Public Infrastructure Bulletin

Risk and uncertainty in project management decision-making

Karolina Koleczko — Tue, 30 Oct 2012 17:38:57 PDT

Today, managing for risk and uncertainty are cornerstones of the project manager’s role. It is common practice for practitioners to use the terms risk and uncertainty interchangeably which can be unhelpful when managing long-term and complex projects, minimising adverse impacts and taking advantage of upside opportunities that may develop. However, the literature points to important differences in practices to measure, cost, mitigate and manage project risk and deal with future uncertainty which suggests that the distinction may warrant greater understanding at the project level.

Contemporary project management requires practitioners to understand a great deal about the risk profile of a project and manage in conditions of uncertainty. This is especially the case with long-term infrastructure projects. Managers also need to understand a client’s risk appetite, carry out risk-weighted measurement of costs, and make decisions about those risks that can be absorbed with reasonable confidence, and those that should be transferred. Additionally, the manager is required to prepare risk mitigation and management strategies and anticipate future uncertainty in the form of externalities that threaten project outcomes.

This paper distinguishes between risk and uncertainty in the project management context and examines how the distinction influences decision-making in contemporary project management with particular focus on probability and judgement. It also argues that project managers should consider a wider set of variables when considering the impacts of risks and unpredictable future events including the behavioural responses of agents, the role of ownership and control, and the complex relationship between bounded rationality, experience and judgement.

PPP: The best option for Queensland social infrastructure?

Norm Jagger — Tue, 30 Oct 2012 17:31:02 PDT

The trend by governments to procure infrastructure using Private Sector Financing Initiatives (PFIs) has produced a number of variants such as Alliance Contracting and Public Private Partnerships (PPPs) which are now in common use in Australia. The partnership trend has developed due to unprecedented and extraordinary demands on public funding to upgrade existing infrastructure and to provide new infrastructure. Initially social infrastructure did not appear to be a good PFI prospect primarily because Governments found it unpalatable to shift costs to users.

Recently however, social infrastructure has become more attractive due to cost reductions brought about by risk transfer and whole-of-life value management. There has been a shift towards the use of PPPs to deliver hospitals, schools and prisons.

In May 2005, after four years of deliberation, the Queensland Government took its first PFI steps procuring the $240m Southbank Education and Training Precinct (SETP) as a PPP.

This drawn out process was perceived to be linked to the Queensland Government’s reluctance to engage with PPPs. In 10 years of decision making only two projects, the SETP and the Queensland Schools Project (QSP) have reached completion. Both are social infrastructure projects from the education sector.

Public infrastructure procurement: A comparative analysis of adversarial and non-adversarial contracting methods - Working for better procurement outcomes

Michael Regan — Tue, 30 Oct 2012 17:25:54 PDT

Most public infrastructure is provided by traditional procurement methods generally based on quantitative selection techniques and adversarial contracting principles. International evidence suggests that this method of contracting is inefficient, is often delivered late, and is often over-budget. Further, the adversarial nature of these contracts means that disputes over variations, changes to specification or renegotiation may lead to lengthy and costly ex post negotiations or civil action. The introduction of alternative procurement methods (APM) in the early 1990s introduced a less adversarial contracting approach in which ownership (of decision-making) and responsibility for design and operation of the service-producing asset passed to the contractor with the state adopting a regulatory role. The contract is non-adversarial to the extent that the relationship between the contractor and the state is one of long-term relationship management. Evidence suggests that APM is achieving better time and cost performance than adversarial methods and contributing to improved service delivery and lower lifecycle costs.

This paper reviews the theoretical literature with a view to understanding the relationship of the parties in a nonadversarial project procurement contract. It finds that the principal and agent view of traditional procurement may not be the best way to understand collaborative contracts where the relationship can be characterised as purely transactional – the principal is a buyer of services and the contractor is the producer. The paper also reviews the empirical evidence and finds that the characteristics of non-adversarial contract models such as the output specification, qualitative selection criteria, the alignment of responsibility for service outcomes and residual control rights, incentives, life cycle costing and risk-weighted value for money measurements, are improving project delivery performance and service outcomes.

Credit rating and project finance default: An important risk management instrument

Susan Thompson — Tue, 30 Oct 2012 17:15:58 PDT

A correlation exists between the credit rating of a project and the likelihood of project finance default. Project ratings provided by rating agencies are intended to express the level of certainty with which project lenders can expect to receive timely repayment of principal and payment of interest, in accordance with the project terms. The debt rating of a project by a rating’s agency involves collating relevant heads of risk, and analyzing each head of risk’s magnitude and likelihood of occurrence. An analysis is then performed on the effect of these risks on the project’s ability to operate and pay its debt obligations. The analytical framework utilised by a rating agency generally addresses project-level risks, sovereign risk; business and legal institutional development, force majeure risk and credit enhancements. This paper will discuss these heads of risk.

