Infrastructure asset lifecycle: Operational risk...

Infrastructure asset lifecycle: Operational risk mitigation from project inception

Industry funds Challenges and possible solutions 1

Infrastructure is a pillar of growth and prosperity for any economy, but particularly for developing economies in which infrastructure investment is intensive. Good infrastructure is necessary to lower the costs and improve the ease of doing business. It is the key to long term industrial competitiveness in increasing challenges of global market.

Inadequate infrastructure remains a major obstacle towards Africa achieving its full economic growth potential. With the continent being seen as one of the world’s fastest growing economic hubs, meeting the demand for key infrastructure has been identified as a priority. The world is eager to do business with Africa, but finds its markets difficult to access due to poor infrastructure.

The lack of infrastructure is a serious obstacle to growth and development, which has resulted in a low level of intra-African trade and trade with other regions. The continent accounts for 12% of the world population but generates a mere 1% of global GDP and only 2% of world trade1. Despite this, six of the world’s ten most rapidly expanding economies are now located in sub-Saharan Africa.

Rapid population growth also places enormous challenges on existing, and often obsolete and poorly maintained infrastructure and resources. Studies, such as that by the Infrastructure Consortium of Africa (ICA), have shown that poor road, rail and harbour infrastructure adds between 30-40% to the costs of goods traded among African countries2.

The table on the next page shows that the South Africa National Infrastructure Maintenance Strategy allows for a certain percentage of the replacement cost of these assets to be allocated to an annual maintenance budget3. As can be seen from the data, infrastructure assets are long-term in nature and capital intensive. This means that maintenance is a key aspect of these assets that not only increases the efficiency but also the life of the asset.

Mitigation of operational risk is unnecessarily complex if not identified and addressed at the outset of an infrastructure project. In practice, operational risks are only catered for and managed in the second phase of the project lifecycle. This needs to be brought forward to project inception in order to unlock sustainable benefits, particularly considering the substantial investment that is ploughed into such large-scale projects. What’s more is that this approach to operational risk management is beneficial on a national level, in the context of South Africa’s intensive investment in new infrastructure.

Infrastructure growth incentive

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Yet experience has shown that despite available budgets for the maintenance of these assets, the infrastructure is in a far worse condition than should be allowed in light of budget allocations. This points towards poor planning within the development phase as well as poor execution within the operational phase. Table 1: Budgeting guidelines for various types of infrastructure to be maintained in South Africa (National Infrastructure Maintenance Strategy) Source: The Construction Industry Development Board

Type of infrastructureAverage annual

maintenance budget as % of replacement cost

Key assumptions

Replacement of major rehabilitation over and above

the annual maintenance budget requiring specific capital budget

Bulk water storage4-8%

Mostly for periodic repair of electrical and mechanical works, storm damage repair, routine maintenance and periodic maintenance.

Every 30 to 50 years

Water treatment works 4-8% Mostly for electrical and mechanical equipment. Every 20 to 30 years

Water reservoirs

2-3%

Generally low maintenance mostly of telementry and electrical equipment, storm damage repair, pipe work repair, safety and security, routine maintenance and periodic maintenence.


Water reticulation4-8%

Mostly for telementry and pumping equipment, emergency leak repair and ongoing leak repair due to degredation, storm damage repair.


Sewage treatment works4-8%

Mostly for electrical and mechanical equipment, storm damage and periodic maintenance.


Sewage reticulation4-8%

Mostly for pumping equipment, emergency leak repair and ongoing leak repair due to degradation, blockage removal, storm drain repair.


Roads and storm water5-10%

Mostly for emergency repair, storm damage repair and periodic maintenance (resurfacing every 7 to 10 years).


Electricity reticulation10-15%

Mostly for emergency repair, storm damage repair, safety and security, routine maintenance and periodic maintenance.


Public buildings4-6%

Mostly for emergency repair, storm damage repair and periodic maintenance (e.g. repainting and cosmetic upgrades every 5 to 10 years).


Hospitals5-8%

Mostly for emergency repair, storm damage repair and periodic maintenance (e.g. repainting every 3 to 5 years, and cosmetic upgrades every 7 to 10 years).


Schools4-6%

Mostly for emergency repair, storm damage repair and periodic maintenance (e.g. repainting every 5 to 7 years).


Electricity generation5-8%

Mostly for electrical and mechanical equipment and dependant on age and technology of works.


