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94 This appendix describes a set of case studies performed to collect additional information on specific practices used for financial planning in a cross section of agencies. Case studies were performed for two international agencies, Highways England and Thames Water, and one public agency, Texas DOT. In addition, field visits were performed to gather more detailed information from two additional agencies, CDOT and MnDOT. Descriptions of the field visits are not included here. Instead, relevant examples from the field visits have been incorporated in Chapters 2 to 6. A.1 Highways England Case Study Overview Highways England is responsible for managing the Strategic Road Network in England. It is a wholly owned government company that receives all its capital and revenue funding directly from the Department for Transport (DfT). Highways England has no direct revenue raising powers. Its capital funding is committed by DfT for 5 years through the Road Investment Strat- egy (RIS). It receives its revenue funding annually. The RIS has a set of eight key performance indicators (KPIs), with associated targets, which Highways Englandâs performance is measured against. One of these KPIs includes asset condition. Highways England also has a license to operate from the DfT, which sets out a series of requirements including its obligations for asset management. The Office of Rail and Road (ORR) is responsible for monitoring Highways Englandâs performance and progress in meeting these obligations. Financial planning for capital and routine maintenance is an activity that is undertaken by Highways England and is the basis from which its capital renewals program is developed and approved. Financial planning is undertaken by both its Financial Directorate and its Operations Directorate. This case study will set out how Highways England undertakes financial planning. Description of Practice There are a number of steps involved in developing and delivering the financial plan for Highways England. This approach is described below. Statement of Funds Available Highways England is funded by the DfT through a 5-year committed capital settlement that totals Â£11bn. This is built up of Â£7.6bn for major projects and Â£3.6bn for capital maintenance. This settlement is referred to as the Statement of Funds Available (SoFA). Although the SoFA is committed for 5 years, it is released annually to Highways England by the DfT as part of the A P P E N D I X A Case Studies
Case Studies 95 treasury spending round. This funding forms the basis of the financial plan for capital mainte- nance that is developed by Highways England for its regions. Delivery Plan Highways England manages the maintenance of its strategic road network through five regions. Each region is required to develop a delivery plan to meet the funding allocated through its 5-year financial plan. Its Delivery Plan for 2016/17 is published on the following page and is updated each year. This delivery plan sets the volume of work that each area is required to deliver over the 5 years. This plan is captured in the âRegional Workbookâ and it forms the basis of funding allocated to each region and the commitment from that region to deliver its work volumes. Highways Eng- land publishes and updates this Delivery Plan each year setting out the volume of maintenance activity it will undertake to meet its financial planning requirements. Annual Budgeting Although the funding allocated to Highways England is committed, the funding allocated by Highways England to its regions is not committed. In principle Highways England has the ability to move its capital funding between maintenance and major projects. Ultimately it is measured on its performance in delivering its 8 KPIs of which asset condition, safety and lane availability are the most applicable to maintenance. Each region is allocated funding on an annual basis. Although there is flexibility to adjust the funding as described above, it is normally in line with the sums sets out in the âRegional Workbook.â Program Development Each region develops a program for its capital projects annually. This is done using the pro- cesses that are set out in Highways England Portfolio Control Framework (PCF) for Capital Renewals. This process is shown below. It comprises seven stages from setting out program objectives to commissioning and handing over projects. The program is developed to meet the sum allocated in the 5-year SoFA and to meet the performance requirements of the region. This will include aspects such as customer satisfaction, asset performance, and safety. The program is measured against the outputs in its Delivery Plan and monitored by the ORR. Maintenance needs are identified from asset condition data and prioritized using a multi- criteria technique referred to as âValue Management.â Needs are prioritized and approved at a regional level with technical assurance undertaken by a central team in Highways England. The Value Management process is undertaken for all major asset classes, including pavement and structures. Programs of work are developed based on asset need and optimized in the most appropriate way to meet the annual funding allocation in the SoFA. There are a number of financial gate- ways each proposed scheme needs to pass through before it can be committed to the annual program of works. These financial gateways are part of Highway Englandâs Investment Control Framework. Meeting Annual Budget Targets Although Highways England has a 5-year financial settlement it still works on annual budget- ing cycles. It has some flexibility (up to 10%) to transfer capital funds between financial years. Otherwise it is focused on delivering its financial targets each year. In order to manage the risk associated with meeting its budget target, it over programs its maintenance schemes to manage the risk of schemes dropping out of the program or works being delayed.
