Managing Infrastructure Project Risks

Agenda

Risk and Risk Management Need for Risk Management L&T Business Structure Risks in Infrastructure Projects Risk Management Process in L&T

Agenda

Need for Risk Management L&T Business Structure Risks in Infrastructure Projects Risk Management Process in L&T

Risk
Consider this :
A man leaps from an airplane without a parachute

What is the Risk attached ?

Risk is exposure to a proposition, outcome of which is uncertain

Risk Definition
Exposure to an uncertain situation that could have an effect which is a deviation from the expected. Deviation can be positive or negative

An uncertain event or set of circumstances that, should it occur, will have an effect on the achievement of one or more of the projects objectives.
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Risk Management

Does it mean avoid or eliminate possibility of any uncertain event happening?

That can happen only if we dont start the basic activity itself e.g. there is always a risk of a car accident. How do we avoid it? By not running the car at all??? OR, We put disc brakes, airbags, seatbelts.. We formulate & follow traffic rules for driving and of course train the drivers well

What we have actually done?

We have put to use tools, standard procedures and training to mitigate risks
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Risk Management

Risk Management is a process whereby responses to the risks are formulated, justified, planned, progressed, measured, monitored to achieve the desired objectives.

Agenda

Risk and Risk Management

L&T Business Structure Risks in Infrastructure Projects Risk Management Process in L&T

Need for Risk Management

Regulatory requirement under Clause 49 of SEBI Listing agreement Large size businesses with complex operations

Avoidance of surprises in companys future earning trends

Increasing competition domestic and international players

Foray into international business fraught with larger unknowns

Analyst and investor community unforgiving

Clients requirement of having a structured risk management process

Etc.

Agenda

Risk and Risk Management Need for Risk Management

Risks in Infrastructure Projects Risk Management Process in L&T

L&T Business Structure

Independent Companies (ICs)

Buildings & Factories Infrastructure Metallurgical & Material Handling Power Transmission & Distribution Hydrocarbon Power Heavy Engineering Shipbuilding Electrical & Automation Machinery & Industrial Products

Subsidiaries & Associates

L&T Finance Holdings L&T Infotech Infrastructure Development Projects Ltd MHI JVs L&T Sargent & Lundy L&T Chiyoda L&T Oman L&T Valdel Others

Project Businesses
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Net Revenues FY 2011-12

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Agenda

Risk and Risk Management Need for Risk Management L&T Business Structure
Risk Management Process in L&T

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Typical Risks in an Infrastructure Project

Regulatory approvals
Delays in land acquisition, ROW approval, Front availability, Environmental clearances etc.

Client related
Creditworthiness of client, client reputation, status of financial closure - important in case of private sector clients or new international clients etc.

Consortium risks
Clarity of risk and liability sharing arrangement between consortium partners etc.
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Typical Risks in an Infrastructure Project

Estimation risks
Increase in input prices, quantity variations, inadequate provision for contingencies, forex fluctuations etc.

Commercial risks
Change order approval process, Bank guarantee clauses, payment terms, taxes and duties etc.

Organisational risks
Inadequate quality of technical and managerial resources, poor project management / cost control / working capital management, unsatisfactory contracts management etc.
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Typical Risks in an Infrastructure Project

Technical, quality or performance risk
Clarity about scope of work, meeting performance standards and time schedule related LDs, Warranty and Latent defect liability conditions etc.

Interfacing risks
Inability to co-ordinate with multiple agencies involved in the project from design to commissioning etc.

Logistics risks
Accommodation of project personnel in remote locations, international movement of large number of people, transportation of material to difficult sites etc.
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Typical Risks in an Infrastructure Project

External risks
Change/unfamiliar legal or regulatory environment, unfavorable geological conditions and weather, earthquake and floods, foreign currency fluctuations, inflation etc.

International Business
Political risk, bureaucracy in environment, legal risks, maturity of banking systems, local labour laws etc.

Dispute resolution
Improper legal clauses, Country specific Arbitration laws, etc.
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Agenda

Risk and Risk Management Need for Risk Management L&T Business Structure Risks in Infrastructure Projects

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Risk Management at Different Levels in L&T

Policy

Board of Directors Corporate Risk Management

Independent Companies SBGs/ BUs Corporate Functions

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Guidelines

Operations

Reporting

Risk Management Process in L&T

Objective Coverage / Scope Organization Structure Roles and Responsibilities Risk Management Process Risk MIS & Reporting

Risk Policies at all ICs

Risk assessment Identify risks

Typical Risk Assessment Process

Analyse risks Evaluate risks

Mitigate risks
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Mitigation of Risks Typical Process Flow

Risk Assessment Identification Analysis Evaluation

Avoid Reduce Overall Risk Transfer Accept

Risk Controlling Reviews Supervision Early Warning

Residual Risk

Risk Mitigation
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Risk Management Process in L&T

Projects are reviewed at two stages

Pre-bid Stage

Execution Stage

Reviewed at different management levels based on their value

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Mitigation avenues and bidding strategy discussed

Monitoring of pre-bid stage risk mitigation plans

Identification and mitigation of new emerging risks

Thank you

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