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Recapitalisation Planning (Sinking Funds)
Engineers Ireland – Autumn Series on Asset Management – Monday 22 October 2018
2
1. What is Recapitalisation Planning?
2. The Context in Asset Management
3. Who uses it and Why?
4. When is it applied?
5. How is it applied?
6. Useful Standards, Codes and Guides
7. Case Studies
Contents
1. What is Recapitalisation Planning?
1. What is Recapitalisation
Planning (Sinking Funds)?
Important that everyone uses common language by
using definitions as provided in:
• ISO 41011 – Facility Management – Vocabulary
• ISO 55000 - Asset Management series.
• BS 8544 – Life Cycle Costing in Maintenance -
Section 3 - Terms, Definitions and Abbreviations
Asset - item, thing or entity that has potential or actual value to an organisation.
Asset Life - period from asset creation to asset end-of-life.
Capital Reinstatement Value - current cost of reinstatement of the buildings in
their present form, including demolition, site clearance and fees, but excluding VAT
(except on fees).
Interested Party / Stakeholder - person or organisation that can affect, be affected
by, or perceive itself to be affected by a decision or activity.
Life-Cycle Cost - total costs (in present-value terms) expected to be spent on an
asset during its operational existence.
Life Cycle Renewal Cost - cost of scheduled renewal of major systems and
components, forming part of the capital costs (not revenue budgets), excluding
annual planned preventive maintenance, minor repairs and unscheduled reactive
maintenance
Performance - measurable result. It can relate either to quantitative or qualitative
findings.
Risk - effect of uncertainty. An effect is a deviation from the expected — positive or
negative. Uncertainty is the state, even partial, of deficiency of information related
to, understanding or knowledge of, an event, its consequence, or likelihood.
1. What is Recapitalisation Planning (Sinking Funds)?
Cost Profile
• Whole Life Cycle
o Life Cycle Costs
o Maintenance Costs
o Renewal Costs
1. What is Recapitalisation Planning (Sinking Funds)?
Sinking Fund - a fund formed by periodically setting aside money for
the gradual repayment of a debt or replacement of a wasting asset.
(Google Dictionary)
A Sinking Fund is a contingency fund established by owners
management companies to provide for future capital
improvements such as lift replacement, painting, or for any
other unexpected remedial works outside the normal scope
of the annual maintenance budget.
(www.resi.ie/sinking-fund.html)Asset Replacement - Asset replacement planning is more than
identifying and financing the replacement of assets that are
approaching the end of their economic lives. Optimal planning
requires consideration of the total life-cycle costs of assets.
(Urban Water Infrastructure)
Capex, 33%Life Cycle
Replacements,
19%
Maintenance ,
19%
Energy,
29%
Opex (AFM),
67%
(IFPI Datasets)
2. The Context In Asset Management
2. The Context in Asset Management
1. Balance of Cost, Risk and Performance
2. Asset Hierarchy – Asset, Equipment, Components, etc.
3. Move from Reactive to Proactive
2. The Context in Asset Mgt
Strategic Level - level at which an
organisation defines its objectives and
policies, and plans and assesses how to
achieve its goals
Tactical Level - level at which an
organisation plans and manages the
specific mechanisms and resources for
operational delivery of products
Operational Level - level at which
activities are performed in a routine way in
support of the organisations functions(Haider 2009)
2. The Context in Asset Mgt
ISO 55002 - 6.2.2 Planning To Achieve Asset Management
Objectives
An asset management plan(s) should be documented at a
level that is appropriate to the organisation and the degree of
sophistication in its asset management approach. There is no
set formula for what should be included or how it should be
structured, however, it is common practice for such an asset
management plan(s) to contain a rationale for asset
management activities, operational and maintenance plans,
capital investment (overhaul, renewal, replacement and
enhancement) plans, and financial and resource plans, often
based on a review of earlier achievements.
