Risk Management in Infrastructure Needs Improvement as Cost Overruns Surge

The recent financial and economic crisis has had an adverse impact on the Infrastructure sector, this downturn is finally turning the corner.

In late 2014, The World Bank Organization stated that its financing commitments in roads, bridges, energy, clean water, and other critical infrastructure projects grew to US$24.2 billion for the 2014 fiscal year, up from US$16.7 billion; this 45% increase from the previous year was due to increased demand from developing countries, but also needed as there was an overall decline in private and public-private partnership (PPP) investment in infrastructure across the developing world. Investments in infrastructure are a major encumbrance on a country’s gross domestic product. When cost estimates are compiled inaccurately, they result in an incorrect ranking of bidders that starts the process of a second-rate project being selected and implemented. This makes it difficult to manage these large infrastructure projects because once started – politics, private interests and economics makes it hard to stop; this leads to cost overruns and further increases the burden on a country’s GDP.

From complex multimillion dollar Information Technology projects to the transportation infrastructure sector, the construction costs overrun is on average 25% higher than forecasted at the time of approval. With project overruns frequently in the headlines, such as:

  • Transbay Transit Center the $300 million overage on the Grand Central Station of the West
  • Union Station in Toronto, Canada is $80 million over the $795 million budget
  • Gezhouba Dam Project China – 337% over budget
  • N2O Patrickswell Cork in Ireland – 370% over budget
  • Verrazano-Narrows Bridge in USA – 380% over budget
  • Humber Bridge in UK – 270% over budget

Project Managers, Owners and Financiers must ensure that The Lack of Managing Risks does not grow into budget conflicts or create barriers to a country’s’ development.

A majority of overruns are foreseeable and avoidable due to a lack of professional, forward-looking risk management. Estimated direct value losses due to under management of risks for prospective large-scale projects exceeds $1.5 trillion over the next seven years. Large infrastructure projects lack key management of risk abilities in practically all stages of the value chain and throughout the projects’ life cycle. With frequent poor risk assessment and risk allocation occurring in the front end engineering design (FEED) phase that perpetuates through to the later stages of the project; only result in higher materialized risks and financing shortages. The development, structuring and delivery of today’s infrastructure projects is extremely complex and the long-term reputation of such projects requires a strategy that mitigates the uncertainty and huge variety of risks that the owner and project team are exposed to over the project’s life cycles.

Frequently, project teams have been inclined to link construction project success with the three aspects of time, cost and quality. Cost of risk is a concept that many construction projects or organizations do not pay attention to, despite the fact that it is one of the largest expense items. Cost of Risk may become obvious during construction and continue after turnover of the project to the Owner, who must then spend additional funds to mitigate the realized risks. Authorized Change Orders during the contract provide the appearance that the project was completed within cost, but the reality is that the final cost of the project is now greater than the forecasted budget when the project was proposed.

Paying later for a modification always costs more as the project progresses, than if assessed, addressed and planned for during project initiation.

Todays’ infrastructure projects involve a large number of stakeholders that enter the project life cycle at different stages with different roles, risk-management capabilities, risk-bearing capacities, responsibilities and interests. This complexity requires the division of roles and responsibilities among the various contractors, operators and vendors; thereby producing significant interface risks among the various stakeholders that materialize throughout the life cycle of the project; these must be better anticipated and managed from the outset. Appropriate front-end project planning is critical in shaping the project’s risk profile so it can be managed during execution. Execution has to be about aggressively mitigating the risks that emerge and know what risks are inherent to a project and to what degree of freedom a project manager has to shape the risk profile before committing additional funds.

The lessons learned process at the end of projects reveals that risks which materialized in later stages of a project were actually caused in earlier stages under different responsibilities. This requires an end-to-end risk-management view, as opposed to a specific process-step responsibility. There must be a greater emphasis for risk-management processes from the outset of a project and for these processes to be applied and continuously developed throughout the life of the project.

Project risk management should deliver a clear, quantified review of the risks associated with costs, performance and schedule that allows the project team to work within effective timeframes and a more realistic budget. The outcome is that the stakeholders and financing partners will have increased confidence in the management approach and ability to make project decisions with greater certainty. Strategy and risk-related processes need to be strengthened, and the governance and organizations’ risk cultures enhanced. Risk management is one of the nine knowledge areas propagated by the Project Management Institute. Risk management in the infrastructure context must be a comprehensive and systematic way of identifying, analyzing and responding to risks that achieve the project objectives. The project’s successful completion is dependent on thorough planning and execution that contains contingencies and mitigation of risks that deliver a project within budget and schedule.

Implementation of a state-of-the-art risk management approach for infrastructure projects needs to reflect the idiosyncrasies of the industry that accepts a forward-looking, life-cycle-oriented risk assessment that produces insights into the root causes of identified and potential risks at the beginning and throughout the project. This should be followed by an accurate understanding of the stakeholders’ capabilities, their preparedness to take on and actively manage certain risks, the respective allocation and costs of these risks and the risk-ownership structure. By adopting this state-of-the-art risk management approach, savings potentials will be realized in these large infrastructure projects. The integration of the risk management system within infrastructure projects must be concerned with the progress of the project and permeate all areas, functions and processes of the project.

With infrastructure projects ramping up around the world – many using public sector funding; it is critical to deliver these projects on time and with the budget that was forecasted by the respective agencies.

  • Philippines has nine water related projects in the pipeline until 2020.
  • Water reclamation projects are quickly increasing, requiring a greater level of co-ordination between government agencies and a better understanding of the economic drivers influencing treatment or re-use and determining the means of paying for the required infrastructure.
  • Taiwan has begun a multi-billion dollar endeavor to turn six of its wastewater treatment plants into resource reclamation centers for its industrial customers.
  • Gabon National Infrastructure – has embarked on the implementation of its masterplan over a 15 year period. Its priorities are to increase industrial capacity and process raw materials locally and sustainably manage the country’s resources and economy for its 1.5 million citizens.
  • A Deep Sea Trans-shipment Port in the Republic of Sao Tome e Principe is to be developed and constructed in phases under a PPP model with China Harbour Engineering Company Ltd (CHEC)
  • India and Germany signed a deal this month to fast track business approvals to make it simpler for German companies operating in India. Eighteen (18) Memorandum of Understandings (MoU) were signed for cooperation in the fields for civil aviation, railways etc..
  • Shell Offshore Inc. recently awarded a development of Subsea Infrastructure to Technip in the Walker Ridge area in the US Gulf of Mexico.

 

Infrastructure Funding Institutions

Inter-American Development Bank – focused on Latin America and the Caribbean

IDB assists countries take on major infrastructure projects that are complex and knowledge focused on best technology through customized, long-term loans that enhance competitiveness, sustainability and productivity within the Energy and Renewable Energy, Transportation, Public-Private Partnerships andWater and Sanitation sectors.

 

 Asian Infrastructure Investment Bank

The AIIB is an international financial institution that is focused on supporting infrastructure construction in the Asia-Pacific region.

 

BRICS Development Bank – renamed to the New Development Bank

This is a multilateral development bank operated by Brazil, Russia, India, China and South Africa. The aim of the bank is to mobilize resources for infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries.

CONTACT US

We're not around right now. But you can send us an email and we'll get back to you, asap.

Sending

Log in with your credentials

Forgot your details?