Downside to mining boom times

The Melbourne Age, April 15, 2006

INADEQUATE planning and a lack of skilled workers will result in many hundreds of millions of dollars being lost during this resources boom as major capital projects run late and get into difficulties during the start-up phase.

The losses will result in some projects becoming financial liabilities, which will either be mothballed or will destroy more shareholder value than they create, according to a leading consulting engineer.
And that is only if the project can actually be built, because the number of projects lined up for design and construction would need far more in skilled human resources than is available in Australia.

"Think back to the last investment cycle and you can think of several (projects) that failed because of poor start-up," said Skipp Williamson, the chief executive of Partners in Performance.

PIP specialises in getting large plants to run smoothly and has been called in on a number of high-profile projects such as the Bulong and Minara nickel plants and BHP's now-defunct HBI operation.

Ms Williamson said that many projects ran into trouble after completion as they ramped up production and, depending on how long it took to get right, that was where heavy financial losses could accumulate.

"If a project takes 18 months to ramp up to planned production instead of, say, nine months, they might have blown 40 or 50 per cent of the net present value of the whole project.

"Much of the value of the project lies in getting it right as fast as possible yet, while companies spend tens, sometimes hundreds, of millions of dollars on the design and engineering side, they spend insufficient amounts on planning and training for the ramp-up and operation phases."

While the engineering and construction side has become scientific, many companies tend to gloss over or even ignore the operational necessities.

"The money is made in the attention to detail," Ms Williamson said. She said companies needed to delve deep into the detail of how the plant was going to be run, what was expected of it and the personnel operating it before ramp-up began.

A common mistake is to look at the organisation chart for an operating plant and hire those people for the start-up, Ms Williamson said. "Start-ups are usually chaotic, and if one or two things start to go wrong then there is usually no one there to pick up the pieces."

However, an increasing number of projects were taking longer getting to the ramp-up stage because contractors could not find the skilled people needed to do the work, said Tony Barry, national president of the Association of Consulting Engineers of Australia.

While there are 270,000 engineers in Australia, half are working in other industries not related to project delivery. Of the rest, 100,000 were in management positions, leaving about 30,000 in the technical field doing the work, Mr Barry said.

When escalating materials costs were added in, the result was that projects might not be worth pursuing, he said. "As the costs rise, some projects simply will not proceed. The clients will take the view that the risk is too great at this point in the cycle and will decide to wait."

Mr Barry said delays in completion caused extra costs to mount quickly. "If you have spent $400 million of a $600 million budget and there is a six-month delay, that's half a year at 7 per cent on $400 million. And there's the double negative that income is not being generated.

"If it's a coal loader designed to carry 10,000 tonnes an hour, the revenue forgone in a six-month delay works out to a very big number."

Source: The Melbourne Age, by Ian Porter, April 15, 2006

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