Are your assets earning their keep? Why sustaining asset investment is critical to maximising value - Aurecon

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Are your assets earning their keep? Why sustaining asset investment is critical to maximising value

Senior decision makers in asset intensive organisations, such as refineries, processing plants, airports, ports, water and energy utilities, telecommunications companies, hospitals, schools and universities face a challenging balancing act of driving short-term cash flow whilst investing appropriately to maximise long-term value.

Furthermore, macro forces including volatility of demand and price investment signals, natural resource depletion and declining ore grades, ageing assets, increasing regulatory scrutiny of investment plans and investor expectations around climate change, sustainability and social licence to operate are adding a degree of complexity to this balancing act like never before.

Despite these forces, organisations must still push to achieve greater profitability while avoiding large capital expenditure, managing risk, and maintaining a license to operate. One of the key levers for achieving this delicate balance is the effective deployment of ‘sustaining capital’ to reinvest in the existing asset base.

Sustaining capital is one of four key operating priorities that successful asset intensive businesses effectively manage:

Four key operating priorities for asset intensive businesses

Operating priority

Operational Excellence

  • Maximising asset performance and reliability while reducing operational expenditure

Sustaining capital

  • Effectively investing in the existing asset base to achieve business objectives

License to operate

  • Ensuring that the right decisions and actions are taken to sustainably maintain a license to operate

Risk

  • Ensuring that business risks are understood and adequately managed

Three key operating priorities for asset intensive businesses

operational excellence

Operational Excellence

Maximising asset performance and reliability while reducing operational expenditure

License

License to operate

Ensuring that the right decisions and actions are taking to sustainably maintain a license to operate

risk

Risk

Ensuring that business risks are understood and adequately managed

Asset reinvestment

Reinvesting in the existing asset base to remain competitive through the effective indication, prioritistion and implementation of the right projects

Quite distinct from routine maintenance, sustaining capital, or asset reinvestment, is the continuous deployment of capital necessary for a business to remain relevant and competitive. This includes replacing and refurbishing assets which have deteriorated, as well as projects to incrementally improve productivity, reduce cost and maintain a license to operate: all part of ensuring that the organisation achieves its strategic goals.

Using an industrial plant as an example, this would include debottlenecking projects (equipment upgrades or modifications), major maintenance projects (equipment, piping and vessel replacement), new buildings, energy efficiency projects and environmental projects (scrubber upgrades, environmental controls and oxidiser upgrades).

Asset reinvestment is extremely important

However, it often does not receive the same level of attention as major growth projects.

While some organisations understand its importance, many still struggle to get the best out of it. More often than not, their problems lie in one or more of these four key areas:

identify

Identify

  • Find the right projects
select

Select

  • Select the best projects in the optimal order in which to execute them
deliver

Develop & deliver

  • Develop and deliver the solution
integrate

Integrate

  • Commission, ramp up and achieve full project value

These areas are characterised by the questions:

  • Finding the right projects: “What projects should I do?” (Note: this sometimes leads to “What does my organisation want to achieve?”)
  • Shortlisting and prioritising them: “Which ones do I do first?”
  • Delivering the projects well: “How do I deliver to requirements, on budget and schedule?”
  • And finally, one that is often overlooked, realising full value: “How do I get my new project fully operational?”

Typical signs and symptoms of an ineffective approach to asset reinvestment programs include:

  • Projects developed and delivered inconsistently, resulting in poor project outcomes, cost, schedule and over-runs
  • Difficulty in identifying, valuing and prioritising projects
  • Recycling projects due to poor business case definition and stakeholder alignment
  • Poor visibility of project performance
  • Unexpected project cost and schedule overruns
  • Surprise ‘business critical’ projects which need to be fast tracked (panic projects)
  • Poor project performance due to lack of project management and technical capability
  • Lengthy procurement and contract delays
  • Misalignment of roles, responsibilities and expectations between operations, projects and functional groups

More often than not, taking the wrong approach to answering these fundamental questions causes slippage in the delivery of the program which often manifests itself as “underspend” within a financial year. This almost always leads to significant value loss which can compound over multiple years if not addressed.

Program value loss due to underperformance

Program value loss due to underperformance - Aurecon

Underinvesting in the existing asset base can lead to:

  • Decreased competitiveness
  • Legislative breaches and loss of regulatory license to operate
  • Major safety incidents
  • Catastrophic equipment failure
  • Community outrage and loss of social license to operate

Preserving, maximising and realising value – how to get it right

Organisations that fully realise the value of their ongoing reinvestment programs take a strategic and structured approach to their deployment of sustaining capital.

Many mature businesses have some form of this:

Clear process

Clear process

A well defined capital program process with clear decisions/gating and fit-for-purpose program activities

Decision methodologies to identify & prioritise combined with strong delivery to re-risk scope, cost and schedule

But many business lack these 'golden threads' across their processes to make it work in practice.

