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Risk planning for large and BOT projects : a holistic framework Yaworsky, Ronald Anthony 1994

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RISK PLANNING FOR LARGE AND BOT PROJECTS: A HOLISTIC FRAMEWORK by RONALD ANTHONY YAWORSKY B.App. Sc., University of Windsor, Windsor, Ontario, 1977 M.Eng., University of British Columbia, 1984  A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY in THE FACULTY OF GRADUATE STUDIES Department of Civil Engineering  THE UNIVERSITY OF BRITISH COLUMBIA  January 1994 © Ronald Anthony Yaworsky, 1994  In presenting this thesis in partial fulfilment of the requirements for an advanced degree at The University of British Columbia, I agree that the Library shall make it freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the Head of my Department or by his or her representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written permission.  Department of Civil Engineering The University of British Columbia Vancouver, Canada Date: 11 January 1994  ABSTRACT Large engineering projects embody a number of special aspects and unique characteristics in comparison to smaller undertakings. Additionally, a growing number of large projects are undertaken employing the Build—Operate--Transfer (‘BOT’) approach, significantly increasing the project’s complexity. With the BOT model of project delivery, the private sector finances, builds and operates a revenue-generating project, usually one which would have traditionally been executed in the public sector.  Despite the range of available risk assessment methods and techniques, significant aspects of the challenges which large and BOT projects face may be attributed to shortcomings in current risk planning processes. On larger projects, risk planning is important as risks are more numerous; additionally on BOT projects risks are not only more numerous, many are novel and longer-lasting.  The unique aspects of large engineering projects were defined, with a view to provide guidance to participants. The ‘BOT’ project delivery process was examined, and through an examination of the approach, the six phases of ‘PEN-BOT’ were proposed (Propose, Evaluate, Negotiate, Build, Operate, Transfer) as a better description of the phases and the process.  A survey illustrating the increasing popularity of the PEN-BOT approach was presented, including a detailed case study of the Channel Crossing project, outlining both the  11  prevalence and the unique challenges of the such projects and lessons drawn from the problems encountered.  The attitudes and perceptions of project participants respecting risk planning issues were surveyed in a working environment through a “Project Planning Issues Questionnaire”. The significant differences, amongst project participants, in risk and project planning attitudes and perceptions was revealed with a number of recommendations addressing these problems developed.  A Holistic Risk Planning Framework was presented as a map of a process to address many issues which in themselves, are difficult to structure, particularly within the environment of large and PEN-BOT projects.  The Framework defines an approach to formalize and  organize risk planning processes with the benefits of identifying linkages, gaps and weaknesses in the planning process, and thus enhancing the project’s chance of success.  111  TABLE OF CONTENTS bstract 1 A  .  ii  List of Tables  ix  List of Figures  x  1. Introduction  1  1.1  Background  1  1.2  Motivation: The Challenge Of Large Projects And The Importance Of Risk Planning  2  Objectives of Thesis  7  1.3  1.3.1  LargeProjects  7  1.3.2  BOT Projects  7  1.3.3  Risk Planning and Large and BOT Projects  8  1.4  Methodology  1.5 1.6  Organization of the Thesis SomeDefinitions 1.6.1  Stakeholders, Participants and Feasibility  1.6.2  1.7  What Are ‘Risk’ And ‘Uncertainty’? Risk Planning Approaches  9 10 11 11 12 21  1.7.1  What Is ‘RiskPlanning’?  21  1.7.2  Existing Risk Planning Approaches  22  2. The Unique Aspects of Large Engineering Projects 2.1 Uniqueness and Complexity  30 31  2.2  Numerous and Large Risks  31  2.3  Project Indivisibility  32  2.4  Longer Execution Times  32  2.5  Large Financial Requirements  33  2.6  High Vulnerability  33  2.7  Multiple Stakeholders  34  2.8  Appreciable Organizational Challenges 2.9 Difficult Logistics 2.10 Broad Impact  35 36 36  iv  3. The ‘Build-Operate-Transfer’ Approach  38  3.1  The Evolution of the BUT Approach  38  3.2  The Increasing Prevalence of BUT Projects: A Survey 3.2.1 Canadian BUT Project Opportunities  40  3.3 3.4  3.5  41  3.2.2 North American and Worldwide Transportation BOT Project Opportunities  46  3.2.3  50  Other BUT Project Opportunities  The Phases of BUT Special Characteristics of BUT Projects 3.4.1 New Roles And Objectives  52 55 55  3.4.2 Longer Time Frames  57  3.4.3  New Risks  58  3.4.4  Risk Allocation Considerations  59  The Proposed Six Phases of BOT 3.5.1 The Importance of the PEN Phases of PEN-BUT 3.5.2 Propose 3.5.3 Evaluate  66 66 68 71  3.5.4 Negotiate  72  3.5.5  Build  73  3.5.6  Operate  74  3.5.7  Transfer  74  4. Case Study of the Channel Tunnel BOT Project  75  4.1 4.2  The Evolution of the Channel Crossing BOT Project: 1802-199 1 A Summary of Characteristics of the Channel Tunnel Project  5. How Project Participants View Risk Planning 5.1 The Project Planning Issues Questionnaire 5.2  How Participants View Project Risks 5.2.1  5.3  75 112 120 120 123 124  5.2.2  Sources of Risk Measures of Risk  5.2.3  Reducing Project Risks  126  Measures ofProject Success and Failure 5.3.1 Precursors of Success and Failure  127  5.3.2  125  128  5.4  Judging Success and Failure Propensity to Accept Project Risks  132  5.5  Budget Uncertainties  132  129  v  5.6 5.7 5.8  Problems on Projects Minimizing Risks: The Problems of Contractor Selection The Ubiquitousness of Cost Overruns  .  5.9  Incongruent Perceptions and Attitudes: The Potential for Problems 5.10 Future Directions for Data Gathering 6. A Holistic Framework for Risk Planning 6.1  6.2  The Development of the Framework  136 140 143 146 150 151  6.1.1  A Comprehensive Literature Review  151  6.1.2  Case Studies ofBOT Projects  152  6.1.3  A Project Planning Questionnaire  154  6.1.4 Reflections Upon Professional Experience Framework Overview  154 155  6.2.1 6.2.2 6.3  135  The Dimensions of the Framework Operationalizing the Framework  Framework Description  7. The Framework Stage I: Definition of the Project’s Environment  156 159 161 166  7.1 7.2  Identify and Define the Need for a Project Defme Project Objectives  168  7.3  Identify External Influences  171  7.4  Some Lessons from the Channel Crossing and Other Projects  172  8. The Framework Stage II: Definition of the Project  169  181  8.1  Identify Project Approaches  181  8.2  Identilj Potential Participants, and Define Participant Objectives andRoles  184  8.3  Define Project and Participant ‘Success’ and ‘Failure’ Criteria 8.3.1 The Difficulty in Judging Project “Success” and “Failure”  184 185  8.3.2  8.4 8.5  Precursors of Success and Failure: Guidance for Participants.... 188 The Importance of Addressing Stakeholders 199 8.4.1 The Steps in Addressing Stakeholders 200 The Framework’s Components for Addressing Stakeholders 8.5.1 Identifj Possible Stakeholder-Coalescing Issues 8.5.2 8.5.3  Identilj Potential Stakeholders Assess Potential Stakeholder Missions, Goals and Objectives  202 203 210 215  v  9. The Framework Stage UI: Processing and Adjusting the Project’s Risks 9.1 Assess Potential Conflicts  9.2  9.3  Identify Risk Events and Scenarios 9.2.1 Checklist Techniques for Identifying Risks  9.5  220 225 229  9.2.2  Consideration of Scenarios  231  9.2.3  The Consideration of Rare Events, Escalations and Surprise Scenarios  238  Challenges in Addressing Risks  244  9.3.1  Expressing Probabilities  246  9.3.2  Subjective Judgements  249  9.3.3  RiskBiases  251  9.3.4  Understanding Perceptions of Risks Possible Stakeholder Reactions to Risks  260  9.3.5 9.4  220  269  Design of Stakeholder Involvement Process, Issue Management Process and Outline Risk Communication Strategies  272  Subsequent Framework Activities  279  10. Operationallzing the Framework: The Risk Planning Brief 10.1 An Outline of the Project Risk Planning Brief 10.2 The Organization of the Risk Planning Brief 10.3 The Suggested Contents of the Brief 10.3.1 Project Mission Statement  281  281 282 283 283  10.3.2 Project Objectives  283  10.3.3 Project Failure and Success Criteria 10.3.4 External Influences  284  10.3.5 ParticipantProfiles  285  10.3.6 Participant versus Project Matrices 10.3.7 Participant Roles and Responsibilities  285 285  10.3.8 Potential Stakeholder Issues  288  10.3.9 Potential Stakeholder Profiles 10.3.10 Project Organization and Structure  289  10.3.11 RiskEvents 10.3.12 Execution Plans  290  284  289 290  10.3.13 Stakeholder Involvement Strategy 10.3.14 IssueManagement  290  10.3.15 Risk Communication Strategy  291  291  vi’  10.3.16 Feasibility Assessment Summaries  .  11. Conclusions 11.1 Recommendations for Future Work  291 293 296  Bibliography  301  Appendix A. Channel Tunnel Project Timeline (1802-1990)  337  Appendix B. The Growth of the Channel Tunnel Project Budget (1874-1993)  361  Appendix C. Project Risk and Planning Issues Questionnaire  372  Appendix D. Questionnaire Detailed Results  383  Appendix E. Precursors of Success and Failure: Checklists from the Literature. 416 Appendix F. Additional Background, Section 9.3 and Section 9.4  427  viii  LIST OF TABLES Table 1.1  Checklist Example of Primary Sources of Risk in Projects  25  Table 2.1  Unique Characteristics of Large Engineering Project  31  Table 3.1  Special Characteristics of BOT Projects  55  Table 4.1  Example Entries from Appendices A and B  113  Table 4.2  Characteristics of the Channel Tunnel Project  114  Table 5.1  Some Differences in Attitudes of Senior Management Compared with Project Managers with Respect to Selected Project Characteristics 134  Table 8.1  Strategies for Overcoming Potential Problems on Large Projects  192  Table 8.2  Example Project Objectives and Failure and Success Criteria  198  Table 8.3  Stakeholder Motivational Features ofProject with Recent Examples from the Prince Edward Island PEN-BOT Project  205  Stakeholder Motivational Features of Processes, with Examples from PEN-BOT Projects  208  Table 9.1  Features of Forecasts Versus Scenarios  234  Table 9.2  Factors Involved in the Public’s Perception of Risk  266  Table 9.3  Advantages Flowing from Effective Risk Communication  273  Table 10.1  Example Risk Planning Brief Participant Roles and Responsibility Matrix  287  Table 8.4  x  LIST OF FIGURES Figure 3.1  Figure 3.2 Figure 3.3 Figure 4.1  Figure 4.2 Figure 4.3  Risk Allocation Amongst Participants Comparing Conventional, Turnkey and BOT Project Approaches  61  Decision Tree Comparison, Bidder’s Perspective on BOT Project versus Conventional Project  65  The Typical Repetitive, Overlapping Phases of the ‘Propose-Evaluate Negotiate-Build-Operate-Transfer’ Approach  67  The Cycles of the ‘Propose-Evaluate-Negotiate-Build’ Phases of the Channel Crossing Project: 1750-1885  76  The Cycles of the ‘Propose-Evaluate-Negotiate-Build’ Phases of the Channel Crossing Project: 1885-19 75  77  The Cycles of the ‘Propose-Evaluate-Negotiate-Build’ Phases of the Channel Crossing Project: 1975-  78  Figure 6.1  Simplified Overview of a Holistic Risk Planning Framework  162  Figure 6.2  A Holistic Risk Planning Framework  165  Figure 7.1  Stage I Activities of the Holistic Risk Planning Framework  167  Figure 8.1  Stage II Activities of the Holistic Risk Planning Framework  182  Figure 9.1  Stage III Activities of the Holistic Risk Planning Framework  221  Figure 9.2  Numerical Scaling of Verbal Probability Descriptors  248  x  CHAPTER 1. INTRODUCTION  1.1  BACKGROUND  Large engineering projects, for example, the English Channel Crossing and the Mackenzie Valley Oil Pipeline, embody a number of special aspects and unique characteristics in comparison to smaller undertakings. Additionally, a growing number of large projects are undertaken employing the Build—Operate—Transfer (‘BOT’) approach, significantly increasing the project’s complexity. With the BOT model of project delivery, the private sector finances, builds and operates a revenue-generating project, usually one which would have traditionally been executed in the public sector.  Judging the success of large projects is difficult, for, with numerous participants, they must by necessity achieve numerous objectives. Many are not explicitly identified or may be conflicting.  Not unexpectedly, a significant portion of large projects cannot be  considered successful, i.e. in terms of meeting time, budget or quality implementation targets; achieving commercial or technical functionality measures; or when judged against other more qualitative criteria, e.g. sociopolitical aspects such as public acceptability.  Risks on large projects must be identified, assessed, quantified, responded to, managed and allocated. Some are more readily identified, analyzed and quantified (e.g. financial risks) than others, such as organization and conflict risks, which are difficult to visualize and quantify.  1  Chapter]. Introduction  Page 2  Despite the range of available risk assessment methods and techniques, significant aspects of the lack of project success may be attributed to shortcomings in current risk identification, assessment and management processes. Particularly on large projects, all risk sources, and their interplay between project variables, are difficult to identify a priori. There may be a dichotomy between risks focused upon, because they are readily quantifiable, and those which actually contribute to a project’s lack of success but are difficult to quantify.  On larger projects, risk planning is important as risks are more  numerous; additionally on BOT projects risks are not only more numerous, many are novel and longer-lasting.  This thesis will address some of these shortcomings, with an emphasis on non-traditional risks and BOT projects, and present elements of a risk planning framework, with a view to providing guidance for potential project participants on large projects.  1.2  MOTIVATION: THE CHALLENGE OF LARGE PROJECTS AND THE IMPORTANCE OF RISK PLANNING  Evidence can be found that a substantial number of large projects can be considered less than successfiil. Morris (1986) noted projects often exceed their cost or schedule targets or fail to perform satisfactorily. Morris & Hough (1987) reported on a survey of over 3,500 major projects worldwide. They noted cost overruns, as one measure of successful implementation, were the norm, typically ranging between 40% and 200% with even greater overruns on some types of projects, such as the U.S. nuclear program.  Chapter]. Introduction  Page 3  Murphy (1983) reported completion delays and cost escalations are common on ‘macroprojects’ executed in less developed countries.  Further, it was found that the  likelihood and magnitude of delays, escalations, postponements and suspensions increased with the size of the project.  The World Bank experience is similar; they annually conduct systematic performance evaluations of their projects. Their most recent evaluation of the execution of over 1500 projects (World Bank, 1988), considered quantitative measures such as project implementation time and cost, and qualitative success measures such as sustainability and overall success. It was reported that almost 90% of World Bank projects required more time to complete than originally estimated, with 49% of the projects requiring over 50% more time and 21% requiring over 100% more time. Respecting cost performance, 52% of all projects overran the original budget by more than 10%, with 17% of all projects overrunning by more than 50%.  Lastly, 17% of all projects were considered  ‘unsuccessful’ in that they achieved few, if any objectives and no foreseeable worthwhile results.  A recent World Bank confidential report indicated the situation is not improving, with unsuccessful projects becoming even more prevelant—upwards of 35% of recent projects are considered ‘unsuccessful’ and the number of projects cancelled because of problems rising by 50% since 1988. The report cited a tendancy to underestimate the potential for problems, including delays and opposition from local stakeholders, coupled with a tendancy to overestimate potential project benefits (Hossie, 1992).  Chapter]. Introduction  Page 4  In response to the lack of project success, the World Bank (1988) called for broader risk analysis and more deliberate efforts at risk management. Jaafari & Schub (1990) indicated many project failures are related to inadequacies in risk planning and control processes, and risk identification and project planning tasks are paramount. Murphy (1983) noted in light of the conmon occurrence of problems, the project’s planning stage is crucial. Hayfield (1986) felt the majority of project failures are related to non-technical causes; this points to the importance of planning in the project’s initial phase, and highlights risk identification, analysis and management tasks.  It was noted that risks are sometimes  inadequately identified, or only partially identified but highly analysed. Morris & Hough (1987) suggested that the causes for a lack of project success may be found in areas which traditionally have not been the concern of project management—escalation, changes, uncertainty respecting regulatory requirements and other externalities—which has tended to focus more on the technical aspects of the project. Horwitch (1984) noted the more ambiguous factors of politics, organizational strength, quality of champions and managers, and corporate strategic support usually makes or breaks a large project; where organization, political, historical and stakeholder awareness is at least as important as technical and economic expertise.  Large engineering projects present a particular challenge from a planning and organizational perspective, and are characterized by structural complexities and a high degree of environmental uncertainty (Yeo, 1982; Tatum & Fawcett, 1986). Horwitch (1984) noted the predominant characteristic of large projects which embody multiple and  Chapter]. Introduction  PageS  diverse participants, is their diverse and extreme complexity. The projects are volatile, vulnerable and unprotected.  Additionally, the environment for executing large projects is evolving and becoming increasingly complex and turbulent.  ‘BOT’ undertakings are becoming more prevalent,  and project participants find themselves encountering numerous non-traditional risks and uncertainties of which they have little experience to draw upon.  Horwitch (1984) described the recent evolution of large projects through three stages: first, large projects in the post-war to mid-1960’s period were commonly defense and aerospace projects, aided and facilitated by national prestige and strong political commitments. Second, a transitional period followed, where large projects were proposed in new sectors and became increasingly dependent upon private sector customers, but momentum based on national defense, national prestige or international rivalry was sometimes insufficient to overcome problems.  