Business Case Analysis - September 2018
BCAs in Infrastructure
Strategic Regional Research Alliance (SRRA) and its founders have conducted over 20 Business Case Analyses (BCA). Terms also commonly used for such inquiries include; Cost Benefit Analysis, Business Cases, Pro Formas, and Value Plans. SRRA has employed the BCA process and applied its principles in developing arguments for educational facilities, employment clustering, real estate development and transit. In five business cases summarized below, decisions were influenced by arguments and principles set out in this report.
Infrastructure investments shape communities for generations. The purpose of preparing a Business Case Analysis (BCA) is to provide decision makers with the best possible information to make the best possible decisions. Public sector infrastructure investors invest in transit, roads, bridges, education, energy, waste and water projects to facilitate the creation of personal property built by private and public-sector investors, homes, places to work, shop and gather in communities.
These projects often take years to complete and during the delivery period governments, economies and culture can change, in some cases, dramatically. Unforeseen events can alter the value of the proposed infrastructure and the markets originally intended to be served. But once the decision is taken to proceed with a project, it may be years before the impact on the community is realized. The decision must be able to withstand the passage of time, adjust to change but always create value for the community.
Projecting where people will live, how they want to live and what their infrastructure needs will be 5, 10, and 20 years into the future is an imperfect art more than a science. The challenges and the grounds for making these decisions require the same process of thought, research methods, and standards for projecting the future for both public and private sector decision makers.
Once started, investors have to see projects through and sustain them for long periods of time. A major transportation project for example is rarely opened by the same politician who decided to build it as more often than not political leaders and indeed often parties have changed. This is also true in the private sector. Large commercial real estate projects may take 10 to 15 years to complete and the original investors may not be involved at the time of completion. When the decision is made to undertake an infrastructure project it is often irreversible. The objective of the BCA process is to build confidence and accountability at the beginning so that support for the project is sustained through to its completion. This reduces the possibility of terminating a project prematurely or substantially reducing its scope without cause.
Business Case Analysis is not a selling exercise. Rather, it should be a discovery process intended to inform and prioritize rather than justify a predetermined outcome. The importance of instilling confidence in the BCA process cannot be understated. The objective of a Business Case Analysis is to present to decision makers an accurate assessment of the cost of the infrastructure over its lifetime and quantify measurable benefits in an equation of value. When done well, a BCA will mitigate the risk of unintended future consequences.
Governments, like private investors, have limited resources and making decisions which maximize the value of an investment is critical for future success. The relatively short time and cost required to develop BCAs can save billions of dollars and create lasting value.
Business Case Analysis is a term commonly associated with public sector transit projects. However, the principles of the analytical process are consistent with other public-sector infrastructure and consistent with the process private investors engage in when making long-term investments in significant real estate assets such as major commercial ventures. The BCA process quantifies cost, both short and long term, then quantifies benefit to establish value. A BCA considers all elements of cost and benefit, aggregates what is reasonably known to enable decision makers to focus judgement and risk evaluation on what is unknown. This may seem self-evident, but regrettably, the BCA process is often overlooked for consideration when partial evidence exists. Rather than allowing for “known unknowns” an analysis can be foregone entirely or undertaken inadequately.
When cost match benefit in a ratio (1:1) the project is considered at break even. Often in projects where operational cost is high such as transit a sub 1:1 ratio will require significant subsidy. Projects higher than 1:1 will be revenue positive. BCAs identify at the outset the likelihood of on-going operating expenditure subsidy being required. In its simplest form this can let decision makers know what the long-term impact on further investment.
Most infrastructure investment projects require significant capital dollars, take time to complete and once completed are very costly to modify. There is often no middle ground or half way point, it is either one very large investment or nothing. Getting it right in the first place is very important.
Sometimes an infrastructure project has self-evident value, great public appeal, but just appears to cost too much. Other times a valid alternative is overlooked without a complete understanding of its value. Decisions based on ‘persuasive but partial’ arguments which look at only some of the costs or some of the benefits can result years later in unintended consequences.
Making good decisions about the priority, scale, and location of infrastructure requires a process where all relevant information affecting cost and benefit is presented in a complete, unbiased analytical framework and is based on known evidence, reasonable projections and risk management expertise. BCAs can also be utilized to prioritize projects with acceptable value equations by organizing the relationship between absolute values. The value of one option over another or selecting where a project goes or when to invest in a series of projects is enhanced by the application of the discipline required by a BCA.
