Programming Capital Facilities

The deterioration of the urban infrastructure is a very serious problem of national scope. Recognition of the seriousness and magnitude of the infrastructure problem unfortunately comes at a time when resources are constrained at all levels of government. Since the 1960's, a pronounced decline has been evident in aggregate local spending for capital improvements. During recent period of fiscal pressures, many local governments also have deferred maintenance spending as a "temporary measure" to ease their financial burdens. Such spending deferrals, however, have only multiplied future repair needs and invest-ment requirements. As a consequence, public officials and administrators have had to confront a number of difficult, complex, and often politically sensitive decisions.

The Infrastructure Problem from the Local Viewpoint

The programming of capital facilities should be based on a system of priorities which, in turn, should be linked to the goals and objectives set forth in a capital facilities plan. Procedures must also be developed for the continuous evaluation of services and facilities. The process by which limited public resources are allocated among a wide range of competing improvement needs should include the following key elements:

o A basic inventory and a set of indicators for assessing the condition of the infrastructure systems of the community.

o Determination of current conditions and range of potential infra-structure improvement needs.

o Analyses of the maintenance, repair, and replacement options for different improvement proposals (including the "do-nothing" option).

o Analyses of risks and uncertainties associated with various invest-ment options, culminating in a ranking of investment proposals.

o Evaluation of financing options.

o Selection, programming, budgeting, and scheduling of specific improvement projects.

Since difficult questions must be faced in the context of the local political environment, local officials need solid information and sound analytic procedures to address these issues effectively. The need is especially critical as local governments must allocate increasingly constrained resources to competitive investment alternatives. Such information and analysis are essential to assure that funds are being spent on the "right" proposals.

Coordination of Three Basic Elements

If a capital project is to be implemented successfully, three elements must be coordinated into a project plan and operations schedule:

(1) Operations: the things that must be done (activities or jobs), each with a sequential relation to other operations and each requiring resources for some time period.

(2) Resources: the things utilized in a project, normally reduced to a common standard of cost, but including personnel, equipment, materials, and time.

(3) Constraints: conditions imposed by outside factors, such as budgetary limits, completion deadlines, availability of resources, inputs from other units, and so forth.

Project planning should provide a blueprint for project implement-ation and should include: (1) an identification of project tasks and activities; (2) specifications of performance requirement and functional plans related to organizational responsibilities; and (3) development of cost estimates and budgets. An operations schedule details the order or sequence in which the activities must be carried out. It must: (1) reflect the total resource capacity assigned to the project; (2) take into account the availability of resources, the sequence of activities or jobs, the resource requirements, and possible starting times for each activity; and (3) level the use of resources to avoid dramatic shifts in resource requirements (particularly personnel).

Use of Network Analysis to Program Capital Projects

Network analysis provides (1) a mechanism for identifying and displaying the tasks and activities required to successfully carrying out a project; (2) a basis for determining the order (sequence and/or priority) in which these activities should be undertaken; and (3) the means for establishing the critical linkages among tasks/activities. PERT and CPM are two basic approaches to network analysis that have application to capital facility projects.

Program Evaluation and Review Technique (PERT)--the more sophisticated approach to network analysis--is designed to deal with large-scale projects characterized by: (1) unclear objectives, (2) multiple or overlapping management responsibilities, (3) relatively high levels of uncertainty as to time and cost requirements, and (4) complex problems of logistics. PERT is used to deal with problems of sufficient complexity to justify the use of computers to continuously track projects in some detail.

The Critical Path Method (CPM) has been described as a "back-of-an-envelope" or "in-the-field" approach, with much less dependence on computer programming skills.

(1) CPM techniques are applicable to well-defined projects, under a single management, with relatively clear objectives and limited levels of uncertainty.

(2) The Critical Path Method is job- or activity-oriented. Activities are linked together in a sequence of dependence to form an arrow diagram, often without particular attention to the connecting points.

PERT and CPM facilitate the selection of a "best route" to be followed to reach project objective. Potential obstacles and delays to the successful implementation of the project plan are also identified. PERT and CPM are excellent tools of communication--they show graphically the interrelationships of all activities in a project or program and indicate clearly where responsibilities for supervision and management should be assigned. In developing a schedule, the critical path is determined not so much by the duration of the various activities, but by the segment of resources that can be assigned to complete each activity.

Project management is best served by a real-time control system that responds to situations according to their degree of urgency. Deviations from the predicted schedule should be used to revise the plan, adjust resource allocations, and recalculate the overall time required to implement the balance of the project or program. In the final analysis, the procedures adopted for the planning, scheduling, and control of a capital facility project are still tools that are only as good as the managers who use them.

