Risk Assessment of Port Investment Projects

Within a large port investment project the assessment and management of risks is very important. Without an extensive risk analysis the project might easily go over budget or will not be finished within the project deadlines. Or even worse: the project is cancelled before completion and loss of money is the result. Large port investment projects regularly include several kinds of risks. The following main risk categories can be identified: country, market, project, environmental and regulatory risks. All these different risk categories should be assessed and their impact on the project needs to be identified. Since port investment projects normally require very large investments in a dynamic and uncertain atmosphere, a clear risk analysis and identification of the critical path of the project is needed. Therefore investors of port projects are eager to receive strategic planning and investment advice. A reliable and thorough risk analysis is the basis on which the shareholders of an investor decide to commence, to continue with or to withdraw the investment. A strategic planning methodology is required to assess and manage the projects dynamically. Within literature, little is written about risk assessment in large port projects and furthermore international port consultants require a method statement on how to provide and offer dynamic strategic planning advice to their clients. The main research question is therefore:  Is risk assessment for port investment projects needed and what would be a solid methodology? The following sub-questions are considered:  What are the major risk factors involved in port investment projects?  How do we present the risks within port projects and identify additional possible cost?  How do we prioritize issues in time and provide insight into the critical path of the project? The primary objectives for this thesis resulting from the research questions are 1) to develop the input for a systematic methodology to identify and assess the risks specific for port development projects and 2) to qualify, quantify and prioritize the relative importance of the identified risks. Risk Management comprises the structuring of project tasks, the identification of the project risks and the control of these most important project risks. Risk Management usually consist of the following steps: risk assessment, risk mitigation and control and risk management evaluation. In this thesis the focus is on the first step of the risk management cycle: the risk assessment including risk identification and analysis. Performing a risk assessment for investment projects may result in several results and benefits. The project and accompanying investment will be continuously reconsidered through the project Master Thesis Urban, Port and Transport Economics Risk Assessment of Port Investment Projects C.W. Bos 16 May 2012 Final Report ii life cycle resulting in a greater chance on achieving the strategic project objectives, or as a last resort by rethinking the strategic project objectives itself. A more realistic planning can be prepared as possible delays in the projected schedule can be identified in early stages and as a result there will be a larger chance on achieving the business planning. Due to better planning in cost and time, resources can be more effectively used and services will be improved as a result of the stricter management. Since the construction of very large infrastructural projects, budget overruns are well-known. The challenge in project evaluation is to value the investment correctly and to continue with an investment that will add value. To achieve this, project risks and strategies must be incorporated in the capital budgeting process. If the decision is made to proceed with the project, these risks and strategies must be monitored during the project. The nature of port projects shows the need for a risk analysis as these are generally large projects with large cash flows, having many different and diffuse players, containing various types of risk events and the impact of these projects goes beyond the regional boundaries of the port. The increasing size of investments in port development projects result in risks having a growing impact on the project’s performance. Larger and longer projects are more sensitive to cost overruns. Furthermore stakeholders will have different perceptions of risk and uncertainty. Risk assessment is considered to contribute to a positive project outcome especially for complex projects like port developments. The use of a risk assessment may result in investors being prepared for existing and potential risk and organisations having increased confidence in achieving the desired outcome of the investment. Investors will be able to take informed decisions about investments based on clear forecasting and assumptions and constrain the impact of risk events by taking mitigating measures. Risk assessment takes into account what might occur and will save time, money and stress today and in the future. Risk identification is the first step of the risk assessment process with the aim to understand all the key risk events that are relevant to the port investment project and to define all potential consequences. The risk identification process for port investment projects is recommended to consist of a standard checklist, scenario analysis and/or flow chart, stakeholder workshops and expert interviews. A risk register need to be setup to keep track of the risks of the project and act as a repository of knowledge and initiate the risk analysis process. By ranking the risks the importance of the risks with regard to likelihood and impact is indicated. It is advised to apply both qualitative and quantitative methods in the risk assessment. Not all risks can be transferred into monetary values and/or time impact. The risk events within a project are joined by corresponding costs that influences the decision taking about the project and the amount of budget and time that should be used for mitigating the risk. A (semi) qualitative risk analysis is recommended for presenting the likelihood and impacts of the risk events. A risk rating matrix and risk map should be applied to visualize the risk events. Special attention should be paid to risk with a major consequence and a very low likelihood. These risks may result in severe environmental, social or project results or can be potential show stoppers for the business. These risks might be related to other events and this Master Thesis Urban, Port and Transport Economics Risk Assessment of Port Investment Projects C.W. Bos Final Report 16 May 2012 iii should be investigated carefully. It is recommended to indicate these risks in the Risk Register as exceptional risk and urgently evaluate them. In case sufficient and reliable data is available a quantitative risk analysis can be added to the risk assessment by using the Monte Carlo method. Two sources of risks need to be identified, namely general contingencies and special events. General contingencies are taken into account for uncertainty in the unit rates, local prices and changes in the design. These general contingencies have a 100% probability in the quantitative analysis and are allocated to all elements of the capital cost estimate of the project. The special events have a probability of less than 50%. These special events have a relative small probability and are therefore not included in the deterministic cost estimate. In the probabilistic estimate the probability distribution of these risks is included. It is recommended to perform a sensitivity analysis and stress test to the results of the quantitative analysis. The risk assessment methodology for port investment projects as set up in this thesis will contribute to providing investors strategic advice for their investments. International maritime consultants can apply the methodology for making carefully considered recommendations to their clients on the progress of the projects. The methodology for risk assessment provides engineering consultants a standard method statement that can contribute to a uniform way of working for strategic planning advisory projects.