Wits IAM 9 Capital Investment PDF August 2024

IAM 9 CAPITAL INVESTMENT Objective Needs Constraints Getting Acquainted with Financial Scenarios Prioritisation Forecast Presenter: Rob Childs Pr Eng PMP CSAM Objective ❑ Assembling full capital investment needs ❑ Contempla...

IAM 9 CAPITAL INVESTMENT Objective Needs Constraints Getting Acquainted with Financial Scenarios Prioritisation Forecast Presenter: Rob Childs Pr Eng PMP CSAM Objective ❑ Assembling full capital investment needs ❑ Contemplating constraints and financial scenarios ❑ Capital funding priorities and forecast Life-cycle Expenditure Categories Expenditure Type Description Works to create a new asset, or to upgrade or improve an existing asset beyond its Development original capacity or performance Significant work that restores or replaces an existing asset towards its original size, Renewal condition or capacity. Extends the useful life of the asset Activities which have no effect on asset condition but are necessary to keep the Operational asset utilised appropriately (i.e. power costs, overhead costs, etc) The ongoing day-to-day work required to keep assets operating at required service Maintenance levels, i.e. repairs and minor replacements. Required for the asset to achieve its expected useful life Disposal Any costs associated with the disposal of a decommissioned asset  Depreciated Replacement Cost (DRC) DRC ….the DNA of the life-cycle model CRC RV RUL EUL CRC Current Replacement Cost EUL Expected Useful Life RUL Remaining Useful Life RV Residual Value The Depreciated Replacement Cost (DRC) is determined by the following formula: RUL DRC = x (CRC - RV) + RV EUL 4 Key Lifecycle Activities Influencing Portfolio Health Grade …. (also consider the maintenance to achieve the Expected Useful Life………)  The Renewal Tsunami…… 1. Need to see the renewal bow-wave coming……and react in sufficient time New Infrastructure Portfolio Mid-Life End-of Life CRC CRC CRC RUL / EUL RUL / EUL RUL / EUL 2. Recognise the long-term impacts of new infrastructure implemented in the planning period…….. R 10 Replacment cost R8 (R' billion) R6 R4 R2 R- 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 101 Years Existing assets Additions in report period Capital Renewal Model To forecast renewal NEEDS, and inform programme RESPONSES EUL typically very long term – 5 to 80, upto 200 years, on average generally around 40 to 50 years……..but not forever EUL tied to the component lifecycle models to definitively document the lifecycle context Slow, relatively indiscernible, but large and potentially catastrophic impact, long response time – need to have predictive models, and risk-based – directed by firm understanding of how bad is too bad – ie define infrastructure provision and performance standards – eg % assets in poor / very poor condition per Portfolio and / or Asset Group Type – ie risk tolerance Gives rise to a target portfolio Health Grade …….to report / determine targets and plan Rolled-up Condition - Portfolio Health Grade Set minimum Health Grade for a 1 Very Portfolio and / or Component Group Good based on CRITICALITY (and input to V Good Good Fair Poor VP optimisation based on affordability) 2 Good 2a Good “Component” Data – Roll-up on V Good Good Fair Poor VP V Good Good Fair Poor VP weighted CRC basis – and complete – not 3 Fair just visible items V Good Good Fair Poor VP Infrastructure Health Portfolio Health (DRC-RV)/ Grade description (CRC-RV) 4 Poor 4a Poor 1 Very Good 65% or more V Good Good Fair Poor VP V Good Good Fair Poor VP 2 Good 52% to 65% 3 Fair 47% to 52 4 Poor 40 to 47% 5 Very Poor 5 Very Poor 40% or less V Good Good Fair Poor VP Nature, Extent, Value and Portfolio Health Annual DRC RV Cost Extent CRC Portfolio depreciatio Asset Class Asset Group Type Extent (R (R opening unit (R million) health n million) million) (R million) (R million) Boreholes 258 No 90 51 0 Good 4 94 Bulk Mains 354 661 m 1 293 473 0 Very poor 17 660 Dams & Weirs 1 No 57 36 3 