CAPITAL BUDGETING AND ASSET MANAGEMENT

Transcription

1 CAPITAL BUDGETING AND ASSET MANAGEMENT

2 BRIEF REFLECTIONS Capital Programming Political influences Sustainability in Capital Investment (Prudential Code) The overwhelming need to invest in infrastructure in many countries The effects of IPSAS/IFRS implementation

3 HOW IS THE CAPITAL PROGRAMME FORMULATED? WORST CASE SCENARIO The Schemes: A long list of pet schemes Aunt Sally schemes Grant-induced proposals Entirely departmentalised Descriptions amended to fit criteria Local analyses critical to politicians Political timeframes shorter Based on: No business case No options appraisal Outline costs Impact on revenue ignored No reference to partners Competitive bidding No search for external resources No surrender of surplus assets

4 CAPITAL PROGRAMMING: THE SEVEN DEADLY SINS Lack of vision Unclear governance Too sexy Not corporate Poor processes Lack of rigour Lack of scrutiny Inappropriate capitalisation

5 AN IDEAL SYSTEM? Corporate Fair Strategic Balanced Linked to the Asset Management Plan Corporate plan Departmental Service Plans Golden thread

6 HOW CAPITAL PROGRAMMES SHOULD BE DEVELOPED Capital Programme Objective The objective of this project is to develop a ten year Investment Strategy for the country or organisation, together with robust corporate processes to ensure that the capital programme reflects the strategic objectives and the proactive management of assets.

7 CREATING AN INVESTMENT STRATEGY Alignment to strategic objectives Guidance manual Flowchart Timetable Corporate buy-in Commissioning Corporate team Developmental process Legacy

8 FINANCING THE CAPITAL PROGRAMME Revenue Borrowing Future revenue consequences Capital Receipts Links to Asset Management Plan Grants Be careful not to be grant driven PFI/PPP Issues with regard to IPSAS Leasing Operational and Finance leases IPSAS considerations

9 CAPITAL INVESTMENT OUTCOMES Capital Programme focused on strategic objectives Investment in infrastructure and networks Better disposition of services and local facilities Faster progress towards objectives Integrated business planning Improved political oversight and management control year Investment Strategy Improved infrastructure Better maintained buildings More appropriate buildings Fewer winners and losers more rational, transparent and fairer corporate processes Optimal use of resources

10 HOW SHOULD YOUR CAPITAL PROGRAMME FORMULATED? THE RATIONAL MODEL Hierarchy of planning: Funded from: Strategic Framework Medium Term Financial Plan Asset Management Plan Other statutory plans Service priorities Invest to Save Partnership funding Government Savings Release of assets Future revenue And, finally, Capital resources

11 BUSINESS CASES

12 A BUSINESS CASE APPROACH Business Cases long established in the private sector and now being used in the public sector A structured and well evidenced approach to making decisions about Projects New products New or amended services Should enable a rational comparison between options Private sector will consider commercial considerations Public sector needs to consider how it will assess and compare noncommercial (and potentially non-quantifiable benefits and costs) IFRS/IPSAS provides a financial treatment The Do Nothing option needs to be considered

13 PRIVATE SECTOR The objective is to make money! Comparison methods NPV Internal Rate of Return Rate of Return on capital employed Breakeven analysis Cash Flow Aimed at assessing the end results on the financial performance of the company Reported using IFRS Requires rigorous testing and challenge Risk analysis

14 HM TREASURY APPROACH: GREEN BOOK Investment decisions should be strategic Part of overall Resource Accounting and Budgeting A common mechanism for assessing very different schemes A fairer process A resource allocation mechanism Business case-making is iterative Affordability and VFM are critical factors The five case model of appraisal/prioritisation

15 THE FIVE BUSINESS CASE THEMES Strategic Make the case for change within the organisational context by consideration of strategic objectives. Options Appraisal Affordability Commercial Identifying, evaluating and presenting the best value for money option (total community). Consideration of affordability (capital and revenue) and impact on Prudential Borrowing Indicators. Procurement strategy, testing the market, development of contract. Management Overall Management including Project/Programme, Business Change, Contract, Risk.

16

17 YOUR ORGANISATION S ASSETS What do you think the value is of the assets used by your organisation whether owned, leased, rented or borrowed? Would the accounts tell you the value of assets?

18 THE FOUR STEPS TO EFFECTIVE ASSET MANAGEMENT Identify and Record the Assets Understand the Assets Monitor the Assets Manage the Assets

19 RECORDING THE ASSETS TYPE OF ASSET Land and buildings Vehicles Plant Computers Office Equipment RECORDING MEDIUM Property Terrier Vehicle register Plant register IT Department list Inventory Inventory Stores systems How are these assets recorded in your organisation?

20 MEANS OF DEVELOPING ASSET VALUE Land banking Linking key sites Ransom strips Investing in infrastructure Marketing Partnering with developers

21 WHAT YOU NEED TO DO IN YOUR ORGANISATION Introduce a fully--costed Asset Management Plan Get a capital programme based on your strategic priorities Introduce business case methodology Improve monitoring and control Choose the best financing option Review completed schemes Support external research activity Keep abreast of what s happening elsewhere Introduce regular Training Programmes Maintain awareness of best practice