Application of Life Cycle Costing (LCC) in Public Procurement A Közbeszerzési Hatóság Nemzetközi Konferenciája Budapest, 2017. november 14. Application of Life Cycle Costing (LCC) in Public Procurement Kovács Károly President Hungarian Water Association www.maszesz.hu

Life cycle approach– International outlook Well researched and widesperad scientific literature (from the 1960’s) Several guidelines, manuals and recommendations Practical references and experiences from all over the world (eg.: Germany, Canada, England, South-Korea etc.)

Application of LCC in Public Procurement Public Procurement procedures in 2016, Hungary: 8650 procedures Green Procurement: ~400 procedures~ less than 5% NONE LCC!! General change in focus of procurement legislation, all procedure, not just water

EU Public Procurement Reform New rules promote Life Cycle Costing approach! „(96) … contracting authorities can determine the most economically advantageous tender and the lowest cost using a life-cycle costing approach. (…) Common methodologies should be developed at Union level for the calculation of life-cycle costs for specific categories of supplies or services. Where such common methodologies are developed, their use should be made compulsory.” „Article 67 (2) The most economically advantageous tender from the point of view of the contracting authority shall be identified on the basis of the price or cost, using a cost-effectiveness approach, such as life-cycle costing„ General change in focus of procurement legislation, all procedure, not just water Directive 2014/25/EU Directive 2014/24/EU

EU Public Procurement Reform and the new Hungarian Public Procurement Act 1/5 of EU GDP (= 2.3 trillion Euro)!! „MEAT only, please!” (Most Economically Advantageous Tender) Katharina Knapton-Vierlich Deputy Head of Unit Directorate General Internal Market, Industry, Entrepreneurship and SMEs Directive 2014/25/EU Directive 2014/24/EU 2015/CXLIII. PPA. 76-78. § (4) „…Methodological Guidence on Life Cycle Costing methods will be published by the Public Procurement Authority”

Legal framework and professional background of LCC Guide to the Public Procurement Authority on the application of lifecycle cost calculation methods in procedures Sets out the legal, procedural and methodological framework for the application of lifecycle cost calculation in public procurement procedures Public Procurement Authority Working Group on LCC: Assisted and cooperated by HWA, Hungarian Chamber of Engineers National Chamber of Public Procurement Advisers http://www.kozbeszerzes.hu/adatbazis/mutat/tajekoztato/portal_506827/

Legal framework and professional background of LCC methodological guide for the practical application of lifecycle cost calculation Explain the general methodology of LCC, supplementary methodological guideline to the Public Procurement Authority’s Guide on LCC Easy to understand- economical background is not a necessary!!! Based on: HWA (2011): Dynamic Cost Comparison(DCC) Calculations for selecting least-cost projects http://www.maszesz.hu/aktivitasaink/kiadvanyaink/eletcikluskoltseg-szamitas-2

Legal framework and professional background of LCC Dynamic Cost Comparison (DCC) Methodological Guidline HWA (2011) Option Analysis of water utilities The appropriate interpretation of cost efficieny is: „life cycle costing efficiency”!!! Economical knowledge for engineers („common language”) International knlowledge transfer, 5+1 CEE countries LIFE CYCLE APPROACH Dynamic approach Real economy approeach Schematic cost structure Schematic calculation process http://www.maszesz.hu/aktivitasaink/kiadvanyaink/eletcikluskoltseg-szamitas-2

Life Cycle Costing ≠ Life Cycle Assessment! Life Cycle Costing (LCC): „An economic evaluation method that takes account of all relevant costs over the defined time horizon(period of study), including adjustinig for the time value of money„1 Life Cycle Assessment (LCA): „LCA addresses the environmental aspects and potential environmental impacts throughout a product's life cycle from raw material acquisition through production, use, end-of-life treatment, recycling and final disposal”2 Two basic tools, need to distinguis EVALUATION CRITERIA IN PUBLIC PROCUREMENT: LIFE CYCLE COST! 1 BS ISO- Standardized Method of Life Cycle Costing for Construction Procurement 2 ISO 14044:2006 (EN)

Applying Life-Cycle Costing approach during the planning process In case of FIDIC yellow book Option analysis, conceptual plans,, feasibility study Permission Public Procurement Tender design 100% ability to influence costs time DCC in option analysis! and(!) Direct Life Cycle Cost as evaluation criteria

ENVIRONMENTAL (total) LIFE-CYCLE COST Operation, maintenance The elements of Life Cycle Cost DIRECT ENVIRONMENTAL (total) LIFE-CYCLE COST (construction, purchase) Investment Rehabilitation? Replacement Operation, maintenance time External costs (indirect, negative social economical and enviromental effects) In the water industry the negative external effects appear only occasionally (e.g.: construction period) and only locally (e.g.: wastewater treatment plants), and on social level their strength is significantly weaker than the one which positive external effects have. INDIRECT

Assessable with Extended DCC (EDCC) Calculating Life Cycle Cost (LCC) TOTAL LIFE-CYCLE COST DIRECT Can be assessed with DCC Objective Transparent Verifiable Data base, methodology, practical experience! Easy to learn! Assessable with Extended DCC (EDCC) Monetizable INDIRECT The monetary value of external effects should be estimated It is impossible in significant number of cases Uncertain, theoretical and inevitably subjective Difficult to verify, special expertise needed Not Monetizable

Interpretation of Life Cycle Cost Investment Cost Operational Cost Replacement Cost End of life-costs External cost Revenue („negative cost”) External benefits Direct Life Cycle Cost(LCC) Environmental Life Cycle Cost (ELCC) Whole Life Cycle „cost” (WLCC) LCC ~ TCO WLCC ~ CBA Considering relevant cost items! Interpretable? Zero? Considered as zero? Estimable? Verifiable? Items being the same in all alternatives, does not affect the decision!

Evaluation criteria and LCC M.E.A.T The lowest cost Life Cycle Costing (LCC) Other cost-efficiency metod The best quality-price ratio Life Cycle Costing (LCC) + other evaluation crieterias Price+ other evaluation criterias The lowest price

Technological options for a pump station Example Technological options for a pump station Option „A” Direct LCC = 580 thEUR Option „B” Direct LCC = 793 thEUR

Speed up the knowledge cycle! Knlowledge exchange and capacity bulinding is needed What is the „cheapest”? Speed up the knowledge cycle! Life Cycle Costing (LCC) capacity building for non-economist! >> better planning processes >> better public procurements >>„ Short term pain, long term gain”

Better cooperation is needed at all levels! In order to apply LCC in practice cooperation is needed between different fields of expertise science and practice organizational units of tenderers users and market law-makers and practitioners

Conslusion Cooperation and capacity building at every level!! „ Short term pain, long term gain” Life Cycle Costing approach should be applied at the right stages of the planning process for both financial and environmental sustainability Legal and methodological framework for LCC is given in Hungary!

Thank you for your kind attention! Kovács Károly kovacs.karoly@bdl.hu +36 30 941 20 88 www.maszesz.hu