Very good 1 84 Distribution 4 761 266 m 2 793 1 299 0 Poor 62 1534 Water Supply Distribution Points 350 No 42 33 0 Very good 2 20 Network PRV stations 4 No 4 4 0 Very good 0 2 Pump stations 33 No 38 21 0 Fair 1 37 Reservoirs 368 No 356 186 2 Fair 9 494 Water treatment 6 No 58 32 4 Fair 2 72 works (WTW) Totals 4 731 2 136 9 Poor 99 2 997 Renewals Backlog Establish the condition renewal triggers e.g. not more than 10% of critical assets (by CRC) worse than "Fair" – link to class / type and / or criticality (Can report the infrastructure health based on criticality groups – critical, important, non-critical) - DRC / CRC (excluding RVs) ……. typically DRC/CRC > 50% is target for a portfolio (with a balanced renewals activity), perhaps 40% for non-critical….. Health grade less than 40% is viewed as a tipping point, beyond which the recovery challenge will escalate exponentially – ie the collective increase in deterioration at end of life across a portfolio New Development Cost Model Baseline rates for new development, densification and upgrading – per customer unit (eg site) Underlying model at Asset Group Type level (eg pump station, substation, treatment works, suburb network) Linked to defined levels of service - green field and brownfield cost rates Employ CRC data from the asset register – though take into account changes in modern design requirements – eg environmental / safety / green infrastructure requirements Or …..from first principles - using unit rates, and possibly also applying “cost surfaces” based on cost influencing factors  Establishing a Complete Picture of Capital Backlogs ( / needs) Backlog model that provides a macro picture of the full infrastructure needs over the planning period – per sector: Existing capital backlogs (unaddressed needs): Access backlogs Capacity, performance, condition ……. and future capital backlogs (future needs) as they establish over the forecast period (next 10 …….. Say upto 30 years): Growth (public, private residential, commerce / industry) Ongoing additional capital renewal and upgrading needs  …… the Complete Picture For completeness ……… (next module)………. Maintenance backlogs Status quo (year 0) – actual per sector – wages / salaries, and corporate overheads (including allowance for consumption of workshops, stores etc), material, vehicle and contractor / supplier costs (Spot) needs in year 10, 20 and 30 (maintenance needs model) - based on the assumption of addressing existing backlogs over the period, growth, and service standard / efficiency improvements Operations backlogs Status quo – based on analysis of existing data in Year 0 – bulk purchases, process management (eg at treatment works etc), service standards, change trends – excluding depreciation, interest etc – plus service-based operations (eg libraries) Renewal Response Planning  Multi-term Capital Renewal Needs example Prior to budget smoothing…… 2 500 Operational buildings 2 000 Community facilities Waste facilities R million 1 500 Electricity network 1 000 Roads, Rail and 500 stormwater network Sanitation network 0 Water supply 2017 2010 2011 2012 2013 2014 2015 2016 2018 2019 2020 2021 2022 2023 2024 2025 network Example - Property Life Cycle Model CREATE HIERARCHY & STANDARD REFURBISHMENT RENEW ROUTINE UPGRADE PROJECT DISPOSE -Link to PCS CRITICALITY - Condition - Number of iterations - Expected Useful MAINTENANCE -Component PACKAGING -Cost of making (Project Control - Grade (1 to 5) trigger (linked to (0, 1, 2 etc infinite) Life - Inspections groups that don t safe and or System) criticality) - % Renew Cost - Residual Value - Reactive exist that need to transfer -Componentise - % Expected Useful Current - Scheduled be provided (e.g. Life Extension Replacement - %Current Replacement there is no fire Cost Cost p.a. linked to equipment) criticality and condition Response type -Refurbish or Renew Very Good 100% CRC (CRC +RV) Good Ren ew Renewal %(CRC-RV) Refurb iterations=n Fair Refurb% (CRC-RV) Condition