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RISK MANAGEMENT IN

CONSTRUCTION

MBA CPM GROUP-1


SUB GROUP-6
TEAM MEMBERS:-

ADITYA PRATAP SINGH


SIDDHANT SINGH
AYUSH SONI
SHIVANKIT SHARMA
RAVI MUTNEJA
EFFECTIVENESS OF
MITIGATING MEASURES
The survey asked the respondents to evaluate the
effectiveness of the generally available mitigating
measures for the critical risks associated with Indias BOT
infrastructure projects, which were developed from the
literature review, personal experience and informal
discussion with my colleagues. The various critical risks
involved are:-

1) delay in approval risk


2) change in law risk
3) cost overrun risk
4) dispatch constraint risk
5) enforceability of contracts risk
EFFECTIVENESS OF MITIGATING
MEASURES FOR DELAY IN
APPROVAL RISK
Maintaining a good relationship with government authorities, especially
officers at the state or provincial level, is regarded as the most effective
measures because a foreign consortium will at least know from where and
who and how to get the approvals.

Mitigating measure Effectiveness


Mean Score Ranking
Establish JV (Joint Venture) with Indian 3.43 2
government agencies or state-owned
enterprises or local private partners, or with
foreign (international) company either
already or not yet operating in India
Obtain governments guarantees to adjust 3.19 3
tariff or extend concession

Maintain good relationship with Central and 3.86 1


State governments
EFFECTIVENESS OF MITIGATING
MEASURES FOR CHANGE IN LAW
RISK
Respondents felt that the most effective mitigating measure for this risk
was to obtain guarantees from the government to either adjust the tariff
or extend the concession period.

Mitigating measure Effectiveness


Mean Score Ranking
Obtain governments guarantees, e.g., 3.86 1
adjust tariff or extend concession period

Insurance for political risk 1.67 3

Maintain good relationship with Central and 3.62 2


State governments authorities
EFFECTIVENESS OF MITIGATING
MEASURES FOR COST OVERRUN
RISK
Respondent felt that the most effective mitigating measure for this risk was to include
penalty clauses in contracts with the project participants, e.g., constructors, input
suppliers, and the operator so that all share the responsibility, and the incentive, to
perform well as individuals but also to engage in solving problems that affect the health
of the overall project even if the cause of the problem does not lie with them.

Mitigating measure Effectiveness


Mean Score Ranking
Enter into contracts with the project 3.86 1
participants, e.g., constructors, input
suppliers, and the operator

Additional capital provided by shareholders 3.10 2


in the form of a stand-by subordinated loan
or as a stand-by capital contribution

Ask the lenders to provide standby credit 2.95 3


facilities for cost overruns
EFFECTIVENESS OF MITIGATING MEASURES
FOR DISPATCH CONSTRAINT RISK
The most effective measure for this risk, according to respondents, is to enter
into take-or-pay contracts with other parties. A take-or-pay contract is an
agreement by the product purchaser to pay specified payments periodically
for the product purchased, and to make specified minimum payments even if
it does not take delivery.
Mitigating measure Effectiveness
Mean Score Ranking
Enter into take-or-pay products (e.g., power 3.33 1
or water) purchase arrangements with
purchaser.

Enter into dispatch contracts with 3.33 2


government authorities to dispatch facilities
at full capacity for a minimum number of
hours each year.
Ask government to guarantee that 3.10 3
transmission system will be ready for
dispatch.
RISK MANAGEMENT FRAMEWORK FOR BOT
INFRASTRUCTURE PROJECT

Based on the survey results and analysis as well as case studies, a risk management
framework for investing in Indias future BOT infrastructure projects can be proposed as
follows.

Step 1: List all risks associated with the proposed BOT infrastructure project and then
analyze these risks in order of importance. The more critical the risk, the more attention
should be paid to it.

Step 2: For each risk, list corresponding mitigation measures as more as possible, and
then examine the availability of mitigating measures in sequence based on their
effectiveness. The more effective the measure, the higher the priority for adoption.
Sometimes, a combination of several mitigating measures is needed to be adopted.

Step 3: For each risk and its mitigating measures, negotiate with Indian government and
related entities to incorporate the risk mitigation measures, and fine tune the concession
agreement and other agreements as much as possible to ensure that all of these risks are
adequately covered.

Step 4: Allocate risks to related parties according to the principle that risk should be borne
by the party most capable of controlling it. An optimal allocation of risks depends on the
relative bargaining power of the parties and the potentiality of reward for taking the risks

Step 5: Adopt the risk allocation and security structure and enter into financing process
for the project.
CONCLUSION:-

In this research, the critical risks associated with Indias BOT projects were investigated. The main conclusions are as follows:
1) The identified critical risks in order of importance are: delay in approval, change in law, cost overrun, dispatch constraint,
land acquisition and compensation, enforceability of contracts, construction schedule, financial closing, tariff adjustment,
and environmental risk.
2) The measures for mitigating each of these risks have been evaluated by respondents. Most of the measures were
regarded as effective to some degree, however the most effective measures to mitigate each risk are:

) For delay in approval, maintaining a good relationship with government authorities, especially officers at the state or
provincial level.

) For change in law, obtaining governments guarantees via adjusting either the tariff or extending concession period.

) For cost overrun, entering into contracts with the project participants so that all share the responsibility and the
incentive.

) For dispatch constraint, entering into take-or-pay contracts with other parties

) For land acquisition and compensation, obtain governments guarantees to achieve timely acquisition of land.

) For enforceability of contracts, making a credit judgment on the financial ability and integrity of the contracting party
to live up to its contractual obligation;.

) For construction schedule, choosing quality, trust-worthy Indian partners with knowledge of how to handle everyday
construction issues.

) For financial closing, equity financing and cooperation with government partners;.

) For tariff adjustment, negotiating to separate and redefine the tariff burden so that while some portions of the total tariff
burden remained fixed other portions were either adjusted, re-scheduled or paid in foreign currency;.

) For environmental risk, creating appropriate lines of communication and contacts with government authorities and
agencies.