A Dynamic Model for
Risk Characterization of
Mega-projects and its
Impact on Project
Financing
33'4 International
System Dynamics
Conference
Atanu Mukherjee
July 22, 2015
‘gn goa
DASTUR
oal. opt
AcuLead
The Mega Project Challenge
Multi-billion dollar
industrial projects
40 TT$ spend in 20
Energy years
Negative Returns,
Metals xX Project suspensions
and abandonments
Petrochemicals
Risk of cost & time
Transportation overruns:
Projects need to be structured, organized, financed and managed ina
way, which accommodates change, characterizes risk while minimizing
late cost, functionality and schedule impacts
(D>) | AcuLead
DASTUR
Understanding Risk based on the Dynamics of Mega Projects is Key
Interactions in mega
projects
Highly inter-coupled
Feedback driven
Non-linear nature
Lack of clarity on...
Understanding of project value
Ambiguity in the
understanding of Assessment of risk premiums
the dynamics
Structuring the project finance
f(D) | AcuLead
DASTUR
Current Decision Analysis Methods for Understanding Risk is often Inadequate
> Traditional mechanisms used to establish causal relationships are weak
...they ignore feedback effects, multiple interconnections, non-linearities, time delays,
and other elements of dynamic complexities
» Various methods to infer causality is constrained
....temporal and spatial proximity of cause and effect, temporal precedence of causes,
covariation and similarity of cause and effect
>» These methods lead to difficulty in large complex projects where
...cause and effect are often distant in time and space, actions have multiple effects, the
delayed and distant consequences are different than proximate effects
>» The assumptions in the traditional models are at aggregate levels
...are at higher levels of aggregation, underestimate the tail behavior and non-stationary
effects
(D>) | AcuLead 4
DASTUR
A Causality Based Approach to Modeling and Characterizing Risks
>» Understand cause-effect relationships in terms of
...attributions, feedbacks, delays and non-linear & higher order effects
> Understand how
....projects are structured, elements interact at project, macro and industrial sector level;
change, shocks and delay effects propagate through the project
>» Causality estimation based on facts, data and intuition in the context of
macro-industry dynamics allows to
....understand attributions, feedback effects and time delays in a iterative top-down,
bottoms-up manner in a “closed loop” system based approach
>» Frame dynamic models of project structures and interactions to
....infer patterns of behavior based on hybrid simulations using techniques from system
dynamics and traditional Monte-Carlo mechanisms
(D>) | AcuLead ;
DASTUR
Traditional method of
statistical risk modeling
Fails to provide meaningful
value in risk assessment due
to the highly inter-coupled,
feedback driven and non-
linear nature of interactions in
mega-projects
The unique and craft nature
of each project limits the
extent of reasonable analysis
based on correlations of
comparative data
Dynamic risk behavior
modeling
Associated risks can be
characterized, quantified and
monitored in a more accurate
manner
The transparency and
understanding results in
meaningful assessment of
dynamic risk profiles
Appropriately priced risk
premiums
Progression from Static to Dynamic Modeling of Projects, Shapes Project Markets
Project finance market
expansion
Larger institutional investors
for funding (e.g. insurance,
pension funds)
Enhanced market liquidity
for project finance
Greater financial innovation
and opportunity expansion
in fully functional project
finance markets
Transformative impact on the industry and society
(D>) | AcuLead
DASTUR
...We need a Framework for Structuring,
Organizing, Managing and Financing
Industrial Megaprojects for dynamic risk
understanding
>) | AcuLead
The Basis for Understanding Complexity in Megaprojects
Large engineering projects are complex because they tend to have
Multiple...
Changing...
Delays...
>» Shaping phases
> Stages of design
v
Procurement
v
Construction
v
v
Organizations involved
(consultants, contractors,
vendors...)
v
Possible sequences for
accomplishing the work
Interacting technical disciplines
>» Customer requirements
>» Performance priorities
(schedule, cost, technical)
v
Government regulations and
standards
v
Political Environment
v
Work scope
v
Technologies
v
Resource availability
v
Contractor productivity
v
Work quality
> Effect of macro-economic
shocks
v
In discovering rework
v
In experiencing full effects of
events and conditions that
impact the project
v
In perceiving true project
performance
v
In implementing management
responses
v
In project supply chain behavior
(D>) | AcuLead
DASTUR
A Two-Stage Framework to Model Large Project Dynamics
Market Feedstock Investment Technology Labor
Structure Organize Finance Manage Insure
Dynamic Behaviour, Risk and Uncertainty Characterization
Work ae done
rN Vv
" nae
discovery y
Obsolescence == Customer changes
Design Structure Hybrid Project Supply
Cedi olaeits Matrix Simulations Chains
Project Uncertainty Flexibility and
Databases Models Options
[D) | AcuLead
DASTUR
Project Work-Rework Cycle Model
{Resource, Time}
Work to be Work
done finished
{People, Productivity, Quality}
_ to be ¥ ag «Really done
jone
Work being done
Undiscovered
Rework
Rework discovery
Obsolescence rate
Customer changes
D
DASTUR
| AcuLead
Project Investment Causal Model Archetype
Pric€funas
5
Tice oe + Trrice SUPPY
T Funds.
