“When the first attempts at systematic weather forecasting were made, one idea was to look back through the records for a day where the weather was much the same as the day when the forecast was being made. The assumption was that the weather on the following day would be the same as the weather on the following day in the historical past. But surprising events are always occurring to disrupt this sort of forecasting.” (from Len Fisher’s talk on the ABC’s Okham’s Razor, 11 May 2016.
We laugh now at the absurdity of these first weather forecasters. However, many in the stock market still analyse charts of past stock prices to predict future changes (this is a bit more complicated, perhaps, but it still seeks to find answers to the future from the past) At least, if you get it wrong with stock prices, you lose a bit of money but can try again tomorrow. But if you apply these ‘looking back’ ideas to future infrastructure investment decisions that will impact our communities for decades, that is a very different matter.
Thirty years ago when I became interested in infrastructure planning, it was common to take a rising trend and simply extrapolate it and although it often resulted in major oversupply, we still did it. And we are still doing it! We just use more complicated algorithms.
But if not extrapolation of the past, what techniques are available for anticipating a changing future?
Here is a story about looking forward that you might enjoy.
Many farmers use windmills to run bores for stock watering but pumps allow water to be extracted from much deeper resources. It is critical, however, that the pumps work or the stock dies. A friend had set up a business in selling – and servicing – pumps to farmers and his business was flourishing. He would routinely drive out and check all the pumps to ensure that they were working well.
Then he had the idea of buying a drone to do his survey work for him, but not a $500 hobbyist model, he decided on a top of the line model from the leading drone producers in Israel. He sent off his $27,000 cheque – only to have it returned to him! The Israeli government said it was not prepared to sell it to him for security reasons!
This was about 8 months ago. Not to worry, he said, soon there will be satellites I can connect to and I will be able to check the pumps using my smart phone!
This is a fellow who is keeping his eye on the rapid rate of technology change.
No specific question today – just enjoy!
Switch (courtesy Falk2)
If we have information that can lead to better decisions, can we fail to act? Can we excuse ourselves with “it’s their job”, “not my responsibility”, “I don’t want to be involved”.
Philippa Foot devised a thought experiment in 1967, routinely called the “Trolley Problem”. The experiment involves a train (trolley) heading toward 5 workers. The train is a runaway and all 5 workers will certainly be killed if nothing is done. There is a side track with only one worker and you are in the right place at the right time to make a decision. You can activate the rail switch, diverting the train and resulting in a single certain death. Or not. There is no time to alert the workers, or gain assistance; the train can’t be stopped.
As a tool to teach ethics this particular experiment is deceptively simple, should I sacrifice 1 to save 5? It does however raise numerous questions, “am I obliged to act?”, “do I have a duty?”, “is interfering wrong?” “do I act morally or ethically?”, “do I act for the greater good, the good of the people involved, or for myself?”
This dilemma is very long lived and has captured the imagination of the professionals and public. There are many variations – is it Ok to stop the train by pushing someone in front of it? What if that person was responsible for the runaway train? What if the workers could be saved by sacrificing a bystander, or a loved-one?
When anyone is faced with making a decision at a switch they can make a moral choice, an ethical choice, a popular choice, and when making that choice they can include longer time frames, wider consequences, how the action will make them feel, how others will think of them.
Questions today: When it comes to infrastructure decision making, when our decision takers are standing at the switch, how do we know if we should contribute to the conversation? When would we join in if we do, and with what level of action?
“General equilibrium”, an economics colleague explained, “is like a bowl of marbles, move one and we have to reckon with a change in every other one. Depending on the location of the original marble, the change will be large or small, but there will be always be a change.”
Thinking now of energy, a breakthrough in battery storage development would be the equivalent of moving a marble at the very bottom of the bowl. Anyone following the technical developments in batteries, and the vast resources now being devoted to this exercise, would expect to see this happening within the next five years (and probably sooner rather than later). In other words a breakthrough in the length of life and the economics of solar energy (and wind energy) storage is an almost certainty. But what then?
As important as technological innovations are, they are not the end of the story. In fact they are just the beginning. When battery storage possibilities improve, here are some of the impacts we can expect to see – a change in social attitudes towards energy usage; changes in manufacturing to take advantage of this; a great increase in the demand for solar panels; an increase in the willingness of some to go completely off grid; but also an interest of many more in adapting the present distribution network to serve localised production and sharing of power. Localised power production and distribution will enable greater security from events such as the recent power outage in South Australia and future impacts from climate change, as well as attacks on our critical infrastructure.
However, the change in demand for distribution networks will present a business model challenge for network owners which is why ‘economic innovation’ is now needed. No change will take place unless a profit can be made from it. Profit is not a dirty word. It is essential to good resource allocation.
So my question today is: what do we know of research into new business models that can promote and support the adaptation to distributed production and distribution that solar and wind power combined with good battery storage can make possible?
