Project Life Cycle Risk Management Plan In An Urban Railway Development Project

The common problems in any urban rail projects are procurement which involves huge investment cost and risks treatment in construction and operation of long project life cycle.

HCMC Urban Railway Construction Project is the first Urban Rail Project in Vietnam and there is no good project model available in Vietnam in terms of big scale underground development, urban rail system, legal framework as well as no rail operator.

In addition, in completing this project, big capital is needed and inviting sponsor or investor involves lots of potential risks in Urban Rail PPP project since there is no law and regulation on PPP investment. Therefore, there is no good contractual sample in PPP opportunity in Urban Railway Project. The contractual risk management of concessionaire for Urban Rail in Vietnam shall be considered for the future, because the SPV or Concessionaire will face unforeseeable risks during construction and operation in its Project Life Cycle.

Mr. Gentaku Goto made a case on the Urban Railway Development Applied in Vietnam. His objectives were to: (1) study how to identify, provide treatment Major Risks to be occurred in Project Life Cycle of Urban Railway Project especially in Construction and Operation Phase; (2) study effective Contractual Risk Management in Public Private Partnership of Railway Development Project; and (3) study Key Success Factors and Risks of Urban Railway PPP Project in Vietnam and provide possible solution.

Conclusion

Through literature review and Case study, there are several findings which are useful for Risk Management Plan in the PLC of Urban Rail PPP. Conclusion and findings are summarized below.

Objective # 1

Critical Risks in the PLC of Urban Railway Investment are:

1. There is a tendency that risks can be identified in plan stage of the RMP, while system requirement shall be clarified in this stage. In case study, through preparation of the preliminary design and tender document and basic cost estimate, major risks are identified.

2. It seems that risks are allocated in the contract for its treatment (risk mitigation, avoidance, transfer, allocation, etc.,), while system requirement shall be apportioned into the contract as legal document.

3. Contract document is not a perfect RMP tool, but just a tentative basis of continuous risk management plan. During execution stage, uncertainty in the system requirement shall be continuously and verified to meet the requirement and for further risk treatment.

4. Upon Completion of Execution, System Acceptance shall be made in order to meet the System Requirement. After all uncertainties in the System Requirement are solved, such System is accepted and validated for commencement of the Railway Operation.

5. Risk management in the PLC shall focus on 5W + 3H e.g. When in the PLC stage? Where is the Scope of Work? What kinds of risks are identified? How much is the impact? How often it likely to occur? How much is the severity? To which way such risk will affect to other, and how to treat such Risk?

6. Legal and Political risks always interfere with the project progress in all stages in the PLC, in terms of feasibility of the investment, financial and taxation, construction quality, environment, traffic issues.

7. Project cost increases to VND 47 trillion due to change of demand, design requirement, safety improvement etc. It requires the approval by the National Assembly, one of the biggest Legal Risks, causing over 1 year delay of the project progress. Such delay will cause further cost increase.

8. The major reasons of the cost increase comprises of exchange fluctuation risk (46%), 30% demand increase risk (31%), allocation of future risk in contingency and escalation (29%), price increase for material, labor and equipment (20%), improvement of safety, reliability and convenience (19%).

9. Exchange rate fluctuation is the biggest risk and is commonly occurred in project investment in Vietnam, which should be avoided and eliminated by financer, because such risk factor affects cost increase of VND 12.0 trillion out of total cost estimate of VND47.0 trillion. If this risk is successfully eliminated, National Assembly approval may not need to wait because VND 35.0 trillion is the border line in terms of Law and Regulation (Resolution 49). JICA, as financer of mega project, may be required for big decision making for granting exchange rate fluctuation amount, for risk avoidance purpose, with some barter from Vietnamese side.

10. Demand increases by 30% risk affects scale of facility and equipment in preliminary design causing the project cost increase such as necessity of bigger station box in both underground and elevated, more rolling stocks etc.

11. Contingency rate is increased for change order by 4% and for escalation by 25% in order to allocate risk factor in the future. Due to the risk evaluation in the preliminary design stage and tender stage, the general consultants evaluate more uncertainty in the future of the PLC.

