methodologies to optimize capex expenditure in government ... · impact vs. risk matrix. allocate...

CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited

Effective and fast methodologies to optimize capex expenditure in government portfolioCAPEX OPTIMIZATION | JANUARY 2019

Last Modified 14/01/2019 14:54 Arab Standard Tim

ePrinted

2McKinsey & Company

Today, we will share with you our experience in optimizing capital spend from Middle Income Countries

Arno is leading our public expenditure optimization work in the Middle East. He has been serving Ministry of Finance and cost optimization units in Middle East and Africa. His work is focusing on optimizing capital spend while achieving same outcomes for the population.

Client context: Public finances in many middle income economies rely to a significant share on the export of resources and are therefore dependent on commodity prices. Heavy drop of these prices, such as the oil price decrease in 2015, drive the need for significant fiscal optimization.

Our clients had built large capex portfolios in times of government surplus. The focus on optimizing these portfolios and getting the maximum out of capex spending is a key lever to fiscal balance.

Contact: phone: +971-56-6867237, email: [email protected]

Arno HeinrichPartnerDubai


ePrinted

3McKinsey & Company

Middle income countries with high dependency on oil prices experienced significant debt to GDP increaseAverage annual OPEC crude oil price from 1960 to 2018 (in U.S. dollars per barrel)

Government Balance in relation to Government Revenue [Percent]

-29

2

41

16

33

-1

25

-14

-1

-2

Oman

Nigeria

Saudi Arabia

Kuwait

Iraq

United Arab Emirates

Algeria

Qatar

Angola

Russia

Drop in oil price has led to massive increase of government debt to GDP ratio triggering the need for fast fiscal optimization

107.5 109.5 105.996.3

49.540.7

52.5

162011 12 13 14 201715

-109

-72

-31

-50

-28

-57

-12

-49

-22

-22

2013 2016


ePrinted

4McKinsey & Company

Ourobservation

4McKinsey & Company

With real financial pressure, these economies are making a step change by approaching capex with the same discipline as opex

Optimize the portfolio of projects

Optimize the design

A

B


ePrinted

5McKinsey & Company

CapEx project by sizeProjects can be scored on “value-add impact” and “risks of not completing”

Risks of not completing the project

“Val

ue-a

dd”

Impa

ct

Impact vs. Risk matrix

Allocate project in the “Impact matrix by region”

040 31 2 5

5

2

3

4

1

26

25

14

1

6

15

24

3

175

822

23

209

12

13

7

21

18

11

4

Projects in each region are ranked in a range 1-5 (1=low; 5=high) on two dimensions:▪ “Value-add” impact▪ Risks of not completing the project

Main factors to consider when ranking the “value-add” impact:▪ Capacity increase (additional capacity, % of increase

of existing capacity)▪ Potential revenue generation▪ Asset overutilization/congestion relief▪ Other metrics specific to the project

Main factors to consider when ranking the Risks of not completing the project impact: ▪ Financial risk (potential economic losses)▪ Safety (or lack of safety improvement)▪ Regulatory (environmental, compliance, etc.)▪ Social risk (life quality, educational, etc.)

Description of guidelines


ePrinted

6McKinsey & Company

Based on the scoring, the portfolio can be prioritized

Level of Risk of not completing the project

Leve

l of “

Valu

e-ad

d” Im

pact

54321

1

2

3

4

5

High Risk if not completed. Projects could potentially be:▪ Continued as-is, or▪ De-scoped,

and/or▪ Explored for PPP

options

High Impact, but medium or low Risk if not completed. Projects could potentially be:▪ Delayed, or▪ De-scoped, and/or▪ Explored for PPP options

Impact and Risk are averageEvery CapEx optimization option should be considered

Low Impact and Low Risk Projects could potentially be:▪ Delayed, or▪ Cancelled

▪ Matrix provides suggestions for defining and allocating projects to CapExreduction groups

▪ Four areas identified on the matrix based on the level of “Value-add” Impact, and Risks of not completing the projects

▪ Each area suggests the most suitable CapEx reduction options for each project, including:– Cancellation– Delay / prolongation– De-scoping – PPP options– or continuing “as-is” without any changes


ePrinted

7McKinsey & Company

Force-rank projects that an entity wants to pursue into four quartiles

25%

25%

Prioritizedprojects

25%

25%

Leve

l of p

riorit

y

Description of guidelines Prioritized projects portfolioUSD Million

▪ Prioritize projects based on Impact vs. Risk ranking and allocate projects to four quartiles by value (25% maximum share per each quartile)

Top priority projects

▪ List of projects▪ ……

High impact / High risks of not completing the project


Low Impact / Low risks of not comple-ting the project


High impact / Low risks of not comple-ting the project



ePrinted

8McKinsey & Company

Ourobservation

8McKinsey & Company

With real financial pressure, these economies are making a step change by approaching capex with the same discipline as opex

Optimize the portfolio of projects

Optimize the design

A

B


ePrinted

9McKinsey & Company

Our methodology to review initiatives is structured along eight efficiency levers

B Demand reduction

C Utilization of existing assets

D Scope optimization

A Capacity alignment with future demand

Capacity demand analysis

E Cost optimizationBudget estimates

F Alternative fundingMultiplicity of solutions

G Deferral beyond 2020 Implementation plan

H Revenue generationOther

▪ Comprehensive:– 360 review including cost efficiency,

implementation maturity, demand/supply analysis, etc.

