The Budget process is a massive exercise. The exercise has different stages and each stage kicks off at a different stage of Budget making process.
The two sides of the Budget
Like our family budget, the nation's General Budget has two major parts: Revenue and Expenditure.
Assessing the revenues from different central taxes is the primary function of the Department of Revenue and the expenditure estimates for the current and the next year for various expenditure heads are assessed by the Department of Expenditure. The Department of Expenditure also assesses the resources of the public sector undertakings (PSUs).
The Budget division is a part of the Department of Economic Affairs. The Finance Secretary coordinates the overall Budget-making process. All of them keep the finance minister informed and seek directions from time to time. The Chief Economic Advisor assists the concerned departmental officer in this process.
1) Resources (Revenues) side
Leaving aside the tax receipts, the other sources of the revenue which go into the Budget are the dividends paid by the PSUs on the government shareholdings, including the interim dividends and the capital receipts on account of the divestment of the government share holdings.
Besides external receipts on account borrowing from international agencies like World Bank, ADB, etc, are also estimated and included in the assessment of the gross budgetary resources of various programmes under various ministries.
Resources of the public sector undertakings, including their operating surplus and the borrowings by them, also constitute an important component of the gross budgetary resources and goes to fund their plan.
The general policy is to fund the plans of the PSUs through their own resources except in some strategic and economically vital areas where the budgetary support is provided based on the recommendations of the Planning Commission.
This assessment of the Internal and External Budgetary Resources(IEBR) conducted by the Department of Expenditure forms part of the total plan resources and is also reflected in the budget documents.
To estimate the earnings of PSUs, the government invites CMDs or the finance directors of the PSUs to the North Block. A joint secretary level officer of the ministry of finance holds one-on-one meeting with the PSU chairmen and estimates revenue.
He passes on the information to Expenditure Secretary, who in turn, passes on the information to Finance Secretary. This exercise starts usually in the month of August/September. This revenue forms a part of plan expenditure.
Now comes role of the ministries of the government. Each ministry has a financial advisor. The financial advisor is called by the ministry of finance and asked about the expenditure of the amount allocated to his ministry. Generally, ministries are not able to spend the allocated amount but some may overspend as well.
Based on the inputs of different ministries Revised Estimate (RE) is prepared. Revised Estimate means as to how much is actually required by the ministry.
As a part of the expenditure management, the government has issued instructions to various ministries to adhere to the quarterly expenditure schedule and to avoid bunching of the expenditure in the last quarter.
Additional funds are also provided in the RE stage. Important is the estimates of the non-plan requirement for the next year.
Plan allocations are to be provided by the Planning Commission later based on the total gross budgetary support (GBS) indicated by the ministry of finance. This exercise starts in the month of October-December.
As is known, the Department of Revenue, the ministry of finance has two boards -- Central Board of Direct Taxes (CBDT) and Central Board of Excise and Customs (CBEC). By mid-January, these boards give the figure of tax collection up to December 31. For remaining three months, tax collection is assumed on the basis of previous trends.
The boards also estimate the tax revenue expected in next financial year. The integrity of the budget making depends on the realistic nature of these estimates particularly in the face of the fiscal discipline imposed by the FRBM Act.
It is a happy development in the past two or three years the estimates are generally not very wide off the mark.
2) Expenditure side
Parallel to all this, the Planning Commission goes into stock-taking mode. It starts meeting with individual ministries in the month of September-October and reviews ongoing schemes of the ministries, considers allocation for them, etc. It may decide to stop some ongoing scheme or merge two similar schemes.
Thus, an estimate of Plan Budget is prepared. The Planning Commission conveys to the ministry of finance that it requires so and so amount to run planned schemes for next financial year.
The finance minister and the Deputy Chairman of Planning Commission discuss the demand in detail. This way Plan Expenditure is ready. Different ministries are also asked to tell about their fund requirement, which forms a part of budget estimate.
Side by side, Department of Economic Affairs meets representatives of trade unions, industry chambers, economists and other groups. In the Budget-making exercise, suggestions of different stakeholders are kept in mind.
FM has to decide with his team
By this time, the finance minister is in a position to estimate as to how much it will get through taxes and how much it has to spend in coming financial year.
The finance minister has other constraints also. He has to abide by FRBM Act and cut fiscal deficit. Keeping in mind all these, the finance minister -- with his team -- decides whether some new taxes should be levied to collect more tax, how to widen tax net in order to earn more revenue. While doing so the suggestions from various interest groups are duly taken into account.
GDP assessment
The Department of Expenditure and the Department of Economic Affairs sit to decide GDP assessment for next year. Generally, a nominal growth in GDP is projected. Actual growth in GDP is nominal growth of GDP reduced by inflation figure.
The Budget Speech of the FM
Now comes the Budget Speech. It is fine-tuned to the last minute. Around February 15, some of the Budget documents are almost ready and goes for printing to a press located in North Block itself. Security agencies cordon off the press and entry is almost prohibited.
The D-Day: The finance minister delivers the Budget Speech in Parliament. Normally, on February 28, the finance minister delivers the Budget Speech in Lok Sabha. After which Budget documents are made available.
These are also put on the Web site www.finmin.nic.in.
However, 2008 being a leap year, this time the Budget would be presented to Parliament on February 29.
* Finance ministers who shaped India's economy
* What is the Budget all about?
Thursday, February 21, 2008
Wednesday, February 13, 2008
Market crash: A quick guide for young investors
f you are young and restless and into the stock markets then this is for you.
For the Indian stock markets are caught in a whirlwind and you might need a straw to hold on to something. Some words of wisdom, some nuggets that may help you to relax, howsoever often you may have heard them before.
Waking up this morning would you have imagined the 30-stock benchmark index, the Sensex, would crash by more than 1,500 points after noon?
The US markets seemed a bit stable with the Dow Jones down by about 0.5 per cent. The Indian stocks too had been on a downslide since January 15. However, the shock and awe that the Sensex witnessed today must have made a few of the weak-hearted amongst you stop and take heed.
Weak-hearted we all are but if you also have some patience -- considering your age -- here's what you should keep in mind to weather stock market turbulences.
1. Start nibbling in
If you believe in India's growth story every steep fall should be seen as a buying opportunity. If you haven't yet entered the market but want to then tighten your belts. Market crash like the one today is an ideal time to buy. However, since these are very tumultuous times don't put all your eggs in one basket.
That is, if you have Rs 100 to invest then put only Rs 25 or even less during such crashes. If you have heart for some risk then put Rs 25 out of that Rs 100 today and keep the rest for later. However, do this only if you are willing to stake your money for at least five-seven years. The long-term stock market story in India still looks positive.
2. Don't panic
If you are already invested in the market and are sitting on huge losses, don't panic. The macro economic story in India led by the consumption, infrastructure and engineering sectors still have chances to remain insulated from what's happening in the US markets. This because many believe that the US recession is responsible for the current weakness across global markets.
If the US can't buy our goods, no problem. India and Indians have the purchasing capacity believe some experts, who say that the US recession will not have a huge impact on the Indian growth story.
*
Make money with shares
Moreover, India's demographics, skewed heavily in favour of the young, will help India overcome external pressures in the long run. Young Indians like you are spending more on their daily needs thereby increasing the consumption demand.
So if you are a brave heart and believe that there are bound to be minor hiccups along the way this is your time. Add more and good quality stocks to your portfolio.
3. Avoid averaging
If you are a short-term trader and think that you can buy more of the same stocks to average your buying price then you may be in for a rough ride. Nobody knows for sure about which direction the markets will take in the weeks ahead.
Any bad news coming from global giants like the US, Europe and China can only have multiplier effects. If the markets were to tank further your losses are likely to increase manifold. So book your losses and get out of the market.
However, if you want to invest with a long-term perspective start nibbling in on good quality stocks.
4. Don't go by tips
If you are young and eager to make money then you are an ideal target for those who give stock tips. They will start flying thick and fast from tomorrow. Or may have started doing rounds even today for all we know. Some of your friends will ask you to buy stocks; some other will advise you to sell them.
*
Greed = Loss at the stock market
Agreed you will find a lot many stocks at prices far lower than what they were a fortnight ago. Check for their credentials. For this is the time when gullible investors go for the bait thrown by stock market manipulators. Don't buy any stock merely because a broker or a market punter advised you to.
Similarly, there will be a host of technical advisors jostling for your attention. "This particular stock looks weak on the charts. Traders can make some profits by selling them now and buying the same at lower levels with strict stop losses." Shun the thought. For you never know when the markets will bounce back.
Bottom line: don't trade on tips. Better still don't trade at all. Go for long-term investments. For the time being forget what Lord Maynard Keynes said: "In the long-term we are all dead."
God knows what will happen in the long-term but in the current scenario if you were to act on tips then you will only be responsible for your own ruin.
5. Mutual funds are your best friends
In such times let experts manage your money if you find stock markets to be a hot potato. Put your money in mutual funds for the mutual fund manager is a market expert and is assisted by a big team of market specialists. A decision made by a team of experts will help you make far greater profits than what you will try to do on your own.
The stock market hammering of the last few days should be taken as an opportunity to buy into good diversified equity funds. For, they put their money into the markets irrespective of any sector, theme, or market cap limitation.
When the markets will bounce back they will have a far higher chance of appreciating faster than any other type of mutual funds.
6. Don't try to time the markets
As an individual you are in no way going to buy when the market falls and sell when the market rises. Believe in investing money into stocks or mutual funds' systematic investment plans, SIPs, regularly. This is the only key to avoid getting ruined in the stock markets.
