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Investing Sustainably in Infrastructure

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As a responsible and accountable level of government, municipalities build and maintain public infrastructure with a view to meeting the needs of citizens. As a result, the public has come to expect that municipalities deliver a variety of local services. 

Although the public does not generally consider the infrastructure required to deliver services (for example, clean drinking water), municipalities are constantly making decisions regarding infrastructure investment which have environmental, economic, political, and social impacts and include planning for: 

  • the infrastructure they are responsible for maintaining
  • the current level of service delivered by their assets
  • what level of service demand will be on assets in the future
  • how to make sustainable investments to meet future needs 
  • their obligations to future generations

Municipalities face the challenge of rehabilitating or replacing existing infrastructure while at the same time, investing in new infrastructure in growing communities. Many are currently dealing with aging assets and increasing infrastructure funding pressures. There are a number of factors contributing to the challenging current state of infrastructure, in Ontario municipalities and worldwide, which include:

  • Rapid and changing population growth patterns in urban areas placing stress on existing infrastructure and creating more demand for new infrastructure investment.
  • Population decline in rural and remote areas making it difficult for small municipalities to create enough revenue to invest in essential infrastructure.
  • Financial restraints and competing priorities creating a gap between infrastructure requirements and the resources made available to meet them. This is often referred to as the “infrastructure gap” or the “infrastructure deficit.”
  • Service standards may impact infrastructure decisions and effectively require investments be made to provide a particular level of service. For example, Ontario Regulation 169/03: Ontario Drinking Water Quality Standards sets service standards for drinking water systems, including those owned and operated by municipalities.  
  • Climate change leading to extreme weather events (e.g. floods, wildfires, hurricanes) presents a risk for effective and long-lasting infrastructure. Long-term climate changes (e.g. rising temperatures, rainfall patterns) may impact infrastructure gradually over time.

MOVING FORWARD: ASSET MANAGEMENT PLANNING

Asset management planning is the process of making coordinated decisions regarding the building, operating, maintaining, renewing, replacing and disposing of infrastructure assets. Leadership at the local level is needed to help ensure infrastructure investments are sustainable. 

Asset management is an integrated, lifecycle approach1 to effective stewardship of infrastructure to maximize benefits, manage risk and provide satisfactory levels of service to the public in a sustainable and environmentally responsible manner. It can help communities meet desired levels of service in a carefully planned, efficient and sustainable manner.

The overall asset management planning process takes an organization's objectives, determines how these rely on infrastructure, and then develops a plan to provide the supporting infrastructure services at the lowest lifecycle cost. Lifecycle costing looks at the total cost of an asset over its entire useful life, from construction to disposal. Asset management is essential to the development of a common, systematic understanding of what needs are most important and how they can be addressed. 

Improving infrastructure decision-making starts with an effective asset management plan (AMP). An AMP provides an opportunity to balance financial resources with the needs of a municipality. The Province’s Building Together: Guide for municipal asset management plans outlines the key elements for an AMP.

An effective AMP uses a long-term perspective to maximize the benefits provided by infrastructure. The benefits of an AMP may include:  

Costs justification

The incremental costs involved in moving towards detailed AMPs are generally offset by the savings that are realized.

Improved decision-making

AMPs can be used to provide decision makers with objective, evidence-based advice regarding resource allocation. This can help prioritize capital decision-making at budget time.

Reduced risks

Good asset management practices can lessen risk by accurately identifying issues and facilitating early intervention. This is particularly important for major assets, for example, water and wastewater infrastructure, which could negatively impact or inconvenience the public if they were to fail.

AMP is needed for provincial funding

Municipalities will need to demonstrate that they are undertaking asset management planning - and that their grant requests are supported by their plan - in order to access provincial funding for infrastructure.

Improved public confidence

A transparent, publicly-communicated AMP provides a foundation for municipalities and its citizens to understand the costs of providing services.  This contributes to enhanced accountability for municipal decision-making, opens up an opportunity for council to discuss needs, priorities, and financial requirements on a more informed basis, and demonstrates that public money is being invested responsibly by showing that results are being achieved.

