Developing Strategic Projects - Project Executive Group
Developing Strategic Projects - Project Executive Group
Developing Strategic Projects - Project Executive Group
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<strong>Developing</strong> <strong>Strategic</strong> <strong><strong>Project</strong>s</strong><br />
PMI Houston Presentation – July 2008
• A Strategy is a long term plan of action designed to achieve a<br />
particular goal, most often "winning." Strategy is differentiated from<br />
tactics or immediate actions with resources at hand by its nature of<br />
being extensively premeditated, and often practically rehearsed.<br />
Strategies are used to make the problem easier to understand and<br />
solve.<br />
• Strategy is about choice, which affects outcomes. Organizations can<br />
often survive -- indeed do well -- for periods of time in conditions of<br />
relative stability, low environmental turbulence and little competition<br />
for resources. Virtually none of these conditions prevail in the<br />
modern world for great lengths of time for any organization or sector,<br />
public or private. Hence, the rationale for strategic management.
The presentation is an overview of systematically planning, developing<br />
and executing strategic projects.<br />
• <strong>Strategic</strong> projects are where the project is HOW one “implements<br />
the strategy.”<br />
• <strong>Strategic</strong> projects require significant differences in approach and<br />
management, significant skills in all aspects of project management,<br />
and skills not found in the PMBOK.<br />
• For example, strategic projects can include<br />
– capital intensive projects,<br />
– new strategies for companies, and/or<br />
– new business automation or ERP systems to increase competitiveness.
The presentation will address strategic issues in<br />
• Development of the <strong>Strategic</strong> Decision – What is the STRATEGY?<br />
• Decision Execution and decision management of that decision<br />
• Life cycle planning in a strategic project development<br />
• <strong>Project</strong> management within strategic project development<br />
• Financing tools examples for a capital intensive strategic project<br />
• Risk-based decision support packages in strategic projects<br />
• Monitoring and delivering on the promise of sanction expectations<br />
Solid strategic project execution in implementing the strategy.
The <strong>Strategic</strong> Decision Development and<br />
Strategy Execution<br />
Strategy execution has always been one of the more difficult problems in<br />
business. Creating a brilliant strategy is nothing compared to executing it<br />
successfully. It has always been much easier to create a strategy document<br />
than to get employees to abide by it. Many employees don’t even know the<br />
details of strategies. Plans by senior management are neither attended to<br />
nor executed. Performance expectations aren’t met. You know the drill.<br />
Strategy execution has for too long lurched between two extremes.<br />
1. “strategic engineering,” envisions strategy execution as an engineering<br />
exercise, and views employees as cogs in a machine well-oiled by<br />
computers.<br />
2. “strategic anarchy,” encourages executives to simply get out of the way of<br />
their employees’ entrepreneurial and innovative energies. “Command and<br />
control” organizational structures are a relic of the past, according to this<br />
perspective.<br />
Neither extreme, of course, is very useful for organizations attempting to<br />
perform well in difficult and changing business environments. Obviously<br />
the right answer to effective strategy execution lies somewhere in the<br />
middle, but how can these extreme views be reconciled?
