Project Risk Management

Gabungan Perusahaan Nasional Rancangbangun Indonesia

(GAPENRI)
Asosiasi Ahli Pialang Asuransi dan Reasuransi Indonesia
(APARI)

Jakarta, 2 November
Agenda

▪ The Parties

▪ The Cost of Risk

▪ Risk Associated with the Project

▪ Risk Radar

▪ Project Risk Assessment (PRA)

▪ Risk Management

▪ Project Risk Issues - Exercise

▪ Case Study
The Parties
The Parties

▪ Principal / Project Owner / Sponsors / Borrower

▪ Contractor, Sub Contractor (offshore & onshore)
▪ Manufacturer, Supplier, Vendors,
▪ Consultants, Engineers
▪ Buyer / Off taker
▪ Bankers, Lenders, Financiers
▪ Directors, Officers, Employees of above parties
Typical Structure for a Project Finance Project

GOVERNMENT CONCESSION
OR
PRIVATE CUSTOMER
SPONSORS LENDERS

LENDER 1
(Onshore)
COMPANY 1
SECURITY AGENT
Equity Funding Loans LENDER 2
Assignment/Pledge of:
(Offshore)
• assets
PROJECT COMPANY • land rights
Shares in Project • all project contracts
Company Repayment of Loans • accounts
• insurance policies LENDER 3

COMPANY 2
LENDER 4
(Islamic Bond)

INSURER
EPC CONTRACTOR
OPERATOR
• Engineering, Procurement
• Operation and
and Construction
Maintenance Agreement
Contract
The Risk Shift (When a contractor transitions to being an Owner)

▪ CONTRACTOR ▪ OWNER
– EPC – Concession / PPA
– Owner – Government Agency
– 3-5 years – Whole life cycle
– Subcontractors – EPC Contractor
– Liquidated damages – Liquidated Damages
– Lenders (12-25 years)
– Political Risks
– Environmental Risks
– Reputational Risks
The Cost of Risk
The Questions for Contractors

▪ Whose money/investment is at stake?

▪ Who ultimately has risk of loss?

▪ What is required by the various Project contracts?

▪ How can they be made compatible and aligned ?

▪ Who will Third Parties sue?

▪ Who is liable for damage to any existing assets?

▪ Is there a liquidated damage exposure?

▪ Do you have adequate financial protection

The Cost of Risk

Labour Risk

Plant
Materials

Development Project Cost Finance

Design Process Permits/

Approvals

Tariff
Risk Allocation

EPC
Insurance Contract

Liquidated Self
Damages: Insurance
Performance

OEM
LTSA/CSA Warranty
Concession
or
Service Contract
DLP Financing
Agreement

Deductible Liquidated
Finding Damages:
Delay
O&M Technology
Contract Indemnity
How Owners/Contractors can Manage Risk in Projects

Owner
Owner
Cost of Risk

Owner

EPCC EPCC

EPCC

Insurance
Insurance Insurance
Risk Associated with the Project
Systematic Approach
Risk Associated with Project
Risk Associated with Project
Risk Radar - An Interactive Exercise
Risk radar - Property development industry risk environment
Corporate Responsibility
Sustainable Development Project Governance & Control
Partnerships Tender control
Economic recession Seasonality of demand
Access to commodities Procurement rationalisation
Brand / Reputation Supply chain resilience
Integrating Acquisitions Health & Safety
International expansion Environmental Incident
Demographic changes Political risk

Debt management Planning controls

Foreign exchange Tightening Corporate
Contractual Liabilities Governance expectations
Revenue recognition Government Directive changes
Credit Political change
Commodity price inflation Legal compliance
Risk radar - Manufacturing risk environment
Corporate Responsibility
Brand / Reputation
Market Restructuring
International Expansion
Managing organisation change
Attracting & Retaining talent
Competition
Customer / Demographic changes
R&D Investment Strategy
Raw Material supply
Business Continuity
Environmental Incident
Major Fire / Loss of Facility
Health & Safety / Loss of key people
Quality Failure / Product Recall
Customer Injury
Counterfeit & ‘Grey Product’
Political Change

Foreign Exchange Regulatory change

Credit Government Directives
Contractual Liabilities Legal compliance
Pension Liabilities Intellectual Property Infringement
Cost base control Legal / Regulatory Compliance
Revenue recognition Competition Authority action
Money Laundering Corruption / Money laundering
Risk radar - Engineering industry risk environment
Quality Failure / Product recall
Corporate Responsibility Unionised Workface
Brand / Reputation Raw Material Supply
Product Life Cycle Corporate IT system Failure
Pricing / warranties Theft of Raw Material
Attracting & Retaining Talent] Major fire / Loss of Facility
Competition e.g. Low Cost Economics Health & Safety
Managing Organisational Change Loss of critical equipment / utilities
R&D / Technological Innovation Environmental Incident
Mergers & Acquisition Efficiency / Lean Manufacturing

