Guidelines for Preparing Capital

Expenditure Program 2015

Issued by : Budgetary Control Wing, PTCL H/Qs, Islamabad

Contents
DEFINITIONS.................................................................................................................................................. 3
Assets .................................................................................................................................................... 3
Capital ................................................................................................................................................... 3
Capital Expenditure............................................................................................................................... 3
Capital Expenditure Program ................................................................................................................ 3
Current Assets....................................................................................................................................... 4
Financial Feasibility ............................................................................................................................... 4
Fixed Assets/ Non-Current Assets......................................................................................................... 4
Overheads ............................................................................................................................................. 4
Project ................................................................................................................................................... 4
Project Implementation Plan (PIP)........................................................................................................ 4
BUDGETING & PLANNING PROCESS OVERVIEW........................................................................................... 5
PURPOSE ....................................................................................................................................................... 7
NON-PERMISSIBLE EXPENSES WITHIN A CAPITAL PROJECT ......................................................................... 8
SCOPE............................................................................................................................................................ 9
PRELIMINARY APPRAISAL BY PROJECT INITIATOR/ END USER ........................................................... 10
POST PRELIMINARY APPRAISAL BY PLANNING WING:........................................................................ 11
DETAILED APPRAISAL BY FINANCE WING ........................................................................................... 12
REVENUE PARAMETERS ..............................................................................................................................13
OPERATING EXPENDITURE PARAMETERS (OPEX).......................................................................................16
SCENARIO/ SENSITIVITY ANALYSIS..............................................................................................................16
APPRAISAL OF NON-COMMERCIAL PROJECTS............................................................................................ 16
REVIEW USING TENDER/ CONTRACT PRICES..............................................................................................18
DELAY IN PROJECT IMPLEMENTATION ....................................................................................................... 18
2

DEFINITIONS
Assets
Anything of material value or usefulness that is owned by a person or company for
generating revenues for business is called as an Asset.

Capital
1. Capital is the money that is used to generate income or to make an investment.
2. Cash or goods used to generate income by investing in the business.

Capital Expenditure
Capital expenditures (CAPEX) are incurred to have future benefits. A capital expenditure is
incurred when a business spends money either to buy fixed assets or to add to the value of
an existing fixed asset resulting in extension in the useful life of that asset beyond one
accounting year. Capital expenditure is incurred on:
a.
b.
c.
d.

Acquiring fixed assets.

Fixing problems with an asset that existed prior to acquisition.
Preparing an asset to be used in business.
Legal costs of establishing or maintaining one's right of ownership in a piece of
property.
e. Restoring property, plant and equipment or adapting it to a new or different use.
f. Enhancement of capacity or increase in useful life of existing asset.
g. Starting a new business.
In accounting, normally a capital expenditure is added to an asset account i.e. capital work
in progress account and on completion of the asset, this account is closed which is called as
capitalization thus resulting in increase of asset's base. In some cases the assets are directly
charged to Fixed assets acquired through direct purchases e.g. land, building, vehicles etc.
(Admn CAPEX).

Capital Expenditure Program

The Capital Expenditure Program explains the proposed financial commitment of planned
capital projects and its respective cash out flow during a year and its phasing as the project
life can be more than one year.

Current Assets
A current asset is an asset which is expected to be sold or otherwise used up in the near future,
usually within one year, or one business cycle whichever is longer. Typical current assets
include cash, cash equivalents, accounts receivable, inventory, the portion of prepaid accounts
which will be used within a year, and short-term investments.

Financial Feasibility
Financial feasibility is a study to check that the proposed project is giving higher rate than
expected rate of return after taking into consideration its total cost and probable revenues
over a period of its useful life. In other words, it is the decision whether to go for the project
or not.

Fixed Assets/ Non-Current Assets

A long-term tangible piece of property that a company owns and uses in the production of
its income and is not expected to be consumed or converted into cash any sooner than at
least one year's time.