Electricity reticulation10-15%

Mostly for emergency repair, storm damage repair, safety and security, routine maintenance and periodic maintenance (e.g. every 7 to 10 years).


1 African Development Bank Consortium of Africa (2011), Programme for Infrastructure Development in Africa (PIDA) Phase III PIDA report website: www.afdb.org/fileadmin/.../PIDA%20-%20Inception%20Report.pdf (last accessed in October 2013)

2 African Development Bank Consortium of Africa. (2012) Africa’s Infrastructure Outlooks 2040. website: http://www.afdb.org/en/ (last accessed in May 2013).3 The Construction Industry Development Board. (2012) The National Infrastructure Maintenance Strategy In Support Of ASGISA And Government Growth Objectives. website: http://cidb.org.za/procurement/

delivery/infrastructure_maintenance/nims/default.aspx (last accessed in May 2013).


In order to understand where and operational risk should be considered, it is important to understand the lifecycle of an infrastructure asset, which includes the cycle of activities that an asset goes through. This begins with planning and design and extends to initial acquisition, which would include financing, execution and construction, cycles of operation and maintenance and capital renewal. It concludes with asset disposal4.

Due to the continuous investment during the operations and maintenance of infrastructure assets, as well as the long-term nature and large capital expenditure required, the operational performance of these assets demands close monitoring. This performance comprises not only the extent and quality of the physical services provided, but expands to economic, social and environmental outcomes. Uncertainty about the level of operational performance that is possible over the operating life of the asset is the operational risk associated with the asset.

Operational risk importance

Timeous management of operational risk and uncertainty is necessary from the very inception of the project. This requires building mitigations measures into the design and development of the infrastructure asset to protect infrastructure investment while unlocking short and long term benefits. Short term benefits include making sure the project is built and completed on time and within budget. Long term benefits include maintaining and optimising the efficiency of the asset throughout its life – even prolonging the life of the asset.

4 Department of Provincial and Local Government, 2009, Guidelines for Infrastructure Asset Management, South Africa.

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Figure 1: Infrastructure project lifecycle

The lifecycle of a project consists of two phases, namely the development phase and the operational phase. The development phase entails planning, financing and execution of the project. Activities such as focusing on the business strategy, identifying business objectives, doing a market analysis and a feasibility analysis and conducting project due diligence are undertaken.

Once the feasibility of the project has been established, the objectives have been identified and the strategy has been laid out, procurement and financing of the project takes place. This entails structuring the finance of the project, estimating costs and implementing a governance structure. Appointing a contractor and all tender procurement also take place during this stage.

The development phase further includes the construction or the execution of the asset and involves all the elements of project managing including risk, information, human resources, environmental considerations, stakeholder management and quality management.

The operational phase involves commissioning and handover, operations and maintenance and decommissioning. The commissioning and handover includes evaluating the operational readiness of the project, handing the project over to the final owner, identifying lessons learnt and closing off the financial and contractual accounts.

The operational and maintenance stage and the decommissioning stage both entail monitoring and assurance processes, resolving any contract disputes, supply chain activities, cost reduction activities and finally, compiling any lessons learnt.

At every stage and phase of the project lifecycle, there are risks that need to be measured and mitigated. However, these risks change depending on which stage of the lifecycle the project is in and as indicated previously, such risks have historically only been evaluated in the operational phase. The long-term nature of infrastructure assets, together with the impact and often the irreversibility of these risks, poses a question as to the sustainable nature of this practice.

Infrastructure project lifecycle

Project lifesyle

Strategy and planning

Procurement and financing

Commissioning and handover

Operation and maintenance DecommissioningExecution/implementation/construction

Business strategy Project structure & funding

Project integration management Risk management Operational readiness Monitoring

& assurance

Business objectives Governance structure Project estimating & cost management

Information management Owner acceptance Contract dispute

Markets analysis Best procurement practices

Project schedule management

Environment, health & safety

Financial & contractual final account Supply chain

Environmental strategy Cost estimates & baseline timeline

Project scope management

Human resources and labour relations Lessons learned Cost reduction

Stakeholder consultation Tender procurement Contracting &

contract administrationRegulatory & stakeholder

management Lessons learned

Monitoring & assurance

Contract dispute

Supply chain

Cost reduction

Lessons learned

Scoping study Appoint contractor Quality management

Feasability & options analysis Procurement plan

Project Due Diligence

Value assessment

Development phase Operational phase

At every stage and phase of the project lifecycle, there are risks that need to be measured and mitigated.


