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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),,,

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