Overheads
1. Overhead or overhead expense refers to an ongoing expenses on the projects that
cannot be directly identified to a specific project/sub project.
2. Resource consumed or lost in completing a process that does not contribute directly
to the end product.
3. Overhead (OH) expenses are all costs except for direct labour, direct materials, and
direct expenses. Overhead expenses include accounting fees, advertising, insurance,
interest, legal fees, labor burden, rent, repairs, supplies, taxes, travel expenditures
and utilities, etc.

Project
Proposals for capital investment/ expenditure that are required by the company for
expansion of networks, increase in capacity and diversity, to improve quality, efficiency,
rehabilitation of existing networks, introduction of new services and to acquire new
technology that would result in operational cost savings etc. are called projects.

Project Implementation Plan (PIP)

A Project Implementation Plan is used to identify activities associated with an
implementation to ensure adequate preparation has taken place and adequate
contingencies are in place.
4

BUDGETING & PLANNING PROCESS OVERVIEW

As per Finance and Accounting Manual, the budgeting activities of the company are broadly
divided into two categories, which are:
1. Long term planning in the form of Business plan which covers period of five years, and
2. Short term planning in the form of Annual Corporate Budget.
The business plan is updated and revised every year along with annual corporate budget. The
companys short term planning process is a part of annual budgeting process which should be in
line with the business plan.
The planning and budgeting process result in series of related budgets. The budgeting process
at the Regions/ Zones/ Headquarters is initiated once the strategic plan within business plan
has been finalized. Due to interdependencies between the budgets and to enable the effective
and efficient preparation of annual corporate budget, the sequence of preparation of the
budgets is as follows:
1.
2.
3.
4.
5.

Revenue budget.
Capital Expenditure budget.
Human Resource budget.
Non Project Capital budget, and
Operating budget.

Each owner/ budgeting unit is responsible for preparation of its budget but it is the
responsibility of Finance wing to consolidate all budgets received from appropriate controlling
departments to prepare Annual Corporate Budget.
The business plan and annual corporate budget is submitted to PTCL BoD for review and
approval in October every year.
In order to monitor and smooth management of CAPEX for the year, it is essentially required to
have an insight of expected CAPEX and commitment of the Company against all projects of
CAPEX 2015. In this regard, a concept of Procurement budget has been introduced. This
Procurement budget would give the details of actual CAPEX, actual and expected commitments
against all projects, commitment for the year 2015, CAPEX and capitalization outlook for year
2015, etc. Format of procurement budget is placed at Annexure D.
Further, to capture information for procurement budget, it is required that Project
Implementation Plan (PIP) for every planned investment is made part of planning and financial
appraisal process. The information provided in PIP would be used as input for preparation and
reporting of Company vide Procurement budget.
Procurement wing will provide a monthly report of commitments issued/ finalized against all
projects against prescribed format placed at Annexure E to Budgetary Control wing.
5

Process flow for budgeting, planning and execution of projects relating to Corporate Sector is
under process and will be made part of these guidelines as and when finalized.

PURPOSE
The purpose of these guidelines is to ensure that before entering into major infrastructure
expenditures, it is essential to undertake a detailed review of this expenditure in order to gauge
its feasibility. A more thorough and disciplined approach is required so that capital expenditure
proposals are adequate at time of approval and to ensure that PTCL does not find itself in an
adverse financial position afterwards. Therefore, these guidelines have been revised to:

Have systematic appraisal of all capital projects in order to ensure that the best choices
have been opted so that better returns can be obtained.
Introduce greater consistency in project appraisal while maintaining a meticulous
approach.
Reflect changes in financial evaluation, project appraisal,
Provide more clarity and greater understanding in relation to the roles of all those
involved in approving capital expenditure.

