Shekarsan

Sunday, February 28, 2010

Projects delayed are profits denied



Sapan Ghosh is a technology consultant specializing in the reduction of emission levels from power plants and petrochemical units. By helping these chemical plants to conform to the increasingly more stringent standards of ecology and regulations governing environmental safety, he was helping his clients extend the lease of life on their aging Chemical plants. However, one of his European clients Finding the investment required to upgrade the facilities in the plant so prohibitively expensive, decided to relocate the plant to India where the cost of upgrading the technology was commercially viable. A team of financiers approved of the plan to commission the plant in November 2012, while the CEO moved the State government to allocate land at a substantial subsidy and hired the best of Indian experts and engineers to oversee the construction of the project.

The entire project was lead by a Project Director with impeccable record for his technological insights and a no-nonsense approach to managing the project along very professional lines. His reputation had generated so much awe that no one dared to question him or his approach although a similar sized project undertaken by Reliance Petrochemical was concluded in under 70 weeks.

A few weeks down the road, the project schedules began to slip, resulting in cost overruns. Upon the reassurance of the redoubtable Project Director, the extra funds were mobilized and the meetings continued without too many questions. Unwilling to confront the issue directly, the members of the board began to register their concerns in a very oblique and guarded fashion.

Sapan, the CEO and the CFO felt uneasy at having to alert the Project Director about the grave risk to the viability of the project. While the CFO reported the progress to the investors and regulated the flow of funds as required for the timely completion of the project, the project review meetings continued to be conducted with the highest levels of professional regard. In one such meeting, the CFO expressed his helplessness to revise the projections of project outlay all too frequently and highlighted the needed for the Project Director to anticipate events better and give advance indications about slippages in the project schedule and the need for fresh capital infusion.

The Project Director took serious offense and protested to the CEO that the CFO was needlessly interfering in his work. He felt he could not compromise the quality of construction or the safety of the plant to save ‘a few Crores of rupees’ the CFO wanted and advised the CEO to caution the CFO to mind his own business. The CFO, on the contrary, felt it was very much his business to question the propriety of the fundamental assumptions underlying the project plan. He cited three reasons:

  1. Across industries, ranging from new product introductions, timely entry into new markets, commissioning of new residential space or bridges and highways meant for the public, are delayed. He registered his surprise at the lack the political will in the management to question a senior fellow member on the projections he made about the lead time for projects resulting in the associated cost over runs.
  2. Given that the single largest reason for the delay in projects of all kinds worldwide stems from a poor review of the estimates of time and efforts required to complete a project on time, why were the project plans not audited for its integrity ? If every purchase could be justified by the invitation of at lest three tenders, whey did it not apply to project estimates. Why was the board allowing itself to be held to ransom?
  3. Ironically, instead of taking the initiative to conclude the project sooner and vacating the scene, the overseas consultants were being paid an inordinate fee until the project was fully commissioned. While their expertise and money was essential, why was no one concerned about their returning home early.

Right from inception, the CFO had prepared himself for just this showdown to happen. If the risk of annoying the Project Director was very real, so was the opportunity for early commissioning of the plant and the release of attractive dividends to the shareholders.

He convened an extraordinary board meeting to deliberate on the merits of saving Rs 5 crores for every day the project was commissioned sooner. He summarized his calculations (see table) and appealed to the Project Director to supplement his techno-managerial line of reasoning with a sound appreciation for the financial risk and appraise the board of the need to fore go these savings.

Sapan appreciated the line of reasoning of the CFO but was visibly anxious.

Meanwhile some of the Board members found the reasoning offered by CFO worthy of consideration but were unwilling to challenge the statusquo. How many of us in the board would stand up to such an invitation to greatness; and save the Millions we are meant to safeguard for the benefit, not merely for the shareholder but, the society our posterity as a whole?

Quite like justice, every project delayed is a profit denied!


Shekarsan

Computation of savings of RS 5 Crores per day

  1. Additional investment required to crash the project schedule
  • Re-estimation of effort estimates and execution lead time for project completion
  • Additional investments in balancing equipment required to speed up the project
  • Creation of buffers to meet contingencies
  • Provision of incentives for early commissioning
  1. Avoidable heads of expenditure overrun
  • Cost of rework
  • Cost of interest on additional quantum borrowed due to overrun of the initial project outlay
  • Provision for penalties applied on delayed commissioning by suppliers and financiers
  1. Potential profit opportunity to from cash flows kicking in earlier than 100 weeks
  • Interest saved due to advancement in repayment schedules
  • Higher savings from the enhanced earnings during tax holiday period
  • Lower premiums paid on risk of project delays, currency and forward cover for the price of oil and Natural gas in the global markets


2 comments:

  1. You are Tamiler?
    Submit Your News in tamilers.com

    ReplyDelete
  2. yes my mother tongue is Tamil but I am not a Tamiler. If you wish to read this in Tamil , you are welcome to it . It is featured in the Nanayam of Ananda Vikatan that has hit the stands today . Cheers. Shekar

    ReplyDelete