Calculating ROI for Process Safety Projects
Return on investments for production capital expenditures is typically calculated based on materials, energy consumption, production rates, etc. ROI made on intangibles associated with process safety represent more complex calculations. The following provides some insight into assessing ROI for process safety.
Risk reduction worth is perhaps the most straight forward approach when attempting to correlate ROI for safety improvements. Most improvements have various options for achieving a predetermined level of safety or operational risk. Each option has an associated initial cost (purchase) and maintainability cost. Likewise, each should have some risk reduction factor designed to improve safety; if not, the option is unacceptable and should not be considered.
The concept of risk reduction worth is simple, the solution providing the most reduction of risk or conversely the highest “assessable” level of safety, at the lowest overall cost (initial and maintenance) is the best choice.
For example, a process hazard is assessed as unacceptable using standard HAZOP qualitative methods. Evaluation of the hazard and potential resolutions is conducted by the engineering staff. A total of three potential fixes are identified. Therefore, the ROI may be correlated as follows.
Basis: hazard severity assessed as major, i.e., losses in excess of $1MM; probability of occurrence assessed as medium, i.e., loss may occur within 2 – 5 operating years. Therefore, what present day dollars should be spent in order to save $1MM within a maximum of 5 years; assuming an average interest rate of 6% to compensate for unknowns. Approximately $747,000 present dollars would equal $1MM in a 5 year period based on a 6% rate. Therefore, options below this basis will be considered.
Option I Cost = $730,000 + yearly projected maintenance = $12,000; total for 5 years = $790,000 [unacceptable]
Option II Cost= $190,000 + yearly projected maintenance = $22,000; total for 5 years = $300,000; approximate ROI = 60%
Option III Cost= $445,000 + yearly projected maintenance = $3,000; total for 5 years = $460,000; approximate ROI = 38%
If both options II and III provide the same reduction of risk, then option II would be selected. Using LOPA or other risk assessment techniques the risk reduction can be determined. This is often much less exact than the example above and many analyst stop after calculating total project cost.