12. Other than the above mentioned major influenced factors, price increase of oil and construction materials, and improvement of safety, reliability and convenience requirement also affect cost increase by 40%. Those kinds of risk factors are not able to be avoided due to requirement by the employer, financer and customer in the future.

13. Technical risks such as design error risk, system integration risk, maintenance risk are not critical because it can be managed by continuous risk management and verification.

14. Demand forecast for revenue calculation shall be less estimated rather than carefully estimated, because demand forecast were overestimated on the average by 65% for major urban rail project investments overseas. It will affect decision making on investment risk treatment, so more conservative investment and cash flow planning is required.

15. At last, establishment of SPV is also critical risk for HCMC City, because this is first urban rail operator and maintenance service provider, on behalf of host government.

For objective number 2:

1) More public means the government body has empowerment for owing assets, technology, know-how, man power, using tax fund, in more traditional and closed (monopoly) market.

2) More private means the Special Purpose Vehicle (SPV), as a private entity, is empowered for owning assets, technology, know-how, man-power, using private fund, in more flexible and competitive market.

3) Eight (8) major responsibility dimensions of PPP options (Ownership, Competitiveness, Strategy, Organization Structure, Personnel Staffing, Funding, Know-How, and Public Image) shall be evaluated for contracting out. If successfully utilize private technology, know-how, funding in competitive market, the project cost will be reduced and money for value will be achieved.

4) Through the stakeholder analysis, it is important that contractual relationship between major party as SPV and the other party shall be analyzed and major risks behind the relationship between the SPV and others are identified. To reduce uncertainty, it should be clearly defined scope of work, responsibility and obligation of parties, time frame, and budget.

5) Procurement of consultant, contractor, input supplier, and off taker etc, shall be done through tendering consisting of 5 steps (request for proposal (tender document), proposal, evaluation of proposal, contract negotiation, contract signing). During the process, risks are identified, mitigated, controlled and apportioned into the contract. The requirement consists of technical and financial.

6) Contractual document shall indicate budget, schedule, man power, scope of work, responsibility and obligation of the both contractual parties, payment condition and technical and other requirements and shall be a basis to continuously monitor the performance against the system requirements in the PLC.

7) Through the contract negotiation, the employer (or the contractor ) ‘s thinking shall be accessed in terms of risk management as below:
- insufficient contingency or budget
- limited study budget
- very limited scope of work (partial construction etc.,)
- procurement of contractor without consideration of quality assurance, safety and health assurance of labor
- misunderstanding that construction cost estimate is the ceiling amount assures the final completed cost estimate, while it actually is tentative estimation we suppose.

8) A clearly defined scope of work is essential, because the employer tends to understand expanded scope of work in case its definition is vague. Especially, if the employer, in many cases, does not understand limitation of the consultant (contractor), prior conditions and assumption for the work,
- service scope and period
- experience and specialty of expertise
- responsibility undertaken

Payment of fees to consultant (contractor) shall not be affected by the factor. The contractual parties cannot control within their capability such as delay or climate factors.

9) Procurement process of the consultant (contractor), its quality and capability shall be evaluated fairly and allocate enough, but not too much fees toward the scope of work. If enough remuneration fee is not secured by the employer:
- quality of the service will be terribly low and will cause bad reputation, losing employment, bankruptcy due to low cost bidding, uncompleted report and output etc.,
- it may cause cash flow problem, low quality outcome, increase of total project life cycle cost, increase of construction cost, further design required and downloaded during the construction stage etc.

10) The relationship between the employer and the consultant (contractor) shall not be against relationship and both sides should share same goal on the project, and objective and prospect shall co-exist.

11) Resources shall not be over-committed in the Contract because it will lower the quality in case committed resources are totally replaced by mobilizing cheaper resources such as young expert.

12) Quality oriented planning is required in the contract to satisfy quality requirement in consideration with understanding of scope of work, implementation plan, manning plan, appropriate scheduling and appropriate budget allocation.