PTCL has entered into ERP-SAP environment, so it is required that investment proposals are
generated in SAP-Investment Management (IM) module. The IM module provides functions to
support planning, investment and financing processes, so the integrated planning process
allows rolling up planned values (budget) from appropriation requests. It also measures the
investment program (project) to which they are assigned i.e. SAP is an integrated system so the
budgetary control on capital projects will be established from SAP IM module as soon as any
business proposal is finalized.
Release Strategy (RS) mechanism has been implemented in ERP-SAP for strengthening of
budgetary controls on CAPEX processes. This process flow is applicable to Capital Expenditures
like Business CAPEX, Deposit Works, USF Projects etc. however it is not applicable to Admin
CAPEX. Release strategy comprises of following two stages:
1. After approval of project by relevant authority as per Authority Matrix and creation of
Project structure in SAP by Project Planning & Capitalization (PP&C) wing, project
structure will be released by Budgetary Control Wing.
2. After release of project structure, PP&C will allocate budget at WBSE level in SAP. Budget
for projects will be released by Budgetary Control wing on the basis of actual BOQ and
relevant information as and when required.
It is mentioned that no transaction/ financial activity in SAP would take place without release of
project structure and budget.

NON-PERMISSIBLE EXPENSES WITHIN A CAPITAL PROJECT

Expenses of following items should not be included in Projects as capital expenditure:
a)
b)
c)
d)
e)
f)
g)
h)

POL
Stationery and Printing
Wages of daily paid staff
Purchase of furniture and fittings
Purchase of Vehicles
Repair and Maintenance of Vehicles/ Buildings
Purchase of Office Equipment
TA/DA, etc.

SCOPE
These guidelines are limited to capital projects only and explain the process flow for
formulating capital projects as follows:
1. Preliminary appraisal by project initiator/ end user.
2. Post preliminary appraisal by Planning Wing.
3. Detailed financial appraisal/cost vetting by Finance Wing.
The abovementioned three stages are elaborated in following paragraphs:

PRELIMINARY APPRAISAL BY PROJECT INITIATOR/ END USER

Preliminary appraisal will be carried over by the project initiator/ department/ region before
sending official capital investment proposal to Project Planning Wing. This aims to assess that
the project proposal has sufficient merit to justify a full detailed appraisal.

a. Concept/ Initial Plan

Preliminary work on potential projects will be undertaken by regions/end user or relevant
department

b. Need Analysis
It is important to demonstrate a clear need for a particular project proposal. The need
analysis should be aligned to Companys strategic objectives, highlighting how a proposed
project helps to achieve these goals. The analysis should describe clearly:
The reasons for incurrence of Capital expenditure along with the extent and urgency of
the project.
Supporting with statistical data and baseline information justifying the need for capital
expenditure at that point of time.
The trade off results if the project is not undertaken

c. Risks Associated
Regions/End User must assess the main areas of risk that might prevent a project from
delivering anticipated results/outputs.
Cost overruns, including those resulting from inflation or foreign exchange rate
fluctuations
Any Regulatory difficulties
Chances of delays in project implementation due to any other reason.

10

POST PRELIMINARY APPRAISAL BY PLANNING WING:

After the investment has been analyzed in accordance with above mentioned criterion, a
formal CIP should be initiated in Project Planning and Capitalization (P P & C) Department. The
capital investment proposal (CIP), when forwarded to Finance wing must contain the following
information complete in all respect:
1. Name, Type of the Project and Location/Sites.
2. Project description.
3. Budget provision and cash flows in Annual capital expenditure program 2015 along
with yearly breakdown of expenditure.
4. Category/sector under which the project falls.
5. Verification of allied services likely to be provided with the major element of CIP.
6. Relevance/ benefit of the project with regard to the existing capital projects/ future
projects.
7. Explore all the alternatives, in case the project does not become viable/ not approved.
8. Project Implementation Plan (PIP) highlighting critical activities, costs, expected
difficulties and schedules that are required to achieve the objectives of the investment
proposal.
9. Estimated capital costs with detailed BOQ mentioning separately cost of each and
every cash and store item along with the break-up under major asset heads of
expenditure and aggregation of the same on site level.
10. Pending/ projected demand for services covered under the capital expenditure project.
Projects of additional capacities of fixed line, WLL, DSL, DXX, DRS etc should mention
the capacities separately which should be given by the concerned head/ project owner
along with yearly physical phasing.
11. For expansion projects, where services are already provided, the existing ARPUs for all
the services covered for respective region/ exchange should be provided separately by
the project owner.
12. For any project proposal prepared for new service, approved tariffs verified from
commercial department should be annexed with the proposal.
13. Number of yearly active customers, tariffs, etc should be verified by Commercial
department. At present, there are eight major revenue segments and these segments
along with their owners are attached as Annexure B.
14. Estimates of any incremental operating costs associated with the project.
15. Cost benefit analysis of those projects which have no direct revenues, must be
mentioned clearly by taking assumptions of e.g. saving in operating cost, improvement
in the efficiency of system, personnel, reduction in churn/ bad debts etc. However,
these assumptions should have solid justification and vetting by respective
department.
16. Useful life of each capital project.
11