Development Evaluation & Economics<br />
Rough Pro-Forma Go/No Go – Using a WBS Approach<br />
At the very early stage, use this approach for evaluation TIME and MONEY.<br />
Do a quick risk-based approach with SME’s to develop rough pro-forma and<br />
stay with Level 1. Work down into Level 2 and lower as more info available.<br />
Another good approach is to go at it from a “contract” point of view, i.e. what<br />
would we contract out and in what form to who. They can provide SME info.<br />
<strong>Strategic</strong> <strong>Project</strong><br />
Level 1 Level 1 Level 1
<strong>Strategic</strong> <strong>Project</strong> Development<br />
Program at Rice University -<br />
2008<br />
<strong>Developing</strong> <strong>Strategic</strong> <strong><strong>Project</strong>s</strong><br />
<strong>Strategic</strong> Development – The <strong>Strategic</strong> Decision
The <strong>Strategic</strong> Decision<br />
It starts with the RIGHT strategic decision…<br />
What is the<br />
Opportunity?<br />
What are the<br />
Alternatives?<br />
Select the<br />
Preferred<br />
Alternative<br />
Execution<br />
Operations<br />
Good <strong>Strategic</strong> Decision<br />
and <strong>Project</strong> Definition<br />
Good<br />
Execution<br />
Poor<br />
Execution<br />
Poor<br />
Definition
IDM (Integrated Decision Management)*<br />
builds higher quality into a decision process<br />
Discovery<br />
Screen<br />
Opportunity<br />
A<br />
Creation &<br />
Framing of<br />
Alternatives<br />
B<br />
Evaluation<br />
and<br />
Agreement<br />
C<br />
Fully Develop<br />
Selected<br />
Alternative<br />
D<br />
Implement &<br />
Monitor<br />
Performance<br />
E<br />
Process<br />
Steps<br />
• Clarify situation<br />
• Define opportunity<br />
• Criteria screen<br />
• Create options<br />
• Quant. model<br />
• ID Experts<br />
• Assessments<br />
• Analysis work<br />
• Optimize strategy<br />
• Resource plan<br />
• Scheduling<br />
• Resourcing<br />
• <strong>Project</strong> Mgmnt.<br />
• Tracking metrics<br />
Decision<br />
Review Board<br />
Stop / Go<br />
or do IDM<br />
Framing<br />
Review<br />
Select<br />
Alternativ<br />
e<br />
Funding<br />
Approval<br />
Phase<br />
Deliverables<br />
• Business situation<br />
• Stakeholder list<br />
• Screening for<br />
- strategic alignment<br />
- benefits & risks<br />
• IDM resource plan<br />
• Decision Hierarchy<br />
• Strategy Table<br />
• Qualitative analysis<br />
• Influence Diagram<br />
• Expert identification<br />
• Analysis plan<br />
• Financials<br />
• NPV / EVA<br />
• Sensitivity tornado<br />
• Risk profiles<br />
• Risk reduction &<br />
contingency plan<br />
• VOI/VOC<br />
• Hybrid<br />
• Options<br />
• <strong>Project</strong> work plan<br />
• Staffing plan<br />
• Budget<br />
• Schedule<br />
• Metrics<br />
• Earned value<br />
• Metrics tracking<br />
• Periodic review<br />
• Communication<br />
• Learning<br />
• Quality audit<br />
Key<br />
Participants<br />
• <strong>Project</strong> Owner<br />
• <strong>Project</strong> Manager<br />
• IDM Facilitator<br />
• <strong>Project</strong> Owner<br />
• <strong>Project</strong> Lead<br />
• IDM Facilitator<br />
• Core team<br />
• <strong>Project</strong> Owner<br />
• <strong>Project</strong> Lead<br />
• IDM Facilitator<br />
• Core team<br />
• SME’s<br />
Source: * IDM (Integrated Decision Management) is a process of Decision Strategies , Inc.<br />
• <strong>Project</strong> Owner<br />
• <strong>Project</strong> Lead<br />
• Implem. Team<br />
• <strong>Project</strong> Owner<br />
• <strong>Project</strong> Lead<br />
• Implem. Team<br />
Source: Copyright: 1994 – 2005 Decision Strategies, Inc. Includes material copyright 1994 – 2002 Kenneth R. Oppenheimer
Development <strong><strong>Project</strong>s</strong> Process <strong>Group</strong>s<br />
Process <strong>Group</strong>s<br />
Core Process <strong>Group</strong>s & Phases or Stage Gates<br />
<strong>Strategic</strong> Decision (IDM)<br />
Discovery &<br />
Screen Opportunity<br />
Framing of<br />
Alternatives<br />
Evaluation &<br />
Agreement<br />
Fully Develop<br />
Execute<br />
Selected<br />
Alternative<br />
Decision<br />
Fully Develop<br />
Execute<br />
Selected<br />
Decision<br />
Alternative<br />
Operate &<br />
Monitor<br />
Decision Execution (IDE)<br />
Decision<br />
Development<br />
Front-End<br />
Loading<br />
Optimized<br />
<strong>Project</strong><br />
Execution<br />
