Revisiting capital planning and delivery in a COVID-19 world

Authors:
Brandon Vatter, Senior Manager (Email)
Mark Olson, Manager (Email)
Seth Garrison, Senior Manager (Email)
Rich McGillis, Senior Manager (Email)

Water finds a way. When confronted by an obstacle, it changes course to find a new level, its new normal.

At the start of 2020, operations and capital programs were flowing along; gaining momentum to meet critical schedules and asset management goals, achieve operational metrics, and match cash flow projections.

The COVID-19 pandemic has required many local governments and utility organizations to change course and shift focus from business as usual to avoiding staff cuts, keeping core functions running, and preserving as much of their capital programs as possible. Many targets and goals are now on the back burner. As we adjust to remote work and online meetings, utilities and local governments must look at how to adjust their operations and capital programs to answer tough questions:

• Can we meet the cash flow target for the year?
• What modifications need to be made to operational metrics and targets?
• Do we need extensions to critical regulatory schedules and deliverables?
• Do project scopes and schedules need to be adjusted to phase projects to reduce spending?

Even without the obstacles posed by the pandemic, both utilities and other units of local governments are challenged with developing defensible capital programs and delivering them on time and on budget. Capital programs are commonly the product of deliberations between senior decision makers, based on historical practices and the juxtaposition of priorities and engineering master plans. Capital program delivery is difficult, and an inability to get projects finished on time may impact future plans and cash flow. Declining consumption and revenue, as well as the specter of other impacts is forcing service providers to make difficult choices. Organizations must adjust programs to meet cash flow changes, while salvaging important capital programs that are critical to ensuring community safety, meeting level of service expectations, conforming to regulatory requirements and maintaining quality of life.

One solution to the challenges is to make capital and operations programs more defensible, efficient, and centered on quantifiable benefits to ratepayers and/or taxpayers. The best way to do this is by defining capital and operations priorities and improving delivery efficiency. This means outreach to stakeholders to better define priorities, as well as internal changes to improve processes, and clearly defining quantifiable ratepayer and constituent benefits. Process changes can include new performance metrics and targets, adjustments to project scopes and schedules, new tools, and new ways of doing business.

Here’s how Raftelis is helping address capital planning and delivery needs:

Step 1: Understand the organization’s priorities and codify the capital planning framework

Capital programs must clearly reflect the priorities of the organization, its customers, and stakeholder to be defensible. Key questions we often hear utilities and local governments asking are:

Capital & Operations Execution

1. Are the costs included for key projects accurate or subject to unforeseen cost increases?
2. Are the current projects the right scope and cost to achieve the desired benefits or regulatory compliance outcomes?
3. Are there operating and capital cost reduction opportunities available to potentially reduce necessary rate increases?
4. Could projects be reasonably phased to spread out expenditures?
5. Are there additional project risks that we should be concerned with that may affect costs and schedule?
6. How do we balance the need and costs for renewing existing assets through a robust asset management program versus costs and schedule timing to build new assets?
7. Do we have the right mix of expenditures on water, wastewater, and stormwater assets to address the greatest risks and regulatory obligations?
8. Are the selected mix of projects and capital spending centered on benefits to the ratepayers and are these benefits easily quantifiable and defendable?
9. How do we get our capital program delivery back on track working remotely and with reduced revenue?

Procedure & Process Improvements – Can We do More with Less?

1. Do we have the necessary staff and organizational structure to execute the capital program?
2. Do we have the necessary program management information and data systems in-place or are improvements needed to execute the capital program?
3. Are the needed schedule and risk management processes and procedures in-place to execute the projects on scope, schedule and budget?
4. Do we need staff training and/or coaching to ramp-up the capital expenditures from current levels?
5. Do we need better cross-communications and processes between operations and design groups to more effectively execute projects and reduce operating and capital costs?

Understanding how to address these key questions and defining a set of weighted priorities is necessary to make decisions about what capital efforts are funded and when. Raftelis can work with your organization to develop or refine your prioritization framework and methodology for capital programs. This will generate a highly defensible decision-making framework.

Step 2: Refine the capital planning process

Having developed a clear prioritization methodology focused on addressing priorities and goals, attention can be focused on improving and refining the capital planning and delivery processes to meet them. In this step, waste or inefficiencies in existing processes are identified, as are cases where processes are not meeting evolving needs. Examples might include: delays in procurement and lack of cash flow tracking for projects on a monthly basis. Staff are interviewed, projects are reviewed, and current processes are documented. The steps to refine the capital planning process are:

1. Review of the Five-Year Capital Program to understand projects scopes and budgets. Projects are discussed with staff to understand details, confidence in project budgets, risks, and desired outcomes.
2. Determine if the provider’s regulatory short and long-term obligations are met with the proposed capital projects. Identify gaps and make recommendations to close those gaps.
3. Identify potential opportunities to reduce project costs or achieve regulatory compliance more cost-effectively. Recommend next steps to achieve cost-savings.
4. Evaluate whether utilizing the Integrated Planning provisions now included in the Clean Water Act will help prioritize projects or cost less than the current approach.
5. Identify if projects in the provider’s CIP have an optimum mix of asset management (renewal of existing assets) and new assets construction to comport with industry standard metrics and/or meet other objectives.
6. Identify process, procedure and/or staffing improvements to increase annual capital spending rates to achieve the target annual cash flow goals.
7. Recommend next steps to achieve and implement the identified improvements.

Step 3: Ask the hard question, “can we do more with less?”

In this step, our team works with clients to identify opportunities to reduce their operations budget. Major operations expenditures will be discussed and reviewed with staff to understand details, confidence in budgets, are risks identified, and if expenditures will achieve the required outcomes. Working closely with staff the following are identified:

1. Potential opportunities to reduce operations costs or achieve regulatory compliance more cost-effectively are identified. Next steps are recommended to achieve those cost-savings.
2. Operational improvements to increase asset renewal, system condition assessment rates or system cleaning rates to meet industry standard metrics and client’s objectives.
3. Potential technology and process tools improvements to reduce costs, streamline project scheduling and tracking, and increase performance efficiencies.
4. Additional staff training and/or coaching needs, along with potential better communications to internal and external customers.

Step 4: Implement changes

Finally, changes to the program and processes must be implemented. Improvements must be implemented in a logical, stepwise, rapid manner. A clear implementation plan, accompanied by a strategy to communicate effectively within the organization, to elected officials, and to outside stakeholders is developed and implemented to meet priorities and goals.

Rather than writing a report with recommendations and leaving it to clients to find time to implement, Raftelis provides the necessary staff and skillsets to help them quickly and efficiently implement the recommendations.

Takeaway

Raftelis can help you identify your new obstacles, change your course, and find your new normal. Water finds a way – and so do we. Together.

To learn more, see how we helped our clients with their capital and operations programs.