FCI (Facility Condition Index)
Over the past few years there has been a movement to set up new management systems for large operations and Infrastructure. In the wake of decaying private sector assets and infrastructure a system was developed called FCI (Facility Condition Index). This system at first glance and by some good marketing appears to be the answer for most forms of Governments and large asset management groups.
In reviewing how the FCI is used, it labels the assets as good, fair or poor based on the percentage of the depreciated portion of the asset divided into the value of the asset. From this calculation, funding levels are set to meet the a target in 25 years of the future funding needs.
Good less than 5%
Fair 5% to 10%
Poor above 10%
The % is the target amount based on the depreciated portion of the asset that is outstanding in future dollars in 25 years. Funding is set to meet this amount.
Using the calculated failure rate curve of an asset can provide this data and the goal of the FCI is to set the funding to meet within the 5% range of this calculation.
If an asset is worth $10,000,000 in today's dollars it will be worth $16,124,000 in 25 years using 2% inflation to meet future dollars. This would mean that the FCI would be setting up to meet the total depreciated portion of the asset in 25 years at:
$16,124,000 * 5% = $806,200
The $806,200 would be the remaining depreciated portion of the asset targeted in 25 years. This future point requires considerable funding to meet and is not required to maintain the asset in good standing.
Most people working in the life cycle costing industry have realized that the FCI does not make sound financial analysis of assets future monetary requirements.
An asset has a depreciative curve that normally happens as the asset ages. This appears to be what the FCI is based on. If you defer maintenance and or replacements the FCI will be greater.
The problem with this type of management is that it does not actually manage the asset, it manages the depreciated portion of the asset.
You do not need to catch up the deprecated portion of the asset. It is natural occurring events that works on a cycle.
An asset or a group of assets that uses this system will require funds that are not based on the actual needs of the asset's components life cycles.
The FCI requires funding to be set up so that all the assets are managed in the good condition (less than 5% of the value of the asset in depreciated components) , but if you have an asset that has a large repair and or component replacement required and the FCI rating is poor (more than 10% of the value of the asset in depreciated components). Once you have completed the one or two large repairs or replacements, the asset may be considered to be in good condition.
When managing a large portfolio this would cause the funding for this asset to drop when in fact the funding may be needed to prevent additional deferred maintenance (repairs/replacements) from occurring.
An asset will always have a number of smaller less costly components. These components if not repaired or serviced will add to additional failures that will require additional funding in the future.
Most Government and Private sector systems, if told that an asset is in good condition will move funding to the assets that have a poor rating. This is a normal response to the needs of asset management.
It may be a normal response but it creates a funding circle. Over time this will requires more funding to meet the needs of all of the assets being maintained than is actually required.
The FCI system appears to work to put out the fires of deferred maintenance while allowing the flames to spread and not manage the actual assets.
Basing funding on a percentage of the value of the asset does not deal with the reality of the asset.
In the nineties a form of funding was used called Equity Replacement. This type of funding added up the depreciated portion of the asset and calculated what the depreciated portion of the asset would be in 25 years, then set the funding to meet this goal. When you compare this methodology to the FCI it is the almost the same system. Both systems meet their deprecated portions within the 5% of the value of the asset in 25 years. The reason that this type of system was replaced is the fact that considerable unnecessary funding was being accrued for future events.
Currently there are a number of software programs that were developed before this change in the industry had taken place and now are being marketed as the systems to use. Some of these programs are set up to utilize the FCI or Equity Replacement as their funding models.
Other more effective models of funding have been developed over the past 5 years.
The private sector have developed other systems that maintain assets in good standing for the minimum amount of monies over time.
Scott A. MacKay
EnerMac Consultants Inc.