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Suggested Citation:"Chapter 4 Initial Asset Value." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 4 Initial Asset Value." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 4 Initial Asset Value." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 4 Initial Asset Value." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 4 Initial Asset Value." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 4 Initial Asset Value." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 4 Initial Asset Value." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 4 Initial Asset Value." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 4 Initial Asset Value." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 4 Initial Asset Value." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 4 Initial Asset Value." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 4 Initial Asset Value." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 4 Initial Asset Value." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 4 Initial Asset Value." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 4 Initial Asset Value." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 4 Initial Asset Value." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 4 Initial Asset Value." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 4 Initial Asset Value." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 4 Initial Asset Value." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 4 Initial Asset Value." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Section 4.1 General Guidance introduces the four approaches to calculating initial value selecting an appropriate initial value approach. Section 4.2 Alternative Approaches provides additional detail on the challenges and motivations of each approach and lists calculation steps for the four ap- proaches. Section 4.3 Examples includes four illustrative examples demonstrating the calculation of initial value for replacement cost, historical cost, market value, and eco- nomic value. Section 4.4 Practice Assessment gives examples of emerging, strengthening, and ad- vanced practices with respect to the calculation of initial value. 4-1 A Guide to Computation and Use of System-Level Valuation of Transportation Assets After establishing the scope of the asset value calculation, the methods may be applied: replacement cost, historic cost, market value, and economic value. Chapter 4 Initial Asset Value

Approaches for Calculating Initial Value Initial asset value is the value of an asset at the start of the analysis period. What this represents, exactly, depends on the approach being used to make constructed or acquired, while in others, it may be the value at a particular point in time. This guide describes four basic approaches to calculating initial value. These are as follows: Current Replacement Cost – the cost of replacing the asset with its mod- ern equivalent in today’s dollars. This is also referred to as the “gross re- placement cost. When this approach is used, the initial value is the cost of constructing or acquiring a new asset. The cost is then adjusted for depre- ciation to obtain a “depreciated replacement cost” as described further in subsequent chapters. This approach is consistent with the cost perspective described in Section 2. Historic Cost – - pressed in year of expenditure dollars. When this approach is used, the initial value is the historic cost constructing or acquiring the asset. This approach is consistent with the cost perspective described in Section 2. Market Value – market. This value can be established only if such a market exists. In this Further adjustment to this price may be required to account for recent appre- ciation or depreciation. This approach is consistent with the market perspec- tive described in Section 2. Economic Value – - set’s owner, and asset users. When this approach is used, the initial value is - bined. This approach is consistent with the economic perspective described in Section 2. Table 4-1 Replacement Cost The replacement cost of an asset in today’s dollars represents the value of an asset from the perspective of the asset manager charged with deciding which assets to repair, rehabilitate, or replace using today’s dollars. Not surprisingly, many U.S. agencies base their estimate of asset value on asset replacement cost Section 4.1 General Guidance Chapter 4. Initial Asset Value 4-2 A Guide to Computation and Use of System-Level Valuation of Transportation Assets

Chapter 4. Initial Asset Value / Section 4.1 General Guidance in their initial TAMP, and much of the U.S. and international guidance on calculat- ing asset value to support TAM describes this approach. 4-3 A Guide to Computation and Use of System-Level Valuation of Transportation Assets Table 4-1. Approaches for Establishing Initial Value Approach Description Strengths Weaknesses Current Replacement Cost Cost of replacing or reconstructing the asset in today’s dollars Aligned with the perspective of an asset owner who is charged with maintaining the asset Consistent with inter- national standards and best practices Requires additional judgement (unit costs) to calculate relative to historic cost Value not related to the asset will yield to users Historic Cost Cost originally paid to construct or purchase the asset Minimizes uses of subjective data Consistent with GASB 34 and U.S. GAAP Historic cost data may not be available for asset components less than the current replacement cost Limited support for TAM decisions Value not related to the asset will yield to users Market Value Price of the asset in a competitive market Applies best to cases where a market exists, such as for vehicles and equipment Can be used to establish current value without further adjustment for depreciation Where available, it can serve to integrate on value No competitive market exists for many trans- portation assets May require adjustment for externalities not factored into the price - lated depending on whether the asset is assumed to be sold as a single unit, a set of components (liquidation value), or scrapped (salvage value) Must periodically revalue assets Economic Value Present worth of future a comparable proxy value) Supports evaluation of what assets are worth constructing, retaining, or improving Consistent with best practices for bene- Can be time consuming to calculate Requires quantifying - eters – e.g., discount rate and value of time Limited value for supporting decisions concerning how to maintain existing assets

