Tuesday, February 15, 2011

MIT Infrastructure “Life Cycle” Study is Progress Both Left & Right Can Embrace - Part 2, Fiscal Responsibility

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Perhaps moving to the center is where we all need to be politically on the environment and effective spending compatibility. Not all “green technology” is crazy, and not all “business profit” or “government expenditure” is evil.

Even if you do not believe in man caused climate change, we can all agree leaving a cleaner planet and a more fiscally responsible government for the next generation is preferable to not doing so.

Perhaps green technology can be cost effective, and government fiscal responsibility may realistically include affordable green initiatives. Honest “life cycle analysis” and “life cycle cost analysis” study considerations should be a political compromise starting point both the left and the right can embrace.

MIT’s ongoing work on measuring the life-cycle carbon emissions of materials is scheduled to be completed by August 2011. The environmental findings will then be supplemented by economic analyses in 2011 to provide the most accurate assessment of the economic and environmental impacts for buildings and pavements yet produced.

CEMEX is an example of a responsible and realistic corporation. They understand the balance needed for a business in providing rightful green benefit and rightful shareholder benefit. “Our role in creating a sustainable future begins with our philosophy of corporate responsibility - to run an efficient and profitable business while caring for our employees, our communities, and the environment.”

Continuing our interview with CEMEX USA is Executive Vice President, Commercial, Frank Craddock and Vice President, Commercial Strategy & Marketing, Francisco Uzcategui to speak to fiscally focused questions around LCA and LCCA.

BKH: What is the average life in years of a building, road, etc?
CEMEX: The average life in years is a moving target. With technology, design, materials and construction experience, we are constantly expanding the life of assets. Today, it is commonly accepted that a road can last between 30-50 years with limited maintenance. When it comes to buildings, it is usually for 60 years, but concrete structures can last longer than that.

BKH: What percentage of current project cost is actual construction, and what percentage is life maintenance?
CEMEX: From our own experience and the use of statistical models such as The Mechanistic Empirical Pavement Design Guide (MEPDG), in a typical Life Cycle Cost Analysis (LCCA), the initial costs for a concrete pavement accounts for 80 to 90% of the pavements life cycle costs. For new construction or reconstruction pavement costs are approximately 40% of the projects costs.

A concrete pavements first rehabilitation will occur somewhere around year 35, and it will require 1 or 2 rehabilitation activities to get to 50 years.

While for asphalt pavements, the initial cost is about 50-60 % of the pavement’s life cycle costs. The first rehabilitation will occur sometime between years 8-15, and the asphalt pavement will require 4-5 rehabilitation activities to get to 50 years. Maintenance is 40-50% of the life cycle costs.

However, once historical actual inflation rates for liquid bitumen are taken into account, the asphalt maintenance costs increase to between 50-60% of the life cycle costs. Liquid bitumen is the refined petroleum product which is used as the “glue” in asphalt pavements and asphalt overlays.

BKH: What would happen if government projects were covered by current receipts allowing for no deficit increase?
CEMEX: Reducing spending to current receipts would be counter productive with little, if any, contribution to deficit reduction. Every study shows that America is under investing in its transportation infrastructure.

The final 2009 report of the National Surface Transportation Infrastructure Financing Commission submitted to Congress, led off with the opening statement: "The nation faces a crisis. Our surface transportation system has deteriorated to such a degree that our safety, economic competitiveness, and quality of life are at risk."

The current difference between federal transportation funding and user tax receipts is about 20% or $11B per year. One has to differentiate between spending on needed investments like transportation infrastructure, which are largely financed through user taxes, and other non-investment government spending which is driving the federal deficit to about $1.5 trillion.

Moreover, the current difference between tax receipts and spending doesn't factor in the job creation benefits that also produce substantial multiplier effects on the economy which contributes to lower deficits.

The nation should be increasing the funding for our transportation infrastructure. That can be done with innovative financing mechanisms to supplement and leverage existing revenues in a fiscally responsible manner.

BKH: How can we be more fiscally responsible in the construction bidding process?
CEMEX: The National Surface Transportation Infrastructure Financing Commission reviewed numerous studies and determined that spending from all levels of government needs to more than double to just meet the nation's maintenance needs.

In view of this massive level of under-investment, Departments of Transportation (DOTs) need to get the most value out of every dollar spent. To do so, they need to evaluate alternative designs using alternative materials on a full life cycle basis and employ competitive bidding.

Reducing funding may force DOTs to do more with less, but they need to maximize investment returns to society regardless of the level of funding.

BKH: Why do government infrastructure projects routinely have such large overruns - double, triple or more?
CEMEX: We think it is two fold. First, the budgets for projects are set in the planning processes, which occur 3-5 years before construction, and are often based on construction cost data that is 3-4 years old. By the time a project goes to bid, the economic conditions have often changed, and if an agency fails to properly account for inflation in their budget analysis, there is a shortfall.

This can be further compounded when constraints on an agency’s budget delay a project by an additional 2-5 years past their original construction date.

Second, too much emphasis is placed on the initial construction cost rather than the full life cycle cost of projects. In many cases when life cycle is taken into consideration the lack of a comprehensive methodology and correct inputs leads to the wrong conclusion that tax payers have to ultimately pay for.

BKH: Which state or federal projects are already participating or looking to support life cycle cost analysis for existing, current, or near future projects?
CEMEX: Thirty-eight states use life cycle cost analysis in some form for pavement type selection. Of these 38 states, approximately 10 states have used Association of Development Agencies Alternate design alternate bid (ADAB) and life cycle costs analysis to try and lower their pavement costs. Of these states, the 2 most successful have been the Louisiana Department of Transportation and Development (LA DOTD) and the Missouri Department of Transportation (MODOT).

Louisiana was the first state to use ADAB and LCCA starting in 2001. On the 32 Projects during 2001-2006 that have used ADAB, LA DOTD estimates they saved approximately $62.5M. The MODOT has combined the use of MEPDG and ADAB to successfully lower their pavement costs by over $1.6B.

A recent state to start using ADAB successfully is West Virginia. WV first used ADAB in 2007, and they have 9 projects as ADAB since then. Of these 9 projects, 8 have gone concrete, all based on the first cost. On the last 4 projects alone, WV Department of Housing estimates that they have saved $9.8M.

And the trend is continuing. Ohio has recently started using ADAB on projects with similar life cycle costs. Many other states such as North Carolina, Florida, and Texas are investigating how they may be able to implement ADAB and LCCA.

BKH: What do you anticipate being the most benefit to taxpayers by looking at projects with a life cycle analysis approach?
CEMEX: There are a few rating systems looking at both commercial and residential buildings, and in our opinion they represent a starting point in understanding the economic and environmental cost of constructing buildings.

Given the fact that the energy consume in buildings through their life is responsible for 39% of CO2 emissions in the US, it is imperative that all rating systems incorporate the effect of the use phase into their methodology.

Having a clear view of the full cost of a project not only initial construction cost will present authorities with the opportunity to make the right long term decision in the benefit of tax payers. We will move away from only caring about how much it cost us today to what is the right decision long term.

BKH: Thank you again gentlemen for sharing your expertise.

MIT concludes, “As policymakers and political leaders work to account for the environmental and economic costs of public building and paving projects, this type of comprehensive costing model of key materials may provide a roadmap to those who plan these major initiatives.”

Frank Craddock sums up the important balance needed for today’s responsible infrastructure considerations well. “The building decision making process must take into account our children’s future. We must take into account the financial cost impact as well as the environmental impact they will have to live with years from now. Both ultimately matter in the present and for the future.”

See Part 1, Green Responsibility

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