Risk sharing with Multilateral Financial Institutions in infrastructure and energy project financing : effect on capital relief for commercial banks

(Matsukawa and Habeck, 2007) analyse the main instruments for risk mitigation in infrastructure financing with Multilateral Financial Institutions (MFIs). Their review coincided with the global financial crisis of 2007-08, and is highly relevant in current times considering the sovereign debt crisis, the lack of available capital and the increases in bank regulation in Western economies. The current macroeconomic environment has seen a slowdown in the level of finance for infrastructure projects, as they pose a higher credit risk given their requirements for long term investments. The rationale for this work is to look for innovative solutions that are focused on the credit risk mitigation of infrastructure and energy projects whilst optimizing the economic capital allocation for commercial banks. This objective is achieved through risk-sharing with MFIs and looking for capital relief in project finance transactions. This research finds out the answer to the main question: "What is the impact of risk-sharing with MFIs on project finance transactions to increase their efficiency and viability?", and is developed from the perspective of a commercial bank assessing the economic capital used and analysing the relevant variables for it: Probability of Default, Loss Given Default and Recovery Rates, (Altman, 2010). An overview of project finance for the infrastructure and energy sectors in terms of the volume of transactions worldwide is outlined, along with a summary of risk-sharing financing with MFIs. A review of the current regulatory framework beneath risk-sharing in structured finance with MFIs is also analysed. From here, the impact of risk-sharing and the diversification effect in infrastructure and energy projects is assessed, from the perspective of economic capital allocation for a commercial bank. CreditMetrics (J. P. Morgan, 1997) is applied over an existing well diversified portfolio of project finance infrastructure and energy investments, working with the main risk capital measures: economic capital, RAROC, and EVA. The conclusions of this research show that economic capital allocation on a portfolio of project finance along with risk-sharing with MFIs have a huge impact on capital relief whilst increasing performance profitability for commercial banks. There is an outstanding diversification effect due to the portfolio, which is combined with risk mitigation and an improvement in recovery rates through Partial Credit Guarantees issued by MFIs. A stress test scenario analysis is applied to the current assumptions and credit risk model, considering a downgrade in the rating for the commercial bank (lender) and an increase of default in emerging countries, presenting a direct impact on economic capital, through an increase in expected loss and a decrease in performance profitability. Getting capital relief through risk-sharing makes it more viable for commercial banks to finance infrastructure and energy projects, with the beneficial effect of a direct impact of these investments on GDP growth and employment. The main contribution of this work is to promote a strategic economic capital allocation in infrastructure and energy financing through innovative risk-sharing with MFIs and economic pricing to create economic value added for banks, and to allow the financing of more infrastructure and energy projects. This work suggests several topics for further research in relation to issues analysed. (Matsukawa and Habeck, 2007) analizan los principales instrumentos de mitigación de riesgos en las Instituciones Financieras Multilaterales (IFMs) para la financiación de infraestructuras. Su presentación coincidió con el inicio de la crisis financiera en Agosto de 2007, y sus consecuencias persisten en la actualidad, destacando la deuda soberana en economías desarrolladas y los problemas capitalización de los bancos. Este entorno macroeconómico ha ralentizado la financiación de proyectos de infraestructuras. El actual trabajo de investigación tiene su motivación en la búsqueda de soluciones para la financiación de proyectos de infraestructuras y de energía, mitigando los riesgos inherentes, con el objeto de reducir el consumo de capital económico en los bancos financiadores. Este objetivo se alcanza compartiendo el riesgo de la financiación con IFMs, a través de estructuras de risk-sharing. La investigación responde la pregunta: "Cuál es el impacto de risk-sharing con IFMs, en la financiación de proyectos para aumentar su eficiencia y viabilidad?". El trabajo se desarrolla desde el enfoque de un banco comercial, estimando el consumo de capital económico en la financiación de proyectos y analizando las principales variables del riesgo de crédito, Probability of Default, Loss Given Default and Recovery Rates, (Altman, 2010). La investigación presenta las cifras globales de Project Finance en los sectores de infraestructuras y de energía, y analiza el marco regulatorio internacional en relación al consumo de capital económico en la financiación de proyectos en los que participan IFMs. A continuación, el trabajo modeliza una cartera real, bien diversificada, de Project Finance de infraestructuras y de energía, aplicando la metodología CreditMet- rics (J. P. Morgan, 1997). Su objeto es estimar el consumo de capital económico y la rentabilidad de la cartera de proyectos a través del RAROC y EVA. La modelización permite estimar el efecto diversificación y la liberación de capital económico consecuencia del risk-sharing. Los resultados muestran el enorme impacto del efecto diversificación de la cartera, así como de las garantías parciales de las IFMs que mitigan riesgos, mejoran el recovery rate de los proyectos y reducen el consumo de capital económico para el banco comercial, mientras aumentan la rentabilidad, RAROC, y crean valor económico, EVA. En escenarios económicos de inestabilidad, empeoramiento del rating de los bancos, aumentos de default en los proyectos y de correlación en las carteras, hay un impacto directo en el capital económico y en la pérdida de rentabilidad. La liberación de capital económico, como se plantea en la presente investigación, permitirá financiar más proyectos de infraestructuras y de energía, lo que repercutirá en un mayor crecimiento económico y creación de empleo. La principal contribución de este trabajo es promover la gestión activa del capital económico en la financiación de infraestructuras y de proyectos energéticos, a través de estructuras innovadoras de risk-sharing con IFMs y de creación de valor económico en los bancos comerciales, lo que mejoraría su eficiencia y capitalización. La aportación metodológica del trabajo se convierte por su originalidad en una contribución, que sugiere y facilita nuevas líneas de investigación académica en las principales variables del riesgo de crédito que afectan al capital económico en la financiación de proyectos.

