Actuarial advice is essential when deciding on long-term capital projects. Actuaries play a key role in weighing up risks and deciding how they can best be minimised and controlled. This special expertise is combined with strategic vision and a commonsense practical approach.

Capital projects - Making the right decisions

Not many capital projects today will take as long to create as the Great Pyramids. However a time horizon of ten years or more is not unusual for the implementation of modern capital projects, such as:

• New factories, warehouses, shops and offices.
• Transport infrastructure schemes, e.g. roads, railways, bridges, tramways, airports.
• Assets created under the Private Finance Initiative: schools, hospitals, prisons, computer systems.
• The development and launch of new products.
• The purchase of existing businesses.

Actuarial advice is essential when deciding on such projects, if there is to be the best chance of avoiding mistakes.

Actuaries bring to the project team their extensive training, skills, professionalism and experience in risk management and the financial value to be placed on risk. This is combined with strategic vision and a common-sense practical approach.

Actuaries are trained to make financial sense of the future, sometimes applying sophisticated statistical techniques. They have the ability to distil clearly the key issues and shape informed business judgement.

Minimising risk

Institutions such as insurance companies and pension funds, which have revenue flows and payment obligations stretching many decades into the future, employ actuaries to manage their risks. The long-term risks involved have been studied extensively by actuaries, using stochastic models and other specialist techniques.

The expertise stemming from this approach to risk gives them unrivalled appreciation of business risk management. Being skilled mathematicians as well as businessmen, actuaries are able to analyse past events, assess risks and model what could happen in the future. They can then forecast the financial results which can be expected from a capital project and the extent to which these may vary due to the occurrence of particular events.

A key task, when examining a proposed project, is to weigh up the risks and decide how they can best be minimised and controlled. Actuaries (working with civil engineers and economists) have recently developed a comprehensive methodology for this purpose.

RAMP - a comprehensive methodology

Known as Risk Analysis and Management for Projects (RAMP), this methodology helps to identify, analyse, mitigate and control risks. It pays special attention to potentially disastrous scenarios and ensures that these are not lost sight of in the appraisal process. In addition it ensures that planned actions to mitigate risks are in fact taken.

Discounted cash flow calculations

Actuaries can carry out discounted cash flow calculations. They can also advise on the discount rates which companies should use for the purpose of such calculations - these are sometimes known as 'hurdle rates'. Related questions include:

• What is the difference between 'real' and 'nominal' discount rates?
• Why is it dangerous to rely solely on 'payback periods'?
• Which is it better to use - the Internal Rate of Return or the Net Present Value?

Seeking actuarial advice

If you would like to discuss (informally and without obligation) the possibility of seeking help and advice from a consulting actuary, please contact:

Mark Symons, Institute of Actuaries, Staple Inn Hall, High Holborn, London WC1V 7QJ
mark.symons@actuaries.org.uk
Tel +44 (0)20 7632 2133
Fax +44 (0)20 7632 2131