DETAILED APPRAISAL BY FINANCE WING

Detailed appraisal will be carried out when the project is forwarded to Finance Department
after furnishing all the above mentioned requisite information. In case any vital information is
not provided the case will be returned to GM (PP&C) without financial vetting/feasibility. This
appraisal will facilitate to arrive at a decision by considering the financial results.

I.

Cost Vetting
Projects proposed costs will be checked by Finance Department in the following
perspectives;
The project is identified in Annual Capital expenditure Program for the year 2015.
That budgeted costs are complete and realistic.

Apart from cost vetting, Finance wing will also allocate provision of Overheads charges (OH)
to every capital project @ 9% (inclusive of disallowed GST) of total capital cost of each
project. This rate may vary on the basis of CAPEX Budget approved by BOD.

II.

Financial Appraisal
In order to carry out the financial appraisal, following techniques will be applied to assess
the financial feasibility of the project keeping in view the life of the project:

III.

Cash Flow Analysis

Profit and Loss Account Projections
Net Present Value (NPV) @ 16% discount rate
Internal Rate of Return (IRR)
Payback Period

Commitment Certificate
Before finalizing financial feasibility of projects where revenue/ cost savings is forecasted by
respective revenue owner/ project owner against new/ additional capacities deployed, the
respective revenue owner/ project owner and EVP NP&S will provide a certificate as in
Annexure C. This will be the certification of planned installed capacity, sale of services/
loading of lines, ARPU, etc. upon which yearly inflows/ benefits to the company are
estimated and feasibility is based.

12

REVENUE PARAMETERS
Following revenue parameters will be used while formulating financial feasibility of the project.

I.

Average Revenue Per User (ARPU)

Actual ARPU of the relevant region will be taken into account with the annual dip of;

2% in PSTN services
2% in WLL services
3% in BB services
3% in EVO services
3% in other services

In case of non availability of actual ARPU the following ARPU may be considered,
however, these must be verified by respective commercial department.

II.

Year

PSTN

WLL

DSL

EVO

2015

570

154

1,252

805

2016

559

151

1,214

781

2017

547

148

1,178

757

2018

536

145

1,143

735

2019

526

142

1,108

713

CPE Sales Revenue

CPE sale revenues should be taken at latest available tariff prescribed by the company at
the time of formulation of the project.

13

III.

Revenue Apportionment
For economic feasibility calculations, revenue for Access Network Wire/ Wireless,
Switching Wire/ Wireless, Transmission, International, etc will be proportionately taken
according to the deployment cost of the fixed assets of the company. Revenue
apportionment on different network components will be carried out on the following
basis:

Revenue Apportionment on Network Components

On the basis of Capital Employed

Access Net Work Wire (Voice)

Copper Pairs

30.57%
30.57%

Access Net Work Wire (BB)

