Risk Management in Infrastructure Projects: Challenges and Solutions
Infrastructure projects face various risks such as funding challenges, contract frustrations, and supply chain exposures. Managing these risks is crucial for successful project completion. This article discusses the importance of insurance and other risk management instruments in infrastructure development, addressing issues like failed projects and security concerns.
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INSURANCE AND OTHER RISK MANAGEMENT INSURANCE AND OTHER RISK MANAGEMENT INSTRUMENTS FOR INFRASTRUCTURE INSTRUMENTS FOR INFRASTRUCTURE By Engr. Jacob Adeosun B.Sc., AIRM, ACII, MAIChE, MNSE. Registered Professional Engineer Chartered Insurance Practitioner Executive Director, Industrial Risks Protection Consultants . Presented at Nigeria Infrastructure Building Conference At Eko Hotel and Suites. Victoria Island, Lagos. 29 SEPTEMBER 2016
INTRODUCTION Infrastructure Resources, ITC, Airports, Rail & Highways etc. are major, strategic and critical for every nation. There are several risks in the way of their acquisition and sustenance. These include: Challenges of funding, Frustration of Contract, Inadequate Assessment, Interdependency Factors, Supply Chain Exposures, Construction & Erection Risks, Tests and Commissioning Risks, Delay in Startup; Low Capacity Performance etc. assets which include Power, Water Insurance instruments take control of pure risks of natural catastrophes, construction & erection risks, injury & death risks, marine and liability risks, delay in startup etc. Insurance is also playing a major role in the financing of infrastructural projects through institutional investment. There is potential and need to improve this.
INTRODUCTION Other Risk Management instruments are required for uninsurable risks which include: Security & Political Instability, Corporate Mis-Governance, Ineffective System of Justice, Business & Financial Risk Exposures; Supply Chain Tsunamis, and several other Challenges. Project Management
FAILED INFRASTRUCTURAL PROJECTS NEED FOR RISK MANAGEMENT Several infrastructural intentions have remained mirage and dream. A lot of them failed from conceptual and design stages while considerable numbers end up as abandoned projects. A significant number of completed ones are unable to operate or deliver near expected capacities. Why? In today s complex and rapidly changing global environments, any project that is not risk-based planned and intrinsically risk managed is doomed to fail at one point or another in its life time.
SECURITY & POLITICAL INSTABILITY Communities and countries bedeviled with violence, war and terrorism suffer from destruction of lives and infrastructures. Only the arms dealers rejoice and thrive in the confusion and the catastrophe. Peace, people, economic activities and development repel and emigrate from them. Maintenance of security of lives and assets; and political stability is the first and most important risk management imperative for investment and development. This is the No. 1 responsibility of a Country Head. The benefits of insurance are not enjoyed in war, violent and terrorist zones. War and terrorism are exclusions in most insurance policies.
CORPORATE MIS-GOVERNANCE The next very important risk management requirement for investment and development is the enthronement of anti- corruption and good corporate governance culture in both the public and the private sectors BUT more critically in the Public Sector. This ensures that resources are wholly utilized for intended purposes efficiently to achieve projected targets. Investors abhor territories bedeviled with corruption and corporate misgovernance.
CONTD There is no insurance protection for corruption and mis-governance losses. Fidelity Guarantee Insurance protection is tied to the right of prosecuting the culprit covered by the policy. The conditions for Credit Insurance and Performance Bond policies are very stringent with copious exclusions in corruption ridden territories.
ADMINISTRATION OF JUSTICE The efficacy and effectiveness of Administration of Justice for the defence and protection of contractual rights and privileges is in the top hierarchy of considerations by investors. Insurance protection is a contract between the insurer(s) and the insured(s) which is subject to adjudication in the Court of Law in the event of a dispute that cannot be resolved amicably by the parties and any other Alternative Dispute Resolution system. The judicial system in Nigeria needs to be drastically re- engineered and overhauled for efficient & speedy dispensation of justice without conflicting judgments and incessant injunctions.
CONTD Inadequate Assessment Can you remember that a power plant project suffered delay for years because the bridge on the only access road to the site could not carry the weight of the gas turbine generator package? Bridge construction was not in the scope of work. Securing government approval and provision of fund to rectify this serious omission did not come efficiently.