*
Want to bid for shares? Read this first
The stock market crashes -- like the one witnessed today -- get evened out by long-term gains. For instance, those who had been regularly investing from the time markets crashed steeply during the May 2006 crash would not feel bothered about the crash today.
The market had crashed to some 12,000 points then from about 16,000 levels in just a month's time. Today even after the crash the market was trading at 17,000 plus levels.
Remember that age is on your side. If you are in your early, mid or late twenties then this is the right time for you to put your money in stock markets. Historically, stock market gains have outweighed gains from other asset classes over 10-year, 15-year and 20-year time horizons.
Who knows, by the time you are in your 40s or 50s, twenty years from this day, you might look back at this crash as your first stepping stone towards building wealth for yourself and your family.
For the Indian stock markets are caught in a whirlwind and you might need a straw to hold on to something. Some words of wisdom, some nuggets that may help you to relax, howsoever often you may have heard them before.
Waking up this morning would you have imagined the 30-stock benchmark index, the Sensex, would crash by more than 1,500 points after noon?
The US markets seemed a bit stable with the Dow Jones down by about 0.5 per cent. The Indian stocks too had been on a downslide since January 15. However, the shock and awe that the Sensex witnessed today must have made a few of the weak-hearted amongst you stop and take heed.
Weak-hearted we all are but if you also have some patience -- considering your age -- here's what you should keep in mind to weather stock market turbulences.
1. Start nibbling in
If you believe in India's growth story every steep fall should be seen as a buying opportunity. If you haven't yet entered the market but want to then tighten your belts. Market crash like the one today is an ideal time to buy. However, since these are very tumultuous times don't put all your eggs in one basket.
That is, if you have Rs 100 to invest then put only Rs 25 or even less during such crashes. If you have heart for some risk then put Rs 25 out of that Rs 100 today and keep the rest for later. However, do this only if you are willing to stake your money for at least five-seven years. The long-term stock market story in India still looks positive.
2. Don't panic
If you are already invested in the market and are sitting on huge losses, don't panic. The macro economic story in India led by the consumption, infrastructure and engineering sectors still have chances to remain insulated from what's happening in the US markets. This because many believe that the US recession is responsible for the current weakness across global markets.
If the US can't buy our goods, no problem. India and Indians have the purchasing capacity believe some experts, who say that the US recession will not have a huge impact on the Indian growth story.
*
Make money with shares
Moreover, India's demographics, skewed heavily in favour of the young, will help India overcome external pressures in the long run. Young Indians like you are spending more on their daily needs thereby increasing the consumption demand.
So if you are a brave heart and believe that there are bound to be minor hiccups along the way this is your time. Add more and good quality stocks to your portfolio.
3. Avoid averaging
If you are a short-term trader and think that you can buy more of the same stocks to average your buying price then you may be in for a rough ride. Nobody knows for sure about which direction the markets will take in the weeks ahead.
Any bad news coming from global giants like the US, Europe and China can only have multiplier effects. If the markets were to tank further your losses are likely to increase manifold. So book your losses and get out of the market.
However, if you want to invest with a long-term perspective start nibbling in on good quality stocks.
4. Don't go by tips
If you are young and eager to make money then you are an ideal target for those who give stock tips. They will start flying thick and fast from tomorrow. Or may have started doing rounds even today for all we know. Some of your friends will ask you to buy stocks; some other will advise you to sell them.
*
Greed = Loss at the stock market
Agreed you will find a lot many stocks at prices far lower than what they were a fortnight ago. Check for their credentials. For this is the time when gullible investors go for the bait thrown by stock market manipulators. Don't buy any stock merely because a broker or a market punter advised you to.
Similarly, there will be a host of technical advisors jostling for your attention. "This particular stock looks weak on the charts. Traders can make some profits by selling them now and buying the same at lower levels with strict stop losses." Shun the thought. For you never know when the markets will bounce back.
Bottom line: don't trade on tips. Better still don't trade at all. Go for long-term investments. For the time being forget what Lord Maynard Keynes said: "In the long-term we are all dead."
God knows what will happen in the long-term but in the current scenario if you were to act on tips then you will only be responsible for your own ruin.
5. Mutual funds are your best friends
In such times let experts manage your money if you find stock markets to be a hot potato. Put your money in mutual funds for the mutual fund manager is a market expert and is assisted by a big team of market specialists. A decision made by a team of experts will help you make far greater profits than what you will try to do on your own.
The stock market hammering of the last few days should be taken as an opportunity to buy into good diversified equity funds. For, they put their money into the markets irrespective of any sector, theme, or market cap limitation.
When the markets will bounce back they will have a far higher chance of appreciating faster than any other type of mutual funds.
6. Don't try to time the markets
As an individual you are in no way going to buy when the market falls and sell when the market rises. Believe in investing money into stocks or mutual funds' systematic investment plans, SIPs, regularly. This is the only key to avoid getting ruined in the stock markets.
*
Want to bid for shares? Read this first
The stock market crashes -- like the one witnessed today -- get evened out by long-term gains. For instance, those who had been regularly investing from the time markets crashed steeply during the May 2006 crash would not feel bothered about the crash today.
The market had crashed to some 12,000 points then from about 16,000 levels in just a month's time. Today even after the crash the market was trading at 17,000 plus levels.
Remember that age is on your side. If you are in your early, mid or late twenties then this is the right time for you to put your money in stock markets. Historically, stock market gains have outweighed gains from other asset classes over 10-year, 15-year and 20-year time horizons.
Who knows, by the time you are in your 40s or 50s, twenty years from this day, you might look back at this crash as your first stepping stone towards building wealth for yourself and your family.
7 super tax saving, fixed income plans
f you like the safety of a steady predictable income, every month, quarter or year, then there are a number of tax-saving instruments available for you. In fact, most of the tax-saving paper you could buy earlier was in this category.
For those who are uncomfortable with fluctuating incomes that market-linked instruments give, these are the products for you.
Admittedly, returns from fixed income instruments averaging about 8 per cent a year, do not even compare with those from equity-related products that have returned over 40 per cent in the last few years. But then, the return you get is also market risk-free. At the end of every designated period, you know you will get a certain amount.
And that imparts stability to a portfolio. They are suitable for investors who need to cut down on the risk, such as people nearing retirement. For them, these could even form the mainstay of their portfolio. The choice you have is fairly wide. (See Table below: Fixed Income Tax Saving Options)
Vantage points
Three important things that one needs to look at before investing in any of the mentioned fixed income instruments are taxability of interest income, frequency of income, and tenure of investment. Even if the interest rate on the Senior Citizens' Savings Scheme (SCSS) is 9 per cent per annum, the income is fully taxable. This means that for someone in the highest tax-bracket, the actual return after-tax will be only 6.22 per cent.
Similarly, if your need is a regular monthly income, the instrument with the highest post-tax return, public provident fund, may not be the right choice. Only three of the fixed income instruments that qualify for relief under Section 80C give a regular stream of income. The SCSS pays interest quarterly, 5-year notified bank deposits half-yearly, and time deposits annually.
So, it appears that there is nothing for anyone who is looking for steady monthly income. But that is not quite correct, although you would have to get a little active about your investments in that case.
Rather than putting in a lump sum when the taxman is almost knocking on your door at the end of the financial year, you can invest throughout the year. That, de facto, will give you steady monthly or quarterly returns as the instruments mature in a phased manner.
So, you can invest and rest assured that your money is safe, although inflation can eat away at it quietly.
Fixed Income Tax Saving Options
Investment in all these instruments qualifies for Section 80C deduction and gives a guaranteed fixed income. Only endowment life insurance plans give bonus-based returns
Instrument available
Duration (yrs)
Returns (%)
Compounding
Taxability of income
Yield� (%)
Bank Fixed Deposit (Tax savers)
5
8.50�
Quarterly
Interest taxable
5.87
Employee Provident Fund
Till retirement
8.50�
Yearly
Tax-free
12.30
Life Insurance (Endowment)
10 and more
Around 6.00�
Yearly
Tax-free
8.68
National Savings Certificate
6
8.00
Half-yearly
Interest taxable
5.53
Post Office Time Deposits
5
7.50
Quarterly
Interest taxable
5.18
Public Provident Fund
15
8.00
Yearly
Tax-free
11.57
Senior Citizens' Savings Scheme
5
9.00
Quarterly
Interest taxable
6.22
� Applicable to 30% tax slab, including education cess | � May vary from bank to bank | � Fixed by govt each year | � Internal rate of return based on bonuses
For those who are uncomfortable with fluctuating incomes that market-linked instruments give, these are the products for you.
Admittedly, returns from fixed income instruments averaging about 8 per cent a year, do not even compare with those from equity-related products that have returned over 40 per cent in the last few years. But then, the return you get is also market risk-free. At the end of every designated period, you know you will get a certain amount.
And that imparts stability to a portfolio. They are suitable for investors who need to cut down on the risk, such as people nearing retirement. For them, these could even form the mainstay of their portfolio. The choice you have is fairly wide. (See Table below: Fixed Income Tax Saving Options)
Vantage points
Three important things that one needs to look at before investing in any of the mentioned fixed income instruments are taxability of interest income, frequency of income, and tenure of investment. Even if the interest rate on the Senior Citizens' Savings Scheme (SCSS) is 9 per cent per annum, the income is fully taxable. This means that for someone in the highest tax-bracket, the actual return after-tax will be only 6.22 per cent.