13) Contractual risk shall be mitigated and avoided by doing the followings:
- to understand and carefully study obligation in the service contract
- to identify important but burdensome terms, and provide legal advice on such terms
- to negotiate to eliminate such burdensome terms

For objective number 3:

1) The consultant should understand the importance of performing with due diligence, efficiency and economy in order to meet requirement of money for value, service quality and provide enough performance toward amount of fee.

2) Huge transfer of facility from MAUR, the project owner, to O&M Company will suppose after completion of infrastructure and railway systems and equipment. There is big risk in huge transfer especially; O&M Company is newly established. Therefore, transfer of MAUR staff to new O&M Company as well as gradual transfer of railway facility from MAUR to O&M Company is recommended.

3) After completion and operation of the Railway System, the project will be audited by 3rd party auditor. It is essential for the Employer (as well as the General Consultant) to record effectively and periodically key monitoring indicators for explanation to 3rd party in terms of :
- Improvement of public services: time and accessibility from Ben Thanh to Cat Lai Interchange
- Life opportunity: Increase of population having accessibility less than 10 minutes walk to nearest station.
- Revitalization of region: Increase of Business Zone Area along rail line
- Increase of employment: Increment Ratio of Population working for the Firm along Rail Line.
- Local society: Increment of Sub-Contract Nos. and Value with Local Contractor in the Region.
- Safety : Reduction of Car/ Motorbike Accident along the rail line and city
- Environment : CO2 reduction at the point

4) Transparency operation of the project in the PLC should be ensured for design requirement, tender selection transparency, 3rd party verification on tender result, disclosure of project outline and explanation, construction procedure, documentation recording system, demand forecast and other survey result related to the rail line on website etc. In terms of railway operation, safety, accuracy, environmental friendly and financial validity shall be monitored and opened in website.

5) Performance specification for the project shall be clearly set in the employer’s requirement in tender document and agreed in the contract. After contracting, the contractor shall perform; verify their work to meet the system requirement. Finally, at the completion of work, the system requirement shall be validated through commissioning and testing and system acceptance by the authorized party for rail operation.

6) Legal & regulation requirement: it is important for all the stage to study legal requirement in terms of overall project management, design, tendering, construction quality, environment, operation, government permission, auditing and accounting, taxation, etc, as well as to know whose authority to approve it if the proposal is beyond the law and regulation. Those legal restrictions shall cause critical issues such as delay of schedule, cost increase, re-work, and finally the cancelation of the project. Considering severity, risk treatment shall be considered case by case.

7) Risk capital: Funding is ensured by HCMC People’s Committee for Urban Railway Line 1 for establishing Operation and Maintenance Company as the State Owned Enterprises by funding 100% government fund. In the future, RMP for Share Issued Privatization (SIP) is also needing long term strategy for privatization, because SIP is required huge transfer of assets, human resources, technology and know-how to private sector. It takes time to develop competitive and transparent market for rail operation services.

His abstract thesis is copied and posted.

Abstract

To obtain benefit from Urban Rail Investment, it takes several decades to show actual reasonability of the investment while huge capital expenditures are easily spent through the Project Life Cycle. Two theory approaches are taken in Literature Review and Case Study to apply Risk Management Plan in the Project Life Cycle in order to identify, handle, control, treat major risks which will be occurred in the Project Life Cycle of Urban Railway Investment including Design, Construction, Operation stages as well as to apply Public Private Partnership in Urban Rail in order to study effective Contractual Risk Management among the Stakeholders in Public Private Partnership of Railway Development Project.

The Case Study for Ho Chi Minh City Urban Railway Construction Project (Ben Thanh –Suoi Tien Section) Line 1 is analyzed in order to apply actual Risk Management Plan to breakdown Risk Factors of Project Delay and Cost Increase etc, and find our Key Success Factors of Urban Railway PPP Project in Vietnam. This research can hopefully be a hint to find out connection between Risk Factors in activities in the Project Life Cycle.

Keywords ; Risk Management, Project Life Cycle, Urban Railway, Public Private Partnership, Stakeholder Risk Management, Construction and Operation