Demand =
T shook +: + . + Tenoci SYPPY
Shockpemans ——————+ Demandrunds ——> Funds ir Demandgunas - SUPP! YFunds Supplyrunds Shocksuppiy
|
é " +t! .
\
\
\
Trrica pares Thrice iis 1
\
\
cosnay
(Drivers) +-------------
ee
These interacting loops of demand, supply with lags exhibit a stable or
unstable dynamic behavior over time
[D) | AcuLead "
DASTUR
Stage One Dynamic Model
Turis
+
Tec + + + Topo 28
Sho¢koerand ————> emandrunds —» Funds = Pemandyunds - SupplYiuncs ¢—— Supplyrunds *————_— Shocksuppy
S m z A
Trico == | Thee
Project
Project J Quality i
+
Policy Shock +t 1
(Govt Investment) ill is Capacitysien! !
f
Torun tl ty Project-
Price Completions
Pricesteet
4 Taay [oo Priceegyneen Technology
cpp —— —_} J -
+ F us * Shocks.eoy
Manufacturing 1, Demandseui —* Steel , = Demands! -Supp¥sce — Supple! ‘Shockperand Temten,
| a6 be | wo tll: Late | Toma
+ Urbanization e S = iu
[ Tete Tone ontird Demandeapicar—? Egpltech p= Demandeapieen - SUPPIYEge/tch me
—
: Teica i
Eesdatock -——————— Privette 2 is
= ‘Shock:
Snockss Sap
sath ee Shockpemand Ter
1ockpemans Tow, al
Ae , + Teno PO" +|I- *L ste | Tome?”
+ = = et me abe Jemanduarer -Supplyiase «— Suppl
Demandoe —+ Ore , = Demandore - Supplyor—— SUppIVoxe Demand’ Pemandisser—* LaBOr 4 Gals
Te mi OCs fc Tone
a
Tat
Feedstock mie. Trice: Pricetand Cand
[Picco
+
Shocksupsiy
a Shocksuppiy ‘Shockpermand T Land, a
‘Shockeman T cote, s | “| Tews 0
e sp, SuDdh 4 . - ge oo
a ee ee Demahdhang—? Land , = Demandyant - SUPPIYiand ¢ — SupplYian
+ Demand yay
Demande —> Coke , = dere - SUPDIYCxke ¢— Suppl Tsk =
Toro 9
(D>) | AcuLead 12
DASTUR
Stage Two Dynamic Model
struction
= =e Se ee ee ee ee =
i I Ramp - Oo ;
I I Design Fraction <Const I
[Fomplete to Start Construskion Net Believed Remaini
I Construction | Hitlng I
I I Construction Hiring nstruction Labour I
i I Adjustment Time Resource Deficit ,
1 pesign Hiring Design iekaned ! Pe atidaee I
| Adjustment Time Design Desired ! Construction '"11C™ I
I Effective Design oui bs I Desired WF I
tual Fraction of
I hd I Construction WF actyal Fraction of I
I Design Fractio I Construction Man Dayon \wijjingness to Chang)
6 Satistactor I Project Construction WF !
1 I
I an) Serer ! | Constitiction . =
I Desigif ScopePésign Erro I sre Browthronstru ition !
Fraction I Fraction red Construction i]
I i Lt pletion Delay I
Vy [Design Ren ass Desigh 1 fi iginal Work! |] Construction Construc} \, I
I Rate Generation Rate Design Time f todo Progress Rate Genera j nstruction Time |
1 Design Fraction Remaining. ! Construction Fraction Remaining |
Pesi Actually gl | cohscon Total Actually Done I
1 / Construction Time
! A Required !
I I I InitralConstruction i
gy Volume
I ! 4
I ES —— I ; _- Construction Fractio| !
ne Reported Doné <
Time to Discover so” I Time to Discover _Betleved Done p-lonstnctior I
! Design Rework I ! Construction Rewor A I
1 l Construction Effort I
Known Design Work Destetefior’ I ‘nown Construction Believed Remaining
I Remaining Design Work Believed Remaining I Work Remaining Construction Work i]
I Believed Remaini ! I Believed Remainin I
1 Engineering ; : Construction I
—_—e eee eee eee ee eee ee ee fll cella esllctlicmtilltilimtiicmtiantiictilattcntctilatiaticticatiatiictiiantttiond
AcuLead
D
DASTUR
13
Project Outcome Sensitivities to Changes
ng Project itivity Model
Engineering summary Deadline and Scope Engineering Workforce
2s
Initial Experienced WF 4.00 empl Initial Deadline
0
Initial Engineering Deadline 1,510.00 days nm x 2
eer yadiiaret 500 2,000 2,500 3 a
z
tin ir 0.08 ic * 10.
g SSierreess|
Rework discovery and morale seve of Wests
work fraction reported done | 300 TF SF SSS SESS SS
x s Fes
0.8
200
300 ite Engineering Progr
bec] O48 100: see
100 4, 1,200
0. 9 1,000
g 800
Resources: Hiring, Productivity, Training, Overtime 3 600.