Similarly, if your need is a regular monthly income, the instrument with the highest post-tax return, public provident fund, may not be the right choice. Only three of the fixed income instruments that qualify for relief under Section 80C give a regular stream of income. The SCSS pays interest quarterly, 5-year notified bank deposits half-yearly, and time deposits annually.
So, it appears that there is nothing for anyone who is looking for steady monthly income. But that is not quite correct, although you would have to get a little active about your investments in that case.
Rather than putting in a lump sum when the taxman is almost knocking on your door at the end of the financial year, you can invest throughout the year. That, de facto, will give you steady monthly or quarterly returns as the instruments mature in a phased manner.
So, you can invest and rest assured that your money is safe, although inflation can eat away at it quietly.
Fixed Income Tax Saving Options
Investment in all these instruments qualifies for Section 80C deduction and gives a guaranteed fixed income. Only endowment life insurance plans give bonus-based returns
Instrument available
Duration (yrs)
Returns (%)
Compounding
Taxability of income
Yield� (%)
Bank Fixed Deposit (Tax savers)
5
8.50�
Quarterly
Interest taxable
5.87
Employee Provident Fund
Till retirement
8.50�
Yearly
Tax-free
12.30
Life Insurance (Endowment)
10 and more
Around 6.00�
Yearly
Tax-free
8.68
National Savings Certificate
6
8.00
Half-yearly
Interest taxable
5.53
Post Office Time Deposits
5
7.50
Quarterly
Interest taxable
5.18
Public Provident Fund
15
8.00
Yearly
Tax-free
11.57
Senior Citizens' Savings Scheme
5
9.00
Quarterly
Interest taxable
6.22
� Applicable to 30% tax slab, including education cess | � May vary from bank to bank | � Fixed by govt each year | � Internal rate of return based on bonuses
10 stocks to make young investors crorepatis
t fell like the proverbial house of cards.
The 30-stock benchmark of the Indian stock exchange, the Sensex, recorded its biggest crash on January 21. The index closed the day at 17,605 points, down a precipitous 1,400 points.
While the event is likely to send shudders down the spines of investors across all age groups for the young brave hearts amongst you we have got ten stock picks that can make you millionaires.
The caveat, however, is that you need to hold them for a long period: ten years if you can to reap the benefits of picking stocks that will create value for you.
We asked brokerage house K R Choksey Shares and Securities to hone in on ten stocks that will create value for investors in the long run. Gaurang Shah, vice president, equity research at K R Choksey Shares and Securities came up with these ten gems for long term investors just a few days before January 21. Over to him.
Here are our top picks which have the potential to be multibaggers ( a stock that grows manifold over a period of time) if held with an investment horizon of ten years: Large caps are selected because of their proven track record and ability to grab mega opportunities through their financial strength. Mid caps if the management has the vision and management band width to scale up rapidly to become large caps.
They are grouped under the following themes:
Commodities:
~ Reliance Industries [Get Quote] (Perennially evergreen company)
~ Reliance Petroleum [Get Quote] (Largest refinery with very high Nelson complexity index that will lead to highest gross refining margins, GRMs)
~ Gujarat NRE Coke [Get Quote] (integration from coking coal to coke)
~ Tata Steel [Get Quote] (formerly Tisco; lowest cost producer of steel plus large value addition through Corus acquisition)
~ Hindalco [Get Quote] (lowest cost producer of aluminium plus large value addition through Novelis Fusion Technology)
*
Market crash: A quick guide for young investors
~ Sterlite Industries (commodity powerhouse at a time when globally commodities are in a super cycle)
~ Sesa Goa [Get Quote] (largest reserves of iron ore in private sector)
I am including many stocks in this sector since global commodities will be on the upswing for the next 5 years.
Telecom
~ RCom (marketing aggressiveness plus financial engineering plus political acumen)
Auto
~ Tata Motors [Get Quote] (from world's cheapest car to luxury Jaguar to SUV Landrover to trucks -- will be in global top five in 5 years)
Finance
~ ICICI Bank [Get Quote] (proactive, aggressive fund raising and lending taking full advantage of slow decision making at PSU banks)
*
Making money vs creating wealth in stocks
~ Reliance Capital [Get Quote] (straddling all areas of non-banking financial services)
Infrastructure
~ L&T (another evergreen company -- value unlocking through listing of subsidiaries, very strong core business)
~ Patel Engineering [Get Quote] (strong position in high margin high technology construction sector, real estate development)
Pharma
~ Glenmark [Get Quote] (innovator, outlicensor of drugs in fast growing therapeutic areas like lifestyle diseases)
~ Cipla (innovator copier -- low cost supplier of essential medicines people can't do without)
Realty
~ DLF (proxy for the Indian real estate sector)
~ Unitech (number 2 and tries harder than number 1)
~ Sobha Developers
The 30-stock benchmark of the Indian stock exchange, the Sensex, recorded its biggest crash on January 21. The index closed the day at 17,605 points, down a precipitous 1,400 points.
While the event is likely to send shudders down the spines of investors across all age groups for the young brave hearts amongst you we have got ten stock picks that can make you millionaires.
The caveat, however, is that you need to hold them for a long period: ten years if you can to reap the benefits of picking stocks that will create value for you.
We asked brokerage house K R Choksey Shares and Securities to hone in on ten stocks that will create value for investors in the long run. Gaurang Shah, vice president, equity research at K R Choksey Shares and Securities came up with these ten gems for long term investors just a few days before January 21. Over to him.
Here are our top picks which have the potential to be multibaggers ( a stock that grows manifold over a period of time) if held with an investment horizon of ten years: Large caps are selected because of their proven track record and ability to grab mega opportunities through their financial strength. Mid caps if the management has the vision and management band width to scale up rapidly to become large caps.
They are grouped under the following themes:
Commodities:
~ Reliance Industries [Get Quote] (Perennially evergreen company)
~ Reliance Petroleum [Get Quote] (Largest refinery with very high Nelson complexity index that will lead to highest gross refining margins, GRMs)
~ Gujarat NRE Coke [Get Quote] (integration from coking coal to coke)
~ Tata Steel [Get Quote] (formerly Tisco; lowest cost producer of steel plus large value addition through Corus acquisition)
~ Hindalco [Get Quote] (lowest cost producer of aluminium plus large value addition through Novelis Fusion Technology)
*
Market crash: A quick guide for young investors
~ Sterlite Industries (commodity powerhouse at a time when globally commodities are in a super cycle)
~ Sesa Goa [Get Quote] (largest reserves of iron ore in private sector)
I am including many stocks in this sector since global commodities will be on the upswing for the next 5 years.
Telecom
~ RCom (marketing aggressiveness plus financial engineering plus political acumen)
Auto
~ Tata Motors [Get Quote] (from world's cheapest car to luxury Jaguar to SUV Landrover to trucks -- will be in global top five in 5 years)
Finance
~ ICICI Bank [Get Quote] (proactive, aggressive fund raising and lending taking full advantage of slow decision making at PSU banks)
*
Making money vs creating wealth in stocks
~ Reliance Capital [Get Quote] (straddling all areas of non-banking financial services)
Infrastructure
~ L&T (another evergreen company -- value unlocking through listing of subsidiaries, very strong core business)
~ Patel Engineering [Get Quote] (strong position in high margin high technology construction sector, real estate development)
Pharma
~ Glenmark [Get Quote] (innovator, outlicensor of drugs in fast growing therapeutic areas like lifestyle diseases)
~ Cipla (innovator copier -- low cost supplier of essential medicines people can't do without)
Realty
~ DLF (proxy for the Indian real estate sector)
~ Unitech (number 2 and tries harder than number 1)
~ Sobha Developers
3 common mutual fund misconceptions
Few would dispute the utility that mutual funds as investment avenues can add to investors' portfolios. Similarly, in recent times, the greater acceptance of mutual funds and their impressive showing in the domestic context has been chronicled in detail. There is also a huge amount of information available on how to invest in mutual funds and make the most of them.
Sadly, little is being done to remove the several misconceptions doing the rounds. Thanks to these misconceptions, investors end up making incorrect investment decisions. In this article, we expose three common mutual fund misconceptions.
SIP is an investment avenue
SIP (systematic investment plan) is a buzzword of sorts in the mutual fund industry. Fund houses have done their bit to spread the gospel of SIP among investors. Advertisement campaigns exhorting investors to invest via an SIP are common place. However, many investors have been led to believe that SIP is an investment avenue. It is not uncommon to find investors who want to invest in an 'SIP fund' (incidentally, there was even a mutual fund launched with that name).
The fact: SIP is a mode of investment, not an investment avenue. The conventional method of mutual fund investing entails making one-time lump sum investments. SIP investing involves making regular investments in a staggered manner. By spreading the investments over longer time frames (at least 12-24 months), investors stand to gain by lowering the average purchase cost vis-�-vis lump sum investments. This is most evident when equity markets experience prolonged bouts of turbulence. Also, SIP investing tends to be lighter on the wallet as opposed to lump sum investing.
#
SIP: All you need to know
'Since inception' numbers are comparable
It is a common practice to evaluate equity-oriented funds by comparing their performances over longer time frames like three and five years. At times, investors are known to draw conclusions based on 'since inception' performances. 'Since inception' refers to the growth clocked by a fund since its origin.
The fact: 'Since inception' performances are not comparable, simply because not all funds have the same inception date. For example, a diversified equity fund launched in 1995 can be compared with another fund launched in 2002 over the 3-Yr and 5-Yr time frames. However comparing their 'since inception' performances would be inappropriate because the first fund has a 13-Yr track record while the latter has been in existence for 6 years. A fund's performance since its inception can at best be considered for drawing comparisons vis-�-vis the benchmark index (i.e. by considering a corresponding period) to evaluate its relative performance.
