Capital Improvements Planning Validation Process
Capital Improvements Planning validation processes are used to:
- Develop a business case for each capital investment
- Assess the quality of the evaluation process for different sized investments and the business risk exposure of projects.
Corporate Policy/Guidelines
This element assesses the quality of corporate policy for capital investment evaluation. It looks at the uniformity or equality of the process across the whole of the organization whether it is a:
- Utility service (electricity, gas, water)
- Manufacturing company
- Municipality (with a wide range of service streams or programs).
Best appropriate practice includes:
All capital expenditure evaluation follows a standard corporate approach.
Cause of Expenditure
How the organization identifies and records the "cause of the capital expenditure" and then classifies it as:
- Capacity (demand, growth and augmentation)
- Performance / Level of Service (change in regulation, customer requirements)
- Mortality / Reliability
- Efficiency / Improvement Investments.
Best appropriate practice includes:
The depth or sophistication of the process is related to the cost of the capital and the risk exposure that the project represents - that is, the return on investment.
Risk Based/ Stepped Evaluation Process
How the organization evaluates its capital applications.
The evaluation processes are assessed against a best practice process model, which requires achieving a confidence level linked to the value of the application and risk it represents to the organization.
Best appropriate practice includes:
The demand for the asset (and its future income stream) is fully assessed and the risk profiles (failure modes and probabilities) are fully recognized.
Demand Analysis/Income Projections
This element is part of the previous one and connects with demand management.
This process identifies the demand for the service required (either new or renewed). This assessment also looks at the way in which the income or benefits are calculated and the associated risk profiles are analyzed and reported.
Best appropriate practice includes:
The different quality evaluation guides are properly documented and clearly available to all relevant personnel.
Supply/Program Options
How the organization assesses the different supply options that are available, including:
- Totally private service delivery
- Build, Own, Operate, Transfer (BOOT)
- Public/Private Partnerships (PPP)
- Total Public Sector Service Provision.
It also looks at the overall program delivery aspects, rather than just the provision of individual assets or facilities.
Best appropriate practice includes:
Responsibility is delegated for projects with different values and risks.
Operations and Maintenance
The quality of the operations and maintenance processes used in the capital expenditure evaluation including:
- The history of previous operations and maintenance expenditures
- Current expenditure levels
- Predicted expenditure levels.
It also looks at the validity of and accountability for the figures.
Best appropriate practice includes:
Each capital expenditure program is supplied with its recurrent expenditures in operations and maintenance.
Multiple Solution Options
This element assesses the way in which the organization seeks to provide alternative options in determining the best (Life Cycle Cost) option. It checks whether internal processes identify a wide range of asset and non-asset options to allow budget rationalization and capital trade offs.
Best appropriate practice includes:
The optimal capital expenditure solution is chosen from amongst alternative solutions that offer different capital and recurrent expenditure levels.
Economic Evaluation Process
How capital investments are analyzed and reported. It looks at the modeling processes used including:
- New assets and services - life cycle cost analysis
- Renewals or life extensions - ORDM analysis.
Best appropriate practice includes:
That a peer group or independent review is included in the process.
New capital works are separated into:
- Capacity (demand, growth and augmentation)
- Performance / Level of Service (change in regulation, customer requirements)
- Mortality / Reliability
- Efficiency / Improvement Investments.
Case Studies Australia
"Capital is Free"
How many times do you hear this statement? Don't apply for an increase in maintenance budget, as the board or council will knock that back. But if we let the asset decay through lack of maintenance then the board will immediately grant us capital funds
Don't fool yourself. Capital is not free. Capital may costs agencies just on 6% per year (in simple terms). So if your request for capital cannot save the agency 6% of its estimated costs then we should question its justification. If an increase in maintenance will extend the life and improve the reliability at a lesser cost then consider this option, evaluate it and adopt it if warranted. We need to get our political masters aware of the principles of life cycle costing and the benefits of appropriate maintenance budgets. Capital is not free.
A Corporate Devil's Advocate
The Electricity Trust of South Australia recognized something about new capital proposals that is typical of most agencies, namely that they are initiated within a small section of the organization that sees the benefits for itself, but frequently does not see the benefits – or the costs – for the organization as a whole.
Some agencies appoint a project sponsor, a senior executive member, to "smooth the way" for the project development, and teams vie for the most powerful sponsor who will do battle on their behalf. But who fights on behalf of the corporate whole? Who checks assumptions for relevance or figures for accuracy and who questions the analytical rigor and ensures that the section’s goals reflect agency goals? Executive committees are too busy, so unless it is someone’s assigned task, it doesn’t get done.
So the Trust tasked the Corporate Finance Unit to be a ”corporate devil’s advocate”, to analyze all capital proposals from a corporate perspective. Since up to this time the sections had used the Finance Unit to prepare their capital proposals for them, changes had to be made. The Finance Unit developed a staff-training program that equipped all sections to do their own capital evaluation work. This stopped many proposals from ever being made and the corporate unit allowed others to gain the global benefits.
PS. The best practice model now used at ETSA is that a ”peer review team” made up of specialists from all divisions, supplemented by two independent experts in the field, review all capital investment proposal. The sponsor of the project must prove the questions asked above.
Value Engineering & Management is a Major Capital Expenditure Evaluation Tool
The application of value engineering and value management, that is, examining the real function a new prison had to fulfill, resulted in a better and cheaper design that realized savings of $4m from the original $14m construction cost.
The revised plans included domestic-scaled cottage accommodation, a small unit of traditional secure construction for management purposes, an indoor recreation and industries building of standard commercial construction and a very secure perimeter to ensure adequate protection for the public. These were subject to further evaluation of all aspects of the design, methods of construction, analysis of locality risks, supply of furniture and equipment, etc and of the use of prisoner industries to supply some of the construction elements.
Having Confidence in our Investments Decisions
The managing director asked the chief engineer to tell him the confidence level he had in the capital project he was putting forward.
The engineer said he was sure it was the right solution. It had gone through preliminary design, and the final design calculations for process and stresses were best practice. The managing director then said, “I am sure it is well designed, I am sure that the estimate is pretty right and that you can build it in the time shown, but are you sure it is the right project solution, and therefore the right cost (lowest life cycle cost) at the right time for the right reasons?” The question was really whether the solution overcame the actual failure mode/s that were supposed to be the reason for the project.
The engineer said, “No I can’t say that I’m sure of that…”
The managing director asked the design team to go back and answer these questions before putting the project back up again.