Project Delay Cost

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					                                                                 Version 1.0 dated June 2010


Regulatory Change Measurement
(RCM) - Calculating Delay Costs
These slides available at: www.dtf.vic.gov.au/betterregulation
Questions to: betterregulationunit@dtf.vic.gov.au
Contact the Better Regulation Unit (BRU)


   + If you expect to measure the cost of delays, please
     contact BRU in the first instance

   + BRU will take you through the key steps of the
     methodology and agree to the methodology and
     formula to be used

   + These slides are intended to be an introduction
What are delay costs?


  +   Delay costs are the expenses and loss of income
      incurred by a regulated entity through:
        a) an application delay and/or
        b) an approval delay
Application Delay

 + This refers to the time taken by a regulated entity to
   complete an application (e.g. for a licence or permit)

 + To be counted as a delay, an application delay must:
    – prevent operations from commencing
    – not coincide with a parallel process during the course of
      application, including business processes normally undertaken
      during that period
Approval Delay


  + This refers to the average time taken by a regulator
    to communicate a final decision regarding the
    application, and includes a ‘normal’ level of re-work of
    the application

  + To be counted as a delay, an approval delay must:
     – prevent operations from commencing
     – not coincide with a parallel process during the course of
       application, including business processes normally
       undertaken during that period
     – not double count parallel processes of re-work during the
       approval process
Examples of Delay Costs


  + Holding costs of land while waiting to commence
    operations
     – interest on loans for land, and
     – opportunity cost of capital (equity) blocked in land

  + Standby costs of capital (plant and machinery of
    machinery) not able to be used due to a regulatory
    process
     – interest on loans for plant and machinery,
     – opportunity cost of equity in plant and machinery, and
     – rental costs
Examples of Delay Costs (contd)



  + Standby costs of labour unable to be put to use due to
    a regulatory process
     – wages and overheads

  + Lost business opportunities
     – loss of reputation due to late deliveries
     – reduced flexibility to respond to market conditions
     – more difficult to obtain finance
Mapping the delays
Reference: Toolkit 1
Key question: Does an obligation delay the
activities of a regulated entity?

  + Will removing a regulation or obligation allow the
    regulated entity to commence operations earlier?
     – then such obligation could potentially be a cause of delay


  + To precisely identify whether the obligation causes a
    delay, a project management GANTT chart is useful
     – Are the activities to comply with an obligation part of the
       critical time path of a business project?
Identification of delay – GANTT chart

           RP2
                                                 Re-work RP2

                   RP3                                         Re-work RP3
     RP1
                   RP4                           Re-work RP4
                                  RP5
                                                                             Re-work RP5


 Start                                  Submit                                             Approved
 T=0                                     T=1                                                 T=2


            Application Process                        Government Approval Process




           In this figure the red dotted lines during the application process
           represent the actual time that could be saved by a regulated
           entity if the relevant obligation was removed (i.e. these portions
           are on the critical path)
           See next slide for detailed explanation
Identification of delay – illustration
Regulatory
Process 1




Regulatory            Over-lapping time period
Process 2                 with Process 1

             0                               1                            2
                                           TIME

     For example, if a building company is no longer required to prepare
     the building fire plan during the application process, this will remove
     the Regulatory Process 2 (RP2) in the figure above. However, as it
     must also demonstrate at the same time why its buildings meet the
     environmental requirements (RP1), the reduction in the length of the
     application process is only equal to the red section of RP2.
Identification of delay – illustration contd.


Regulatory
Process 1




Regulatory                                      Time saved by removing
Process 2                                         Regulatory Process 2

             0                             1                              2
                                         TIME


   Re-iteration: The reduction in the length of the application process
   by removing RP2 is only equal to the red section
  Identification of delay – another illustration

          + In the case below, if RP4 is removed, then re-work for RP4 is also
            removed.
          + However, as this re-work is completed within the same time as re-
            work for RP2 (a separate, parallel process) the length of the
            approval process is not reduced in this case.