Thematic funds make good investments
This is likely to be the most disputed misconception. After all, most thematic funds have delivered superlative performances over the last 18-24 months. Let's not forget that just about every fund house worth its salt is launching thematic NFOs (new fund offers) and that includes fund houses like HDFC [Get Quote] Mutual Fund which were always averse to the idea. Clearly, the worthiness of thematic funds cannot be doubted.
The fact: All the hype surrounding thematic funds doesn't change the fact that they are high risk-high return investment propositions. Furthermore, such funds can deliver only so long as the underlying theme does well; once the theme runs out of steam (every theme does at some point in time), so does the fund. And given the restrictive investment mandate of a thematic fund, the fund manager has no option but to stay invested even in the aforementioned scenario.
Conversely, there are diversified equity funds that invest in an unrestricted manner. By not being tied down to any specific theme, they are free to seek attractive investment opportunities across the investment universe. Statistics reveal that over longer time frames (more than 5 years) well-managed diversified equity funds are known to score over their thematic peers. More importantly, diversified equity funds are known to outscore their thematic peers on the risk parameters i.e. they expose investors to lower risk levels.
At best, thematic funds are suited for informed investors who can time their entry into and exit from the fund. Retail investors should stick to diversified equity funds with proven track records over longer time frames and across market phases.
E
Sadly, little is being done to remove the several misconceptions doing the rounds. Thanks to these misconceptions, investors end up making incorrect investment decisions. In this article, we expose three common mutual fund misconceptions.
SIP is an investment avenue
SIP (systematic investment plan) is a buzzword of sorts in the mutual fund industry. Fund houses have done their bit to spread the gospel of SIP among investors. Advertisement campaigns exhorting investors to invest via an SIP are common place. However, many investors have been led to believe that SIP is an investment avenue. It is not uncommon to find investors who want to invest in an 'SIP fund' (incidentally, there was even a mutual fund launched with that name).
The fact: SIP is a mode of investment, not an investment avenue. The conventional method of mutual fund investing entails making one-time lump sum investments. SIP investing involves making regular investments in a staggered manner. By spreading the investments over longer time frames (at least 12-24 months), investors stand to gain by lowering the average purchase cost vis-�-vis lump sum investments. This is most evident when equity markets experience prolonged bouts of turbulence. Also, SIP investing tends to be lighter on the wallet as opposed to lump sum investing.
#
SIP: All you need to know
'Since inception' numbers are comparable
It is a common practice to evaluate equity-oriented funds by comparing their performances over longer time frames like three and five years. At times, investors are known to draw conclusions based on 'since inception' performances. 'Since inception' refers to the growth clocked by a fund since its origin.
The fact: 'Since inception' performances are not comparable, simply because not all funds have the same inception date. For example, a diversified equity fund launched in 1995 can be compared with another fund launched in 2002 over the 3-Yr and 5-Yr time frames. However comparing their 'since inception' performances would be inappropriate because the first fund has a 13-Yr track record while the latter has been in existence for 6 years. A fund's performance since its inception can at best be considered for drawing comparisons vis-�-vis the benchmark index (i.e. by considering a corresponding period) to evaluate its relative performance.
Thematic funds make good investments
This is likely to be the most disputed misconception. After all, most thematic funds have delivered superlative performances over the last 18-24 months. Let's not forget that just about every fund house worth its salt is launching thematic NFOs (new fund offers) and that includes fund houses like HDFC [Get Quote] Mutual Fund which were always averse to the idea. Clearly, the worthiness of thematic funds cannot be doubted.
The fact: All the hype surrounding thematic funds doesn't change the fact that they are high risk-high return investment propositions. Furthermore, such funds can deliver only so long as the underlying theme does well; once the theme runs out of steam (every theme does at some point in time), so does the fund. And given the restrictive investment mandate of a thematic fund, the fund manager has no option but to stay invested even in the aforementioned scenario.
Conversely, there are diversified equity funds that invest in an unrestricted manner. By not being tied down to any specific theme, they are free to seek attractive investment opportunities across the investment universe. Statistics reveal that over longer time frames (more than 5 years) well-managed diversified equity funds are known to score over their thematic peers. More importantly, diversified equity funds are known to outscore their thematic peers on the risk parameters i.e. they expose investors to lower risk levels.
At best, thematic funds are suited for informed investors who can time their entry into and exit from the fund. Retail investors should stick to diversified equity funds with proven track records over longer time frames and across market phases.
E
FED CUTS INTEREST RATES WHY DOESNOT RBI?
Recent policy announcements in the US, eurozone and UK on the one hand, and India on the other, manifest two marked differences in the conduct of monetary policy:
*
Both the US Fed and the European Central Bank have intervened aggressively in the money markets in recent months in the wake of the credit crisis. The objective was to bring the credit premium, that is, the difference between the 91-day risk-free rate and the three-month LIBOR, down to its normal level, clearly evidencing their concern with the level of interest rates rather than the supply of money. In fact, during the course of the Fed's aggressive rate cutting, there was no reference to the money supply at all. In contrast, our monetary policy seems to still focus on money supply growth.
*
Again, these central banks are as willing to cut interest rates and pump money in the system, as they are to act in the opposite direction when circumstances are different. The Fed seems to aim at minimising the sum of squares of the inflation gap (difference between targeted and actual inflation) and the output gap (difference between optimum and actual output), suggesting equal importance to both. In our case, while the central bank is quite willing and happy to tighten money, in general, it is far more reticent in opening the tap or dropping interest rates.
I have, on several occasions, contrasted the difference between our monetary aggregates -- broad money, bank deposits, bank credit, and so on -- as a percentage of nominal GDP, and the corresponding ratios for most other Asian economies: our ratios are generally much lower.
In this connection, I recently came across some interesting statistics comparing US GDP growth with credit expansion: the ratio of credit generated per dollar of GDP growth was fairly stable at around 1.5 for several decades after 1950. It started growing rapidly in the 1990s and was as high as 4.5 last year! In our case, the credit growth has been consistently below the growth in GDP.
For example, in the last fiscal year, GDP grew by Rs 493,000 crore (Rs 4930 billion), while bank credit grew by just Rs 416,000 crore (Rs 4160 billion). The figures are not very different for the previous two years, but credit growth as a percentage of GDP growth was even lower in 2003-04. One does not know whether the central bank or its advisors compare such data but it would be interesting for them to do so. Arguably, the comparison with the US is not valid, but surely this cannot be the case with reference to the other Asian economies? Any bets on what the comparison would show?
The issue regarding credit growth is all the more important in the context of the monetary policy statement's emphasis on "credit quality as well as credit delivery, in particular, for employment-intensive sectors". One would have thought that the central bank should have expressed satisfaction at the deceleration in credit growth from 30 per cent to 22 per cent on a year-on-year basis, which was its objective.
But obviously circumstances seem to have changed. As for the employment-intensive sectors, a few that readily come to mind include construction, garments, gems and jewellery, leather, handicraft, and so on. All these sectors are suffering from either very high real interest rates and/or an uneconomic exchange rate. In fact, the very viability of many units in these sectors is now in question.
For example, jewellery manufacturing firms in SEEPZ, Mumbai, employ 35,000 semi-literate persons. The firms' exports have dropped by 25 per cent between July and November, 2007, as compared to the corresponding period in 2006 (from $1.2 bn to $900 mn). To my mind, for banks to increase their exposure to such employment-intensive sectors when both the time and external values of the rupee are uneconomic, would lead to dilution of the overall quality of credit, increasing the probability of generating non-performing assets.
Critics of "lazy bankers" also point to the increase in the SLR portfolio of the banks, even as credit growth has slowed. Such criticism needs to be tempered by the fact that, until early 2007, most banks did not need to add to their portfolio of such securities even when deposits were growing. Once, however, the ratio came to about 28 per cent or so, banks had to resume investing in SLR securities. The ratio now, at about 29 per cent, is not very different from what it was a year back (28 per cent).
But coming back to monetary policy, the RBI is obviously constrained by the priorities of Delhi. As the finance minister said in Davos recently, "I will not be politically in trouble if my growth rate slows down to 8.5 to 8 per cent. I will be in greater trouble if my inflation rises to 6 per cent this year." What seems to be missing from the numbers is that each output gap of 1 per cent means Rs 50,000 crore (Rs 500 billion) of lost output -- and, even more importantly, the non-creation of millions of reasonably paid jobs, adding to potential recruits to Naxalism.
*
Both the US Fed and the European Central Bank have intervened aggressively in the money markets in recent months in the wake of the credit crisis. The objective was to bring the credit premium, that is, the difference between the 91-day risk-free rate and the three-month LIBOR, down to its normal level, clearly evidencing their concern with the level of interest rates rather than the supply of money. In fact, during the course of the Fed's aggressive rate cutting, there was no reference to the money supply at all. In contrast, our monetary policy seems to still focus on money supply growth.
*
Again, these central banks are as willing to cut interest rates and pump money in the system, as they are to act in the opposite direction when circumstances are different. The Fed seems to aim at minimising the sum of squares of the inflation gap (difference between targeted and actual inflation) and the output gap (difference between optimum and actual output), suggesting equal importance to both. In our case, while the central bank is quite willing and happy to tighten money, in general, it is far more reticent in opening the tap or dropping interest rates.