The third and present implementation  environment for large projects, sees the development of commercialization goals for large projects, with the emergence of multiple stakeholders in an open and diverse environment, and the vanishing protection of national security or prestige support.  This emphasizes  how the role and importance of stakeholders has changed significantly and broadened considerably over the past several decades.  Stakeholders view large projects, project  participants and even government with increased criticalness and skepticism.  These  considerations, coupled with an increasingly-complex regulatory environment, can lead to costly delays in planning and execution (Anderson, 1979).  Chapter]. Introduction  Page 6  As projects become more complex, it is increasingly-important for participants to be able to adapt a holistic viewpoint. For example, Morris (1985) suggested the absence of a premier proponent, i.e. one person or organization in charge and one participant with a holistic viewpoint, has allowed some large projects to proceed when perhaps they should not have. These failures were attributed because there was no one party able to come to grips with all the potential problems: there was no holistic viewpoint adopted. While the converse may not always be true, adapting a holistic project viewpoint will certainly aid the chances of a project’s success.  Ward & Chapman (1991) noted the use of formal risk planning activities are often overlooked for a number of reasons, including a lack of awareness, expertise or time, but also because some owners may view the risks as either well-understood or not large enough, or, conversely, see the risks as difficult or impossible to quantifr and thus analyse.  Risk  planning  involves  proactive,  anticipatory  consideration  of risk  issues.  Implementation problems, and the lack of success of some large projects, can often be attributed to risks not normally considered, and thus implicitly traced to weaknesses in the risk planning process. An industry-labour-government ‘Major Projects Task Force’ has noted further research is warranted respecting risk issues as they relate to the undertaking of major projects (Construction Industry Development Council, 1984).  The lack of a suitable risk planning framework for project participants is hampering the approval and implementation of these types of projects. Proponents seek guidance with  Chapter 1. Introduction  Page 7  respect to appropriate processes and procedures, a structure for organizing risk planning knowledge and experience, and guidance on effectively utilizing relevant portions of the diverse body of knowledge with respect to risk analysis. Accordingly, the notion of a  framework’ herein implies an approach in which to formalize and organize risk planning processes with the benefits of identifying linkages, gaps, and weaknesses and thus enhancing the project’s chances of success.  1.3  OBJECTIVES OF THESIS  The objectives of this thesis are:  1.3.1  Large Projects a.  To characterize unique aspects of large engineering projects and attributes of the projects’ environment.  1.3.2  BOT Projects a.  To define the important phases of the ‘BOT’ project delivery process.  b.  To characterize, as a special case of large projects, unique aspects of ‘BOT’ projects and attributes of the projects’ environment.  Chapter]. Introduction 1.3.3  Page 8  Risk Planning and Large and BOT Projects  a.  To identify risk planning process considerations, from the literature and observation.  b.  To identify problems which may result from inadequacies in risk planning, from the literature and observation.  c.  To formulate a holistic risk planning Framework addressing identified problems and shortcomings.  d.  To suggest the applicability of some of the diverse body of knowledge and experience with respect to risk planning.  e.  To examine some risk planning postulates, including identifying the risk characteristics important to stakeholders such as relevant quantitative and qualitative dimensions.  The thesis will approach the process definition and framework formulation with a view towards practical implementation and to operationalize some of these approaches, with the contribution being one of development of an implementable process: one which can assistparticipants in their riskplanning and in the evaluation ofBOTprojects, including consideration ofwhen it may be appropriate to withdrawfrom or terminate the process.  Chapter]. Introduction 1.4  Page 9  METHODOLOGY  The methodology employed was a combination of investigation, observation, experience and literature review. A comprehensive review and compilation of relevant literature from a wide range of fields was undertaken. A bibliography of over 1000 works was collected, making extensive use of non-UBC sources through the facilities of the Inter-Library Loan service. This encompassed both engineering and non-engineering fields, including decision and risk analysis; engineering management; construction and project management; business and management science; and risk and decision-related areas of sociology and psychology. In this manner, many non-engineering perspectives were brought to bear on issues of engineering project management. The study of the literature was distilled to about 250 relevant works as cited in the thesis. To assist with the usefulness of such citations, an author index has been compiled and is included with the bibliography. The thesis can thus serve as a useful compendium for future work as well as a source embodying useful guidance for project participants such as consultants, contractors and financiers.  The thesis has also been based upon formal and informal discussions; interviews with project participants; a project planning questionnaire, and first hand observations gained from over sixteen years of professional experience related to project planning and delivery. This also includes recent engineering senior management experience, where an emphasis was placed on addressing project planning issues and non-traditional areas of risk, including needs and objectives definition; stakeholder consultation and management;  Chapter]. Infroduction  Page 10  project participant team-building and consensus building, necessitating reconciliation of particularly divergent perspectives.  1.5  ORGANIZATION OF THE THESIS  In summary, the thesis is organized as follows:  Chapter 1 presents the motivation for the thesis, thesis objectives and discusses some important definitions which will be useful throughout the thesis. It also describes existing risk planning approaches.  Chapter 2 outlines the unique characteristics of large engineering projects (and their environment) which are important from the aspect of risk planning.  Chapter 3 focuses upon the development of BOT projects as an increasingly-prevalent subset of large projects; and identifies their important characteristics, the delivery process and environment.  Chapter 4 presents a case study of the Channel Tunnel BOT project to serve as the backdrop for risk planning discussions.  Chapter 5 describes the results of a questionnaire survey of practitioners and discusses postulates and a number of issues related to project planning and how participants view risk.  Chapter]. Introduction  Page 11  Chapters 6, 7, 8 and 9 detail the three stages of the proposed holistic Framework for risk planning, including examples from the Channel Tunnel BOT and other projects as an illustration of the proposed Framework.  Chapter 10 describes the use of a Risk Planning Brief as an effective tool to operationalize the Framework.  Chapter 11 outlines conclusions and recommendations.  1.6  1.6.1  SOME DEFINITIONS  Stakeholders, Participants and Feasibility  Project stakeholders are considered to be those persons, groups, companies or agencies which have, or perceive to have, an interest or involvement in the project or its outcome. Cleland (1990) also suggests the term ‘organizational claimants’ as describing stakeholders, and notes ‘strategic issues’ impacting the project may arise from stakeholder groups—a condition of internal or external pressure which may have a significant effect on some aspect of the project.  Within the context of this thesis, stakeholders will also refer to groups of the ‘public’, and include parties such as public interest groups (e.g. project advocates, interveners or opponents and other ad hoc single—issue assemblages of varying formality); end users;  Chapter 1. Introduction  Page 12  labour groups; regulators; legislators and other poViüca1 constituencies. Stake\xo\ets maj also encompass groups which actively support a project.  Project participants are those directly involved in the project’s management and execution—i.e. its formulation, planning, evaluation or implementation—such as the project owner, designer, or contractor. All project participants, by definition, would be considered stakeholders.  The concept of assessing a project’s feasibility may be considered as the process of first identifying criteria with which to measure performance or expectations, and secondly, establishing thresholds from which to base decisions respecting the project. Often both the criteria and feasibility thresholds are dynamic and change as time and participants evolve.  1.6.2  What are ‘risk’ and ‘uncertainty’?  Risk will be considered to embrace issues of technological, sociopolitical, environmental, organizational, economic and financial uncertainties, in that some or all aspects of knowledge related to those issues is uncertain. Technological issues can include those associated with the design, construction and performance of the project. Sociopolitical issues can embody nonmarket uncertainties in the environment of the project, which is sometimes referred to as ‘political’  and ‘country’ risk (e.g. Kennedy,  1991).  Environmental issues are those associated with the potential or perceived influences on the surroundings or ecosystems. Organizational issues may be those related to the internal  Chapter]. Introduction  Page 13  structure and interelationships within the project or venture. Organizational issues may also be associated with the stakeholder’ s uncertainty related to identifying risk thresholds and measures, as well as their potential temporal fluidity. Economic issues include a broad range of market and other external uncertainities and more global influences, such as inflation and exchange rate variations. Financial issues can be considered as those related to the financing, revenues, and costs.  A variety of definitions of risk and uncertainty are commonly encountered in the literature. All recognize risk and uncertainty are ubiquitous on large engineering projects, but few would agree as to exactly what are ‘risk’ and ‘uncertainty’. A brief survey of the literature reveals the variety of concepts and definitions which are offered, reflecting classical decision theory, technological risk assessment, as well as psychological, managerial and construction perspectives. This survey is briefly presented to highlight the necessity and advantages of considering risk as previously defined:  issues of technological,  sociopolitical, environmental, organizational, economic and financial uncertainties.  Viek and Stallen (1980) suggested a qualitative definition of ‘risk’ as the complete description of possible undesired consequences of a course of action, together with an indication of their likelihood and seriousness. They offered six alternate definitions for a quantitative risk variable: the probability of loss; the size of loss; the expected loss; the variance of the probability distribution over the utilities of all possible consequences; a semi-variance of the utility distribution; or a linear function of the expected value and the variance of the distribution of consequences.  Chapter]. Introduction  Page 14  Vesely (1984) felt ‘risk’ is always associated with an undesirable event which can produce harmful consequences, and involves both the frequency of the undesirable event and the severity of the consequences. Similarly, Hoidgate (1981) defined ‘risk’ as the probability of a particular outcome following from an event or action; and ‘uncertainty’ as the situation where this cannot be quantified. Gratt (1987) considered ‘risk’ as the potential for realization of unwanted, adverse consequences to human life, health, property or the environment.  Hansson (1989) noted ‘risk’, in its everyday usage has two closely related main senses. It can refer to the estimated probability that an undesirable event will occur. Secondly, in a more general sense, ‘risk’ can be used to refer more in general to a situation where it is possible, but not certain, that an undesirable event will occur, which includes the concept of both the probability and the character of the undesirable event.  Sherif (1991)  considered ‘risk’ as the potential for the realization of unwanted negative consequences of an event, and an uncertainty in the occurrence of that consequence which can be expressed in the form of a probability of occurrence.  A number of authors approach risk from the perspective of engineering projects. Erikson & O’Connor (1979) considered ‘risk’ as exposure to possible economic loss or gain arising from involvement in the construction process.  Wideman (1986) considered  ‘project risk’ as the chance of certain occurrences adversely affecting project objectives. Noting risk and uncertainty are inherently present in construction projects, Perry and Hayes (1985b) felt distinctions between risk and uncertainty, and also between pure risk  Chapter]. Introduction and speculative risk, are usually unnecessary and may even be unhelpful.  Page 15 Cooper &  Chapman (1987) defined ‘risk’ as exposure to the possibility of economic or financial loss or gain, physical damage or injury, or delay, as a consequence of the uncertainty associated with pursuing a course of action. Jaafari & Schub (1990) defined ‘risk’ as the presence of potential or actual constraints that could stand in the way of project performance, causing partial or complete failure during construction, commissioning or operation. Bunni (1990) considered the ‘best’ definition of risk as that given by British Standard No. 4778, as the combined effect of the probability of occurrence of an undesirable event, and the magnitude of the event. Al-Bahar & Crandall (1990), however, noted there was no uniform or consistent usage of the word ‘risk’ in the literature, and commented that most definitions of risk have focused only on the downside associated with risks such as losses or damages, and neglected the upside such as profits or gains. They proposed ‘uncertainty’ to represent the probability that an event occurs (thus a ‘certain’ event has no uncertainty) and ‘risk’ as the exposure to the chance of occurrences of events adversely or favorably affecting project objectives as a consequence of uncertainty.  Others view ‘uncertainty’ differently. Kaplan & Garrick (1981) considered that ‘risk’ must involve uncertainty and damage; i.e. probability and consequence. Baird & Thomas (1985) described a typical definition of ‘risk’ as a condition in which the consequences of a decision and the probabilities associated with the consequences are known entities. ‘Uncertainty’ exists if the problem structure, consequences, and probabilities are not fully known. They noted, however, there is considerable overlap in the literature respecting the  Chapter]. Introduction  Page 16  usage of the terms ‘risk’ and ‘uncertainty’, and pointed out some conceive of ‘risk’ as expected value, encompassing both the outcomes of a decision and some representation of the probability of the outcomes, whereas others (Sjoberg, 1980; Viek & Stallen, 1980) suggested outcomes and probabilities as separate proxies for ‘risk’.  Alternately, the  variance or dispersion of outcomes has also been a common surrogate for ‘risk’ in both the finance and psychological literature (Libby & Fishburn, 1977).  Lopes (1983, 1987) described ‘risk’ as referring to situations in which a decision is made whose consequences depend on the outcomes of possible future events having known probabilities. If the knowledge of probabilities is very inexact or unknown, then such decisions are regarded as involving uncertainty.  Moskowitz and Bunn (1987) saw ‘risk’ and ‘uncertainty’ as closely related and involved in virtually all important decisions  They felt conventionally, ‘uncertainty’ refers to  probabilities and to probability distributions associated with decision alternatives having uncertain outcomes which may be favourable or unfavourable.  ‘Risk’, they noted, has  many interpretations, and its precise meaning and usage varies across individuals, disciplines, and contexts. Loosely defined, ‘risk’ is associated with the likelihood of an unfavourable outcome, noting ‘risk’ increases as unfavourable outcomes become more probable, or probable unfavourable outcomes increase in adversity.  Kahneman & Tversky (1982a) considered that assessments of ‘uncertainty’ can be made in different modes, by focusing on frequencies, propensities, the strength of arguments, or  Chapter]. Introduction  Page 17  direct experiences of confidence, and these variants of ‘uncertainty’ are associated with different expressions in natural language. Paterson (1986) considered ‘uncertainty’ as a measure of our inability to predict accurately the future as it affects decisions. As the future is intrinsically uncertain to a greater or lesser extent, decisions which can only be implemented at some future date are likely to be more uncertain than decisions which can be acted on immediately.  Rodgers (1987) noted ‘uncertainty’ may go beyond  probabilities, including ‘transcientific’ uncertainties, involving an attempt to predict the unpredictable, compare the incommensurable, identify elusive political or cultural preferences, respond to ever-changing constituencies, choose among values, and elevate one discipline over another, where views and information are constantly changing.  Some feel considering ‘risk’ only in terms of probabilities and outcomes is inadequate and may lead to misunderstandings. Fraser (1979) pointed out because we consider ‘risk’ so commonplace in everyday life, most of us are quite certain we know what it means, but referring to a ‘big risk’ may mean very distinct things to different parties. For example, it may mean some unforeseen event may occur to upset existing plans; or there is great uncertainty as to whether some damaging event may occur or not; or that some damaging event is very likely to occur; or that if some damaging event occurs, a large amount of money may be involved.  Sjoberg (1980) also noted the word ‘risk’ is ambiguous, and considers three broad classes of meanings: those concerned with the probability of negative events, those concerned with the negative events themselves, measured in some suitable way, and those concerned  Chapter]. Introduction  Page 18  with a joint function of probability and consequences, most often their product. But it is also suggested that ‘perceived risk’ is seldom well pictured by the product of probability and consequences and the use of this product and its use, although it is often suggested as the definition of ‘risk’, can be quite misleading within the context of public decision making.  Fischhoff, Watson & Hope (1984) observed the meaning of ‘risk’ has always been fraught with confusion and controversy, and while some of this conflict has been overt, more often the controversy is unrecognized.  