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characterization of risk factor management in infrastructure projects a case study of Pakistan

CHARACTERIZATION OF RISK FACTOR


MANAGEMENT IN INFRASTRUCTURE PROJECTS A
CASE STUDY OF PAKISTAN

Submitted By

Ahmar Waqas Khan Niazi


Sp-2016/M.Sc.EM/013

Supervisor

Dr. Nadeem Kureshi


Associate Professor

FACULTY OF MANAGEMENT SCIENCES


CENTER FOR ADVANCED STUDIES IN ENGINEERING

February 2018
characterization of risk factor management in infrastructure projects a case study of Pakistan

CHAPTER NO 1
INTRODUCTION

Risk management (RM) is a concept which is used in all industries, from IT related
business, automobile or pharmaceutical industry, to the construction sector. Each industry
has developed their own RM standards, but the general ideas of the concept usually remain
the same regardless of the sector. According to the Project Management Institute (PMI)
(2004), project risk management is one of the nine most critical parts of project
commissioning. This indicates a strong relationship between managing risks and a project
success. While RM is described as the most difficult area within construction management
(Winch, 2002; Potts 2008) its application is promoted in all projects in order to avoid
negative consequences (Potts, 2008).

Infrastructure projects in a country represents a set of assets, which if managed


effectively, can become attractive to foreign investments, in addition to supporting the
development and social, cultural, and economic stability of a nation. There are different
types of infrastructure projects, divided into two categories: a) economic: bridges, drainage
systems, industrial plants, telecommunications, rail transport, etc. social: construction of
schools, prisons and hospitals, tourist systems, etc. (Ng & Loosemore, 2007).

Background
Infrastructure is the fundamental requirement in the functioning of any country. In
today’s modern era, we need electricity to power our homes and industry. We need roads
to transport goods from one place to the other and then ports and airports to export our
industrial products to foreign trade partners. Similarly, a modern nation requires effective
water and sanitation to improve and sustain the health and cleanliness of its people. In all
situations, infrastructure is such a necessity that it affects the lives of every single individual
on this planet. Lack of proper infrastructure causes chaos and havoc in our lives. It also
causes bottlenecks in the smooth functioning of the economy (Ahmed, Abbas, & Ahmed,
2013). Pakistan’s infrastructural situation is relatively poor by international standards and
this has an acute effect on the lives of every Pakistani in the country. Everyone suffers from
electricity shortages and the lack of proper water and sanitation provisions. Also as the
population increases our problems have gotten worse.
characterization of risk factor management in infrastructure projects a case study of Pakistan

The Government of Pakistan and its people face an uphill battle against poor
infrastructure and it seems like the latter is winning. The improvement and expansion of
infrastructure is a pre-requisite for sustaining and accelerating economic growth and social
development in a country. Improving quality and service coverage in power, water supply
and sewerage treatment, transport and logistics is crucial for Pakistan’s economy and to
improve the quality of life. It is estimated that due to insufficiency, Pakistan looses about
4 to 6 percent of its GDP (approximately $6 billion). Logistical bottlenecks increase the
cost of production of our goods by about 30 percent. This has a significant impact as
Pakistan is facing stiff competition from the likes of India and China in the export markets.
To improve and expand infrastructure, Pakistan’s needs are massive and its resources are
limited. Not only is there limited fiscal space, there are also huge gaps in public sector
capacity to build and operate infrastructure. Tight fiscal indicators such as fiscal deficit of
4.2 per cent, trade deficit of around $ 10 billion and current account deficit of 4.4 percent
of GDP does not permit to spare public sector resources for infrastructure development. As
the economy is growing at the average rate of 7 percent per annum, it requires investment
on infrastructure at around 7 to 9 percent of GDP (Kessides, 2013).
Investments in infrastructure projects are necessary conditions for the economic
growth of a country. This is not a trivial effort. Developing countries like Pakistan have
been able to mobilize resources, in a horizon of more than 20-30 years, without reductions
that compromise the integrity and quality of the projects in this sector (Lodi, 2015). In
general, and regarding the experience of developed countries and emerging economies (Fay
& Morrison, 2005), it is observed that these projects result in assets that, if well managed,
can contribute to sustainable gains in competitiveness (Ng & Loosemore, 2007). All over
the world, development of the country relies on construction sector which is considered as
a vital industry. The development and growth of a country depends upon the excellency of
construction companies and their qualification (Lodi, 2015). Construction industry is a
risky business because construction project contains series of activities which requires
diversified coordination. Every project is specific and complex in the construction industry
because it operates on uncertain environment (Mohammad Ali Rezvani Befrouei, 2015).
Construction industry is greatly susceptible to risk, with dynamic and complex project
atmospheres which form an environment of high risk and uncertainty. The construction
industry is exposed to different business, sociopolitical and technical risks. The track record
is not good with dealing these risks in construction industry. The outcome of this will lead
people associated with this industry to bear various failures, such as operational and quality
characterization of risk factor management in infrastructure projects a case study of Pakistan

requirements failure, more financial requirement and completion of project with uncertain
delays. The process which involves risks identification, quantitatively and qualitatively
assessment, handling risks with suitable method for responses and monitoring for
controlling the risks is termed as risk management (Krantikumar Mhetre, 2016). It is
necessary for the construction industry to follow appropriate submission of business
practices. A lot of different variables are observed during the execution of a construction
project and for the enforcement of sound business practices and decision, complex
relationship exists (Shahid Iqbal, 2015).When the contract is won by the tender, risk should
be taken into account in the beginning stage for the investment process. The decision for
accepting the contract is largely dependent on risk levels which are identical for similar
construction contract.