I have, on several occasions, contrasted the difference between our monetary aggregates -- broad money, bank deposits, bank credit, and so on -- as a percentage of nominal GDP, and the corresponding ratios for most other Asian economies: our ratios are generally much lower.
In this connection, I recently came across some interesting statistics comparing US GDP growth with credit expansion: the ratio of credit generated per dollar of GDP growth was fairly stable at around 1.5 for several decades after 1950. It started growing rapidly in the 1990s and was as high as 4.5 last year! In our case, the credit growth has been consistently below the growth in GDP.
For example, in the last fiscal year, GDP grew by Rs 493,000 crore (Rs 4930 billion), while bank credit grew by just Rs 416,000 crore (Rs 4160 billion). The figures are not very different for the previous two years, but credit growth as a percentage of GDP growth was even lower in 2003-04. One does not know whether the central bank or its advisors compare such data but it would be interesting for them to do so. Arguably, the comparison with the US is not valid, but surely this cannot be the case with reference to the other Asian economies? Any bets on what the comparison would show?
The issue regarding credit growth is all the more important in the context of the monetary policy statement's emphasis on "credit quality as well as credit delivery, in particular, for employment-intensive sectors". One would have thought that the central bank should have expressed satisfaction at the deceleration in credit growth from 30 per cent to 22 per cent on a year-on-year basis, which was its objective.
But obviously circumstances seem to have changed. As for the employment-intensive sectors, a few that readily come to mind include construction, garments, gems and jewellery, leather, handicraft, and so on. All these sectors are suffering from either very high real interest rates and/or an uneconomic exchange rate. In fact, the very viability of many units in these sectors is now in question.
For example, jewellery manufacturing firms in SEEPZ, Mumbai, employ 35,000 semi-literate persons. The firms' exports have dropped by 25 per cent between July and November, 2007, as compared to the corresponding period in 2006 (from $1.2 bn to $900 mn). To my mind, for banks to increase their exposure to such employment-intensive sectors when both the time and external values of the rupee are uneconomic, would lead to dilution of the overall quality of credit, increasing the probability of generating non-performing assets.
Critics of "lazy bankers" also point to the increase in the SLR portfolio of the banks, even as credit growth has slowed. Such criticism needs to be tempered by the fact that, until early 2007, most banks did not need to add to their portfolio of such securities even when deposits were growing. Once, however, the ratio came to about 28 per cent or so, banks had to resume investing in SLR securities. The ratio now, at about 29 per cent, is not very different from what it was a year back (28 per cent).
But coming back to monetary policy, the RBI is obviously constrained by the priorities of Delhi. As the finance minister said in Davos recently, "I will not be politically in trouble if my growth rate slows down to 8.5 to 8 per cent. I will be in greater trouble if my inflation rises to 6 per cent this year." What seems to be missing from the numbers is that each output gap of 1 per cent means Rs 50,000 crore (Rs 500 billion) of lost output -- and, even more importantly, the non-creation of millions of reasonably paid jobs, adding to potential recruits to Naxalism.
ASSET MANAGEMENT
Asset Management
in the
South African
Water Services Industry
An Introduction
Introduction
This document was written to provide a brief and simple description of what asset management is, what benefits it can provide and what steps are required to implement an asset management system. It is intended for anyone who has an interest in the improved management of water services, both supply and sanitation. The table of contents below shows you how this document is structured, and where you can look for specific information.
Section Page
Introduction 1
What are Assets? 3
What is Asset Management? 5
1. The Register 5
2. The Plan 9
How will Asset Management help me? 11
1. Financial and Management Benefits 11
2. Legislative Benefits 14
How can I implement Asset Management? 16
How do I set up an Effective Asset Register? 18
1. Decide on an Identification and Classification System 18
2. Determine Boundaries for the Identification System 19
3. Determine the Asset Types and their Measures 19
4. Determine required values for Asset Measures 20
5. Capture data and a measure of data accuracy for all assets 20
6. Register Maintenance and Use 21
Conclusion 22
For most people, the term asset management will conjure images of stocks and bonds, the stock market and money, but any organisation has far more assets than just those that can be invested by a bank. There is also much more to the management of assets than just ensuring that you get a good return on your investment.
In order to help explain the concepts in this booklet, we will regularly refer to an example system, and we will always mark the example with the icon on the left. The example we will use is a small, stand-alone, water supply system which supplies a community of about 4 600 people in the Northwest province. The reason we chose to use this particular example is twofold. Firstly, a simple example makes it easier for the reader to understand the points being explained. Secondly, a simple system was chosen to show that asset management is not only the responsibility of large institutions with strong resources, but that it can also be achieved by the very smallest as well. The example system consists of two boreholes with diesel driven pumps, about 4,2 km of rising main feeding an elevated storage tank, and about 16 km of distribution pipework supplying 43 standpipes.
The following abbreviations are used in this booklet:
AMP Asset Management Plan
GAMAP Generally Accepted Municipal Accounting Policies
GIS Geographic Information Systems
What are Assets?
In this context the definition of ‘assets’ is very broad. Anything that is used by an organisation in order for it to achieve its function can be considered an asset of the organisation. This will include a number of different types of assets, some more obvious than others. Some types of assets, including examples are listed below:
• Financial assets, such as investments and cash on hand. The example community has saved over R15 000 from water payments, which has been invested with a local bank.
• Moveable assets, such as vehicles and office furniture. The system operator from our example village uses a bicycle and a small set of tools and spares in his duties. These make up the moveable assets of the organisation.
• Fixed assets, such as land, buildings, pipes and pumps. As mentioned earlier, the example community’s fixed assets consist of two diesel pumps, about 4,2 km of rising main, a storage tank, about 16 km of distribution pipework, and 43 standpipes.
• The software and information stored on the organisations computer system. The example system has no computers, but they do have written information on all their assets, which is in itself an asset.
• The knowledge and expertise developed by the organisation. The example system is managed by a Project Steering Committee drawn from the local community. These people attended formal training for six months, and the knowledge they have gained both from this training and ‘on the job’ experience is an asset of the organisation.
• The people who work for the organisation, in our case the operator, and a standby operator.
• The customers whose needs are being met by the organisation.
All of these things can help an organisation do its job in a better way if they are well managed. Good management of assets enhances community life, and increases the useful life of available resources. These things can also make it difficult for an organisation to do its job at all if they are badly managed.
How then should an organisation manage its assets to achieve maximum value? Answering this question is the goal of asset management.
What is Asset Management?
Asset management can be broken down into two main components. Firstly, one needs to know is exactly what assets are owned by the organisation. This usually takes the form of a register or inventory of assets. The second component is a plan setting out what the asset management should achieve, and how it will work.
1. The Register
In its simplest form an asset register is just a list of all the assets owned by an organisation. You might think that it is obvious that an organisation should have a list of all the things it owns, and it is. But in reality, it very often doesn't work like this. If the organisation is small, then it often relies on a few people to remember all the things it owns. For example, do you have a list of all the things you own in your home?
Large organisations often have many different lists; for example, the finance department might have a list of the value of all the assets, while the maintenance department might have a list of when certain assets need to be serviced. The problem here is that these lists usually don't agree, so you never know which one is right.
For this list of assets to be useful, it has to contain enough information on each asset so that the asset can be effectively managed. Some of the information that should be contained in an asset register is given below:
• Each asset must have a unique name that clearly identifies the asset throughout the entire organisation.
• There should be a basic set of data that is the same for all the assets within the organisation, such as the location, age and assessments of value, performance, condition and risk.
• The register should also record for each asset any information over and above the basic set of data that is necessary to effectively manage the asset. This would also include regular monitoring information such as when the asset was last serviced, or how much it has been used.
Obviously, the information required for each asset will be dependent on the type of asset. For pumps, you need to know the pressure and flow ratings, whereas for a car you would need to know the engine size and kilometres travelled. Also, the way in which the asset's value, performance, condition and risk are measured will also be different for each type of asset.
It is not feasible for an organisation to include every single thing it owns, down to the last pencil and washer on the asset register, so a line has to be drawn somewhere. Ultimately, the value of the information recorded must be greater than the cost of obtaining and maintaining it. But this is not easy to establish. Normally, in order to decide on which assets to include in a register, organisations would look at the following for each type of asset:
• the value of the asset to the organisation,
• the information required to effectively manage that type of asset, and
• the cost of obtaining and maintaining that information.
The asset register by itself is not particularly useful to an organisation. It must be kept up-to-date, and it must provide useful information to the organisation. How this is done is defined by the Asset Management Plan.
As mentioned earlier, asset management is not only the responsibility of the large water services institutions, but also that of small institutions. The example village scheme we have been discussing could use an entirely manual, paper-based asset management system. The asset register would consist of a small filing system with a file for each type of asset, in which all the relevant information is stored. Regular monitoring of the assets could take place by means of pre-printed logbooks, of which two possible examples are shown below.
Date Water Tank Fuel Tank Motor
Start Level
(m) End Level
(m) Start Vol.
(l) End Vol.
(l) Start Time End Time
Figure 1 - Example Daily Pumping Logbook
Date Meter 1 Meter 2
Reading
(m3) Consumption
(m3) Reading
(m3) Consumption
(m3)
Figure 2 - Example Monthly Meter Reading Logbook
The register and these logbooks would provide a basic level of asset management information that would allow the Project Steering Committee that manages the example Village Scheme to monitor and effectively manage their assets. Some examples of how this information could be used are presented later in this document.