The determinants of multinational contractors' willingness to bid for Australian public sector major infrastructure projects : towards deploying the eclectic paradigm of internationalisation

Against a background of already thin markets in some sectors of major public sector infrastructure in Australia and the desire of Australian federal government to leverage private finance, concerns about ensuring sufficient levels of competition are prompting federal government to seek new sources of in-bound Foreign Direct Income. The aim of this paper is to justify and develop a means to deploying the eclectic paradigm of internationalisation that forms part of an Australian federally funded research project designed to explain the determinants of multinational contractors' willingness to bid for Australian public sector major infrastructure projects. Despite the dominance of the eclectic paradigm as a theory of internationalisation for over two decades, it has seen limited application in terms of multinational construction. It is expected that the research project will be the first empirical study to deploy the eclectic paradigm to inbound FDI to Australia whilst using the dominant economic theories advocated for use within the eclectic paradigm. Furthermore, the research project is anticipated to yield a number of practical benefits. These include estimates of the potential scope to attract more multinational contractors to bid for Australian public sector infrastructure, including the nature and extent to which this scope can be influenced by Australian governments responsible for the delivery of infrastructure. On the other hand, the research is also expected to indicate the extent to which indigenous and other multinational contractors domiciled in Australia are investing in special purpose technology and achieving productivity gains relative to foreign multinational contractors.

The determinants of multinational contractors' willingness to bid for Australian public sector major infrastructure projects : deploying the eclectic paradigm of internationalisation

Based on Dunning's dominant international business theory and the unique characteristics of construction, a novel framework is developed and tested to explain multinational contracting into Australia. Beyond contributions to theory, Australian governments now have clear evidence upon which to develop more effective procurement reform towards increasing the attractiveness of public sector major infrastructure projects and competition in this sector.

Implementing value management as a decision-making tool in the design stages of design and build construction projects : a methodology for improved cost optimization

Value Management (VM) has been proven to provide a structured framework, together with other supporting tools and techniques, that facilitate effective decision-making in many types of projects, thus achieving ‘best value’ for clients. One of the major success factors of VM in achieving better project objectives for clients is through the provision of beneficial input by multi-disciplinary team members being involved in critical decision-making discussions during the early stage of construction projects. This paper describes a doctoral research proposal based on the application of VM in design and build construction projects, especially focusing on the design stage. The research aims to study the effects of implementing VM in design and build construction projects, in particular how well the methodology addresses issues related to cost overruns resulting from poor coordination and overlooking of critical constructability issues amongst team members in construction projects in Malaysia. It is proposed that through contractors’ early involvement during the design stage, combined with the use of the VM methodology, particularly as a decision-making tool, better optimization of construction cost can be achieved, thus promoting more efficient and effective constructability. The main methods used in this research involve a thorough literature study, semi-structured interviews, and a survey of major stakeholders, a detailed case study and a VM workshop and focus group discussions involving construction professionals in order to explore and possibly develop a framework and a specific methodology for the facilitating successful application of VM within design and build construction projects.

