How to Maximize Your Capital Investment Strategies

[IMAGE]Stimulus.jpg[/IMAGE]From Stimulus Act dollars to statewide appropriations, few industries have as great a near-term opportunity to transform themselves as the transportation industry does. Transit provisions of the American Recovery and Reinvestment Act (ARRA) alone include $8.4 billion dollars for new capital investment for public transportation. State funding for the improvement of transportation and traveler safety is also high.

The question is, how can transit and transportation agencies capitalize on these opportunities? Are they changing processes quickly, thinking differently, and moving into a rapid deployment mode to take full advantage of their capital budgets?

Yes — and no. Many agencies have gone through the process of evaluating their current project lists or wish lists, identifying priority initiatives and where the dollars should be applied. But true transformation is rarely accomplished through this type of incremental advancement alone. It requires specific resources to be allocated to transformative initiatives. The real trade-off is often between how to balance supporting the base business and investing in change.

This article looks at collaborative decision-making software applied by both transit and transportation agencies to make the best possible decisions in capital planning and resource allocation. Regardless of the source of funds, these organizations are taking great strides in transforming American transportation.

Transit Stimulus Dollars

A prime example of an organization leading the way in responsible budgeting is the Washington Metropolitan Area Transit Authority (WMATA). Created by an interstate compact in 1967, WMATA is tasked with planning, developing, building, financing and operating a balanced regional transportation system in the national capitol area. The modes of operation include rail, metro, bus and paratransit services. WMATA serves a population of 3.4 million people within a 1,500-square-mile jurisdiction.

Originally estimated at $530 million, WMATA's stimulus budget was reduced to $325 million and, ultimately, to $200 million before the legislation was passed.

In January 2009, WMATA selected Decision Lens, a provider of decision support software solutions for government and commercial clients, as a partner in prioritizing its 2011- 2020 capital budget prioritization and allocation. WMATA's Capital Needs Inventory (CNI) includes approximately $11.3 billion of unconstrained needs that include life-cycle replacements, current conditions and future demand.

The CNI did not include system expansion projects (for example, an extension of service to Washington Dulles International Airport in suburban Virginia) or transit projects to be funded or implemented entirely by jurisdictions or debt repayment costs. WMATA intended to implement a structured, highly transparent process to prioritize all capital programs according to criteria that reflect agency goals.

A new capital decision-making process would allow the transit authority to evaluate capital programs, build consensus, and ensure consistency and repeatability when allocating available financial resources to the projects that yield the greatest return to WMATA customers. In addition to the pressing needs of the stimulus decision, the Office of Long Range Planning (PLAN) introduced a new process of collaboration, a new method of evaluation and a tool to evaluate the CNI. In December 2008, PLAN had already begun to conduct outreach to WMATA's Executive Leadership Team (ELT), the Jurisdictional Coordinating Committee (JCC), Riders' Advisory Council and Sustainability Group to develop the agency's Strategic Goals for the CNI, and to obtain greater support.

These goals were leveraged by the newly chartered Capital Planning and Advisory Committee - Technical (CPACT) in a facilitated brainstorming session to create measurable objectives. The CPACT consists of members across the entire organization, from IT to the specific modes (such as bus and rail) to Transit Police. This group is comprised of subject matter experts on the projects being proposed and the baseline situation across WMATA's services.

Goals and objectives related to the capital funding decisions were collaboratively developed and defined, and then socialized with the agency's decision makers, the ELT. The ELT, in a brief executive decision-making session, were asked to go through a "Pairwise Comparison" process. In this process, remotely controlled voting keypads enabled the executives to vote on priorities through a set of judgments in which two criteria are compared at a time until all criteria have been compared.

This "Pairwise Comparison" process derives criteria weights collaboratively, rather than by assigning arbitrary weights by an individual. During this process, the ELT represented all parts of the organization (CFO, IT, Operations, Corporate Strategy, Bus Operations, etc.), creating an opportunity for strategic discussion on where the organization should place its heaviest priorities.

[PAGEBREAK]Stimulus Considerations

Once the stimulus effort had begun, WMATA considered which additional criteria would be relevant when thinking about the purpose of ARRA.

Given the spirit of the legislation, consideration was given to projects that would look at job creation or were "shovel ready," which meant that they could be contracted in 90, 120 or 180 days. In addition, WMATA worked to build on the basic principles of the strategic goals: to deliver quality service, to improve safety, to use resources wisely, to retain and attract the best workforce, and to enhance its image.

An ARRA stimulus criterion was given a priority in the decision-making process, using sensitivity analysis — that is, the priority of the stimulus initiatives relative to the importance of all evaluated projects as a whole. All previously weighted criteria were automatically adjusted proportionately, ensuring that stimulus projects were ready to be evaluated. The stimulus allocation looked at a subset of the CNI, comprising 46 projects for evaluation, culled from all parts of WMATA's capital needs.

The CPACT, brought together again in a series of three half-day sessions, provided the expertise to evaluate all these projects against all the criteria. Prior to voting on projects, a short presentation was provided on each project, identifying how it did or did not contribute toward the criteria set through a set of qualitative, verbal rating scales. Stakeholders then voted on the importance of each project, using a scale from "Critical" to "No Contribution."

Each department advocated and voted on behalf of its needs, in addition to being able to hear and vote on needs across other departments. This approach formed the basis of a repeatable process - critical for consistency and transparency in decision-making. Because ARRA funding had not yet been set, WMATA presented several budget planning recommendations across several scenarios based on a range of estimated funding levels. The ELT provided direction on management overrides for contractually obligated projects, as well as projects that were too critical to leave unfunded.

The process underwent several iterations as budget variables were introduced and new projects were presented. In essence, trade-offs using the software were made to determine a final recommended portfolio. As a result of creating and implementing this process, WMATA became the first agency in the region to have an approved list of stimulus projects from their planning board — ahead of D.C., Maryland and Virginia.

Future Funding Priorities

Transformation requires more than the routine expenditure of time thinking about projects and initiatives to transform an organization. Executives need to make real tradeoffs in determining which base business activities are not high priorities, so that the resources can be re-allocated to truly game-changing initiatives.

If transit and transportation organizations use their current capital planning process to implement this level of change, they are likely to be sorely disappointed. Why? The current capital planning process is designed to preserve the current system, and to incrementally extend it where possible.

Transformation is not just about care and feeding. It is about carefully evaluating the mission of the organization, and focusing on what new things to invest in, what current things to maintain and where things should be shut down. The time is now to use the resources at hand to make a generational leap forward.

Prioritization requires understanding how many dollars should be spent on strategic initiatives or transformation for every dollar spent on maintaining assets.

One national transit organization recently determined that 99.5 percent of its available funds had been spent on "state of good repair." Prioritization indicated that, while state of good repair and safety and security are critically important (with nearly 70 percent of the overall spending priority), strategic initiatives/transformation should receive 20 percent of every dollar spent.

That moves the ball down the field — it opens up the organization to realize that there has to be a focus on innovation. More importantly, it also makes one focus the last 70 percent on what services should truly be supported and where to cut.

Whether you are looking at new funding sources such as ARRA dollars, or simply making the best use of regularly appropriated funding, can you afford not to focus on the higher order strategy and process that will lead to the type of change you've wanted to see all along?