Risk Management: Mitigating delivery flaws

The infrastructure sector is yet to reach maturity levels at which mitigation strategies are leveraged to exploit project risks, writes Raj Kalady.

Infrastructure projects, by their very nature, are long duration and capital intensive. Keeping in mind the nature of infrastructure projects, both the companies and governments involved in the development of infrastructure have to devote significantly high investments, and human and technical resources. While many factors are involved in ensuring successful project execution, one of the key factors is to have a proper risk management process in place encompassing all the stages of the project.

The economic prosperity of a nation is reflected in the state of infrastructure. In fact, the development of many nations is measured by the extent of progress being achieved in the development of infrastructure. The efforts of majority of the developing nations to improve infrastructure facilities had resulted in a sudden surge of activity. The development of ports and inter-connectivity of ports, power infrastructure, inland transportation facilities, services infrastructure like telecommunications network etc, are assuming center-stage. The success of each of these infrastructure projects has the potential of far reaching changes which can together positively impact the economic growth of the country.

Successful project delivery and spend efficiency, by the government and private sector alike, are imperative to realise the desired growth and consequent benefits. The latest data furnished by the Ministry of Statistics & Programme Implementation (MoSPI) states that out of the 555 projects being implemented in the country, 190 projects have incurred cost overrun of nearly 60 per cent or Rs 130,000 crore, which could have funded many other projects, making significant difference.

While modest strides have been made in enhancing project delivery, projects are still burdened by serious time and cost overruns, misconduct, wastage, all within an inflationary environment.

As the economy revives, it is critical for owners and contractors, the government and the entire project stakeholder community, to mitigate delivery weaknesses while consolidating strengths, and collaborate in delivering projects successfully.

Need for assessment of project risks and uncertainties

Infrastructure projects face multiple risks at each stage of its lifecycle, it is crucial to upfront identify and prioritise risks that pose the largest threat to project performance. Mitigation strategies devised to control such risks are then built into the project overall implementation plan itself. Based on the implementation plan and the inherent risks therein, project requirements are drawn up and resources allocated, which requires specific skill sets and experience to manage the prioritised project risks. Ineffective planning can thus easily lead to ineffective resource utilisation. This is exacerbated in an environment of chronic manpower shortage.

Periodic risk assessment, risk management reports, project level risk management framework and independent risk reviews can enhance project risk management.

With increasing project complexity and stakeholder interdependencies, project risk management takes on a larger role in improving the decision-making ability and guiding project teams towards successful delivery.

Evolution of risk management

The infrastructure industry has a high level of awar­eness on risk management process as an effective means to tackle project uncertainties. A generic risk mana­gement process is a close-looped sequence of risk identification and assessment, risk mitigation, risk reporting and risk monitoring. With the advent of quantitative risk models and tools, the industry is clearly on the path of sophistication. However, this sophis­tication is limited to risk assessment only. There are some concerns on the comprehensiveness of risk identi­fication, given the high incidence of projects having suffered due to risks that were hitherto unidentified and hence not mitigated. Continuous risk identification and research procedures can ensure that the risk registers are comprehensive and relevant. Critical improvements are also required to acquire a robust level of sophistication and maturity in risk mitigation. Routinely used mitigation strategies are either ‘reduce’, ‘transfer’ or ‘avoid’. While ‘accept’ strategies are used infrequently, ‘exploit’ strategies are rarely used.

The industry thus, is yet to reach maturity levels at which mitigation strategies are leveraged to exploit project risks and are used as means to maximise project potential. While the project delivery team and oversight team might opt for avoidance, transference of reduction of risk levels, confident project delivery teams might want to choose to exploit certain risks thus maximising the project potential. Risk reporting and monitoring are the remaining links in the risk management loop that are critical for its effectiveness. Evolving information systems can make available timely and accurate projection formation for reporting purposes. The information reported should comprise early warning indicators and provide content that facilitates decision making. On the monitoring front, the industry sees a clear benefit in independent teams, either internal or external, conducting risk reviews and feeding the oversight team with independent reports on the status of risk management. The role of the independent risk team goes beyond reporting and must include the responsibility to driving a risk-aware culture across the organisation. With the required sophistication and, sustained investments in developing a risk-aware culture and a rigorous risk management discipline, the infrastructure industry is on track to realise the benefits of maximised project potential.