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Capital

Three for the price of two, 30% off, special offer – the importance of capital efficiency

Bill Kingdom's picture



In our daily lives we are bombarded by offers to get more for less.  And we respond accordingly as we strive to balance our household budgets. This saves us a few dollars here and there, perhaps hundreds of dollars on a big-ticket item, and we get to feel good about ourselves and our financial skills.

But when it comes to the millions of dollars invested in infrastructure around the world, do we have the same attitude towards buying more for less? This is a question that is difficult to answer.

As practitioners we often focus our attention on operational efficiency. What were this year’s costs compared to last year’s?  Is efficiency increasing or decreasing? There are suites of tools to give technical comfort to back up such assessments – from simple ratio analyses through to more sophisticated approaches such as econometric modeling and Data Envelope Analysis.

But what about capital efficiency? The assessment is not so simple as, in most cases, this is a prospective assessment – that is to say, a comparison of what was spent compared to a hypothetical of what might have been spent. It is rare to have a side by side comparison. Yet in the water sector, annualized capital costs can be equal to the annual operating costs. So, when we focus on operational efficiency, we are in fact only looking at half the story.

At the same time, we talk about mobilizing more finance to fill the gap between historic investment levels and projected investment needs. Yes, there will always be a financing gap in all countries around the world. However, whilst thinking about bridging that financing gap (“Maximizing Finance for Development” comes to mind), shouldn’t we also be thinking about how to reduce the financing gap by being more efficient in our use of capital?