Chapter 4. Initial Asset Value / Section 4.1 General Guidance Historic Cost purchase or construct the asset in the year-of-expenditure dollars. This value is almost always less than the current replacement cost, or the cost of replacing The historic cost is consistent with the U.S. GAAP and U.S. agencies’ calculations supporting decisions about how to spend today’s dollars. Further, it is frequently especially for older assets. Market Value Where a market exists for an asset, using the market value can simplify the pro- cess of calculating both initial value and depreciation, because both aspects are - ing what asset value represents. Using the market price to establish fair value is consistent with the international accounting standard IFRS 13. Economic Value The economic value can be calculated explicitly as the net present value (NPV) - decisions, like determining which assets to prioritize for resilience investment, data-intensive approach of the four listed here. For supporting day-to-day deci- sions regarding how to maintain existing assets, the additional information the economic value yields may be of limited use. Selecting an Approach Figure 4-1 - ing initial asset value. The chart recommends current replacement cost as the default approach for establishing initial asset value, while presenting the cases where one of the other approaches may be preferred. The basic factors and used in cases where an agency seeks to maintain consistency with its calcula- when the asset manager seeks to calculate the overall value of the asset to 4-4 A Guide to Computation and Use of System-Level Valuation of Transportation Assets

Chapter 4. Initial Asset Value / Section 4.1 General Guidance society in order to establish if an asset is worth constructing or decommis- determining whether it is worthy of investment. In the situations where the market value of the asset is available, it should be used over the current replacement cost. When market value is not available, current replacement cost should be used. 4-5 A Guide to Computation and Use of System-Level Valuation of Transportation Assets Figure 4-1. Flowchart for selecting the appropriate approach to calculate initial asset value. No Yes Yes Yes Yes Yes Yes No No No No End Start Is it necessary to maintain consistency with the agency’s GASB34 calc. of asset value? Is the calculation being made to determine prioritize which assets to construct? Is the calculation being made to demonstrate the value of assets to society and/or transportation users? Does a market exist for resale of the asset? Is it feasible to obtain a market value adjusted for externalities? Is historic cost data available? Use historic cost Use economic value Use market value Use replacement cost

This section describes how to calculate initial asset value using each of the four methods described previously: current replacement cost; historic cost; market to each approach and provide step-by-step guidance. This guidance should be - Current Replacement Cost Overview - forward exercise, and generally speaking it is. One must establish a unit cost for construction of a new asset, determine the quantity of the asset, and multiply complications that one must consider. These include: Determining the units of measure for an asset. This requires considering what factors drive the cost. For instance, for pavements and bridges costs are generally proportional to area (lane miles of pavement or square feet of deck). For other assets costs may be expected to vary based on system length or other variables. That is, how many dif- ferent unit costs need to be determined? At a minimum, there should be at versus concrete bridges) or functional system (Interstates versus minor arte- rials). Often an analysis is performed of ac- tual, historic costs to determine the current replacement cost. Where such an Deciding when an asset would need to be replaced by its modern equiv- alent. In some cases, it may not be practical or desirable to replace an asset in kind, such as in cases where an asset is based on obsolete technology. It is important to consider where this might be the case, and in these cases estab- lish the cost of replacing an asset with its modern equivalent. inventory, as a practical matter, agencies’ asset inventories are often too large to justify the expense of preparing detailed cost estimates for each individual asset. To support TAM applications, agencies need to establish unit costs to use Section 4.2 Alternative Approaches Chapter 4. Initial Asset Value 4-6 A Guide to Computation and Use of System-Level Valuation of Transportation Assets

