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Management Side
Week of 6 January 2020: Do low interest rates make for sloppy capital projects?

Email Jim at jthompson@ipulpmedia.com

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I have been around long enough to remember when retail interest rates were in the +20% range. At the time, corporations were not usually being charged at these levels, but they did reach into the mid-teens. The usual reaction at that point was not to do capital projects, but to wait. Even if corporations were self-funding, they often waited because they could make larger and safer returns with their money at interest in the bank.

Today, interest rates are trivial, even for construction loans. Gone are the days when there was a sharp focus on construction interest costs. In those days, not so long ago, there were all sorts of financial instruments to employ (and earn a return) on unspent construction funds while the project was built. The intention was to reduce the overall capitalized interest expenditure. I remember a time when the project team did a weekly update on what capitalized construction loan interest was doing to the total installed costs of the project. The idea was to keep the team focused on completing the project quickly and efficiently,

Without the capitalized interest rate driver, I think some projects are losing one of the tools needed to keep them moving in a most efficient manner. Why go fast when rates are low? Going slow increases the costs, for the team may not have the focus required to push constantly for the most economical solutions.

There is an excellent case unfolding here in the United States right now. At nearly the same time, two different companies announced the construction of recycled paperboard machines. One of those projects, executed by a company with a high energy level, ended 2019 with one quarter of excellent production results. The other, the last I heard, is projected to start up in early 2021, likely about a year and a half after the first. Higher capitalized interest costs may have helped the second to improve its schedule.

My experience says perform a project as fast as possible without being reckless. This results in the best projects, not only during construction, but for years to come. If the project team is intently focused on the project process details, costs and schedule, the team will do the best project. This has been proven time and again.

It is just like sports. Teams that play to win, win. Teams approaching a game casually often lose. This is why teams that have a long winning streak often are defeated by an underdog. One team was not taking the effort seriously.

I once reviewed a papermachine that was being removed and sold to a third world country. It had been rebuilt 3 times in its 40-year history. Every rebuild was the "last" of that particular technology. Apparently the mill was so cautious that not only did it not buy "serial number one" of a given technology, they waited until the particular technology was nearly obsolete before it committed.

It is like, I have heard it said, like learning how to pilot an airplane. You cannot learn how to fly with one foot on the ground. You have to commit.

Today, projects are suffering because timeliness of completion has lost a bit of its edge due to cheap money. Don't let this happen to your company.

For safety this week, fast does not have to be a safety problem. Lots of rapidly built projects have excellent safety records.

Be safe and we will talk next week.

________

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