Foreign Exchange Regulatory Change

Interest Rates Corporate Governance
Reliance on Key Customer Government Directives
Legacy Liabilities Legal Compliance
Contractual Liabilities Loss of License to Operate
Long Lead Times & Working Capital Loss of Intellectual Property
Commodity / Raw Material Prices Competition Authority Action
Receivables / Credit
Risk radar - Construction industry risk environment
Adverse Weather
Corporate Responsibility Project Governance & Control
Sustainable Development Tender control
Partnerships Seasonality of demand
Economic recession Procurement rationalisation
Brand / Reputation Supply chain resilience
Health & Safety
Merger & Acquisition
Environmental Incident
International Withdrawal
Political risk
Demographic changes Labour shortage
Access to commodities Professional Indemnity
Outsourcing Human Capital

Debt management Planning controls

Foreign exchange Corporate Governance
Contractual Liabilities Government Directive changes
Revenue recognition Political change
Credit Risk Legal compliance
Commodity price inflation
Risk radar - Power risk environment
Brand / Reputation
Corporate Responsibility Supplier Failure
Sustainable Restructuring Weather & Seasonality
Demographic Change Political Instability
Managing Organization Change Raw Material Supply
Partnership / Outsourcing Business Continuity
Market Restructuring Health & Safety
Competitors Environmental Incident
Economic Recession Corporate IT system failure
Access to Commodities Terrorism
R&D Development Strategy Attracting & Retaining Talent

Pension Liabilities Tightening Corporate Governance

Debt Management Regulatory Change
Foreign Exchange Impact of Government Directives
Interest Rates Carbon emission trading
Credit Legal Compliance
Contractual Liabilities Loss of License to Operate
Commodity Prices Loss of Intellectual Property
Litigation Competition Authority action
Project Risk Assessment
Project Risk Assessment (PRA)

PRA – “the systematic and comprehensive identification, evaluation and control

of those critical risks that threaten the success of a project”.
This is an in depth, comprehensive process leading to the establishment,
maintenance and regular updating of the Project Risk Register. This is
achieved through a formal process and a “PRA” would benefit the project in the
following ways:
▪ A logical and systematic assessment process to identify and prioritize risks that may
threaten the achievement
▪ Increase the likelihood of successful completion of a project to cost, time and
performance objectives
▪ To identify and prioritize the critical risks of each phase of the project
▪ To understand the severity of the risk identified to the project
▪ A consolidated approach by the project team in understanding and managing risk
across the project

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Project Risk Assessment (PRA)
▪ To develop a monitoring mechanism by assigning ownership of the key risks for each
phase of the project
▪ To evaluate risk transfer options, either through insurance, contracts, service level
agreements etc
▪ To have in place a robust mitigation and monitoring plan throughout the project
▪ To identify roles and responsibility for key stakeholders.

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 Project Risk Assessment Stages – Activities

Phase 1 Phase 2 Phase 3 Phase 4 Phase 5

Project Initiation Documentation Review Risk Identification Treatment & Mitigation Risk Reporting
and Context Setting and Analysis

- Scope clarification - Documentation review - Analyse risks using a - Assess the appropriate - Review and analyse
variety of tools and strategy for effective finding from each phase
- Deliverables definition - Interviews with key process risk mitigation / of the project
stakeholders exposure reduction
- Key stakeholders - Qualitative and - Developed risk
definition semi quantitative - Evaluate Risk treatment monitoring template and
- Agree scoring criteria
assessment options time chart
and risk categories with
- Delivery Time frames project team.
- Evaluate risk controls - Embedding risk - Final report with
- Discussion and provision treatment into project findings,
- Agree project residual
- Agree initial risk list planning process recommendations and
of information risk list and Map
available for the review next steps
- Review and finalize - Allocation of risk
project critical risks
Project Risk Assessment (PRA)
The key phases used within the methodology to carry the Project Risk Assessment

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Project Risk Categorisation and Consolidation

Strategic
Risks
Regulatory &
Political Operational
Risks Risks

Supply & Risk External &

Procurement Categories Internal
Risks Stakeholders

Environ-
People
mental
Risks
Risks
Financial
Risks
Building the Risk Matrix/Register

