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:
License to operate
Maximising asset performance and reliability while reducing operational expenditure
License to operate
Ensuring that the right decisions and actions are taking to sustainably maintain a license to operate
Ensuring that business risks are understood and adequately managed
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).
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:
Develop & deliver
These areas are characterised by the questions:
Typical signs and symptoms of an ineffective approach to asset reinvestment programs include:
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.
Underinvesting in the existing asset base can lead to:
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:
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
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 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
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 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
Strong communication and alignment across the organisational units involved, clear accountabilities
Complementing the process and technical capabilities with requisite organisational support
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:
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.
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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