THE FINANCING STRATEGY OF THE AMP

The financing strategy is a key part of a detailed AMP comparing short and long-term asset needs to available revenues. A sustainable financing strategy makes use of different revenue tools (taxes, user fees, service charges, development charges, etc.). As a best practice, asset management planning is part of the annual budgeting process and long-term financial planning.

While operating budgets generally focus on sustaining service, capital budgets are used for long term assets that both sustain and enhance service. Long-term financial planning, which could be for 10 years, 20 years or even longer, accounts for gaps identified through the AMP and provides strategies to help address them.

To achieve financial sustainability and even-out costs in the long run, municipalities may need a fiscal strategy outlining the long-term relationships between the capital plan, reserves and debt.

Debt is another financing source that may be used to implement the plan. Borrowing may allow municipalities to spread the cost of a project over several years. In this way, infrastructure costs, including maintenance, can be paid not just by today’s taxpayer, but by tomorrow’s taxpayers as well.

Including asset management planning into a broader long-term financial plan will help to ensure municipalities have a diverse and well-organized set of strategies to finance infrastructure needs.

Calculating infrastructure investment

It is important for a municipality to recognize the impact of levels of service in helping to determine investment needs. Infrastructure assets are designed to provide services to the public and public demand for these services helps identify the levels of service required.

Asset management planning involves recognizing the difference between a municipality’s demand for services and its ability to provide them, and the role that infrastructure plays in providing these services. While there is no consensus on the definition of an “infrastructure gap”, a 2013 report from the Canadian Centre for Policy Alternatives described it as the value of current infrastructure relative to the value of infrastructure that is needed2.

Municipalities may want to focus on conducting a needs assessment to identify a positive (surplus) or negative (deficit) infrastructure gap.

Infrastructure investment scenario: Main Street, Municipality of Sampleton

If a municipality is looking to replace a road, it may need to evaluate its desired level of service for the road. The level of service, or condition, of infrastructure assets can be evaluated in a  general way (e.g. poor, fair, good, or excellent) according to a variety of criteria and/or in a more technical way according to specific data (e.g. type, extent and severity of pavement surface distresses).

Legal requirements, for example, the minimum highway maintenance standards found in regulations, may also be a consideration.

Let’s imagine that Main Street in the municipality of Sampleton is evaluated and council evaluates its condition as poor (40 out of 100), suggesting that the municipality should take action. This information helps to generate a discussion among Sampleton councillors about the level of service to be provided by Main Street. Sampleton would then look to optimize its investments for that road using a lifecycle approach to minimize its long-term costs. Perhaps Sampleton council must decide between Option A, “fewer, larger investments” and Option B, the “smaller, frequent investments” option.

The chart below illustrates the difference between these options:

Municipality of Sampleton's road investment options   

  • Option A costs $6 million every 25 years and it would improve the condition of the road from poor to excellent only in the reinvestment years. The total investment is $18 million over 50 years.
  • Option B costs $2 million every 15 years and it would improve the condition of the road from poor to good. The total investment is just over $8 million over 50 years.

Municipalities often do not have enough resources to directly pay for a project in one year, so it is important to have a well-designed, in-depth asset management plan with a financing strategy in place to properly plan for capital infrastructure. 

SUMMARY: 

  • Municipalities deliver many of the services critical to Ontarians. These services often rely on well-planned, well-built, and well-maintained infrastructure. 
  • Using the required standards and the preferred levels of service identified by the public is important in determining infrastructure investment needs. 
  • Minimizing long-term infrastructure costs requires a lifecycle approach to investments.
  • The infrastructure gap is the difference between the asset’s condition and the desired level of service for that asset.

1For more information please see Building Together – Guide for Municipal Asset Management Plans
2https://www.policyalternatives.ca/sites/default/files/uploads/publications/National%20Office/2013/01/Canada%27s%20Infrastructure%20Gap_0.pdf