Grade Index CRC % Poor Refurb %EUL x P oor %EUL Refurb %EUL x P oor %EUL Very Poor EUL 0% 30% 55% 75% 90% EUL (%) Initial model established (based on the following per Component *Max of ea ch band anythin g less than 75% is P &VP Group): Description Minimum Rapid Median Maximum 1) Assigned criticality Very Good 70 85 100 2) Assigned condition-based action trigger - e.g. P + VP condition >= 50% Good 45 57.5 70 3) Allocated response type - Replace or Refurbish Fair 25 35 45 Poor 10 17.5 25 4) Where applicable, defined number of refurbish iterations before renewal Very Poor 0 5 10 5) Refurbish or renewal cost applied (using % CRC and Residual Value) 6) Refurbish or renewal life extension applied (% of EUL) 1 © Western Cape Government 2012 | 6  Life Cycle Model parameters – building example LEVEL 1 LEVEL 2 Level 3 Condition based action TRIGGER (% total P+VP) - STANDARD Refurbish Cost Value at end of life Major Component Component Component Component Type of Grade 1-FA Grade 2-FA Grade 3- Grade 4-FA Grade 5-FA REFURB C4 Poor C5 Very Poor % Max No refurb EUL Residual Groups Groups Categories Categories Type Deteriorat Requiremen Requirement FA Requirement Requirement EXTENT A- Pro (%CRC-RV) (%CRC-RV) EUL iterations (years) value ion CURVE t Rating Rating Requirem Rating Rating rata before renew (%CRC) if ent Rating B- Full scope > 20% B. SITE B.2 External Paved Areas Paved Rapid 50 40 50 30 10A 50 100 70 2 20 0 Amenities B. SITE B.2 External Paved Areas Gravel Rapid 60 50 30 30 30 Amenities D. INTERNAL D.3 Internal Interior Wall All finishes Rapid 50 50 40 30 20B 5 0 FABRIC Finishes Finishes Paintwork, Tiles etc. D. INTERNAL D.3 Internal Floor Covering Granolithic Rapid 30 30 30 20 20A 100 100 50 2 40 0 FABRIC Finishes Finish D. INTERNAL D.3 Internal Floor Covering Vinyl Rapid 30 30 30 20 20A 100 100 50 2 15 0 FABRIC Finishes D. INTERNAL D.3 Internal Floor Covering Carpet Rapid 30 30 30 20 20A 100 100 50 2 12 0 FABRIC Finishes D. INTERNAL D.3 Internal Floor Covering Rapid 30 30 30 20 20A 100 100 50 2 30 0 FABRIC Finishes Tiles E. BUILDING E.1 Water and Sanitary Fittings Complete Rapid 60 30 20 10 10B 20 0 SERVICES Sanitation System  Example Sector-level Maintenance and Renewals Models (%CRC pa) 6,0 renewal needs for period 5,0 4,0 maintenance % CRC 3,0 weighted average maintenance & depreciation 2,0 weighted average life-cycle cost for period 1,0 weighted average maintenance 0,0 Solid Waste Community Facilities Water Sanitation Roads and storm- Electricity Operational buildings …. For high-level estimates in conjunction with the development water cost model for forecasting  Capital Needs – Current Backlogs CAPITAL (report period) – Yr 0 prices Yr 0 Replacement Actual Technical Backlog Sector Value (Rm) Expenditur Access Total Increase in Capacity / Additional % Increase Yr 0 e (Rm) Backlog Backlog assets Performance Condition Total (Rm) in Assets Yr 0 (Rm) (Rm) (Rm) (Rm) (Rm) Water 6 199 49 66 415 481 1 001 1 482 1 416 23% Sanitation Capital 4 966 25 Needs 73 – Current 158 Backlogs 231 878 1 109 1 036 21% Roads & Storm-water 31 259 468 112 1 131 1 243 8 825 10 068 9 956 32% Electricity 24 386 1 003 347 4 358 4 705 2 522 7 227 6 880 28% Solid Waste 2 215 131 5 13 18 0 18 13 1% Community Facilities 6 103 201 36 298 334 219 553 517 8% TOTAL 75 128 1 877 639 6 373 7 012 13 445 20 457 19 818 26% % of asset replacement value 1% 8% 9% 18% 27% 26%  Capital Needs – Current Backlogs cont CAPITAL (report period) – Yr 0 prices Yr 0 Replacement Actual Technical Backlog Sector Value (Rm) Expenditur Access Total Increase in Capacity / Additional % Increase Yr 0 e (Rm) Backlog Backlog assets Performance Condition Total (Rm) in Assets Yr 0 (Rm) (Rm) (Rm) From the (Rm) (Rm) asset Water 6 199 49 66 415 481 1 001 1 482 1 416 23% register Sanitation (incl 4 966 25 73 From the asset 158 231 878 1 109 1 036 21% Roads & Storm-water externalCapital Needs – Current Backlogs 31 259 suppliers) 468 register 112 (estimated 1 131 1 243 8 825 10 068 9 