Project Initiation Process

Introduction

Project Initiation Process (PIP)

Project Initiation Process Flow Chart

Functions

Options

Risk Analysis

Budget Analysis

Comparative Analysis Statement

Project Definition Statement

Introduction

Background

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.

Benefits

The Project Initiation Process:

• ensures that the Government receives the best value from its investments by requiring an analysis of needs, risk and budget in more than one development option before an investment is approved;
• promotes efficient and effective planning of service delivery strategies and resource needs by agencies;
• ensures the clear definition and documentation of the criteria which will be applied to determine project viability and to support project justification;
• encourages service delivery options which are innovative, including:

• solutions developed in conjunction with the private sector;
• using optimum technology to achieve desired outcomes;
• "no build" solutions to satisfy service delivery needs;
• "end use" planning to provide alternative uses for built assets; and

• provides an audit trail of the processes followed to arrive at the option proposed.

Applicability

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:

Function Analysis

• Identify and rank the functions required, together with their relative cost and worth.
• Establish all the user requirements; include benchmarks of the requirements.

Group Functions

• Sort the required functions into process-related groups.

Option Generation

• Generate value improvement options through considering innovative and alternative means of achieving the required functions.
• Short-list viable options.
• Further develop options for evaluation.

Project Initiation Process (PIP)

Sequence of Procedures and Products

• Agency identifies a service delivery requirement.
• Agency considers that an asset investment may be required to deliver a specific service.
• Function analysis is conducted to set out all of the functions contained within the service delivery requirement.  These are consolidated in a functional brief.
• The functions are grouped into interrelated (process related) function groups.
• Options are generated to meet each function group and set out into:

• those proposing service contract;
• those proposing leased assets (various innovative lease arrangements are available);
• those proposing owned assets.

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.

• Each option for service contracts and leased and owned assets is checked against the functional brief to determine if it addresses the required functions.
• From those options which provide the required functions, a short list is compiled.
• Short-listed options are developed to allow them to be evaluated.
• Risk analysis and budget analysis are applied to the developed options.
• A Comparative Analysis Statement is prepared, incorporating the following 'products' generated by the Project Initiation Process for each function group:

• the short-listed options
• budget analyses
• risk analyses

• The Comparative Analysis Statement is evaluated and the Preferred Options determined. These may be any of (or a mix of) service contract, leased asset and owned asset.
• A Preferred Option involving owned assets is forwarded, in the form of a Project Definition Statement, by the agency Minister to the Budget Sub-Committee for consideration in the forthcoming Budget round.  If supported by Budget Committee and approved by Cabinet, the proposed asset construction or purchase will be placed on the Capital Investment Program.
• A Preferred Option involving leased assets will proceed to a lease agreement process.
• A Preferred Option involving service contracts will proceed to the Competitive Tendering Contract process.

The following chart outlines the elements of the Project Initiation Process.  Detailed explanations of the key steps in the process are provided below.

Project Initiation Process Flow Chart

Functions

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:

• What does it do?
• What must it do?
• What does the function cost?
• What is the function worth?

Functions can be simply defined and described in verb-noun terms.

The function definitions produced through this process are assembled into a functional brief.

Function Grouping

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.

Options

Generate Options

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:

• How else may the required function groups be achieved?
• What else would carry them out?
• What will the alternatives cost?

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.

Option Preparation

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:

• service contracts;
• leased assets; and
• owned assets.

Short-list Options

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.

Option Development

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:

• a variety of factors required for Risk Analysis - refer Comparative Analysis Statement.
• breakdown of all costs, time schedule needs, life cycle considerations, etc., all required both for the Budgeting Analysis and for consideration by Budget Committee - refer Definitions Statement.

Risk Analysis

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:

• identifying and reducing key risk exposures
• providing greater certainty to support decision-making, and
• improving the planning of contingencies for dealing with risks and their impact

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:

1. there may be large losses unless projects are managed carefully;
2. for assets with long economic lives, risks associated with changing economic conditions, varying levels of demand for services and changes in competition, must be anticipated and managed; and
3. investments involving private sector participation require the identification and management of the Government's residual risks.

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.

Risk identification

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:

• commercial and legal relationships;
• economic circumstances;
• personnel/human behaviour;
• natural events;
• political circumstances;
• technology and technical issues;
• management activities and controls; and
• individual activities.

Risk analysis

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:

• asset and resource base, including personnel;
• revenues and costs;
• the community;
• performance, including timing; and
• the environment.

Risk assessment

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

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:

4. avoid the risk by deciding not to proceed with the project, or by choosing an alternative course of action to achieve the same outcome;
5. reduce the level of risk through management or organisational controls;
6. transfer the risk by shifting the responsibility for it from the agency to another party (such as an insurer); and
7. accept those risks which cannot be avoided or transferred, or those where the likelihood and potential consequences of the risk are low.

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.

Budget Analysis

Introduction

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.

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.

Process

There are four steps in the budget analysis process:

1. identify project construction and life-cycle cash-flows;
2. rank options by calculating NPVs;
3. perform sensitivity analysis; and
4. review options in terms of risks and benefits.

Cash Flows

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)

where:

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.

Expertise

For large and complex projects, it may be necessary to acquire expert assistance to analyse the financial costs and benefits of competing options

Comparative Analysis Statement

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:

• any significant or high risks involved;
• risk treatment;
• budget analysis; and
• cash-flow.

Project Definition Statement

Context

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).

PDS Content

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.

• initial capital investment
• land acquisition costs
• design and supervision fees
• loose furniture and fittings (new)
• equipment (new)
• other (please specify)
• life cycle costing over the life of the project.

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.

Project timetable

Key dates including, but not restricted to, the following:

• Parliamentary Standing Committee on Public Works hearing date;
• design commencement date;
• project tender date;
• planned completion date;
• planned occupancy date; and
• planned disposal date.

Funding

• proposed source(s) of funds

• Capital Investment Program
• alternative funding source/contribution

• annual cash flow requirements

• capital
• recurrent.

Functional Analysis

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:

• service contracts;
• leased assets; and
• owned assets.

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.

Project approval

Endorsement for the proposed project must be obtained from:

• Head of Agency, and
• Minister.