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Mantra for Entrepreneurial Project Management

Bhavesh ThakkarDy ManagerGammon India Limited

Decision Analysis for successful Project Investment in midcourse of

BOT Infrastructure Projects

Theme – Mantra for Entrepreneurial Project Management

Abstract

For any Projects selection, organization invariably undertakes Sensitivity Analysis, if project offers either

decent IRR or positive NPV. Sensitivity analysis particularly pivots on understanding few key variables

like revenue fluctuations in Toll etc and its consequences before finally agree to bid / sign the Concession

Agreement.

In midcourse, some process excellence or innovative methodologies may emerge to improve bottom line

or top line which may require considerable investment. Iloiu and Csiminga have devised methodology of

Sensitivity Analysis using the guided criteria of Switching Value and Sensitivity Indicator which proves to

be very effective tool for better selection.

Case Study to reduce Energy Costs of street lighting by using Power Savers, in Operation phase of PLC

which in turn can improve bottom line and enhances company’s brand value, was taken up in a 4 lane

divided road project between Rajahmundry and Tuni in Andhra Pradesh on NH 16 using this stated

approach.

The analysis provides the following major conclusions:

On Switching Value:

a) Up to Impact of 50% increase in Cost in Investment , IRR would be above the Cost of Capital

thereby NPV will be positive in these range;

b) But for any reason, Balance Concession Period as envisaged for this analysis gets reduced due

to capacity augmentation by NHAI or Concessionaire delays in implementing this feasibility

exercise by more than 28% of balance period, NPV would be less than zero

On Sensitivity Indicator:

a) Low sensitivity indicator ranging between 1.2% and 4.9% on cost of equipment and balance

project duration indicates positive NPV.

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Table of Contents

Sl. No Contents Page No

1.0 Introduction 3

2.0 Project Details 3

3.0 Case genesis of Energy conservation 4

4.0 Evaluating options 5

5.0 Field Experimentation 7

5.1 Fixture of Power Saver 7

5.2 Fixture of LED Lights 8

5.3 Comparison of Alternatives 8

6.0Financial model of project investment including capital

budgeting9

6.1 Method Approach 9

6.2 WACC analysis and project assumptions 9

6.3Identifying locations of Investment and evaluation of

alternatives10

7.0 Sensitivity Analysis 12

7.1 Identification of Variables 13

7.2 Calculation of effects of changing Variables 13

7.3 Sensitivity Analysis of risk factors: 14

8.0 Result observations 14

9.0 Conclusions 14

10.0 Acknowledgements 15

11.0 References 15

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1.0 Introduction:

Survival in infrastructure industry in an environment of highly unorganized section, fragmented, intense

rivalry, wafer thin margins amidst opportunities for executing Road projects but lacking in supply side

issues such as non-availability of professional management skill and insufficient equipment had brought

almost all the companies to an alarming situation because of cost overruns and declining profit margins

across the board

This is even particular especially when any investment proposal in O & M Phase of Project Life Cycle is

not keenly given due importance and as a result, good opportunity is lost for improving bottom line

especially when projects are being executed on Annuity basis.

A Case study conducted in our 100 Km Road Project which had approximately 40% of yearly expenses

towards Energy consumption bills. Feasibility studies states that investment of Rs. 19.7 Lakhs towards

installing Power Saver Equipment will yield around 25% savings in Energy consumption

These operational efficiencies if implemented, by infusing capital investment, will enhance brand image,

improve bottom line, and bring sustainability. Unless the scenario of any future impact due to likely policy

changes is evaluated it is likely that the decision taken in favorable condition may go haywire and

therefore Sensitivity Analysis, desirable tool, has to be undertaken using IRR and NPV

2.0 Project Details:

it is a 100Km long Operation and Maintenance Road Project of two continuous packages namely

Rajahmundry Expressway Limited (53 Kms) and Andhra Expressway Limited (47 Kms) being executed

by Gammon Infrastructure Projects Limited, a subsidiary of Gammon India Limited is in 15 years O & M

Phase slated to end in Nov 2019.

In O & M period, Concessionaire has to carry out the routine maintenance works such as Corridor

Cleaning, Reinstating the damaged / missing road furniture, median plantation, Street lighting, repairs to

pavement such as pot holes and crack sealing, re-doing the faded road marking, providing emergent first

aid treatment to accident victims, clearing the blocked vehicles on carriage way etc. besides executing

periodic maintenance works in every fifth year.

Among the above, Major component of routine maintenance activities constitute towards incurring the

energy charges of street lighting which is 42% of total monthly expenses.

There exists a scope of process improvement amidst customer dissatisfaction in the area of minimizing

energy consumption

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3.0 Case Genesis on Energy Conservation:

The Project site had provided Street lighting in all urban areas within corridor. Source of power for

illumination is APGENCO supplied electricity. Barring Toll Plaza location, no other location has any

standby power generation.

Package No of locations No of Poles No of bulbs (250 W)

AP – 15 ( REL) 14 504 880

AP – 16 ( AEL) 13 774 1157

Total 27 1278 2037

Table 1 – Details of Electrical Installations

The site are in receipt of customer complaints for the below par performance from operational

deliverables as stipulated in Concession Agreement.