96 A Guide to Developing Financial Plans and Performance Measures for Transportation Asset Management Implications for the TAMP Financial Plan The commitment of funding for 5 years enables Highways England to set out a committed long-term financial plan. This enables its maintenance regions to set out 5-year maintenance programs with a high degree of certainty in terms of funding. This enables maintenance schemes to be developed well in advance and financial efficiencies to be generated from better planning and commitment to whole life costing (cost over entire life cycle). However, as its financial plan is funded annually based on all of its capital spending, there is still scope to âveerâ and âhaulâ between major projects and maintenance. The result is that capital sums allocated from mainte- nance in the financial plan may still vary from one year to the next, which impacts its approach to planning. Asset values are calculated for the agency, but used for financial reporting purposes only. The GRC and DRC are determined in accordance with Highways England accountancy procedures that are based on the IFRS. A.2 Thames Water Case Study Overview Thames Water (TW) is the largest Water and Wastewater Company in the UK responsible for provision of clean water to 9 million customers and removal and treatment of waste for 15 million customers in the London and Thames Valley regions. It is a privately owned com- pany, as all water companies in England are, generating a turnover of Â£2b (2015â16) through charges to customers for provision of water and waste services. TW is subject to UK and Euro- pean legislation as well as various health and environment regulators. All water companies in the UK are regulated. The economic regulator, Ofwat is responsible for oversight of water utilities for the protection of consumer rights. TW is required to produce business plans outlining its asset investment needs to deliver the service expected by customers every 5 years. These plans are submitted to Ofwat for review and approval through the Price Review (PR) process. The plans and supporting evidence are reviewed by Ofwat before a determination is made on the allow- able revenues for companies (including charges to customers and developers) and expenditure limits. This determination will be based on company performance, evidence base, quality of plan and customer support along with benchmarking against other water companies. In addi- tion, companies propose an outcome framework based on the priorities of customers follow- ing extensive consultation ahead of business plan submission. TW has five key outcomes with 21 performance commitments and associated targets. Ofwat, as part of their determination on the company plan, can amend or prescribe changes to these frameworks, including the setting of targets based on company evidence provided. Company performance will be measured and reported on an annual basis and submitted to Ofwat formally through a process known as Annual Return Reporting. Financial planning for capital and routine maintenance is undertaken by TW and included in the business plan for approval by Ofwat before it is executed over 5-year periods known as Asset Management Plan (AMP) periods. All of the investment activities proposed in the busi- ness plan for maintenance or enhancement of assets to deliver customer supported levels of performance should be delivered within the regulatory period. This includes both capital and operational activity designed to achieve the required performance. Progress and performance against the plan will be monitored annually with the regulator as part of the Annual Return Reporting process. In the event that performance and priorities change within the AMP period, this process provides the opportunity for conversations with the regulator regarding any nec- essary changes to the AMP plan to address new risks. This case study will set out how TW
Case Studies 97 undertake financial planning and the link with its delivery plan and its approach to meeting its performance requirements. Description of Practice There are a number of steps involved in developing and delivering the financial plan. Business Plan (PR) TW must produce a business plan to Ofwat every 5 years to determine the allowable rev- enues and expenditure for the delivery period known as the AMP period. These plans must be completed in accordance with a methodology prescribed by the regulator, which includes key themes and evidence bases that must be present to support a plan. Examples of such themes include: â¢ Customer support for investment, â¢ Clearly stated customer supported outcomes with associated measures, â¢ Defined asset management capability, â¢ Consideration of total expenditure (TOTEX) [capital expenditure (CAPEX) and operating expenditure (OPEX)] investment for each activity, and â¢ Demonstration of efficiency. TOTEX is a relatively new requirement for consideration within company business plans and requires companies to understand both the capital and operational expenditures for assets within a planning horizon. Companies are expected to understand what proportion of these types of expenditure is needed over the planning horizon to achieve performance. This includes the optimal balance between CAPEX and OPEX for the most efficient management of the assets to achieve