CAPITAL BUDGETING AND ASSET MANAGEMENT - …€¦ · CAPITAL BUDGETING AND ASSET MANAGEMENT. BRIEF...
Transcript of CAPITAL BUDGETING AND ASSET MANAGEMENT - …€¦ · CAPITAL BUDGETING AND ASSET MANAGEMENT. BRIEF...
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