Risk Management in Infrastructure Needs Improvement as Cost Overruns Surge part 1 of 2
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.