Chapter 4. Initial Asset Value / Section 4.2 Alternative Approaches for estimating the cost of asset replacement. Calculation Steps The basic steps involved in calculating current replacement cost using unit costs are shown in the following table. These steps should be followed for each asset class and component being included in the calculations. 4-7 A Guide to Computation and Use of System-Level Valuation of Transportation Assets Calculating Initial Value Current Replacement Cost Determine Units of Measure Analyze the data to determine the correct units of measure to use for each asset class and component for the purpose of estimating replacement costs. Typically, costs are estimated based on area (e.g., for pavement and bridges), length (e.g., for guideway) or asset count (e.g., for vehicles). Collect Data on Replacement Costs as described in Chapter 3. The data may include historic asset construction costs and/or cost estimates for planned projects, as well as data on units of measure established in Step 1. Where data are unavailable, it may be possible to obtain data from an agency’s peers. Adjust the costs obtained in Step 1 to represent costs in today’s dollars. This Determine How to Group Assets - may impact replacement costs. Calculate Unit Costs for Each Group Using the data for each asset group, take the sum of the construction costs and divide by the total area, length, or count (depending on the asset type). Apply Unit Costs The last step is to multiply the unit costs established in Step 5 by the quantity of each asset or asset component to determine the current replacement cost.

Chapter 4. Initial Asset Value / Section 4.2 Alternative Approaches Historic Cost Overview The primary motivation for establishing initial value based on historic cost is to (1). This document describes that: Capital assets should be reported at historical cost. The cost of a capital asset should include capitalized interest and ancillary charges necessary to place the asset into its intended location and condition for use. Ancillary charges in- clude costs that are directly attributable to asset acquisition—such as freight and transportation charges, site preparation costs, and professional fees... In principle, determining the historic cost of an asset should require nothing support this approach, one should determine the cost of construction or acqui- sition, as well of capitalized interest and ancillary charges as described above. The fundamental challenge with this approach is that records on historic costs may not be readily available, and where they are available may not provide a For instance, one might have a single cost from the time a highway corridor was - ment or per bridge, let alone for assets such as signs, signals, culverts, guard- the corridor was constructed. The challenge is compounded by the fact that many transportation assets are long-lived, so one may need to review extensive historic data to establish the costs for a given asset. to capitalize assets as a group based on capital outlays made each year. This replacement costs by asset class using unit costs expressed in today’s dollars, (6). Calculation Steps The following are the basic steps involved calculating initial asset value using historic costs with this approach: 4-8 A Guide to Computation and Use of System-Level Valuation of Transportation Assets

Chapter 4. Initial Asset Value / Section 4.2 Alternative Approaches Market Value Overview Where a competitive market exists for an asset, it may be feasible to establish the asset’s market value. This market value represents the current value of the asset. Unlike the current replacement cost and historic cost approaches, this - ed or acquired. - er than the rule that a market value may be determined. In most cases it is not terribly practical to transfer a transportation asset from one owner to another. There are two primary exceptions to this rule. One is the case of vehicles and equipment that can be easily transferred, and the second is the case where a market value is established for the purpose of privatizing infrastructure, such as to issue a concession to a private entity to operate and maintain a toll road. These two cases are described below. Vehicles and Equipment In many cases it is possible to perform an independent fair market value as- sessment for vehicles and equipment, as these assets are readily transferrable from one owner to another. Where a market value can be established, this value 4-9 A Guide to Computation and Use of System-Level Valuation of Transportation Assets Calculating Initial Value Historic Cost Collect Data on Asset Age Collect data on asset age for the assets and asset components established age distribution of the inventory may be used as an alternative. Calculate Current Replacement Cost Follow the steps in the previous section to calculate current replacement cost for each asset class and component. Step 1 to obtain estimated historic costs. Appendix 4.B discusses the treat-

