Large capital projects, with their multi-year timelines, changing requirements and complex procurement issues, are inherently risky, warns PwC. "They require diligent oversight from management and the board, given the common occurrence of budget overruns and their effect on the company's financial health," says Jonathan Cawood, Capital Projects Leader for PwC Africa.
"Boards have the responsibility to oversee an organisation's strategy and key risks. Capital projects fall squarely within the realm in the light of their significant costs and the business implications of delayed or over-budget projects," says Cawood.
He points out that lack of oversight from the board can result in severe consequences, For example, in the power sector, regulators have rejected substantial portions of capital funding requests in situations where they believe management and the board could have exercised better oversight of costs, schedules and risks.
Any institution that has ever undertaken major capital building projects knows they almost always take longer and cost more than expected. Unless strong project controls are in place, project owners often don't realise the severity of delays and cost overruns until well after a project has foundered.
How a board and its management handle the various issues on a capital project go a long when determining the success of the project, he says.
A recent analysis carried out by PwC of 52 capital projects missteps at public companies showed that after a public announcement of a capital project delay or shutdown, a majority of companies experience a steady decline in the share price. By the three month mark following the announcement, the declines in price averages 15 percent. In the most severe case of the companies analysed, one experienced an almost 90 percent decline in share price.
While cost overruns and delays have always been serious issues, companies have become increasingly concerned about them since the recent economic uncertainty. A new report issued by PwC, 'Correcting the course of capital projects', states that mega-projects usually exceed their budgets by 50% or more. Also, large projects tend to be risky with some exceeding $1 billion over many years and encompassing many moving parts, resources and contractors.
"In emerging markets, such as Africa, project developers also face unique problems, including language barriers in contract negotiations, different legal standards, a greater likelihood of political interference, and the need to import skilled labour, equipment and materials."
A number of infrastructure projects have been rolled out across the African continent. The Industrial Development Corporation has invested a total of R6.2 bn in 41 projects across 16 African countries in 2012, the majority of these being in mining, industrial infrastructure and tourism.
Within South Africa, the Government is on track to spend in excess of R4-trillion on infrastructure in the near future, focusing on rail, roads, water, energy, communication and sanitation.
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