CONTD Interdependencies Factor The role of interdependent actors at every phase of a project is often downplayed or ignorantly omitted. The undesirable action(s) or inaction(s) of every Stakeholder government(s), regulator(s), equity partners, investors, lead consultant, turnkey contractor, other consultants, subcontractors, secured buyer(s), transporter(s) etc could result in the failure of a project.
CONTD Supply Chain Exposure Closely related to the Interdependencies of Actors is the Supply Chain Exposure. Many projects have failed or suffered considerable shocks of exorbitant, unbudgeted increased cost of idle equipment and manpower resources following unanticipated interruptions locally and globally. supply chain For instance, an earthquake in Chile, hurricane storm in Louisiana, severe flooding in China, riots in Pakistan could impair the ability of a supplier of critical items for a project to meet delivery target. If envisaged and properly arranged, contingent business interruption insurance could alleviate the loss.
SUMMARY (Charts)
INFRASTRUCTURE ASSETS/PROJECTS Water Resources Power Seaports Rail Systems Airports Highways Information Technology & Communication Up INDICES OF DEVELOPMENT LEVEL Down
EFFICIENT & EFFECTIVE INFRASTRUCTURE DELIVER STRATEGIC GOAL PROJECT OBSTACLES RISK MANAGEMENT INSTRUMENTS INSURANCE INSTRUMENTS INSECURITY 1 ARMED SECURITY/POLITICAL STABILITY/NATIONAL COHESION PATRIOTISM & NATIONAL AWARENESS LIMITED/RESTRICTED COVER TO ARMED ROBBERY, K&R, TERRORIST CORRUPTION 2 VALUE SYSTEMS/NEED FOR DECENTRALISATION TO CORPORATE, INSTITUTIONAL MICRO LEVELS ACROSS THE NATION, PUBLIC & PRIVATE & RELIGIOUS HOUSES NONE IMPUNITY & INEFFECTIVE JUSTICE 3 RETURN THE GLORY & FEAR OF THE COURT NONE LACK OF FUND 4 PERFECT SOLUTION TO TOP THREE WILL READILY FACILITATE ALL OTHER SOLUTIONS NONE LACK OF SKILLS 5 LACK OF MARKET 6 CONSTRUCTION LOSSES 7 PHYSICAL RISK CONTROL MEASURES INSURANCE COVERS 8 PHYSICAL RISK CONTROL MEASURES INSURANCE COVERS INTERDEPENDENT STAKEHOLDERS & SUPPLY CHAIN CHALLENGES C O N C L U S I O N KNOWLEDGE & APPLICATION OF RISK MANAGEMENT BY ALL, AT ALL LEVELS, ALL THE TIME WILL YIELD DESIRED RESULTS
INTERDEPENDENCY OF STAKEHOLDERS AND SUPPLY CHAIN LOCAL & INTERNATIONAL REGULATORS GOVERNMENTS EQUITY PARTNERS INVESTORS LEAD CONSULTANT(S) OTHER CONSULTANTS TURNKEY CONTRACTOR OTHER SUBCONTRACTORS SECURED LARGE SCALED BUYERS FINAL CONSUMERS LOGISTICS PROVIDERS TRANSPORTERS RAW MATERIALS SUPPLIERS LONG LEAD ITEMS / MANUFACTURERS
PROJECT LIFE CYCLE FEASIBILITY/ VIABILITY DESIGN & ENGINEERING PROCUREMENT EXPANSION SALES & MARKETING FABRICATION OPERATIONS & PRODUCTION MAINTENANCE & REVAMPING CONSTRUCTION ERECTION/ INSTALLATION TESTS & COMMISSIONING SUPPLY CHAIN RISK ASSESSMENT INTER-DEPENDENCY RISK ANALYSIS
PERFORMANCE OF PROJECT NAIRA / $ EXPANSION START - UP NORMAL OPERATIONS CONSTRUCTION / PRODUCTIVITY & EXPENDITURE EARNINGS DECLINING FACILITY 0 1 2 3 4 5 6 YEARS
CONCLUSION The need to proactively and intentionally apply insurance and other risk management instruments for the successful implementation of infrastructural projects cannot be overemphasized. Any project that is not risk-based planned and intrinsically risk-managed is doomed to fail at any point of its life cycle. It is time for Government s plans, decisions, actions and overall governance to be risk-based i.e. subjected to risk analysis for risk solutions at all times.