2. The Plan
The Asset Management Plan (AMP) is the set of rules and procedures that govern the creation, use and maintenance of the asset register and its information. It will include things like who is responsible for the collection and maintenance of data. This will be different for different types of assets and for different types of data. The AMP will also govern who has access to which data. This will be much broader than who may modify data. Typically an AMP would allow only the maintenance department to modify data on the condition of a pump, but would allow anyone in the organisation to view that information. At our example village, for instance, only the system operator, or the stand-by operator should fill in the logbooks, or make changes to the information in the asset register files, but anyone in the community should be able to view the information.
The AMP must also lay down policies and procedures for maintaining the information in the asset register. The asset register, and the AMP based upon it is only as good as the information stored in the register. If this information is not maintained then it will quickly become out-of-date, redundant and possibly misleading. The data in the register is also an asset of the organisation, and as such the value, performance, condition and risk associated with the register must be measured and recorded.
The AMP will also include financial planning based on the values of assets as recorded in the asset register. This will include short term plans to meet shortfalls in the performance and condition of various assets or types of asset, as well as longer term plans to meet the growth in demand for services, repair and replacement of assets as they deteriorate with time, etc.
Asset management plans are not static, but they evolve with the organisation. As the organisation becomes more familiar with the Asset Management Plan, and as more detailed data on the assets becomes available, so the plan should become more detailed and more accurate.
By using the Daily Pumping Logbook, the system operator of our example village can regularly calculate the efficiency of the system pumps, and the fuel consumption of the diesel motors. If these values begin to decline, it would indicate that maintenance is necessary on the equipment. This information can then be used to plan how much to charge the consumers in the following year.
How will Asset Management help me?
1. Financial and Management Benefits
The main reason for implementing Asset Management is the financial and management benefits that it will deliver. An example of the financial benefits that can be realised by effectively managing the assets of an organisation is the management of water meters. It is only through the accurate metering of the water delivered to its customers that a water supply organisation can provide the required level of service, thus it is vitally important that the meters are effectively managed. To manage the meters effectively it is necessary to know how much water has passed through each meter, when the meter was last serviced, when the meter was last calibrated and what the results of the calibration were. By keeping a record of the calibration results of each meter the organisation can estimate the time it takes for meters to go out of calibration, and therefore, how often they should be recalibrated.
Most water supply organisations do calibrate and service their meters regularly, but they generally have no idea if they are doing it too often, and wasting money on calibration, or doing it too seldom, and wasting money on inaccurate meter readings. It is only through an accurate and up-to-date register of meters, which includes information about service and calibration history that an analysis of the calibration frequency could be carried out. This register will also tell the organisation when the meters are next due for calibration, and how much money should be planned for the replacement of meters.
By relating the meter information to other information on, for instance, the water quality in different regions of supply, the organisation can also analyse on the effect of water quality on the service life of different types of meters. This kind of analysis is necessary to achieve ‘best practice’ management of an organisation, and is only possible with accurate data.
The simple logbooks used by the example Village System can provide the following asset analyses and management information (Examples of these logbooks are given in the previous section on the Asset Register):
• The volume pumped versus time taken can be used to calculate the pump efficiency, a decrease in which would indicate that maintenance is required.
• The fuel consumption information can also be used to calculate the efficiency of the diesel motor.
• The volume of water pumped each day can be reconciled with the monthly meter readings to check that there are no leaks in the system, or other sources of unaccounted for water such as illegal connections, inaccurate meters, etc.
• The volume of fuel used can also be reconciled with the amount purchased to ensure that all fuel is accounted for.
The calculations required for these analyses would require only a very basic level of mathematical skill, and could thus be taught to the system operator. The information produced would help the community to effectively manage their water system.
2. Legislative Benefits
The Water Act No. 54 of 1956 and its numerous amendments were replaced by two pieces of new water legislation, namely the Water Services Act No. 108 of 1997 and the National Water Act No. 36 of 1998. Both acts contain extensive requirements for consultation by the water services authorities and providers with water users and stakeholders. These authorities are also responsible to the general public and to government to provide water services in the most cost effective and sustainable manner possible.
Standard asset management practices are currently being implemented in many countries across the world. The local governments in Australia, New Zealand and the United Kingdom are the leaders in implementing and standardising asset management programmes. At present the legislative requirements in the South African water industry call for the provision of Water Services Development Plans by water services authorities and water services providers. These plans are equivalent to basic Asset Management Plans and are designed to meet the minimum requirements for services and financial planning. However, a proactive Water Services Institution should adopt a more advanced Asset Management Plan, which could be used to generate the Water Services Development Plan required by government.
The new South African constitution also requires that the National Treasury develop and prescribe generally recognised accounting practices for all spheres of government. The Generally Accepted Municipal Accounting Policies (GAMAP) have been devised for municipalities in accordance with this constitutional requirement. These policies define for local government how they should set out and manage their accounts, and local governments will probably be required to institute these by 30 June 2002. One of the significant aspects of GAMAP is that it requires a comprehensive and accurate register of all the assets owned by the local government. If the local government already has an asset management plan in place, it will be simple to export the necessary information from the general asset register to create the register required by GAMAP. If however, the organisation does not have an asset register in place, it would be an ideal time to create a full asset register when creating the register required by GAMAP.
How can I implement Asset Management?
Because Water Services Institutions vary so widely, it is practically impossible to say what a ‘Standard’ Asset Management Plan would be. However, the preparation of an Asset Management Plan should include at least the following essential steps. Note that these steps are not necessarily sequential. You can do more than one of the steps at the same time, and sometimes you will have to come back to a step and refine the results.
1. Contact a consultant who can advise you on Asset Management, and the creation of AMPs.
2. Establish the Goals, Objectives and Framework of the AMP.
3. Establish what asset management processes and data acquisition methods currently exist, and are required.
4. Determine what level of AMP is required, based on the level of services and assets controlled by the institution.
5. Establish what levels of service are required, based on customer expectations, and willingness and ability to pay for services.
6. Prepare an Asset Register, including conditions, performance measures and valuations. This is discussed in detail in the following section.
7. Evaluate existing levels of service, and compare with required levels to determine gaps.
8. Examine demand management plans and prepare demand growth predictions.
9. Determine required capacity expansion based on demand growth predictions, service level gaps and available resources.
10. Prepare a financial summary, including financial forecasts, funding strategies and valuation forecasts.
11. Prepare an AMP improvement programme including performance measures for the plan itself, and monitoring and review procedures.
This last step mentioned indicates that the AMP is not a static document. It is a ‘living’ tool that needs to be constantly reviewed and updated as the institution grows and develops.
How do I set up an Effective Asset Register?
The Asset Management Plan discussed above is entirely dependant on an accurate and up-to-date knowledge of all the assets owned and used by the organisation. Having an effective Asset Register best provides this knowledge. The sections below discuss the major steps required to set up an effective asset register. Some of these steps will be repeated, for instance, when listing all the types of assets it may become obvious that the identification system is slightly inadequate and will have to be extended. Also, it may not be necessary for every institution to perform all these steps, as it may be possible to reuse some information between different organisations.
1. Decide on an Identification and Classification System
Because it is so necessary for each asset to be uniquely identified the development of a comprehensive and detailed classification and identification system is the first step. The simplest form of identification system is just to give each asset a sequential number. This is easy to implement, but gives the users no information about what type of asset a particular number refers to.
A more intelligent form of identification classifies each asset according to one or more criteria, and then assigns a code to each classification. An individual asset’s identification number is then made up of the classification codes, and a sequential number to distinguish it from any other assets that are identically classified. An example of a classification system may be to classify assets according to their physical location, their type and their function or cost centre within the organisation.
2. Determine Boundaries for the Identification System
Once the classification system has been decided upon, it is necessary to determine exactly what types of assets fall into which class, and to assign a code to each class. Asset type classifications may be common across the entire water services sector, but location classifications would obviously be local to each institution. Each institution would thus have to decide on the exact boundaries of each location class, and assign unique codes to those classes.
3. Determine the Asset Types and their Measures
A list of all the different types of assets must be drawn up. This may have been done as part of the classification system if that system classifies assets according to their type. It could also be standardised across the sector. Part of this exercise will also be to determine which assets will be included in the register, and which ones will be left out.
For each type of asset it would then be necessary to determine exactly what information about that asset would need to be recorded, the units of measure and the level of accuracy necessary. It would also be necessary to draw up unambiguous and effective measures for the value, performance, condition and risk assessment of each class of asset. Assets that require exactly the same information to be recorded, and that can use the same measures of value, performance, condition and risk should be grouped into the same class of asset. For example, it may be possible to group all types of valves into a single class of assets called ‘Valves’. One of the items of information recorded for each member of the asset class ‘Valves’ would then be the type of valve, say ‘Butterfly’ or ‘Gate’
4. Determine required values for Asset Measures
Once measures of performance, condition and risk have been determined for each class of asset, it is necessary to determine the required values of these measures. The required levels of service set in the AMP will determine these required values. Levels of service will have to be determined for specific functions of the organisation, for example, minimum pressures and quantities to be delivered. These levels of service must then be translated into required values for the performance, condition and risk for the individual assets that are required to provide that service, i.e. the pumps and pipelines.
5. Capture data and a measure of data accuracy for all assets
Once all of the above definitions have been completed, it will be necessary to capture the information on all the assets in the organisation. To start with this can be done from existing information such as drawings, insurance reports, etc. The accuracy of this information must then be verified, by means of field surveys. The accuracy can should then be continuously upgraded by checking it whenever possible, such as during maintenance. By keeping careful records of the accuracy of the data in the register it is possible to determine where verification is most needed, and to prove to the users that the data is accurate and can be used for effective decision making.
