Optimising support for your capital investment proposal. Facilitated by Greg Thompson (DTF)

Transcription

1 Optimising support for your capital investment proposal Facilitated by Greg Thompson (DTF)

2 Session Objective To learn how to: Validate that something is indeed broken and needs improvement!! Ensure the best option is selected. Improve the overall quality of your capital investment proposal. Incorporate suggestions to simplify the development process. Make the preparation of necessary evidence less costly/ time consuming.

3 Investment LifeCycle Guidance DTF website: Launched Sept 2008

4 Investment Development Process & Guides Action for Victoria s Future Government Policies Gateway Risk-Assessments at Strategic Points Strategic Assessment Options Analysis Business Case Procurement Strategy Funding Strategy Delivery Plan In-Operation Business Case Coverage Service Strategy Asset Strategy Multi-Year Strategy Investment Management Standard Investment Evaluation Policy Guidelines egovernment Investment Evaluation Framework & Methodology Guidelines Partnerships Victoria and Alliance Guidance Material Different funding treatments for Sustain Vs Growth Investment Monitoring & Optimisation of Existing Asset Base Asset Management Framework

5 Gateway Review Process GATE 1 Strategic Assessment GATE 2 Business Case GATE 3 Readiness for Market GATE 4 Tender Decision GATE 5 Readiness for Service GATE 6 Benefits Evaluation Establish Business Need Develop Business Case Develop Procurement Strategy Competitive Procurement Award & Implement Contract Manage Contract Ongoing Operation / Closure To confirm business strategy and need To confirm business justification To confirm procurement method and sources of supply To confirm investment decision To confirm readiness for service To confirm in service benefits

6 Four Dimensions of Strategic Capital Planning Service Delivery Indicative (unabated) future demand (using indicators or proxies such as demographic growth) Demand Management Strategies Service Gap Service Gap Moderated future demand Service Gap Service Gap Planned new investment over time, to replenish existing capacity (sustain) or to increase/ improve existing capacity Capacity of existing infrastructure to support Service Delivery over time Time

7 Asset Management Framework An asset strategy is a subset of an agency's long-term strategic plan Asset Strategy 10+ Years Multi-Year Strategy 10 Years Action for Victoria s Future Service Strategy 10+ Years Corporate Plan 3-5 Years Agreed Service Levels Client Services Plan Human Resources Plan Asset Plan Financial Plan ICT Systems Plan Service Delivery

8 Function of Multi-Year (Asset) Strategy -MYS DRIVER Service Strategy Asset Strategy/ Asset Plan/ Budget Capacity Fiscal Outlook TIME SLOT 10 6 Years out 5 3 Years out 2 0 Years out PERIOD Longer term Medium term Short term Budget year PROGRESS Strategic Assessment Options Analysis Full Business Case ERC Submission DETAIL Broad Program/ Strategy/ Proposals over $50 million+ Indicative Program Components & Individual proposals over $20 million+ Specific proposal details >$5 million and all sensitive proposals COSTING Cost Range indicative only +40% Costs firming up +20% Near final cost +10% Reliable cost +5% DESCRIPTION Proposal Name Proposal Long Description & Nick Name/Title

9 What DTF looks for Alignment with Government priorities. Service need / urgency. A strong evidence base. Robustness of submission, including costings (over whole-of-life). Funding and procurement options. Readiness of initiative. Impact of individual decisions on overall asset base.

10 ERC Business Case Reviews Quality of Business Cases 100% 80% 60% 40% Unsatisfactory % Borderline Acceptable 25 0% Year

11 Assessm ent of Service Need 2009 Business Case Review Adequacy of 2009 Business Case Components Description of Service Need Adequacy of ILM Project Objective & Scope Realisation of Benefits Stakeholder Identification Public Interest Analysis Identific ation of O ptions Sum m ary Eval of Options Critical Assum ptions/constraints Social & Enviro Analysis Econom ic & Finance Analysis Budget & Funding Analysis Risk Analysis Procurem ent Strategy Im plem entation Strategy Recom m endation & Exec Sum m ary Acceptable Borderline Rejected 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% ILM s Stakeholder Analysis Options Analysis Cost: Benefit Analysis Risk Analysis Implementation Strategy Exec Summary

12 Recent ERC Capital Investment Submissions Most asset proposals supported by business case. Some cases insufficient information to fully assess proposal. Most neglected areas are: Understanding of (& assess proposal against) benefits. Critical assumptions and constraints of options. Risk analysis & valuation Budget analysis, funding strategy and procurement strategy remain as problems for many. Quality and quantity improvement on last year scope for further improvement. Business cases following Gateway Guidelines were more compelling.

