Risk Management in infrastructure projects

Prologue
Recently I came across an interesting quote by Warren Buffett which goes like Risk is a part of Gods game, alike for men and nations. This quote more or less substantiates what we learnt in IPM class i.e. Risks are part and parcel of any project. Every organization wants to finish projects in budget and time but during course of the project numerous uncertainties and unforeseen problems arise which may lead to cost and time overrun as compared to the original estimate. All these uncertainties constitute risks associated with the project.

Origin of risks
I strongly believe that once origin of risks is properly understood chances of risks can be prevented to some extent. An ounce of prevention is worth a pound of cure in infrastructure developments because once the risks are not mitigated in initial stages of the project it may scale up beyond control. The origins of Risks are the Uncertainties and unknowns one encounter during the course of the project. Risks come from people, technology, planned work, management structure and systems. Risks also comes from all sorts of stakeholders including Public interest groups, local government, affected communities, regulatory agencies, project team, financial institutions, competitors, contractors, employees, end users. The chances of risks are highest in initial phase of the infrastructure development mainly because of the lack of understanding, uncertainties and other indeterministic paraphernalia regarding the project. Gradually as the project

advances from the Initial phase to planning phase and then to implementation phase and finally the delivery phase the risk keeps on reducing because of continuous building of the knowledge curve.

Types of risks
Ashwin very lucidly classified risks encountered in infrastructure projects in either of the five categories i.e. Construction risks, operation and maintenance risk, financial risks, Environmental and social risks, force majeure and termination risks. We can classify these risks in either one of these three categories i.e. inherent risk, Owners risk and execution risk. Any organization encounters risk in two forms i.e. Strategic and execution risks. Strategic risks are generally linked to the risk appetite of an organization. The organization whose target is to earn higher IRR goes for projects involving high risk. Execution risks are the risks encountered in cases when there is a lack of clarity about project objective, use of wrong technology, delay in materials procurement, risks associated with stakeholders etc. Execution risks can fit into either of technical, external, organizational, project management risks. All kinds of risks can be broadly classified into Positive risk and negative risks. Positive risks are opportunities which a project poses whereas negative risks are the events which hinder the execution of the project. Positive and negative risks should be thoroughly analyzed before undertaking any project by an organization.

Risk management strategies

Risk management and control is critical for any projects success. Risk consciousness is absolutely essential for framing risk management strategies. Risks are not easily

quantifiable and hence its assessment is needed. Strategic risk identification and management is the cornerstone for any project success. Organizations which better understand the nature of the risks can manage them more efficiently. They cannot only avoid unforeseen disasters but also work with lesser contingencies and tighter margins thereby freeing its resources for other endeavors. For efficient risk management first of all an organization should identify and prioritize risks. Next risks need to be analyzed to prepare risk response plans finally the Implementation and management of plans should be proper. Risk factor identification can be made in various ways like brainstorming meeting, Expert opinion, past history etc. I strongly believe that focus should be shifted to knowledge management of the projects done in past. Knowledge base from the previous projects can be utilized to tackle the risks faced in similar kind of ongoing infrastructure project. In case of undertaking new projects one should look at the similar project and the risk. As it is already understood the chances of risks are maximum in the beginning of the project. The quantum of risks can be significantly reduced by adopting strategies translating into strategic bidding process. The organizations should do the assessment by themselves and match it with that done by the bidder depending on that they should select the bidder. By this way project will be subjected to lesser ambiguities in interpretation, better dispute resolution and settlement. Also in cases of PPP projects there should be adequate flexibility in project terms so that if the private organization is unable to make money out of the project there is some provision of renegotiation so that they can increase tariffs from users, go for a decrease in interest rates on debts, increase of concession period etc.

Risk management is a continuous process and hence with continuous analysis old risks may go and new may arise. Risks must be monitored and managed day by day. There should be periodic risk reviews also the organizations should keep an eye on risk status. The organizations generally follow risk response strategies to manage risks efficiently by Avoiding, mitigating, Accepting and reducing the risks encountered.

Final thoughts
Optimum combination of Risk and project completion objectives plays a pivotal role in determining a project success. In above sub-headings lots of risk mitigation strategies have been highlighted. What about a situation where an Infrastructure project has Zero risks or very low risk associated with it? Most of the organizations dont even think of taking any project with low risk because the monetary benefits associated with low risk projects are minimal, hence most of the organizations consider low risk projects a waste of time and effort for themselves. A successful infrastructure project is the one in which proper risk sharing mechanism among all the stakeholders exists.

References
http://www.techgig.com/expert-speak/Project-Management-Leadership-Series-Session-10-StrategicRisk-Management-for-Project-Leaders-190 http://deloitte.wsj.com/cio/2013/05/21/creating-value-through-strategic-risk-management/ http://blogs.law.harvard.edu/corpgov/2012/08/23/strategic-risk-management-a-primer-for-directors/