DSLAM
MSAG/ ONU
MSAN

8.88%
4.32%
3.60%
0.95%

Access Net Work Wireless

BTS (Voice)
EVO BTS

15.71%
2.97%
12.74%

Switching Wire
Switch Remote
Switch MSU
Switch Transit
C5 NGN (Soft Switch/ MGW/ SBC)
Wire line BB Core (BRAS, AAA, Routers, DNS,URL Fil,
Cache, DPI, NMS)
FIXED IN Network

14.72%
4.99%
4.47%
0.55%
1.80%
2.25%
0.66%

Switching Wireless
Wireless BB Core (MSC, BSC, PDSN, AAA, NMS,
OCS)

1.65%
1.65%

Transmission

15.05%

DRS
P2MP
WiMax
Satellite Services (V-SAT, Domsat)
DVB S2
Aggregation (Carrier Ethernet, NG-SDH)
Metro Core (Carrier Ethernet, DWDM, NG-SDH)

1.95%
0.05%
0.06%
0.46%
0.16%
1.24%
2.21%

Transport OFS (DWDM, SDH, MPLS - TP, Spurs, Subsidiary

links)

6.87%

14

Multi service Core (PIE, MM&BB IP Core, Gateway Routers)

0.42%

NOC/ SIMS/
R-NOC

1.63%

International
Cable & Satellite

8.30%

Int'l Gateway (C4 NGN)

6.57%
1.40%

Switch International

0.33%

Others
IT Support

Total

5.11%
5.11%

100.00% 100.00%

In
case
of disagreement from the above mentioned apportionment, Project Planning and
Capitalization wing will suggest appropriate share for each project duly supported by end
to end network diagram and solid justifications.

15

OPERATING EXPENDITURE PARAMETERS (OPEX)

Following major expenses are to be considered separately while formulating a capital
investment project.

General OPEX
o
o
o
o
o
o
o
o

Marketing expense
Miscellaneous expenses
R & D , Annual licenses fee, TSA and USF
Repair and maintenance
Fuel and power
Depreciation
Employment cost
Interconnect cost

Specific as per projects nature

o
o
o
o
o
o
o
o

Bad debts expenses

Dealer Commission
Customer Retention Cost
Cost of Customer Premises Equipment
RUIM/ CPE charges
Foreign Operators Cost
Bandwidth Cost
Any other than the above

The rates of different OPEX components are attached as Annexure A respectively.

SCENARIO/ SENSITIVITY ANALYSIS

The cost of large and mega projects will be adjusted to reflect different scenarios based upon
variations in key assumptions. Sensitivity analysis of the project will also be undertaken by
examining the effect on the key financial elements on varying the main assumptions of the
project (including the discount rate).

APPRAISAL OF NON-COMMERCIAL PROJECTS

16

In the case of non-commercial projects, cost benefit analysis will be carried out to assess
whether the costs benefits associated with a project are greater than its capital costs?

17

REVIEW USING TENDER/ CONTRACT PRICES

When a tender price becomes available, the case for proceeding with the proposal should again
be reviewed. If tenders are over the approved limit re-appraisal may be required to determine
whether the project should be abandoned or proceeded with.

DELAY IN PROJECT IMPLEMENTATION

If a decision is taken to defer a project, then it should be resent to finance department for full
re-evaluation before being started again.

18

19

Annexure A: OPEX Parameters

Proposed
Rate

Expense Type

Percentage of
Gross Total
Assets
Gross Total
Assets
Gross Total
Assets
Gross Total
Assets
Gross Total
Assets

Annual
Increase

Period

7.0%

Per annum

20.0%

Per annum

2.5%

Per annum

10%

Per annum

15.0%

Per annum

Employment Cost

5%

Repair & Maintenance (OSP)

1%

O & M (Telecom Equipment)

3%

O & M (IT Equipment)