13 Commercial & Financial Advisory Services Panel General Strategic Assessment and Options Analysis. Business Case and Procurement Strategy Development. Tendering of Commercial Projects. Commercial/Project Contract Management. Commercial Project Audit and Post-Project Evaluations. Strategic Commercial and Negotiations Advice. Project and Stakeholder Management Advice. Specialist Advanced Financial Modelling and/or Commercial Project Finance Structuring. Stakeholder Analysis and Research. Project related Accounting and Taxation Treatment Considerations. Project Alliancing. Users will be required to obtain a DTF Authorisation Number and report on the use of the Panel on a quarterly basis at minimum. -> Whole of Govt Services -> Prof Services WOVGAdvisoryServicesPanel@dtf.vic.gov.au

14 Key Phases of Proposal Lifecycle Strategic Assessment Options Analysis Procurement Strategy Business Case Funding Strategy Delivery Plan In-Operation

15 Lifecycle Guidance Template 1. Confirm Service Need Description of Service Need Stakeholder Identification Project Objectives and Scope Used by decision makers to assess whether there are sufficient grounds for the proposal and if it s development should continue; and Forms basis for project objectives and scope, and description of the service need in the business case 2. Analyse Options 3. Evaluate to Determine Preferred Option 4. Recommendation 5. Implementation Strategy 6. Executive Summary

16 UNDERSTANDING INVESTMENT LOGIC PROBLEM workshop INVESTMENT Benefit Management Plan Investment Logic Map Investment Concept Brief LOGIC SOLUTION workshop BENEFIT workshop

17 BUILDING THE INVESTMENT LOGIC MAP PROBLEM BENEFITS SOLUTION PROBLEM INTERVENTIONS (high level) BENEFIT Changes SOLUTION Assets needed Existing inefficient rail freight system is impacting the state s economy 55% Major growth opportunities will be lost be the condition of the freight network 10% Encourage new operators to enter the state s freight market 15% Improve the reliability and cost effectiveness of the rail network 45% Better integrate road and rail freight across the state 20% Increasing road transport is causing congestion and eroding liveability 35% Reduce road congestion by changing the rail/road balance 20% Reduced costs for both government and the community 15% Growth in the State s economy 40% Improved local and global environment 20% Stronger regional communities 25% Develop an integrated freight transport strategy for State Establish full cost recovery for all freight modes Establish competition in rail freight network OR cost surveillance Coordinate compliance & safety regulation nationally Improve State s regional freight rail network Make improvements to State s freight system Enhanced above rail infrastructure Enhanced below rail infrastructure

18 BENEFIT MANAGEMENT PLAN Developed in a 2-hour facilitated workshop Benefits claimed must be real Are KPIs MEANINGFUL? Are they ATTRIBUTABLE? Are they MEASUREABLE? Simple, low-cost and common-sense validation of benefits Changes the balance from only being able to accept measurable ROI as legitimate benefits

19 BENEFITS - CONTEXT Enterprise What outcomes is the enterprise is seeking? Organisation How will the organisation contribute to the enterprise outcomes? (BENEFITS) Investment How will this investment help the organisation meet it s objectives? (KPI) Friendly, confident and safe communities Reduce crime Increase forensic matches

20 SOLUTION DEFINITION WORKSHOP BUSINESS PROBLEM PROPOSED SOLUTION Strategist Alignment Does the proposed solution align with the organisation s (& WoG) policies and strategies? Innovator Innovation Has the proposed solution been innovative in the way it seeks to solve the business need? Implementer Feasibility Is the proposed solution both sound and feasible from an implementation perspective?

21 INVESTMENT CONCEPT BRIEF

22 What makes a good ILM.the 6 tests 1. Can your uncle/aunty/grandpa read and understand it? 2. Does each statement of the Problem convey what is broken and the impact of it being broken? 3. Do the Interventions read as a sensible set of strategic interventions that will be required to respond to the Problem? 4. Are the Problem and Interventions described in a way that provides no hint of a solution? 5. Are the Benefits expressed in a way it is clear what GVT benefits the investment will provide and the 'localised' impact of these benefits? 6. Does the Solution read as a practical response to the Problem that is consistent with the Interventions?

23 . good asset delivery??

24 Mapping from ILM to Business Case

25 Options Analysis Provides indicative assumptions and options for the way forward; and Identifies ranked options for short listing and further analysis in the business case. 1. Identify/ Confirm Service Need 2. Analyse Options Summary of Options Critical Assumptions or Constraints 3. Evaluate to Determine Preferred Option 4. Recommendation 5. Implementation Strategy 6. Executive Summary

26 Options Analysis 1. The do nothing option is important 2. Use a suitable (meaningful) base case 3. Have all feasible options been considered? eg. has the use of existing assets or non asset options been considered? 4. Have the options been addressed for different factors eg. volume, location, x-portfolio solutions, staging, procurement and delivery options. 5. List critical assumptions/constraints for each option.

