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Project Initiation Process
The effective and efficient management of public sector physical assets is fundamental in an environment where there are competing demands for Government resources.
A key element of that framework is the establishment of a Project Initiation Process for projects proposed for inclusion in the Capital Investment Program.
The Project Initiation Process
The Project Initiation Process (PIP) facilitates capital investment decision-making by requiring agencies to rigorously evaluate proposals for capital investment projects at the earliest stage.
Because infrastructure assets only assist in the delivery of services, a process must be followed to ensure that the need for new investment can be clearly demonstrated.
The process for assessing capital investment proposals must include a review of: service delivery; alternative asset solutions; capital budgeting and risk.
In implementing the PIP, agencies should concentrate on the planning of services and, in particular, the resources required for the delivery of those services.
The greatest potential for identifying and achieving capital and recurrent savings is in the early planning phases of a project (see diagram below). Significant savings can be realised through careful consideration of the need for new services and the most appropriate means of service delivery.
The PIP will ensure that investment in assets will occur only where the need for the assets has been identified, thoroughly investigated, evaluated and substantiated. Projects will not be approved for the Capital Investment Program until a PIP has been undertaken.
The PIP, by emphasising the need for detailed planning and evaluation of projects, will assist agencies in establishing the most appropriate means of meeting service delivery.
For inclusion on the Capital Investment Program, completion of a PIP will be required for all bids for projects valued at more than $100 000.
The Project Initiation Process:
The Project Initiation Process applies to all projects funded through the Capital Investment Program.
While the basic principles of the PIP can be applied to all investment projects, it is mandatory for all projects with a cost of more than $100 000.
The degree of detail required will vary according to the size, complexity and specific circumstances of each project. Agencies should consult with Treasury, on a case by case basis, to determine the specific approach and standard necessary to satisfy Government's requirements.
For projects with a cost between $100 000 and $250 000, a properly recorded, "in-house" PIP will satisfy audit requirements and should ensure the best solution for Government. This is a relatively simple procedure.
For projects with a cost between $250 000 and $750 000, agencies may need to engage professional consultants to assist with the PIP.
For projects with a cost greater than $750 000, agencies are expected to engage professional consultants, unless appropriately qualified professionals are available from within the agency.
The need for assistance from external consultants will depend on the complexity of the project and an agency's in-house expertise in the required skills. A school laboratory refit and extension may cost in excess of $250 000, but alternative options may be very limited and the various Project Initiation Process elements could be worked through in-house. However, to extend the size of a primary school by fifty percent may require expert consultant advice.
Value Management Overview
The incorporation of Value Management in the Project Initiation Process represents the integration of a structured process of analysis into the earliest stages of planning for service delivery. As a "best practice" process, it is used to maximise value for money.
Value Management is a structured, systematic and analytical process which seeks to ensure all necessary functions are provided at the lowest total cost consistent with required levels of quality and performance.
Underlying the Value Management process are the principles that there is always more than one way to satisfy a need and that a rigorous and structured examination of the alternatives will produce the most acceptable solution.
The Value Management process incorporated in PIP has been tailored to suit public sector needs and is set out in the following steps:
Sequence of Procedures and Products
The latter two both provide accommodation for Government employees.
A service contract may be possible for the entire service delivery need, for only some of its function groups, or not at all. A service contract would be awarded to an external supplier following a comprehensive tendering and contracting process.
The following chart outlines the elements of the Project Initiation Process. Detailed explanations of the key steps in the process are provided below.
Function Analysis/Functional Brief
Value Management is particularly useful in focusing on objectives and priorities. It depends on a Functional Analysis which rigorously examines the cost and worth of precisely described functions.
Function Analysis involves clearly identifying all the component functions contained in the service delivery requirement.
Key questions are asked during the analysis of functions, namely:
Functions can be simply defined and described in verb-noun terms.
The function definitions produced through this process are assembled into a functional brief.
It is fundamental to examine the functions from the perspective of a whole system. This involves the linking of interrelated or interacting functions into groups known as functional groups.