Chapter 4. Initial Asset Value / Section 4.2 Alternative Approaches of equipment, taking into consideration prior use, current condition, remaining useful life, and other factors. In some cases, a vehicle or piece of equipment scrap or disposal value. be equated to a value per vehicle. For non-revenue vehicles and pieces of equipment, it is more common for any transactions to occur through private party transactions or auctions. In these cases, an independent fair market value assessment of the asset is often per- used vehicles (30), and other industry guides. Privatized Infrastructure When evaluating opportunities for privatizing transportation infrastructure, an asset that is already operational is transferred to private control in exchange - ated, provide an opportunity for establishing the market value of transportation assets. value drivers to determine the market value of a given investment. Asset Type: system or large network of toll roads that connects major population cen- contrast, a standalone road in a rural area may be more speculative in terms - Remaining Concession Term: in a toll road concession structure, investors will consider the remaining term of the concession with a public sponsor, - 4-10 A Guide to Computation and Use of System-Level Valuation of Transportation Assets

Chapter 4. Initial Asset Value / Section 4.2 Alternative Approaches - the concession term typically remains static. Thus, the ability to generate cash over the remaining concession term will directly impact the price that an investor is willing to pay for an asset. In general, the longer the concession term, the higher the price that an investor would be willing to pay for the as- set, as the investor has a longer period of time available to generate a return on investment. Further, longer concession terms may provide opportunities for investors to issue additional debt to further leverage the asset, which will ultimately increase the asset’s value. The economic life of properly main- tained toll roads should outlast the concession term. Counterparty Risks: in certain toll road structures, investors will have to consider the ability for a counterparty to make timely and ongoing pay- ments throughout the term of the project. An availability payment structure requires the public sponsor to make a long-term commitment to provide annual payments for the operation and maintenance of a project, subject to concession requires the concessionaire to assume the risks of revenue gen- eration. Investors purchasing a toll road asset under an availability payment structure will consider the public sponsor’s ability to make payments to the concessionaire, as well as the performance payment regime. Revenue Considerations: assessing revenue considerations is one of the most important factors of valuing a toll road. Investors will primarily consider two overarching aspects with respect to the ability to generate revenue for a - rates over time contributes to investor’s view of risk when valuing a toll road - valuation with no operating history. Operating Cost Considerations: when valuing operating costs for a toll road, investors may consider the age of the road and associated equipment, its geographic location and typical weather conditions, terrain, and toll col- life and investors will consider the level of future funding that is needed to ensure proper road preservation. Also important is the concessionaire’s con- tractual structure for handling operations and routine maintenance. Under a concession structure, the concessionaire may outsource the operations and maintenance of the toll road to a third-party who specializes in provid- ing these services. Investors will consider both the actual level of operation and maintenance costs from the history of operating the asset as well as the operating and maintenance regime. 4-11 A Guide to Computation and Use of System-Level Valuation of Transportation Assets

Chapter 4. Initial Asset Value / Section 4.2 Alternative Approaches Renewal Costs Considerations: investors will seek to understand the expected economic life of the toll road asset, and the level, if any, of addi- tional capital improvement funding that is needed to be made to ensure the asset is maintained to proper standard. These capital improvements would ideally be paid with revenue generated from the asset. If additional funds are needed for capital improvement requirements, investors will consider these additional needs when determining the price paid for the asset and the overall funding mix compared to the remaining term of the concession. Asset conditions will impact the level of future capital improvement needs, oper- ating and maintenance (O&M) costs, ability to generate revenue, and future funding needs. Handback Requirements: investors will also consider the handback require- requirements typically surround the asset’s return to the public sector in a certain condition (i.e., properly maintained throughout the term of the con- - ties to the investor. Investors entering into a concession agreement will consider primary key value drivers, such as those described above, as well as other structuring, legal, and the asset will potentially generate over the remaining term of the concession. The price that an investor would be willing to pay is determined based on the expected future level of cash generation. In many cases, there is no terminal value calculated on a concession, as once the concession term has expired, the asset is handed back to the public sector. - op a forecast of revenue generation from tolling or availability payments and deduct expected future O&M expenses, renewal and rehabilitation costs, taxes, principal and interest on debt, and any other ongoing obligations as part of the to investors for forecasting future needs. The bottom-line amount on an annual basis represents distributions to the equity investors for purchasing the asset, and the expected amount of future distributions will inform investors of the current price they are willing to pay. The key value driver considerations as discussed above as well as other risks to a project as determined by an investor will determine the discount rate that informing the investor of the price that should be paid for the equity ownership Investors will determine their optimal capital structure to purchase the equity in a concessionaire. 4-12 A Guide to Computation and Use of System-Level Valuation of Transportation Assets