The value of “value management”, as Mark Neasbey, Director of the Australian Centre for Value Management, has illustrated in each of his previous posts, is in challenging what we think we know. In “The Power of ‘What if?'” he reveals how questioning a ‘given’ led to a radically different solution and a saving of hundreds of millions of dollars. Mark writes:
The types of things that are generally in a list of givens include:
- a law or regulation that has to be complied with;
- a technical performance requirement – be it a range or a set minimum or maximum number or a specific number – which can represent dimensions, volumes, rates and so on;
- a limiting boundary or barrier or a technical constraint;
- financial – e.g. an amount not to be exceeded or specified sources of funding, interest rates and so on;
- ownership and operating arrangements;
- authorities and delegations;
- a specific time or date that the asset is required or to be disposed of; and
- application of a particular process or corporate policy.
[Not an exhaustive but just some main examples.]
Now the thing about such givens is that we develop our options or solutions accepting these, rather than challenging them. So they tend not to come into creative thinking processes, accept as a limitation. Yet what happens if its not really a given, rather it turns out to be possible to change it – even if only to treat it as an assumption?
A recent rail project to develop expanded train maintenance and stabling facilities began with a given that the existing mainline was fixed – it could not be changed. By not allowing it to be moved the project solution involved some complex and expensive engineering and infrastructure to manage the train movements into and out of the depot, which are planned to eventually have headways as short as 30 seconds. [Driverless trains.] There was also an effect on how the layout of the expanded facility could be realised – it was not going to be as ideally efficient as possible to operate.
During a value engineering review however, the effects of not moving the mainline to the engineered solution became clearly a cause – not of concern – but for a better appreciation of the opportunity forgone to create a simpler, more elegant engineered solution and at a huge cost reduction.
The mainline alignment had been stated as a given by the client early in the planning process. So all of the initial feasibility work and preliminary concepts evolved based on that given. What subsequently emerged in the value engineering review was that this arose from a decision not to acquire a particular developed property adjacent to the line.
By asking the simple question “what if…?” the team was able to show a much better outcome was possible – not only at a lower capital cost, but with significant long term reduction in maintenance and operational risks to the network.
Two important highlight lessons to me are:
- Do you have an understanding of what is being labelled or taken as givens for your assets and asset strategies?
- Do you have a process to all testing and challenging of such givens so decision-makers are aware of their implications?
The Task today: An answer to either of Mark’s questions OR an example of a positive ‘What if?” challenge of your own.
By now, every Australian would know that the entire state of South Australia experienced a power system failure as severe storms with high winds uprooted 22 high voltage power pylons cutting off a major part of system generation at Port Augusta. For about 10 hours on Wednesday, we all effectively went ‘off grid’. Rolling blackouts or brownouts are not uncommon but this was the first time that an entire state has been without power.
At 3.30pm light and power was cut to my office. The desk top computer stopped – the laptop, however, continued working for another 5 hours. The land line phone connection ceased – but the mobile did just fine. Televisions stopped but information got out to everyone via Facebook on mobile connections. Power was mostly resumed at 1.10 am Thursday but, for ten hours, the battery was king!
Those in government responsible for the future of our infrastructure might well have asked themselves whether climate change might not engender future storms like this and, reflecting on the fact that the statewide blackout was caused by the necessity to protect the integrated system, perhaps they might also have asked themselves whether the efficiency benefits of integration might not come at a cost? They might then have considered whether a more disintegrated system of power generation and distribution, such as is now available with the growth of renewables such as wind and solar might not have mitigated the impact? After all, when the system goes down, those who are not reliant on it benefit. So it is curious that the Prime Minister and assortment of others antagonistic to wind and solar should blame renewables for the failure!
Or perhaps not so curious if the aim is to protect incumbent power and distribution networks? The electricity industry is well aware of the threat of wind and solar to its generation and distribution networks when long lasting batteries are developed, which is now, perhaps, not more than five years away.
Our Question today: Given that battery development will represent a major disruption to power production and distribution what should be the intelligent, forward looking, attitudes of our government – to block, or to adapt?
This is the fourth of a series of posts by Mark Neasbey, a director in the Australian Centre for Value Management examining the role of the planning budget. In the first Mark considered the differing attitudes that may be taken to strict adherence to the budget and in the next two, he gave examples of the problems this had created for a major teaching hospital and for a mining operation. In this, the last of the present series, Mark considers how a planning budget can be constructed and utilized to smooth the path of the capital budget.
It’s good business practice to require planning for asset projects to look well ahead of the short-term i.e the current financial reporting period. This is because assets typically last many years and impose long-term costs to the business or government service.
Good practice also involves life-cycle planning around the asset project – what it costs to establish, what needs to be spent to keep it operating, periodic costs for replacement and renewal of plant and equipment and also periodic refurbishment necessary to sustain functionality, safety, image etc. This extends to considering disposal – when an asset is no longer needed – what has to be done to get rid of it. This principle applies equally to physical assets and soft assets such as computer software or systems.
So when an initial concept is proposed, what sort of things need to be addressed and what’s the significance of these to the budget?
Well a key starting point has to be determining its purpose – what is the asset supposed to do? What are the business or service functions that the asset must accommodate or support? Why can’t these functions be undertaken some other way, without the need for the asset project?
These questions can’t be answered without research, we need to test and clarify the scope of the project so we can set a reasonable capital budget. That means we have to start with a planning budget so the planning and analysis work can be done to decide a) the functions that the organisation needs to deliver; b) the options that should be considered for delivering those functions – including non-asset strategies; c) determine the relative merits of the options – key pros and cons, including business (service delivery) risks.
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?
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