[Agency Logo]

[Agency Title]

[Investment Proposal Title]

Options Analysis

[Date]

Approval

Name/Title / Signature / Date
Senior Asset Investment Planner

Analyst

Name/Title / Email / Phone

Version Control

Version / Date / Status/Action/Change / Approved By
Draft 1
Draft 2
Final

Executive Summary

Short List

The final results of the options analysis are presented in clear, concise terms that justify the recommended and alternative options, and the exclusion of other feasible options from the short list.

The results are summarised in a way that clearly displays the underpinning logic and assumptions. Diagram1 below provides an example, based on a fictitious business case for the delivery of improved hospital services.

Diagram 1: Options Analysis – Results Summary

Options / Reasons for Inclusion/Ranking
Short List / Status Quo:CurrentHospital at location A / Base case
Option Two: Refurbish / Moderate social impact/benefit
Moderate service delivery improvement
Within agency and State budgets, (including recurrent costs)
Option Three: Refurbish, plus out-sourced community care / Stronger social impact / benefit
Affordable
Faster service delivery start
Option Four: New Hospital at location B, plus community care / High social impact / benefit
Beyond State and agency budgets
Private finance likely
Long List / Reasons for Exclusion
Option Five: New hospitals in locations B and C / High service delivery impact
But beyond demand scope for the next 10 years in those locations
Well beyond State budget and agency capacity

The final list of options is not extensive. It focuses on the top three to four highest priority options, plus the highest ranking ones that failed to make the short list.

The key points that are clarified include:

  • which is the recommended, value-for-money option in the short list, and why, despite its weaknesses;
  • which shortlisted options present the best alternatives, if decision-makers wish to take a less risky or less costly approach;
  • the strengths and weaknesses of each option, including those excluded from the short list; and
  • why the excluded options were rejected (for example, due to excess or inadequate scope, affordability, or relatively low social benefit and service delivery improvement).

As depicted in the following diagram, reviewers in both an agency and Treasury should also be able to understand easily how the options analysis results relate to the main points of advice in the ACA or business case.

Diagram 2: Options Analysis – Input

Options Analysis / / ACA/Business Case Advice
Strategic Justification / Options Short List
Investment Scope / VFM Comparison
Short-listing /
  • Scope

  • Social Impact
/
  • Benefits

  • Agency Financial
/
  • Cost

  • Agency Performance
/
  • Schedule

  • Economic
/
  • Risk

Strategic Justification

This section anchors the options analysis to the justification for an investment proposal, as expressed in the service delivery objectives and model, and the prioritised list of investments in the strategic asset plan.

The options analysis should take as its point of reference a particular, high priority investment proposal listed at the conclusion of the agency’s strategic asset plan.

There is no analytical work required at this stage. The purpose is to confirm that the justification for the investment proposal has been established in the strategic asset plan before proceeding to the options analysis.

Investment Scope

This section clarifies the scope of the investment proposal, particularly the primary functions that will be enabled by the asset.

Concise articulation of the primary functions is critical in demonstrating what the asset components must do to achieve the State’s service delivery objectives and practical results from the perspective of the community members who will benefit from the operation of the asset.

Value management is one technique that can be used to clarify the functional requirements and to establish a coherent scope for the investment proposal before proceeding to the next phase of the analysis. Further information is in the SAMF Value Management module.

Functions

The analysis assesses how a function could be achieved at the most efficient level of quality and cost, including whether the initial proposal should be reconfigured, scaled back, relocated or even avoided.

The scope analysis results in documented:

  • evaluation of the functional scope against strategic business and service delivery plans;
  • prioritisation of project objectives and functions;
  • an action plan for the next phases of the analysis.

Key questions include:

  • what are the expectations of likely service recipients?
  • what are the quality standards, both mandatory and comparable from relevant projects (e.g. square metres per office worker)?
  • how will the achievement of the benefits be measured over time?

Completion of this section provides a foundation for the comparison of the options to follow. An agency therefore develops the scope and functions to a level of detail that will allow each option to be compared, and to clarify the difference an option would be expected to make.

Investment Options – Long List

This section identifies the full range of feasible options to deliver the service delivery objectives targeted by the investment, based on the functional scope.

The emphasis is on sorting the feasible from any academic options – for example any that would rely on unproven technology that would not be available and reliable for some time after the service delivery start date identified in an agency’s strategic asset plan. While emerging options are monitored, the allocation of significant time and resources to their analysis is not appropriate.

The appraisal of a single type of investment option is not sufficient. Instead, a range of options is identified which covers a mix of existing asset optimisation, non-asset initiatives and varying levels of new minor or major capital expenditure. Within that range, alternatives are explored (for example, the construction of a new building versus an office lease).