15%

Fuel and Power*

2%

Marketing Cost

1%

Revenue

N/A

Per annum

Dealers Commission

1%

Revenue

N/A

Per annum

Bad debts

3%

Revenue

N/A

Per annum

Research & Development

0.5%

Revenue

N/A

Per annum

Annual License Fee

0.5%

Revenue

N/A

Per annum

TSA

3.5%

Revenue

N/A

Per annum

USF

1.5%

Revenue

N/A

Per annum

3.5%

Revenue

N/A

Per annum

14%

Revenue

N/A

Per annum

3.5%

Revenue

N/A

Per annum

Domestic Termination
(Interconnect Cost)
Foreign Operators Cost
Satellite Charges
Miscellaneous Expense

&

Rental Charges

As Per Market Norms

Per annum

Co-location Charges

As Per Market Norms

Per annum

Cost of ADSL CPE

Cost of WLL/ EVO CPE
Spectrum Charges

Based on cost price and latest

tender price
Based on cost price and latest
tender price
As per frequency utilization

N/A

One Time

N/A

One Time

N/A

20

*It should be calculated on the basis of projected consumption, capacity and usage of the
project as per requirements, however, in the absence of these details above mentioned rate
would be taken.
The above-mentioned rates are based on the averages of actual data; however these rates can
be changed depending on the nature of project.

21

Annexure B : Eight Major Revenue Segments along with their Owners

SNo

Revenue Segment

Owner

PSTN

EVP Wire line Business, PTCL H/Qs, Islamabad

WLL

EVP Wireless Business, PTCL H/Qs, Islamabad

BB

EVP Wire line Business, PTCL H/Qs, Islamabad

EVO

EVP Wireless Business, PTCL H/Qs, Islamabad

IPTV

EVP Wire line Business, PTCL H/Qs, Islamabad

Carrier & Wholesale

EVP Carrier Services & Wholesale, PTCL H/Qs, Islamabad

Corporate Services

EVP Corporate Services & Product Dev, PTCL H/Qs, Islamabad

International Business Relations

EVP International Business Relations, PTCL H/Qs, Islamabad

22

Annexure C
Project Name
COMMITTED REVENUE/ COST SAVINGS for______________
Year

Installed Capacity/
Drivers of Cost Savings

Loading

ARPU

Total Revenue/ Cost

Savings

2014
2015
2016
2017
2018
2019

Certified that the above customers and revenue/ cost savings projections taken in feasibility
are correct and acceptable for additional revenue in my revenue targets for the respective years
Certified that the additional/ new capacities taken in feasibility are correct and will
enhance the existing capacities in the respective years as mentioned above

Respective Revenue Owner

EVP NP&S

23

Annexure D :

Procurement Budget : Format CAPEX

PKR - M
Balance Budget C/F
from LY

Expected
Commitments as
per PIP in 2014

Expected
Commitments to
be C/F to next year

Balance Budget

Active Projects
Project A

XX

XX

XX

XX

Project B

XX

XX

XX

XX

Project C

XX

XX

XX

XX

XXX

XXX

XXX

XXX

Project D

XX

XX

XX

Project E

XX

XX

XX

Project F

XX

XX

XX

Sub - Total

XXX

XXX

XXX

Total

XXXX

XXXX

XXXX

Sub - Total
New Projects

24

Annexure E

Statement of Contracts Signed during xxxx

As On <Date>

SNo

Project
#

Contract No.
Title of Contract
PO Ref

SAP #

Amount
Vendor Date Of Delivery
Name Signing Period Foreign Portion Local Portion
CFR USD
PKR

Total Amount
PKR

1
2
3
4
5
Total

25

Flowchart
End User

Project
Information

GM PP&C
Preparation of Project

GM BC
Financial Evaluation

Prerequisite
Available

No

Yes
NPV, IRR,

Financial Evaluation

Payback etc.

Financial
Viable

No

Yes
EVP (FP &T)

EVP (NP & S)

Project Committee
for Appraisal and
Recommendation

26

Project Committee

For Approval by P&CEO

No

If CAPEX is more
than Rs. 500 M

Yes
Approved

Technical Committee

No

For Approval by Board of

Directors

Yes

Approved

No

Yes
PC-1 Issued

For issuance of PC-1 by PP&C

EVP NP&S

End User

27