Chapter 4. Initial Asset Value / Section 4.2 Alternative Approaches The capital structure for a concessionaire or investor purchasing a toll road con- will maximize earnings by leveraging the asset as much as lenders and struc- tural project features will allow, as additional debt in lieu of equity maximizes may purchase the original equity in the concessionaire in the transaction, and (31). Implications for Establishing Asset Value The above discussion has several important implications for the use of the market per- spective for valuing transportation assets. These include: Where market value can be determined, it incorporates consideration of the cost of an asset, its current condition, and a range of other factors. It is often feasible to establish market value for assets that can be readily trans- ferred, such as vehicles and equipment. establish a market value for a facility en- compassing multiple assets by observing the price established for a proposed or actual privatization concession. Where a market value has been estab- - ity and cannot be readily applied to other assets without accounting for the key value drivers. Examples of these drivers are discussed above for the case of a toll road concession. - ly important in the case of large-scale transactions such as toll road conces- sions. This complicates the process of using the price of such a transaction for asset management applications where are largely immaterial. 4-13 A Guide to Computation and Use of System-Level Valuation of Transportation Assets Chicago Skyway The Chicago Skyway was purchased by This example demonstrates Canadian pension funds’ appetite for mature U.S. infrastructure assets that have complet- ed construction and have a demonstrated operating history – thus reducing risk to a level commensurate with a pension funds’ appetite. The original capital structure included a combination of equity and debt Calumet Concession Partners LLC to- taled $2.8 billion including the sources of funding provided below. The term of the concession did not change when Calumet purchased the original equity stake in the concessionaire. Original capital structure: $882 million equi- ty; $948 million bank loan $510 million equity; $961 million capital appreciation bonds; $439 million current interest bonds; $150 million subordi- nate bank debt $1.5 billion equity; $1.26 billion bank debt

Chapter 4. Initial Asset Value / Section 4.2 Alternative Approaches Calculation Steps The process for applying the market perspective to asset valuation is summa- rized below. 4-14 A Guide to Computation and Use of System-Level Valuation of Transportation Assets Calculating Initial Value Market Value Establish Whether a Competitive Market Exists Evaluate whether a market exists for a given asset or group of assets. A market is likely to exist in cases where the asset can be readily transferred between owners, such as for vehicles and equipment. A market may exist if a private concession has been proposed or implemented. The market can be competitive if there are multiple potential buyers and/or multiple sellers in the market. Identify Applicable Assets case where value is established through the price of a private concession, the - es that are part of a toll facility. - ket price has been adjusted, it represents the current value for the selected assets. Value Other Assets Using the Replacement Cost Method Where market price can be calculated for only a subset of the assets being in- cluded in a calculation, the initial value for other assets should be calculated using the current replacement cost approach.

Chapter 4. Initial Asset Value / Section 4.2 Alternative Approaches Economic Value Overview - spectives due to the way it compares the value of an improvement to a baseline. With the other perspectives baseline values are established, but with the eco- nomic perspective the baseline is not a starting point for future valuation via treatments or depreciation. Instead, the baseline is compared to the improve- ment value, or the total net incremental value to the public brought about by impact of treatments are inherently included within the user and externality val- ues. Furthermore, unlike the case of the other perspectives, the economic per- spective incorporates both user and non-user impacts, positive and negative. With the economic perspective, historic data on the use and economic value of an asset mark trends for the current economic value. With this perspective, the - tion or decommission, an asset’s value is assessed by comparing the total future opportunities an asset generates with the opportunities created by alternative land uses. Establishing Value the outcome is simple. If the public experiences a net gain in value due to the roadway investments, then these investments are worthwhile. While economic theory provides a reasonable methodology for assessing the net value of these investments, the challenge is determining how the public values changes to roadways or other transportation assets. Members of the public do not value a transportation asset equally, nor do they prioritize the same value categories. The size and geographical range of the - portation system increases the impacted range also increases. For example, the a thousand miles away from each other. Meanwhile, only the residences located emissions, especially if those externalities lower property values. Establishing the value for improvements to a transportation asset begins with recognizing its role in people’s lives and business activities. Transportation assets allow people and goods to travel faster, safer, and more conveniently. They enhance route options via improved network connectivity and create new links to destinations previously inaccessible or at least for which access was 4-15 A Guide to Computation and Use of System-Level Valuation of Transportation Assets