More often than not, a number of risks that crop up in the operational phase could have been avoided if considered while the project was in the development phase. During the development phase of infrastructure projects, focus is given to completing the asset within budget and delivery expectations. It is usually in the operational phase that management of operational risk and associated uncertainties is undertaken, in both a reactive and proactive manner to enhance performance, particularly for major assets where the operating life extends over a long period.

The operational phase consists of operations and maintenance and transfer and decommissioning of the project or asset. Chapman and Ward (2003) detail the operational phase and break down this phase into three essential actions – deliver, review and support.

The deliver action involves commissioning and handover, which involves verifying what the product of the project will do in practice. This covers its actual performance compared with its designed performance, i.e. does the nameplate capacity meet actual performance. An important threat here is if the deliverable fails to meet expected performance criteria.

The review action involves a documented audit of the project management process after delivery of the product and also, documenting the lessons learnt for future projects. This also provides the detail required for decision makers to understand their options going forward. These actions involve living with the product until it is discarded, decommissioned or otherwise disposed of, or until additional capacity is commissioned.

The retrospective view of projects, both in South Africa and globally, is that the causes of operational risk are often rooted in decisions taken in earlier stages and most often identified in later stages after which it is too late to remedy fundamental failures in planning design. This is the long-term cost of design decisions made in a vacuum.

Taking a proactive view of the operational risks and sources of uncertainty during the development phase can lead to lower operational costs and higher operational performance in the long run. Added to this, it must be remembered that strategic and operational perspectives on risk are beneficial in most stages of the infrastructure asset lifecycle.

Taking a proactive view of the operational risks and sources of uncertainty during the development phase can lead to lower operational costs and higher operational performance in the long run.

Operational risk understanding and evaluation

More often than not, a number of risks that crop up in the operational phase could have been avoided if considered while the project was in the development phase.


In Stephen Ward’s (2008)5 cross-sector study on infrastructure projects, key areas of uncertainty driving operational risk across all the projects were identified. Be it energy, transportation or water infrastructure sector, the common denominators that drive the operational risks of these infrastructure assets are listed below, and span across the lifecycle of the project.

Table 2: Areas of uncertainty that drive operational risk

Project stage Common denominators that drive the operational risks

Stakeholders • Managing change

Objectives • Lack of clarity about objectives per se• Relative importance of various performance criteria• Re-prioritised performance criteria• Changes to the set of relevant objectives• Operating period considered relevant

Whole-life factors • Individual events that adversely affect implementation or availability e.g. climate, seismic, political, sabotage/terrorism, accidents

• Changes required due to revised/new regulations or legislation

• Interdependence with other infrastructure (same or different kind)

New build construction

• Cost of financing• Availability and cost of relevant new technology,

obsolescence• Availability and composition of resources

Operational infrastructure

• Capability and viability of operators• Demand for use of asset (variability in amount, type and

intensity)• Factors influencing demand (population, climate change,

competition, pricing restrictions, substitutes, customer loyalty, changes in behaviour)

• Knowledge of asset condition• Rate of deterioration• Routine running costs• Staffing problems• Human error• Component failure• Failure of fuel supplies or power

Decommissioning • Managing the costs associated in order to optimise the process• Lack of understanding of maintenance budgets and

long-term replacement planning of the assets

Operational phase issues, risks and opportunities

5 Stephen Ward, 2008 Operational risk in major infrastructure projects/businesses, 2008 University of Southampton, UK

In Stephen Ward’s (2008) cross-sector study on infrastructure projects, key areas of uncertainty driving operational risk across all the projects were identified.

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Ward goes on to say that the drivers of these operational risks will ultimately fall under the five main categories that are generally seen as barriers to achieving more effective identification and management of operational risks. These are:

1. Interdependencies between elements of infrastructure within and across sectors - operational risk management is an integral part of decision making in an infrastructure business

Within a portfolio of infrastructure assets there are potential interdependencies between underlying risk drivers as ‘common cause’ sources of uncertainty and knock-on effects of concurrent events, that warrant co-ordinated management. In portfolio management terms, operational risk management activity such as maintenance or upgrading of existing assets needs to be considered alongside investment in additional or replacement assets.