Acceptance<br />
Operate &<br />
Monitor<br />
Performance<br />
<strong>Project</strong> Management<br />
Initiating<br />
Planning<br />
Executing<br />
Controlling<br />
Closing<br />
<strong>Project</strong> Development<br />
Feasibility Phase<br />
Concept<br />
Define<br />
Develop<br />
Implementation Phase<br />
Execute<br />
Accept<br />
Operate<br />
<strong>Project</strong> Finance<br />
Business Plan<br />
With Pro-formas<br />
Offering<br />
Memorandum<br />
Contracts &<br />
Structuring<br />
Documentation<br />
& Securitization<br />
Financial<br />
Closing<br />
Monitoring<br />
& Performance<br />
Troubled <strong><strong>Project</strong>s</strong><br />
Triage<br />
Turnaround Plan<br />
Recovery or Salvage<br />
Turnaround<br />
Execution<br />
Turnaround<br />
Maintenance<br />
Risk Analysis&Mgt (PRAM)<br />
Define & Focus<br />
Identify & Structure<br />
Ownership & Estimate<br />
Three <strong>Strategic</strong>-Level Iterations<br />
Evaluiate Evaluate & Plan<br />
Manage<br />
Execution<br />
<strong>Project</strong> Risk Management<br />
RM Planning<br />
Identification<br />
Qualitative<br />
Assessment<br />
Quantitative<br />
Assessment<br />
Risk Response<br />
Plan & Mitigate<br />
Risk Monitoring<br />
& Control
<strong>Developing</strong> <strong>Strategic</strong> <strong><strong>Project</strong>s</strong><br />
<strong>Strategic</strong> Decision Execution & Decision Management<br />
Pictures from<br />
“Katrina”
<strong>Strategic</strong> Decision & Decision Execution<br />
Process - “Inception to Disposal”<br />
Decision Management<br />
Execution Management<br />
Discovery &<br />
Screen<br />
Opportunity<br />
Creation &<br />
Framing of<br />
Alternatives<br />
Evaluation<br />
and<br />
Agreement<br />
Fully<br />
Develop<br />
Selected<br />
Alternative<br />
Execute,<br />
Operate &<br />
Monitor<br />
<strong>Strategic</strong> Decision<br />
Stop /<br />
Go<br />
or do<br />
IDM<br />
Framing<br />
Review<br />
Select<br />
Alternativ<br />
e<br />
Funding<br />
Approval<br />
Decision Review Board Activities<br />
Execution<br />
Input<br />
Decision Execution<br />
<strong>Project</strong><br />
Decision<br />
Development<br />
Execution Review Board Activities<br />
Executable<br />
Front-End<br />
Loading<br />
Notice to<br />
Proceed<br />
Optimize<br />
<strong>Project</strong><br />
Execution<br />
Begin<br />
Accept<br />
Acceptance<br />
Final<br />
Accept<br />
Operate<br />
& Monitor<br />
Performance<br />
<strong>Strategic</strong><br />
Disposal<br />
This provides a consistent terminology and information flow
The Strategy Execution Model<br />
Corporate<br />
Strategy<br />
Corporate<br />
Structure/<br />
Integration<br />
Strategy Execution<br />
operates within a<br />
surrounding context.<br />
Biz Unit<br />
Strategy & ST<br />
Op’g Obj<br />
Biz Unit<br />
Structure/<br />
Integration<br />
Incentives<br />
& Control<br />
Source: Strategy Execution by Hbrenick
The Strategy Execution Context<br />
Strategy<br />
Execution<br />
Power &<br />
Influence<br />
<strong>Strategic</strong> Fit<br />
Check<br />
Ten Schools (of Strategy):<br />
• Descriptive (3)<br />
• Prescriptive (6)<br />
• Hybrid (1)<br />
Leadership<br />
Organizational<br />
Culture<br />
Strategy<br />
Execution<br />
Plan (SEP)<br />
Change<br />
Management<br />
<strong>Project</strong><br />
Development<br />
Execution Results<br />
Source: Strategy Execution by Hbrenick
Decision Execution<br />
Discovery<br />
Framing<br />
Evaluation<br />
Develop<br />
Alternative<br />
Execute<br />
Operate<br />
& Monitor<br />
<strong>Strategic</strong> Decision Execution<br />
Execute<br />
Decision<br />
Strategy<br />
Execution<br />
Decision<br />
Execution<br />
Strategy is implemented through projects. Every project<br />
should have a clear link to the organization’s strategy.*<br />
Decision<br />
Development
Decision Execution<br />
Decision<br />
Execution<br />
Decision<br />
Development<br />
Major<br />
<strong>Project</strong><br />
Decisions<br />
<strong>Project</strong><br />
<strong>Project</strong><br />
<strong>Project</strong> Risk<br />
<strong>Project</strong><br />
Capital<br />
<strong>Project</strong><br />
<strong>Project</strong><br />
Development<br />
Management<br />
Management<br />
Finance<br />
Stewardship<br />
Governance<br />
Strategies<br />
Decision Hierarchy<br />
Policy - Decisions already made (policies and strategic decision)<br />