▪ Collaborative, yet independent:– Reviews include meetings and workshops

with initiative owners

▪ Data-driven: – Local, regional, and global benchmarking– Subject matter experts interviews

▪ Execution-minded: – Practical approach & risks analysis– Global best practices and lessons

▪ Outcomes-focused: – Quality, time, and cost as the key

considerations

Key efficiency leversKey guiding principles


ePrinted

10McKinsey & Company

3.4

4.70.8

offshore premium

Bridge capex Island reclamation

capex

0.5

Total

100 118 126 138

261 274 297

Royal Opera House London

Opera in 2030

Dubai Opera

Sydney Opera

Kauff-man

Center

Espla-nade

NCPABejing

Moving the venue inland or close to shore as other world class venues can save elements associated with offshore construction (LCU 4.7 bn savings)

Case study: An Opera House Project can achieve same status and targets as otherworld class venues with less capital investment

Venue utilization lags other world class venues if it’s built with 6000 seats; a 3000 seat venue will have same utilization as the average of top 3 and save LCU 0.9 bn

0.9

6.5

4.7

Unit costoptimization1

Capacity reduction

0.3

0.6Private sectorccontribution

Building inland

Savings outof total budget

Key optimization leversInitiative details

Opera House

9bnTotal budget ask

3bnOptimized budget

6000seat Opera hall

Art museum, botanical garden

375moffshore on two submerged islands

1 Unit cost optimization of Opera House, Bridge, Botanical Gardens

Project components that can be taken out if built onshore, LCU bn

Venue utilization, visitors/seat per yearLCUb2 3.4 3.6 6 5.7 5.5 2.3

XX Annual visitors, thousands

C


ePrinted


Case Example: Sector Capex Optimization Illustration

▪ Vast majority of current network will accommodate 2030 traffic with LoS1 A or B (free flow and utilization <55%)

▪ Seven criticalities identified around the areas of City 1, City 2, City 3, City 4, City 5– Criticalities around the urban areas of City 1, 2

and 3 are driven by the national transport network configuration

– Criticalities around major corridors of City 1 o City 5, and the North and South roads to City 6 (LoS equal to D) are driven by national transport network capacity

– Criticalities around City 3 and 4 seems to be driven by the urban transport network configuration

Current road network vs. 2030 road traffic demand Key insightsIdentified areas of criticality

Los A + B

Los C

Los D + E + F


ePrinted

12McKinsey & CompanySOURCE: Published reports, IATA data, press search; team analysis

Index at 100 Project under constructionCompleted project

RAIL/METROCost per linear km

AIRPORTCost perPassenger/ year

ROADSCost/ square meter

Case Example: Comparisons of project costs across countries

100

Country 1 Country 2 Country 3 Country 4

120-145

230-250

140-160

410

185 230 185100 125

City 1(80% under ground)

City 2(20 % under ground)





500

300 290

150 140 125 105 100

City 2 City 7City 1 City 3 City 4 City 5 City 6 City 8


ePrinted


Type of surfacing mSEK 2010 Description

▪ Bitumen-bound hot asphalt mass with good abrasive durability and stability. Suitable as wearing course on roads with medium density of traffic

▪ Dense, durable and good stability properties. Suitable as wearing course on roads with high density of traffic

▪ Soft-bitumen-bound ▪ gravel with oily gravel grading is used on roads with

low density of traffic

▪ Is a combination of a thin layer of modified binding agent and a layer of hot-mixed mass that is then packed

▪ Simple surface treatment on bitumen-bound underlay. The binding agent is spread out first, then the stony material.

318

314

202

169

125

MJOG Soft-bitumen-bound gravel with oily gravel grading

ABT – asphalt concrete, dense

ABS – asphalt concrete, stony

TSK – Thin-layer surfacing combined

Y1B – simple surface treatment on bituminous underlay

SOURCE: McKinsey

Case Example: Improved selection of road surface paving type has a potential of ~12% of the life cycle cost (1/2)


ePrinted


Questions for our discussion

Bring back the results of the group discussionand any questions which were arising to the plenary (20 Minutes)

Please identify the capex projects in your portfolio which might need intervention

Which optimization levers would be most important and highest impact?

How would you apply them?

Discussion in groupsof four–

15 minutes

methodologies to optimize capex expenditure in government ... · impact vs. risk matrix. allocate...

Documents