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One billion Dollars. Seven billion Dollars. Tenbillion, 30 billion, 100 billion, 130 billionDollars! These numbers reflect neither the GDP of any particular country nor the marketcapitalization of any of the world’s largestcorporations. They are simply examples of thevalue of a single capital project (1 to 7 billiondollars) and of total project portfolios (10 to 130billion dollars) that have been committed to – inthe past 12 months alone – by government, quasi-government and private sector entities inthe Gulf Cooperation Council countries. Theyspan industries from real estate to infrastructure to oil and gas.

Thinking abouttomorrow: capital efficiencyin the GCC

Financial services

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But whilst spending on some capital projects within theGCC continues to shock, only two words can ensure itssustainability. Capital. Efficiency.

The entities commissioned to carry out the projects,whether government or private, are entrusted withabsolute power not only to deliver these projects, but todeliver legacies as well to their respectivecommissioners.

But with absolute power comes absolute responsibility,and extracting maximum value from each project orportfolio not only improves a company’s Internal rate ofreturn (IRR) or Return on investment (ROI) – it could alsomean the difference between delivering 130 schoolsinstead of100, five bridges instead of three. It couldmean installing rail networks that reach morecommunities, delivering critical lifesaving infrastructuresooner rather than later. The importance of these capitalprojects and portfolios cannot, and should not, beunderestimated. Because of their wide-ranginginfluence, they should have the complete commitmentof the project owners and governments – evenconsultants and contractors – to maximize their valueand ensure their success.

What distinguishes the GCC region from other regions isthe source of funds, which are predominantlygovernment-related and driven from oil and gas-basedeconomies. Many projects do not therefore take intoconsideration financing and interest when assessinghow capital efficient they can be, which could drivebetter business practice and capital project delivery.Many companies elsewhere in the world responsible fordelivering capital projects continually consider

shareholder value, driven by the need to be capitalefficient because of the availability (or lack thereof) ofproject funding. The GCC is not different because of anyreduced capital requirements for its projects, it isdifferent primarily in that there is a perception thatcapital is readily accessible!

As world dependency on energy and resourcescontinues to grow, what will drive capital efficiency inthe Middle East for years to come is not likely to beanything borne out of necessity but by choice. What isclear is that the same capital efficient mentalityemployed elsewhere around the world, if applied to thisregion, could reap immense efficiencies and savings.

What all of the entities that are delivering capitalprojects in the region have in common – in addition tohaving captured the attention of global businesses withtheir jaw-dropping capital expenditure figures – is theneed to deal with the challenges resultant from verycompressed timetables. For some, it may be a limited-year concession agreement during which they need tobegin oil refining operations, for others, it may be a rushto provide essential infrastructure for a vast populationthat has both social and political implications. Thereinlies the critical paradigm – in their rush to deliver theselarge capital projects to achieve a wide range of criticalobjectives, are project overseers truly maximizing valueor are they leaking away billions in cash that could beused for other projects?

With billions of dollars in the balance striving to achievethe optimum balance between cost, time and quality,project owners realize now is the critical time to shifttowards achieving all three in the most efficient waypossible.

To be or not to be (capital efficient)?Rushing to deliver projects may eliminate the most cost-effective procurement strategy, whether it be toprogress with project design to a more advanced levelto allow for more accurate tendering, or to limit privatesector involvement through longer-term focusedtendering (such as Public Private Partnerships) which canadd up to 12 months to the procurement process. Can

Whilst spending on some capitalprojects within the GCC continues toshock, only two words can ensure itssustainability. Capital. Efficiency.

A Middle East Point of View | Fall 2012 | 33

we select the appropriate procurement strategy,balancing time and funding requirements and creatingprivate sector opportunities that will diversify theeconomy? Or shall we simply progress with the front-end design, reducing overlap of design, constructionand procurement activities, to focus more on drivingexpenditure into the region’s local economies? Thequestion to answer is: do we have the ability and toolsto identify, quantify and maintain value throughoutdelivery? Simple math would indicate that achievingeven a few percentage points of efficiency willundoubtedly allow for billions of dollars in savings. Theanswer of course is yes, but some immediate measureswill have to be considered and taken before we can fullytake advantage of the concept of capital efficiency.