400
ing Lag Training Time to
be Experience/Learning Curve #00:
4 a e ° og os § Se
at Da f> | —t—— » PPO LS SOS Lg
o 10 20 30 40 50 © 2020'30409060705090 0 10203040 5060708090 Engineering Cost (Million $)
‘empl days
days 0
18
16
i Maximum 9 Increase in| 9 Engineering Workforce “
ri ts 12:
10
1 r 8
as
ar <a F—— a] Dla > €
0.00 | 0.04 0.08, 0.00 0.04 0.08 *
0.0 0.20.40.60.8 1.0 0.00.20.40.60.91.0
tasks/(empl*day) tasks/(empl*day) 2
3 see Sf SP
SEEPS LPS S
DASTUR
AcuLead
Typical Questions and What If’s the Framework Helps Answer
Market Ri
d the market?
2 How would the commodity price evolve?
3 How would raw material availability and pricing
evolve?
Impact of availability and pricing of
4 > Land
> Equipment & technology
> Labor & workforce
Execution Risks
A How should the project be structured?
Impact of
2 > Timing and magnitude of Scope changes
> Delays in decision making
> Delays in discovering rework/changes
3 Impact of supply chain disruptions
Impact of unavoidable events
4 > Labor strikes
> Forces majeure
> Inter-contractor dependencies
(D>) | AcuLead
DASTUR
Is there an opportunity for investment in a project in
N= Na NS ONS
wn
BRON
. Potential return envelope
. Capacity bounds
. Market segments
. Price evolution trajectory
. Price bounds and sensitivities
. Raw material supply trajectory
. Raw material price envelope
. Impact of returns on project
. Feasibility of new projects
. Complete (EPC) and discrete
turnkey option
. Number of packages
. Difference in cost between
contracting options
. Cost impact
. Schedule impact
. Workforce impact
. Trade-off zone
Thus Shaping Megaproject Uncertainty through Flexibility Options
Dynamic Risk & Uncertainty
ha
Option to Delay Option to Sell Excess
Option to Expand Option to Abandon
Small Plant Alternative : .
Expansion option.
creates value 4,
/
Small Plant + Increased
Capacity Alternative Large Plant Alternative
/
Yandonment option
creates value
(D>) | AcuLead
DASTUR
Our Project Dynamics Framework and Platforms Expand the
Opportunities for Project Finance
> Project Shaping & Analysis
> Project Structuring
> Project Flexibility and Phasing
> Project Risk Modeling
> Project Ratings
> Project Monitoring
> Project Restructuring
(D>) | AcuLead
DASTUR
Project Finance Innovation
company A — > Investors
Project bonds <— subscribe
Company B —_ (Senior debt)
< RBI
Subordinated <— NDB* > Gol
debt AIIB™
Share risk
Equity
t_ +
Project Evaluation
and Monitoring Board
Company N (>
* New Development Bank
* Asian Infrastructure Investment Bank
Enabling the Creation of Competitive Markets for Project Finance
Megaproject Finance Requirements
Long Tenors (20+ years) Large Transactions / 500 MM$+ Large Risk Spreads
en
Current Under-Developed Project Finance Markets
Market Concentration Low Market Higher Agency Higher Risk
(Liquid Banks/IFC) Liquidity Costs Premiums
Dynamic Risk Understanding
& Characterization
kkk
Stage Gated Risk Narrowing Risk Megaproject Cost-of-Capital
Quantification Spreads Dynamic Risk-Rating Term structure
————_L—_L——
Large Market Competitive
Erquicity Many Market Players Cost-of-Capital Financial Product
(Pension Funds, Fls..) Innovation
Developed Project Finance Markets
(D>) | AcuLead
DASTUR
Conclusion
Success in Industrial Megaprojects is all about understanding,
characterizing, quantifying and managing risk across the project lifecycle
Understanding dynamic risk behavior and control points is critical in
allocation and control of risks
Understanding the dynamic behavior of projects during execution is critical
in understanding uncertainty, risk and change dynamics
If risk, uncertainty and change impacts can be characterized it can have
transformative effect on Megaprojects, including the markets for project
financing
Our framework for project dynamics is a comprehensive mechanism for
understanding complexity, uncertainty and change in Industrial
Megaprojects
(D>) | AcuLead 19
DASTUR
AcuLead
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