In more strategic terms, there are interdependencies between different operators and sectors that warrant attention in operation risk management terms, but which may be difficult for any single operator to address. This is reinforced when decisions or planning is undertaken sequentially, for example the concept is handed over to designers, then to cost estimators and finally to contractors. Maintenance inputs are often only considered during operation and not throughout the decision making process. If they had been, they might have influenced the design and cost phases of the project and thereby reduced long-term operation costs.

Multi-functional design teams should be created at the very beginning of the lifecycle of the project. These teams should be involved from the design inception, through to the execution and operational phase. In addition, having an operator on the design team will ensure that maintenance and other operational risks are considered and addressed in the design phase.

2. Clarity and stability of operational performance objectives As indicated above, operational risk is defined as uncertainty about

the level of operational performance achievable. This means that effective operational risk management requires clarity about performance objectives and appropriate trade-offs between key operational performance criteria. Often, the ill-defined performance criteria such as flexibility, resilience, reliability etc. will lead to emerging operational risks. A lack of clarity about operational performance objectives and acceptable trade-offs between them is a serious current difficulty in developing operational risk management practice.

At this stage, the performance criteria should be defined and identified in detail. Risks relating to the performance should be highlighted and possible mitigating factors during a later stage should be identified. The owners must be positive that the asset is being built for the intended purpose and operated at the required level.

3. Short-termism Short-term thinking is a significant barrier to addressing operational

risk in long-lived infrastructure assets. Heavy discounting of future costs and benefits, and uncertainty about how to specify future performance criteria, can lead to overemphasis on the more immediate costs and benefits of a proposed project. For large, capital intensive infrastructure projects with lengthy development and construction periods, this amounts to an over-emphasis on capital costs compared with later operational costs and benefitse private sector.

The operational costs (opex) of a project are equally important as the capital costs (capex) of the execution thereof. This is more observant in Public Private Partnership (PPP) projects where risk matrices encompass both capex and opex cost, however for the majority of other mega projects not under the PPP procurement opex costs and risks are not taken into account. It is therefore recommended that for any project procured under any method, the same principles of the risk matrix are applied.

4. Appreciation of the asset lifecycle Best practice risk management recognises the need to consider

operational risk in the early development stages of the project lifecycle, not only addressing operational risk once the operating style has begun. Though the question has been asked as to how well developed this early consideration of operational risk actually is. For example, which operational performance criteria are considered, how far are trade-offs between them considered and what range of drivers of operational risk are considered in making changes to designs.

In many instances the real attention is given at the stage of execution of the infrastructure asset, not appreciating the actual lifespan and operation of the asset. It is recommended that the owners pay equal attention to both the operational phase and execution phase.

5. Asset management, the role and extent of maintenance strategies Asset management is a major activity with ongoing efforts to enhance

the quality of information about asset condition and reliability, as well as processes for planning maintenance that are often sophisticated. However there certain difficulties to consider, which are in respect of monitoring the condition of assets, understanding how assets deteriorate and at what rates, maintaining effective and efficient inspection and prioritisation of work, understanding the implications of organisational changes on maintenance effectiveness, and optimising maintenance towards the end of an asset’s life.

The skills and knowledge on operating mega structures can be quite daunting, especially if the mega structures have not been produced during the extent of a period of time longer than 20 years. Therefore it is imperative that the younger generations seek clarity and garner input from experienced professionals within the mega structures, particularly during the operational stage. It is also important for this generation to provide operating and asset maintenance services.


Quite often in the African context, the issues outlined on previous pages can be more pronounced. African countries have historically needed to tackle poor infrastructure, issues of poverty, illiteracy, high mortality rates, social inequalities and institutional inequalities. Though these kinds of issues are prevalent in most developing economies anywhere in the world.

The Coega deep water port near Port Elizabeth in South Africa is an example that illustrates the potential negative impact of interdependencies between the different elements of infrastructure. Since 1999, over R3.1 billion of public money has been invested in Coega but it has previously struggled to attract and keep investors. Anchor projects such as the Alcan aluminium smelter plant were cancelled over questions about the electricity infrastructure in place and the country’s ability to supply power.