Frequency Severity
▪ 4 = Very Likely ▪ 4 = Severe
▪ 3 = Probable ▪ 3 = Significant
▪ 2 = Possible ▪ 2 = Moderate
▪ 1 = Highly Unlikely ▪ 1 = Minor
The Risk Matrix / Register
Risk Category Risk Description
Activities
X Operation Cross-Divisional Communication Issues
▪ Identification of Best Practice Actions
Risk Owner Management Actions
▪ Pre-Workshop Booklet HR Manager 1. Manager feedback programme
▪ Risk workshops ▪ Within 6 months after key event / system is
developed, the system owner should complete
▪ Develop Management Action Plans a review questionnaire (be confidential)
▪ Report ▪ A report should be generated for review at both
senior manager and manager levels
▪ Appropriate improvements should be deployed
2. The core value execution:
▪ Company-wide deployment action has been
undertaken to embed the core values into all
operations

No. Category Risk Risk Risk Current L Impact TRS Risk Key Actions Date Comments
Description Causes Controls Owner Stakeholders Due

1 e.g. the e.g. concise e.g. fall details on e.g. description of e.g. all current e.g. entity e.g. list of who the key e.g. e.g. general
category statement of the background to all main / root controls in place to to whom stakeholders of the risk actions comments on
used to the risk the risk causes of the risk manage the risk the risk is are taken to activities etc.
classify the allocated mitigate
risk the risk

4
Project Risk Assessment (PRA)
Sample Output
Risk Management Program
Risk Management Program

▪ A logical and systematic assessment process to identify and prioritize risks

that may threaten the achievement of project’s business objectives.

▪ High level analysis on key controls in place to manage the key risks.

▪ Insurability analysis and options on key risks

▪ An awareness and understanding of business risks that will allow consistent

risk management and provide the opportunity to develop a sustainable
methodology for future monitoring and implementation, and continuous
improvement throughout the organization;

▪ A basis for risk management that is flexible to cater for changing needs and
opportunities and the ability to develop a long term and sustainable risk
management framework and culture
Operational Risk Solutions
Combination of proprietary data, models and platform together with specialist in
scenario analysis, modelling, appetite/tolerance, framework, insurance and
governance we help the client use their investment in operational risk to:
▪ Minimize their Total Cost of Risk (retained losses and costs)

▪ Optimize their management of volatility (capital financing and insurance

mitigation)
▪ Use risk understanding to drive business decisions and performance
management
Project Risk Issues - An Interactive Exercise
Water Treatment Project Risk Issues – Contamination

▪ Risk
▪ Causes
▪ Who impacted ?
▪ Frequency
▪ Severity
▪ Current controls
▪ Treatment options
▪ Best-fit risk allocation
Water Treatment Project Risk Issues – Site Conditions

▪ Risk
▪ Causes
▪ Who impacted ?
▪ Frequency
▪ Severity
▪ Current controls
▪ Treatment options
▪ Best-fit risk allocation
Minemouth Project Risk Issues – Industrial Action

▪ Risk
▪ Causes
▪ Who impacted ?
▪ Frequency
▪ Severity
▪ Current controls
▪ Treatment options
▪ Best-fit risk allocation
Minemouth Project Risk Issues – T&D Lines

▪ Risk
▪ Causes
▪ Who impacted ?
▪ Frequency
▪ Severity
▪ Current controls
▪ Treatment options
▪ Best-fit risk allocation
Minemouth Project Risk Issues – Site Safety

▪ Risk
▪ Causes
▪ Who impacted ?
▪ Frequency
▪ Severity
▪ Current controls
▪ Treatment options
▪ Best-fit risk allocation
Power Plant Project Risk Issues – Terrorism

▪ Risk
▪ Causes
▪ Who impacted ?
▪ Frequency
▪ Severity
▪ Current controls
▪ Treatment options
▪ Best-fit risk allocation
Power Plant Project Risk Issues – Political FM

▪ Risk
▪ Causes
▪ Who impacted ?
▪ Frequency
▪ Severity
▪ Current controls
▪ Treatment options
▪ Best-fit risk allocation
Power Plant Project Risk Issues – Insurance Cost

▪ Risk
▪ Causes
▪ Who impacted ?
▪ Frequency
▪ Severity
▪ Current controls
▪ Treatment options
▪ Best-fit risk allocation
Case Study
Conclusion

 A Contractor faces different and additional risks

 Therefore risk identification is a vital element of project development

 Due Diligence process: Be prepared

 Risk Allocation should be founded on cost-effectivity

 Understanding the project’s risk can assist in creating flexibility

 Risk Management is NOT just about preventing the negative!

 Insurance should be tailored to the project’s inherent risks

Thank You