<strong>Strategic</strong> - Decisions needed - analyze and make now<br />
Tactical (execution dependent) - Decisions to be Made Later
Decision Execution<br />
Development <strong>Project</strong> strategies must be determined…<br />
<strong>Project</strong><br />
Strategies<br />
<strong>Project</strong><br />
Decision<br />
Strategy<br />
QUALITY<br />
You must FIRST establish which TWO you are<br />
going to OPTIMIZE…and in what order…and<br />
then do the best you can with the last one.<br />
SOME COMMON PROJECT STRATEGIES<br />
Negotiating<br />
Financing<br />
Contracting<br />
Procurement<br />
Operating<br />
Maintenance<br />
Constructability<br />
Strategies<br />
Strategies<br />
Strategies<br />
Strategies<br />
Strategies<br />
Strategies<br />
Strategies<br />
Human<br />
Resource<br />
Strategies<br />
Partnering<br />
Strategies<br />
Local Content<br />
Strategies<br />
Host Country<br />
Strategies<br />
Economic<br />
Incentives<br />
Strategies<br />
Tax<br />
Strategies<br />
Industrial<br />
Relations<br />
Strategies<br />
Risk<br />
Management<br />
Strategies<br />
Alignment<br />
Strategies<br />
Optimization<br />
Strategies<br />
Sustainable<br />
Development<br />
Strategies<br />
Acceptance<br />
Strategies<br />
Exit<br />
Strategies<br />
Disposal<br />
Strategies
<strong>Developing</strong> <strong>Strategic</strong> <strong><strong>Project</strong>s</strong><br />
Life-cycle Planning
Life Cycle of the Development<br />
1. Pre-Concept<br />
2. Concept<br />
3. Initial Business Case Plan - FEL 1*<br />
4. Development of Alternatives - FEL 2*<br />
5. Front End Engineering and Design of Alternative/s - FEED or FEL 3*<br />
6. Transition Phase - Bridge Between Planning and Execution/Construction<br />
7. Execute/Construct Phase – Understanding/Managing the Execution Phase<br />
8. Acceptance Phase - Obtaining a complete and effective project acceptance<br />
9. Operations Phase - Delivering the Performance/ Upgrades & Expansions<br />
10. Salvage / Disposal Phase - Planning and Implementing<br />
* FEL I, II. III are IPA (Independent <strong>Project</strong> Analysis) process names
1. Pre-Concept<br />
• Pre-Concept<br />
– Back of the Envelope Economics<br />
– <strong>Strategic</strong> Fit?<br />
– Does it make sense?<br />
Development Funnel<br />
-30% / + 70%<br />
1. Pre-Concept<br />
2. Concept<br />
3. FEL I – Business Plan<br />
4. FEL II – Alternatives<br />
5. FEL III – Select – Define<br />
6. TRANSITION Phase<br />
Execution<br />
5-10% at Best Financial Closing
<strong>Developing</strong> <strong>Strategic</strong> <strong><strong>Project</strong>s</strong><br />
<strong>Project</strong> Management in <strong>Developing</strong> <strong>Strategic</strong> <strong><strong>Project</strong>s</strong>
<strong>Project</strong> Development<br />
<strong>Project</strong><br />
Development<br />
Concept Define Develop Execute<br />
Accept<br />
Operate<br />
Executable<br />
Optimize<br />
Operate<br />
Front-End<br />
<strong>Project</strong><br />
Acceptance<br />
& Monitor<br />
Loading<br />
Execution<br />
Performance<br />
Validate<br />
Develop<br />
Design Best<br />
Transition<br />
Opportunity<br />
Best Scope<br />
Execute Plan<br />
To Execution<br />
FEL 1 FEL 2 FEL 3<br />
Bus. Case Scope <strong>Project</strong> Plan<br />
Opportunity Definition F.E.E.D.<br />
Independent <strong>Project</strong> Analysis (IPA) Processes<br />
Integrated Decision Execution (IDE) ©<br />
Objective: Maintain the “value of the strategic<br />
decision and its options” created during IDM<br />
while the decision and its project are being<br />
executed. - David Skinner, Managing Director, DSI
<strong>Project</strong> Management Process <strong>Group</strong>s<br />
<strong>Project</strong><br />
Management<br />
IF this is not happening,…<br />
You Do NOT have any<br />
project management going on!<br />
Initiating Planning Executing Controlling<br />
Closing<br />
Initiating<br />
Planning<br />
Circutuitos and dynamic<br />
activity “in each Phase.”<br />
Phase<br />
Phase<br />
Controlling<br />
Executing<br />
Closing
Example of a <strong>Project</strong> Management Methodology<br />
More than 45,000 people in 50 different countries currently use the<br />
MPMM <strong>Project</strong> Life Cycle to deliver projects. MPMM project management<br />
methodologies are based on the best practice industry standards for<br />
project management: PMBOK® and Prince2®.
