Estimating the Restoration and Modernization Costs of Infrastructure and Facilities

Abstract

Underspending for the maintenance of public facilities and infrastructure is a well-known issue. At least part of the problem can be attributed to our poor understanding of precisely what funding is required. Methodological limitations diminish the credibility of budget estimates that for many agencies, are based on ad hoc approximations or historical trends. Estimates based on physical inspections are more defensible but are expensive and more useful for defining remedial projects than estimating future budget requirements. Carefully defining facility restoration and modernization (R&M) requirements yields a collection of determinants—including obsolescence, changing uses, and extraordinary damage—closely related to the concept of economic depreciation. Once this link is made, the methods of economic capital theory are available for understanding R&M needs. More specifically, R&M costs can be estimated using depreciation rates defined by Hulten and Wykoff (1980) and later adapted by the U.S. Bureau of Economic Analysis—an approach useful for any large organization requiring credible R&M cost estimates but unable to bear the costs of frequent physical inspections. The U.S. Department of Defense will begin using the approach as the basis for projecting R&M funding requirements beginning in fiscal year 2008. Among other uses, the depreciation model can provide long-term recapitalizion targets for complying with Executive Order No. 13327, requiring real property asset management plans from all major federal agencies.