Act Plan
DoCheck
4. Asset Management Enablers &
Controls4.1 Structure, authority and responsibilities
4.2 Outsourcing of Asset Management activities
4.3 Training, awareness and competence
4.4 Consultation, participation and communication
4.5 Asset Management system documentation
4.6 Information management
4.7 Risk management
4.8 Legal and other requirements
4.9 Management of change
3. Asset Management
Strategy, Objectives and
Plans3.1 Asset Management strategy
3.2 Asset Management objectives
3.3 Asset Management plans
3.4 Contingency planning
5.Implementation of Asset Management
Plans5.1 Life cycle activities
5.2 Tools, Asset and equipment
6. Performance Assessment
and Improvement
6.1 Performance and condition monitoring
6.2 Investigation of Asset-related failures,
incidents and nonconformities
6.3 Evaluation of compliance
6.4 Audit
6.5 Improvement activities
6.6 Records
2. Asset Management Policy
Asset
Management
System
1. General
Requirements
7. Management Review
3. Who Uses It And Why
2. Who Uses It And Why?
Who (Developer) Why Who (Audience)
Asset Managers Improved Financial Performance – improve ROI C-Suite
Estate Directors Managed Risk – H&S, Env., Financial, CEOs
Maintenance Managers Performance – for assets reaching end of life CFOs
Facilities Manager Assurance - improved services and outputs - Building Owners
IT Managers Enhanced Reputation - Customer Satisfaction Property Managers
Production Managers Compliance / Regulation Estate Directors
HSQE Managers Improved Financial Performance Financial Officers
Maintenance Engineer Improved efficiency and effectiveness -
Informed Decision Making / Asset Investments -
Which
investments
are going to
be made
within the
next 12
months to
help with
Asset
Management
strategies?State of the
Infrastructure
Industry 2012-
2022, The IAM
Exchange 2017
4. When Is It Applied
4. When Is It Applied?
3.4.4 Life Cycle Considerations
In developing the maintenance strategy, consideration must be given to a rolling maintenance
replacement programme. There should be a planned approach, to replace larger components and
elements of building services systems over a five-year programme as their performance and the
costs required to keep them in service incrementally increase.
….
With a robust plan in place, the operator or FM can have meaningful discussions with the finance
team within the organisation about requirements and budget projections, so informed decisions can
be made on funding and associated impact and the resulting resources needed over the planned term.
(CIBSE Part M Guide 2014)
4. When Is It Applied?
Building Life – 30-50 years
Initial Cost
Planning
2-3 years
Recapitalisation
Opportunity
4. When Is It Applied?
Drivers for Asset Replacements
• End of Life
• H&S / Environmental Risks
• Consequence of Failure (catastrophic, significant)
• Technological Advancements / Obsolescence
• Timing / Access Issues / Planned Shutdowns
• Excessive Running Costs
• Increased productivity (person, product or service)
• Full / Partial Replacements
5. How Are These Applied
5. How Are These Applied?
Asset Register
Estimated Fail Year
Asset Replace. Cost
Criticality Analysis
Cost Plan Profile
Analysis V Budgets
Optimised Asset Replace.
€0
€250,000
€500,000
€750,000
€1,000,000
€1,250,000
€1,500,000
COSTS
YEAR
Replacement Costs Repayment Costs
Asset Register
Estimated Fail Year
Asset Replace. Cost
Criticality Analysis
Cost Plan Profile
Analysis V Budgets
Optimised Asset Replace.
• Asset Hierarchy
• Asset Groups
• Assets
(Equipment)
• Components ????
Asset Register
Estimated Fail Year
Asset Replace. Cost
Criticality Analysis
Cost Plan Profile
Analysis V Budgets
Optimised Asset Replace.
• Install Year (estimated)
• Life Expectancy References (CIBSE, Ashrae, RICS,
NHS), important to know basis, e.g. run hours per day
• Asset Condition (ISO 15686 – 7 factors, NHS A-E Rating
for Backlog Maintenance)
• Estimated Fail Year
Asset Register
Estimated Fail Year
Asset Replace. Cost
Criticality Analysis
Cost Plan Profile
Analysis V Budgets
Optimised Asset Replace.
• Labour involved with the removal of existing
equipment and installation of equivalent equipment
and certification of install.
• Localised draining and recharging of mechanical
systems / de-energising and re-energizing electrical
systems.
• The supply of new (equivalent) equipment.
• Installing individually zoned systems such as
sprinklers, detectors concurrently.
• Normal installation tasks, that is, excludes flat
pack installs or similar.
• Hidden costs - scaffolding
The Replacement Cost does not include for:
• Disposal costs.
