Development of an asset valuation model for wastewater infrastructure assets

Hyeon-Shik Baik, Purdue University

Abstract

Valuation of infrastructure assets has drawn close attention in the U.S. since the Governmental Accounting Standards Board Statement 34 (GASB 34) was issued in 1999. GASB 34 recommends two valuation methods: the depreciation method and the modified approach. The depreciation method estimates the asset values by applying depreciation techniques to historical costs or replacement costs. When using the modified approach, the assets are not depreciated if they are maintained at or above the predefined minimum acceptance level using asset management systems. The expenditures on maintenance activities are recorded as expenses or capital in the annual financial reports of governmental agencies, depending on the maintenance activities and the valuation method employed. However, both methods do not adequately reflect the deterioration of infrastructure assets. To account for the condition changes in infrastructure asset values, a valuation method incorporating the condition changes due to deterioration is presented in this study. The proposed valuation method estimates the asset value based on Markov chain-based deterioration models. The deterioration-based valuation value method can reflect the different levels of investments for maintenance and repair (M & R) activities and estimate the future asset values in a probabilistic manner by incorporating the different transition probabilities for different types of M & R activities, such as routine maintenance, preservation, and improvement. The comparisons of asset values obtained from different valuation methods show substantial variations in asset values depending on the valuation method selected. By incorporating the conditions of infrastructure assets, the deteriorated value method provides a more reasonable basis for governmental agencies for making decisions regarding future investments for M & R activities. The negative effects of delayed maintenance can also be captured in terms of reduced asset values. The profitability of public agencies can be evaluated by estimating return-on-investment (ROI) using the values of infrastructure assets as investment and the profits generated from infrastructure assets as return. The deteriorated value method is also useful for the determination of infrastructure asset values for privatization by reflecting current or future condition of the infrastructure assets in their values.

Degree

Ph.D.

Advisors

Abraham, Purdue University.

Subject Area

Civil engineering|Business administration

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