The Computer in Capital Facilities Planning

The data storage/handling capacity of the computer makes it possible to maintain relatively large data sets on the current inventory of capital facilities and to carry out various types of calculations and estimates that otherwise would be too laborious and time-consuming to contemplate. The development and maintenance of a geographic information system (GIS) that provides spatial data regarding the location, condition, and capacity of capital facilities is possible with current computer technology.

Modeling and simulation techniques have been used effectively in various aspects of capital facilities planning. Computer-assisted models can provide general direction to management decisions in the initial iterations, and more detailed specifications in subsequent cycles of project planning, scheduling, and control.

Priority Classification Systems

Each project should be measured and evaluated against the total capital expenditure needs of government through a sound system of priorities. Approaches to the assignment of priorities include: (1) those that stress intangible values, and (2) those that undertake to quantify various criteria to develop a numerical scoring system. A six-way breakdown of priorities under an intangible approach is shown in Exhibit 3, along with criteria for assigning capital projects to each of these categories. An examination of the suggested criteria will reveal several areas in which more measurable indices could be developed. Hatry, Millar, and Evans have proposed eleven criteria for the evaluation of capital project requests, as summarized in Exhibit 4.

Exhibit 3. General Criteria for Capital Facilities Priority System

Adopted from: Alan Walter Steiss, Local Government Finance: Capital Facilities Planning and Debt Administration (Lexington, Mass.: Lexington Books, 1978), p. 38.

A number of governments have begin to assign numerical weights to each criterion and to use multipliers to calculate an overall summary score for each proposal. The criteria usually are a mixture of economic, political, social impact, and distributional considerations. The criterion judged to be most important or most significant is given the highest score (frequently based on units of ten or some multiple of ten). All other criteria are then ranked in relation to this score. The resulting summary scores are then used to rank the proposals. Thus, for example, "protection of life and maintenance of public health" may be ranked as the most important criterion and given a score of 100. "Conservation of resources" may be judged to be nearly as important and thereby, given a score of 90. On the other hand, "aesthetic and cultural values" may be ranked relatively low, scoring only 20 points.

It should be evident that any effort to develop such an "objective" approach must be based, to a large degree, on subjective judgments. Ranking procedures are not intended to make decision making on capital improvement proposals "automatic." They are not a substitute for judgment and consideration of the political environment. Rather, they provide more substantive information--in effect, making explicit issues and trade-offs that are always present but often hidden. At the same time, it must be recognized that in government, ". . . the actual choice and establishment of final priorities are still accompanied by the political process of compromise, a give-and-take between all groups concerned." [4]

Exhibit 4. Suggested Evaluation Criteria

Adapted from Harry P. Hatry, Annie P. Millar, and James H. Evans, "Guide to Setting Priorities for Capital Investments," Guides to Managing Urban Capital, Volume 5 (Washington, DC: The Urban Institute Press, 1984), p. 9.

Capital Improvements Program

A capital improvements program (CIP) usually spans a five to six year period to reflect the more immediate, detailed portions of the long-range capital facilities plan. Projects should be arrayed in the CIP according to their priority ranking.

The responsibilities for preparing the CIP are shared by a number of groups and individuals within government: the chief executive, the legislative body (e.g., city council), various operating departments, the finance agency, and the planning agency. Each plays an important role in the decision-making process. As Coughlin has observed: "Each group attempts to look at the program as a whole and make decisions about its parts. But, because of its particular function and position, each group sees the problems with a slightly different emphasis." [2]

Operating departments are primarily concerned with their own efficiency and are likely to view the entire capital improvements program in terms of its impact on their own project requests. As a consequence, these departments will tend to over emphasize the importance of their own requests in assigning priorities.

As the "watch-dog" of expenditures, the position of the finance agency is somewhat counter to that of the operating departments. This agency must be concerned primarily with maximizing the returns from individual projects, while achieving economies in the total program. Each proposal must be examined critically to evaluate the potential "need" that it is designed to serve. Emphasis often is given to the short-run implicaions of the capital facilities plan.

The planning agency, in turn, must have a greater concern for the long-range implications and the functional relationship among projects as they fit together to further the objectives of the capital facilities plan. In order to explore some of the more subtle ramifications of the individual project requests, the planning agency frequently must develop projections beyond the immediate needs embodies in the "justifications" submitted by the operating department.