SRRA concludes that of the BCA process is evolving and constantly being improved as proponents gain more experience and knowledge, based on a worldwide scan of the application. It is a process in a constant state of review and validation, a development of practical experience and benchmarking. Constant re-examination of an initial BCA through the lifecycle of an asset is essential to the development of the BCA process. Benchmarking original assumptions allows for a critical review of tools and principles and increases the reliability of the process. Confidence in the BCA process comes from understanding what assumptions have proven effective and the conditions under which they have established value.
SRRA Case Studies Applying the Principles of the BCA process
The following case study summaries illustrate the complexity of the challenge of quantifying cost and benefit in infrastructure decision making. Each case varies considerably in complexity, depth and application. In some cases, the work was undertaken in the late stages of the decision-making cycle or involved a binary decision (‘to do or not to do’) or compared two separate options. These BCAs were more general in nature and relied on evidence in an informal presentation because of the limited time constraints. Other cases are more complex, not as constrained by time and required considerably more evidence and analysis.
The cases address a variety of decisions influenced by BCAs, ranging from individual buildings to investments affecting an entire transit network. The fifth case study emphasizes the similarity between BCAs conducted for the private sector with those undertaken in the public sector:
Sheridan Campus in Mississauga
Downsview Aerospace Cluster
Transforming the Rail Corridors in the GTA
Creating Net System Ridership
The BCA process Applied to the Real Estate Development Sector
Case One – Sheridan Campus in Mississauga
The founders of SRRA participated in a research project, “Downtown 21” for the creation of a new downtown plan in Mississauga City Centre in the spring of 2009. At the same time, Sheridan College was in the final stages of selecting a new third campus to house their Business School, which at the time, was located on the Oakville and Brampton campuses. The site search committee approached SRRA to complete its due diligence at the final stages of the selection process.
The preferred site at the time was a greenfield site of approximately 17 acres with road access, ample surface parking but limited bus transit and no other development in the area. The site had been generously offered at no cost to Sheridan by a private citizen. The option of locating in the City Centre was considered too expensive.
The SRRA team put together a short BCA in presentation format for the committee in 10 working days to suggest that the committee should revisit locating in Downtown Mississauga. This option had previously been ruled out for two major reasons: higher land cost and limited parking.
The site selection committee presented to Sheridan College and the executive team at Mississauga the arguments contained in the BCA, which ultimately led to the creation of the campus north of the Living Arts Centre in Mississauga’s Downtown, now known as the Hazel McCallion Campus.
The BCA concluded that, notwithstanding the availability of free land and low cost (surface) parking on the greenfield site, the City Centre location had the potential for Sheridan College to create more than twice the value of the greenfield site.
The new Sheridan College campus, opened in September 2011 and has since been expanded with the construction of the Phase 2 Campus Building in January 2017. This underscores the expectation of the BCA that the Downtown Mississauga location would attract more students than the greenfield site. To date the planned structured parking has not been built, validating the finding of the BCA that other modes of transport would result in less demand for parking.
The Sheridan College (now named after Hazel McCallion) Campus is recognized as one of the most successful new college campus locations in both the region and Province of Ontario. It is the opinion of the SRRA team that if a review of the BCA was conducted today the actual Financial BCA would be higher; the Wider Economic Benefits could also be quantified more accurately and used to benchmark other BCA work in similar situations.
Case Two - Downsview Aerospace Cluster
Downsview Park is a large tract of federally owned land (as of 2014) located north of Highway 401 in the City of Toronto. This property was originally used in the early days of flight by De Havilland to manufacture and maintain airplanes; in later years the site served as a supply depot for the Royal Canadian Air Force, and more recently as a finishing facility for the Bombardier Dash 7 aircraft. The availability of an airstrip in the heart of a growing urban environment surrounded by vacant industrial land made the site unique.
In 2013, SRRA associates were asked to develop a business case for the relocation of colleges and universities engaged in training, research and teaching in the aerospace industry to complement the assembly and manufacturing of airplanes at the Bombardier facility located adjacent to the airstrip. Bombardier is the largest single industrial employer in the City of Toronto and retaining that function at the site is extremely important to the City. Creating a cluster of research training adjacent to a world class producer of airplanes was seen as a rare opportunity.
