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Wednesday, January 30, 2008

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The capital challenge

Friday, January 18, 2008

A LARGE number of new capital projects are being approved in the resources sector but the number of people with extensive experience in managing these projects is spread thinly across them, writes Partners in Performance managing director Skipp Williamson.

The industry has seen early movers blowing budgets, time and NPV, with reputations badly damaged as a result.

Prices have come off considerably in a number of commodities and storm clouds are gathering over the economy. Managers are saying the time has come to focus on capital efficiency.

There are three main processes you can put in place to lower your capital and increase your chances of coming in on time and budget, and of getting a good start-up:

Capital value optimisation

Before you get locked into a capital design, step back and systematically challenge options around how best to optimise the project's value.

At the business case/pre-feasibility stage you can increase its value by around 30% by asking questions like:

Do you need to go full size right now? Can you modularise?
Does the plant have to be new?
Can you get someone else to take on the risk of owning the railway or port?
What is the NPV trade-off of tailoring the product for higher margins versus one bulk product with lower capital?
Which parts can be made in cheaper countries?
What are the tradeoffs of targeting high-grade first versus long-term mine life?

You can save 20% during the feasibility stage and 10% in the detailed design stage with questions like:

Why does the road need to be that wide?
Why does it need to be sealed? Stainless versus painted?
How can you alter the design to reduce the carbon cost and save energy?

Proactively managing the capital contract rather than having it manage you:

Again, it's a matter of asking the right questions from the outset. Do you have:

the right key performance indicators to align each party's incentives?
the right data collection and reporting – and is it timely, on the right desk or in the right meeting?
tight reviews focusing on key issues?
good decision making approaches and meeting management so when variances occur they are identified early? And can they be solved at the root cause to prevent or mitigate the variance?

Wiring for commissioning success:

The speed and tonnage achieved from commissioning is pivotal for the NPV of the project. Slow, dragged out commissioning can wipe out much of the NPV. Putting in the basic 'wiring' will help your people to focus during the noise of commissioning.

For the bare minimum we suggest you ensure you have in place:

KPIs which are driven from a value driver tree to ensure they are 'single point' (no overlaps, no gaps).
Role clarity, so each person understands what they are accountable for (and what they're not accountable for).
Automated data tracking converted into 'at a glance reporting' that clarifies what is happening.
Extensive training of supervisors and managers on how to assign tasks, run meetings, drive closed-loop reviews and do basic problem-solving.

The above three processes are vital if you want to enhance the NPV and manage the carnage that could be caused to reputations and value if it's done wrong.

Early movers have proven that NPV and reputations can be blown through poor start-up, project management blow-outs and capital overruns. This is largely because of the lack of experience across the industry.