956 32% external Electricity 24 386 From1 003 the 347 suppliers 4 358 4 705 From 2 the 522 7 227 6 880 28% Solid Waste 2 215 latest 131 5 13 18 developmen 0 18 13 1% AFS t cost model Community Facilities 6 103 201 36 298 334 219 553 517 8% TOTAL 75 128 1 877 639 6 373 7 012 13 445 20 457 19 818 26% % of asset replacement value 1% 8% 9% 18% 27% 26%  Capital Needs – Growth 1st 10 years CAPITAL (report period) – Yr 0 prices Future (Yrs 1 to 10) Sector Balance Renewal Total capital Increase in % increase in Average annual Growth (Rm) (Rm) (Rm) assets (Rm) assets increase % Water 1 648 757 2 405 1 648 27% 2.7% Sanitation 1 554 213 1 767 1 554 31% 3.1% Roads & Storm-water 9 598 8 862 18 460 9 598 31% 3.1% Electricity 6 983 1 725 8 708 6 983 29% 2.9% Solid Waste 724 258 982 724 33% 3.3% Community Facilities 1 043 1 571 2 614 1 043 17% 1.7% TOTAL 21 550 13 386 34 936 21 550 29% 2.9% % of asset replacement value 29% 18% 47%  Capital Needs – 1st 10 years CAPITAL (report period) – Yr 0 prices Future (Yrs 1 to 10) Sector Balance Renewal Total capital Increase in % increase in Average annual Growth (Rm) (Rm) (Rm) assets (Rm) assets increase % From Water forecasts, 1 648 757 2 405 1 648 27% 2.7% and Sanitation developme1 554 213 1 767 1 554 31% 3.1% Capital nt cost Roads & Storm-water renewal - model 9 598 8 862 18 460 9 598 31% 3.1% existing Electricity 6 983 and1 725 8 708 6 983 29% 2.9% Includes planned Solid Waste private and724 new infra258 982 724 33% 3.3% public Community Facilities budgets1 043 1 571 2 614 1 043 17% 1.7% (addressing TOTAL needs)21 550 13 386 34 936 21 550 29% 2.9% % of asset replacement value 29% 18% 47% Capital Needs – Following 20 yrs Future (Yrs 11 to 30) Total Increase in Average Balance Total Average % increase Sector Growth Increase in % increase capital assets annual Renewal capital annual in assets (Rm) assets (Rm) in assets (Rm) (Rm) increase % (Rm) (Rm) increase % Water 1 648 757 2 405 1 648 27% 1.3% 6 292 4 712 76% 2.5% Sanitation 1 554 213 1 767 1 554 31% 1.6% 4 643 4 144 83% 2.8% Roads & S'water 9 598 112 9 710 9 598 31% 1.5% 38 238 29 152 93% 3.1% Electricity 6 983 1 725 8 708 6 983 29% 1.4% 24 643 20 846 85% 2.8% Solid Waste 724 258 982 724 33% 1.6% 1 982 1 461 66% 2.2% Community Facilities 1 043 1 571 2 614 1 043 17% 0.9% 5 782 2 603 43% 1.4% TOTAL 21 550 4 636 26 186 21 550 29% 1.4% 81 580 62 918 84% 2.8% % of asset replacement 105% 23% 128% 109% value  Future Maintenance Needs MAINTENANCE (pa) Yr 0 Yr 10 Yr 30 Sector Assessed Need Forecast Need Forecast Need Actual Yr 0 (Rm) % increase % increase % increase (Rm) (Rm) (Rm) Water 155 169 9% 192 13% 150 -3% Sanitation 118 139 18% 146 5% 123 4% Roads & S'water 587 839 43% 839 0% 839 43% Electricity 813 1 041 28% 1 126 8% 1 006 24% Solid Waste 83 106 28% 106 0% 106 28% Community Facilities 102 144 41% 177 23% 140 37% TOTAL 1 858 2 438 31% 2 586 106% 2 363 27% % of asset replacement 2,5% 3,2% 31% value ….. Rest is pro- rata to CRC  Maintenance Needs MAINTENANCE (pa) Yr 0 Yr 10 Yr 30 Sector Assessed Need Forecast Need Forecast Need Actual Yr 0 (Rm) % increase % increase % increase (Rm) (Rm) (Rm) Water 155 169 9% 192 13% 150 -3% Maintenance budget model Sanitation – ALL 118 costs (wages, 139 18% 146 5% 123 4% vehicles, workshops, Roads & S'water equipment, 587materials) – 839 43% 839 0% 839 43% assume constant mix of Electricity 813 condition of1 041 assets, target 28% 1 126 8% 1 006 24% assets, efficiency Solid Waste 83 106 28% 106 0% 106 28% improvements. SECTOR- Community Facilities level 102model 144 41% 177 23% 140 37% TOTAL 1 858 2 438 31% 2 586 106% 2 363 27% % of asset replacement 2,5% 3,2% 31% value - detailed model…. or ….. Rest is pro- %CRC rata to CRC  Operational Needs OPERATIONS (pa) Total O&M (pa) Yr 0 Yr 10 Yr 30 Assessed Forecast Forecast Sector Forecast Actual Yr 0 Actual Yr 0 Assessed Forecast Need Yr 0 Need Yr Need Yr % increase Need % increase % increase (Rm) (Rm) Need (Rm) Need (Rm) (Rm) 10 (Rm) 30 (Rm) (Rm) Water 155 165 6% 