The land was publicly owned, serviced by both commuter rail service and the subway. The location has unique characteristics which do not exist anywhere else in North America.
During the process it became clear that an additional BCA was required to address the relative merits of selling land for residential development versus retaining employment on the property. Both cases had similarities but different audiences. The provincial government has jurisdiction over colleges and universities and the federal government owned and operated Downsview Park.
The BCAs developed analytics for both cases, which quantified benefit exceeding the cost by a considerable amount. The outcome of the business cases presented to both parties led to the establishment of Centennial College’s training and research facilities and the decision to halt a policy of selling land around Downsview Park for residential development.
The first case presented to the Federal government used as a base case the selling of designated areas of Downsview for residential development. The comparator was the financial benefit to the tax base, the productivity of the industry and the economic value of the aerospace industry as a whole to the creation of jobs which would be created by a new cluster. The second case, locating Centennial’s aerospace trancing facilities on a new campus at Downsview. The comparator was business as usual and the benefit analysis exceeded a 1:1 ratio strictly on cost.
Footnote: following a decision by Bombardier to leave the site, the Federal government subsequently sold the property. Although the original arguments emphasized the importance of Bombardier’s manufacturing activities, the authors of the BCA believe that the case to retain the site as a manufacturing, research and development cluster remains very strong, based on its size, history and transit infrastructure.
Case Three – Transforming the Rail Corridors in the GTA
The founders of SRRA conducted original research with the aim of supporting transformation of the Region’s rail corridors to sustain the growth of high value office jobs in clusters not served by public transit. Arguments for a new approach to mobility in the Region requiring long distance, high speed access to labor combined with efficient solutions to technology-driven micro distribution of commuters for first and last mile challenges led to the creation of a BCA which established benefits exceeding cost. This value had not previously been recognized by policy makers.
Transit planners in the post-war era built a grid-based transit service in the higher density areas of downtown Toronto augmented by a GO rail service for commuters traveling to downtown Toronto. Transit plans developed by advocates of the traditional dense urban grid approach had primarily focused on moving people into and out of the financial core of the city and this focus continued in the Big Move prepared by Metrolinx in 2008.
By the mid-1980s, dispersed employment patterns created ever-worsening congestion in the outer reaches of the 416 and communities in the 905. International research into other jurisdictions helped identify the potential of rail corridors originally built for the movement of goods and services then repurposed for effective urban transport solutions.
In the fall of 2010 and again in 2014, SRRA associates presented the case for transforming rail corridors from commuter use to surface subways serving travel throughout the region. The BCA process employed by SRRA revealed a value equation where the costs is more than offset by reasonably projected ridership revenue. The initial economic BCA exceeded the 1:2 ratio for economic benefit, an extraordinarily high value. The extensive BCAs prepared by Metrolinx in subsequent years confirm this initial evaluation. The analysis of wider economic benefits produced ratios exceeding 1:3.
Importantly, the case is based on not only providing the service on the rail corridors but the interface with existing and new networks for solutions to first and last mile distribution. The net new system ridership within the 7 major regional transit agencies was an integral component of the analysis. When further quantifiable benefits of transforming low value, industrial land surrounding the rail corridors into affordable places to work and live the social benefits make the project extremely valuable.
This work contributed to the adoption of these arguments into the provincial commitment to fund Regional Express Rail and the subsequent Smart Track enhancement. This case study reviews the principles employed in the original BCA (called a Value Plan at the time) to connect Markham, Downtown Toronto and the Airport employment corridor and establishing new nodes within the region which were adjacent to the rail network.
Case Four – Creating Net System Ridership
SRRA associates developed research which suggested that the arguments for new transit projects required an enhanced approach to the analysis of revenue. Traditional arguments about the type or mode of transit (buses, LRTs or subways) which have consumed the political conversation narrowly contrasted optimum capacity of each modality with capital cost and operating benefits applied to individual routes. SRRA employed the BCA principles to analyze the impact of many different types of transport projects with a new paradigm of benefit: net system-wide ridership.