An integrated framework to assess financial reward systems in construction projects

Motivation is a major driver of project performance. Despite team member ability to deliver successful project outcomes if they are not positively motivated to pursue joint project goals, then performance will be constrained. One approach to improving the motivation of project organizations is by offering a financial reward for the achievement of set performance standards above a minimum required level. However, little investigation has been undertaken into the features of successful incentive systems as a part of an overall delivery strategy. With input from organizational management literature, and drawing on the literature covering psychological and economic theories of motivation, this paper presents an integrated framework that can be used by project organizations to assess the impact of financial reward systems on motivation in construction projects. The integrated framework offers four motivation indicators which reflect key theoretical concepts across both psychological and economic disciplines. The indicators are: (1) Goal Commitment, (2) Distributive Justice, (3) Procedural Justice, and (4) Reciprocity. The paper also interprets the integrated framework against the results of a successful Australian social infrastructure project case study and identifies key learning’s for project organizations to consider when designing financial reward systems. Case study results suggest that motivation directed towards the achievement of incentive goals is influenced not only by the value placed on the financial reward for commercial benefit, but also driven by the strength of the project initiatives that encourage just and fair dealings, supporting the establishment of trust and positive reciprocal behavior across a project team. The strength of the project relationships was found to be influenced by how attractive the achievement of the goal is to the incentive recipient and how likely they were to push for the achievement of the goal. Interestingly, findings also suggested that contractor motivation is also influenced by the fairness of the performance measurement process and their perception of the trustworthiness and transparency of their client. These findings provide the basis for future research on the impact of financial reward systems on motivation in construction projects. It is anticipated that such research will shed new light on this complex topic and further define how reward systems should be designed to promote project team motivation. Due to the unique nature of construction projects with high levels of task complexity and interdependence, results are expected to vary in comparison to previous studies based on individuals or single-entity organizations.

Towards testing a new first-order decision making model for the procurement of public sector major infrastructure

Given global demand for new infrastructure, governments face substantial challenges in funding new infrastructure and simultaneously delivering Value for Money (VfM). As background to this challenge, a brief review is given of current practice in the selection of major public sector infrastructure in Australia, along with a review of the related literature concerning the Multi-Attribute Utility Approach (MAUA) and the effect of MAUA on the role of risk management in procurement selection. To contribute towards addressing the key weaknesses of MAUA, a new first-order procurement decision making model is mentioned. A brief summary is also given of the research method and hypothesis used to test and develop the new procurement model and which uses competition as the dependent variable and as a proxy for VfM. The hypothesis is given as follows: When the actual procurement mode matches the theoretical/predicted procurement mode (informed by the new procurement model), then actual competition is expected to match optimum competition (based on actual prevailing capacity vis-à-vis the theoretical/predicted procurement mode) and subject to efficient tendering. The aim of this paper is to report on progress towards testing this hypothesis in terms of an analysis of two of the four data components in the hypothesis. That is, actual procurement and actual competition across 87 road and health major public sector projects in Australia. In conclusion, it is noted that the Global Financial Crisis (GFC) has seen a significant increase in competition in public sector major road and health infrastructure and if any imperfections in procurement and/or tendering are discernible, then this would create the opportunity, through the deployment of economic principles embedded in the new procurement model and/or adjustments in tendering, to maintain some of this higher level post-GFC competition throughout the next business cycle/upturn in demand including private sector demand. Finally, the paper previews the next steps in the research with regard to collection and analysis of data concerning theoretical/predicted procurement and optimum competition.

The role of core protest group members in sustaining protest against controversial construction and engineering projects

Community-based protests against major construction and engineering projects are becoming increasingly common as concerns over issues such as corporate social accountability, climate change and corruption become more prominent in the public's mind. Public perceptions of risk associated with these projects can have a contagious effect, which mismanaged can escalate into long-term and sometimes acrimonious protest stand-offs that have negative implications for the community, firms involved and the construction industry as a whole. This paper investigates the role of core group members in sustaining community-based protest against construction and engineering projects. Using a thematic story telling approach which draws on ethnographic method and social contagion theories, it presents an in-depth analysis of a single case study - one of Australia's longest standing community protests against a construction project. It concludes that core group members play a critical role, within anarchic structures which provide a high degree of spontaneity and improvisation, in sustaining movement continuity by building collective identity, mobilising resources and a moving interface which developers find hard to communicate with.

