Constructability and Peer Reviews
Infrastructure projects are high on governments’ agendas, and the infrastructure-development and investment pipeline is huge. The current global project pipeline is estimated at $9 trillion, one-third of it in Asia. India is expected to spend some $550 billion on large-scale projects over the next five years, half of which will be in the energy and utility sectors. Developed economies also have significant infrastructure plans. The United Kingdom, for example, has identified an infrastructure pipeline of over 500 projects that is worth more than £250 billion.
However, major infrastructure projects have a history of problems. Cost overruns, delays, failed procurement, or unavailability of private financing are common. The final cost of the much-anticipated Eurotunnel between the United Kingdom and France, for example, was significantly higher than originally planned, while the Betuwe cargo railway linking the Netherlands and Germany came in at twice the original €2.3 billion budget and more than four times the original estimate. Nor are these problems confined to the past. Today, the construction of Kuala Lumpur’s new airport terminal, for example, is facing huge overruns and significant delays following frequent design changes. In our view, most overruns are foreseeable and avoidable. Many of the problems we observe are due to a lack of professional, forward-looking risk management. Direct value losses due to under-management of risks for today’s pipeline of large-scale projects may exceed $1.5 trillion in the next five years, not to mention the loss in GDP growth, as well as reputational and societal effects.
The structuring and delivery of modern infrastructure projects is extremely complex. The long-term character of such projects requires a strategy that appropriately reflects the uncertainty and huge variety of risks they are exposed to over their life cycles. Infrastructure projects also involve a large number of different stakeholders entering the project life cycle at different stages with different roles, responsibilities, risk-management capabilities and risk-bearing capacities, and often conflicting interests. While the complexity of these projects requires division of roles and responsibilities among highly specialized consultants, this leads to significant interface risks among the stakeholders that materialize throughout the project, and these must be anticipated and managed from the outset.
Project Risk across the Infrastructure Lifecycle
A life-cycle risk-management approach involves making decisions using a risk-based perspective. Specifically in the earliest design and planning phases of a project, this may require a conscious effort to identify, assess, and, ideally, quantify the risks the project will be exposed to across its life cycle. This includes reflection on potential adverse circumstances and scenarios. Problems often arise because contractors either fail to meet their contracts, resulting in cost overruns, delays, and defects. In summary, during project execution, the key risks for the owner sponsor or developer are related to contractual default, claims, keeping public political stakeholders aligned, and monitoring for any mismanagement by the contractor.
The interface with the contractor is therefore the critical element. It is vital to ensure that required expertise in planning, structuring, and so on is brought in early on, and that due diligence is conducted. This should include a detailed monthly schedule, with measureable key performance indicators linked to the contract. Any slippage from contractual obligations can be planned for within an overall portfolio of obligations and contracts. Often it is helpful to designate a dedicated project scheduler with overarching risk responsibility. For each contract package or area of a project, clear owners risk need to be identified, and meetings should be held to assess progress against targets, and potential problems.