Life Cycle according to the MPMM Methodology<br />
Initiation involves starting up the project, by<br />
documenting a business case, feasibility<br />
study, terms of reference, appointing the<br />
team and setting up a <strong>Project</strong> Office.<br />
Planning involves setting out the roadmap<br />
for the project by creating the following<br />
plans: project plan, resource plan, financial<br />
plan, quality plan, acceptance plan and<br />
communications plan.<br />
Execution involves building the<br />
deliverables and controlling* the project<br />
delivery, scope, costs, quality, risks and<br />
issues.<br />
Closure involves winding-down the project<br />
by releasing staff, handing over<br />
deliverables to the customer and<br />
completing a post implementation review.<br />
Controlling – you don’t control a project; however<br />
you “trend and adjust” – actions you take to bring<br />
the project back on track is the control part.<br />
You cannot control UNLESS you have already<br />
planned for action using good risk management<br />
AND the Risk & Opportunity Register Tool AND<br />
set a Baseline (needed for Change Management).
Example of a <strong>Project</strong> Management Methodology<br />
<strong>Project</strong> Initiation is the first phase in the <strong>Project</strong> Life Cycle and<br />
essentially involves starting up the project. You initiate a project by<br />
defining its purpose and scope, the justification for initiating it and the<br />
solution to be implemented. You will also need to recruit a suitably skilled<br />
project team, set up a <strong>Project</strong> Office and perform an end of Phase<br />
Review. The <strong>Project</strong> Initiation phase involves the following six key steps:
Example of a <strong>Project</strong> Management Methodology<br />
After defining the project and appointing the project team, you're ready to<br />
enter the detailed <strong>Project</strong> Planning phase. This involves creating a suite<br />
of planning documents to help guide the team throughout the project<br />
delivery. The Planning Phase involves completing the following 10 key<br />
steps:
Example of a <strong>Project</strong> Management Methodology<br />
With a clear definition of the project and a suite<br />
of detailed project plans, you are now ready to<br />
enter the Execution phase of the project.<br />
This is the phase in which the deliverables are<br />
physically built and presented to the customer<br />
for acceptance.<br />
While each deliverable is being constructed, a<br />
suite of management processes are undertaken<br />
to monitor and control the deliverables being<br />
output by the project.<br />
These processes include managing time, cost,<br />
quality, change, risks, issues, suppliers,<br />
customers and communication.<br />
Once all the deliverables have been produced<br />
and the customer has accepted the final<br />
solution, the project is ready for closure.
Example of a <strong>Project</strong> Management Methodology<br />
<strong>Project</strong> Closure involves releasing the final deliverables to the customer,<br />
handing over project documentation to the business, terminating supplier<br />
contracts, releasing project resources and communicating project closure<br />
to all stakeholders. The last remaining step is to undertake a Post<br />
Implementation Review to identify the level of project success and note<br />
any lessons learned for future projects.