The definition of ‘risk’ is felt to be inherently  controversial, and the choice of definition is a political one, expressing someone’s views regarding the importance of different adverse effects in a particular situation.  Hohenemser, Kates & Slovic (1985) distinguished between a ‘hazard’ and ‘risk’; where ‘hazards’ are defined as threats to humans and what they value, and ‘risks’ defined as quantitative measures of hazard consequences expressed as conditional probabilities of experiencing harm.  Slovic, Fischhoff & Lichtenstein (1985) however, considered that  ‘risk’ should include a wide range of cognitive dimensions that extend well beyond the idea of quantitative measures of hazard consequences expressed as conditional probabilities of experiencing harm. Arabie & Maschmeyer (1988) also pointed out if we are to gain further understandings of reactions to ‘risks’ and ‘hazards’ over diverse contexts, then more versatile models than a unidimensional continuum are needed to represent the perception of ‘risk’.  Chapter]. Introduction  Page 19  Rayner (1987) felt the concept of ‘risk’ has been refined to the extent that we have lost sight of many aspects of ‘risk’ as a multifaceted phenomenon. There may be a consensus the essence of ‘risk’ consists of the probability of an adverse event and the magnitude of its consequences, which may be adequate to define ‘risk’ at the level of engineering-type calculations, but is quite misleading at the broader, more intractable, level of risk management. Hence Rayner (1987) pointed out the need for a polymorphous definition that encompasses purely societal concerns about equity from the risk-management perspective (i.e. allocation amongst stakeholders), and purely engineering-type concerns about probability and magnitude from technical perspectives. He proposed a concept of ‘risk’ as a way of classifying a whole series of complex interactions and relationships between people, as well as between man and nature.  From a managerial perspective, MacCrimmon & Wehrung (1986) noted ‘risk’ embodies three components: the magnitude of a loss, the chance of a loss, and the exposure to the loss, with the degree of ‘risk’ viewed as directly proportional to the chances and size of the loss, and to the degree of exposure. elements:  probability and severity.  Shogren (1990) defined risk in terms of two  Boodman (1987) claimed most senior corporate  managers lack an understanding of the basic facts of ‘risk’, and few can define the term appropriately.  March & Shapira (1987) commented that in classical decision theory, ‘risk’ is most commonly conceived as reflecting variation in the distribution of possible outcomes, their likelihoods, and their subjective values.  However, they noted, finding a satisfactory  Chapter]. Introduction  Page 20  empirical definition of ‘risk’ within this framework has proven difficult. They suggested the ways in which human decision makers define ‘risk’ may differ significantly from the definitions of ‘risk’ in the theoretical literature, and that different individuals will see the ‘risk’ in the same situation in quite different ways (e.g. Kahneman & Tversky 1982a). March & Shapira (1987) further noted that managers often see ‘risk’ in ways that are both less precise and different from ‘risk’ as it appears in decision theory.  They felt most  managers do not treat uncertainty about positive outcomes as an important aspect of ‘risk’; it is not primarily a probability concept; and while managers seek precision in estimating ‘risk’, most show little desire to reduce ‘risk’ to a single quantifiable construct.  The Construction Industry Institute (1989) noted ‘risk’ is usually defined in terms of its parent, ‘uncertainty’, which can be considered as the set of favourable and unfavourable possible outcomes.  ‘Risk’ would be considered as the probability of an unfavourable  outcome, and ‘opportunity’ as the probability of a favourable outcome.  Perry & Hayes (1986) noted that while the boundaries are blurred between ‘risk’ and ‘uncertainty’, and ‘risk’ and ‘hazard’, the practical aspects of considering ‘risk’ outweigh the semantics, and a better understanding of the project flows from identifring the sources of events which may change predictions.  Narrowing considerations of ‘risk’ in terms of ‘consequences’ and ‘probabilities’ or thinking of uncertainty only in terms of probabilities, has been common in the construction field (for example, Al-Bahar & Crandall, 1990). However, this narrow perspective may  Chapter]. Introduction  Page 2]  contribute to the difficulty some project participants may have in envisioning the broader, qualitative context of many important project risks. On large undertakings, for example, proponents may be viewing ‘risk’ as financial, which can be readily understood in a quantitative manner.  Some stakeholders, however, may be viewing ‘risk’ in terms of  social or environmental adverse effects, which may be both very difficult to represent quantitatively and difficult to agree upon a common perception of a representation. The definition employed in this thesis embodies this implicit recognition of the various facets of ‘risk’ and the importance of the various participant and stakeholder perspectives.  1.7  1.7.1  RISK PLANNING APPROACHES  What Is ‘Risk Planning’?  Risk planning will be considered in this thesis within the context of large engineering projects. It may be defined as a systematic, iterative process in which issues of uncertainty are identified, acknowledged, considered and responded to in a manner which best uses the project’s resources and best addresses the project’s and stakeholders’ objectives. Risk planning approaches can be considered as a number of related comprehensive, implementable protocols and activities which are carried out with the goal of improving the project’s success through management of risk.  Similar to project planning (Cleland, 1990; Laufer, 1990a), risk planning can embody a number of components such as anticipatory decision-making; the systematic integration of  Chapter]. Introduction  Page 22  independent decisions into a hierarchical framework; and forecasting, informationgathering, analysis, decision-making and implementation activities.  1.7.2  Existing Risk Planning Approaches  A number of project risk assessment and management techniques have been described in the literature. The evolution of such risk planning approaches, as outlined in this section, highlights how risk identification and allocation checklists have evolved to an examination of risk event cause-and-effect linkages and expert system frameworks. Nevertheless, it would appear few techniques have gained wide-spread acceptance and implementation. Ward & Chapman, (1991) noted to their knowledge, only BP International utilizes a comprehensive methodology for risk identification, understanding and management.  Erikson & O’Connor (1979) examined risk assignment in construction, but limit their examination of risks to those related to the construction process.  They outline a  procedure for risk identification followed by a risk-sharing approach by means of contractual assignment.  A checklist of risks (project related, outside influence and  contractual risk) are provided as a guide to allocation to the appropriate party (owner, designer or contractor).  Ashley (1981) categorized risks into three categories (performance, completion and liability), and recommends a coordinated approach to construction risk management. The advantages in considering a broader perspective (owner, contractor, designer, financier, regulatory bodies and users) are recognized.  The potential for conflicting participant  Chapter 1. Introduction  Page 23  objectives is also noted. A number of risk management options are presented and the importance of evaluating the impact of risk reallocation on all participants is acknowledged.  Perry & Hayes (1985a) highlighted the importance in risk identification and quantification during the early stages of project appraisal. A detailed list of risks in seven categories (physical, design, political, financial, operational, construction and environmental) is presented to aid in the identification, assessment and allocation processes.  Perry & Hayes (1985b) considered the risk management process of identification, analysis and response (avoidance, reduction, transfer or retention).  A variety of financial risk  analysis techniques are summarized and nine categories of sources of risks are suggested (physical, environmental, design, logistics, financial, legal, political, construction, and operational), building upon the seven previously suggested.  Examples of risk  identification, quantification and allocation strategies are given. Table 1.1 summarizes in a checklist, the cited primary sources of risk in projects.  Hayes, Perry, Thompson & Willmer (1986) presented an overview of the risk management process, encompassing risk identification, analysis and response. The importance of early quantification of risk and the choosing of appropriate risk allocation strategies (through contract strategy) is highlighted.  Wideman (1986) proposed a systematic approach to risk management, through risk identification, impact analysis, response planning, response system and data applications.  Chapter]. Introduction  Page 24  Five categories of risks are suggested (external, unpredictable; external, predictable; internal; technical, and legal). Building on the risk categorization and management model proposed by Wideman (1986), Al-Bahar & Crandall (1990) developed a risk model entitled ‘Construction Risk Management System’, which is intended to allow contractors to identify and classify project risks (acts of God, physical, financial and economic, political and environmental, design, and construction-related), primarily in a traditional construction setting, and respond with one of five strategies (risk avoidance, loss reduction and risk prevention, risk retention, risk transfer, and insurance). The model is cited as having potential use by the construction industry as part of an ‘analytical hierarchy process’ to evaluate the riskiness of a project when bidding (Mustafa & Al-Bahar, 1991).  Chapter]. Introduction  Page 25  Physical: • Loss or damage by fire, earthquake, flood, accident, landslip. Environmental: • Ecological damage, pollution, waste treatment. • Public enquiry. Design: • New technology, innovative applications, reliability, safety. • Detail, precision and appropriateness of specifications. • Design risks arising from surveys, investigations. • Likelihood of change. • Interaction of design with method of construction.  Logistics: • Loss or damage in transportation. • Availability of specialized resources. • Access and communications. • Organizational interfaces. Financial: • Availability of funds, adequacy of insurance. • Adequate provision for cash flow. • Losses due to defaults of contractors, suppliers. • Exchange rate fluctuations, inflation. • Taxation. Legal: • Liability for acts of others, direct liabilities. • Local law, legal differences between home country and home countries of suppliers, contractors, designers. Political: • Political risks in countries of owner and suppliers, contractors.—war, revolution and changes in law.  Construction: Feasibility of construction methods, safety. Industrial relations. Extent of change. Climate. • Quality and availability of management and supervision.  • • • •  Operational: • Fluctuations in market demand for product or service. • Maintenance needs. • Fitness for purpose. • Safety of operation.  Table 1.1 Checklist Example of Primary Sources of Risk in Projects (Perry, & Hayes, 1985b)  Chapter]. Introduction  Page 26  Similarly, Jaafari (1987) proposed a ‘Management Confidence Technique’ to assess the project’s riskiness and overall propensity to succeed or fail as a result of project ‘constraints’ (obstacles to achieving project goals).  These constraints are broadly  classified as project-related, management-related and environment-related (sociopolitical); a list of suggested initial constraints is provided. It is recognized further work will be necessary to identify and formulate a relationship between project constraints and the riskiness, or overall propensity to succeed or fail. The World Bank (1988) recommended the use of such approaches to evaluate a projects’ overall propensity to succeed or fail. Jaafari (1 988b) further outlined some of the key aspects of the strategic assessment of project options, at the early stages of the project’s development and prior to the use of the ‘Management Confidence Technique’.  Cooper and Chapman (1987) described a number of risk analysis approaches suitable for large projects, suggesting techniques to assess primarily time and financial risk. Ashley & Levitt (1987) and Mohan (1990) surveyed the development of a number of expert systems in the area of construction management. Two in particular are related to project risk management and are described further below.  Ashley & Perng (1987) reported on the development of an ‘Intelligent Risk Identification System’, which is designed to be an expert system for the identification of construction problems, their potential impact and possible actions, based upon past experience. The system is intended to assist users, in the early stages of a project, in analysing risk and potential problems.  Influence diagrams illustrating problem causes-and-effects can be  Chapter]. Introduction  Page 27  generated, indicating the potential impact of the risk on project cost, schedule and construction. The further development of the system is described by Ashley, Stokes & Pemg (1988).  In a similar manner, Bufaied (1987) identified major construction risk  variables, at the project level, and modelled causal linkages.  Kangari & Boyer (1987) described a knowledge-based construction risk-management system, ‘Expert-Risk’, intended to provide guidance to owners, designers and contractors. The system functions as an intelligent questionnaire on risk, assisting with risk identification, management and fuzzy set evaluation of risk, and is integrated with financial and cost data bases.  Kangari (1988) further described ‘Expert-Risk’.  The system  considered six categories of risks (construction related, contractual and legal, physical aspects, performance and management, general economic factors, and political and public) and could offer suggestions for risk sharing or allocation.  Kangari and Riggs (1989)  detailed the fuzzy set aspects of the risk analysis and described the use of natural language terms, which allowed the system to evaluate the overall risk of a project.  Both the ‘Intelligent Risk Identification System’ and ‘Expert-Risk’ approaches build on experiential knowledge through capturing the experience of construction participants to establish cause-effect linkages and potential risk impacts. The systems can, based upon this knowledge, suggest risk allocation or contractual strategies.  These approaches are an attempt to develop an operational model for risk planning, but are, at this time, limited in breadth and cannot yet be regarded as providing a broad  Chapter]. Introduction  Page 28  framework for risk planning. Large and BOT projects by their nature are unique. Many risks and even categories of risks are novel; the contractual and organization structure of the project is unique; and participants need process guidance. Checklist approaches are useful if participants use them as tools to assist in the “brainstorming” of possible risks and scenarios. However, while approaches described in the literature are useful in assisting some of the participants evaluate some aspects of the project, none could offer ‘holistic’— broadly based, multiperspective—risk planning assistance.  As previously noted, another important facet of risk planning would be the project ‘stakeholder management’ process. However, from a project risk planning perspective, it has received relatively little attention in the literature. Weiner & Brown (1986) noted that issue management leads to stakeholder management.  It may be observed that their  suggested strategic planning approach may be useful for risk planning if placed within a project context.  Cleland (1986) noted the importance of explicit stakeholder management on projects, and suggested a multi-stage ‘Project Stakeholder Management Process’ (identification; gathering information, stakeholder mission, characteristics, and strategy identification; behaviour prediction; and implementation of stakeholder management strategy). Cleland (1990) recognized that a well-designed and properly implemented ‘Project Stakeholder Management Process’ can forestal potentially adverse stakeholder activities and enhance stakeholder support for the project.  He extended stakeholder management from an  organizational perspective into a project perspective.  The importance of formal  Chapter]. Introduction  Page 29  stakeholder management on large projects is emphasized. The linkage is also made to the identification, assessment and management of project ‘strategic issues’ (Cleland, 1990).  Ward & Chapman (1991) described numerous important roles for risk analysis and their possible uses by different project participants, such as the client and the contractor, with the goals of minimizing uncertainty respecting time, cost and quality. They question why risk analysis is not as extensively used as it might be.  In partial answer, further attention towards the development of practical, comprehensive approaches, formalized through a framework, with the goal of facilitating risk planning from all persectives for all project participants with due attention to ease of use and demonstrated usefulness, will likely encourage their application, as noted in Section 1.2. No such comprehensive risk planning framework exists. Framework.  This thesis describes such a  CHAPTER 2. THE UNIQUE ASPECTS OF LARGE ENGINEERING PROJECTS Large engineering projects, for example, the English Channel Crossing or the Mackenzie Valley Oil Pipeline projects, quite apart from dollar value, embody many special aspects  and unique characteristics in comparison to smaller scale undertakings. Many labels have been attached to describe the scope of such undertakings, such as ‘mega-projects’, ‘giant projects’ (Sykes, 1982); ‘VLP’s’ or ‘Very Large Projects’ (Kelley & Morris, 1981); ‘major projects’ (Morris & Hough, 1987); and ‘super projects’. Warnock (1979) noted projects (or at least their terminology) have evolved from ‘large’ to ‘jumbo’, ‘giant’ and even ‘super’. Within the context of this thesis, however, all these undertakings will be referred to as ‘large’ projects. BOT projects, discussed in detail in the following chapter, represent an important sub-set of large projects.  A variety of authors, such as Claxton (1978), Warnock (1979), Hoffman (1979), Kelley & Morris (1981), Yeo (1982), Sykes (1982), Murphy (1983), Morris (1985), Morris & Hough (1987) and Lang (1989) presented a number of unique attributes of large engineering projects. Based upon these and other observations, it is proposed that the important characteristics of large engineering projects—as compared with smaller scale projects—from the aspect of risk planning can be categorized in accordance with ten distinctive characteristics. The characteristics are summarized in Table 2.1 and discussed in the following sections 2.1 through 2.10.  