performance in the planning period. The targeted investment plan is developed through analysis of risk, performance, and cost using a risk framework that features top-down and bottom-up optimization of risks across asset portfolios. These outputs will form the optimum level of investment needed to achieve the out- comes and customer expectations efficiently. This analysis will form the justification and evi- dence base for the proposed program of investment activity included in the financial business plan submitted to the regulator. All of the inputs to this risk framework including costs will be subject to a rigorous assurance process ahead of regulatory scrutiny. Final Determination Once the business plan is submitted to Ofwat, an assessment will be made of each com- pany plan as to whether they meet the criteria set out in the prescribed methodology. Additionally, all supporting information will be assessed typically through a benchmark- ing comparison known as a âhorizontal auditâ to determine whether the proposed plan is appropriate for the needs of the organization based on other similar organizations. Items such as efficiency and unit costs will be tested through this exercise. The findings of these assessments will inform the determination or decision of the regulator on the proposed plan. This determination will include the allowable revenue and expenditure as well as outcomes, measures and targets. Annual Reporting Once expenditure and allowable revenues have been determined, companies then have the flexibility to further define their program of delivery within the 5-year period unless they have made express commitments to deliver particular investment items at specified milestones during the period.
98 A Guide to Developing Financial Plans and Performance Measures for Transportation Asset Management The regulator will, however, monitor performance annually against the outcomes and associ- ated measures proposed by companies in their plans and agreed in the final determination. This will be executed via an agreed assurance process. Program Development The targeted investment program to deliver customer supported outcomes is outlined in TWâs business plan, for example, 650 km of mains replacement to address network deterioration and maintenance of leakage and interruptions. This program can be further defined within the AMP period once the final determined has been made. The exception is if TW has committed to delivery of specific schemes to meet regulatory or statutory require- ments within the period, for example, delivery of a new transfer scheme to meet new demand expected by a specific date within the period based on demand modeling or plan- ning applications. TW will review the proposed investment and develop the most efficient method to deliver the program before proceeding to design and construction stages. Implications for the TAMP Financial Plan The process of developing business plans for a 5-year planning horizon with a determination on allowable funding and revenues for the period has several distinct benefits: 1. Longer planning horizon: a. Certainty: A 5-year planning horizon allows TW to adequately plan the investment activi- ties necessary to deliver its service in the most sustainable manner with a reasonable level of certainty. This ensures a high degree of confidence in allocating customer-generated funding to the most beneficial activity. b. Efficiency: The planning and delivery to 5-year horizons creates visibility of programs of work, which enables schemes to be developed. This longer-term approach to planning enables both financial efficiencies to be realized and a reinforced commitment to whole life costing. The development of the investment plan over a 5-year horizon also enables current experience, trends, and innovation to be incorporated into the plans which also enables efficiency to be realized. There is also the opportunity to deliver components of longer term investment plans such as the Water Resources management plan in a phased manner with incorporation of new data every 5 years to meet demand more accurately in future using efficient methods. c. Flexibility: The 5-year planning process and annual reporting mechanism allows compa- nies the flexibility to develop more detailed plans through the AMP period. This allows for response to changing priorities and external factors such as flooding or drought. Addi- tionally deliverers have the opportunity to utilize new trends or techniques as they become available during the period to realize efficiency. 2. Transparency: The high level of regulation and assurance included in the PR process, combined with the monitoring of performance through the annual reporting process provides transparency to the customers and stakeholders of water utilities. This in turn provides further confidence to customers and instills trust in the provision of their water and sewerage service. 3. Customer Assurance: The strong focus on continuous consultation with customers through- out the investment planning process and incorporation of customer valuation data to ensure performance and investment plans are supported by customers. Asset values are calculated for the agency, but used for financial reporting purposes only. The GRC and DRC are determined in accordance with procedures that are based on the IFRS.
