Critical Risk Areas for Public Infrastructure Projects - Part 1

July 22, 2019 | 4 minute read
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Public infrastructure is the backbone of global economic activity, facilitating the delivery of an array of vital services including: education, health, sanitation, transport, communication, electricity, clean water, and many others.

Unfortunately, infrastructure also faces an array of challenges, ranging from under-spending, poor planning, cost overruns and quality issues, to occasional project failure. Industry professionals can steer clear of this host of potential project pitfalls by becoming aware of seven areas of risk in public infrastructure projects.

Risk #1: Selecting the wrong project

The identification, evaluation, and selection of a public infrastructure project portfolio are vital to both governments and citizens. Projects selected for funding and implementation directly impact the social, economic, and environmental sustainability of countries, regions, and/or cities for decades to come.

Unfortunately, governments’ long-term transformational objectives frequently clash with citizens’ short- term sustainability needs. For example, a country may have a long-term goal of transitioning to a low-carbon economy, but citizens may need ageing coal-fired power stations to keep the lights on at their homes and businesses.

Public infrastructure can’t provide value to the community when projects are planned in isolation—and run the risk of becoming a stranded asset.

For example, a new dam is worthless without the support from multiple community stakeholders. A dam requires a supporting network of pump-stations, distribution channels, and water cleaning facilities as well as electricity to power the equipment, access roads, and government employees who can operate and maintain the system.

Risk #2: Reputational damage

The success or failure of large public infrastructure development projects can either boost or destroy careers and stakeholder reputations.

For example, during the project construction or commissioning phase, a community could become resentful if they weren’t invited to provide their input during the planning phase. Communities can shut down projects—irrespective of how the project may benefit the region or country—if they aren’t consulted during the hiring process for construction workers.

What’s more, communications can accuse projects of collusion or corruption in tender or contracting processes if infrastructure projects are lacking business processes or financial governance.

Further, a lack of appropriate business processes and financial governance can result in accusations of collusion and corruption in the tender or contracting processes. Setting up public infrastructure development projects can also result in misrepresenting project financial information.

If an individual or company is implicated in mishandling public funds, the potential consequences include damage to reputations and stock price—and even threats to the company’s very survival.

Risk #3: Financial failure

The financial success or failure of a project is classified into four broad categories, each with associated risk:

  • Financing and funding

A public infrastructure project might not secure public or private financing if financial governance processes and systems aren’t properly established. Projects could potentially lose funding midway due to financial irregularities, potentially delaying and disrupting the project program.

  • Capital costs

During the planning phase, part of financial modeling includes estimating the capital cost of a public infrastructure project. Unfortunately, substantial cost overruns in public infrastructure projects are the norm rather than the exception.

Capital costs are often underestimated if E&C professionals use incomplete designs as the basis for the cost estimate, resulting in requesting incorrect material quantities.

Further, under-resourced or inexperienced project development teams can also include outdated or inaccurate rates for labour, equipment, or material in the cost estimate. Awarding bids based on tender or bidding prices alone contributes to capital cost over-runs.

  • Complexities of project delivery

Tender or bidding adjudicators may not understand the full scope or complexity of the project delivery. Additional project costs include unforeseen rising prices and loan interests that manifest during extended construction periods for delayed projects.

Lastly, contractors will charge additional fees if the project owner causes any project delays or work disruptions. This may result in uncontrolled project cost increases without a rigorous contract change control system in place.

  • Revenue

Eventual users of the new public infrastructure development often provide funding via tariffs known as the “user-pay principle”. A current trend is to award a public-private partnership (P3) contract based on an asset’s estimated future revenue.

In many cases, income from an asset may not cover the operational and capital cost of the new asset. For example, if the community or end user didn’t agree to pay for a service, such as a toll road, the government will be responsible for servicing the loans used to finance the asset resulting in the financial failure of the project.

P3s are an attractive model for infrastructure projects that could potentially offer a significant upside to the public sector, but governments should take heed that P3s are legal, technically, and financially complicated. This financing model trend must be implemented thoughtfully and handled with care.

Read part two of this article, in which we explore additional areas of risk - and how technology help mitigate these exposures.

Watch our "Best Practices for Managing Public Infrastructure Projects" on-demand webinar.

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Werner Maritz

Werner Maritz is director of industry strategy for Oracle Construction and Engineering

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