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Getting Our Money’s Worth: A Life-Cycle Approach to Infrastructure Investment

By Andy Winkler

Monday, April 17, 2017

Infrastructure projects—everything from bridges to water systems—have an intended lifespan, whether that’s 20, 50, or even 100 years. When planning projects, engineers and analysts can forecast both the upfront cost of construction as well as the cost of maintenance and operations over the expected life of a project, and make design and delivery decisions to minimize them. That type of long-term planning, called life-cycle cost analysis, is a primary benefit of public-private partnerships (P3s). The very nature of a P3 agreement, in which a private partner is often contracted to design, construct, operate, and maintain an infrastructure asset over several decades, incentivizes the private partner to make cost-effective decisions or risk losing money. Yet project designers do not uniformly or regularly apply this tool in most projects, leading to inefficiencies and, eventually, poorly maintained infrastructure. This lack of foresight is fiscally irresponsible.

Why does it matter?

For anyone who has visited the nation’s capital, the Washington metro’s stained orange railcar carpeting vividly illustrates the need for a life-cycle approach. The carpet may have been an aesthetically pleasing choice at the time, but it clearly wasn’t a good long-term option. Today, the latest railcar purchases feature nonporous, durable flooring and older cars are receiving an upgrade. This more recent decision was likely not driven by aesthetics alone but a consideration of long-term or life-cycle costs. The new flooring has been designed to be more resilient to wear and tear. Despite its likely higher upfront cost, lower upkeep or replacement costs over the entire life of a railcar make that cost worth it.

By analyzing long-term costs in all aspects of a project (not just the flooring), a project’s sponsors can ensure the project best reflects the public’s needs and can be well-maintained over its intended life. Public agencies that have considered full life-cycle costs have accrued the benefits. For example, in constructing Seattle’s Tolt Water Treatment Facility, city officials estimated savings of 40 percent using a Design-Build-Operate contract over a traditional procurement. These savings were largely driven by life-cycle efficiencies in its design and by aligning incentives from construction through 15 years of operations.

By analyzing long-term costs in all aspects of a project, a project’s sponsors can ensure the project best reflects the public’s needs

Still, public procurements too often overvalue low initial costs and undervalue future obligations, rewarding bidders who can build cheaply rather than those who offer the best value over a project’s intended life. This can increase costs down the road—higher operations and maintenance costs, more frequent repairs that often go unaddressed, infrastructure failing prematurely requiring expensive rebuilds, etc.—for which states and localities will appeal to the federal government to fund.

If policymakers hope to attract private capital to U.S. infrastructure, as has been proposed by President Donald Trump and others, adopting a life-cycle approach to infrastructure projects is essential. Private companies account for their long-term obligations as a matter of course. As a result, they find it difficult to engage with public-sector partners who lack data about current and future operational and maintenance costs. Incorporating life-cycle accounting as a regular practice rather than a one-off exercise undertaken only for special projects would help to facilitate more partnerships between the public and private sector to deliver needed infrastructure. 

Consider also that public spending on water and transportation infrastructure tops more than $400 billion a year, of which federal outlays account for about one-quarter, and another $2.5 trillion will be needed in the next decade. In his address to Congress, President Trump committed to pushing forward a proposal for $1 trillion in infrastructure investment, with a combination of both public and private investment. But without incorporating an approach to infrastructure investment that plans for long-term costs and screens for the most cost-effective type of project delivery, such a proposal will waste valuable and needed resources. Without accounting for the full cost of operations and maintenance in the years to come, the United States will find itself yet again facing degraded infrastructure and trillions in unmet needs.

What’s the federal role?

As the Bipartisan Policy Center’s Executive Council on Infrastructure detailed in its report last year, incorporating a life-cycle approach may be executed at the local and state level, but the federal government has a role to play as well. As part of required certifications for federal infrastructure funding and other financial support, applicants should demonstrate they have fully accounted for the long-term costs of their projects, including any risks inherent in construction, operations, or maintenance, and have selected the project delivery model that provides the best value. In some cases, this process may lead to selecting a P3 and in other cases it may lead to a more traditional procurement. This requirement could apply both to grant programs and to financing assistance (everything from TIGER grants to the Clean Water and Drinking Water State Revolving Funds). Programs in other agencies that support infrastructure development, such as Department of Agriculture rural development grants and credit support, or any new programs President Trump proposes to fund or finance infrastructure—such as a national infrastructure bank—could also incorporate these principles.

Life-cycle cost analysis is a primary benefit of public-private partnerships in infrastructure. 

Recognizing that not all projects are of sufficient size to make this level of screening cost effective, the administration could impose a cost threshold below which these requirements would not apply. The exact threshold may vary depending on the type of infrastructure. Such a threshold would also need to be set at a level, or otherwise be construed, so as to not discourage opportunities for the “bundling” of smaller projects (bridges, roads, water systems, etc.), as was done in Pennsylvania’s Rapid Bridge Replacement Project. Bundling can bring efficiencies to the delivery of many small projects, but requiring full life-cycle evaluation and consideration of alternative delivery models may be inappropriate or too burdensome in some cases. For example, the WIFIA program actively encourages the bundling of smaller water projects to meet its requirements for loan assistance. But if a cost threshold is implemented without that in mind, it could undermine a central aim of the program.

To be clear, this recommendation would create a framework that would likely lead to more P3s, but it would not require that any particular project be a P3. In other words, P3 projects would not get extra weight in the evaluation process or be favored simply because they are P3s; what matters is that any proposed project will deliver the best value for the public. Though such a proposal may require additional effort among applicants for federal funds, it would help assure taxpayers that the projects being funded through these programs are making the most efficient use of limited federal dollars.