This post by Mark Neasbey, a Director of the Australian Centre for Value Management, is the third in a series of posts on the role of the capital budget in infrastructure decision making. In this post Mark examines the issues facing a mine expansion.

The mining operation planned to do two things – one, expand its processing facilities to deliver increased product volumes to exacting customer specifications and two, change from road to rail transport for the whole journey to the port.  An important third aspect of importance was getting the timing to market right to optimise prices and revenue.

A design for the processing facility had been prepared as well as a proposed rail alignment and rolling stock and operating schedule, which enabled a direct loading from the processing plant to train wagons.  Existing operations relied on road transport to a rail transfer point some 40kms from the mine plant.  This needed a large workforce and truck fleet and associated scheduling activities to meet shipping schedules at the port.

In this instance the key decisions that the company executives had to make were how much disruption to supply its customers could tolerate during the weeks needed to expand the plant and what would be the reliability of the delivery program to meet the market opportunity.  Their value management study helped them to assess the options to refine both the plant design and the proposed rail arrangements in a way that minimised disruptions to the existing plant operations – so product could still flow to customers and continue to generate cash flow for the business.  This was possible with a relatively minor increase in use of capital funds in the works at the plant with the rail works staging able to occur in parallel.

Whilst ongoing operating costs were reduced and volumes (and price yield) increased there were some additional asset implications. A significant reduction in the workforce enabled a portion of the accommodation, recreation etc. facilities to be redeployed to another operation and otherwise disposed of, reducing ongoing site maintenance cost.

Concluding Comments   A budget for asset projects is expected to change during the life of the project – but why it changes and whether that is up or down is something that must be actively managed. It should not be blindly adhered to, let alone ignored.  An asset project affects operating (recurrent) costs and potential revenue as well as capital, which are also important considerations for the decision-makers.

Question for today:   What ‘take-away’ do you take away from this?

This post is by Mark Neasbey, a Director of the Australian Centre for Value Management.  In this post Mark presents an example of the dilemma of the different attitudes to planning budgets identified in his last post – and how they may be overcome.

A major teaching hospital complex had reached a decision point about what the project must deliver vs the projected capital cost.  Hospital facilities undergo periodic redevelopment driven by substantive changes in health care practices (models of care) and capacity to service growing populations.

Here the planning involved creating new facilities and demolishing older buildings.  The models of care and health outcome objectives were clearly defined and endorsed but were complicated by the arrangement of services across the campus and the recurrent cost constraints on the health services.  Moving functions around to create space for the new facilities was one aspect and another was inefficient service delivery arrangements which had evolved over time and which were compromised by the inflexibility of the existing facilities.

So it was not possible and not appropriate to just focus on the capital project cost.

These tensions were recognised and tested in a value management study process that worked through the schematic design, the relationships between services across the campus and the sequence and timing of moving services around and into the new facilities.  This made it clear that the space requirements and associated capital project budget exceeded the original estimate.

Question was: Should the budget be left where it was and the scope of the initial redevelopment stage reduced, or should the budget be increased to enable it to be made larger?

By focusing on the clinical outcomes and hospital operating (i.e. recurrent) costs it was clear to senior management that a change in scope for the first stage was vital.  Adding extra floor space in stage 1 enabled significant reduction in operating costs ($10m p.a.).  But the extra $30m for stage 1 also enabled the second stage to be a much lower cost development – a simpler demolition and a ‘cleaner’ new build.

Question for today:   What ‘take-away’ do you take away from this?

This post by Mark Neasbey, a director in the Australian Centre of Value Management is the first of four that looks into the role of the budget in infrastructure decision making. 

We are about to undertake a capital project for which we need a planning budget. We have chosen a figure that we think is affordable and justifiable and off we go with planning. We employ architects, engineers, cost planners and other specialists to work up a proposal.  They’re all qualified experts so we can rely upon their advice to give us a value for money solution.  Right?

But now we strike a problem.  To some the capital project’s budget figure becomes the target to realise and push beyond, because once the decision-makers see the brilliance and worth of the proposal they’ll get the extra money – that way we don’t have to compromise on anything!  Right?

For others, it’s the opposite – a barrier that must not be exceeded – the limit that has to be imposed irrespective of what compromises must be made.  We simply cannot afford to pay any more.  This is because no capital project should be seen in isolation of the whole business.  The organisation’s other priorities will also need to be appreciated so the best overall outcomes can be realised.

Both attitudes have some merit.

Our question today is:  How can they be reconciled?