<strong>Developing</strong> <strong>Strategic</strong> <strong><strong>Project</strong>s</strong><br />
Financing Tools
Documentation (Security Packages) Risks for Financing<br />
Organizational documents – such as partnership agreements, joint venture agreement<br />
and shareholder agreement<br />
Agreements with Host Country governments – such as a concession agreement,<br />
governmental licenses, sovereign guarantee and implementation agreement<br />
Real property agreements – such as title documentation, leases, easements, and<br />
construction lay-down rights<br />
Construction documents – such as a construction contract<br />
Technology documents – such as a license agreement<br />
Operation & maintenance documents – such as an operating agreement and a spare<br />
parts supply agreement<br />
Fuel supply documents – such as a fuel supply agreement<br />
Utility documents – such as electricity, oil, gas and water agreements<br />
Off-take revenue documents – such as production sale agreements, energy sale<br />
agreements, and the like<br />
Transportation documents – such as transportation agreements<br />
Financing documents – such as loan agreements, inter-creditor agreements, and<br />
collateral security agreements<br />
© 2006 Paul Allen and Hossein Razavi
Risk Issues in Detail – Cross-Border (Political) - 1<br />
• Currency-related risk<br />
– Non-convertibility of currency<br />
– Currency transfer inability<br />
• Exchange controls<br />
• Violation of exchange laws<br />
• Enforcement of transactions in case<br />
• Exchange permissions and consents<br />
– Currency devaluation risks<br />
• Indexing revenues<br />
• Matching currencies - revenue and debt<br />
• Raising debt in local currency<br />
• Derivatives<br />
• Sharing of risks<br />
– Offshore accounts<br />
– Special currency problems in project<br />
– Advance approvals<br />
• Consent<br />
• exemption<br />
– Currency risk mitigation techniques<br />
• Payment in hard currency<br />
• Foreign exchange risk insurance<br />
• Indexed local currency payments<br />
• Permits, concession and license risks<br />
• Expropriation risk<br />
• Expatriation<br />
• Change of law<br />
– Import tariffs<br />
– Export tariffs<br />
– Production or consumption controls<br />
– Taxes<br />
• Taxes on income<br />
• Customs duties<br />
• Withholding tax on payment of interest<br />
• Nondiscrimination<br />
– Environmental controls<br />
– Regulation and deregulation<br />
• Political violence, civil unrest, war and<br />
other political Force Majeure events<br />
• Political collapse and succession<br />
• Preemption and priority<br />
• Sovereign risk<br />
• Breach of undertakings (contract<br />
repudiation)<br />
© 2006 Paul Allen and Hossein Razavi
Risk Issues in Detail – Cross-Border (Political) - 2<br />
• Collateral risks<br />
– Types of collateral security allowed by<br />
the Sovereign Government?<br />
– Local formality compliance?<br />
– Priority of liens?<br />
– How is lien enforced?<br />
– How does foreclosure process work?<br />
– Collateral trusts<br />
– Real property issues?<br />
– Interaction among risks?<br />
• Law and Legal Systems risks<br />
– Choice of law?<br />
– Agent for process and submission to<br />
jurisdiction?<br />
– Fees, approvals and filings<br />
– Legal expertise and experience<br />
– General business law and regulation<br />
– Waiver of Sovereign Immunity?<br />
• Illiquidity of equity investment<br />
• Freezing or blocking orders<br />
• Export prohibitions<br />
• Price controls and regulation<br />
• Commercial or political – or both?<br />
© 2006 Paul Allen and Hossein Razavi
Risk Issues in Detail – Commercial<br />
• Probability of risks into problems<br />
• Due diligence<br />
• Feasibility study in Risk Identification<br />
• Credit risks<br />
• Increase in construction costs<br />
• Delay in completion<br />
• Force majeure in construction contracts<br />
• Experiences & resources of contractor<br />
• Building materials<br />
• Facility site<br />
• Technology<br />
• Construction of related facilities<br />
• Shortfalls in mineral reserves<br />
• Raw material supply & utilities<br />
• Creditworthiness of off-take purchaser<br />
• Market for product of services<br />