27

28 What are best investments based on? Good Foundations! Ie; Strong justification of need and reasons for preferred option. Business Case

29 What is a Business Case? - Purpose Grouped elements 1. Identify/Confirm Service Need 2. Identify Options 3. Evaluate to Determine the Preferred Option: Social & Environmental Analysis Economic & Financial Analysis Risk Analysis & Management Budget Analysis & Funding Strategy Procurement Strategy 4. Recommendation 5. Implementation Strategy Builds on solutions outlined 6. Executive Summary at strategic assessment stage to present detailed single view of all feasible options: - costs / benefits / risks / interdependencies / governance, to meet identified need. Recommends preferred option to meet the service delivery needs, based on detailed analysis of benefits, costs, risks and opportunities. Provides living blueprint of project, to be referenced by sponsor / advisors / management, to inform all high-level decision making and change requests through to post-delivery evaluation of benefits.

30 How much. The business case should: Present costs and benefits of options, by year: Whole of life costs - capital and operational. Are the benefits genuine, attributable and measurable? Separately identify asset disposal aspects. Determine the ratio of discounted costs to discounted benefits: Discount costs to benefits (C:B) to a point in time (net present value more about NPV next slide). Public good investments may have C:B<1 Assess TBL (social/environment/economic) aspects: Did this analysis alter the recommended option? Were the criteria and weightings valid? (sensitivity analysis)

31 The Financials Net Present Value (NPV) NPV is a capital budgeting concept defined as the present value of the project s annual net cash flows less the project s initial outlay NPV discounts each year s cash flow back to the present then deducts the initial investment, thus giving a net value to the investment in today s dollars. Cashflows What will happen to revenue and costs over time? (This could influence the Procurement Strategy ) What are the likely effects on C:B due to price fluctuations in main drivers? How sensitive is the model to the assumptions including discount rates?

32 . good asset planning??

33 Cost : Benefit Analysis Quantify option costs by year Quantify option benefits by year Discount each to a point in time Determine the ratio of discounted costs to discounted benefits Be careful to use realistic time frames and discount factors. The most frequently used discount factor is ~ 8%p.a. (which is approx. equivalent to the Treasury Bond Rate, or the best return-on-investment the govt could obtain if it retained its funds, rather than investing in the proposal).

34 Financial Analysis Benefit - Cost Ratio Option A Option B Option C Option D Do Nothing Base Case Discounted benefits Discounted costs Benefit-cost ratio

35 Non Financial Drivers -Eg. issues considered by Melbourne Water Main environmental categories: Air (local, regional global) Water (fresh / potable, marine, ground) Land (Soil, geomorphology, capacity, flood, biodiversity) Material and Waste (renewable & non-renewable resources, waste generation) Main social categories: Water (consumptive, leisure) Built Environment (construct, demolish, cultural, heritage) Habitability (safety, access, nuisance smells, sights, noise) Main economic categories: Opportunity (skills, jobs, land use) Revenue stream

36 Socio-Economic / Environmental Weighting Weighting Government Commitment 20% Socio-economic Impacts 30% Strategic Objectives 20% Total Non-Financial 70% Financial Performance 30% Total 100% using -3 to +3 rating Rating Scores Base Case Option 1 Option 2 Option 3 Government Commitment Socio-economic Impacts Strategic Objectives Financial Performance Weighted Scores Base Option Option Option Case Government Commitment Socio-economic Impacts Strategic Objectives Sub-total non-financial Financial Performance Total Score

37 Prioritisation / ranking of the options Proposal Name Reduced costs to Government and the Victorian community (30%) Scoring the Benefits (Maximum = 10) Growth of Victoria s economy (50%) Improved liveability, both locally and globally (20%) Strategy Which interventions does this support When When will benefits be delivered (year) Cost What will be the cost (TEI in $M) Risks What are the major risks <name of priority- 1> ,4 2014/ Difficulty obtaining environmental approvals - Capability of market to deliver <name of priority- 2> / Compulsory acquisition of property - trucks fail to change their routes <name of priority- 3> ,4 2017/ Lack of private sector investment - Reluctance to embrace <name of priority- 4> /15 1,200 - Negative response from local residents - Managing engineering difficulty - Environmental / Planning Approvals <name of priority- 5> ,4 2011/ Capability of market to deliver <name of priority- 6> / Improved Road infrastructure, priority lanes to support extra services

38 Non-numeric techniques for ranking options SCENARIO Capital Cost (estimated) EPA Notice* Public Issues Asset Condition Capacity Reuse ( Y / N ) Option 1: pipe the ROS from N N Morwell $142m Enables E.W.R.S. ( Y / N ) Option 2: treat at Rosedale, increase pipe capacity $133m N N Option 3: partial reuse Option 4: treat at Morwell $170m Y N $90m Option 4a: treat at Morwell, Y Y reuse $137m Option 4b: treat at Morwell, N N replace piped part of ROS $157m Extent addresses issue: Completely Partially Not at all