30  Chapter 2. Unique Aspects ofLarge Engineering Projects  • • • • • • • • • •  Page 31  Uniqueness and Complexity Numerous and Large Risks Project Indivisibility Longer Execution Times Large Financial Requirements High Vulnerability Multiple Stakeholders Appreciable Organizational Challenges Difficult Logistics Broad Impact.  Table 2.1 Unique Characteristics of Large Engineering Projects  2.1  UNIQUENESS AND COMPLEXITY  Large projects are generally complex and particularly demanding, in terms of size, urgency, or technology.  They often involve technological advances, new materials and  innovative construction techniques. They are unique in terms of type or size; often the projects are the largest undertakings of that type to date. Because of the uniqueness, there is little opportunity for learning curves. Significant infrastructure to support the project itself may be required.  The projects are highly intricate in scope and are difficult to  control in terms of complexity,  including  engineering,  legal,  management  and  organizational requirements, financing, and staffing demands.  Many of these complexities foster risks which cannot be addressed by specific experience, since the project is unique.  2.2  NUMEROUS AND LARGE RISKS  Project risks are numerous and inescapably large, and cannot be averaged out through repetition because of their magnitude and the singularity of the project.  Chapter 2. Unique Aspects ofLarge Engineering Projects  Page 32  Participants can take no solace in averaging potential losses, for the project is nonrepeatable. As well, the magnitude of risks may be so great such that participants may not be able to recover from an adverse effect—i.e. the risks may be so great as to threaten the survival of the enterprise or the firm or the project may be lost.  2.3  PROJECT INDWISIBILITY  Large projects are often essentially indivisible, i.e. have no value unless completed. Additionally, there are commonly significant ancillary requirements—training, institutional adjustments, support infrastructure, etc.—which must be provided or the project cannot fI.jnction.  The participants are faced with the situation where they must complete the  project or it has no value—an incomplete tunnel, bridge, or plant, has no value. This ‘all or nothing’ attitude contributes to escalation, irrational judgements respecting ‘sunk costs’ and the evaluation of additional commitments judged on criteria other than normal considerations.  While large projects are indivisible, they are often comprised of inter-related but very different components which must be highly-coordinated and well-integrated; this leads to increased complexity and risks related to these interfaces.  2.4  LONGER EXECUTION TIMES  Large projects commonly require a significantly longer-than-normal length of time to plan and execute, including a longer construction period.  Chapter 2. Unique Aspects ofLarge Engineering Projects  Page 33  The longer time frames required for the planning and construction phases expose the project to much greater uncertainties.  Commitments are made in the planning stage  respecting actions very much in the future. Longer construction periods result in greater negative cash flows, and increase the projects sensitivity to interest and escalation charges.  Longer execution times are also linked with longer term payoffs. This may include both a longer time until positive cash flows and positive returns; and the return and payoff stretched over a much longer period of time.  2.5  LARGE FINANCIAL REQUIREMENTS  Large projects require large financial commitments and sophisticated financing arrangements, which may go beyond traditional sources of financing and commonly requiring financing from a wide range of sources, including public and private. More financial participants increases the level of complexity and elevates the potential for conflicts. Each financial participant may have their own criteria to address with respect to risk allocations; government and international arrangements may also contribute additional complexities and introduce sources of risk (e.g. exchange rates).  2.6  HIGH VULNERABILITY  Large projects typically have a higher level of vulnerability and sensitivity to external and environmental factors, as such projects often cross national boundaries or are otherwise  Chapter 2. Unique Aspects ofLarge Engineering Projects  Page 34  highly dependent upon global economics and political environments and other externalities and unforecastable events.  2.7  MULTIPLE STAKEHOLDERS  Typically, large projects attract a greater-than-usual number and diversity of project stakeholders. They offer ‘large targets’ and thus become more exposed to the attentions and agendas of participant or stakeholder groups, some of which may coalesce solely because of the project. Large projects have a high profile and are subject to intense government and public scrutiny, a complex (and sometimes shifting) regulatory environment, and societal debate. Large projects may entail the involvement of many thousands of individuals, often in cross-cultural settings, adding complexities and conflicts, and are particularly vulnerable to labour unrest and disruptions.  Often the projects’ multiple objectives are ill-defined and conflicting, increasing potential risks. A large number of stakeholders leads to incongruities in perspectives, including objectives, social and cultural values. Stakeholder management, as part of risk planning, becomes an essential but potentially difficult task.  Multiple project participants are common, resulting in multiple, often conflicting, goals, as the risk of conflict escalates with the number of participants (and thus number of inter relationships between participants). Large numbers of participants add complexity and significantly encumbers the decision-making process.  Chapter 2. Unique Aspects ofLarge Engineering Projects 2.8  Page 35  APPRECIABLE ORGAMZATIONAL CHALLENGES  Because of the project’s size and complexity, large projects are typically beyond the capabilities of a single organization. Joint ventures, and joint ventures of joint ventures, are commonly required. Joint ventures bring extra risks, as the partners accept exposure risks of all other partners. Trans-national contributions and the participation of one or more governments may be necessary, as the projects usually will require an official sanction, sponsorship, guarantee or other implicit or explicit government participation.  These relationships add organizational and cultural complexities. large projects is a major challenge in itself.  The organization of  The bargaining powers of the prospective  participants varies widely and adds uncertainty and conflict. The project organizations themselves are commonly ad hoc by virtue of the uniqueness of the project, and are extremely dynamic, undergoing significant change throughout the project life-cycle. There is a need to not only manage the project by means of the organization, but manage all necessary change within the organization itself. This contributes to stress, conflict and uncertainty.  Senior project participants are often seconded from other organizations, which may be unpopular, and they may lack sufficient large project experience or be subject to conflicting loyalties or demands, particularly in early phases. Large projects, as they are executed by aggregations of organizations, may lack a readily-identifiable identity, ‘corporate culture’, and important information paths of communication, adding  Chapter 2. Unique Aspects ofLarge Engineering Projects  Page 36  uncertainties and conflicts from blending corporate cultures. Often large projects lack an identifiable project ‘champion’ or premier proponent.  2.9  DIFFICULT LOGISTICS  Projects are often executed in unfamiliar, difficult or hostile location, climate or terrain, often spanning large geographical areas and extending over national boundaries, contributing to logistical, management and construction difficulties.  This adds  complexities and risks, some more readily identifiable (procurement lead times and international shipping complexities, etc.) than others, which may be ‘soft’ risks such as productivity, motivational, social, and cross-cultural problems, or recruiting difficulties at remote sites.  Challenging logistics and climatic extremes increases demands upon  supervision and other management and planning tasks.  2.10 BROAD IMPACT Large projects sometimes have the ability to significantly influence their own environment as well as project participants. Because of their size, some large projects can have a wide— reaching influence upon economies at the national level. In the extreme cases, the projects provide an element of improvement of quality of life and possibly a change in the social order; they represent step-like advances, have a potentially significant impact upon society and thus may have impacts far beyond what was envisioned. They often have a potentially significant environmental impact and may be socially and culturally incongruous,  Chapter 2. Unique Aspects ofLarge Engineering Projects  Page 37  particularly if executed in remote or less developed regions. The potential for such broad impacts add significant levels of uncertainty and complexity.  CHAPTER 3. THE ‘BUILD-OPERATE-TRANSFER’ APPROACH  3.1  THE EVOLUTION OF THE BOT APPROACH  Within the realm of large projects, the Build—Operate—Transfer (‘BOT’) approach is becoming increasingly prevalent and important. With the BOT model of project delivery, the private sector finances, builds and operates a revenue-generating project, usually one which would have traditionally been executed in the public sector.  Some projects may be alternately labelled as Build—Own—Operate—Transfer (‘BOOT’, terminology common in the United Kingdom (Barnett, 1989)); Finance—Build—Operate— Transfer (‘F-BOT’), or ‘F-BOOT’.  Other less frequently applied acronyms include  Design—Build—Operate—Transfer (‘DBOT’); Design—Build—Operate-Maintain (‘DBOM’) and Build—Own—Operate (‘BOO’) (McCarthy & Tiong, 1991).  The development of the present form of the BOT model is attributed to the Turkish Prime Minister Turgut Ozal in 1984 (Tiong, 1990a). While the current structure of the approach was proposed in Turkey, the first major BOT project to proceed was a US$1.8 billion highway in Malaysia (Carnevale, 1988).  The government granting of concessions for private sector-provided infrastructure is not in itself a new concept.  Many seminal large projects, such as railways and canals in  Canada and elsewhere, were financed and undertaken by the private sector (Thompson, 1988). As early as 1972, large project participants began to find ‘financial engineering’ 38  Chapter 3. The Build-Operate-Transfer Approach  Page 39  aproaches were increasing in prevalence. This required contractors and other participants to assemble financial packaging, raise equity or organize countertrade arrangements (ENR, 1984b). These approaches added significant complexities and risks to the project planning process, particularly if countertrade or barter provisions were involved.  In response to the 198 1-82 debt crisis, it was noted (Barrett, 1986; Mills, 1987) that engineering and contracting companies were being asked to accept even greater risks than before by taking equity stakes in, and operating projects once completed, including involvement with BOT projects. Interest in BOT projects continued to grow as financiers and government credit agencies became more comfortable with the approach (ENR, 1988b), but the risks of the approach still had forestalled most potential BOT projects. Typically, large projects (particularly those in developing countries) had employed ‘project finance’ approaches, whereby the financing risk was evaluated on the basis of the project’s cash flows as opposed to the borrower’s credit worthiness (Carnevale, 1988). With the debt crisis of 1981—82, compounded by the fact revenues of many projects failed to meet expectations, financiers looked to models which shifted risks to the contractors, such as the BOT approach.  The current motivations of governments adopting this approach are many. They range from shortages of hard currency in developing countries; an increased desire to transfer infrastructure costs more directly to users; a reluctance (or inability) to fund large capital projects in the face of escalating costs of social programs, to simply the predominance of political philosophies favouring privatization. Governments share the attendant desire to  Chapter 3. The Build-Operate-Transfer Approach  Page 40  obtain project benefits yet minimize risks (i.e. transfer them to the private sector); the risks of some large projects may be viewed as more palatable politically if tackled by the private sector.  Enhancing the attractiveness to government of the BOT approach are the  increasing need for infrastructure development and renewal, compounded with increasing debt loads and growing taxpayer fatigue.  The private sector, seen by governments as possessing the ability to finance, build and operate infrastructure projects, is aggressively responding. The net result is contractors, consultants, banks and others are increasingly called upon to become involved in BOT projects, with the attendant new gamut of risks. As BOT projects become increasingly prevalent, some contractor and consulting firms are examining their corporate structure and ownership with a view towards enhancing their financial strength, to permit a more ready involvement in projects requiring an equity position (ENR, 1991g). Banks are not only increasingly financing BOT projects, but are taking equity positions as well (Construction Weekly, 19911).  3.2  THE INCREASING PREVALENCE OF BOT PROJECTS: A SURVEY  There are many examples regionally, nationally and internationally, of projects, in the proposal or execution stage, which traditionally would have been executed in the public sector, but are now being transformed by governments into a BOT approach. Utility or transportation infrastructure projects are most common by virtue of their revenue— generating capabilities coupled with likely growth in demand.  Chapter 3. The Build-Operate-Transfer Approach  Page 41  The development, design, financing, construction and operation of the English Channel Tunnel, with an estimated capital cost of over $17 billion is a conspicuous example of a BOT project under construction. Tiong (1990b) cited fourteen BOT projects which are currently under construction worldwide outside North America, ranging in size from US$8.0 million to US$9.2 billion (which has subsequently escalated to over US$17 billion), including eight of the projects at over US$500 million. A recent survey identified 175 worldwide projects, worth US$44 billion which were undertaken with non-traditional public-private approaches (ENR, 1990d). There are many others projects in the planning or proposal stage.  3.2.1  Canadian BOT Project Opportunities  In Canada, two notable BOT transportation infrastructure projects in various stages of study or implementation are the fixed link Northumberland Strait crossing to Prince Edward Island (“PET”), and a high-speed rail line for the Windsor-Quebec City corridor.  Ideas for a PEI fixed link had been advanced since the 1880s and been the subject of federal election promises dating to 1891. More recently, the project was proposed by the government in the 1960s (Yaffe, 1985) with some approach roads constructed before the project cancelled because of cost considerations.  In 1985, the government received two unsolicited private sector proposals, and responding to a high level of interest by developers and contractors, openly requested proposals in 1987 (Duncan, 1988; Feltham, 1989). The seven proposals—six bridges and  Chapter 3. The Build-Operate-Transfer Approach  Page 42  one tunnel (Franklin & Matich, 1990; Dilger, Tadros & Calder, 1990)—were narrowed to three.  With an originally estimated project cost of upwards of $700 million, it was  estimated proponents spent between $3 million and $5 million preparing their proposals (Thompson, 1988).  Subsequently, the project appeared stalled following a recommendation against the project by a federal environmental review panel (Cox & Duerden, 1990; Federal Environmental Assessment Review Office, 1990; Globe & Mail, 1990b, 1990c, 1990d). With increased attention to environmental concerns, plans were revived amidst controversy (Cox, 1991 a, Globe & Mail, 1991b), as proponents hoped a decision was possible before the end of 1991 (Cox, 1991b).  In the ensuing two stage technical then financial review, the  government approved the proposal of Strait Crossing Inc., an international consortium which at the time was 40% owned by a Calgary construction company, SCI Engineers & Constructors Inc.; 35% by Morrison Knudsen Corp. of Idaho, and 25% by GTM Entrepose of France.  In early 1993 the consortia sought to raise financing for  construction of their proposed $840 million, 13.3 km toll bridge through a $600 million offering of 40 year inflation-indexed bonds, with an after inflation return of 4.75%. In February, 1993, the consortium faced the hurdles of environmental hearings and approvals and court challenges from stakeholders opposed to the project.  As an example of the numerous and novel risks faced by project participants, the governments of Canada, New Brunswick and PEI found themselves at that time defending legal challenges with respect to their ability to even proceed with the project,  Chapter 3. The Build-Operate-Transfer Approach  Page 43  notwithstanding the challenge faced by the “successful” consortium. Given the uncertainty associated with the groundrules of BOT projects themselves, a challenge of such a basic premise of the project adds considerably to the risks and costs incurred by the consortium (and taxpayers).  By late March, 1993, the project’s future was again cited as uncertain, as the Federal Court of Canada ruled the project could not proceed until an environmental review of the project was conducted—the earlier Environmental Review Panel undertook an assessment of a “generic” bridge crossing without reference to the specifics of the Strait Crossing’s project (Fine, 1993). The project was also halted by the Court on constitutional grounds, as a violation of the Federal government’s promise to P.E.I. dating from 1873 to provide “efficient steamship service” to the island from the mainland. The economic basis of the project was also questioned, as it was revealed a government-commisioned 1992 financial assessment found the project is not viable and indicated the federal government would provide guarantees to financiers for overruns or defaults in addition to an annual indexed subsidy of $42 million. The proponents, while asserting the project cannot afford any further delays, had not yet signed a contract with the government (Cameron, 1993) as the court challenges proceeded.  By late summer, 1993 the Federal Court challenge was still unresolved. The latest rulings in favour of the bridge were appealed by the “Friends of the Island”. Although the bill to allow the project to proceed had been passed, proclamation was withheld pending the outcome of the environmental legal challenges. It was hoped the contract to allow the  Chapter 3. The Build-Operate-Transfer Approach  Page 44  consortium to proceed would be signed in early September, 1993. The Strait Crossing consortium noted the challenges had added to the cost of the project, in terms of delays, stand-by staff costs and legal bills which alone were cited as $1 million (Globe & Mail, 1993c).  