Introduction

PAS 55

PAS 55

PAS 55 - Optimal management of physical assets is a Publicly Available Specification published by the British Standards Institution.This PAS gives guidance and a 28-point requirements checklist of good practices in physical asset management; typically this is relevant to gas, electricity and water...

describes the Optimal management of physical assets and is typically relevant to gas, electricity and water utilities, road, air and rail transport systems, public facilities, process, manufacturing and natural resource industries.


The definition of Asset Management according to PAS 55:

"Systematic and coordinated activities and practices through which an organization optimally and sustainably manages its assets and asset systems,

their associated performance, risks and expenditures over their life cycles for the purpose of achieving its organizational strategic plan"

Within PAS 55, risk management is one of the key elements for an organisation to get control over their assets. The challenge is to choose a risk management method that enables management to choose the most effective measurements to optimize their assets.

Risk Management

The objective of risk management according to Hoffmann in “Risicomanagement” by Claes is that risk management is a policy instrument to secure the enterprise targets.
Although this statement expresses a general understanding, it forms the direct relation to this subject. According to Claes, the relation between risk management and the enterprise targets consist of general and operational targets;

1. The general targets are income acquiring and spending dimensions, meaning striving for continuity of growth of trust and a good social climate, growth perspective and employee participation. These targets however do not offer much grip for an organization.
2. The operational targets consist of corporate targets, targets of business activities and targets of functional business divisions.

All these targets are meant to prevent an organization to be hindered by risks and consequences of risks in achieving her targets. In practice, this means that the main target of risk management at profit organizations is to maximize (shareholder) value.

For shareholders value this financial (or cost driven) risk management process is predominant. For divisions within the company that are responsible for operational targets the financial target is less predominant. Many targets other than financial are relevant as well. Operational targets like safety-, security-, social-, environmental- and work perception or system effectiveness are more difficult to express and translate into shareholders value.

The above indicates that there are different levels of risk management in an organization each contributing to specific goals of an organization. Claes recognized this and pointed out the situation that most companies have two main points;

• First there is the department handling the (financial) insurances to identify and evaluate risks and propose counter measures to prevent risks against lowest possible costs.
• Second there is the safety official is responsible for physical and organizational risk reducing and damage prevention counter measures.

Both care for the same problem areas and targets, at parts of respectively risks financing and damage prevention. The disadvantages of this situation are:

1. Top management sees risk financing and reduction as task that can easily be delegated at (often) lower organizational levels. However, the relation to the enterprise targets is not made.
2. There is insufficient integration of risk management measures in all parts of the organization. This means a lack of coordination.
3. Knowledge about risks an organization is facing is disintegrated and interconnections of consequences of risks throughout an organization are not clear.

Based on these observations, it can be concluded that Risk Management itself may become a risk to the organization. An organization therefore needs to be clear in formulating a consistent risk management policy throughout the organization. The risk management policy demands a method or structured framework that enables a company to identify, evaluate risks in order for the management to base their decisions, to communicate, implement and control risk measures.

When focusing on risk-based decision making, at first risks need to be ranked in order to make a decision. According to Chicken, in major projects there are basically three applications of risk ranking available:

Factor	Nature of Risk	Possible Composition of Factors
Technical	Plant would not perform as required	Plant performance Plant reliability Harm to the public
Economic	Less than optimum benefit from financial commitment	Supply and demand Magnitude of possible financial loss Payoff Index of harm / benefit Cost-benefit analysis Through life cost
Socio-Political	Not politically acceptable	Public acceptability Results of public inquiries Political climate Views on current quality of life

The process of risk-based decision-making is based on these ranking factors. According to Chicken, decision-making in a project optimally should take place by examination of the problems involved in assessing the acceptability of the technical, economical and socio-political aspects of a proposal.
The problem arises how to value all this information in a way that objective decisions are made that include all these aspects and are not driven by emotional reasoning. In order to rank the technical, economical and socio-political aspects, each should be ranked in a context that is relational to the other aspects. The ranking criteria of each aspect therefore are essential, meaning that a not well-balanced relation between the aspects could lead to wrong decisions. Often risks are valued against only one of the aspects (e.g. economical) and by that technical or socio-political aspect tend to be overlooked.

Problem definition

How to gain insight in and prioritize risks or opportunities in order to achieve a higher cost-effectiveness during the exploitation phase of an asset?

In order to research this, first cost-effectiveness needs to be described. Stavenuiter researched how capital assets can be controlled in a cost-effective way. Furthermore, according to Juran, cost – effectiveness (CE) is the value received for the resources expended and is the ratio of costs to (system) effectiveness (SE). When the CE meets a value of 100%, the system meets its operational need within the baseline budget. It can be concluded that when the CE of a physical asset is 100%, the system requirements and operational costs of an asset are exactly as they are meant to be, at the baseline point. Any deviation from this baseline point, indicates that either costs or system performances are not in balance with its designed or meant state.

Tactical Risk Management

The problem challenged Franssen to investigate and develop a Tactical Risk Management method in order to bridge the gap between strategic risk management and operational risk management.

This has resulted in a thesis "Would implementation of Tactical Risk Management within Electrabel lead to higher cost-effectiveness?".

Step 1: Risk Management Effectiveness

In order to achieve this, common risk matrices and opportunity matrices are used to identify threats and opportunities related to categories such as finances, environment, legislation, safety, availability, etc. The categories often are based on a companies deprival values. By not only identifying these risks and opportunities, but also include their measures and the effect of these measures, the impact of Risk Management effectiveness is measured.

This way of risk management is based on a qualitative risk management approach. Figures 1 and 2 are an example of these effects. Risk and Opportunities are valued before and after measures are taken. The improvement of measures, is used to identify and prioritize measures and are then expressed in relation to the baseline point of each measurement. Thus all risks and opportunities are comparable from the same (baseline) point. See figure 3.
Risk Management Effectiveness is not yet specifically related to cost-effectiveness meaning several risks or opportunities may end up in the same chance of occurrence and/or the same effect category. It therefore might be difficult for management to base their decisions on, because when (investment) costs are related to these risk and opportunities, these costs often will prevail.

By relating the impact of identified threats and opportunities more specific towards cost-effectiveness, more objective and transparent based decision making becomes within reach.

Step 2: Cost - Effective Risk Management

The starting point of Cost - Effective Risk Management is formed by declaring each present situation of a risk or opportunity as the baseline point. The baseline point is formed when the system performance and the LCC costs both are exactly 100%. See figure 4. Thus by allocating the delta reduction or delta improvement of each threat or opportunity, this enables management to compare these items among each other. The items with the highest delta in relation to the baseline point are the most effective. Items that end up below the base line (LCC / SE = constant) are not 'cost - effective' since these items will reduce system performance or increase costs.

Typically when managing risks or opportunities just based on cost-effectiveness, measures below the constant baseline are not eligible.

Step 3: Tactical Risk Management

To be continued...