• Shortfalls in anticipated capacity, output,<br />
and efficiency<br />
• Operator experience<br />
• General operating expenses<br />
• Sponsor commitment<br />
• Management experience<br />
• Permits and licenses<br />
• Political environment<br />
• Interest rate<br />
• Force majeure<br />
• Economic projection and feasibility<br />
report inaccuracy<br />
• Environmental<br />
• Contract mismatch<br />
• Contract risks generally<br />
• Commercial risk mitigation<br />
– Construction Period Mitigation<br />
• Contractual undertakings; Contingency<br />
reserve funds & equity & other; Insurance<br />
– Operations Period Mitigation<br />
• Contractual undertakings; Contractual<br />
arrangements; Contingency reserve funds<br />
• Cash traps; insurance<br />
© 2006 Paul Allen and Hossein Razavi
Modules in <strong>Strategic</strong> <strong>Project</strong> Finance<br />
Module<br />
Cost Estimate<br />
<strong>Project</strong> Evaluation<br />
<strong>Project</strong> Finance<br />
Developer<br />
takes<br />
design basis<br />
estimate basis<br />
schedule basis<br />
+ market survey<br />
op costs, working<br />
capital basis<br />
+ funding basis,<br />
accounting basis<br />
taxation basis<br />
and<br />
produces<br />
capital cost<br />
estimate, draw<br />
down of funds<br />
project cash flows,<br />
IRRs, NPVs, initial<br />
working capital<br />
after tax cash flows<br />
IRRs, NPVs, and<br />
financial statements<br />
Draw Down<br />
Cash Flows<br />
Cash Flows<br />
120<br />
100%<br />
150<br />
150<br />
100<br />
90%<br />
80%<br />
100<br />
100<br />
Revenues (Turnover)<br />
Operating Costs<br />
80<br />
U<br />
S<br />
60<br />
$<br />
40<br />
70%<br />
60%<br />
50%<br />
40%<br />
30%<br />
Left Scale<br />
FC<br />
Yemeni Rials<br />
Right Scale<br />
Cumulative<br />
50<br />
U 0<br />
S<br />
$ -50<br />
-100<br />
Revenues (Turnover)<br />
Working Capital<br />
Operating Costs<br />
Capital Cost<br />
50<br />
U 0<br />
S<br />
$ -50<br />
-100<br />
Operating Phase<br />
Dividends<br />
Tax & Production Share<br />
Debt Service<br />
-----------------------------<br />
Construction Phase<br />
20<br />
0<br />
Dec-93 Dec-94 Dec-95 Dec-96<br />
Half Year Ending<br />
20%<br />
10%<br />
0%<br />
-150<br />
-200<br />
1993 1998 2003 2008 2013<br />
Year<br />
-150<br />
-200<br />
1993 1998 2003 2008 2013<br />
Year<br />
Equity<br />
Loan Draw Down
Paul’s “Rule of 1/6 th ” for Successful Development <strong><strong>Project</strong>s</strong><br />
NTP<br />
Contractor’s Contract<br />
Contract<br />
EPC or Design-Build<br />
Reward Period<br />
Uses THIS Completion Date<br />
For Contract and Managing Expectations<br />
IN the Money<br />
Contract<br />
Penalty Period<br />
1/6 Buffer<br />
Time & Money<br />
NTP<br />
Owner’s <strong>Project</strong> NPV<br />
Basis of the Investment<br />
Uses THIS Completion Date<br />
For Economics and Managing Expectations<br />
Contractor<br />
is OUT of<br />
the money<br />
PROTECT<br />
The Buffer!
<strong>Developing</strong> <strong>Strategic</strong> <strong><strong>Project</strong>s</strong><br />
Risk-Based Decision Support Packages<br />
Picture from a balcony of<br />
a church in Bay St. Louis<br />
Katrina 30+ ft storm surge
Decision Support Package A: <strong>Strategic</strong> Decision<br />
Policy Decisions - Already Made<br />
Capital is available from the parent company for good<br />
investments<br />
Financial guidelines include a 12% cost of capital discount<br />
rate<br />
Deadline for a recommendation is tomorrow<br />
<strong>Strategic</strong> Decisions - for Team Focus<br />
Plant size - 0, 25, 50, 75 or 100 mcf<br />
Location - Deer Creek or Future Supply Area<br />
Facility - Leverage Deer Creek or Build New<br />
Return on Investment<br />
Meet Producer’s<br />
Current and Future Needs<br />
GasCo<br />
Corporate Value - NPV<br />
Plant Capacity<br />
And Utilization<br />
Future <strong>Strategic</strong> Value<br />
Reputation<br />
$ MM NPV<br />
(10) 0 10 20 30 35 40<br />
Utilization<br />
Tactical Decisions - to be made later<br />
Operator ship - internal control or outsource<br />
Specifications - electric or gas drive, etc.<br />
Sulphur handling - production or injection<br />
Capital<br />
Risk<br />
Producer<br />