The final decisions regarding capital expenditures must rest with the chief executive and the legislative body. As the elected representatives of the people, these officials must share a primary concern for the broader interests and the welfare of their constituents. However, their particular functions and positions dictate that they emphasize different aspects of the capital improvements program. The chief executive must assume a position that places primary emphasis on middle-range objectives, falling somewhere on the continuum between the short-range perspective of the finance agency and the longer-range viewpoint of the planning agency. The chief executive must also pay particular attention to the political consequences of capital expenditure decisions. The legislative body must also take cognizance of the political implications of decisions, but tends to gravitate toward more immediate objectives of the program, placing particular emphasis on the cost factors involved.

The drawbacks to this approach, in terms of the time required to carry out the process and the compromises that often are necessary, should be obvious. As one student of government has put it: "Rome wasn't built in a day--but it would have taken a heck of a lot longer if the construction proposals had to go through our modern form of democratic government." To circumvent the delays which arise from this approach, the capital facilities plan and capital improvements program must be developed with a spirit of close coordination and cooperation among the various groups involved.

Even after legislative action has been taken in adopting the CIP, funds must still be made available. Therefore, another opportunity for review occurs at the time appropriations are made, or in the case of an issuance of general obligation bonds, at the time the referendum is placed before the voters. Of course, even after appropriations are made, changes and adjustments are still possible prior to construction or acquisition. If the original project requests are based upon a sound planning foundation, however, the need for such changes should be minimal.

Gaining Political Support

A capital facilities plan has a far better chance of success if it has political support from the outset. In communities where bond elections must be held, the referendum vote provides an opportunity to build public backing for the entire capital plan. Unfortunately, local governments have not been particularly successful in promoting bond referenda. The local business community, which requires adequate infrastructure support to be cost competitive, seldom has been enlisted as an effective partner in designing the capital plan and generating public support for it.

Cost Analysis

Effective capital improvements programming requires analytical techniques that can accommodate the risk and uncertainty which are associated with future decisions regarding the commitment of scarce resources. Future costs are influenced by: (1) scope and quality of the services or products to be delivered, (2) volume of activity required to deliver these services or products, (3) methods, facilities, and organiza-tional structure required to perform the program activities, (4) qualities and types of labor, materials, equipment, and other cost elements required by these programs, (5) price levels of the various cost elements.

Monetary costs include research and development costs, invest-ment costs, and the costs of operations, maintenance, and replacement. It also is important to consider the marginal or incremental costs of increasing the size or scope of a program or project. Some program costs are fixed--they are the same regardless of the size or duration of the program. As a project increases in size or scope, these costs are distributed over a larger number of service units. Other costs are variable; that is, they may change significantly as the scope of the project or program is increased. It may be appropriate to look beyond these monetary costs to what economists call opportunity costs, associated costs, and social costs.

Discounted cash flow techniques apply the principles of compound interest to determine the differences in the worth of money over time and to examine future negative and positive cash flows (costs and benefits) required to produce the desired returns from particular investments. Cost-benefit analysis requires that estimates of both the direct and indirect costs and the tangible and intangible benefits be translated into a common measure, usually (but not necessarily) a monetary unit. The cost-benefit approach, first outlined by Otto Eckstein, involves an identifica-tion of: (1) an objective function, (2) constraints, (3) externalities, (4) time dimensions, and (5) risk and uncertainty. Benefits that accrue in the present usually are worth more to their recipients than benefits anticipated some time in the future. Resources invested today cost more than those invested in the future, since one option would be to invest the same funds at some rate of return that would increase their value. Cost-benefit analyses provide only limited assistance in establishing priorities among various goals, and they are of limited usefulness in evaluating projects of relatively broad scope or in comparing projects with widely differing objectives.

Under cost-effectiveness analysis, the preferred alternative either (1) produces a desired level of performance at the minimum cost or (2) achieves the maximum level of performance possible for a given level of cost. Although costs can ordinarily be expressed in monetary terms, levels of achievement usually are represented by nonmonetary indexes, or measures of effectiveness, i.e., the direct and indirect effects of resource allocations. Three supporting analyses are required under the cost-effectiveness approach:

(1) Cost-goal studies are concerned with the identification of feasible levels of achievement.

(2) Cost-effectiveness comparisons assist in the identification of the most effective program alternative.

(3) Cost-constraint assessments determine the cost of employing less than the most optimal program.

Cost-benefit and cost-effectiveness analysis can be applied at two pivotal points: (1) in the planning stage, based on anticipated costs and benefits, and (2) after a project has been implemented and shown to have a significant impact to assess whether the costs are justified by the magnitude of net outcomes.

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