Department of Treasury and Finance
Tasmania
10 DECEMBER, 1996 - 2
PROJECT INITIATION PROCESS
Page1
Foreword
Over the past few years, the Tasmanian State Service has made considerable progress in
the implementation of financial management reforms. The aim is to provide better value
for money in the delivery of services. The reform agenda has been outlined in the
publication Tasmania’s Financial Management Reform Strategy July 1996 issued by
Treasury.
Central to the reform agenda is the need for improved accountability for the use of
scarce resources.
Physical assets comprise a significant segment of public sector resources. Those assets
under the control and stewardship of public sector agencies are held and used to meet
Government policy objectives through the provision of goods and services.
Effective asset management is essential in an environment where there are competing
demands for Government resources.
In order to improve the management of the State’s resources, the Government has
recognised that there is a need for the development of a framework for strategic asset
management. A framework for the strategic management of public sector assets will be
published in early 1997.
The Project Initiation Process is a significant component of strategic asset management,
ensuring that new investments in infrastructure assets are made only where they are the
most appropriate means to support improved service delivery.
The Project Initiation Process establishes a structured framework to be followed by
agencies in presenting projects proposed for inclusion in the Capital Investment
Program.
D W Challen
SECRETARY
December 1996.
Page2
TABLE OF CONTENTS
1. INTRODUCTION ................................................................................................................................. 5
1.1 BACKGROUND .................................................................................................................................... 5
1.2 THE PROJECT INITIATION PROCESS .............................................................................................. 5
1.3 BENEFITS ............................................................................................................................................. 6
1.4 APPLICABILITY .................................................................................................................................. 7
1.5 VALUE MANAGEMENT OVERVIEW ............................................................................................... 7
2. PROJECT INITIATION PROCESS (PIP) ......................................................................................... 8
2.1 SEQUENCE OF PROCEDURES AND PRODUCTS ............................................................................. 8
3 FUNCTIONS ........................................................................................................................................ 11
3.1 FUNCTION ANALYSIS / FUNCTIONAL BRIEF.............................................................................. 11
4 OPTIONS .............................................................................................................................................. 12
4.1
4.2
4.3
4.4
4.5
GENERATE OPTIONS ...................................................................................................................... 12
CHECK OPTIONS AGAINST FUNCTIONAL BRIEF...................................................................... 12
OPTION PREPARATION .................................................................................................................. 12
SHORT-LIST OPTIONS .................................................................................................................... 12
OPTION DEVELOPMENT ................................................................................................................ 13
5 RISK ANALYSIS ................................................................................................................................. 13
5.1
5.2
5.3
5.4
5.5
5.6
5.7
THE PROCESS OF MANAGING RISK .............................................................................................. 13
DEVELOPMENT OF RISK ASSESSMENT CRITERIA ..................................................................... 14
RISK IDENTIFICATION .................................................................................................................... 14
RISK ANALYSIS ............................................................................................................................... 14
RISK ASSESSMENT .......................................................................................................................... 15
RISK TREATMENT ........................................................................................................................... 15
MONITORING AND REVIEW. ......................................................................................................... 15
6 BUDGET ANALYSIS .......................................................................................................................... 16
6.1 INTRODUCTION ..................................................................................................................................... 16
6.2 NET PRESENT VALUE .................................................................................................................... 16
6.3 DISCOUNT RATE ............................................................................................................................. 16
6.4 PROCESS ........................................................................................................................................... 17
6.4.1 CASH FLOWS ............................................................................................................................... 17
6.4.2 CALCULATE THE NPVS ............................................................................................................. 17
6.5 EXPERTISE........................................................................................................................................ 17
7 COMPARATIVE ANALYSIS STATEMENT................................................................................... 18
8
PROJECT DEFINITION STATEMENT ........................................................................................ 18
8.1 CONTEXT .......................................................................................................................................... 18
8.2 PDS CONTENT ................................................................................................................................ 18
Page3
8.2.1 STATEMENT OF PREFERRED OPTION ...................................................................................... 18
8.2.1.1 Project title and description ..................................................................................................... 18
8.2.1.2 Government’s stated policy objectives ..................................................................................... 18
8.2.1.3 Total project cost ...................................................................................................................... 19
8.2.1.4 Additional costs related to the proposal ................................................................................... 19