Maintaining infrastructure elements is a costly exercise with the continent facing an infrastructure funding gap of USD31 billion a year6. On average, 30 percent of African infrastructure assets need intensive maintenance. In the best cases, for example in countries such as Burkina Faso and South Africa, little more than 10 percent of assets need rehabilitation. In the worst cases, such as in the Democratic Republic of Congo, Nigeria, Rwanda, and Uganda, more than 40 percent require rehabilitation7.

However, even facing tough challenges such as these, Africa is positioned as the next frontier for economic growth and the African consumer story continues to attract numerous international companies looking to the continent for expansion. According to BMI, Sub-Saharan Africa is pinpointed as a region that will see the most growth in construction, which indicates that there is significant scope for infrastructure projects.

This places Africa, African governments and African infrastructure project owners in an ideal situation to pay attention to focusing on operational risks early on in the project lifecycle. Doing so will increase the efficiency of the asset and will extend asset lifetimes through reduction of risk and inevitably, costs. To boot, depending on how the projects are structured, this approach could add to investors’ returns.

African infrastructure context

6 Foster, V. & Briceño-Garmendia, C. (ed.), 2010, Africa’s Infrastructure: A Time for Transformation, The World Bank, Washington.

7 Foster, V. & Briceño-Garmendia, C. (ed.), 2010, Africa’s Infrastructure: A Time for Transformation, The World Bank, Washington.

Maintaining infrastructure elements is a costly exercise with the continent facing an infrastructure funding gap of USD31 billion a year.

On average, 30 percent of African infrastructure assets need intensive maintenance.


Table 3: Recommendations for management of operational risks

Development phase Operational phase

Concept and business case strategy

Operation and design strategy

Implementation and delivery strategy

Procurement Detailed design and planning

Delivery and commissioning

Operation and maintenance

Identify key stakeholders and agendas

Operationalize ‘sustainability’ and ‘value-for-money’ objectives – define ‘fit-for-purpose in these contexts

Define robust business case with clear assessment of risks

Evaluate tenders, informing negotiations, evaluation of contractor risk management processes and plans.

Provide clear design and materials selected to facilitate future modification and decommissioning/demolition

Provide detailed extent of testing that should be carried out

Implement inspection/monitoring regimes: condition based, risk based, frequency, associated information systems

Consider key objectives, performance criteria, and their relative importance to different relevant stakeholders

Identify requirements for ‘future-proofing’ infrastructure – resilience and flexibility

Market test outline concepts

Develop detailed processes and procedures regarding suppliers and equipment to be developed

Use highest quality components as an (obviously) risk-efficient and robust choice due to evidently high cost (difficulty) of future maintenance or repairs, and potential for catastrophic failure

Involve both development phase and operational phase personnel

Monitor the efficacy of the regulatory regime

Identify strategic purpose of infrastructure, within a wider context

Define requirements for RAMS: reliability, availability, maintainability, systems/safety

Select form of procurement, contractual terms and conditions, allocation of (operating) risk, period of contract, design of reward/incentives package.

Establish clear timelines and lead times to be allowed in case if operational phase staff does have changes

Install condition monitoring devices in infrastructure

Ensure proper handover and commissioning to the operations

Maintain the use of assets, forecasting future demand, and informing demand management strategies

The importance of operational risk and the need to manage it thoroughly from project inception is one of the most critical factors within the infrastructure industry. In concluding, it is important to keep in mind that risk is not just associated with particular events that could adversely affect operational performance. It is driven by a range of uncertainties that could have a positive or negative effect on operational performance. It should also be top of mind that operational uncertainties can rapidly escalate to have strategic significance.

With risk being a ‘make or break’ factor for the success of massive infrastructure projects, institutions can, by taking an Asset Lifecycle Management approach, identify and structure projects to ensure sustainable performance – right from the very start. In our view, this is one of the ultimate goals in future-proofing infrastructure on which so much socio-economic growth depends for billions of people on the African continent.

Conclusion

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Irina UnkovskiCapital Projects Risk Advisory lead

Direct: +27 (0)11 209 6721Email: [email protected]

Author

Key contacts

André PottasInfrastructure and Capital Projects lead

Direct: +27 (0)31 560 7033 Email: [email protected]

JP LabuschagnePPP & Infrastructure and Capital Projects specialist

Direct: +27 (0)11 209 8723Email: [email protected]

Karthi Pillay Director Risk Advisory

Direct: +27 (0)11 806 5173 Mobile: +27 (0)82 883 7337Email: [email protected]

Contacts

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