The road to rational accounting

26 Jul 13
Stephen Goldsmith

The US’s infrastructure – including roads, bridges and utilities should be financed, built and managed as assets and not liabilities. What is needed is a proper capital budgeting approach

Only in the world of government accounting would tens of billions of dollars in capital assets – roads, sewers, utilities and other major infrastructure – be seen as liabilities. As the public sector continues to feel the fiscal strain of building, operating and maintaining this infrastructure, public leaders too often yield to the temptation to either ignore the decay or to go to the other extreme: selling or leasing out the resource and using a one-time payoff to patch a budget hole.

However, if governments employed a true capital budgeting approach, this infrastructure would be  and appropriately managed as such. Such an explicit asset management framework could governments ensure a successful approach to issues ranging from contract design to legal barriers. Success requires quality leadership and a capable workforce, of course, but also boils down to a few simple, crucial factors.

For both existing and new infrastructure, rates of deterioration, repair and borrowing need to be aligned.  – taking into account not only the expense of building infrastructure but also the costs of operating and maintaining it – needs to become the de facto mode. Immediate savings due to cutting corners shouldn't excuse operating or repair costs that spiral out of control in later years.

An example from Georgia illustrates the benefits of life-cycle costing. A life-cycle cost analysis allowed the state's department of transportation to undertake Fast Forward, a six-year, $14.4bn programme to relieve long-term traffic congestion, enhance economic development and accelerate 18 years of projects to be completed in six.

Engaging with the private sector in asset management agreements can bring additional capital and experience into the process of infrastructure development. Firms that specialise in managing a particular asset can find economies of scale and stores of experience and best practices that states or local governments might be incapable of unlocking on their own.

But specific precautions must be taken to prevent government missteps. Successful efforts are marked by high-quality advisers, transparency of process, speed, firm leadership and ample competition.

Governments also must better understand the value of their assets to potential private sector partners. This means accurately looking at the value through the lens of the investor, guarding against windfall returns by potential purchasers, and educating the public about the process.

Misalignment of analytical lenses may have explained the very large payments in the lease deals for the Indiana Toll Road and the Chicago Skyway, both of which came in a billion dollars or more above estimates.

Good contracting practices play a pivotal role, giving government the opportunity to exit a flawed transaction when the vendor does not perform as promised. An asset management approach would allow the vendor to creatively manage the infrastructure, suggesting new ways to gain revenue, while guarding against windfall returns and creating congruent incentives: Both parties should benefit when the asset returns value above the model for the deal.

Finally, good asset management s to ensure that the asset accomplishes its public mission instead of merely realising the highest price sale or the lowest recurring cost. It gives governments the capacity to realise the value of assets without sacrificing important public needs, such as providing subsidised services to poor populations.

A well written contract might be performance-based to incentivise a high standard of service, based on a well developed set of guarantees and benchmarks. It would address end-of-contract issues to ensure a smooth transition, and assessment procedures to gauge whether maintenance standards have been met would be clear.

Today's typical approach to infrastructure, separating design from construction from operation, not only adds time but almost fails to optimise taxpayer value. Asset management takes a public owner down a different path that may or may not involve privatisation but certainly promises better results for the taxpayer.

Stephen Goldsmith is a professor of government at the Harvard Kennedy School. He was formerly the two-term mayor of Indianapolis and deputy mayor for operations for New York City. This post first appeared on's

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