The root causes of below par performance were evaluated using Fish bone method as drawn below:

Fig 1 – Fish bone diagram of Illumination for below par performance

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Key factor

Out of the above causes, barring Electricity Transmission issues all other parameters are man managed

with effective planning and execution. While experimenting, it is understood that electrical losses are to

the extent of 25% in transmission due to fluctuation of voltage termed as Spikes. The sudden voltage

fluctuations are not considered in inputs by any of the electrical appliances and thus these spikes go as a

waste of electricity and an alternate solution needs to be adopted to minimize wastage which in turn can

reduce costs and improve bottom line.

4.0 Evaluating options

Life cycle project management is necessary because of turbulent environments (particularly shifting

markets), the rapid rate at which technology changes, the increasing influence of the host communities

and stakeholders, and the environmental, social, safety and legal implications of capital projects (Jaafari

2000; Jaafari & Manivong 2000).

Fig 2 – Pictorial representation of choosing projects

To improve the performance, options are explored using Saaty’s analytical hierarchy process which

advocates usage of weighted average criteria.

Criteria and qualifying parameters for rating are tabulated below:

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Table 2 - Weightage criteria of qualitative parameters of illumination

Table 4 – Ratings assigned for qualitative deliverables

However, the evaluation of detailed investment analysis with respect to the balance time of the

Concession period needs to be computed for preferred lighting (existing setup (SV) lights of Power saver

vis-à-vis LED lights on conventional electricity

Physical features of the all the alternatives are studied with the existing provisions before zeroing on

choosing the options:

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But considering the customer need from the above survey and feasibility, two alternatives are possible

for enhancing the customer satisfaction and meeting road user needs;

Addition of spike utilization devices for smoother flow of electricity such as Power Savers

to the existing setup and assess the power consumption to minimize cost and

improvement in efficiency;

Introduction of new technology of LED lights by replacing the entire Sodium Vapor lamp

setup which has high investment cost but low power consumption to be evaluated with

reference to the balance time;

5.0 Field Experimentation

Field experimentation at site was undertaken for two options

5.1 Fixture of Power saver to the existing 250 W Sodium Vapor lamp being operated on

conventional basis;

Fig 3 – Power Saver Experimentation Fig 4 – Power Saver Experimentation

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Trial tests were conducted at our AEL Maintenance Yard using Servomax ‘Power Saver’ by fixing Power

saver to the setup without operating power saver to know the utilization of spikes quantum of energy for

conserving the electrical energy.

The readings were taken at one and half hour intervals to also study the fluctuation in voltages and

ampere readings

The Summary of the test results are tabulated as under:

Load Applied : 750 W

Test duration / day : 12 hours

5.2 Fixture of LED lights functioning on the normal conventional supply from APEPDCL

Since, the usage of LED lights is in developing stage of introduction at various places in the

country including our present town, Rajahmundry. Usage of LED lights is a deviated item from

the scope of works. As such, if at all, it needs to be initiated under NHAI approval for

modification of scheme. However, if adopted, the following is comparative table

5.3 Comparison of alternatives

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Table 7 – preliminary comparison of initial costs

In light of obtaining the similar savings in the power, investment of Rs. 41.0 Lakhs is far viable than

the investment of Rs. 10 Cr.

6.0 Financial Model for the Project Investment including Capital Budgeting

“Time is the essence of the Contract” and similarly timely investment is the key driver for

obtaining the first mover advantage to improve the profitability of the organization. Based on the

technical findings, it is the time to capitalize the opportunity for investment for obtaining smart

returns

The question remains how to tap the savings in energy wattage can be translated into

income by suitably investing in the system wherein the time and expenses have been

frozen.

6.1 Method Approach for analyzing the Project Investment

The viability of project investment is done in the following sequence

Calculate the Savings from the present billing trend;

Freeze Project assumptions like tax rates, risk parameters and other components;

Do WACC analysis and arrive D/E ratio;

Identify the locations of investment ;

Evaluate the project feasibility in different conditions;

Compute Cash flow statement based on the project assumptions;

Determine Internal Rate of Return and Net Present Value on all the parameters;

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Select the best option inclining towards 15% profitability;

Carry out sensitivity analysis;

6.2 WACC Analysis and Project Assumptions WACC Analysis is tabulated below:

Table 8 – WACC Analysis

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Table 9- Project Assumptions

6.3 Identifying locations of Investment and evaluating various alternatives

On evaluation of present energy consumption vis-à-vis theoretical gains, 21 locations are chosen

from 26 locations to be provided with Power Saver Equipment

Investment feasibility is evaluated for IRR, NPV and Cost Improvements in four conditions

separately for these two packages:

Debt funding in first phase followed by internal accruals in second phase

Debt funding in two phases

Entire Debt funding at the beginning of project

Own Equity at the beginning of the Project

Sample Result among the eight alternatives is depicted below:

Table 10- IRR and NPV analysis for one of the alternative

The summary results of all the options are tabulated below for taking appropriate decisions:

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Table 11 – Summary of Project Investment

With the above analysis, it was financially concluded to opt with the below recommendations:

REL Package: Debt financing in first phase and through internal accruals in second phase

AEL Package: Entire Debt financing in one go.