A critical study of major construction projects in kerala vis-a-vis effectiveness in project implementation

Chapter 1 presents a brief note on the state at which the construction industry stands at present, bringing into focus the significance of the critical study. Relevance of the study, area of investigation and objectives of the study are outlined in this chapter. The 2nd chapter presents a review of the literature on the relevant areas. In the third chapter an analysis on time and cost overrun in construction highlighting the major factors responsible for it has been done. A couple of case studies to estimate loss to the nation on account of delay in construction have been presented in the chapter. The need for an appropriate estimate and a competent contractor has been emphasised for improving effectiveness in the project implementation. Certain useful equations and thoughts have been formulated on this area in this chapter that can be followed in State PWD and other Govt. organisations. Case studies on project implementation of major projects undertaken by Government sponsored/supported organizations in Kerala have been dealt with in Chapter 4. A detailed description of the project of Kerala Legislature Complex with a critical analysis has been given in this chapter. A detailed account of the investigations carried out on the construction of International Stadium, a sports project of Greater Cochin Development Authority is included here. The project details of Cochin International Airport at Nedumbassery, its promoters and contractors are also discussed in Chapter 4. Various aspects of implementation which led the above projects successful have been discussed in chapter 5. The data collected were analysed through discussion and perceptions to arrive at certain conclusions. The emergence of front-loaded contract and its impact on economics of the project execution are dealt with in this chapter. Analysis of delays in respect of the various project narrated in chapter 3 has been done here. The root causes of the project time and overrun and its remedial measures are also enlisted in this chapter. Study of cost and time overrun of any construction project IS a part of construction management. Under the present environment of heavy investment on construction activities in India, the consequences of mismanagement many a time lead to excessive expenditure which are not be avoidable. Cost consciousness, therefore has to be keener than ever before. Optimization in investment can be achieved by improved dynamism in construction management. The successful completion of coristruction projects within the specified programme, optimizing three major attributes of the process - quality, schedule and costs - has become the most valuable and challenging task for the engineer - managers to perform. So, the various aspects of construction management such as cost control, schedule control, quality assurance, management techniques etc. have also been discussed in this fifth chapter. Chapter 6 summarises the conclusions drawn from the above criticalr1 of rhajor construction projects in Kerala.

Role conflict and role ambiguity in construction projects

Role conflict happens when a person faces different and incompatible expectations regarding a particular social status which they occupy. The literature on role conflict is reviewed for a better understanding of project dynamics in construction teams. The discussion focuses on issues surrounding the miscommunication of role expectations and tensions owing to differences in expectations of the same role. This ongoing doctoral study involves a qualitative research design, based on interviews with practicing professionals. Analysis will focus on the relation between formal expectations, as evidenced in contracts and other types of written communication, and informal expectations as observed from the interviews. Insights from the literature review suggest: 1. that the differences between formal and informal expectations is a major sources of role conflict in construction teams and 2. that this effect is exacerbated by the failure of team members to recognise it and take it into account.

Risk management in oil and gas construction projects in Vietnam

Purpose - The purpose of the paper is to the identify risk factors, which affect oil and gas construction projects in Vietnam and derive risk responses. Design/methodology/approach - Questionnaire survey was conducted with the involvement of project executives of PetroVietnam and statistical analysis was carried out in order to identify the major project risks. Subsequently, mitigating measures were derived using informal interviews with the various levels of management of PetroVietnam. Findings - Bureaucratic government system and long project approval procedures, poor design, incompetence of project team, inadequate tendering practices, and late internal approval processes from the owner were identified as major risks. The executives suggested various strategies to mitigate the identified risks. Reforming the government system, effective partnership with foreign collaborators, training project executives, implementing contractor evaluation using multiple criteria decision-making technique, and enhancing authorities of project people were suggested as viable approaches. Practical implications - The improvement measures as derived in this study would improve chances of project success in the oil and gas industry in Vietnam. Originality/value - There are several risk management studies on managing projects in developing countries. However, as risk factors vary considerably across industry and countries, the study of risk management for successful projects in the oil and gas industry in Vietnam is unique and has tremendous importance for effective project management.

