past their effective life, and the renewal and operations and maintenance costs may far exceed the costs that would be applicable if the asset was replaced with the latest type of building or structure. However, they constitute a community service obligation (CSO) and organizations with such assets need to take a special approach to their management. In most cases this will mean that additional maintenance will be required, or if the assets are run down then substantial renewal programs may need to be undertaken.

Instigating a proper asset management plan for this type of infrastructure, and detailing the inventories and the long term strategic planning requirements, together with a detailed assessment of the on-going operations and maintenance costs, will then enable the organization to identify the cost of these assets to their customers.

Parks and Gardens

In many case the valuation of parks and gardens seems a daunting task, however, it is not as difficult as it looks.

We must continually keep in mind the purpose of valuations. We are trying to derive a valuation and a form of accounting that will allow us to identify the income needed for that asset to perform its intended level of service.

As with other passive assets the most logical valuation method for parks and gardens is replacement value. The replacement value should be the capital cost that would be necessary to establish the park if it was totally destroyed.

The Value of Earthworks in the Original Capital Cost

Valuation of earthworks is possibly the most contentious of all asset valuations, especially in the private sector where the depreciation of capital investment is an allowable tax deduction. In this case the Tax Office will not allow the depreciation of earthworks as it claims that the earthworks have an infinite life and are a one-off cost. They will not require replacement, and therefore should not be depreciated. However it needs to be accounted for.

It is the intention of accrual accounting to indicate the value of the assets under the control of the organization, and indicate an acceptable rate of return on the original investment. Land will not depreciate and the earthworks component of construction works does has an infinite life. The earthworks will not therefore constitute any future liability to the organization, and it is the future liability that is important.

If an asset is likely to have a future liability to the organization, it should be accounted for.

Information and Data

For many public sector service authorities the data contained in information systems are an essential part of their operation. These may include:

• Assets details
• Human resource details
• Customer details
• Billing information.

The maintenance and protection of these data is vitally important to the organization. It is important that a real value for this data and information is maintained.

American studies have indicated that the overall information services for public sector service authorities may represent over 10% of the current replacement value of the associated assets. The validity of this assumption cannot be verified, however it is vitally important for an organization to include the value of its data and information as part of its overall asset valuation.

Difficult Areas in Valuation that Require Definitions/Policies

In accountancy terms an asset is defined as:

"Service potential or future economic benefits controlled by the organization as a result of past transactions or events."

As described previously there are many valuable community assets that do not have a "market value". These are catered for by valuing them as "replacement values".

Difficulties arise in the following areas:

Intellectual Assets

• The skills of the organization (ignored for the purposes of most valuations)

Human Resource Assets

• The value of the trained and experienced staff to the organization (ignored for the purposes of most valuations)

Potential Income

• Failures to correctly value future organization viability have been responsible for many of the corporate crashes in Australia recently. For a non-profit public sector Authority it should be ignored except for determining equity value if the Authority is to be privatized or ownership changed.

Value of Stocks Held etc.

• Current stock/spares held should be valued at current cost. For long life assets spares may be superseded or rendered obsolete, and may be written off. This aspect needs to be considered.

Intangible Assets

• Copyright of systems or programs may be claimed, but this may have little validity in the public sector. Patents or similar items may require special assessments.

Value of water held in Water Board storages

No payment has been made for this asset. The organization has no control over the acquisition of this asset and therefore its earning potential. The water held in storage may ultimately derive income for the organization in a variety of ways, e.g.

• Sale of irrigation water
• Potable water price
• Power generating potential
• Other benefits
• Flood mitigation.

It is concluded that this asset should not be valued as part of the Authority's assets because:

• The value of this "asset" will vary considerably with climatic conditions on a year-to-year basis so that its true value will not be reflected.
• There has been no cost to the Authority to acquire the water.
• Losses by evaporation, overflow and seepage are beyond the control of the Authority.
• The income derived results from the value added to the base product e.g. finance, operations and maintenance. The product really has no base value.
• There is no total utilization of the water and thus no "competing value" achievable through a "world market price".
• It is recommended that the Authority record the volume stored at the end of each financial year for the purpose of indicating its viability for potential income recovery.

Asset Value Verification

To verify that the values determined using the methods outlined reflect the true costs of major assets a series of methods to verify the values determined should be adopted. For example, a 60 Ml/d water treatment plant valuation can be checked by:

Using gross estimating charts to determine the current estimated capital cost, say $23 M, and then break the gross valuation down into the individual components by using the percentage breakup from the schedule of quantities used on the original project or,

Taking the original schedule of quantities and the "as constructed" costs, and applying a suitable cost index to estimate the current reproduction costs.

Valuing the Hole or Trench

The value of the trench ultimately becomes the difference in value between the cost of an optimized replacement in a “brown fields” environment and the cost of the insertion program or process to renew and extend the life of the asset.

The key issues relating to the cost of an insertion program involve the:

• Size of original pipe
• Condition of the original pipe and the clearances required to accept the insertion pipe and the costs involved in achieving these clearances eg. pipe cleaning.
• Size of the optimized replacement pipe or insertion
• Type of material that could be used for the insertion pipe
• Number of house connections and cross connections that may be involved in the insertion process.

These factors will give an indication of the cost of the insertion program.

The difference between the above insertion program value or costs and the value of the optimized replacement asset gives us the true value of the trench or hole. The value of the optimized replacement asset is covered in more detail elsewhere in this manual however, the key factors affecting this value relate to the:

• Size of the pipe
• Type of pipe
• Density of development and surface restoration required to enable the construction to be completed.

The most appropriate way to express this minimum value is to determine different percentage replacement values that represent the value of trench and therefore assets can be book to this percentage of replacement value and the whole process can be easily automated as part of the asset register depreciation process. In some cases the insertion process may not be applicable as some major customers cannot allow an interruption of supply and therefore a replacement process would need to be required to ensure supply continuity. To allow for issues such as this, it is best to apply a percentage of the mains in the various collection areas where this would be necessary.

This approach will further complicate the accounting process with the need to capitalize and depreciate these individual assets. The lack of reality represented by an optimized-depreciated replacement cost valuation makes future accounting processes complicated and irrelevant to the real business of managing this mature network.

Another issue involves the actual timing of the insertion or renewal program and how the depreciation issue should be dealt with depending on the ultimate economic renewal point, eg. whether or not it is completed before or after the asset has been depreciated to the trench value. If it is renewed prior to the trench or minimum disposal value, then there should be an extraordinary write-off, whereas should it be later than the minimum value is achieved then it should be at that value.