The likely net savings with this above proposal would fetch in improving bottom line by Rs. 7.1 mn in

balance concession period.

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Table 12 – Final Proposal of Investment

7.0 Sensitivity Analysis

The purpose of sensitivity analysis is

To help identify the key variables which influence the project cost and benefit streams

To investigate the consequences of likely adverse changes in these key variables

To assess whether the project decisions are likely to be affected by such changes

To identify actions that could mitigate possible adverse effects on the project

Sensitivity analysis needs to be conducted to understand its impact on both financial and

economical internal rate of return. Model suggested in this risk evaluation method is based on

the Technical Paper submitted at Annals of the University of Petrosani, Economics by Mirela

Iloiu and Diana Csiminga

Sequence of steps to be adopted:

7.1 Identification of Variables

Considering the project under study, the author identifies two variables to assess the impact on

possible changes on the recommended proposal of IRR and NPV on the following risks:

Cost of the Assets due to delay in approval from Head Office;

Balance Concession period as the adjacent packages have already been awarded for six

laning works.

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7.2 Calculation of effects of changing Variables:

The values of the basic indicators of project viability (EIRR and ENPV) should be recalculated for

different values of key variables. This is preferably done by calculating sensitivity indicators

and switching values which is reproduced below:

Table 13 – Explanation of SI and SV

7.3 Sensitivity Analysis of risk factors:

Financial Model for Price increase of 10% and duration reduction by every one year is prepared

and analyzed using the above formula and obtain the following results:

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8.0 Result Observations:

Price Variable:

The values obtained in Sensitivity Indicator are far less than the discount factor of around 12%.

As such the price is not critical for both the packages as indicated in Sensitivity Indicator

On the price front as indicated in switching value, unless increase in prices vary minimum around

50% to have NPV Value zero equivalent to Cost of Capital.

Duration Variable

The values obtained in Sensitivity Indicator are less by around 8 ½ percent as such price is not

the critical issue

However on the duration front, switching value indicates that no economic value will be added to

investment proposal, if duration reduces by 20.40%.

9.0 Conclusions:

As a result, Rs. 71 Lakhs can be saved providing annual savings of around 12% in the balance

concession period of 7 years with Positive NPV and IRR 35%.

Up to Impact of 50% increase in Cost in Investment, IRR would be above the Cost of Capital

thereby NPV will be positive in these range;

But for any reason, either Balance Concession Period as envisaged for this analysis gets

reduced due to capacity augmentation by NHAI or Concessionaire delays in implementing this

feasibility exercise by more than 28% of balance period, NPV would be less than zero

Due to cost constraints amidst economic slowdown, Company could not envisage this proposal

till now and thereby great opportunity is lost now due to balance concession period being only

five years. However still, if management pursues, it can have process improvement to fulfill green

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objectives and at the time of handover, these power savers can be shifted to other project sites to

have positive economic value added scenario

Thus leveraging PM methodologies and leadership skills can launch new innovations at the

earliest possible time and gain competitive advantage.

10.0 AcknowledgementsThe Author thanks PMI for giving the opportunity to present the paper. The Author also thanks

entire team of Rajahmundry Site team comprising M/s. Bhagavan Raju, and other team members

besides GIPL Management for facilitating this experimentation to give way for this new thought

process. The Author thanks Mr. D. V Prasad, Power tech solutions for permitting his equipment

at site for demonstration and evaluation. The Author also thanks Mr. M. U. Shah, member- BoM

for his constant guidance and encouragement in submitting this paper. The Author also thanks

various authors shown in the references for providing their various valuable insights in their

respective fields to culminate this overall innovation into possible new thought process of

sustainable project execution

11.0 References:

1) Concession Agreement signed between REL / AEL with NHAI, Asset Deliverable Criteria(2001) , Appendix A of Schedule I,

2) European Renewable Energy council, Green Peace (2007), A report on Indian National Energy Scenario

3) Giedrius Grondskis, Alfreda Sapkauskiene(2011) – Cost Accounting information use for product mix design (Eknomica IR Vadyaba,2011:16)

4) Jack R. Meredith, Samuel J. Mantel (2010)- Text book of Project Management, a Managerial approach, seventh edition

5) L. Dwayne Barney Jr., Morris G. Danielson(20034) – Ranking mutually exclusive projects – The role of duration, The Engineering Economist, 49 , 43 -61

6) ManTech Associates(2012), Catalogue on Servomax Power Savers by, pp1-3

7) Mirela Iloiu, Diana Csiminga(2009) – Project risk evaluation methods – Sensitivity Analysis , Annals of the University of Petrosani, Economics, 9(2), 2009, 33-38

8) Project Management Institute(2013), “A Guide to the Project Management Body of

Knowledge”, fifth edition

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