Optimisation tools for the design of a road project: Recent developments in the European community

Ari-Pekka Manninen et al. — Tue, 30 Oct 2012 17:10:49 PDT

Present design control and cost management of road construction projects is at an unsatisfying level, which has led to cost overruns, budget failures and expensive design solutions. The design process does not utilise the design control tools such as construction landmass planning, which is crucial for the emergence of road project costs.

The purpose of this article is present a framework which utilises new design control tools for road construction projects. New tools consider a landmass allocation scheme and a project partition-based cost estimation method. The aim of this paper is to evaluate the functionalities of the framework in practice. Furthermore, the paper describes the changes of project parties’ actions, which the framework sets.

The studies reported in this article indicate that the founded framework will enable an efficient design solution optimisation. Moreover, project parties will need to integrate their applications and systems if they want the full efforts of the framework. Parallel to this, the building information modelling is a workable platform for the framework and the integration of parties.

Congestion pricing for roads: An overview of current best practice, and the economic and transport benefits for government

Peter Murray — Tue, 30 Oct 2012 17:00:59 PDT

Congestion pricing for roads has the potential to deliver significant benefits to Australia’s economy. The three tiered toll introduced on to the Sydney Harbour Bridge and Tunnel in 2009 represents a limited first step in testing the benefits of congestion pricing, and whilst this is a step in the right direction, Australia is still lagging behind international best practice. The purpose of this paper is to examine some of the initiatives being undertaken internationally and to illustrate how road pricing by time-of-day can:

• Constructively modify travel behaviours,
• Improve traffic management outcomes, and;
• Generate significant economic benefits.

Implementing PPPS in Timor Leste: Institutional challenges in the near north

Laure Darcy — Tue, 30 Oct 2012 16:50:47 PDT

Context:
When Timor Leste became an independent country in 1999, much of its basic power, water, transport and telecommunications infrastructure had been destroyed in the preceding years of conflict. Almost everything needed to be rebuilt and the country faced a massive task in planning and executing a wholesale infrastructure investment program estimated at more than $10 billion. Eleven years later, while notable progress had been made in some sectors, Timor-Leste remained far behind its original investment targets. While the country possessed significant oil & gas resources to support infrastructure financing, its capacity for investment planning and implementation remained constrained, and as such its engagement with the private sector was narrowly focused on traditional construction and engineering contracts. Much of the potential for the private sector to expand the Government’s capacity to deliver infrastructure and related services remained untapped.

A discussion of the Monte Carlo technique applied to commercial property: Examining risk in perspective

Mark Crudden — Tue, 30 Oct 2012 16:50:46 PDT

This paper discusses the application of the Monte Carlo simulation technique to commercial property investment feasibility studies. The paper is divided into five sections as follows:

1. A discussion on the variables in commercial property returns
2. A critique of commonly used contemporary techniques for project feasibility analysis
3. An overview of the Monte Carlo risk analysis technique
4. Interpretation and analysis of simulation results
5. Utility, and inherent limitations, associated with modelling real world uncertainty using Monte Carlo

Life-cycle costing and the procurement of new buildings: The future direction of the construction industry

Jemima Highton — Tue, 30 Oct 2012 16:45:42 PDT

Traditionally, building procurement was undertaken without further consideration as to the costs which would be incurred from acquisition to disposal. For all intents and purposes, such buildings were, amongst other things, to provide occupants with safe and secure shelter and deliver positive revenue streams and returns to the developer/registered proprietor/landlord. The registered proprietor/landlord has an obligation to ensure the building is maintained to an acceptable standard, which would require operation, maintenance, and repairs or replacement to building components and materials that had depreciated, failed and/or become obsolete. On the basis that buildings are long-term assets, attending to regular operation, maintenance and repairs or replacement was not only time consuming, but affected potentially favourable returns (Ellingham & Fawcett 2006; Kelly, Morledge & Wilkinson, 2008).

Risk in project finance and capital markets: The challenges of present market conditions

Marianne Garden — Tue, 30 Oct 2012 16:41:15 PDT

Tamir Agmon in his 1985 book states “International financial markets are shaped by politics and economics: The basic laws of economics push relentlessly toward market integration and worldwide global economy, while the political process practised by governments and other interest groups is expressed by constant jockeying for special economic privileges”.

The World Bank is an international financial institution that provides loans to developing countries for capital programs. The Bank was created in 1944, with its official goal being the reduction of poverty – to address the imbalance of wealth and support the laws of economics which Argon refers to. Although the first recipients of the loans were European countries (the very first loan recipient was France), the focus shifted in the 70s and 80s to concentrate the lending on meeting the basic needs of developing countries (infrastructure and social) rather than on the ability of the borrower country to repay the loans.