CAPITAL BUDGETING AND ASSET MANAGEMENT

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

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

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

AN IDEAL SYSTEM ?

•Corporate

•Fair

•Strategic

•Balanced

• Linked to the Asset

Management Plan

•Corporate plan

•Departmental Service Plans

•Golden thread

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.

CREATING AN INVESTMENT STRATEGY

•Alignment to strategic objectives

•Guidance manual

•Flowchart

•Timetable

•Corporate buy-in

•Commissioning

•Corporate team

•Developmental process

• Legacy

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

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

• 10-15 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

HOW SHOULD YOUR CAPITAL PROGRAMME FORMULATED? THE RATIONAL MODEL

•Hierarchy of planning:

• Strategic Framework

• Medium Term Financial Plan

• Asset Management Plan

• Other statutory plans

• Service priorities

• Invest to Save

•Funded from:

• Partnership funding

• Government

• Savings

• Release of assets

• Future revenue

• And, finally,

• Capital resources

BUSINESS CASES

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 non-

commercial (and potentially non-quantifiable benefits and costs)

• IFRS/IPSAS provides a financial treatment

• The ‘Do Nothing’ option needs to be considered

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

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

THE FIVE BUSINESS CASE THEMES

Make the case for change within the organisational

context by consideration of strategic objectives.Strategic

Options

Appraisal

Commercial

Affordability

Management

Consideration of affordability (capital and revenue) and

impact on Prudential Borrowing Indicators.

Overall Management including Project/Programme,

Business Change, Contract, Risk.

Procurement strategy, testing the market, development of

contract.

Identifying, evaluating and presenting the best value for

money option (total community).

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?

THE FOUR STEPS TO EFFECTIVE ASSET MANAGEMENT

Identify and Record the

Assets

Understand the Assets

Monitor the Assets

Manage the Assets

RECORDING THE ASSETS

TYPE OF ASSET

• Land and buildings

• Vehicles

• Plant

• Computers

• Office Equipment

• Inventory

RECORDING MEDIUM

• Property Terrier

• Vehicle register

• Plant register

• IT Department list

• Inventory

• Stores systems

How are these assets recorded in your

organisation?

MEANS OF DEVELOPING ASSET VALUE

• Land banking

• Linking key sites

•Ransom strips

• Investing in infrastructure

•Marketing

•Partnering with developers

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