150 -9% 133 -14% 310 334 342 284 Sanitation 118 127 7% 123 -3% 97 -18% 236 266 269 220 Roads & S'water 587 839 43% 839 0% 839 43% 1 174 1 678 1 678 1 678 Electricity 813 1 030 27% 1 006 -2% 932 15% 1 626 2 071 2 132 1 938 Solid Waste 83 106 28% 106 0% 106 28% 166 212 212 212 Community Facilities 102 168 65% 140 -17% 149 46% 204 312 317 289 TOTAL 1 858 2 434 31% 2 363 97% 2257 21% 3 716 4 873 4 950 4 620 % of asset 9.4% 12.3% 31% 5% 31% 33% 24% replacement value Note: Operations is modelled using existing expenditure as a departure point (and therefore linked to existing levels of efficiency) and caters for envisaged increases in bulk acquisitions, and operational cost increases (such as operations at treatment works) or adjustment to service standards, if any. Depreciation, loan repayments and corporate overheads are NOT included in the model Operational Needs OPERATIONS (pa) Total O&M (pa) Yr 0 Yr 10 Yr 30 Assessed Forecast Forecast Sector Forecast Actual Yr 0 Actual Yr 0 Assessed Forecast Need Yr 0 Need Yr Need Yr % increase Need % increase % increase (Rm) (Rm) Need (Rm) Need (Rm) (Rm) 10 (Rm) 30 (Rm) (Rm) Water 155 ….based on 165 6% 150 -9% 133 -14% 310 334 342 284 Sanitation existing 127 118 7% 123 -3% 97 -18% 236 266 269 220 expenditure / ….including Roads & S'water costs, 587efficiency. 839 43% 839 efficiency 0% 839 43% 1 174 1 678 1 678 1 678 EXCLUDES forecasts, real Electricity 813 depreciation, 1 030 loan 27% 1 006 bulk cost -2% 932 15% 1 626 2 071 2 132 1 938 Solid Waste repayments, 83 106 28% 106increases0% etc 106 28% 166 212 212 212 corporate Community Facilities overheads 102 168 65% 140 -17% 149 46% 204 312 317 289 TOTAL 1 858 2 434 31% 2 363 97% 2257 21% 3 716 4 873 4 950 4 620 % of asset 9.4% 12.3% 31% 5% 31% 33% 24% replacement value Note: Operations is modelled using existing expenditure as a departure point (and therefore linked to existing levels of efficiency) and caters for envisaged increases in bulk acquisitions, and operational cost increases (such as operations at treatment works) or adjustment to service standards, if any. Depreciation, loan repayments and corporate overheads are NOT included in the model Funding options – examples (municipalities) (i) Integrated Urban Development Grant (IUDG) (ii) Municipal Infrastructure Grant (MIG) (iii) Budget Facility Infrastructure (BFI) Grant (offered by National Treasury) (iv) PPPs – though guarantees need to be provided – potential external support (v) SLPs (Social and Labour Plans) from local industry (vi) DBSA loans (for capital projects) with qualifying criteria based on affordability to the municipality, including seed funding for pilot projects (vii) Unsolicited bids (viii) Development charges (previously “Bulk Contributions”)  Portfolio Investment Scenarios 100 % Portfolio not in P/VP Scenario #3 - Aggressive 90 Recovery Expenditure 80 condition Scenario #2 - Moderate 70 Recovery Expenditure 60 Scenario #1 - Holding 50 Expenditure 40 Scenario #0 - Existing 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Expenditure Typical Life-cycle Needs Profile vs Affordability R7 000 Expenditure need pa (R Million) R6 000 R5 000 R4 000 R3 000 R2 000 R1 000 R- 0 10 20 30 Year CAPEX budget availability OPEX budget availability Renewals cost Growth cost Access backlog cost Technical backlog cost Maintenance cost Operations cost Strategic Responses R7 000 Expenditure need pa (R Million) R6 000 R5 000 R4 000 Effective and sustainable R3 000 strategies R2 000 R1 000 R- 0 10 20 30 Year CAPEX budget availability OPEX budget availability Renewals cost Growth cost Access backlog cost Technical backlog cost Maintenance cost Operations cost Planning and Project Preparation Optimisation of the “Project Expenditure Pipeline” Priming with Catalytic Initiatives Wrap ❑ Method to assembling full capital investment needs ❑ Tool to enable determination of constraints and financial scenarios ❑ Capital funding priorities as a basis for preparation of a planned forecast