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Language: English

Large Capex Projects: Solving the ROI Dilemma

 
 
 

Company: A.T. Kearney
Tag: Procurement
ROI
CAPEX


Striking the right balance between capital expenditures and financing options is key to maximizing return on investment in large capex projects.

A new steel mill, an offshore wind park, a mammoth aircraft carrier, a floating oil platform, a state-of-the-art manufacturing facility—these examples of large-scale capital expenditures (capex) are vastly different in nature but all face a crucial challenge: finding the right trade-off between capex cost and financing options to optimize return on investment (ROI).

Every industry has large capex projects, and besides the ROI challenge, they share many of the same characteristics:

Complexity. Not surprisingly, large capex projects demand a multitude of results—decisions made, technical problems solved, financing requirements assessed, supplier capacities evaluated, legal issues addressed. The list goes on and on, and not even the smallest detail can be overlooked.

Multiple stakeholders. Aligning the many functional stakeholders typically involved in large capex projects is a major task. While finance wants to ensure export credit agency (ECA) coverage, for example, procurement is looking for the best costs and supply security, and engineering is lobbying for the finest technical solutions. The burden increases when projects are led by international consortia.

Interfaces. The combination of functional and international stakeholders and different segments and procurement packages requires well-managed interfaces. Good communication is essential.

Negative supply-market shifts. Large projects can create market demands that may be detrimental. For example, the steel requirements can cause prices to rise and negatively affect the project's budget.

Bankruptcy risks. Negative market shifts, budget overruns, and delays can lead to significant problems—including bankruptcy. Since procurement comprises the lion's share of costs, a well-planned procurement strategy is crucial to a project's success.

 





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