Decisions to build new public transit in the Region during the 20th Century were based on relatively simple, empirical and self-evident perspectives. Destinations for residents of the Region including retail, government, cultural attractions and business were centered on a small area of downtown within a 300-meter radius of the University and Yonge subways south of Bloor. Increasing ridership was a direct derivative of capacity, reasonably easy to predict and maintained without creating the need for subsidy. Transit operators until the early 1970s operated without subsidy.
Between 1980 and today the public subsidy of transit has risen from zero to over $1.2 billion per annum. This is largely a result of additions to capacity which have not met the test of the BCA benchmark of a 1:1 ratio. New services were added without regard to offsetting revenue.
SRRA associates developed research which suggested that this transition required a new approach to analysis of infrastructure investment in transportation solutions and capacity enhancements. The missing factor was the analysis of new projects on system-wide revenue basis. In 2016, the Toronto, Mississauga and York Region commissioned a study based on the unique aggregation of public and private data to determine the probable impact of several new transit projects. This study led to several conclusions about the interdependency of transportation networks on the value of each project.
Intensification driven by unparalleled and consistent growth not experienced in any major urban economy elsewhere in North America also brought with it new complexities which made it more difficult to evaluate and prioritize the allocation of infrastructure investment on a project by project basis. The conclusion of the report was that priority in the allocation of public resources to transit needed to have as an objective the value equation of cost per new system wide ridership benefit. Of the nearly one dozen new projects analyzed those that showed net new system ridership had the highest BCAs.
Case Five - The BCA process Applied to the Real Estate Development Sector
Developers of major commercial buildings, multi-building complexes and completely new nodes create buildings and places which service communities for many years. Once created buildings do not move. Tenants may come and go, ownership may change occasionally, economies will change over time requiring repurposing, but the buildings’ value will always be dictated but the acceptance of markets. Legendary international developer, Paul Reichmann, commented at the beginning of the development of ‘Canary Warf’ that it ‘will have to survive several business cycles and political change before it creates permanent value”.
The decision-making process in infrastructure by both the public and private sectors requires the same discipline; an analysis of initial capital cost, operating cost over time and benefit producing similar ratios of value. In new research performed by SRRA in early 2018, the BCA principles were tested with the development industry to understand what lessons can be learned to improve the BCA process and allow public sector decision makers to improve their processes. While the economic specifics studied remain confidential to protect strategic industry advantage the principles can be described.
Decision makers in the commercial real estate development industry have made a business of investing in future markets. Their expertise in anticipating growth and change is often the difference between success and failure. The reliance on detailed “Pro Forma” preparation, extensive market research and applied expertise in preparing risk analysis mirrors the principles of the BCA process.
While initial capital costs weigh heavily on infrastructure investment in both the private and public sectors, value is realized over a long period of time while sustaining its operating costs from the outset. The process of anticipating the market response when a project is complete, often 5 or 10 years later, requires the decision maker to balance initial costs against the anticipation of future markets.
“Lever Site” now known as East Harbor built a case for creating a major office employment hub near the downtown financial district of Toronto. This decision was not immediately self-evident and required the consideration of multiple changes to the shape of future employment markets, anticipated transit improvements, public planning and market acceptance of the concept. The process required a risk analysis which was rigorous.
Notably, reaching financial sustainability -- cost equality with revenue -- was the major distinguishing factor. Transit planners’ revenue value paradigm was ‘build it and hope that they will come. A Developer’s paradigm is “build it where they are or will be.”
The second most important differentiator was the nature of the return. Private developers’ principal objective is cash flow, public sector objectives are more widely based on public benefit. The challenge for future planners is to recognize that the two aren’t mutually exclusive.
Brief Outline of Principles of a Business Case Analysis
1st Principle – Establish Objectives
Define clearly the scale and complexity of the decision to determine how the BCA is developed and how it will to used. The objective or purpose of the BCA will help frame the factors required for a comparative framework. Some decisions require summary level data and analysis while others are more complex. Some outcomes are more self-evident than others, requiring a minimum of evidence and analysis. Others are more nuanced and complex.
2nd Principle – Establish a Base Case or Comparative Framework
The base case is an option or alternative which has the least data and analytical risk. The base case may not be the optimum option or maybe be the most undesirable case, but by establishing the case which has the most “knowns” or greatest certainty of outcome, the decision maker is best able to evaluate the benefits of other options and their relationship top risk.
