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Using 'Asset Genetics' to Unlock Hidden Capital; Understanding an Infrastructure Asset's Unique Characteristics Can Extend its Life Span--and Save Money
BY JANNA de GROOT and ASHAY PRABHU
To continue to grow, the world needs to invest in new infrastructure—and it is not keeping up. According to recent McKinsey research, current infrastructure spending is $2.5 trillion to $3.0 trillion a year, far short of the $6.0 trillion needed to meet average annual demand to 2030.The need to renew existing infrastructure is also acute, and doing so will be expensive. Once an asset—whether it is a road, a bridge, a pipeline or a rail track—degrades beyond a certain point, it enters the “failure zone” in its life cycle (Exhibit 1).
The cost to maintain such assets is high, adding further financial pressure. In addition, the service an asset provides declines substantially when it is not renewed.
Investing capital in existing infrastructure at the right time reduces the proportion of assets that enter the failure zone. When an asset reaches that juncture, it can become necessary to pour in emergency money. By paying attention to the factors that help estimate the point in the asset’s life cycle where it makes sense to invest in renewal, such emergency spending can be avoided, unlocking capital for new projects. In this article, we explain how the concept of “asset genetics” can help.
What is asset genetics?
The unique characteristics of an infrastructure asset—such as its location, construction materials, usage statistics, physical condition and maintenance history—constitute its DNA, or its asset genetics. These factors determine how fast the asset degrades and how long it can last: in short, the shape of its life-cycle profile. Using the data embedded in an asset’s genetic code can help to optimize spending and thus cut future costs.
Imagine a rail-network operator that is managing a portfolio of thousands of assets worth $10 billion. Typically, such an asset portfolio degrades at a rate of 3 to 4 percent a year, or $350 million of value. An approach emphasizing asset genetics helps identify the right time to invest in the renewal of the right assets to reduce the rate of decline by half—without needing to spend more money.
There are three steps to make this happen.
Understand the Assets. This means compiling relevant information, such as age, location and condition from on-site visits, surveys and data collection. For example, a rail owner or operator needs to know what its assets are, where they lie and how they should be segmented according to characteristics such as construction material, location and usage. It can then develop a life-cycle profile for each segment, including average useful life and typical maintenance costs at different points in the life cycle. The owner or operator can then use current condition data to determine where each asset is in its life cycle.
Set up a Framework. The next step is to tap into the knowledge of internal and external experts to create a framework for evaluating options and determining when to intervene for each asset segment (early, middle or late in the life cycle). The goal is to recognize the different points where investment might be appropriate, the cost of the treatment and its impact on overall portfolio-maintenance costs. For a rail operator, this would involve understanding the costs, benefits and optimal time to rehabilitate its tracks, which is much less expensive than replacing them.
Decide What to Do. The framework described above can offer clarity about available options. At this point, financial-optimization models should be used to determine the best combination of interventions across the portfolio. Software can be used to determine the type, timing and level of investment to produce the lowest renewal and maintenance costs and best service.
Taken together, these three steps can reduce the proportion of assets that enter the failure zone and thus lower renewal and maintenance costs significantly.
deGroot is the general manager for product, marketing and strategy, and Prabhu is the cofounder and joint managing director of Assetic, a Melbourne-based infrastructure asset management firm. This article was originally published by McKinsey & Company as part of its Global Infrastructure Initiative. Copyright © 2016 All rights reserved. Reprinted by permission. See the article and additional graphics here. McKinsey & Company is a global management consulting firm that serves leading businesses, governments, non-governmental organizations and not-for-profits.
“Commentary” features points of view from various sources to enhance readers’ broad awareness of themes that affect public transportation.