Capital Expenditure Obligations
The key business drivers of all capital expenditure relate to the organization's obligations and responsibilities.
It is important to recognize a connection between these obligations and expenditure categories.
This document covers:
Regulatory Licenses, Guidelines and Policies
Regulation applies to private and public organizations. Utilities generally perform in a regulated environment, in which the regulator will issue guidelines or policies in relation to their service delivery and other community obligations.
In many cases, the organization will be regulated through an operating license, where the standards of its service are clearly spelt out.
Industry Standards, Guidelines and Codes of Practice
Organizations may be driven by industry standards as well as government regulations.
These industry standards are often developed by industry associations and are deemed to represent minimum appropriate practice that any member organization should adhere to.
Commonly accepted standards are de facto regulations that may be recognized for civil litigation.
Local Government By-laws and Regulations
Organizations may have facilities in different municipalities.
It is vital to recognize any different policies, by-laws and planning regulations that may affect activities and asset portfolios.
Organization Policies and Quality Guidelines
Organizations place obligations on themselves through their own policies, strategies and quality processes, upon which their asset portfolios and capital expenditure programs are developed.
It is vital to respect and acknowledge compliance with these as part of the CIP process.
Customer Expectations
The organization will also have some expectations from its customers that will be outside all the regulated issues.
Some examples of this are:
- Noise levels
- Speed of response to emergency complaints.
Community Expectations
Apart from serving our customers, we also operate in the larger community.
Sometimes this community will have expectations that we perform over and above the regulated / license requirements.
An example of this is where water resources are becoming an issue. Pressure from the community has driven many organizations to invest in reuse schemes, even though their current treatment capacity easily meets their discharge requirements.
External Stakeholders
The organization holds responsibilities and obligations towards its external stakeholders. Examples of key external stakeholders include major:
- Suppliers
- Contractors
- Consultants
- Service providers, eg. electricity, telecommunications, etc
Organizational Structure
It is important that the organization is structured to provide:
- Clear guidance on the processes to be followed in capital validation
- Review and monitoring of these processes, ensuring complete accountability links.
The capital approval process is an integral part of life cycle asset management. In line with good management principles, the approval process should be clearly defined and appropriate delegations given to suit the risk and value of the works to the organization.
The key issues include:
- Links between the corporate strategy plan and the capital expenditure program
- All units and divisions follow a consistent and coordinated process
- Capital expenditure rationing and debt management practices
- Quality monitoring program
- Ownership of process and ultimate approval by key stakeholders.
Process Control
The capital investment review processes should include the following key requirements:
- Defined performance obligations and accountabilities that are made available to all staff
- Independent auditing and benchmarking of the organization's process quality, the data used in the validations and the outcomes and accountabilities
- Clear understanding of the organization's strategy for the commercial opportunities it faces.
It is vital that the processes followed and the data used in the validation provide confidence in the outputs derived.
The critical issues include:
- Understanding current condition and performance
- Predicting future condition and performance
- Quantifying the consequences of the likely failure modes to the organization
- Determining the best treatment option to reduce the risk exposure represented by these consequences.
The technical input to the development of capital programs should include:
- Review of the quality assessment system
- Asset knowledge, utilization, condition, needs and risk
- CIP and level of service
- Capital programs and management options
- Matching risk to environmental and social and financial needs
- Capital programs prioritization
- Clear definitions of CIP vs. maintenance
- Accurate costing of works, identification of benefits (direct and indirect) and cost benefits analysis
- Timing of capital works (ORDM)
- Financial planning integrated with asset management planning
- Post implementation review process - first completed once commissioned and fully accepted, e.g. 2 years. The second review is suggested and this review horizon should be at least 25% of the useful life of capital projects. This could be as much as 25 years, so a maximum of 10 years should be set. This would give valuable feed back into the design, construct and strategic project teams.
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