1. Recognize the difference between strategic versus commercial projects Many of the multi-billion dollar quasi-governmentalbusinesses (government-related entities) that areestablished to operate in line with leading private sectorcorporations are also mandated with delivering projectsthat are primarily for economic diversification anddevelopment of the region’s national populations. Otherentities are entrusted by their respective governmentswith delivering major civil and social infrastructureprojects because of the importance placed on timing –they serve as a safe pair of hands. The measure ofvalue – of what makes commercial sense versus what isa strategic, longer-term objective – is of a differentnature. However, once the commercial and strategicimperatives are agreed upon, the capital project deliveryobjective remains the same: deliver the projectrequirements within an accurately estimated budget, inline with the agreed timing for projected operations.

2. Defining value What is value? Is it ‘delivering within budget’ – whichcould be achieved through measures as far-reaching asvalue engineering of the design or accepting reducedproject quality during the course of delivery? Conversely,placing such emphasis on delivering under budget couldcreate a culture that values predictability over trueefficiency. Is value ‘delivering on time’ – where

commercial operational revenues could vastly outweighthe additional cost of accelerating and delivering theproject on time? Is it ‘delivering the industry’s leadingtechnological solution’ – where cost could be viewed asno object? Or is it to ‘maximize local participation’ forthe diversification and reinforcement of the localeconomy – accepting that this may cost more to thebottom line and result in delays to commercialoperation? The answer, of course, is not simple at aproject level. At a business-level, managing projects withdifferent objectives and maximizing value requires acommitted and experienced management team with theright information at their fingertips.

3. Do we have the data to truly be efficient? Many government and government-related entities havedemonstrated that there is an essential need to improvediscipline in terms of simple project and contractadministration, which will subsequently allow for projectdata to be collected accurately, simply and consistently.One specific oil and gas project offered a significantlyquicker return on its capital expenditure investmentbecause it was delivered later than originally planned,inadvertently benefiting from greater commodity pricingat the time of commercial operation (in this instance, itwas the cost of a barrel of oil). This is a simple exampleof an instance in which simply having access tocommercial data and the tools to consider them whenmaking decisions during project execution wouldsignificantly influence the project owner’s capitalefficiency.

Financial services

As world dependency on energy andresources continues to grow, what willdrive capital efficiency in the MiddleEast for years to come is not likely tobe anything borne out of necessity butby choice

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4. Effective and confident decision-making The best data in the world will not be of any value if it isnot comprehensive, nor analyzed in a consistent mannerthat allows executive management to make the bestdecision for the organization for the short- and long-term. The inherent linkages between projects within aportfolio, from timing and value of funding requirementsto commitment of resources and management andoperation of assets, must be recognized and consideredto drive decisions at a project-level that are truly capitallyefficient at organization-level.

5. Commitment to overcoming technologychallengesRigid Enterprise Resource Planning systems that havebeen developed over many years and designed withcontrols and software in mind to structure discipline,have now become the backbone of many organizations.This discipline can, at times, come at the expense ofvision in an organization looking to create a dynamicproject delivery system that can drive value in real time.This vision of capital project ‘nirvana’ could be a projectdelivery process that relies on everything: from usingestimating, cost, planning and contract data to virtuallyconstruct projects, to even utilizing qualitative andquantitative project site data via mobile technology todrive more accurate decision-making. The vision,leadership and investment required to truly capitalize on

all facets of technology to achieve the capability toconduct such analyses are sizable from a managementperspective – but easily justifiable when the cost savingsalone are fully appreciated and understood.