Contracts<br />
Influence the<br />
Competitor<br />
Design and<br />
Operating Results<br />
Competitor’s Move<br />
Fees / Volume<br />
• Reserves - current deliverable and future<br />
• Capital costs of project<br />
• Economics of the operation<br />
• Competition in the area<br />
• Future projects and strategic value<br />
• Early abandonment costs<br />
Operating Costs<br />
Capital Costs<br />
Abandonment Costs<br />
Current Contracts<br />
Beat Competition<br />
Current Contracts<br />
Beat Competition<br />
Wait for Future<br />
Forecasting<br />
Reserves<br />
For Future<br />
Competitive<br />
Intelligence<br />
Marketing<br />
Operations<br />
Contracts<br />
(Utilization)<br />
Operating<br />
Costs<br />
Forecasting<br />
Competitor<br />
Actions<br />
Current<br />
Reserves<br />
Fees<br />
Operations<br />
<strong>Strategic</strong> Planning<br />
Future<br />
<strong><strong>Project</strong>s</strong><br />
Costs to<br />
Abandon<br />
<strong>Strategic</strong><br />
Value-NPV<br />
Operating<br />
NPV<br />
Capital<br />
Investment<br />
Engineering<br />
Corporate<br />
Value<br />
12% WACC<br />
Lifetime years<br />
+ residual value<br />
Investment<br />
Current Contracts<br />
$ 23.4 Capital<br />
Beat Competition<br />
$ 31.2 Capital<br />
Wait for Future<br />
$ 0 Capital<br />
Competitor<br />
Competitor Out<br />
Competitor In<br />
Competitor Out<br />
Competitor In<br />
Utilization<br />
Fully Utilized<br />
Partial Utilization<br />
Fully Utilized<br />
Partial Utilization<br />
Fully Utilized<br />
Partial Utilization<br />
Fully Utilized<br />
Partial Utilization<br />
NPV<br />
$ 11 M<br />
$ 6 M<br />
$ 1 M<br />
$ (4) M<br />
$ 36 M<br />
$ 21 M<br />
$ 19 M<br />
$ (2) M<br />
$ 0 M<br />
Source: Copyright: 1994 – 2005 Decision Strategies, Inc. Includes material copyright 1994 – 2002 Kenneth R. Oppenheimer
Decision Support Package B: Breakeven & NPV
Decision Support Package C: Risk & Cash Flow
<strong>Developing</strong> <strong>Strategic</strong> <strong><strong>Project</strong>s</strong><br />
Monitoring & Delivering on the Promise!<br />
<strong>Strategic</strong> <strong>Project</strong> Development<br />
Program at Rice University -<br />
2008
The FIVE Points (Pareto way for Execution Monitoring)<br />
1. Establish the <strong>Project</strong> Optimization Policy at the very beginning of the project<br />
AND STICK WITH IT!<br />
2. Establish a complete <strong>Project</strong> Execution Plan (PEP), ensure its clear link to the<br />
Strategy Execution Plan for real support, and then keep it updated WEEKLY<br />
keeping a register of updates.<br />
3. Establish a thorough AND complete Risk & Opportunity Register including<br />
the qualitative and quantitative risks & opportunities AND their mitigations with<br />
contingencies and triggers for the immediate implementation of any<br />
contingencies needed to protect the project.<br />
4. Develop & Maintain* a Risk-Based Fully Integrated Master Schedule<br />
5. Develop & Maintain* a Risk-Based Fully Integrated Master Budget<br />
*Monthly during Planning, Weekly during Execution
www.projectexecutive.com/
Websites<br />
Visit the following sites<br />
– www.palisade.com – looking at Decision Tools (risks overall with full suite<br />
of tools including decision tree - PrecisionTree)<br />
– www.pertmaster.com – looking at Pertmaster (risks in schedules)<br />
– www.crystalball.com – another modeling tool for risk<br />
– www.mindtools.com – source of knowledge in various areas for free<br />
– www.mindtools.com/dectree.html - basics of decision trees<br />
– www.treeage.com – basics in creating decision trees<br />
– www.managepro.com – srategy performance management software<br />
– www.projectexecutive.com – <strong>Project</strong> <strong>Executive</strong> <strong>Group</strong> site for lots of info<br />
Paul’s personal website specific pages for review<br />
• http://members.aol.com/AllenWeb/index.htm<br />
• http://members.aol.com/AllenWeb/decision.html - Decision Support Package<br />
• http://members.aol.com/AllenWeb/change.htm - Managing Others’ Expectations<br />
• http://members.aol.com/AllenWeb/planning.htm - see Scope of Feasibility - Financial<br />
Analysis – …(analysis of the cash flow of the project),,,