Clarity of objectives

Clarity of objectives

Alignment on business objectives and clarity on value drivers

Aligned to business outcomes (free cash, NPV, ROA), not simply about delivering assets and projects

Robust program oversight

Robust program oversight

Robust program governance support by real-time digital project controls

Tracking the right metrics, linked to business outcomes and providing early warning of issues

Harnessed asset data

Harnessed asset data

Available asset and business data is validated and harnessed to inform key decisions

Ensure decisions are grounded in a deep understanding of asset performance i.e. linking operations to finance

Sufficient capability

Sufficient capability

Sufficient capability and capacity to manage the program including engineering/technical capability

Engage a multi-disciplinary team including, as examples, asset management, program management, technical and finance professionals

Organisational alignment

Organisational alignment

Strong communication and alignment across the organisational units involved, clear accountabilities

Complementing the process and technical capabilities with requisite organisational support

Integrated technical knowledge icon

Integrated technical expertise

Deep technical expertise and knowledge of the asset base, translated to business imperatives

Deep technical expertise across all asset classes

The best practice approach we adopt at Aurecon (across project identification and selection, delivery and project integration) is underpinned by these critical factors:

  1. A clear process: a well-defined capital program and process with clear line for decision making. Many organisations have some form of this (i.e., they undertake a process to understand which projects, priorities etc.), however, to really make it work in practice, a further five additional pivotal factors are needed.
  2. Clarity of objectives: Alignment on business objectives and clarity on value drivers is an essential part of effective program and project decision making. Put simply, understanding what you seek to achieve as an organisation, what you seek to achieve from your assets, then how that cascades into what you need to achieve from your capital program, and the value drivers for how to judge projects, is essential. This then needs to be translated into an objective, measurable set of value drivers to allow for effective decision making and prioritisation.

    Does your organisation have a clear and well understood set of value drivers tied back to business objectives?
  3. Robust program oversight via independent governance and effective digital project controls and data management: strong program governance and management strategies are crucial to oversee the program and provide transparency to as well as ensure alignment with project owners and stakeholders. These must be supported by real time digital project controls and a robust system using data to provide visibility and a greater understanding of what is occurring, where projects are, their value, costs in a timely and accurate manner.

    Do your program governance controls provide management and stakeholders with the information and assurance that they require?
  4. Harnessed asset data: before decisions can be made around which projects to prioritise, you first need accurate quantitative financial and operational data about your asset e.g. which assets are approaching end of life, which parts need replacing, where bottlenecks are and where your operational risks lie. Having smart digital and data enabled asset management strategies ensures you can make well informed decisions around which projects are necessary and what order will be most effective.

    How well do you understand your assets and what investment actions are required to maximise value?
  5. Sufficient capability: Top tier organisations prioritise three key aspects: focus, capability and capacity.
    • Focus – the co-ordination of numerous minor capital projects works and across multiple areas and stakeholders is challenging. Having program and project teams that are focused on delivery and not distracted by day to day operational issues is essential.
    • Capability – project management and technical professionals with the right experience and expertise are critical to successful program delivery.
    • Capacity – having enough of the right people to deal with the large peaks and troughs of program workload while being efficient is difficult without access to a reliable contingent workforce.

    Do you have enough people, with the right skills, and do you have proven methods for upskilling?
  6. Aligned people across the organisation: With a multitude of stakeholders competing for capital, organisational alignment around a clear set of objectives and drivers (i.e. #2 above) is vital for successful asset reinvestment. This ensures that the entire organisation is working together to achieve the same outcomes and goals. Key to achieving this are strong leadership, effective communication strategies and clear accountabilities across all parts of the business.
  7. Integrated technical expertise: Businesses with physical assets require real world, technical solutions that not only work but deliver tangible business outcomes. However, creating such solutions requires a unique combination of deep technical expertise, a sound knowledge of the asset base and a clear understanding of how they influence business value drivers to ensure that they can be translated to business imperatives.

    Does your capital program and organisation pull together as a whole?

Translating organisational objectives into outcomes

Transforming organisational objectives into outcomes - Aurecon, sustaining capital investment
Transforming organisational objectives into outcomes - Aurecon, sustaining capital investment

Organisations could be coming into, going out of, feeling pain or seeing opportunities in any of these areas within their asset reinvestment programs. However, understanding and managing all six factors effectively will maximise opportunities and ensure that value is fully realised. Another way to look at it is that effective asset reinvestment will ensure that the business is sustainable long term, in line with regulation, stakeholder and customer expectations and profitability goals.

Sustaining asset investment is broader than a project delivery exercise

Across industry, as corporate capital allocation priorities have swung from a ‘growth at all costs’ mentality, to one of capital discipline, there has been a move towards a balanced capital investment portfolio which combines essential sustaining capital spend with selected growth projects to meet ROI requirements. This, combined with the constant drive to improve profitability, means that there is an increased appetite for ensuring that existing assets are operating efficiently and that risks are managed of which asset reinvestment plays a critical role.

Organisations can create and lose significant value through the effective (or ineffective) management of their ongoing program of investment. To ensure that assets earn their keep and deliver continuous improvement, no matter what the business cycle, an effective ongoing asset reinvestment program is critically important to deliver and support sustainable growth and value creation, now and into the future.

Contact Azlan Ho for more information on how Aurecon can help deliver your ongoing sustaining capital /asset reinvestment program to maximise and realise value – covering project identification and selection, delivery, engineering and project integration.

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