39 Risk Matters! Risk management cycle: Monitoring/ review Treatment Identification Context Assessment Allocation Categories of risk: Source Legislative and government policy Force majeure Market /patronage Industrial relations Project Design, construction and commissioning Network and interface Impact Site Society and people Environment Investment Sponsor reputation Financial Operating Asset ownership

40 Risk Assessment & Treatment What are the significant risk management strategies?

41 Risk valuation When ERC considers a project s business case: CapEx costings in ERC bids should be in nominal $ s, risk-adjusted with minimal use of non-specific contingencies. Costings based on robust risk assessment and valuation, by suitably qualified person with a multi-disciplinary team. Approximate risk adjustment / contingency should be in order of 5% Design Risk plus 5% Construction Risk Value of Risk = Consequence x Likelihood of occurrence + Contingency

42 Risk Assessment

43 Lifecycle Guidance Template Grouped elements 1. Identify/Confirm Service Need 2. Identify Options 3. Evaluate Options to identify preferred. 4. Recommendation Recommendation of Preferred Option Sign-Off 4. Recommendation 5. Implementation Strategy 6. Executive Summary

44 Preferred Option 1. Clear indication of preferred option? Description 2. Why is this option preferred? Optimal for service need Best alignment to desired future asset-base profile Merit based on Social, Environmental, and Economic as well as Financial Analysis Manageability of risk implications Budget and Funding

45 Lifecycle Guidance Template Grouped elements 1. Identify/Confirm Service Need 2. Identify Options 3. Evaluate Options to identify preferred. 4. Recommendation of preferred option 5. Implementation Strategy Implementation and Timing Public Interest Issues 6. Executive Summary

46 Procurement Strategy May include different funding options May consider different procurement approaches eg. Construct, Design & Construct, Alliancing, Design Build Finance & Operate (DBFO), Design Construct Finance Maintain (DCFM) Budget Analysis and Funding Strategy Funding requirements for Whole of Life Acquisition Strategies Should consider asset disposal aspects and alternate sources of funding

47 Procurement Strategy Traditional Procurement Approach: Government engages an architect who designs the facility based on input requirements. Government engages a contractor for construction. Following construction, the Government operates the facility. Partnerships Victoria Approach: Government engages one private sector party to design, build and operate the facility to deliver (non core) output / services requirements. Payment is based on the services delivered and conditional on meeting the KPIs specified in the contract.

48 Implementation 1. What is the timing? project readiness preceding approvals and processes NB. Govt required an explicit statement on capacity / readiness to deliver in the ERC process, which remains in vogue today. 2. Implementation planning Gantt charts / Critical path (Pert charts) Resources (personnel, land, market, appetite etc) Transition/change management Governance / Probity regime

49 Legal Framework Surrounding Procurement As soon as govt agency issues invitation to the market (for delivery of service or acquisition of an asset). and a person or body responds to the invitation then, under Contract Law, there is a procedural contract in place. Under terms of a procedural contract, there is legal obligation to follow the process outlined in invitation. Under common law & natural justice principles, govt has (higher than normal) positive expectation to ensure fairness in evaluation process. - not to just remain neutral / passive in regard to fairness!! Some legal precedents have suggested this higher than normal fairness expectation on govt, should be incorporated into Contract Law. Most court cases about tender outcomes are based on perceived / alleged failure of procedural fairness. An aggrieved party needs to only establish a prima facie case of process-failure, to gain a court injunction (which can stall procurement process). If subsequent court action taken by aggrieved party is successful, then any procurement process could be deferred / re-shaped / completely over-turned. PROBITY MATTERS!!!

50 Lifecycle Guidance Template Grouped elements 1. Identify/Confirm Service Need 2. Identify Options 3. Evaluate Options to identify preferred. 4. Recommendation of preferred option 5. Implementation Strategy 6. Executive Summary Executive Summary Supporting Documentation

51 Executive Summary What should be included in the executive summary? The executive summary should provide a stand alone summary of the project and the path to date, ie: - show genuine link to government priorities; - specify service need or problem; - demonstrate clarity around timing, cost and benefits; - only use diagrams/ tables which relate to report & easily interpreted; - be consistent with both numerical & textual detail of the report. It is the most read part of the business case so it needs to sell the proposal! What supporting documentation would you include? Supporting documentation: consultants reports, studies etc should be referenced and available (possibly as appendices). What should NOT go in the Executive Summary? Verbatim recounts of content from body of report. New material not previously addressed in body of report.

52 Thank you and good luck! Greg Thompson