Following the ultimate resolution of the environmental legal challenges in favour of the project, the final agreements and contracts were signed on October 8, 1993. Construction commenced within the following two weeks with an estimated May, 1997 completion date, at which time over 500 Marine Atlantic ferry service employees would loose their jobs.  The high-speed rail project was first proposed in 1989 with joint private-public financing. When the federal government announced no public funds will be available, two competing private-sector groups (including banking partners) advanced proposals (McKenna, 1991a). Amidst much lobbying, they have been vying for government approval of their plans for a high-speed rail line, originally estimated to cost from $3 billion to $5.3 billion (Gibbon, 1991) but most recently estimated at up to $7.1 billion including a required public subsidy of 30% to 50% (Howard, 1991). As of early 1993, a number of studies are proceeding pertaining to possible socioeconomic and environmental impacts, potential market share, and routing, but no final government approvals have been forthcoming.  A large Canadian engineering firm, Lavalin Group (now SNC-Lavalin), has been involved in a $2.3 billion BOT mass rapid transit project in Bangkok (McKenna, 1990a; 1990b).  Chapter 3. The Build-Operate-Transfer Approach  Page 45  The concession was awarded to the Canadian-Japanese-Thai consortium, winning over a Euro-Asian group, although a subsequent military coup placed some uncertainty on the project (McKenna, 1991b) with reports indicating the project will go ahead but not with Lavalin (ENR, 1991d). The project was to be financed through $500 million in equity, $800 million in low-interest loans from the federal government, and $900 million in loans from Japanese and Thai banks. The consortium was to operate the system for 30 years and collect fare revenues.  Canadian developers Huang and Danczkay Properties Inc. are actively pursuing BOT opportunities in Canada and worldwide. They have undertaken the development of the Trillium Terminal 3 in Toronto as the first privately-developed and operated air terminal in Canada; were one of the final three contenders on the Prince Edward Island ‘Fixed Link’ BOT project, and in November, 1991, had been shortlisted as one of four consortia bidding the new Athens International Airport BOT project, estimated to cost between $2 billion and $3 billion (Globe & Mail, 199 if). As an example of the degree of uncertainty and volatility associated with BOT projects, in October 1993 (only weeks before a federal election), their consortium was awarded the privatization contract for the other two Toronto airport terminals. The 57 year concession to redevelop and operate Terminals 1 and 2 at a cost of up to $700 million was cancelled by the newly-elected government about one month later, despite the reported lack of a cancellation provision in their contract.  Chapter 3. The Build-Operate-Transfer Approach  Page 46  A French company, Cofiroute, announced it was undertaking a $300,000, six—month study examining the feasibility of providing a bridge across the Detroit River (supplementing an existing tunnel and bridge), from Windsor, Ontario to Detroit, Michigan (Globe & Mail, 1991 c). Recently, the Canadian half of the international Windsor to Detroit tunnel was transferred (somewhat reluctantly and prodded by court actions) from its private owner to the City of Windsor, under the terms of the original concession agreement.  In Vancouver, British Columbia, the Lions’ Gate Bridge crossing Burrard Inlet, is an early example of a privately proposed, promoted, financed, constructed and operated project. Two rival consortia attempted to gain the crossing concession in 1926. A 1927 plebiscite defeated the proposal, however the two groups merged and the project received plebiscite approval in 1933 followed by government approval in 1936. The total cost of the bridge, which opened as a toll crossing in 1938, was $5.7 million (Harris, 1991). The project illustrates a slight variation of the true BOT model, in that the bridge was not transferred at no cost, but subsequently sold to the provincial government in 1955 for $5.5 million. Recently, in response to exponential growth in traffic crossing the bridge and the need for significant upgrading, proposals have been advanced in the private sector for a parallel crossing of Burrard Inlet, at an estimated cost of over $450 million.  3.2.2  North American and Worldwide Transportation BOT Project Opportunities  In the United States, three high-speed inter-city rail projects are being actively promoted, with one project in Texas, recently being awarded a 50 year operating concession. The  Chapter 3. The Build-Operate-Transfer Approach  Page 47  major promoter of the US $5.8 billion Texas project, Morrison Knudsen, is a traditional engineering and construction company seeking new opportunities and long-term sources of revenue (Saunders, 1991).  Current initiatives in California and Britain indicate governments are encouraging BOT developments through negotiated risk-sharing strategies.  The State of California,  responding to voter defeats of initiatives to raise gasoline taxes and issue highway construction bonds, has turned to the BOT approach for transportation projects. Four consortia (from thirteen contenders) were recently granted permission to proceed with the planning of their highway projects, ranging in value from US$88.3 million to US$1.2 billion.  The consortia will be responsible to plan (including environmental approvals),  finance and operate the projects, in return for a 35 year toll collection and land development concession (Campbell, 1990; ENR, 1990h).  To reduce the liability and  property taxation exposure of these private consortia, the ownership of the facilities will be transferred to the state immediately upon completion, in conjunction with a lease-back (International Road Federation, 1990). The concession for a US$83 million toll bridge was awarded to a Spanish-Puerto Rican consortium, encouraged by guaranteed debt service agreements and generous financing arrangements (ENR, 1991h). Not limiting the use of the approach to highway projects, the Los Angeles County Transportation Commission recently initiated the proposal process for two BOT rail transit line projects (ENR, 199 ii). The state of Massachusetts has begun the process of identifjing portions of transportation infrastructure programs which potentially could be implemented as BOT projects (ENR, 1991h).  Chapter 3. The Build-Operate-Transfer Approach  Page 48  In Britain, private road projects are being attracted through government-promoter risksharing encouragements. The government announced legislation which would allow tolls to be determined in the free marketplace; to grant highway project promoters the related development rights; and to reimburse promoters who are awarded a concession but whose project is not approved at subsequent public inquires (International Road Federation, 1990).  Under construction in Britain is the US$215 million Dartford bridge across the Thames. The BOT project concession was awarded in 1986, after consideration of eight submissions. Construction commenced in 1988. The winning consortium also acquired the lease of two adjacent tunnels, thus obtaining an immediate toll revenue stream (Carlile, 1990; Construction Weekly, 1991d). The concession period will be a maximum of 20 years but may be less, for as soon as the consortium has recouped its costs, the crossings are returned to the government (Blaxall et al, 1991). The project participants see the project as a means of generating construction and financing returns rather than operational profits (ENR, 1991 a). Similarly, the concession to finance, design, build and operate a US$450 million bridge across the Severn Estuary was awarded in 1990. The BOT project will also include the lease and operation of the existing Severn bridge, for a maximum of 30 years (ENR, 1990e). A similar BOT project is under construction in Australia. The $550 million Sydney Harbour tunnel concession also includes the operation of an existing bridge crossing, with a substantial increase in the toll (Tiong, 1990a).  Chapter 3. The Build-Operate-Transfer Approach  Page 49  The UK’s first BOT roadway project (as opposed to river or estuary crossings) was recently awarded to an international joint venture. The consortium will be responsible for the design, financing, construction and operation of the £450 million toll road project near Birmingham. It is estimated the consortium will spend between £15 million to £20 million on the statutory procedures alone, including a possible public inquiry, prior to the final award of the 53—year concession. Tenders for a related project will be called early in 1992 (Construction Weekly, 199 ii) with planning for another bridge project underway (ENR, 1991e).  Nevertheless, while the Conservative government of the time continued to  actively promote private sector projects, the pending election raised uncertainty, for the prospective Labour government voiced strong opposition to private road developments, indicating they not only would favour the elimination of all toll roads, but may rescind BUT concessions granted by the present government (Construction Weekly, 1991j).  Germany recently announced they were examining the BUT approach as a means to provide needed highway infrastructure, with a possible variation of the government leasing the routes from the private sector (Globe & Mail, 1991a). Up to 17 major rail and highway projects, valued at US$17 billion, could be implemented by the private sector utilizing the BUT approach (ENR, 1991g). In France, a number of transportation and transit projects are being promoted or are under construction.  In 1991, the French  government evaluated invited tenders for the study, financing, development and operation of a major underground toll road network in the Hauts-de-Seine region, a project estimated at ‘many billions’ of French francs (Globe & Mail, 1991 a). Based upon the  Chapter 3. The Build-Operate-Transfer Approach  Page 50  tender evaluation, companies were invited to submit a detailed proposal, and will be compensated FF2 million (approximately $370,000) if not  In Hong Kong, two major tunnels have recently been undertaken, including the 4km, HK$2.15 billion ($315 million) Tate’s Cairne Tunnel, owned and operated by a consortium of contractors under a 30 year concession (Construction Weekly, 1991a; 1991h). One of the largest Asian BOT project which is underway is a US$1.2 billion toll highway from Hong Kong to China.  The government of China has guaranteed to  compensate the consortium should they close the border, which has prompted some financiers to point out if there is uncertainty associated with the Chinese government closing the border, there would appear to be similiar uncertainty of the same Chinese government defaulting on the compensation (Pallay, 1992).  3.2.3  Other BOT Project Opportunities  BOT projects are not restricted to the transportation or utility sector. The Province of British Columbia invited proposals from the private sector for the design, financing, construction and operation of a province-wide biomedical waste collection, treatment and disposal system (British Columbia Purchasing Commission, 1990). Proponents would be expected to assume all the risks associated with planning, operating and owning such a facility. An initial concession period of ten years is offered.  Overseas, a major U.K.  consultant is structuring, with contractor and banking partners, a US$130 million water pipeline BOT project in Indonesia (ENR, 199 ii). A US$2 billion coal-fired generating  Chapter 3. The Build-Operate-Transfer Approach  Page 51  plant in China will be financed, developed and operated by the private-sector in partnership with a government agency. The BOT project will be undertaken by Hopewell Holdings Ltd., which is also finalizing plans for a similar US$800 million BOT plant in the Philippines, and is actively seeking partners and pursuing a number of other BOT ventures in various countries including the US$1.6 billion Bangkok mass transit system and the US$1.2 billion Hong Kong to China toliway (Pallay, 1992).  Across Latin America, with a particular emphasis in Mexico, governments are looking to the private sector to implement a wide range of infrastructure projects, including water treatment and distribution systems, wastewater treatment and disposal systems, and solid waste disposal systems.  These BOT projects are attracting considerable interest from  international consortia, as the governments view BOT as the only viable approach in light of their country’s challenging economic environment.  This survey has attempted to illustrate the range of new opportunities which are presented to consultants, contractors and financiers, in many sectors including transportation infrastructure. Owners, which are usually various levels of government, in Canada, many parts of the United States, numerous European countries, and Asia are increasingly amenable to receiving private sector proposals for needed infrastructure or are adopting the BOT model themselves to implement many of their new projects.  Chapter 3. The Build-Operate-Transfer Approach 3.3  Page 52  THE PHASES OF BOT  As a project evolves through various phases during its life, project objectives, risks, and participants change. There is, however, no universal model of this process. Phases are distinguished by the type of characteristic tasks and linked by decision points (Adams & Barndt, 1978).  For example, the World Bank identifies five phases in the project cycle (Baum & Tolbert, 1985):  1.  Ident/Ication:  Identif,ring ideas which may meet objectives and  priorities.  2.  Preparation:  Assess the technical, economic, financial, social,  political, institutional and environmental feasibility of the project.  3.  Appraisal: Formal assessment process and commitment to finance and proceed.  4.  Implementation: Construct project.  5.  Evaluation: Ex post evaluation and monitoring of project against objectives.  These five phases are descriptive of tasks and decisions from the World Bank perspective, and do not consider, for example, an operational phase per se. As ‘evaluation’ of projects  Chapter 3. The Build-Operate-Transfer Approach  Page 53  provides important input to ‘identification’, the project cycle is seen to be cyclical in nature.  Adopting a more generic perspective, Adams & Barndt (1978) identify four phases:  1.  Conceptual: Identify need, establish feasibility, identify alternatives, budget, schedule, project team.  2.  Planning: Implement schedule, conduct studies, design.  3.  Execution: Procure, construct.  4.  Termination: Train, transfer project, reassign project team.  Adams & Barndt (1978) indicate the level of effort peaks between the second and third phases, although capital expenditures will not peak until the execution phase is completed. Generally, these phases are oriented towards a traditional model of project delivery from the perspectives of an owner (phase 1), consultant (phase 2, 3, 4) and contractor (phase 3). The transition between phases are characterized by owner approvals to proceed to planning, proceed to execution, and turnover. Of note, there is no continuing operational phase which would extend over the life of the project.  Similarly, Tiong (1990b) briefly described a typical BOT project as having five linear phases:  Chapter 3. The Build-Operate-Transfer Approach 1.  Pre-investment: Feasibility study.  2.  Implementation:  Page 54  Engineering and design, concession agreements,  project financing.  3.  Construction: Construction.  4.  Operation:  Operation and maintenance, sale of products or toll  collection, loan repayment.  5.  Transfer: Transfer of ownership to government.  It is observed the description of some phases is somewhat misleading. For example ‘pre investment’ implies little or no investment with respect to the project is yet required, where in essence, proponents will have made considerable investment (including equity) in the project before it advances into an ‘implementation’ phase.  No decision points  signalling a transition between phases were noted. McCarthy and Tiong (1991) later defined the five phases of BOT projects slightly differently, as ‘preinvestment’, ‘preconstruction’, ‘construction’, ‘operation’ and ‘transfer’.  To aid our understanding of the important differences of the BOT approach, a more complete characterization of BOT phases is desirable. It will serve to highlight some important differences and illustrate, from the perspective of participants, interactions and  Chapter 3. The Build-Operate-Transfer Approach  Page 55  phase transitions. The six phases which are proposed to better define the project cycle and characteristics of the BOT approach are further discussed in a following section.  3.4  SPECIAL CHARACTERISTICS OF BOT PROJECTS  BOT projects typically share the previously—noted characteristics (Table 2.1) of large projects. Further, it can be observed that BOT projects have a number of additional important characteristics when compared with projects undertaken by means of the traditional public sector proposed, financed and operated model. These include both risk related and project cycle related characteristics. These observed special characteristics are summarized in Table 3.1 and described in the following sections 3.4.1 through 3.4.4.  • • • •  Participants adopt new roles and objectives. Project and participants involve longer time frames. New risks are introduced and accentuated. Novel risk allocation considerations.  Table 3.1 Special Characteristics of BOT Projects  3.4.1  New Roles and Objectives  The private sector adopts, partially or completely, the roles of project proponent, financier, designer, builder, operator and maintainer. As a result, project participants play new and wider roles and respond to new objectives. Many of these roles evolve and  Chapter 3. The Build-Operate-Transfer Approach  Page 56  undergo significant changes throughout the project’s life. Participants must be sensitive to the wider-than-expected range of perspectives of direct and indirect project participants, translated into project objectives and failure and success criteria, and recognize their potential to impact upon the project. These additional roles and objectives fuel many new management challenges. Participants are usually inexperienced in the new relationships, corporate structures and understandings required, and conflicts of interest are common.  Traditionally, the objectives of the project participants were focused towards the physical delivery of a facility (the “project”). In comparison, the objectives of a BOT project are commonly much more diverse and long—ranging, in that delivering the facility is only one, possibly relatively minor, objective; crafting, developing and managing a successful, long— term commercial enterprise are commonly the major objectives.  