• Working out of hours.
• Testing of existing infrastructure such as electrical
/ mechanical supplies.
Asset Register
Estimated Fail Year
Asset Replace. Cost
Criticality Analysis
Cost Plan Profile
Analysis V Budgets
Optimised Asset Replace.
So the Likelihood can be ranked as:
1) Very unlikely (>10 years)
2) Unlikely
3) Fairly likely
4) Likely
5) Very likely (<6 months)
and, Consequence would be ranked as:
1) Insignificant- no injury / downtime (dt)
2) Minor- needing first aid / some dt
3) Moderate- absence / dt up to three days
4) Major- more than three days absence / dt
5) Catastrophic- death / cost / full dt
Asset Register
Estimated Fail Year
Asset Replace. Cost
Criticality Analysis
Cost Plan Profile
Analysis V Budgets
Optimised Asset Replace.
Asset Estimate Fail Year Replacement Cost
Air Handling Unit 2020 €30,000
IT Server 2019 €15,000
Baggage Handling
System2022 €150,000
Rail Sleepers 2025 €50,000
Back-Up Power 2022 €40,000
Road Drainage 2021 €60,000
WWTP Pumps 2023 €55,000
Compressor Station
Boiler2024 €45,000
Conveyors Belt 2025 €75,000
=SUMIF($F$10:$G$18,I1
0,$G$10:$G$18)
Year Repl. Cost
2018 € -
2019 € 15,000
2020 € 30,000
2021 € 60,000
2022 € 190,000
2023 € 55,000
2024 € 45,000
2025 € 125,000
2026 € -2018
2019
2020
2021
2022
2023
2024
2025
20260
20000
40000
60000
80000
100000
120000
140000
160000
180000
200000
2018 2019 2020 2021 2022 2023 2024 2025 2026
Asset Register
Estimated Fail Year
Asset Replace. Cost
Criticality Analysis
Cost Plan Profile
Analysis V Budgets
Optimised Asset Replace.
• Outline the Risks and Responsibilities
• Create 10-20 year Capital Plan Expenditure
• Build the business case for additional funding.
• Rationalise against Risk (L,M, H) versus
available budgets.
• Calculate the Annual Recovery Rate
Asset Register
Estimated Fail Year
Asset Replace. Cost
Criticality Analysis
Cost Plan Profile
Analysis V Budgets
Optimised Asset Replace.
• Detailed Assessments of
more complex assets.
• Understand Total Cost of
Ownership
• Replacement Strategies
(e.g. lighting by floor)
• Software packages
How Are These Applied?
• This is just one way of undertaking this exercise, and without doubt simplistic.
• The level of detail needs to be appropriate to the level of risk.
• Public Private Partnerships (PPPs) will need a much greater level of accuracy as it will impact on the
economic feasibility of the operator and the contract over a 20-30 year period.
Other Complexities:
Net Present Value / Discounted Cash Flow / Inflation & Deflation / Depreciation / Partial Replacements
NPV is the technique used to turn a cost to be paid or a benefit to be received in the future into an equivalent value
today (the present) by applying a discount factor. Once all future costs and benefits have been translated into present
values, they can be added up to give an overall net present value for the project.
6. Useful Standards, Codes and Guides
Useful Standards, Codes and Guides
• BS 8544:2013 - Guide For Life Cycle Costing Of Maintenance During The In Use Phases Of Buildings
• BS 3843-3:1992 - Guide to terotechnology (the economic management of assets) [since withdrawn]
• BSRIA - BG 67 / 2016 – Life Cycle Costing
• BCIS - Life Expectancy Of Building Components 2006 - Surveyors’ Experiences Of Buildings In Use.
• CIBSE - Part M Guide:2014 – Maintenance Engineering And Management – Section 12, Economic Life Factors
• EN 15331:2011 Criteria For Design, Management And Control Of Maintenance Services For Buildings.
• ISO 15663-1, Petroleum And Natural Gas Industries — Life Cycle Costing — Part 1: Methodology.
• ISO 15686-5:2017 - Buildings And Constructed Assets — Service Life Planning - Part 5 - Life Cycle Costing.
• ISO 15686-8:2008 - Buildings And Constructed Assets – Service-life Planning - Part 8: Reference Service Life And
Service-life Estimation.