Classification of Risks

For effective Risk Management, risk classification is of prime importance. There


are many kinds of classifications have been made so far (Chapman, et al., 2003). In general,
risks associated with pipeline projects may be classified as broadly:

 Risk during Construction

 Risk during Operation

The type and causes of risk in each class are different. Risks during construction are
time susceptible and the probability of occurrence of different risk are time dependent,
more is the duration of project higher are the probabilities (Vose, 2008). These are generally
related to execution of work processes, material availability, manpower, finances (budget),
time frame, accidental, legal and environmental. However, in operation, risk are slightly
different, in which emphasis is given to avoid those factor with hurdle safe and smooth
operation/functioning of pipeline. Usually, in mega projects such as cross country trunk
pipelines investment risk are considered most import followed by the security risk. More
precisely, risk during construction and operation of oil and gas pipelines can be divided
into following categories:

i. Political risk

ii. Socio-economical risk


characterization of risk factor management in infrastructure projects a case study of Pakistan

iii. Technical risk

iv. Organizational risk

iv. Natural catastrophic risk

v. Financial risk (investment risk)

vi. Safety and security risk

vii. Environment risk (Meredith and Mantel 2011).

Unlike in other developed countries, there is very less research work that has been
done in past regarding risk management in Pakistan. Hence, there is no significant research
literature available about construction risk management topic in Pakistan. Therefore, there
was a need to literate the construction community about the limitations as well as
opportunities belonging to risk management in infrastructure projects (Smith, 2003).

The scope of research was kept to contractors all the stakeholders of a construction
projects, the role of contractors is more vital than others in terms of allocation, analysis,
and management of construction associated risks. An attempt has been made in this
research to introduce risk management in perspective of contractors in Pakistan through
investigating:

Risks faced by various stakeholders in construction projects,

 Analysis of the approach of Pakistan’s contractor organizations towards risk


management,

 Methodologies of risk management and analysis adopted by Pakistan’s contractors


in different construction projects

 Proposing risk factors to evaluate the impact of risks on scope, schedule and budget
of the projects.

Problem Statement
Risks in construction projects are due to the uncertainty involved at decision making
of management, manipulation of resources, tackling of constraints, implementation of
characterization of risk factor management in infrastructure projects a case study of Pakistan

quality etc. Therefore, construction projects are always a risky undertaking for all involved
stakeholders (client, consultant, and contractor). The contractor as one of the stakeholder
has to face maximum challenges to overcome the risk associated uncertainties. The
management is essential in dealing with the potential risk exposures to the contractors. In
response to these ever increasing uncertainties, in developed countries risk management
was introduced as a separate new field in construction industry to manage risks effectively.
Pakistan’s infrastructural situation is relatively poor by international standards and this has
an acute effect on the lives of every Pakistani in the country. Everyone suffers from
electricity shortages and the lack of proper water and sanitation provisions. Also as the
population increases our problems have gotten worse. The Government of Pakistan and its
people face an uphill battle against poor infrastructure and it seems like the latter is winning
(Hamid, 2010).
This study aims to understand how risk factor management is characterized in the
performance of infrastructure projects. The multiple-case study methodology was used,
including the analysis of 3 projects of three different economic sectors. Empirical evidence
suggests that the impact of risk factors in the performance of projects depends on risk
management intensity and on the skills of risk managers, but it does not vary with project
complexity. Furthermore, the intensity of the analyzed performance dimensions may vary
according to the influence of the factors considered.

Aims & Objectives


This study aims to better understand how is characterized the risk factors on the
performance of infrastructure projects.
 Risks faced by various stakeholders in infrastructure projects
 Analysis of the approach of Pakistan’s organizations towards risk management,
 Methodologies of risk management and analysis adopted by Pakistan’s companies
in different infrastructure projects
 Proposing risk factors to evaluate the impact of risks on scope, schedule and budget
of the projects.

Hypostasis
The Hypostasis of this study include the following:
1 There are significantly correlation between the risk management and performance of
infrastructure project.
characterization of risk factor management in infrastructure projects a case study of Pakistan

2 There are significantly correlation between risk identification and risk control
3 There are significantly difference between risk analysis and risk review
4 There are significantly difference between presence of risk factors in projects is an
important step to prevent damage in the performance.
5 There are significantly difference between risks change during a project life cycle

1.4 Theoretical Framework

Risk Identification Risk analysis

Risk control

Risk Review Risk Response

1.5 Limitations
The research focuses on the construction industry and is based on theories of risk
management described in the literature. The research was complemented by a study of an
infrastructure project in Islamabad with some of the stakeholders involved in it. Due to the
limited research time of the thesis, the project was investigated during the planning and
design phase only.
characterization of risk factor management in infrastructure projects a case study of Pakistan

1.6 Research Design