6. Overcoming a business culture legacy Real-time capital efficiency processes can help maximizeevery dollar, dirham or riyal, but will require amanagement team that thrives on being in a dynamicenvironment and that looks at the objectives of theoverall business and each individual project in parallel andwill be comfortable standing behind each decision,knowing it is in the best interests of the overallorganization for the foreseeable future. It also requireshaving personnel with the experience and expertise tooperate in an analytical and dynamic environment,supported by a top-down culture that is held accountablefor the success of each decision in the long-term.

7. Creating and embedding ‘challenge’ to achievevalue Each capital project’s business case has, within it,assumptions that attempt to balance and addresscommercial and wider-ranging strategic objectives forthe organization. These assumptions can be viewed as a‘snapshot at a particular point in time’ and should bechallenged and validated throughout the delivery of theproject by the organization, not just at the outset.External factors, such as the commercial environmentfor the organization, scope changes, delivery challengesexperienced, etc. all require a revisit and refinement ofthe business case. This can subsequently drive adifferent set of decision-making, to support a reviseddelivery plan, to achieve a revised definition of value forthe project. Each time the anticipated ‘value’ of theproject is revisited, the project’s risks (the downsideimpact on value) and opportunities (the upside impacton value) can be assessed and managed to achievementor resolution. This challenge creates a continual balanceof risk and reward, which may drive, for example, adecision to revise the contracting strategy that wasplanned at the outset of the project. Therefore, valueshould not be viewed as a ‘frozen target,’ rather –through a focus on consistently driving capitalefficiency – it can be a target that is continually revisitedto ensure it is achieved.

Technical, commercial, financial andcorporate support functions operate insilos – not by design, but becausehistorically they have operated in thismanner and they are now attemptingto instill controls across this silostructure to deal with the challenges ofrapidly increasing growth

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Financial services

8. Understand the capital efficiency implicationson the entire life cycle A lot of the discussion around capital efficiency isfocused on the deployment of capital, but one has torecognize that the actual value of the initial capitaldeployed is not necessarily indicative of its importance tothe overall project. For example, the earlier stages in theproject (such as front-end design or scope definition)have a profound impact on the project definition anddetailing of the scope that will drive the cost andschedule objectives, albeit with limited capitalexpenditure occurring at that point in time. Similarly,with respect to management and operations of theasset, not achieving quality objectives in the interest ofreducing costs during project delivery may have a hugeimpact on operations and maintenance costs andultimately the valuation of the asset.

Embracing capital efficiency The values attributed to capital projects in the MiddleEast are nothing short of staggering and demonstratehow capital-intensive industries in the GCC are, and willremain, for quite some time. Throughout the GCCregion, organizations have not been able to groweffectively and organically, due to the immense pressureto deliver increasingly large and growing capitalprograms. Technical, commercial, financial andcorporate support functions operate in silos – not bydesign, but because historically they have operated inthis manner and they are now attempting to instillcontrols across this silo structure to deal with thechallenges of rapidly increasing growth.

While anyone in executive management will agree thatcapital efficiency analyses needs to occur at both theproject and portfolio level (across projects), the actualplanning and management of large capital projects iscomplex in itself, with many variables and uncertaintiesthat need to be identified, assessed, analyzed,quantified and estimated. To truly be capitally efficientrequires a complete commitment by the organization toconsistently collect and consider the right inputs –accurate data and metrics, appropriately from the right

phase (e.g. planned costs during early design, forecastcosts during execution, commercial and market data) toprovide the right answers and to allow effectivedecision-making to be an output.

Time and again in the region, we have seen an erosionof capital project and shareholder value during theexecution of these major projects. In its most simplisticform, focusing on capital efficiency and value can drivealignment across a myriad of departments and functionsin organizations – when questioned as to why this isneeded, the justification for change across these samedepartments and functions becomes easy onceeveryone recognizes the answer is ‘it will save us lots ofmoney’. Effectively assessing capital value and planningcapital effectively creates clarity across the organizationand supports decision criteria for the long-term benefitof the organization. It will more than likely provideorganizations with the best possible chances ofachieving their future objectives: success.

by Rizwan Shah, managing directorCapital Projects Advisory, Deloitte Middle East