DATA FOR COST AND BENEFIT
3rd Principle - Identify Compatible Data and Variables
Each BCA must give the decision maker a clear understanding of relative value among alternatives. This can be achieved by establishing data and variables that are compatible; apples for apples.
4th Principle – Quantify Cost and Benefit “Knowns”
The evidence should be based on what is known at the time and what can reasonably be projected over time. Evidence used in the BCA must be quantifiable, transparent, reliable and as complete as possible.
5th Principle – Non-Beneficiary Knowledge
Confidence in the BCA is critical to its value. Obtain input from acknowledged experts in the field of enquiry who are non-participants in the project and who have no conflicts of interest or stake in the results. In addition, where possible engage in a peer review process. Employing this principle brings transparency and validity to the findings and adheres to the objective of ‘discovery’ as opposed to ‘justification’.
6th Principle - Avoid Omissions
It’s not what is said but what isn’t which drives poor decisions. Where data is incomplete and a “known unknown” is present it is better to disclose omissions or declare when an issue is unknown than to omit.
7th Principle – Establish the Hierarchy of Benefit
Establish the degree to which certain factors are weighted. The benefit hierarchy allows for the analytical framework to avoid absolute black and white outcomes.
If the differentiation of financial benefits does not create a clear separation of options, establish a rationale for the weighting of additional benefits.
For example, in transportation, BCAs have traditionally followed a hierarchy of benefits with a benefit ratio which recognizes that the financial benefit must be at a certain point before Wider Economic Benefits (WEBs) are introduced, followed by social and cultural benefits.
Wider Economic Benefits (WEB)
Social and Cultural Benefits.
This is critical in comparing infrastructure prioritization between classes of infrastructure. For example, a power plant enhancement vs a new hospital may have similar economic benefit but significantly different WEBs, social and cultural benefits.
8th Principle – Establish the Range of Future Costs and Benefits
There are no absolutes in projecting the future and the risk of projection error increases over time. Prepare trend data with a range of expectations to allow the decision maker to identify or assess the difference between high and low estimates.
9th Principle - Avoid Aspirational Benefits
Projecting benefit must be supported by evidence. Projections based on hope without evidence should be distinguished from commentary expressed as aspiration, distinct from evidence-based projections. This is extremely important where investments are innovative or unproven by prior example.
10th Principle - Long-Term Operating and Maintenance Costs
Long-term operating cost risk is an important element in the BCA process. Without reasonable baseline market acceptance in the early stages of an investment, short-term operating cost subsidy will have a negative impact on the value of a project. When there is a need for early subsidy of a project there must be a reasonable expectation that the value of the project will reduce the subsidy in a reasonable time.
11th Principle – Balanced Equation within a Range of Value
Provide an equation which allows the decision maker to understand the range of risks for the future investment in its simplest terms. In the case of transit, the cost benefit ratio is easily recognized in its simplest terms: 1:1 as the break-even ratio, a dollar spent will return a dollar. A ratio of 1: to greater than one is more valuable; a ratio of 1: less than one is likely not worth doing. The hierarchy of benefit leads to multiple ratios defined by the level of benefit and priority of benefit. Where the benefit cannot be proven statistically either because of the nature of the benefit or the availability of data the ratio should have a risk range and be clearly identified as an assumptive value.
12th Principle – Provide an End Point for the Analysis
Provide an end point to the term of analysis which allows for achieving optimal performance without overly evaluating long-term expectations of benefit. Infrastructure sectors vary depending on the relationship between operating costs and benefit. For example, transit BCAs usually consider a time frame which embraces several equipment renewals but are capped at 50 to 60 years, even though the investment may be operational for many years afterward. Rationalizing an investment by having an open-ended time frame to reach optimum value is considerably riskier.
13th Principle – Present all evidence in a format which is clear to a non-expert
BCAs, depending on the breadth and scope of the work, are often presented in summary or even power point format. The analytical summary can be as simple as an equation of value showing a ratio of benefit. Using the latest visual and mapping technologies simplifies the arguments and reduces the need to understand large numbers of charts and data.
 Commercial real estate in this context refers to the creation of property which is provides commercial rental accommodation and the investors are seeking long-term stable recurring revenue.