Status Quo

The status quo (or base case option) must be included as the first item in the long list. This should clarify whether the objectives of the investment proposal could be achieved with existing assets and non-asset initiatives, if there was no new investment.

The status quo option must be realistic. An assessment is provided of the impact, costs, benefits and financial implications associated with continuing the current circumstances. In the absence of compelling consequences, analysed objectively, the status quo may prove to be the best value for money option, at least in the short to medium term, particularly when funding is tight. If not, the status quo option provides a basis against which other options can be compared.

Alternative Options

The following list of questions may be useful when identifying alternative options:

  • Are different sizes or quality of operation possible? For example, could the current operation be scaled down, or is asset replacement justified?
  • What is the sensitivity of demand to the level and structure of pricing? Would varying the pricing structure be a realistic alternative to increased investment?
  • What is the effect of varying the design life or timing of the option?
  • What alternative locations are possible?
  • Are there potential tradeoffs between (say) labour and capital, or capital and maintenance costs?
  • Would better staff training reduce personnel requirements and the pressure for asset investment?
  • Are all elements of the operation equally justified? Could the operation be combined with another, or divided into parts, to advantage?
  • Can economies of scale be achieved?
  • Are there opportunities for integration with other services (for example, through multi-purpose assets or facilities)?

Addressing these questions may also prompt some re-definition of the original objectives for the investment proposal. If this is the case, early advice is provided to investment decision-makers, rather than wait until the final options analysis document is completed.

Apply Key Filters

To assist in the generation of options for the long list, and to help identify the feasible ones, three filters are applied:

  • timing variations;
  • economic conditions;
  • scale and cost.

Timing

It is important to consider variations to the timing of the investment proposal, and of the options, including by making them contingent upon a related event.

The premature development of a project may lead to excess capacity, shorter effective asset lives and higher financing costs. The timing of an option can also have a crucial impact on whether an investment achieves its stated outcomes. The timing filter can therefore be used to mitigate the risks of an option and to optimise its social, financial and economic returns.

Variations to timing are made with regard to aspects including:

  • matching demand with supply;
  • the ability to employ temporary measures to delay the timing;
  • likely technological advances over the interim period;
  • the time pattern of asset construction and replacement costs;
  • cyclical conditions that impact on the proposal, whether economic or
    industry-specific; and
  • phasing development to minimise risks and under-utilisation of the asset.

Phased development can be more expensive, but may provide the flexibility to:

  • achieve a balance between higher construction costs and the opportunity to adopt new technology; and
  • coincide with a projected growth or decline in demand, or movements in the business cycle.

Economic Conditions

Significant proposals should be aligned with projected economic conditions. The purpose of applying this filter is to determine the impact that economic trends may have on the option in terms of its ability to achieve the objectives of the investment proposal.

The assessment of economic conditions helps to identify key uncertainties and risks and the optimal timing for the investment. Commercially-oriented proposals require a greater level of investigation than others.

An ancillary step is the establishment of strategies for monitoring and reviewing the implementation of an option. This entails defining and timetabling key milestones and planned achievements.

The economic conditions filter is also important in building a sense of reality into the sequencing of the various investment proposals in an agency’s Asset Investment Plan, as well as ensuring that sufficient capacity exists in an agency and the broader economy to deliver the option. Further guidance is in the SAMF module on Asset Investment Planning.

Scale and Cost

Filtering potential options in terms of their overall scale and estimated cost is also useful. For example, a minimum investment option would be one that involved the level of funding and effort required to meet only the most urgent, highest priority objectives and functions needed to achieve improved service delivery beyond the status quo.

Following on from the minimum option (which may, for example, have an estimated total cost of $10 million), further options could be developed at the total cost of say $15 million and $20 million, at the moderate and maximum investment levels, respectively.

The scale and cost filter has the advantage of putting the options analyst in the mindset of the investment decision-maker, who will seek to understand the extra value for money that would be achieved from the higher levels of expenditure needed for each option beyond the status quo.

If approached objectively, the filtering of options by scale and cost should help to broaden the focus beyond a particular asset solution, and increase the use of cost-effective non-asset initiatives within each investment threshold.

By making the potential service delivery increments and costs between options transparent, an analyst demonstrates the willingness to participate in the real world of investment trade-offs faced by decision-makers – which in turn enables progress on other worthy proposals from within an agency, or from other agencies.

In that context, an agency is more likely to achieve approval for a manageable increase in investment funding that enables some practical service delivery – rather than place all faith in a high cost option that is worthwhile, but will still fail to gain approval due to funding constraints.