Chapter 4. Initial Asset Value / Section 4.2 Alternative Approaches - that allows utilities (e.g., energy, water, and communications), to expand connec- tivity and capacity for communities. An asset’s total economic value accounts for all uses and location characteristics that could positively or negatively impact people and businesses. The scale of and person travel for transit. This volume is relatively easy to estimate from travel demand models, predict how physical changes to a facility or network impact travel characteristics such as volume, frequency, vehicle occupancy, and trip scheduling. Principles of Economic Valuation Several important principles are applied in all economic valuations. First, it is of understanding. The discount rate, which brings future values into present depending on the timing and magnitudes of the project impacts. As a result, the selection of the discount rate becomes an important policy decision and consid- eration for sensitivity analyses. These and other issues are discussed more fully Comparative Contexts for Asset Management - struction, but still require a comparison to reveal their value. Asset value may Maintenance activities for one or more assets Physical changes to a particular asset that could impact its future uses System-wide assessments for an entire class of transportation assets (e.g., Interstate). Maintenance Activities. - - es or safety features. The user value is measured by comparing an enhanced level of maintenance against the current conditions. Principal measures of user value are travel speeds along with vehicle operating and maintenance costs, which increase with poor road quality. There is an extensive collection of litera- ture studying the impacts of road quality on users (32) incremental economic value of improved maintenance is relatively low com- pared to the value measured via the cost approach. 4-16 A Guide to Computation and Use of System-Level Valuation of Transportation Assets

Chapter 4. Initial Asset Value / Section 4.2 Alternative Approaches Physical Changes. This second case is the most common form of economic - ening, overpasses, and truck lanes), operational improvements (e.g., interchange improvements, shoulders, and auxiliary lanes), and access (e.g., decommission- ing, one-way streets, ramps) that aim to alleviate congestion, improve safety, or serve other agency goals. Economic valuations of such physical changes rely on future uses under the current design. The value of these physical changes is es- over the life of the projects. System-Wide Assessments. The value of an asset can be evaluated from a system-wide perspective by examining the next best alternative road class. aggregated asset perspective, the next best option would be the minor arterials. Each type of roadway has a common set of characteristics, including average travel speeds per mile, intersection crossings and signals, and potential levels of - minor arterials. Since major arterials permit faster speeds, their value is expect- ed to be higher, provided that the value of this reduced travel is not overcome by potentially increased travel cost or crash risk. This same approach could be applied for other roadway classes too. The use of local neighborhood roads in a car can be compared with an option to ride a bike or walk to a destination. These with- or without- asset evaluations require data on the use of a facility as well as data on opportunities created by eliminated vehicle use. Calculation Steps The process for applying the economic perspective to asset valuation is summa- rized in the following section. 4-17 A Guide to Computation and Use of System-Level Valuation of Transportation Assets

Chapter 4. Initial Asset Value / Section 4.2 Alternative Approaches 4-18 A Guide to Computation and Use of System-Level Valuation of Transportation Assets Calculating Initial Value Economic Value - ect contexts. Demarcate the breadth of the analysis geographically and temporally. Identify Potential Impacts Select the variables, or categories of impact, which will have an impact on the the asset, its users, and the community surrounding it. Options include travel time, vehicle operating costs, safety, pollution, asset maintenance, and wider community impacts, among others. Evaluate and Collect the Data Assess the data necessary to measure the potential impacts. Understand the - sen datasets, convert the impact categories into impact factors and impact value per unit. Project System Use in the volume of vehicles and passengers. Predict the use of the system with and without investment, such as through use of a travel demand model. Calculate the Economic Value Using the output of the demand models and the impact data, weigh the ben- if assessing a large transportation asset, account for the residual value at the end of the time period. Compare the two project scenarios to understand the value of the proposed changes.