Depending on the size of the organisation, and the nature of the equipment, it may well be necessary to employ sophisticated tools such as surveys and GIS tools. It will also often be necessary to use technicians and engineers to gather the data and to asses the performance, condition, risk and value of assets.
6. Register Maintenance and Use
Setting up an asset register is a once off process, but the register cannot be left there. To be useful the register must be kept up-to-date and the accuracy must be continuously verified. An important part of creating the register is to determine who is responsible for maintaining what data, and setting out the policies and procedures for this maintenance.
At this stage it is also necessary to determine the outputs of the register, in the form of what reports are to be produced, and to determine who has access to which reports. These policies, procedures and reports will not be static, but will usually grow and develop over time.
Conclusion
In summary, an Asset Management Plan is a document that helps an institution to answer the following questions:
• What do we own and manage?
• Are we meeting our customers needs in the most sustainable, cost-effective manner?
• Where are we now?
• Where do we want to be in the future?
• How are we going to get there?
Not only will an Asset Management Plan help to answer the above questions from a planning point of view, but the information in the plan will also help an institution manage its day-to-day activities in a sustainable, cost-effective and efficient manner.
For further information, please obtain a copy of the full project report, including the demonstration software, from the Water Research Commission. Various other reports and information is also available from the Water Systems Research Group.
Water Research Commission Water Systems Research Group
in the
South African
Water Services Industry
An Introduction
Introduction
This document was written to provide a brief and simple description of what asset management is, what benefits it can provide and what steps are required to implement an asset management system. It is intended for anyone who has an interest in the improved management of water services, both supply and sanitation. The table of contents below shows you how this document is structured, and where you can look for specific information.
Section Page
Introduction 1
What are Assets? 3
What is Asset Management? 5
1. The Register 5
2. The Plan 9
How will Asset Management help me? 11
1. Financial and Management Benefits 11
2. Legislative Benefits 14
How can I implement Asset Management? 16
How do I set up an Effective Asset Register? 18
1. Decide on an Identification and Classification System 18
2. Determine Boundaries for the Identification System 19
3. Determine the Asset Types and their Measures 19
4. Determine required values for Asset Measures 20
5. Capture data and a measure of data accuracy for all assets 20
6. Register Maintenance and Use 21
Conclusion 22
For most people, the term asset management will conjure images of stocks and bonds, the stock market and money, but any organisation has far more assets than just those that can be invested by a bank. There is also much more to the management of assets than just ensuring that you get a good return on your investment.
In order to help explain the concepts in this booklet, we will regularly refer to an example system, and we will always mark the example with the icon on the left. The example we will use is a small, stand-alone, water supply system which supplies a community of about 4 600 people in the Northwest province. The reason we chose to use this particular example is twofold. Firstly, a simple example makes it easier for the reader to understand the points being explained. Secondly, a simple system was chosen to show that asset management is not only the responsibility of large institutions with strong resources, but that it can also be achieved by the very smallest as well. The example system consists of two boreholes with diesel driven pumps, about 4,2 km of rising main feeding an elevated storage tank, and about 16 km of distribution pipework supplying 43 standpipes.
The following abbreviations are used in this booklet:
AMP Asset Management Plan
GAMAP Generally Accepted Municipal Accounting Policies
GIS Geographic Information Systems
What are Assets?
In this context the definition of ‘assets’ is very broad. Anything that is used by an organisation in order for it to achieve its function can be considered an asset of the organisation. This will include a number of different types of assets, some more obvious than others. Some types of assets, including examples are listed below:
• Financial assets, such as investments and cash on hand. The example community has saved over R15 000 from water payments, which has been invested with a local bank.
• Moveable assets, such as vehicles and office furniture. The system operator from our example village uses a bicycle and a small set of tools and spares in his duties. These make up the moveable assets of the organisation.
• Fixed assets, such as land, buildings, pipes and pumps. As mentioned earlier, the example community’s fixed assets consist of two diesel pumps, about 4,2 km of rising main, a storage tank, about 16 km of distribution pipework, and 43 standpipes.
• The software and information stored on the organisations computer system. The example system has no computers, but they do have written information on all their assets, which is in itself an asset.
• The knowledge and expertise developed by the organisation. The example system is managed by a Project Steering Committee drawn from the local community. These people attended formal training for six months, and the knowledge they have gained both from this training and ‘on the job’ experience is an asset of the organisation.
• The people who work for the organisation, in our case the operator, and a standby operator.
• The customers whose needs are being met by the organisation.
All of these things can help an organisation do its job in a better way if they are well managed. Good management of assets enhances community life, and increases the useful life of available resources. These things can also make it difficult for an organisation to do its job at all if they are badly managed.
How then should an organisation manage its assets to achieve maximum value? Answering this question is the goal of asset management.
What is Asset Management?
Asset management can be broken down into two main components. Firstly, one needs to know is exactly what assets are owned by the organisation. This usually takes the form of a register or inventory of assets. The second component is a plan setting out what the asset management should achieve, and how it will work.
1. The Register
In its simplest form an asset register is just a list of all the assets owned by an organisation. You might think that it is obvious that an organisation should have a list of all the things it owns, and it is. But in reality, it very often doesn't work like this. If the organisation is small, then it often relies on a few people to remember all the things it owns. For example, do you have a list of all the things you own in your home?
Large organisations often have many different lists; for example, the finance department might have a list of the value of all the assets, while the maintenance department might have a list of when certain assets need to be serviced. The problem here is that these lists usually don't agree, so you never know which one is right.
For this list of assets to be useful, it has to contain enough information on each asset so that the asset can be effectively managed. Some of the information that should be contained in an asset register is given below:
• Each asset must have a unique name that clearly identifies the asset throughout the entire organisation.
• There should be a basic set of data that is the same for all the assets within the organisation, such as the location, age and assessments of value, performance, condition and risk.
• The register should also record for each asset any information over and above the basic set of data that is necessary to effectively manage the asset. This would also include regular monitoring information such as when the asset was last serviced, or how much it has been used.
Obviously, the information required for each asset will be dependent on the type of asset. For pumps, you need to know the pressure and flow ratings, whereas for a car you would need to know the engine size and kilometres travelled. Also, the way in which the asset's value, performance, condition and risk are measured will also be different for each type of asset.
It is not feasible for an organisation to include every single thing it owns, down to the last pencil and washer on the asset register, so a line has to be drawn somewhere. Ultimately, the value of the information recorded must be greater than the cost of obtaining and maintaining it. But this is not easy to establish. Normally, in order to decide on which assets to include in a register, organisations would look at the following for each type of asset:
• the value of the asset to the organisation,
• the information required to effectively manage that type of asset, and
• the cost of obtaining and maintaining that information.
The asset register by itself is not particularly useful to an organisation. It must be kept up-to-date, and it must provide useful information to the organisation. How this is done is defined by the Asset Management Plan.
As mentioned earlier, asset management is not only the responsibility of the large water services institutions, but also that of small institutions. The example village scheme we have been discussing could use an entirely manual, paper-based asset management system. The asset register would consist of a small filing system with a file for each type of asset, in which all the relevant information is stored. Regular monitoring of the assets could take place by means of pre-printed logbooks, of which two possible examples are shown below.
Date Water Tank Fuel Tank Motor
Start Level
(m) End Level
(m) Start Vol.
(l) End Vol.
(l) Start Time End Time
Figure 1 - Example Daily Pumping Logbook
Date Meter 1 Meter 2
Reading
(m3) Consumption
(m3) Reading
(m3) Consumption
(m3)
Figure 2 - Example Monthly Meter Reading Logbook
The register and these logbooks would provide a basic level of asset management information that would allow the Project Steering Committee that manages the example Village Scheme to monitor and effectively manage their assets. Some examples of how this information could be used are presented later in this document.
2. The Plan
The Asset Management Plan (AMP) is the set of rules and procedures that govern the creation, use and maintenance of the asset register and its information. It will include things like who is responsible for the collection and maintenance of data. This will be different for different types of assets and for different types of data. The AMP will also govern who has access to which data. This will be much broader than who may modify data. Typically an AMP would allow only the maintenance department to modify data on the condition of a pump, but would allow anyone in the organisation to view that information. At our example village, for instance, only the system operator, or the stand-by operator should fill in the logbooks, or make changes to the information in the asset register files, but anyone in the community should be able to view the information.
The AMP must also lay down policies and procedures for maintaining the information in the asset register. The asset register, and the AMP based upon it is only as good as the information stored in the register. If this information is not maintained then it will quickly become out-of-date, redundant and possibly misleading. The data in the register is also an asset of the organisation, and as such the value, performance, condition and risk associated with the register must be measured and recorded.
The AMP will also include financial planning based on the values of assets as recorded in the asset register. This will include short term plans to meet shortfalls in the performance and condition of various assets or types of asset, as well as longer term plans to meet the growth in demand for services, repair and replacement of assets as they deteriorate with time, etc.
Asset management plans are not static, but they evolve with the organisation. As the organisation becomes more familiar with the Asset Management Plan, and as more detailed data on the assets becomes available, so the plan should become more detailed and more accurate.
By using the Daily Pumping Logbook, the system operator of our example village can regularly calculate the efficiency of the system pumps, and the fuel consumption of the diesel motors. If these values begin to decline, it would indicate that maintenance is necessary on the equipment. This information can then be used to plan how much to charge the consumers in the following year.