8.2.1.5 Project timetable ...................................................................................................................... 19
8.2.1.6 Funding .................................................................................................................................... 19
8.2.1.7 Functional Analysis .................................................................................................................. 20
8.2.2 COMPARATIVE ANALYSIS STATEMENT ................................................................................. 20
8.2.2.1 Identification of short-listed options ........................................................................................ 20
8.2.2.2 Risk analysis of the short-listed options ................................................................................... 20
8.2.2.3 Budget analysis of short-listed options .................................................................................... 20
8.2.3 PROJECT APPROVAL ................................................................................................................... 20
9 CONCLUSION ..................................................................................................................................... 21
Page4
1. INTRODUCTION
1.1 Background
The effective and efficient management of public sector physical assets is fundamental
in an environment where there are competing demands for Government resources.
In recent years, the Government has introduced a series of measures to improve the
management of the State’s physical assets, including:
 the devolution of funding for office accommodation costs to agencies
 a requirement for agencies to develop strategic asset management plans
 strategic asset management planning with a whole of Government perspective
 a consultancy to develop options for commercialisation of Government property
services
 the introduction of a revised Capital Investment Program from 1996-97.
Building on the reforms introduced to date, a policy framework for the strategic
management of physical assets is being finalised and will be published in early 1997.
A key element of that framework is the establishment of a Project Initiation Process for
projects proposed for inclusion in the Capital Investment Program.
1.2 The Project Initiation Process
The Project Initiation Process (PIP)facilitates capital investment decision-making by
requiring agencies to rigorously evaluate proposals for capital investment projects at the
earliest stage.
Because infrastructure assets only assist in the delivery of services, a process must be
followed to ensure that the need for new investment can be clearly demonstrated.
The process for assessing capital investment proposals must include a review of: service
delivery; alternative asset solutions; capital budgeting and risk.
In implementing the PIP, agencies should concentrate on the planning of services and, in
particular, the resources required for the delivery of those services.
The greatest potential for identifying and achieving capital and recurrent savings is in
the early planning phases of a project (see diagram below). Significant savings can be
realised through careful consideration of the need for new services and the most
appropriate means of service delivery.
Page 5
high
The opportunity to influence costs
is greatest in the early phases
ability to
influence
costs
low
Initate &
Develop
design
construction
completion
The PIP will ensure that investment in assets will occur only where the need for the
assets has been identified, thoroughly investigated, evaluated and substantiated.
Projects will not be approved for the Capital Investment Program until a PIP has been
undertaken.
The PIP, by emphasising the need for detailed planning and evaluation of projects, will
assist agencies in establishing the most appropriate means of meeting service delivery.
For inclusion on the Capital Investment Program in 1997-98 and thereafter, completion
of a PIP will be required for all bids for projects valued at more than $100 000.
1.3 Benefits
The Project Initiation Process will:
 ensure that the Government receives the best value from its investments by requiring
an analysis of needs, risk and budget in more than one development option before an
investment is approved
 promote efficient and effective planning of service delivery strategies and resource
needs by agencies
 ensure the clear definition and documentation of the criteria which will be applied to
determine project viability and to support project justification
 encourage service delivery options which are innovative, including:
• solutions developed in conjunction with the private sector
• using optimum technology to achieve desired outcomes
• “no build” solutions to satisfy service delivery needs
• “end use” planning to provide alternative uses for built assets
 provide an audit trail of the processes followed to arrive at the option proposed.
Page6
1.4 Applicability
The Project Initiation Process will apply to all projects funded through the Capital
Investment Program.
While the basic principles of the PIP can be applied to all investment projects, it will be
mandatory for all projects with a cost of more than $100 000.
The degree of detail required will vary according to the size, complexity and specific
circumstances of each project. Agencies should consult with Treasury, on a case by
case basis, to determine the specific approach and standard necessary to satisfy
Government’s requirements.
For projects with a cost between $100 000 and $250 000, a properly recorded, “inhouse” PIP would satisfy audit requirements and should ensure the best solution for
Government. This is a relatively simple procedure.
For projects with a cost between $250 000 and $750 000, agencies may need to engage
professional consultants to assist with the PIP.
For projects with a cost greater than $750 000, agencies are expected to engage
professional consultants, unless appropriately qualified professionals are available from
within the agency.
The need for assistance from external consultants will depend on the complexity of the
project and an agency’s in-house expertise in the required skills. A school laboratory
refit and extension may cost in excess of $250 000, but alternative options may be very
limited and the various Project Initiation Process elements could be worked through inhouse. However, to extend the size of a primary school by fifty percent may require
expert consultant advice.
1.5 Value Management Overview
The incorporation of Value Management in the Project Initiation Process represents the
integration of a structured process of analysis into the earliest stages of planning for
service delivery. As a “best practice” process, it is used to maximise value for money.
Value Management is a structured, systematic and analytical process which seeks to
ensure all necessary functions are provided at the lowest total cost consistent with
required levels of quality and performance.
Underlying the Value Management process are the principles that there is always more
than one way to satisfy a need and that a rigorous and structured examination of the
alternatives will produce the most acceptable solution.
The Value Management process incorporated in PIP has been tailored to suit public
sector needs and is set out in the following steps:
Page7
FUNCTION ANALYSIS

