Reinvigorating Capital Improvement Planning: Changing the Face of Project Prioritization

Introduction:
Every water utility in the world goes through the process of creating capital improvement plans (CIPs). Some utilities are more proactive than others, and as CIPs are the formalization of prioritizing capital projects, all face the same challenge, trying to ensure the 'right' projects are prioritized for the available funding.

This paper will describe a new and reinvigorated approach to capital planning that looks to balance capital cost, with the risk reduction of completing a project and leveraging the benefits associated with each project to create balanced, equitable and flexible CIPs. A reinvigorated approach will be of interest to all water utilities wishing to streamline their CIPs. Whether under a financial burden or failing to deliver projects through lack of clear decision making and prioritization, this approach offers a clearer, objective and more defensible approach to capital planning.

Approach:
Applying a reinvigorated CIP approach involves comparing all projects using three common criteria, risk, benefit and cost. Risk when applied is termed risk reduction benefit (RRB). For CIP planning, the RRB is typically determined as the cost of asset failure if not replaced and project benefits. The benefit criteria are identified as a project's social, environmental and economic attributes; collectively called triple bottom line (TBL) and are the potential upside across these areas of building a project. The third common criteria to be considered is cost, the capital and operational cost of implementing a project. The CIP project and the associated common criteria are entered into a prioritization model designed to maximize TBL and RRB and minimize the cost exceedance of the entire CIP portfolio. Figure 1 shows the simple prioritization model. Although simple in concept, prioritizing using three criteria is complex and the approach uses Optimizer™ software by Optimistic to complete the calculations. The software that uses a heuristic learning algorithm, which is an approach designed to solve multi-criteria problems in a faster and more efficient manner that favors speed of process over absolute accuracy or completeness.

The TBL vs. RRB vs. Cost approach when applied to Atlanta made the CIP more comprehensible as each project had a business value and is removed the elements of doubt as to whether the 'right' project were being promoted.

Results:
Stantec applied an Optimatics model for Atlanta using a triple bottom line per dollar (TBL/$) and risk reduction per dollar (RRB/$) to evaluate project benefits and risks. This provided quantifiable and equitable justifiable decisions to governing bodies, regulatory agencies, funding entities, and customers.

The example shown in Figure 2 is taken from Atlanta's Enterprise-wide CIP shows how for the optimal CIP following re-prioritization, the application of annual budget was applied, and how funds for large capital projects were encumbered over more than one year, and projects of different types distributed to create a rolling comprehensible, equitable, and flexible CIP.

Conclusions:
All projects included in a CIP are important but prioritizing them based on triple bottom line per dollar (TBL/$) and risk reduction benefit per dollar (RRB/$) will mean that when scheduling is being determining in year 1, and revisited in subsequent years, will ensure that projects remain value and the changing risk through deteriorating assets are recalculated, moderate risk in year 1, may become a high risk by year 5; understanding the current risk and the potential for change in the future will ensure that, not only are 'right projects' being included, but they are also being designed and implemented at the 'right time'.

One fundamental need of this approach is that the optimization model is designed to run on a routine and periodic basis; for most water utilities this is likely to be on an annual basis. During subsequent updates, the CIP project parameters and cost assumptions can be reviewed and updated as needed. Concurrently, the TBL and RRB scores for those projects already included will be revisited and updated to reflect the passing of time. New scored projects will then be added to OptimizerTM, and a range of scenarios be recreated. Using the available revenues, and project schedules for the next 10-years, the CIP will be re-prioritized, and a new CIP created.