The following are hypothetical examples illustrating application of the steps Example 4-1. Replacement Cost For pavement an agency decides to based its calculation of initial asset value on reconstruction cost using pavement lane miles as the unit of measure. Table 4-2 shows the data obtained to compute a unit cost for pavement in millions of dol- lars per lane mile for a given subtype and network. The table lists data for a set of pavement reconstruction projects. For each it shows the project year, quanti- ty of pavement reconstructed in lane miles, project cost in year of expenditure This may suggest a need to group pavements by system or surface type to bet- ter account for this variability. Section 4.3 Examples Chapter 4. Initial Asset Value 4-19 A Guide to Computation and Use of System-Level Valuation of Transportation Assets Table 4-2. Example Data for Past Pavement Reconstruction Projects Project Year Description Cost ($M) Lane Miles (LM) Unit Cost (2020 $M/LM) Year of Expenditure 2020 1 2010 Route 80 MP 1.9 52.6 68.5 24.0 2.9 2 2016 Route 84 MP 0.6 13.5 15.0 3.6 4.2 3 2007 Route 92 MP 2.6 27.0 38.9 10.2 3.8 4 2011 Route 101 MP 4.7 35.6 45.0 6.3 7.1 5 2005 Route 101 MP 7.1 180.0 277.2 32.0 8.7 6 2014 Route 104 MP 18.6 25.7 30.1 4.2 7.2 7 2009 Route 104 MP 19.9 12.0 16.1 1.8 8.9 8 2017 Route 680 MP 5 42.1 45.0 19.6 2.3 9 2013 Route 680 MP 12 28.3 34.0 8.0 4.3 10 2018 Route 780 MP 15.5 28.0 29.0 9.2 3.2 Total 598.8 118.9 5.0

Chapter 4. Initial Asset Value / Section 4.3 Examples Example 4-2. Historic Cost An agency decides that to maintain con- sistency with its financial reporting, the agency should use historic costs rather than current replacement cost. However, historic cost data are not consistently available. Thus, the agency decides to use the Wooster Method to estimate historic costs. Table 4-3 shows the application of this method for a selected set of assets using unit cost of $5 million per lane mile (as obtained in Example 4-1). The unit cost developed as described in Example 4-1 is applied and deflated to estimate historic costs. In this hypothetical example the total replacement cost is $3.9 billion in constant 2020 dollars and $2.0 billion in year of expenditure (historic) dollars. Example 4-3. Market Value A transit agency has a fleet of over-the road transit buses purchased at different times from the same manufacturer. The agency seeks to establish the value of these buses using market value. Table 4-4 is a list of used coach buses from a selected manufacturer available for sale from an online bus reseller. It shows the age, mileage and price of each bus offered for sale. The agency uses the data in the table to construct a simple linear model for predicting the price of a used bus. In this case, price is predicted as a function of age using the following relationship: Figure 4-2 shows the resulting model. Note that alternative models were tested including both mileage and age, and sub- stituting mileage for age. In this case the age-based model provides the best fit. In practice price may depend on a number of age, mileage, and other variables. 4-20 A Guide to Computation and Use of System-Level Valuation of Transportation Assets Table 4-3. Estimation of Historic Costs of Pavement Reconstruction Route Lane Miles (LM) Year Const. Cost ($M) 2020 Historic 11 96 2001 480.0 265.5 11 128 2004 640.0 397.1 22 72 1989 360.0 144.9 22 192 1996 960.0 470.5 33 32 2000 160.0 86.8 44 44 2003 220.0 128.4 44 8 1997 40.0 20.3 55 128 1990 640.0 264.1 66 28 2001 140.0 77.4 77 52 1999 260.0 137.4 Total 3,900.0 1,992.7 Table 4-4. Over-the-Road Coach Buses Available for a Selected Manufacturer and Reseller Bus Age (years) Mileage Price ($) 1 7 650,000 239,900 2 9 181,000 234,900 3 12 288,000 149,900 4 14 305,000 204,900 5 14 399,899 239,900 6 15 350,000 220.0 7 18 550,567 40.0 8 22 not listed 640.0