Investment Options – Short List

This section provides concise information that summarises the logic and reasons both for the creation of the short list and for the prioritisation of options within it.

Once the long list of feasible options is clear, a comparative analysis of the options is conducted from four perspectives, namely: the social impact; effect on an agency’s performance and financial position; and the economic costs and benefits to the community.

For example, an option may be dismissed objectively because its social impact would be clearly inferior, it would be unaffordable and because the economic benefits would be marginal, at high cost. These failings can be seen, and a short list of options finalised, through objective analysis.

Perspective One: Social Impact

This section identifies the sectors of the community that would gain and those, if any, that would lose, should an option proceed.

An agency considers the social costs and benefits of an option, in the context of the Government’s policies and objectives. Categories of social impact include health and safety, law and order, the environment and indigenous communities.

The qualitative social benefits, costs and risks associated with the option are outlined. The significance of the impact is appraised with reference to various indicators. This ensures that qualitative impacts are considered systematically, along with the quantitative results from the financial and economic analysis that follows later.

There are three broad steps in social impact analysis:

1.define the scope of the analysis;

2.identify the categories of impact; and

3.analyse the significance of each impact.

Step One: Define the Scope of the Analysis

Investment options may cause a change in the relationships, institutions, resources or environment in society, thereby affecting the desirability of an option. These changes are the focus of social impact analysis.

Discretion is exercised in deciding what constitutes a social impact. A consistent approach is taken on the degree to which indirect costs and benefits are included. For example, it would be imprecise to include a broad range of indirect benefits, yet not include the associated indirect costs.

The analysis is subject to two main conditions:

  • the issues should not be quantifiable, and hence the subject of financial or economic analysis; and the
  • impact must be clearly attributable to the option.

Step Two: Identify the Categories of Impact

Objectively-selected impact categories assist in identifying and organising the social impacts that would arise from each option.

The most common social impact categories are:

  • health and safety;
  • quality of life;
  • State development goals;
  • environment and heritage;
  • sustainability;
  • indigenous communities;
  • law and order; and
  • intangible economic (such as business confidence).

Step Three: Analyse the Significance of Each Impact

Due to the difficulties of placing monetary values on the impact categories, the analysis attempts to gain a full understanding of the social ramifications of an option by assessing the degree of potential significance to the community.

For example, each social impact is assessed in terms of:

  • whether the impact is isolated, localised or far-reaching;
  • the expected duration, timing and spread of the impact;
  • whether specific groups in the community and/or industry would be affected, either positively or adversely, and the extent of the impact on these groups; and
  • the level of political sensitivity and public interest.

Community consultation is undertaken, as appropriate, to help identify and analyse the significance of social impacts, particularly when the analysis is done in support of a business case. Community consultation is undertaken in part to help manage expectations of what is possible and affordable for the Government.

Perspective Two: Agency Financial Evaluation

This section identifies the revenues and expenditures that will be created by each option, and establishes the net cash impact on the financial position of the agency.

An essential element of the analysis is to demonstrate the expected financial viability and budgetary impact of each option. For options of a commercial nature, this involves estimating the return on investment and profitability. For
non-commercial options, this involves defining the most efficient way to deliver the desired service delivery strategies.

Financial evaluation is conducted using discounted cash flow analysis. Based strictly on the cash flow for an option, the analysis recognises several important features:

  • an amount of money, even when adjusted for inflation, is worth more now than it is in the future. This is termed the time preference of money;
  • resources used by one option could be allocated elsewhere and cannot be used twice. This is termed the opportunity cost; and
  • the cash flow for an option is often uncertain and subject to risk.

The time preference of money, and the opportunity cost and risks, can be accounted for by discounting future cash flows by an appropriate rate.

The financial evaluation of each option is conducted using the following six steps:

1.state the key factors, assumptions and relationships;

2.identify cash flows;

3.select an appropriate discount rate;

4.calculate financial performance measures;

5.clarify the budgetary implications; and

6.conduct sensitivity and scenario analysis.

Step 1: State the Key Factors and Relationships

All key factors, assumptions and relationships are stated clearly at the outset.

Factors to be estimated may include the following:

  • growth in demand;
  • timing;
  • adoption of technology or services;
  • population growth;
  • inflation;
  • exchange rates;
  • commodity prices;
  • unemployment rates;
  • key input prices and costs, and output prices and revenues;
  • proceeds from any land sales or rezoning applications; and
  • competition from other output providers.

A consistent approach is used in setting the key factors to ensure that the results for different options are comparable.