Identify and rank the functions required, together with their relative cost and worth

Establish all the user requirements; include benchmarks of the requirements.
GROUP FUNCTIONS

Sort the required functions into process-related groups
OPTION GENERATION

Generate value improvement options through considering innovative and
alternative means of achieving the required functions.

Short-list viable options.

Further develop options for evaluation.
2. PROJECT INITIATION PROCESS (PIP)
2.1 Sequence of Procedures and Products
 Agency identifies a service delivery requirement.
 Agency considers that an asset investment may be required to deliver a specific
service.
 Function analysis is conducted to set out all of the functions contained within the
service delivery requirement. These are consolidated in a functional brief.
 The functions are grouped into interrelated (process related) function groups.
 Options are generated to meet each function group and set out into:
-
those proposing service contract;
those proposing leased assets (various innovative lease arrangements are
available);
those proposing owned assets.
The latter two both provide accommodation for Government employees.
A service contract may be possible for the entire service delivery need, for only some
of its function groups, or not at all. A service contract would be awarded to an
external supplier following a comprehensive tendering and contracting process.
 Each option for service contracts and leased and owned assets is checked against the
functional brief to determine if it addresses the required functions.
 From those options which provide the required functions, a short list is compiled.
 Short-listed options are developed to allow them to be evaluated.
 Risk analysis and budget analysis are applied to the developed options.
Page8
 A Comparative Analysis Statement is prepared, incorporating the following
‘products’ generated by the Project Initiation Process for each function group:
. the short-listed options
. budget analyses
. risk analyses
 The Comparative Analysis Statement is evaluated and the Preferred Options
determined. These may be any of (or a mix of) service contract, leased asset and
owned asset.
 A Preferred Option involving owned assets is forwarded, in the form of a Project
Definition Statement, by the agency Minister to the Budget Sub-Committee for
consideration in the forthcoming Budget round. If supported by Budget Committee
and approved by Cabinet, the proposed asset construction or purchase will be placed
on the Capital Investment Program.
 A Preferred Option involving leased assets will proceed to a lease agreement process.
 A Preferred Option involving service contracts will proceed to the Competitive
Tendering Contract process.
The following chart outlines the elements of the Project Initiation Process. Detailed
explanations of the key steps in the process are set out in Sections 3 to 8.
Page9
=Product
2.2 PROJECT INITIATION PROCESS
FLOW CHART
FUNCTIONAL
BRIEF
FUNCTION GROUP
FUNCTION 4GROUP
FUNCTION GROUP
3
FUNCTION GROUP
2
1
OPTION
OPTION
OPTION
=Process
Function
Analysis
refer Section 3
Group
Functions
refer Section 3
Generate
Options
refer Section 4
SERVICE CONTRACT
LEASED ASSET
OWNED ASSET
Risk Analysis
and
Budgeting
Analysis
refer Section 5 & 6
COMPARATIVE ANALYSIS STATEMENT
Summary
refer Section 7
Service Contract
Lease Agreement Project Definition
Statement
Page10
Preferred Option
refer Section 8
29 November, 1996
3 FUNCTIONS
FUNCTIONAL
BRIEF
3.1 Function Analysis / Functional Brief
Value Management is particularly useful in focusing on objectives and priorities. It
depends on a Functional Analysis which rigorously examines the cost and worth of
precisely described functions.
Function Analysis involves clearly identifying all the component functions contained in
the service delivery requirement.
Key questions are asked during the analysis of functions, namely:




What does it do?
What must it do?
What does the function cost?
What is the function worth?
Functions can be simply defined and described in verb-noun terms.
The function definitions produced through this process are assembled into a functional
brief.
3.2 Function Grouping
It is fundamental to examine the functions from the perspective of a whole system. This
involves the linking of interrelated or interacting functions into groups known as
functional groups.
These groups will demonstrate the logical and operational relationship between
functions.
A number of techniques have been developed to analyse and link functions. These
include Functional Hierarchies and the use of Function Analysis System Technique
(FAST).
The purpose of grouping functions is to provide the basis upon which alternative options
may be generated and evaluated. Thus options involving service contracts, leased assets
and owned assets may be developed and assessed for each functional group.
Functional grouping may also provide opportunities for combining (reducing) functions,
while still ensuring that there is compatibility between functions within the whole
system.
Page11
4 OPTIONS
OPTION
OPTION
OPTION
4.1 Generate Options
It is recommended that a number of options be generated for achieving the function
groups required. Lateral thinking is encouraged to produce as many options as possible.
The basis for the generation of options is encompassed by the following questions:
 How else may the required function groups be achieved?
 What else would carry them out?
 What will the alternatives cost?
4.2 Check Options Against Functional Brief
Options are again checked to ensure that they provide what is required by the agency’s
functional brief. Any significant non-compliance with the brief will require an option to
be modified or discarded.
4.3 Option Preparation
Set out options, together with comment on feasibility, cost, constraints, etc.
Some of the options may require further analysis and consultation, particularly where
other parties or projects are involved.
Distinguish between options requiring:
 service contracts
 leased assets
 owned assets
OPTION
OPTION
short list
4.4 Short-list Options
Based on the indicative information on options set out in Section 4.3, select a short list
of options for further development and examination. Elimination of options is always
made on the basis of failure to match the requirements established in the functional
brief.
Page12
Additional research may be required before finalising the short list.
4.5 Option Development
Short-listed options are now developed to a stage which will enable them to be critically
evaluated.
Details to be developed and fully documented include:
 a variety of factors required for Risk Analysis - refer Section 7.
 breakdown of all costs, time schedule needs, life cycle considerations, etc., all
required both for the Budgeting Analysis and for consideration by Budget Committee
- refer Section 8.
risk analysis
statement
5 RISK ANALYSIS
5.1 The process of managing risk
Risk management is a process, effected by management, designed to provide reasonable
assurance that objectives will be achieved by the project.
The risk management process is crucial to ensure that the Government obtains value for
money and that all risks are identified and managed effectively.
The risk management process consists of well-defined steps which, taken sequentially,
support better decision-making by forecasting project risks and their impact.
Application of the risk management process is necessary for effective strategic planning,
and leads to reduce costs and improved outcomes through:
 identifying and reducing key risk exposures
 providing greater certainty to support decision-making, and
 improving the planning of contingencies for dealing with risks and their impact
Projects being assessed under the Project Initiation Process involve significant
Government outlays and will benefit from close attention to risk management. Three
aspects of these projects make risk management essential:
1. there may be large losses unless projects are managed carefully;
2. for assets with long economic lives, risks associated with changing economic
conditions, varying levels of demand for services and changes in competition, must
be anticipated and managed; and
3. investments involving private sector participation require the identification and
management of the Government’s residual risks.
Page13
Risk management is an integral part of good project management. To be most effective,
the agency must consider risk at both the strategic planning stage and during the Project
Initiation process.
5.2 Development of risk assessment criteria
In order to analyse the risks within a project and determine whether or not they are
acceptable, they must be ranked and assessed according to certain criteria. The level of
acceptable risk will vary from project to project, according to the responsible agency’s
policy, service delivery requirements and the project objective. Criteria may be based on
operational, technical, financial, legal and social factors.
In determining those elements which are crucial in supporting or impairing its ability to
manage the risks associated with the project, the agency should identify the project
stake-holders (owners, personnel, customers, suppliers and the community) and
establish communication channels with them.
5.3 Risk identification
This step involves examining all sources of risk, including risks not under the direct
control of the agency, from the perspective of all stake-holders, both internal and
external.
Generic sources of risk include:








commercial and legal relationships;
economic circumstances;
personnel/human behaviour;
natural events;
political circumstances;
technology and technical issues;
management activities and controls; and
individual activities.
5.4 Risk analysis
The likelihood and potential consequences of each risk should be analysed. The
objective is to separate minor acceptable risks from major ones and to provide data to
assist in risk management. Risk analysis may concentrate on a number of possible areas
of impact, including:





asset and resource base, including personnel;
revenues and costs;
the community;
performance, including timing; and
the environment.
Page14
5.5 Risk assessment
An assessment should be undertaken of whether risks are acceptable or unacceptable by
comparing the level of risk found during risk analysis against the established risk
criteria. The output of a risk assessment is a prioritised list of risks for treatment.
5.6 Risk treatment
Risk treatment requires the identification and evaluation of the options available to deal
with risk. Then, a risk treatment plan needs to be prepared and implemented. The risk
treatment needs to be appropriate to the significance of the risk and the importance of
the project. There are four broad strategies for the treatment of risk:
1. avoid the risk by deciding not to proceed with the project, or by choosing an
alternative course of action to achieve the same outcome;
2. reduce the level of risk through management or organisational controls;
3. transfer the risk by shifting the responsibility for it from the agency to another party
(such as an insurer); and
4. accept those risks which cannot be avoided or transferred, or those where the
likelihood and potential consequences of the risk are low.
Selection of the most appropriate risk treatment option involves balancing the cost of
implementation against the benefit obtained. Options should be evaluated on the basis
of the extent of risk reduction, and the extent of benefits or opportunities created.
5.7 Monitoring and review.
Monitoring and review is an essential and integral step in the risk management process.
Risks and the effectiveness of the risk treatment plan need to be monitored as the project
proceeds to ensure that changing circumstances do not alter the risk priorities or their
consequences. The review process should be specified in the risk treatment plan.
Page15
capital budgeting
analysis statement
6 BUDGET ANALYSIS
6.1 Introduction
A fundamental objective in the Project Initiation Process is the development of options
which make the most efficient use of the financial and other resources available to the
Government. Capital budgeting decision analysis is a tool which is used to rank
competing options so that the option with the best net cost over the useful life of the
project is identified.
Budgeting analysis is a crucial exercise in ensuring that the Government obtains value
for money and does not take on any risks that it cannot manage effectively. The key
technique in the process is the ranking of alternatives using a discount cash flow
analysis which takes account of the impact of expenditures on the debt servicing costs of
the Government.
6.2 Net Present Value
The technique which must be used to rank competing options is one which calculates
the net present value (NPV) for each option.
The NPV of an option is an amount which is equal to the present value of its net cash
flows. An option’s NPV gives a measurement of the absolute value of the option in
terms of today’s dollars and is the amount one would be indifferent to paying today
when compared with paying a series of cash-flows in the future.
The NPV technique discounts all cash-flows to present value dollars using an
appropriate discount rate.
6.3 Discount Rate
Government assets are funded from the Consolidated Fund, and it is assumed that
investment decisions add to the State’s debt as, even though funds may not be borrowed
in the year an asset is acquired, the funds outlaid will either add to borrowings or reduce
the amount which would have been available to the Government to reduce borrowings.
In either event, the opportunity cost of the funds is the key aspect, and this is the long
term cost of funds to the Government. As this cost fluctuates from year to year, the
discount rate to apply should reflect prevailing interest conditions.
Accordingly, all NPV calculations should use the prevailing long term Commonwealth
Bond Rate plus a margin of 1.0 per cent.
Page16
6.4 Process
There are four steps in the budget analysis process:
1.
2.
3.
4.
identify project construction and life-cycle cash-flows;
rank options by calculating NPVs;
perform sensitivity analysis; and
review options in terms of risks and benefits.
6.4.1 Cash Flows
This is the key step in the process and must be undertaken carefully. Cash-flows which
are uncertain must be identified and several analyses must be conducted to reflect the
overall range of uncertainty (see sensitivity analysis below). All cash flows should be
listed and grouped on a quarterly basis and only nominal cash flows should be used. Put
another way, one should assume that inflation is zero as the discounting process will
ensure that the correct outcome is identified.
6.4.2 Calculate the NPVs
Focusing solely on the total cash outflow ignores the time value of the cash-flows.
Hence, the cash flows are discounted using the NPV formula and each option is then
ranked. The preferred option is the one which has the lowest NPV. There is literature
available on how to use the NPV formula.
The formula for the calculation is:
NPV
=
where:
NPV
=
CF
=
DR
=
n
=
 (i=1 to n)
-i
(CFi * (1+DR)^ )
the Net Present Value;
the net (hence Net PV) Cash-flows in each period;
the Discount Rate for the period expressed as a decimal; and
the number of periods.
6.5 Expertise
For large and complex projects, it may be necessary to acquire expert assistance to
analyse the financial costs and benefits of competing options
Page17
COMPARATIVE ANALYSIS
STATEMENT
7 COMPARATIVE ANALYSIS STATEMENT
The Comparative Analysis Statement will comprise the short-listed options and their
associated risk and budget analyses.
Each short-listed option should be listed together with the following:
 any significant or high risks involved
 risk treatment
 budget analysis
 cash-flow
PROJECT DEFINITION
STATEMENT
8 PROJECT DEFINITION STATEMENT
8.1 Context
Projects with a capital value in excess of $100 000, regardless of the source of funding,
will require Budget Committee approval. The vehicle for submitting projects to Budget
Committee for its consideration is a Project Definition Statement (PDS).
8.2 PDS Content
To ensure that Budget Committee is provided with the data which will allow it to assess
projects, the Project Definition Statement will consist of the following documents which
have been generated through the PIP.
8.2.1 Statement of Preferred Option
8.2.1.1 Project title and description
Title of project and description of project including service delivery
improvements or changes which will be directly attributable to the project.
8.2.1.2 Government’s stated policy objectives
Relationship of project to stated Government policy objectives.
Page18
8.2.1.3 Total project cost
The following costs are required, depending on the stated preferred procurement
option (ie. design-construct, lease-back, etc). They should be divided into
capital and recurrent. Capital cost should include escalation due to movement in
the Building Price Index.
Capital