• PAS 1192-3:2014 Specification For Information Management For The Operational Phase Of Assets Using Building
Information Modelling.
7. Case Studies
Case Studies
Paul Finnerty – Facilities Manager, Cork County Council
“We developed the County Hall campus in 3 stages over the last 15 years. This
included new multi level car park and County Library headquarters and re-
development of County Hall 17 storey building, Business Growth Hub and Fire
Control buildings. We spent about €100 million on building stock during that
time and realised that we would had major infrastructure at various stages of
maturity which would require serious capital investment into the future.
We took on a tough task of creating a full asset register for the site and
identifying indicative end of life and replacement costs for them. We presented a
report to our Senior Management Team for predicted capital replacement costs
for a 10 year period. We were seen as having had a very proactive and practical
approach from a capital planning standpoint and received increased capital
funding budget of €150k annually for various projects identified since we
completed the report in 2014.
It also makes capital budget planning very easy to submit annually as the
replacement costs of assets are identified in the report for a 10 year period.”
Case Studies
Case Studies
Italy Bridge Collapse: The Financial Facts Behind The Fury
Within hours of the viaduct giving way and sending vehicles plummeting,
Deputy Prime Minister Matteo Salvini said the EU must allow Rome to
include in its next budget all the funds needed to ensure the country’s
infrastructure was safe.
Gustavo Piga, economics professor at Rome’s Tor Vergata University, said
regardless of EU rules, Rome had not always demonstrated that
infrastructure was at the top of its agenda.
Total investment and maintenance spending on Italian transport
infrastructure fell by 58 percent between 2008 and 2015,
according to data by the Organisation for Economic
Cooperation and Development.
https://www.reuters.com/article/us-italy-motorway-collapse-spending-anal/italy-bridge-collapse-the-financial-facts-behind-
the-fury-idUSKBN1L0273
7. Case Studies
A funded capital replacement
programme allows strategic
management of the facility, reducing risks
and added costs
Scope and cost of maintenance and repairs increase
with age
Large theatre, completed
2010
Theatre capital
replacement programme
Case study
A funded capital replacement
programme allows strategic
management of the facility, reducing risks
and added costs
Scope and cost of maintenance and repairs increase
with age
Large theatre, completed
2010
Theatre capital
replacement programme
Case study
3Review with facilities manager7
Sensitivity analysis using Monte Carlo simulation
2Review with discipline specialists (M&E, Facades, Acoustics)
1Desktop review of asset register –assign benchmark life expectancies
6Establish recapitalisation profile
5Asset criticality assessment
4Determine asset replacement costs (QS)
Methodology
3Review with facilities manager
7Sensitivity analysis using Monte Carlo simulation
2Review with discipline specialists (M&E, Facades, Acoustics)
1Desktop review of asset register –assign benchmark life expectancies
6Establish recapitalisation profile
5Asset criticality assessment
4Determine asset replacement costs (QS)
Methodology
Risk ranking score = consequence of failure score X likelihood of failure score
1 Insignificant
2 Minor
3 Moderate
4 Major
5 Catastrophic
1: Rare In > 10 years
2: Unlikely In < 10 years
3: Possible In < 5 years
4: Likely In < 1 year
5: Certain In < 6 months
Risk Ranking Risk Profile
1 -7 Low Risk
8-13 Medium Risk
14 - 25 High Risk
Consequence of failure Likelihood of failure Risk ranking
X =
Asset criticality assessment
Asset criticality assessment
0
10
20
30
40
50
60
€-
€500,000
€1,000,000
€1,500,000
€2,000,000
€2,500,000
€3,000,000
€3,500,000
25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1
No.
of irem
s
Criticality vs. Costs
Items per Risk Rating Cumulative Cost
Recapitalisation fund scenarios
Sensitivity analysis
€0
€5,000,000
€10,000,000
€15,000,000
€20,000,000
€25,000,000
Replacement Costs - Building Fabric and Facades,
All Assets
Sensitivity Analysis (30 years)
95% 5% Mean
Monte Carlo simulation used to conduct sensitivity analysis for worst-case capital requirement scenarios
Simulation was run for 10,000 simulations -10,000 possible outcomes of assets failing at various years