These groups will demonstrate the logical and operational relationship between functions.
A number of techniques have been developed to analyse and link functions. These include Functional Hierarchies and the use of Function Analysis System Technique (FAST).
The purpose of grouping functions is to provide the basis upon which alternative options may be generated and evaluated. Thus options involving service contracts, leased assets and owned assets may be developed and assessed for each functional group.
Functional grouping may also provide opportunities for combining (reducing) functions, while still ensuring that there is compatibility between functions within the whole system.
It is recommended that a number of options be generated for achieving the function groups required. Lateral thinking is encouraged to produce as many options as possible. The basis for the generation of options is encompassed by the following questions:
Check Options Against Functional Brief
Options are again checked to ensure that they provide what is required by the agency's functional brief. Any significant non-compliance with the brief will require an option to be modified or discarded.
Set out options, together with comment on feasibility, cost, constraints, etc.
Some of the options may require further analysis and consultation, particularly where other parties or projects are involved.
Distinguish between options requiring:
Based on the indicative information on options set out in Operation Preparation, select a short list of options for further development and examination. Elimination of options is always made on the basis of failure to match the requirements established in the functional brief.
Additional research may be required before finalising the short list.
Short-listed options are now developed to a stage which will enable them to be critically evaluated.
Details to be developed and fully documented include:
The process of managing risk
Risk management is a process, effected by management, designed to provide reasonable assurance that objectives will be achieved by the project.
The risk management process is crucial to ensure that the Government obtains value for money and that all risks are identified and managed effectively.
The risk management process consists of well-defined steps which, taken sequentially, support better decision-making by forecasting project risks and their impact.
Application of the risk management process is necessary for effective strategic planning, and leads to reduce costs and improved outcomes through:
Projects being assessed under the Project Initiation Process involve significant Government outlays and will benefit from close attention to risk management. Three aspects of these projects make risk management essential:
Risk management is an integral part of good project management. To be most effective, the agency must consider risk at both the strategic planning stage and during the Project Initiation process.
Development of risk assessment criteria
In order to analyse the risks within a project and determine whether or not they are acceptable, they must be ranked and assessed according to certain criteria. The level of acceptable risk will vary from project to project, according to the responsible agency's policy, service delivery requirements and the project objective. Criteria may be based on operational, technical, financial, legal and social factors.
In determining those elements which are crucial in supporting or impairing its ability to manage the risks associated with the project, the agency should identify the project stake-holders (owners, personnel, customers, suppliers and the community) and establish communication channels with them.
This step involves examining all sources of risk, including risks not under the direct control of the agency, from the perspective of all stake-holders, both internal and external.
Generic sources of risk include:
The likelihood and potential consequences of each risk should be analysed. The objective is to separate minor acceptable risks from major ones and to provide data to assist in risk management. Risk analysis may concentrate on a number of possible areas of impact, including:
An assessment should be undertaken of whether risks are acceptable or unacceptable by comparing the level of risk found during risk analysis against the established risk criteria. The output of a risk assessment is a prioritised list of risks for treatment.
Risk treatment requires the identification and evaluation of the options available to deal with risk. Then, a risk treatment plan needs to be prepared and implemented. The risk treatment needs to be appropriate to the significance of the risk and the importance of the project. There are four broad strategies for the treatment of risk:
Selection of the most appropriate risk treatment option involves balancing the cost of implementation against the benefit obtained. Options should be evaluated on the basis of the extent of risk reduction, and the extent of benefits or opportunities created.
Monitoring and review
Monitoring and review is an essential and integral step in the risk management process. Risks and the effectiveness of the risk treatment plan need to be monitored as the project proceeds to ensure that changing circumstances do not alter the risk priorities or their consequences. The review process should be specified in the risk treatment plan.
A fundamental objective in the Project Initiation Process is the development of options which make the most efficient use of the financial and other resources available to the Government. Capital budgeting decision analysis is a tool which is used to rank competing options so that the option with the best net cost over the useful life of the project is identified.