Case Studies 99 A.3 Texas Department of Transportation Case Study Overview The Texas Department of Transportation (TxDOT) is responsible for managing the state- owned roads in the State of Texas. TxDOT is organized into 25 districts, each of which encom- passes six to eight counties. TxDOT is highly decentralized, and as such, districts have great discretion in planning and programming projects, and in how they develop their short- and long-range construction and maintenance programs. Description of Practice TxDOT is currently developing its first statewide TAMP. The process for developing the TAMP financial plan is closely related to the processes for developing the Statewide Long-Range Transportation Plan (SLRTP) and Uniform Transportation Program (UTP). The following sec- tions describe relevant requirements for these items, followed by a discussion of the implications for the TAMP financial plan. SLRTP Requirements Section 201.601 of the Texas Transportation Code (TC) requires that TxDOT develop a SLRTP that covers a period of 24 years (1). The TC was amended in 2017 by SB 312 to require that the SLRTP must contain specific and clearly defined transportation system strategies, long- term transportation goals for the state and measurable targets for each goal, and other related performance measures. This bill also requires that in selecting transportation projects, TxDOT shall consider the SLRTP transportation system strategies, goals and measurable targets. In addition 2017âs SB 312 amended Section TC 201.808 Transportation Expenditure Prio- rities of the SLRTP by adding Subsection (i) to the end of section 201.808, which requires the department to: â¢ Conduct a comprehensive analysis regarding the effect of funding allocations made to fund- ing categories described by Section 201.991(b) and project selection decisions on accomplish- ing the goals described in the statewide transportation plan under Section 201.601; â¢ Provide the analysis to MPOs, the public, and each member of the commission for the purpose of informing deliberations on funding decisions for the UTP; â¢ Update the analysis as part of TxDOTâs UTP and other reports; â¢ Publish the analysis on the departmentâs website in its entirety and in summary form; and â¢ Publish the methodology and data used to create the analysis on the departmentâs website and make the methodology and data available to the MPOs, the public, and the commission. This amended section is in addition to current TC, which requires the department to develop a process to identify and distinguish between the transportation projects that are required to maintain the state infrastructure and the transportation projects that would improve the state infrastructure in a manner consistent with the statewide transportation plan required by Section 201.601. Within this current section of TC the department is also required to add within the expenditure reporting system reports regarding effectiveness of expenditures on projects to achieve goal-specific asset management information regarding pavement condition, including percentages of pavement in good or better condition, condition of bridges and their scores, among other metrics. Section 201.808 (e) also requires the department to establish criteria to prioritize the transportation needs for the state that are consistent with the SLRTP. Unified Transportation Program Requirements TxDOT uses the UTP as its 10-year plan to guide transportation project development. The UTP is required by TC Section 201.9901.
100 A Guide to Developing Financial Plans and Performance Measures for Transportation Asset Management The UTP is an intermediate programming document and part of a comprehensive plan- ning and programming process. It links the planning activities of the SLRTP, the Metro- politan Transportation Plans, and the Rural Transportation Plan, as well as detailed programming activities under the STIP and the 24-month plan for project development (the Letting Schedule). It should be noted that the UTP is a decision-framing document and is not strictly tied to direct funding. That occurs in the 4-year STIP, and, in fact TxDOT cannot go to letting for 4 years as it is constitutionally required to have a 2-year Legislative Appropriation Request (LAR) in place as state constitution requires that agencies can only budget for the biennium. The UTP includes funding strategies and projects to maintain and preserve the existing transportation system and taxpayer investments. The UTP also includes funding strategies and projects to construct transportation infrastructure. It is developed annually in accordance with the Texas Administrative Code (TAC) Â§16.105. It must be approved by the Texas TC annually prior to August 31. The UTP authorizes projects for construction, development and planning activities and is multimodal. Figure A-1 shows the major requirements the legisla- ture requires in the UTP, which is updated annually. Figure A-2 shows the elements required for its annual update. The UTP is a âlisting of projects and programs that are planned to be constructed and/or devel- oped within the first ten years of the SLRTP. Project development includes activities such as pre- liminary engineering work, environmental analysis, right-of-way