How will Asset Management help me?
1. Financial and Management Benefits
The main reason for implementing Asset Management is the financial and management benefits that it will deliver. An example of the financial benefits that can be realised by effectively managing the assets of an organisation is the management of water meters. It is only through the accurate metering of the water delivered to its customers that a water supply organisation can provide the required level of service, thus it is vitally important that the meters are effectively managed. To manage the meters effectively it is necessary to know how much water has passed through each meter, when the meter was last serviced, when the meter was last calibrated and what the results of the calibration were. By keeping a record of the calibration results of each meter the organisation can estimate the time it takes for meters to go out of calibration, and therefore, how often they should be recalibrated.
Most water supply organisations do calibrate and service their meters regularly, but they generally have no idea if they are doing it too often, and wasting money on calibration, or doing it too seldom, and wasting money on inaccurate meter readings. It is only through an accurate and up-to-date register of meters, which includes information about service and calibration history that an analysis of the calibration frequency could be carried out. This register will also tell the organisation when the meters are next due for calibration, and how much money should be planned for the replacement of meters.
By relating the meter information to other information on, for instance, the water quality in different regions of supply, the organisation can also analyse on the effect of water quality on the service life of different types of meters. This kind of analysis is necessary to achieve ‘best practice’ management of an organisation, and is only possible with accurate data.
The simple logbooks used by the example Village System can provide the following asset analyses and management information (Examples of these logbooks are given in the previous section on the Asset Register):
• The volume pumped versus time taken can be used to calculate the pump efficiency, a decrease in which would indicate that maintenance is required.
• The fuel consumption information can also be used to calculate the efficiency of the diesel motor.
• The volume of water pumped each day can be reconciled with the monthly meter readings to check that there are no leaks in the system, or other sources of unaccounted for water such as illegal connections, inaccurate meters, etc.
• The volume of fuel used can also be reconciled with the amount purchased to ensure that all fuel is accounted for.
The calculations required for these analyses would require only a very basic level of mathematical skill, and could thus be taught to the system operator. The information produced would help the community to effectively manage their water system.
2. Legislative Benefits
The Water Act No. 54 of 1956 and its numerous amendments were replaced by two pieces of new water legislation, namely the Water Services Act No. 108 of 1997 and the National Water Act No. 36 of 1998. Both acts contain extensive requirements for consultation by the water services authorities and providers with water users and stakeholders. These authorities are also responsible to the general public and to government to provide water services in the most cost effective and sustainable manner possible.
Standard asset management practices are currently being implemented in many countries across the world. The local governments in Australia, New Zealand and the United Kingdom are the leaders in implementing and standardising asset management programmes. At present the legislative requirements in the South African water industry call for the provision of Water Services Development Plans by water services authorities and water services providers. These plans are equivalent to basic Asset Management Plans and are designed to meet the minimum requirements for services and financial planning. However, a proactive Water Services Institution should adopt a more advanced Asset Management Plan, which could be used to generate the Water Services Development Plan required by government.
The new South African constitution also requires that the National Treasury develop and prescribe generally recognised accounting practices for all spheres of government. The Generally Accepted Municipal Accounting Policies (GAMAP) have been devised for municipalities in accordance with this constitutional requirement. These policies define for local government how they should set out and manage their accounts, and local governments will probably be required to institute these by 30 June 2002. One of the significant aspects of GAMAP is that it requires a comprehensive and accurate register of all the assets owned by the local government. If the local government already has an asset management plan in place, it will be simple to export the necessary information from the general asset register to create the register required by GAMAP. If however, the organisation does not have an asset register in place, it would be an ideal time to create a full asset register when creating the register required by GAMAP.
How can I implement Asset Management?
Because Water Services Institutions vary so widely, it is practically impossible to say what a ‘Standard’ Asset Management Plan would be. However, the preparation of an Asset Management Plan should include at least the following essential steps. Note that these steps are not necessarily sequential. You can do more than one of the steps at the same time, and sometimes you will have to come back to a step and refine the results.
1. Contact a consultant who can advise you on Asset Management, and the creation of AMPs.
2. Establish the Goals, Objectives and Framework of the AMP.
3. Establish what asset management processes and data acquisition methods currently exist, and are required.
4. Determine what level of AMP is required, based on the level of services and assets controlled by the institution.
5. Establish what levels of service are required, based on customer expectations, and willingness and ability to pay for services.
6. Prepare an Asset Register, including conditions, performance measures and valuations. This is discussed in detail in the following section.
7. Evaluate existing levels of service, and compare with required levels to determine gaps.
8. Examine demand management plans and prepare demand growth predictions.
9. Determine required capacity expansion based on demand growth predictions, service level gaps and available resources.
10. Prepare a financial summary, including financial forecasts, funding strategies and valuation forecasts.
11. Prepare an AMP improvement programme including performance measures for the plan itself, and monitoring and review procedures.
This last step mentioned indicates that the AMP is not a static document. It is a ‘living’ tool that needs to be constantly reviewed and updated as the institution grows and develops.
How do I set up an Effective Asset Register?
The Asset Management Plan discussed above is entirely dependant on an accurate and up-to-date knowledge of all the assets owned and used by the organisation. Having an effective Asset Register best provides this knowledge. The sections below discuss the major steps required to set up an effective asset register. Some of these steps will be repeated, for instance, when listing all the types of assets it may become obvious that the identification system is slightly inadequate and will have to be extended. Also, it may not be necessary for every institution to perform all these steps, as it may be possible to reuse some information between different organisations.
1. Decide on an Identification and Classification System
Because it is so necessary for each asset to be uniquely identified the development of a comprehensive and detailed classification and identification system is the first step. The simplest form of identification system is just to give each asset a sequential number. This is easy to implement, but gives the users no information about what type of asset a particular number refers to.
A more intelligent form of identification classifies each asset according to one or more criteria, and then assigns a code to each classification. An individual asset’s identification number is then made up of the classification codes, and a sequential number to distinguish it from any other assets that are identically classified. An example of a classification system may be to classify assets according to their physical location, their type and their function or cost centre within the organisation.
2. Determine Boundaries for the Identification System
Once the classification system has been decided upon, it is necessary to determine exactly what types of assets fall into which class, and to assign a code to each class. Asset type classifications may be common across the entire water services sector, but location classifications would obviously be local to each institution. Each institution would thus have to decide on the exact boundaries of each location class, and assign unique codes to those classes.
3. Determine the Asset Types and their Measures
A list of all the different types of assets must be drawn up. This may have been done as part of the classification system if that system classifies assets according to their type. It could also be standardised across the sector. Part of this exercise will also be to determine which assets will be included in the register, and which ones will be left out.
For each type of asset it would then be necessary to determine exactly what information about that asset would need to be recorded, the units of measure and the level of accuracy necessary. It would also be necessary to draw up unambiguous and effective measures for the value, performance, condition and risk assessment of each class of asset. Assets that require exactly the same information to be recorded, and that can use the same measures of value, performance, condition and risk should be grouped into the same class of asset. For example, it may be possible to group all types of valves into a single class of assets called ‘Valves’. One of the items of information recorded for each member of the asset class ‘Valves’ would then be the type of valve, say ‘Butterfly’ or ‘Gate’
4. Determine required values for Asset Measures
Once measures of performance, condition and risk have been determined for each class of asset, it is necessary to determine the required values of these measures. The required levels of service set in the AMP will determine these required values. Levels of service will have to be determined for specific functions of the organisation, for example, minimum pressures and quantities to be delivered. These levels of service must then be translated into required values for the performance, condition and risk for the individual assets that are required to provide that service, i.e. the pumps and pipelines.
5. Capture data and a measure of data accuracy for all assets
Once all of the above definitions have been completed, it will be necessary to capture the information on all the assets in the organisation. To start with this can be done from existing information such as drawings, insurance reports, etc. The accuracy of this information must then be verified, by means of field surveys. The accuracy can should then be continuously upgraded by checking it whenever possible, such as during maintenance. By keeping careful records of the accuracy of the data in the register it is possible to determine where verification is most needed, and to prove to the users that the data is accurate and can be used for effective decision making.
Depending on the size of the organisation, and the nature of the equipment, it may well be necessary to employ sophisticated tools such as surveys and GIS tools. It will also often be necessary to use technicians and engineers to gather the data and to asses the performance, condition, risk and value of assets.
6. Register Maintenance and Use
Setting up an asset register is a once off process, but the register cannot be left there. To be useful the register must be kept up-to-date and the accuracy must be continuously verified. An important part of creating the register is to determine who is responsible for maintaining what data, and setting out the policies and procedures for this maintenance.
At this stage it is also necessary to determine the outputs of the register, in the form of what reports are to be produced, and to determine who has access to which reports. These policies, procedures and reports will not be static, but will usually grow and develop over time.
Conclusion
In summary, an Asset Management Plan is a document that helps an institution to answer the following questions:
• What do we own and manage?
• Are we meeting our customers needs in the most sustainable, cost-effective manner?
• Where are we now?
• Where do we want to be in the future?
• How are we going to get there?
Not only will an Asset Management Plan help to answer the above questions from a planning point of view, but the information in the plan will also help an institution manage its day-to-day activities in a sustainable, cost-effective and efficient manner.
For further information, please obtain a copy of the full project report, including the demonstration software, from the Water Research Commission. Various other reports and information is also available from the Water Systems Research Group.
Water Research Commission Water Systems Research Group
Subscribe to:
Posts (Atom)