Chapter 4. Initial Asset Value / Section 4.3 Examples Example 4-4. Economic Value An agency is interested in using asset value to help prioritize reconstruction of a set of bridges to improve resilience. After discussing the cost, market and economic perspectives on asset value, agency leadership determines that the economic perspective is needed for this application. This perspective can help compare the benefits to society of reconstructing different bridges. Agency staff adapt the bridge screening approach established in FHWA’s National Bridge Investment Analysis System (NBIAS) to estimate asset value (32). The approach used by NBIAS is to calculate the benefit of a bridge as the sav- ings in travel and operating costs relative to that which would be incurred if all vehicles were detoured around the bridge. The calculation is made for autos and trucks and summed over time, applying a discount rate. The approach utilizes data available for U.S. highway bridges in the National Bridge Inventory (NBI) along with a small number of additional parameters. 4-21 A Guide to Computation and Use of System-Level Valuation of Transportation Assets Figure 4-2. Price and Age of Used Over-the-Road Coach Buses Pr ic e Age 300,000 250,000 200,000 150,000 100,000 50,000 0 0 5 10 15 20 25 y = -16391x + 377035 R2 = 0.6859

Chapter 4. Initial Asset Value / Section 4.3 Examples The following equations detail the calculation: where: Ba = Annual user cost of detouring around the bridge, representing the disben- T = Truck percent, expressed as a number between 0 and 100; L t l t h = Time-based detour cost for trucks (dollars per hour); c l c h = Time-based detour cost for autos (dollars per hour); Vd B = Total user cost of detour; N = Number of years in the user cost accrual period; and r) where r is the discount rate. 4-22 A Guide to Computation and Use of System-Level Valuation of Transportation Assets

This section provides examples of “emerging,” “strengthening,” and “ad- vanced” practices with respect to calculation of initial asset value. Maturity the table an emerging practice is one that supports the guidance with minimal complexity, an advanced practice illustrates a “state of the art” example in which an agency has addressed some aspect of the asset value calculation in a com- prehensive manner, and strengthening practice lies between these two levels. Section 4.4 Practice Assessment Chapter 4. Initial Asset Value 4-23 A Guide to Computation and Use of System-Level Valuation of Transportation Assets Practice Area Maturity Level Description Replacement Cost Calculation Emerging Unit replacement costs are established by asset class/component using expert judgement and/or industry defaults. Strengthening Unit replacement costs are established through a one-time analysis of Advanced Unit replacement costs are established through a well-documented process that includes: analysis of project data; assessment of how assets should be grouped for analysis (e.g., by system, material and/or surface type); and a Historic Cost Calculation Emerging Neither historic costs nor asset age can be reliably obtained at an asset level. Overall expenditures by work type and system are used as the basis for Strengthening An asset inventory is available detailing asset age. Historic costs are not reliably tracked by asset but can be estimated using unit replacement costs and asset age Advanced Actual costs of construction/asset purchases are tracked by asset. Market Value Calculation Emerging Market value is estimated based on expert judgement and/or industry defaults. Strengthening Market value is established through a one-time analysis of asset resale or Advanced Market value is established through a well-documented process that includes: analysis of asset resale or other data; assessment of how assets should be grouped for analysis (e.g., by system, material and/or surface type); Economic Value Calculation Emerging Calculations of economic value rely on estimates of detour distance and speed to estimate changes in user costs from addition or removal of an asset, but do not attempt to quantify the impact of changes in travel demand. Strengthening Calculations of economic value rely on estimates of detour distance and speed to calculate changes in user costs from addition or removal of an asset. Advanced Calculations of economic value utilize travel demand models to quantify impacts of potential changes to the network from addition or removal of an asset.

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Determining the value of a transportation organization's physical assets is important for both financial reporting and transportation asset management (TAM).

The TRB National Cooperative Highway Research Program's NCHRP Web-Only Document 335: A Guide to Computation and Use of System-Level Valuation of Transportation Assets details how to calculate asset value and use it to support application in TAM.

Supplemental to the document are summary of the research project activities and recommendations for implementation.

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