Recurrent
initial capital investment
land acquisition costs
design and supervision fees
loose furniture and fittings (new)
equipment (new)
other (please specify)
life cycle costing over the life of the project.
8.2.1.4 Additional costs related to the proposal
Any impacts on other outputs and/or investment strategies of other agencies and
the community (eg. upgrade of roads, additional services reticulation, etc) should
be identified together with consultation undertaken. These impacts should be
costed and attributed to the relevant agency, GBE, Local Government, etc.
8.2.1.5 Project timetable
Key dates including, but not restricted to, the following:
Date






Parliamentary Standing Committee
on Public Works hearing date
design commencement date
project tender date
planned completion date
planned occupancy date
planned disposal date
8.2.1.6 Funding


proposed source(s) of funds
- Capital Investment Program
- alternative funding source/contribution
annual cash flow requirements
- capital
- recurrent.
Page19
8.2.1.7 Functional Analysis
Each function contained in the service delivery requirement must be defined and
described.
8.2.2 Comparative Analysis Statement
A comparative analysis statement should be provided comprising the short-listed
options and their associated risk and budget analysis.
8.2.2.1 Identification of short-listed options
Set out the short-listed options, together with comment on feasibility, cost,
constraints etc.
Distinguish between options requiring:
service contracts
leased assets
owned assets.
8.2.2.2 Risk analysis of the short-listed options
All significant risks should be identified for each option from the perspective of
all project stake-holders.
For the preferred option provide strategies for management of the identified
risks.
8.2.2.3 Budget analysis of short-listed options
Identified options should be assessed and ranked in terms of the net present
value of the cash flows.
8.2.3 Project approval
Endorsement for the proposed project must be obtained from:


Head of Agency, and
Minister.
Page20
9 CONCLUSION
The Project Initiation Process is an integral part of Strategic Asset Management, and as
such is an element in Tasmania’s Financial Management Reform Strategy. A PIP
submission is required for all projects proposed for inclusion in the Capital Investment
Program, from 1997-98.
This document provides an overview of the PIP. It recognises that expert advice may be
necessary to undertake the PIP.
For further information, please contact the Procurement and Property Branch,
Department of Treasury and Finance.
Page21