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Screening Capital Projects

Thank you for your interest in this information. - Paul    

In screening capital projects, the first step is to determine the 4 or 5 key obstacles to project success. Whether you are an owner who is thinking about a project, or a developer who is thinking about promoting a project, or a contractor who is thinking about getting involved in a project - everyone should establish their own screening capability. The purpose of the screen is to be "selective" in project pursuit. Selectivity increases the efficiency of applied early funds in that it reduces the waste of funding projects that fail due to attributes that could have been identified early and thus avoided.

The second step is to define further screens that are important to your particular industry. The process should be one of identifying the various elements of the project and where they stand from a "probability of success" standpoint. One primary goal of any screen is to identify any "showstoppers." Showstoppers must stop further consideration of project pursuit IF they cannot be mitigated to the point of moving them from a showstopper category to a "manageable" category. Most of the screening is "risk identification" and plays a significant role in the risk management of the project. This risk management process should be identified early and "maintained" during the project early stages as well as through implementation and even through the project life-cycle in some cases.

I use a screening process made up of several elements:

• Quick screening is mandatory for early analysis of a project. It should not take long (less than 1 hour), but should be effective in eliminating projects from further consideration that do not come up to certain "manageable" standards.
  • An example of the quick screen would be the following: regulatory issues, financial viability, political will, deal structure and partnership management. These can be replaced by your key 5 areas that will determine for you whether you should consider a project any further. If a project makes it through this screening (example below of one of the above) then you are ready to proceed to the next screening, which you can call an "initial screen" for purposes of differentiating it from the "quick" screen. In it you should identify the top 10 critical areas for further project consideration, such as competitive advantage for example.

The results of the Quick Screen Analysis should indicate one of the following actions: Continue with the analysis, or drop the pursuit (if in an owner or developer role, or make a "no bid" recommendation (if in a contractor role).

The score should indicate overall where the project "stands" in the analysis. If it ends up averaging a High or Medium Potential then one would go to the next step... the Initial Analysis Summary (Assessment). This is where you can "weight" specific elements of the analysis to craft a finer resulting basis for continuing or dropping. This is where your senior management can have input into what criteria they deem to be more important and can influence the outcome of the analysis to favor their desired attributes in projects they wish to pursue.

Initial Assessment

CRITERIA	Weight	Score	Weight	Max	% of
ASSESSED			Score	Score	Max	Notes:
Competitive Advantage	9	8	72	90	80	We are positioned to be sole source for the project.

Another area of screening criteria can come from the "business" area such as legal & regulatory issues, environmental impact, financial feasibility and so on. This should follow the initial screeing IF the score is such that such activity is worth pursuing. Let's take those three plus one, for example, and further define areas that would categorize them.

Should the top 10 areas of concern in this area add up to a High or Medium Potential, one would go to the Business Summary (Assessment). If Low Potential, discussions would be held prior to going to this next section. Of course, if a Showstopper existed, you would discuss and possibly dispose of the project from further consideration if it could not be mitigated or changed into another category.

Business Assessment

CRITERIA	Weight	Score	Weight	Max	% of
ASSESSED			Score	Score	Max	Notes:
Legal/regulatory issues	7	6	42	70	60%	Well understood but need verification.
Environmental impact	7	3	21	70	30%	Jury still out on EIS - not started yet. Some resistance.
Financial viability	10	3	30	100	30%	Jury still out on finance - not well known.
Political support	9	6	54	90	60%	Strong local but a few environmentalists objecting.

If the Assessment indicates it needs more time or more information before it can truly be evaluated, so be it. You can move on to the Profit Screen. In this screen, you should attempt to evaluate the profitability or risk/reward for money invested. Examples of this can be as follows just to name a few (4 out of what should be a list of 10 of your choosing):

Again, with a score that places the project in the High to Medium Potential category, one would go to the Profit Summary (Assessment). If Low Potential or a Showstopper existed, you would discuss with senior management and decide to proceed with further evaluation or dispose of the project from further consideration. An example of this follows:

Profit Assessment

CRITERIA	Weight	Score	Weight	Max	% of
ASSESSED			Score	Score	Max	Notes:
Proposal/development cost	10	8	80	100	80%	TBD - using 0.5% of TIC as guideline.
Contract Terms & Conditions	9	3	27	90	30%	Minimal to date
Scope definition	8	5	40	80	50%	TBD.

Now you are ready to "add it up." You can take the Screen Summary and note the compelling factors. You would do this because you have evaluated the project through several screens and it has made it through. Since it was not disposed of by the rules of this screening, it is a High to Medium Potential project. You validate this by the following example:

Screen Summary (Assessment)

CRITERIA	WEIGHT	MAX	% OF
ASSESSED	SCORE	SCORE	MAX	Notes:
B. Initial Screen Analysis	629	880	71%	Medium to High Potential
C. Business Risk Analysis	435	820	53%	Medium Potential
D. Profit/Performance Analysis	491	980	50%	Medium Potential
TOTAL	1555	2680	58%	Medium Potential

At the bottom of this assessment you should list two areas: compelling positive factors and possible fatal flaws.

I have developed an additional Screen for Project Finance. If the project is to be "project financed" by definition - and not corporate project financed, then there is another screening to determine if the project is truly capable of gaining project finance funding and support. The Project Finance Screen consists of two sections: checklist for successful project financing and a Lender Credit Risk Appraisal (which is what lenders will look for and demand prior to funding). Both of these must be carried out in detail prior to chasing (pursuing) a project development that is not able to attract financing. It assists in determining what enhancements may need to be put in place to make a development project attractive to financing. An example of both screens are below: ( a sample of 6 out of more than 30 on the checklist)

Checklist for Successful Project Financing - Screen

Project Finance Checklist		YES	N/A	NO
Screen Criteria	SCORE	1	N/A	0
A credit risk rather than an equity risk is involved.		1
A satisfactory feasibility study and financial plan have been prepared.				0
The cost of the product or raw material to be used by the project is assured.		1
A supply of energy at reasonable cost has been assured.				0
A market exists for the product, commodity, or service to be produced.		1
Transportation is available at a reasonable cost to move the product to market.			N/A

Lender Credit Risk Appraisal - Screen

Project Finance Checklist		KNOW	DON'T KNOW
Screen Criteria	SCORE	1	0
1. Management
What is management's objectives?		1
How do they plan to achieve them?			0
What are management's financial and operating policies?			0
Has management worked in the past, and if so, how successful in implementing?		1
Has management provided for unforeseen events?			0
2. Level and stability of earnings.
Demonstrate ability to generate good revenues consistently?		1
...etc.

When the above are assessed fully, then you REALLY understand the project...and, you should. Before making any investment, either as an owner or developer or contractor - you MUST understand your project and all the ramifications if you want to manage the risk and perform successfully in meeting expectations. As they say, "Don't leave home without it!" This should be your attitude - don't do a project without properly "screening" it to fully understand it.

Should you have any particular question regarding screens and how they work, please e-mail me. - Paul

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