acquisition and design. Despite its importance to TxDOT as a planning and programming tool, the UTP is neither a budget nor a (a) The department shall develop a unified transportation program covering a period of 10 years to guide the development of and authorize construction of transportation projects. The program must: (1) annually identify target funding levels; and (2) list all projects that the department intends to develop or begin construction of during the program period. (b) The commission shall adopt rules that: (1) specify the criteria for selecting projects to be included in the program; program funding categories, including categories for safety, maintenance, and mobility; and (3) define each phase of a major transportation project, including the planning, programming, implementation, and construction phases. (2) define Figure A-1. Requirements for the UTP (1). Section 201.992: Annual Update (a) The department shall annually update the unified transportation program. The annual update must include: (1) the annual funding forecast required by Section 201.993; (2) the list of major transportation projects required by Section 201.994(b); and the category to which the project has been assigned and the priority of the project in the category under Section 201.995. Figure A-2. Requirements for annual update of the UTP (1). Source: http://www.statutes.legis.state.tx.us/Docs/TN/pdf/TN.201.pdf
Case Studies 101 guarantee that projects will or can be built. However, it is a critical tool in guiding transportation project development within the long-term planning context. In addition, it serves as a communica- tion tool for stakeholders and the public in understanding the project development commitments TxDOT is making.â (2). The 2017 UTP Cycle includes 12 funding categories that are defined by TAC, Section 16.153. These categories are listed in Table A-1. Funding for the UTP comes from federal, state, and local sources, as well as nontraditional funds including the Texas Mobility Fund, Proposition 12, Proposition 14, and concessions and regional toll revenues (3). Implications for the TAMP Financial Plan TxDOT has a well-defined process for use of its pavement management system to support resource allocation decisions and is in the process of implementing a comparable procedure for bridges. The pavement management system contributes to allocation decisions for both ordinary maintenance funds and Preventative Maintenance and Rehabilitation funds. Together these allocation decisions contribute to the creation of a 4-year pavement management plan. The overall allocations for these funds are driven by formulas authorized at commission level, but the analysis helps project effects of expected funding level and support allocation of any additional funds. A notable aspect of TxDOTâs process is its use of well-defined funding categories established by the Texas legislature. In developing the LRTP, UTP, and TAMP requirements, TxDOT is evaluating how best to align its funding categories with strategic goals of the agency, which may result in further consolidating the categories. Additionally, TxDOT is currently exploring the use of a commercial off-the-shelf software system, called Decision Lens, to inform the allocation of funds between investment categories. Decision Lens uses multi-attribute utility theory to make comparisons on various attributes to strengthen decision making. It can make project evaluations on multiple attributes. It then gives an economic score based on the individual DOT values selected for each attribute. Categories where attributes are applied include congestion, maintenance, safety, preservation, economic impact, and connectivity. The value score is given in relative stance to an attribute value. In 2016 TxDOT piloted use of the system for one of its funding categories (Category 4 rural projects), resulting in some shifts in funding. Moving forward TxDOT seeks to use its pavement and bridge management systems to help develop the investment strategy within selected asset categories, while using Decision Lens to help inform the decision of how best to allocate funds TxDOT Funding Categories 1 Preventative Maintenance and Rehabilitation 2 Metropolitan and Urban Area Corridor Projects 3 Non-Traditionally Funded Transportation Projects 4 Statewide Connectivity Corridor Projects 5 Congestion Mitigation and Air Quality Improvement 6 Structures Replacement and Rehabilitation 7 Metropolitan Mobility and Rehabilitation 8 Safety 9 Transportation Alternatives Program 10 Supplemental Transportation Projects 11 District Discretionary 12 Strategic Priority Table A-1. TxDOT funding categories.
102 A Guide to Developing Financial Plans and Performance Measures for Transportation Asset Management between categories. Ultimately the use of these tools may result in changes to TxDOTâs fund- ing formulas and/or revisions to the investment categories defined by the Texas Legislature for the UTP. Appendix A References 1. Texas Statutes, Transportation Code Section 201. 2. TxDOT. Unified Transportation Program - Funding Highway Construction Plan. TxDOT, 2018. http://www.txdot.gov/inside-txdot/division/transportation-planning/utp.html. Accessed June 18, 2018. 3. TxDOT. Unified Transportation Program. TxDOT, 2018.