Each BOT project, by its nature, is particularly unique, requiring a custom-crafted assemblage of participants attempting to design the most appropriate response to the project’s particular risks, environment, and needs.  Contractors and other potential  participants who wish to take advantage of the opportunities BOT projects provide, must be flexible and adaptive. They find themselves involved in many aspects of the project in which they have little experience to draw upon. Additionally, the number of participants is likely to be greater than would be the case on a non-BOT project.  For example, from the perspective of a contractor or engineering consultant involved on a BOT project, they will find themselves acting in new roles—perhaps including those of  Chapter 3. The Build-Operate-Transfer Approach  Page 57  aggressive project proponents, promoters, and champions, and over a much longer timeframe with a particular emphasis on unfamiliar decision problems and risks in the early, highest uncertainty, project phases.  3.4.2  Longer Time Frames  Participants must be active throughout more phases of the project, from proposal, through implementation and ultimately operation. Often commitments must be made regarding financing, design, construction and operational details of the project at the time of proposal submission, prior even to the award of the concession.  The project phases  typically overlap and are commonly protracted, necessitating considerable investment of ‘sunk costs’ with a difficult-to-judge chance of proceeding to concession award.  For  example, in the case of the PET Fixed Link project, some members of the competing consortia have been involved, at considerable cost, for over seven years since first advancing proposals, and it remains uncertain as to if or when the concession will be awarded. Upon concession award, participants may expect a construction phase of four or five years, followed by an operational phase of 35 years. They will still have an indirect involvement for much longer, however, as they must assure the structure has been adequately designed and built and will perform satisfactorily for a further 65 years (Thompson, 1988).  Longer time frames introduce uncertainty, exacerbated by the inability to presume a continuity in forecasts. There is often a lack of continuity within the consortia themselves,  Chapter 3. The Build-Operate-Transfer Approach  Page 58  as partners come and go and alliances change, as has been the case on the PEI Fixed Link project. It would be difficult, if not impossible, to accurately model ‘project demand’ (and thus revenues) over a typical BOT operating horizon ranging from 20 to 55 years (as in the case of the English Channel tunnel project), as well as forecasting the continuity of the financiers and venture partners themselves. Participants may find it formidable adequately accounting for a possibility of some dramatic but unforeseeable event introducing a discontinuity in the forecasting model, such as innovations, sociopolitical changes, catastrophic or apocalyptic events.  3.4.3  New Risks  New risks are introduced and accentuated by longer time horizons, new roles, greater numbers of stakeholders, more complexities and influences on the project, and involvement in the non-traditional lobbying, financing, environmental approvals, planning, and operational phases. More stakeholders are involved as BOT projects typically have a higher profile, and as a result are often subject to a more intense political and public scrutiny and have a greater vulnerability than conventional projects. McCarthy and Tiong (1991) noted that even ‘medium’ sized BOT projects typically attract some of the problems which are normally associated only with ‘large’ projects.  New risks implies new skills are required of participants. For example, there is a much greater need for “soft side” skills as the proponents must forcefhlly enuciate their vision to give the project sufficient momentum through the lobbying, opposition from stakeholders,  Chapter 3. The Build-Operate-Transfer Approach  Page 59  environmental approvals, keeping financing partners and creditors from vacilating, and overcoming the inevitable inter-organizational conflicts.  Examining the risk allocation on BOT projects in comparison to traditional approaches highlights new risks.  For example, Erikson & OConnor (1979) and Perry & Hayes  (1985a) outlined the allocation of the numerous risks associated with a conventional project approach between the owner, designer, and contractor. Under a BOT approach, most, if not all, of the ‘owner-retained’ risks (such as changes in law; civil disorder; government approvals; and environmental damage) would be shifted, in various forms, onto the ‘promoter-contractor consortium’ undertaking the project. Figure 3.1 compares such risks for BOT participants with those of conventional and turnkey project approaches, illustrating the range of new risks associated with the BOT approach. The complexity of these required risk sharing and allocation arrangements often results in a reluctance amongst some participants, particularly if inexperienced with respect to BOT arrangement, to accept the degree of uncertainty and the novel risks (Pallay, 1992).  3.4.4  Risk Allocation Considerations  By their nature, BOT projects tend to achieve numerous objectives, many not explicitly identified and conflicting. Additionally, they tend to have a particular diversity of project participants and project stakeholders.  Each brings to the project their unique risk  perspectives and potential for conflict. Stakeholder opposition or support for a project should be considered as a significant risk, and one to which BOT projects can be  Chapter 3. The Build-Operate-Transfer Approach  Page 60  especially sensitive. For example, the Northumberland Strait crossing project has been particularly dependent upon the support of key stakeholder groups, including political advocates.  In its fundamental form, the BOT model allocates virtually all risks to the private sector, in comparison with the traditional approach, where many, if not the majority of these risks would normally have been assumed by the public sector. At times, government insistence on a total risk allocation to the private sector may halt the project.  For example, the Turkish government’s continuing instance on such a de facto total risk allocation to the private sector—respecting proposed BOT CANDU nuclear power plant projects—has precluded the successful completion of concession negotiations for many years. The government has remained unwilling to give a subsidy or guarantee in the form of a take or pay agreement, nor grant protection against the potential ‘skimming’ of revenues, and foreign exchange or political risk. As a result, the Canadian government will not grant export credit guarantees, so the project languishes (Barrett, 1986).  Chapter 3. The Build-Operate-Transfer Approach  Conventional Project Approach 0 w n e r  D e  C  S  n t r a c t  I g n e r  0  Page 61  Turnkey Project Approach 0 w n e r  0  r  DCC e 0 0 n S S I t o r r g n a t e c i r t u 0 m r  ‘BOT’ Approach G 0  v e r n m e n t  x  Planning Risks  x  Design Risks  x x  x  Construction Risks  x  Financing Risks Ownership Risks  C  C  0  0  0  n t r a c t  S  m 0  t e r  0  o r t i u m  r  x x x x X  x  Operational Risks Revenue& Market Risks Note: The size of the  Figure 3.1  P r  x  x  *  X  “X” illustrates the approximate relative share of the risk.  Risk Allocation Amongst Participants Comparing Conventional, Turnkey and BOT Project Approaches  Chapter 3. The Build-Operate-Transfer Approach  Page 62  On other projects, the wisdom and expediency of total private sector risk allocation could be questioned. Waste disposal projects (for example, the British Columbia government’s invitation to the private sector respecting the management of biomedical waste) inevitably involve many risks, conflicts and tradeoffs which may be difficult to equitably resolve in the public interest, by the private sector. It may very well be that the private sector is being asked to deal with such risks in the face of an increasing public sector frustration or lack of ability to do so satisfactorily. It should be recognized that packaging an otherwise intractable project with the BOT approach will not guarantee private sector willingness to proceed; Barnett (1989) notes some lesser—developed countries are not yet flilly cognizant  of this.  Other governments recognize even an implicit sharing of risks with the private sector will be necessary to make BOT more attractive. This may include a variety of strategies, from political support, loan or export guarantees, offiake agreements, base revenue guarantees, or other direct or indirect subsidies.  Proponents may be offered partial or complete  remuneration for their submissions if the concession is not awarded or the project is otherwise halted before construction. In most cases, however, proponents must bear the often considerable costs of assembling and advocating a project proposal.  A further  difficulty is few governments have a mechanism whereby a proponent can be awarded a concession without a public competition or tender. Thus, proponents who first propose an unsolicited project enjoy little if any benefits, for they often find themselves bidding against a considerable number of competing consortia during the public competition.  Chapter 3. The Build-Operate-Transfer Approach  Page 63  For example, Trafalger House, a large U.K. engineering construction company, submitted an unsolicited offer for the Dartford bridge in July, 1985 (Carlile, 1990). However, the U.K. government lacked a mechanism for awarding a concession to an unsolicited proposal, and thus publicly invited proposals in 1986. Trafalger House then found itself competing against seven other consortia; they narrowly won out and were awarded the concession in September, 1986.  The Northumberland Crossing project is also similar;  unsolicited proposals from the private sector were first made in 1985, but the Canadian government responding by issuing a public proposal call in March, 1988, whereby seven competing submissions were received; three of which were shortlisted for further consideration. All financial proposals were deemed not to comply with the government’s requirements, however, subsequently the concession was awarded to one of the three. It was not until October, 1993 that a signed contract was in place, only weeks before a national election.  The effect of these BOT project selection processes is that competing proponents are required to invest considerable resources in the face of highly uncertain chances of success, a highly unpredictable and protracted timeframe, and unclear and changing criteria for evaluation and award. For example, as previously noted, the cost of each of the seven competing groups’ proposals for the Northumberland Strait crossing project was cited as between $3 million and $5 million (Thompson, 1988). Subsequently, some proponents have continued to incur significant additional costs. Coupled with government expenditures on the project, it is plausible that up to 10% of the value of the crossing has been spent simply attempting to choose who may proceed with the project. In contrast to  Chapter 3. The Build-Operate-Transfer Approach  Page 64  more traditional tendering procedures, participants must constantly evaluate the risks in investing more time and resources to continue to pursue the project, versus the decision to end involvement and absorb the sunk costs.  As an illustration of the uncertainty which BOT project participants face, particularly in the early stages of the project, Figure 3.2 compares typical BOT and conventional approach decision trees from the perspective of a project proponent (bidder).  In contrast to conventional approaches, the bidder interested in pursuing a typical BOT project is faced with more phases, more branches (possible outcomes) and many states of nature exhibiting dimensions over which the bidders can exercise little control.  Chapter 3. The Build-Operate-Transfer Approach  Page 65  BOT PROJECT APPROACH  1. Submit Statement of Qualifications. Uncertain States of Nature (Chance of Success). Depends upon strength of qualifications, team, political connections, competition, etc.  2. Submit Proposal. Assumes Success (i.e. Invited to Submit). Uncertain States of Nature (Chance of Success). Depends upon strength of proposal, team, approach political connections, competition, price, etc.  CONVENTIONAL PROJECT APPROACH  3. Awarded Concession! Project. Assumes Success (Le. Intent to Award). Uncertain States of Nature (Actual Award). Depends upon strength of political will and circumstances, opposition, political connections, etc. Many factors are beyond the control of the proponents.  4. Receive Regulatory and Legislative Approvals.  5. Proceed with Construction & Operation.  Assumes Success (i.e. Intent to Proceed). Uncertain States of Nature (Regulatory Approvals). Depends upon strength of political will and circurstances, opposition, political connections, etc. Many factors are highly uncertain and beyond the control of the proponents.  Assumes Success (i.e. All Approvals). Uncertain States of Nature (Success). Depends upon economic situation, socio economic circumstances, competing projects, construction and operational costs, etc. Many factors are highly uncertain and beyond the control of the proponents.  1. Submit Bid. Uncertain States of Nature (Chance of Success) Depends upon strength of qualifications, price and competition.  Figure 3.2: Decision Tree Comparison, Bidder’s Perspective on ROT Project versus Conventional Project  Chapter 3. The Build-Operate-Transfer Approach 3.5  Page 66  THE PROPOSED SIX PHASES OF BOT  Figure 3.2 illustrates some of the many hurdles which must be overcome in the pre construction phases of BOT projects. It is suggested these pre-construction phases are particularly important but often underestimated, and in recognition, six phases are proposed so as to better define the BOT project cycle. They are:  •  Propose;  •  Evaluate;  •  Negotiate;  •  Build;  •  Operate;  •  Transfer.  An illustration of these typical phases is provided in Figure 3.3.  3.5.1  The Importance of the PEN Phases of PEN-BOT  A more appropriate acronym ‘PEN-BOT’ is proposed, which places a more realistic emphasis on the considerable front-end efforts and expenditures necessary before the project can ever be ‘built’. It is in these PEN phases where participants may encounter many of the sources of much of the novel risks and uncertainties unique to these types of projects. Thus, it is suggested, it is the PEN phases which emphasize the uniqueness of the BOT approach.  Chapter 3. The Build-Operate-Transfer Approach  I  Page 67  Propose Propose  I  Propose  I  Propose  I Propose Propose EvaILte Propose  1 Propose Evaftate Negotiite  I  I.BuiId Oerate  iI  Transfer >c  Competing Proponents  >(  Consortia formed  (  Project dormant  Project resurrected  Concession Period  Time  Figure 3.3 The Typical Repetitive, Overlapping Phases of the ‘Propose-Evaluate Negotiate-Build-Operate-Transfer’ Approach  Chapter 3. The Build-Operate-Transfer Approach  Page 68  It is also important to note the often repetitive nature, the potential overlaps, and the prolonged nature of the ‘PEN’ phases, which once again, participants may find novel and often underestimate the fortitude necessary to see the project successfhlly through the ‘PEN’ phases. The salient features of each of the phases are described in the following Sections 3.5.2 through 3.5.7.  3.5.2  Propose  The idea for the project is born or resurrected, in the private or public sector. The idea may coalesce into a proposal advocated by a proponent or proponents. During this phase, private sector proponents identify participants, gather partners, and form coalitions or formal consortiums. Competing consortia may emerge, each promoting their own major or minor variation of the project.  This phase may be characterized by lobbying, public pronouncements and advocacy, and competing claims as to the merits and advantages of the consortia’ s schemes. If the idea for the project lacks government support, the consortia must lobby for both the project itself and the merits of their particular approach.  Participants find an increasing investment in time and money is required, often at the expense of the proponents’ existing enterprises. Typically, the type of lobbying and long term strategic planning required consumes an inordinate amount of senior management’s time and energies. A considerable investment of financial resources is required with a very uncertain chance of return.  Chapter 3. The Build-Operate-Transfer Approach  Page 69  As the phase evolves, contractual and financial arrangements are made, and additional information is sought regarding the feasibility and details of the financing, design, construction, and operation of the project, recognizing that many or all of these arrangements may continue to change through the course of the project. Thus, even in the first phase of the process, a long term structure for the project must be established in the face of very great uncertainty.  Consortia may formalize their commitments regarding the project through submission of an unsolicited or preemptive proposal requesting the granting of a concession, usually from the senior government or governments where the project would be resident.  If  accepted without a public proposal call, the phase may evolve into ‘evaluate’.  Alternately, if the project proponents have remained in the public sector, the project may evolve fairly quickly through this phase to an announcement of a proposal call prior to the formulation of private consortia. This is rarely the case, for there is almost always some very early expression of private sector interest in the concept of the project, although it may be private lobbying of public officials.  However, unless criteria had previously been announced, the promotional efforts (including unsolicited submissions) of the consortia may result only in a formal public call for proposals. merge.  Partnerships and alliances may change and competing consortia may  Chapter 3. The Build-Operate-Transfer Approach  Page 70  Lobbying may intensifj, involving politicians and advocacy groups. Stakeholder groups’ influence may be considerable. The senior body (or bodies) define the project’s evaluation and selection criteria, which may involve a significant amount of internal discussions and conflict.  It is not unusual for the ‘propose’ phase to be very protracted and cyclical, as projects, proponents and consortia vie for govermnent acknowledgement and support.  The  objectives respecting the project, and the government as ultimate owner, are often ambiguous and ill-defined. In response, the form of the project and consortia may evolve.  The phase nears an end with the official recognition of the project through a solicitation of proposals respecting the possible award of a concession, although this may not represent a commitment to the project on behalf of the government. Participants must judge if they wish to escalate their commitment through the preparation of a proposal, which must embody considerable detail and commitments regarding the project’s financing, design, construction and operation.  The phase ends with the submission of proposals for  evaluation, although there may be fhrther negotiations and amendments with selected parties, amidst much lobbying and advocacy.  