Budgeting analysis is a crucial exercise in ensuring that the Government obtains value for money and does not take on any risks that it cannot manage effectively. The key technique in the process is the ranking of alternatives using a discount cash flow analysis which takes account of the impact of expenditures on the debt servicing costs of the Government.
Net Present Value
The technique which must be used to rank competing options is one which calculates the net present value (NPV) for each option.
The NPV of an option is an amount which is equal to the present value of its net cash flows. An option's NPV gives a measurement of the absolute value of the option in terms of today's dollars and is the amount one would be indifferent to paying today when compared with paying a series of cash-flows in the future.
The NPV technique discounts all cash-flows to present value dollars using an appropriate discount rate.
Government assets are funded from the Consolidated Fund, and it is assumed that investment decisions add to the State's debt as, even though funds may not be borrowed in the year an asset is acquired, the funds outlaid will either add to borrowings or reduce the amount which would have been available to the Government to reduce borrowings.
In either event, the opportunity cost of the funds is the key aspect, and this is the long term cost of funds to the Government. As this cost fluctuates from year to year, the discount rate to apply should reflect prevailing interest conditions.
Accordingly, all NPV calculations should use the prevailing long term Commonwealth Bond Rate plus a margin of 1.0 per cent.
There are four steps in the budget analysis process:
This is the key step in the process and must be undertaken carefully. Cash-flows which are uncertain must be identified and several analyses must be conducted to reflect the overall range of uncertainty (see sensitivity analysis below). All cash flows should be listed and grouped on a quarterly basis and only nominal cash flows should be used. Put another way, one should assume that inflation is zero as the discounting process will ensure that the correct outcome is identified.
Calculate the NPVs
Focusing solely on the total cash outflow ignores the time value of the cash-flows. Hence, the cash flows are discounted using the NPV formula and each option is then ranked. The preferred option is the one which has the lowest NPV. There is literature available on how to use the NPV formula.
The formula for the calculation is:
NPV = S (i=1 to n) (CFi * (1+DR)^-i)
NPV = the Net Present Value;
CF = the net (hence Net PV) Cash-flows in each period;
DR = the Discount Rate for the period expressed as a decimal; and
N = the number of periods.
For large and complex projects, it may be necessary to acquire expert assistance to analyse the financial costs and benefits of competing options
The Comparative Analysis Statement will comprise the short-listed options and their associated risk and budget analyses.
Each short-listed option should be listed together with the following:
Projects with a capital value in excess of $100 000, regardless of the source of funding, will require Budget Committee approval. The vehicle for submitting projects to Budget Committee for its consideration is a Project Definition Statement (PDS).
To ensure that Budget Committee is provided with the data which will allow it to assess projects, the Project Definition Statement will consist of the following documents which have been generated through the PIP.
Statement of Preferred Option
Project title and description
Title of project and description of project including service delivery improvements or changes which will be directly attributable to the project.
Government's stated policy objectives
Relationship of project to stated Government policy objectives.
Total project cost
The following costs are required, depending on the stated preferred procurement option (i.e. design-construct, lease-back, etc). They should be divided into capital and recurrent. Capital cost should include escalation due to movement in the Building Price Index.
Additional costs related to the proposal
Any impacts on other outputs and/or investment strategies of other agencies and the community (eg. upgrade of roads, additional services reticulation, etc) should be identified together with consultation undertaken. These impacts should be costed and attributed to the relevant agency, GBE, Local Government, etc.
Key dates including, but not restricted to, the following:
Each function contained in the service delivery requirement must be defined and described.
Comparative Analysis Statement
A comparative analysis statement should be provided comprising the short-listed options and their associated risk and budget analysis.
Identification of short-listed options
Set out the short-listed options, together with comment on feasibility, cost, constraints etc.
Distinguish between options requiring:
Risk analysis of the short-listed options
All significant risks should be identified for each option from the perspective of all project stake-holders.
For the preferred option provide strategies for management of the identified risks.
Budget analysis of short-listed options
Identified options should be assessed and ranked in terms of the net present value of the cash flows.
Endorsement for the proposed project must be obtained from:
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