Responding to sustainability challenge and cost implications in highway construction projects

Highway construction often requires a significant capital input; therefore it often causes serious financial implications for developers, owners and operators. The recent industry-wide focus on sustainability has added a new dimension to the evaluation of highway projects, particularly on the economical scale of ‘going green’. Comprehensive analysis of the whole-of-life highway development that responds to sustainability challenges is one of the primary concerns for stakeholders. Principles of engineering economics and life cycle costing have been used to determine the incremental capacity investments for highway projects. However, the consideration of costs and issues associated with sustainability is still very limited in current studies on highway projects. Previous studies have identified that highway project investments are primarily concerned with direct market costs that can be quantified through life cycle costing analysis (LCCA). But they tend to ignore costs that are difficult to calculate, as those related to environmental and social elements. On a more positive note, these studies proved that the inclusion of such costs is an essential part of the overall development investment and a primary concern for decision making by the stakeholders. This paper discusses a research attempt to identify and categorise sustainability cost elements for highway projects. Through questionnaire survey, a set of sustainability cost elements on highway projects has been proposed. These cost elements are incorporated into the extension of some of the existing Life Cycle Costing Analysis (LCCA) models in order to produce a holistic financial picture of the highway project. It is expected that a new LCCA model will be established to serve as a suitable tool for decision making for highway project stakeholders.

The management of transport construction projects : a survey of public sector organisations in Queensland Australia

Construction procurement organisations in the Australian framework provide broad guidelines on project management in setting benchmark performance measurements and processes for evaluating their projects. Despite this, little has been known in the project management practise in transport construction projects in Australia, in particular Queensland. Questionnaire data from 53 project management practitioners employed in State and City public sector organisations in Queensland,suggested that many practitioners in the public sector have little or a lack of understanding of government regulatory policies, which are used as economic evaluation tools for project options. Public sector project managers perceive socio-economic evaluation tools as inappropriate for public sector projects. The survey results also found conducting risk management analysis, developing a risk register and mitigation of risks were most effective way of managing risk. This study provides an opportunity for the public sector to review and provide training on project management practices and government regulatory policies governing public projects. This will improve project management practitioners’ understanding and interpretation of government regulatory policies.

Delivering value for money in the procurement of public sector major infrastructure : a new first-order decision making model

The significant challenge faced by government in demonstrating value for money in the delivery of major infrastructure resolves around estimating costs and benefits of alternative modes of procurement. Faced with this challenge, one approach is to focus on a dominant performance outcome visible on the opening day of the asset, as the means to select the procurement approach. In this case, value for money becomes a largely nominal concept and determined by selected procurement mode delivering, or not delivering, the selected performance outcome, and notwithstanding possible under delivery on other desirable performance outcomes, as well as possibly incurring excessive transaction costs. This paper proposes a mind-set change in this particular practice, to an approach in which the analysis commences with the conditions pertaining to the project and proceeds to deploy transaction cost and production cost theory to indicate a procurement approach that can claim superior value for money relative to other competing procurement modes. This approach to delivering value for money in relative terms is developed in a first-order procurement decision making model outlined in this paper. The model developed could be complementary to the Public Sector Comparator (PSC) in terms of cross validation and the model more readily lends itself to public dissemination. As a possible alternative to the PSC, the model could save time and money in preparation of project details to lesser extent than that required in the reference project and may send a stronger signal to the market that may encourage more innovation and competition.

Construction 2020 - A vision for Australia's Property and Construction Industry

Construction 2020 is a national initiative undertaken by CRC for Construction Innovation to focus its ongoing leadership of the Australian property and construction industry in applied research and best contribute to the industry's national and international growth and competitiveness. It is the first major report on the long-term outlook for the industry since the late 1990s. The report identifies nine key themes for the future of the property and construction industry. These visions describe the major concerns of the industry and the improved future working environment favoured by its stakeholders. The first and clearest vision, agreed across the industry, is that environmentally sustainable construction the creation of buildings and infrastructure that minimise their impact on the natural environment is an area of huge potential. Here technologies like Construction Innovation's LCADesign can make a big difference. This is a calculator that works out automatically from 3D computer-aided design the environmental costs of materials in a building all at the push of a button. By working with industry, we'd expect to have a comprehensive set of eco-design tools for all stages of the construction life cycle, to minimise energy use, greenhouse and other forms of waste or pollution. Other significant areas of focus in the report include the development of nationally uniform codes of practice, new tools to evaluate design and product performance, comparisons with overseas industries, and a worldwide research network to ensure that Australian technology is at the cutting edge.