As noted, the ‘propose’ phase may be cyclical in nature, with a project being proposed, perhaps not gaining acceptance or rejected, refined, and re-proposed a number of times over a protracted timeframe anywhere from several years to several decades (or several hundreds of years in the case of the English Channel tunnel).  Chapter 3. The Build-Operate-Transfer Approach 3.5.3  Page 71  Evaluate  The ‘evaluate’ phase commences with the acceptance by the government, or governments in the case of transprovincial or transnational projects, of proposals. The evaluation of proposals may involve two or more stages, with, for example a prequalification stage with only some consortia selected to submit detailed technical proposals, followed by the submission of financial proposals. As government objectives and selection criteria will be qualitative, possibly to a significant degree, lobbying, public critical review and advocacy on behalf of consortia, proponents and opponents will continue and may vary in intensity from period to period.  Consortia whose proposals may have been rejected in prequalification or other initial evaluative stages may nevertheless continue to seek consideration and reconsideration through lobbying, proposal revision or by forming alternate alliances. In some instances the government itself may request that competing groups consider merging.  The  organization and structure of the consortia themselves may evolve into single-purpose enterprises.  Proponents and other participants may also face uncertainties and frustrations arising from the absence of, or unclear definition of, the evaluation process or criteria. They may find the dimensions of the project and evaluation criteria, including the relative importance of each, somewhat fluid.  Chapter 3. The Build-Operate-Transfer Approach  Page 72  The ‘evaluate’ phase may also extend over a protracted timeframe (in the Northumberland Crossing project it has been over three years) and ends with the selection of one consortia, which still may not represent unencumbered govermnent support for the project.  3.5.4  Negotiate  During the ‘negotiate’ phase, as attention is focused on the one consortium, many sociopolitical, regulatory, economic and technical hurdles are addressed. While the proposal has been selected, the concession has not been granted. Usually some formal expression of government sanction is necessary to enact the award of the concession, which may include hearings, environmental approvals, a public plebiscite or inquiry, enabling legislation, or treaties.  Detailed negotiations with the selected consortium  continue respecting the particulars of the concession and necessary procedures.  Lobbying from loosing competitors may continue and opposition from stakeholders may intensifij. The influence of stakeholder groups may peak during this phase through the processes of public hearings, plebiscites, political lobbying of legislation,  and  environmental approvals. Delays originating in such processes are not uncommon.  The successful consortium must also proceed with the planning and design of the project, even prior to the formal granting of the concession, as well as formalizing the organizational, legal, and financial structure of the project. Once again, the participants must undertake escalating commitments in the face of potentially unpredictable public hearing or legislative processes which may result in delays, require changes to the project  Chapter 3. The Build-Operate-Transfer Approach or even lead to cancellation without compensation.  Page 73 Some, but certainly not all  governments may accept the risk of project cancellation in this phase.  This phase ends with the passing of all enabling legislation and the formal granting of the concession. Financing, planning and design continues and construction can commence. The time requirements for this phase vary in accordance with specifics, however, two or more years is typical.  3.5.5  Build  Parallel with the finalizing of the structure and details of the concession, project engineering design, financing and other details must also be addressed, following which, the project is constructed. In some instances the operation of, and collection of revenue from, related facilities may commence.  The ‘build’ phase of these projects varies with their complexity, from less than three years up to seven years, and will end with the commencement of the revenue operation of the new facility.  3.5.6  Operate  During the ‘operate’ phase, the facility is operated and revenue collected to offset the implementation costs of the project. Revenue may be gained from tolls or utility charges, government subsidies and guaranteed payments to redress shortfalls, as well as related  Chapter 3. The Build-Operate-Transfer Approach  Page 74  development charges. In some instances, the operation of existing facilities, with their attendant revenues, may be granted from a time earlier in the concession period. The ‘operate’ phase will end with the expiry of the concession period, which may range from 20 to 55 years.  3.5.7  Transfer  Upon expiry of concession period, ownership is transferred to the government or governments. However, in some instances the concession may not have been granted outright ownership, or, for liability or other reasons, ownership may have reverted back to the government at some earlier date. Thus, the ‘transfer’ phase is more generally thought of as when the concessionaire’s right to operate the facility and collect revenues expires. Those rights are transferred to the government or governments who granted the concession. The consortium may be granted a further operating lease, but under terms and conditions which are likely different from the original concession agreement.  Although the facility may have been transferred, the consortium’s obligations may not be extinguished.  The government, as owner of the facility, may require some form of  security for the continued satisfactory performance or integrity of the transferred facility over its expected life. This continued obligation may extend 65 or more years beyond the transfer.  CHAPTER 4. CASE STUDY OF THE CHANNEL TUNNEL BOT PROJECT To illustrate the magnitude, complexity and the uncertainty of the risks associated with large and BOT projects, a case study of the English Channel Tunnel BOT project is presented. It is intended to serve as the backdrop for the formulation of a risk planning Framework, as presented commencing in Chapter 6.  4.1  THE EVOLUTION OF THE CHANNEL CROSSING BOT PROJECT: 1802-1991.  Engineers, builders, politicians and promoters had been actively talking of Channel crossing projects for many years:  “We are of the opinion that it is not an unreasonable proposition to drive a tunnel under the Channel, but that in some measure it must be a venture.” (Nature, January 20, 1870 (New Scientist, 1973)) Over a similar period, there has always been skeptics:  “That the Channel Tunnel would have been a big thing from the promoter ‘s standpoint is not to be denied; that it would have paid anything like an adequate interest upon the capital sunk is a matter we regard as altogether doub’ful.... “(Economist, 1884). The current project, said to be the twenty-seventh proposed (Holliday, Marcou & Vickerman, 1991), commenced construction following a two-hundred year gestation period. Figure 4.1 illustrates this cyclical and start-stop nature of the project from 1750 to 1885; Figure 4.2 from 1885-1975 and Figure 4.3 from 1975 onward.  75  Chapter 4. Case Study of the Channel TunnelBOTProject  Page 76  1751 VDesrnarets: Fixed link first proposed -  1802 1834 de Garwnd:V Bobmeged tube tunnEl proposed Malhieu-Favfer:V Bored tunael proposed 1836 1803 do MzllrayV Immersed tube tunnel pr8posed do GamondV Bridge proposed 140 do Gamond:V Causeway prbposed 1842 Ptuarrie:Vsibmerged tube tunnelproposed 1842 dela Haye:y SrbmergeiJ tube tunnel proposed 1848 V Poatidg tunnelproposed 1851 Horeau:y Sibmerged tube tunnel proposed 1855 P4yeme:y Srbmarged causeway proposed 1855  14’3dson: YBobmerged tube tunnel proposed 1855 Favre:y Bored tunnel proposed 1856 do Gamond.’V Twin railway tunnels proposed 1857 French gvemmenlV Cc,mmisslm evaluated de Gamond’s scheme 861 Chalmery Sibmerged tube tunnel proposed •86t Angelfriiysibmerged 2Jbe tunnelproosed 861 Lacomme:Vslbmarine railway proposed 1865 Hawkshaw& Low.V Sngle bored tunnel poposed 1867 do Gamcnd 8 Lowy Railway tunnels poposed l86 Channel B(dgs Compan Bridge proposed  I  1868: G,vemmenlsV Svakjated scherrteskregotiated 1869 Bateman & Revy:Vibmerged tubb tunnel proposed 1872 British Channel Tunnel Co. (Hawkshaw, Bargle bored tunnel proposed 1873 ,4’rglo-F’ench a,bmar*ts Railway Co. (Low Twa, bdred tunnel propctsed 1875 Biitirrh Channel Tunnel Coy Concsrsr granted 1876 1 Oov-rnments.V gnbd treaty—99 yrmonopoly 1878! French:V ciommenced conbtrucfion 1q80 Anglo-French Sjbmarihe Railway Co.V Commenced. construciton 1882 British governmeift ispended bonstruction (delence grounds) 1883 British govemm4nt Vlalted conritruchon (dtence grounds)  Project dermant  1750  Propose  Propose  Propose  -Il  1800  -___  1810  Project dot sian?  1820  —*[Z..  I 1830  yalufite & Evaluate Propose Negosate ‘I’ll”—  esipeting prepO onto  I 1840  1850  Project jormant  Cempetie cone erter  1860  1870  1•  1880  1890  Year  Figure 4.1 The Cycles of the ‘Propose-Evaluate-Negotiate-Build’ Phases of the Channel Crossing Project: 1 750-1885  Page 77  Chapter 4. Case Study of the Channel TunnelBOTProject 1886 Anglo- V FreAch Submarine Railway Cc: ObtAined Bdla’r Channel Tiatnel Co4fmmed Chann (Tunnel Co. 18871 *riiament V Rrlueed pwmissio(r to recommence construction t688 Parliament V Re(oued permission to recommen9e construction 1889 Parliament V;Refooed permishioo to recommdoce coootructlotl 18th le Creuocd: V Propoued bridgd 1889 Sdmelder& V!Hercent: Propo$ed teidge  19o  Parliament V Refused permission to recomnteoce cmtstructi 1892 VSubmergedrail moaning prrfyoeed 1604 Channel 7unnetCo.: V Prcposedtwio bored tu  I  WtrSSSS  1 with central rtsa  nice pesanpr WS04TS  rrssn.a  1906 1 Parliament: V Chunost Tunoet bUt htroduced  01  I  1607 Phrliamerrt V Chknoel Tuooel bl with&ewn (military cbjecfiono) 1913 Parliament: V Commiltlw formed to coodder Channel Tqooel  w7/ersrsss/  1914 Parlia-(tent V Refused permluoion to r4commence cunkfrucfion 1914 Parliament V Refused to debate Channel Tunnel opeofiunu (28 attempts) 1989 Royal ommiuaion: V Studied Cheoeñ croudog uckenlee ithg Vi Wide-gauge railway tunnel prcpbsed 1929 V Submerged tut* tunnel proposAd 1929 V Double causeway proposed  • •  •  d4rdoth MacDunaid& Panbters: 1 V°Propoued bridbe 930 Gorwnment: V Refaced to cucelder ediemeu(defenue grounds) 19471. Bhudemnt: V hated tunnel propoked 19481. Parliament V udy proup eefablithed  1987;  Channel Tunnel Study Group V Fcpmed by Channtl Tunnel Co.; Suez Cm & ethers 1 1687 Channel Tunn at Stlody Droop: V Piupoued twin boiled rail tunnels wth sernlce pwesege 1960 Channel Bidge Droop: Proposed bricfye  -  Angh-Fren9h overnmenta Vdo, ptucted aouumg propouale Angio4ench govemmdpfa Vemmis4ion study fancu4ed funnel proposet Ang°o-enchguvet-nm9ota: V Approved in principle bellow further inneetlgeflone Anglo-Piench goveenmthte: V Undertdok geefegicel edrney 1 1966 Anglo-French gm’einmenta: V Aonbueced tuneet wjll be bolt 1966 Atiglo-Frmtdt gor4nmmite: Cothpetfive proponde malted  16671  I  ChAnnel Tunnel StrAti Group: V Proposed twin bored funnel 1967 i Wa4’urgatat V Prtposedtunnel 1967 l. h-Ill Sn tuel at at: V Prbpoeed croeulntgl 19671 Anglo-French goje-nmentecV E*alueted and ne4otieted with at proponents; • r89Jeeted merger of coneortie 1970 B’Rith ChanAet Tunnel Ca: Formed by mCrged cm,uorfie  Propose Coebt*g proponents  Project donooet -  Yearfr 1880  1890  1900  >611K  Ceepd  Project 4anuact  Propose  —>lJ:-93.()3.93-j44 dormant Projo  Anglo-FrancA, gmra-nmenla :1Vccepted in frmndple Bilish Channel Co. propouaf; i undertook further etudes I 1 1972 Anglo-Ftench govecnmahta and Sdtieh Channel Tunnel Ca: V Slgied Agleement Na l;undertoob preilmivury covufrudion work 1973 Parlianient: V lnfrodocAd Channel Tunnel Sit 1976 Parliament: V Pelted to ratify Anglo-French treaty; project ebendoned Eveluele& Propose Evaluate Negctiete Build —>4116-;. :5597tsifits B”SIIIII I4—  1910  1920  I  1930  I  1940  Cueoo’rj  I  1960  Cempotlrg  1960  Prajd dormant  1970  1980  Figure 4.2 The Cycles of the ‘Propose-Evaluate-Negotiate-Build’ Phases of the Channel Crossing Project: 1885-1975  Chapter 4. Case Study of the Channel Tunnel BOTProject  Page 78  1g77 &RWr VRaI&ENCF: Quietly etideda single track bored tu848tuoeholVmiAion) 18781 EEC:V Tranrortahon hdrsr S icbsre reports paled the cm 19791 BR & SNCF: VEj ted 2thuuefmle proposel to governments 5  0 cia dranr  -  messing  lo  GosernmeraV Invited privateisector propocatp European Channel yTunnel Goupr Proposed double-track tunnel 1980 iLbrkintoEurope$VPropooed 8km span bridge  isao  Euromwle:IV Proposed ‘E.lunn& hybrid bedgedunnel wrs/sr/srsS igso Govennnenlaf V Transport C6mmitleee stode&1 propoealu —if 1• 11881 Tarnrai: rail turnels With RO-RO tratfiti based opec 1975 scheme VrjdtØi 1881 tube bjimet Vd birmerned 1582 Banking consmflwn: Vtindnrlobk analysis ci br and ferandatsopeoto ci the prsied 1984 Channel TwlpdGratp& Vfrancekthrdra Pained byTarrirao, harts, 815th &Prendr currhaotoon, and other rIvet tunnel sctreme proposed Sate bored sure  1. l5 1 Govenmrents:’emjed 7nvdatlar toaomoiersrrequedingpr000nals Channel rbnnel Grasp & VFranceMarch& Proposed twin bored RO-RO meil tunnel aith central service pahoage oposed combined roadhait b(idge & immerseki tube tunnel 1985 EuroBddge: V Proposed 12 bine. 8km spannxcsdheil eodosed tube aispenslon bridge l5 Freeman Fox: rcpnsed 2km spans msqoenplmi bidge l.flloo BoclJrroyd oponed sbstiip-mected, double decked sunpendon bridge He4rrostHornberg roposed 8505n spans cabte-itayed bridge 1 ropoved double-decked roadail bridge ash hydroelectric geewatms Eurollnlr Channel Expressway V Propound twhiroadkal tormetl 1985 Era-oBdrige:V Proposed 12 iena, 5 bm spanErredkeil enclosed tube suspension bridge  l5  Euro-Trans World Channel Tunnels:  WoPosed  1; mu only tunnel  1985 Govenrment&V Evalusted ten schemes submitted 1986 Govenrmenls:V ReqsestedCTGFM, Euro$mite and Channel Expressway donuodiu merge; CTarMrehise 1• 1986 1: Gosamma4s:V Announced approval of the CTG,FMsoherle 11986 1 Gorernmás:V Sigeed Ariglo-Freoch Treaty 1 1986 Govenurn arts & CTG$II* V Sigeed Cdnoesuinn Agreement 55 year S r eeh hoed un -noeopnly unll 0120 re/Arceeeesetaeq,sgredrsak/aotoE,a pp i 11688 Channel public Turarel hearings commenced all: ParllarnentVYAnoJoed  S:x-Iljtiss$  h986 Euroharirel:VPmmed trbrn CTG & FM $mrallel Eribsh &Frerch pmshhc companies to develop and operate the tumiel 1: 1986 Ewolranel:V Sigoed obnohochmr conliaots auth TML an Prrglo-Frevdr ccarsorthim of the foaming carbeotors 1987 Fierldmart:V Ropal assent granted tØ the Channel Tunnel BB;Mglo-Fremrdr beaty rafiteot conoesdup period oomnmeeroed 1987 ThcVcnmnienoed construdjon 19921 I 1 E5srolunnel:V Pt’’ad-in operatir planned  Propose I  Evaluate  thJild  Opwate  ——  —  FWjoct  dayncart  Year[— 1975  Competaêg  praposeolo  I  1900  Competing casoam-tio  1  I  Neoctiute  15  10  F  1995  2990  2995  2010  2015  1  21720  1—  2%5  Figure 4.3 The Cycles of the ‘Propose-Evaluate-Negotiate-Build-Operate’ Phases of the Channel Crossing Project: 1975-  Chapter 4. Case Study of the Channel Tunnel BOTProject  Page 79  Having been first proposed in 1751, and again to Napoleon in 1802, interest in a fixed link crossing—a tunnel was not the only concept, although it may have been the only remotely feasible concept—was closely related to the state of Anglo-French hostilities. By 1875, an agreement had been reached between the two countries, whereby promoters estimated the cost of a twin-track railway tunnel at £10 million (Smith, 1988); given escalations that sum would be around £100 million today. The French government soon afterwards granted a 99-year concession with a thirty year competition-free period (terms similar to the modern concession) to the ‘Association for a Submarine Railway’ consortium, who promised to complete construction within twenty years (Economist, 1882, 1883).  Work commenced on both shores in 1878—although it lacked statutory authority in the case of the British works—and by 1882 over 1800 m of tunnel had been completed on the British side, where the unlined tunnel remains today (Kirkland, 1986; Sargent, 1988). Amidst intense public debate, the War Office suspended construction on defense grounds: are we deliberately to make England less safe in order that tourists may not suffer from seasickness?” questioned an eminent minister of the day (Bonavia, 1987), but not before the Victorian promoters of the Channel Tunnel Company held candlelight dinners in the tunnel, courted royalty, politicians and the press, foreshadowing the intensity of the public relations and lobbying frenzies of one hundred years later. The French, frustrated (for not the last time) by the fhrious English debate and confused indecision about the desirability of a link, halted work in 1883, and in 1884, xenophobic British politicians soundly defeated the Channel Tunnel bill:  “...  we are quite content to see it rejected by a  majority so great that it is not likely to be revived.” (Economist, 1884).  Chapter 4. Case Study of the Channel Tunnel BOTProject  Page 80  That is, until 1890, when the matter was again defeated in the House of Commons; reintroduced in 1906 buttressed by considerable engineering and economic studies, but withdrawn in the face of the reiterated military objections.  Between 1914 and 1922,  twenty-four unsuccessful attempts were made to reintroduce the matter to Parliament, even though the 1914-1918 war dramatically illustrated the military advantages a tunnel would have provided, which accorded considerable further impetus to the French desire for a tunnel. In 1924, defense objections again precluded consideration of the link and lead to an insufficient political will to reopen the matter despite being raised on an annual basis until 1929.  In 1930, a Royal Commission was appointed (felt by many as simply a further manner to avoid action) to study cross-channel links, including a proposal for a tunnel with a high speed electric railway linking London to Paris in 2/4 hours, remarkably similar to the modern project. Despite recognition of the wider range of potential economic benefits, the further consideration of a link was narrowly defeated, again primarily for defense reasons. Little attention was given to the project by British politicians for many years following.  As war loomed in 1939, the French Chamber of Deputies demanded construction of a tunnel, citing defense considerations (albeit the French defense), but received little action apart from two brief considerations of tunnel construction during the war: the first, a worried examination of the possibility of the Germans secretly completing the tunnel; and the second which studied if the British could quickly complete a tunnel to assist in the  Chapter 4. Case Study of the Channel Tunnel BOTProject invasion of the Continent.  Page 81  The answer to both investigations, not surprisingly, was  negative.  