Around the world most organizations are facing severe infrastructure investment challenges due to aging plants, properties, and assets. They are faced with severe backlog of maintenance, shrinking budgets, and growing capital costs. There is a huge liability gap of 1.25 % of current year world GDP. In less than a decade, this will accumulate to a 12.5% liability gap if not funded. Another major risk to our infrastructure is avoidable catastrophic incidents. The economic losses caused by major avoidable catastrophic incidents can cost about 5% of global GDP. It is clear to me that companies need to make decisions differently during the next decade.
Our decision-making approach to investment of infrastructure is out of date. Smart capital budgeting, effective decision-making tools, life cycle costing, and condition assessment and tracking technologies are needed to address this liability gap. We seriously start to challenge the current funding allocation and appropriation measures to stop the aging process.
In a world of aging infrastructure and major avoidable catastrophic incidents, companies with short term perspective and cost focus will end up experiencing excessive stress on their plant, properties, and assets. They will face excess backlog of maintenance, excess service interruptions, and missed delivery dates and unhappy customers.
Most corporations manage two separate budgets, capital and operational. The capital budget impacts operational decisions; and operational priorities could drive capital expenditures. In most organizations, operational choices are managed by Facility Managers. And the capital planning choices are managed by Capital Planning teams. And the two teams often have limited contact. In these cases, the Facility Managers may have little insight into the organization’s overall long-term capital investment plans, while the Capital Planners lack the detailed information of specific assets and systems. This siloed approach to decision making process places a high opportunity cost on the balance sheet.
Sharing information about both capital and maintenance investments is crucial to making optimal decisions about the future of plants, properties, and assets of the company.
What do we need to do differently?
When life cycles of major building systems and components are studied it becomes clear that the future unfunded liability gap is growing at a faster rate than available dollars. Unfunded liability gap should concern all property and asset portfolio owners. This situation begins to talk to an aging infrastructure that is approaching a state of unsustainability. The assets will become liabilities unless managed differently.
Until now, short-term asset management strategies have resulted in funding cutbacks for capital renewal and operations to balance budgets. This impact has increased the number of unfunded capital repair and replacement projects and places a huge stress on on the long term health of the organization.
There are a few key steps required to arrest this challenge and support long term asset sustainability.
- Life cycle costing
- Extending life cycles of assets
- Asset reinvestment and replacement strategies
- Portfolio level holistic decision making
- Building asset resilience, reliability and availability
- Operational excellence and sustainability practices
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A Leader in Corporate Real Estate and Facilities Management, Evrim Ay is the author of “Sustainable Facilities Management” book. In this blog, he makes a strong business case and a compelling argument for “workplace management“, “wellness“, and “productivity“. He believes that the way we are working is no longer working!