Ensuring CIP Accountability
Organizations tend to provide capital without establishing accountability links from the savings in the CIP validation to the operational budgets.
This accountability is paramount to sound asset management.
True accountability for capital investment can only be achieved where the organization:
- Makes deductions for the operational expenditure savings identified in the capital expenditure application
- Has a capital use charging regime to ensure that the organization and the various asset managers have a clear understanding of the cost of capital, and equate this appropriately to an optimal CIP and maintenance/operations blend that gives the lowest appropriate cost pattern or profile
- Has an Asset Accounting and Costing Guideline including:
- Life cycle costs, using average annual renewal annuities for CIP and operational activities
- Capital use charges.
Most renewal capital is justified through the following benefits:
- Reduced maintenance
- Reduced operations
- Improved customer service
- Reduced product loss
- Reduced risk exposure.
Full accountability should be met for all items used for assessing the level of service, especially if rebates have been involved for poor or inadequate service.
With well structured asset management plans, the organization can easily identify the savings in project validation activities.
This linkage is best shown in the following figure:
Example
The Asset Planning Group has put up a renewal project where a series of assets were to be rehabilitated for a project cost of $6M. In the project validation and approval process the following savings were identified:
- Maintenance savings $1.1M/annum
- Operational savings $0.650K/annum
- Reduced product loss $0.320K/annum
- Improved asset performance no tangible benefit
- Reduced risk exposure negligible benefit.
The total savings to be deduced from operating budgets were $2.070M per annum.
The capital use implications also included:
- Existing written down value of assets $4.2M
- Capitalized value of assets following rehabilitation $10.2M
- Capital use charge increase at 10.2% $612K per annum.
That is, $612,000 should have been added to the capital use charges of the organization and $2.070M should have been deducted from the operating budgets.