           RP2
                                                 Re-work RP2

                   RP3                                         Re-work RP3
    RP1
                   RP4                           Re-work RP4
                                  RP5
                                                                             Re-work RP5


Start                                   Submit                                             Approved
T=0                                      T=1                                                 T=2


            Application Process                        Government Approval Process
Calculating Delay Costs
Reference: Toolkit 2
RCM formula for costs
                        Regulatory Costs
                                  (total $)



            Price (P)                X            Quantity (Q)
         Cost per business                      Number of business/
                                                total ‘quantity of assets



  In this case this translates to:

  Delay Cost = Price × Quantity

  = {(costs incurred + opportunity cost) × delay period} × (population)
Example: Cost of delays caused by planning
application process
+ The example below provides a formula for delays during a
  planning application process


                                             TC  IT
               C  i  τ  r  θ  R    D  ROI 
                                                        
 Delay costs                                           t  L
                                      12
                                               Discussed in next slides



+ Note that there can be many other examples of delay
  costs, and different ways to assess them
Price variables for delay costs

 + The cost incurred by each business is the holding costs
   of the asset (land) minus any rents received if the asset is
   rented out during the period in which the project is delayed
    C  i  τ                  
                    r  θ  R 
    where
    C  Total land cost per hectare
    i  interest rate, in percent per annum, at the market rate of interest
      tax, in percent per annum
    r  Council rates, in percent per annum
      Proportion rented out (if any) during application process
    R  Rents, in dollars per annum

 + Note that the term C x i also captures the return that could
   have been obtained on equity in the absence of the delay
Price variables for delay costs

+ The opportunity cost – the best alternative use for the
  capital (net total cost of the alternative investment over the
  life of the original project multiplied by the return on
  investment)
    TC  IT       
    D        ROI 
                  

   TC  Total cost of the investment project, including capital, raw material, wages
   IT  Total interest and taxes paid out on the investment project, (excluding interest
   payments on capital which have been separately counted)
   D  Originally planned project duration, in years
   ROI  Return on investment of the investment project, percent per annum
   t  Reduction in time in the approval process,as mapped
+ Time (duration) of the delay
Quantity variables for delay costs

+ Population: refers to the number of entities affected by a
  particular regulatory obligation. In this case:
   L  Total land/population affected
Worked out example - delay costs from a
planning process
 + A normally efficient business wants to open a new
   manufacturing plant but is facing delays from the need to
   complete an application that requires it to document the
   impact of its proposed plant on the environment.
 + These are its costs:
    – the company buys ten hectares of land on which to build the
      plant
    – the total land cost per hectare is $50,000
    – the interest rate per annum charged by the lender is 10 per cent
    – the land tax per annum is 2 per cent
    – the council rates per annum are 2 per cent
    – during the application delay period the company rents out 50 per
      cent of its land to farmers who use it as grazing land for $4,000
      per annum per hectare
Worked out example - delay costs from a
planning process (cont’d)

  + Data relevant to calculating returns that the business
    is losing through the delay
     – the total cost of the manufacturing project is $250,000 per
       hectare
     – total interest and taxes paid out on the project (excluding
       interest payments on land which have been separately
       counted) is $100,000 per hectare
     – the originally planned project duration is 20 years and the
       return on that investment is 7% per annum
 Worked out example - delay costs from a
 planning process (cont’d)

 + If the cause of delay is removed, the company is able to
   commence its operations 18 months earlier
 + Therefore, as a result of removing that piece of regulation,
   the reduction in delay cost is $82,875 (see below)
 + If this regulation affects 100 businesses, the total delay cost
   of this regulation is = $8,287,500 per annum (see below)

            C  i                      TC  IT
                          r    R   
                                                            
                                                       ROI 
Delay cost                                  D              t  L
                                    12
                                                                   
             50000  0.1  0.02  0.02  0.5  4000   25000020100000  0.07
                                                                                  
Delay cost                                                                        18 100
                                                   12
           $ 8, 287, 500 per annum
Other examples


 + As indicated earlier, there can be many other examples
   of delay costs, and different ways to assess them

 + Please therefore contact BRU for a discussion of the
   specific methodology applicable in your case

				
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