Post-war, interest in tunnel schemes revived, including consideration for the first time of automobile drive-through proposals.  In 1957, the original Channel Tunnel Company,  which had held seventy-six annual meetings in the intervening years usually with little progress to report on construction of a tunnel, formed the Anglo-French Channel Study Group, with strong participation from the British and French national railways as well as the Suez Canal Company, who were searching for another equally dramatic and profitable investment following the nationalization of their primary asset (Gould, Jackson & Tough, 1975).  The Group undertook detailed technical investigations with renewed vigor, which culminated in 1960, with a report which served as the fundamental basis of virtually all following bored tunnel schemes. Although a range of fixed link crossing options were  considered, including later revived tube tunnel, bridge and hybrid bridge/tunnel proposals, it was concluded that a bored tunnel (with an estimated total cost, including escalation and financing, of £160 million) was technically and economically most desirable.  The  consortium anticipated raising all necessary capital privately, but requested government interest guarantees and a ninety-nine year concession period (Bonavia, 1984).  When it became evident the government was favourably considering the tunnel proposal, competing consortia entered the fray, advocated their various schemes, including a  Chapter 4. Case Study of the Channel Tunnel BOTProject  Page 82  massive steel bridge. In 1961 the two governments responded with the establishment of a working group to study all proposals (Gould, Jackson & Tough, 1975). Their report in 1963 lead to a joint French-British announcement in 1964, which approved in principle the construction of a bored, twin rail-shuttle tunnel scheme—essentially an identical forerunner of the scheme resurrected twenty years later.  However, the governments  agreed fbrther geotechnical investigations were required and favoured construction of the link by the private sector with government financing guarantees but operation by a public body (New Scientist, 1973; ENR, 1975).  On July 8, 1966, the Prime Ministers of France and Britain announced the tunnel would be built (Gould, Jackson & Tough, 1975), allowing one to speculate that perhaps the preliminary phase of the project had drawn to a close, after many starts and stops through a duration of 216 years from 1751 to 1966.  Such speculation, including the promises and pronouncements of a tunnel open by 1975, proved premature. At the British government’s insistence, an action to be repeated some twenty years later, proposals were requested from all interested parties, although the Channel Tunnel Group had already submitted a well developed and robust scheme, This was somewhat to the distress of the French, who would have preferred to expeditiously award an exclusive concession, as they had 90 years previously (Gould, Jackson & Tough, 1975).  Chapter 4. Case Study of the Channel TunnelBOTProject  Page 83  Further studies followed the submissions, interrupted by elections. A decision was further delayed by the governments’ attempt to please all parties, as they requested the three competitors combine into one consortium (another action that would be repeated twenty years later). In response, the historic Channel Tunnel Group evolved into a new AngloFrench consortium, which included a number of banks, consultants, the national railways of both countries, and the Rio Tinto-Zinc Corporation, who acted as the project manager (Gould, Jackson & Tough, 1975).  By 1971, the governments again announced an  approval in principle, but to be followed by further studies. As planned in 1972, the total cost of the twin-tunnel project had grown to £365 million with an opening date of 1980.  On October 20, 1972, ‘Agreement #1’ was signed by the governments and the consortium, which outlined the geotechnical investigations and preliminary work to be undertaken as ‘Phase I’. Amidst strong opposition, planning proceeded on a high-speed rail line from the tunnel to London as an integral part of the project.  Planning also  commenced for a high-speed Paris line; however, in contrast, the French link was welcomed (Economist, 1973).  The planned facility was to include twin rail tunnels with a central service tunnel, bored in a stratum of under-Channel chalk, held to be an ideal tunnelling medium by virtue of its impermeability and absence of fissures.  Vehicles were to be transported through the  tunnel on specially designed, enclosed rail shuttle cars running on a looped railway system between two terminals.  Chapter 4. Case Study of the Channel TunnelBOTProject  Page 84  The total cost of the project was estimated at £464 million, which included a 10% contingency allowance but no escalation or interest costs. About 10% of the project’s cost was to be provided as private equity financing, with the remainder governmentguaranteed debt (loans and/or bonds). In return, the government was to receive a share of the operating surplus, ranging from 80% upon opening to 85% within twenty years.  The project took on the appearance of progress:  ‘Phase II’ commenced in September  1973, and included further design and the test boring of two kilometers of tunnel (Kirkland, 1986). Treaty ratification was required by January 1, 1975, which would allow for commencement of ‘Phase III’; construction.  As the test tunneling and design work continued, public and political opponents of the tunnel criticized the potential for ferry-related employment losses, the general idea of closer links to Europe and the Common Market, and particularly focused on the impact of the planned rail link to London—opposition their French counterparts did not face. Two general elections in 1974, which delayed the ratification bill, did not bode well for the prospect of the Treaty. Politicians viewed the rising cost estimates of the rail line to London with increased nervousness, which by then was estimated to exceed the cost of the tunnel (Economist, 1974a). The tunnel project was seen as another binational project similar to Concorde and therefore likely subject to the same skyrocketing expenditure estimates (New Scientist, 1973, 1974).  Chapter 4. Case Study of the Channel Tunnel BOTProject  Page 85  Not surprisingly, and to the intense displeasure of the French who had ratified the Treaty ahead of schedule, the January 1 British ratification deadline was missed (Economist, 1974b; ENR, 1975). The British government formally cancelled the project, and later cited the decision as a simple choice between the tunnel or Concorde.  Participant  investors and contractors were compensated for over £17 million in costs; the 350 m of bored tunnel remained (Economist, 1975; Tunnels & Tunnelling, 1975a, 1975b).  Within three years, the project was resurrected by the national railways, who realized the potential of the opportunity that had been lost (ENR, 1978; New Scientist, 1979). A single track rail-only tunnel, as a scaled down version of the cancelled project, was proposed and soon dubbed ‘the mousehole’.  The EEC transport commission became  interested, for they viewed the project in terms of European-wide transportation infrastructure and hinted at potential financial involvement (Economist, 1978). The range of options advocated expanded to include single tunnels, double tunnels, road bridges and hybrids. Following the 1979 election of Thatcher and the Conservatives in Britain, in 1980 the government announced a desire to see a link built, but it must be privately financed (Economist, 1980b; ENR, 1980).  The race was on, once again: consortia were formed, and competing proposals vied for publicity and political favour (Engineering, 1980). In January 1981, a proposal for a twin bored shuttle rail tunnel was advanced by the contractor Tarmac. The scheme, privately financeable and estimated to cost £1,730 million, was largely based upon the previously  Chapter 4. Case Study of the Channel TunnelBOTProject  Page 86  cancelled project, and would evolve into the Eurotunnel project currently under construction (Engineer, 1981a; Engineering, 1981; ENR, 1981a, 1981b).  The governments announced more studies of the competing proposals would be required; the French were understandably reluctant to be too deeply involved without firm British government guarantees against another withdrawal. Nevertheless, the French government still favoured publicly financing the link, although the EEC subsequently made it clear they would not contribute towards funding, as once hoped (ENR, 1981b; New Scientist, 1985b).  In November 1981, the contractor Wimpey and two merchant bankers joined the twintunnel Tarmac consortium, and formed ‘Channel Tunnel Developments’ (Engineer, 1981b).  The competing proposals, particularly the bridge schemes backed by large  industrial concerns including British Steel, continued to fight a public relations war throughout early 1982 (Engineer, 1981 c; 1 982a), as civil servants and politicians studied the proposals (Economist, 1981).  In the midst of the Falkiand war, March 1982, Anglo-French relations abruptly cooled, which prompted Thatcher to reportedly refuse to consider the project any further (New Scientist, 1982a). In what was considered a face-saving move for the French but a British delaying tactic, studies were nevertheless allowed to continue (New Scientist, 1982b; Economist, 1982a, 1982b). The French agreed to a private rather than public financed link, and five large banks commenced, in June 1982, a study of the legal and financial  Chapter 4. Case Study of the Channel Tunnel BOTProject  Page 87  feasibility of the proposals advanced to date. The banks were seen to have made the study offer to gain an inside track on any future project financing (Economist, 1983).  The completion of the report was promised, at regular intervals, throughout the remainder of 1982 (Engineer, 1982b), all of 1983, and the first half of 1984 (Engineer, 1984). There was little British action regarding a link in 1983, and, in the face of a general election, Thatcher told voters in the Port of Dover a link was “not a live issue” (Jones, 1987).  Proponents, nonetheless, continued to lobby and advanced their proposals. The popular bridge-tunnel scheme, ‘Euroroute’, gained French construction partners, while all the rival tunnel proponents merged and formed the ‘Channel Tunnel Group’ (CTG) (Economist, 1984b). By February 1984 the CTG consortium consisted of five British contractors, joined shortly thereafter by the National Westminster Bank, one of the authors of the still to-be-submitted report (ENR, 1985a).  The long-awaited bank report was released in May 1984, which concluded private financing would be possible but should be coupled with some limited government acceptance of the financial risk.  Not surprising considering the National Westminster  Bank’s recent action, the report favoured the Channel Tunnel Group’s scheme, and viewed the twin shuttle tunnel as the only technically and financially viable project (Economist, 1984a; EN1{, 1984a). Also not surprising, the rival Euroroute consortium heavily criticized the report, calling it “outdated” and a “serious misjudgment” (Engineer, 1984).  Chapter 4. Case Study of the Channel Tunnel BOTProject  Page 88  In the following year, politicians announced criteria for the selection of a scheme would be formulated, as once again they opened the race rather than approve the reported preferable option (New Scientist, 1 985b).  Civil servants developed those criteria, and  proponents announced improvements and advantages, real or otherwise, to their schemes (ENR, 1984c). Government actions culminated, in April 1984, with the issuance of an ‘Invitation to Promoters’. Submissions were requested by October 31, 1984, and were to include details of the scheme’s technical and economic feasibility, a conmütment in principle regarding financing arrangements, and job creation benefits. Promoters were advised that apart from political guarantees against cancellation, which would only be applicable once the requisite legislation was passed, no other financial guarantees would be available from the governments (Engineer, 1985a; Economist, 1985a; New Scientist, 1985a, 1985b).  Soon afterwards, additional British banking participants joined the Channel Tunnel Group (Economist, 1985b). A French counterpart consortium was formed, ‘France-Manche’, which included five French contractors and three banks.  Four of the five banks that  undertook the financing study had by then joined the consortium; the last joined prior to the submission of the proposal (New Scientist, 1985c).  Amidst intensive publicity and lobbying campaigns that focused upon the benefits, employment creation and advantages of the schemes coupled with not very subtle attacks on rivals, ten proposals were submitted to the governments. The rivals were estimated to have spent £20 million on the submissions; £12 million by the ‘Euroroute’ scheme  Chapter 4. Case Study of the Channel Tunnel BOT Project  Page 89  promoters alone (Engineer, 1985b) compared with an estimated £5 million by the CTG consortium (Economist, 1985c).  The leading contenders were thought to be the twin  shuttle tunnel CTGfFrance-Manche proposal and the Euroroute bridge-tunnel (or ‘brunnel’) proposal. A government decision was promised by the middle of January 1985 (ENR, 1985b).  Of the ten schemes submitted, five were immediately rejected as not feasible, which included an airship-suspended bridge; a grandiose £115 billion tunnel; and a toll-free bridge incorporating hydro-electric generation and an international conference centre at mid-Channel (ENR, 1985b).  The more serious bridge contenders were felt to be ‘Eurobridge’, a four-level, twelvelane, seven-span (5 km each) suspension bridge constructed with a new composite fibre ‘Parafil’; a 48-span cable stayed bridge (850 m spans); and ‘LinkintoEurope’, a six-lane, 18-span (2 km each) suspension bridge. Each of the bridge schemes, but particularly the ‘Eurobridge’ and LinkintoEurope proposals, embodied considerable innovations of questionable feasibility.  Euroroute proposed a hybrid bridge-tunnel, the ‘brunnel’, whereby precast concrete bridges (500 m sections) connected two large artificial islands, located about a third of the way across from each coast, to the mainland. The large artificial islands incorporated a spiral roadway down to a submerged tube tunnel, which carried road and rail traffic underneath the main Channel shipping lanes, between the two islands.  Chapter 4. Case Study of the Channel Tunnel BOTProject  Page 90  The hastily assembled ‘Channel Expressway’ scheme proposed two large-diameter bored tunnels for vehicle traffic plus two bored rail tunnels. ‘Channel Expressway’ claimed to be by far the cheapest of all schemes proposed, due in part to having all work competitively tendered. Major problems not adequately addressed included how to avoid driver fatigue and how to provide effective ventilation through such a long tunnel.  The proposals were evaluated by a variety of government committees and departments, although not all were convinced of the wisdom in proceeding.  The British Treasury  consistently viewed all schemes with great skepticism—they believed the revenue estimates were subject to great uncertainties and all cost estimates were likely over optimistic. They held such a combination could only result in some future government bail-out when construction funds ran out or future traffic did not materialize (Economist, 1985d).  By late in 1984, it was felt only two schemes were under serious consideration—the CTG tunnel and the dark-horse, ‘Channel Expressway’ proposal submitted at the last minute by Sealink Ferries, buttressed with intensive media blitzes and polls that claimed the public favoured the expressway alternative over all others by a large margin. The scheme was seen by some as an unrealistic spoiler attempt by a proponent with the most to loose, as a cross-Channel ferry operator, from the construction of a fixed link (New Scientist, 1986a; Economist, 1986a). Nonetheless, it was reported (and later borne out) that Thatcher favoured a drive-across link, due in no small measure to her dislike of the railways and specifically the rail unions (Economist, 1986a).  Chapter 4. Case Study of the Channel Tunnel BOTProject  Page 91  In an attempt to make their decision easier, the politicians asked the three leading rival consortia (CTG, Euroroute and Channel Expressway) to find common ground and combine.  Feeling the front-runner, CTG refused, and advised the government their  financial arrangements, seen as the furthest advanced of all the schemes, would not be transferable to other schemes or consortia (Economist, 1986a; Institutional Investor, 1986).  On January 20, 1986, Thatcher and President Mitterand announced official approval of the Channel Tunnel Group scheme (ENR, 1986a).  It appeared, for the second time in  fourteen years, the cross-Channel fixed link project might advance beyond a 236-year preliminary phase.  The approved Eurotunnel. project consisted of 50 km (with 37 km submerged) of twin, single-tracked bored tunnels, 30 m apart, with a central 4.5 m service tunnel linked to the main tunnels at 375 m intervals. The rail tunnels were connected by pressure relief ducts every 250 m and two full-diameter rail crossover passages provided at 25 and 47 km from the British portal.  Terminals at both portals, linked with a looped railway, would accommodate truck and passenger vehicle traffic, transported through the tunnel on fully enclosed shuttle trains running at up to 160 km/hr. Additionally, passenger and freight trains operated by the national railways would provide service between London and Paris or Brussels at up to 200 km/hr.  Chapter 4. Case Study of the Channel TunnelBOTProject  Page 92  Construction was planned to commence in mid-1987, to follow passage of the Channel Tunnel Bill, with a scheduled completion of May 1993. The total project budget, as of 1985, was £5,736 million, which consisted of:  Construction costs (constant as of 1985)  £2,725 million  Owner costs during construction:  £368 million  Inflation during construction:  £586 million  Capitalised interest during construction:  £1,057 million  Contingencies:  £1,000 million  TOTAL:  £5,736 million  Financing was to be accomplished through a combination of equity, bank loans and a stand-by loan facility. Equity totalling £1,000 million, was to be raised from three sources in three phases: £46 million contributed from the five bank and ten contractor founder shareholders; £204 million to be raised from an institutional offering planned for mid1986; and £750 million from a planned public offering in mid-to-late 1987. The remainder of the project funding would be debt financed through a £4,000 million main bank loan supplemented by a £1,000 stand-by facility (Engineer, 1986; Euromoney, 1986; New Scientist, 1986c).  The Channel Expressway rivals refused to accede to defeat, and claimed with French elections looming, a change of government was likely and support for the CTG scheme would be withdrawn in favour of their Expressway proposal (Engineer, 1986). Following  Chapter 4. Case Study of the Channel TunnelBOTProject  Page 93  the signing of the Anglo-French treaty respecting the tunnel construction on February 12, 1986, a new French government did indeed come to power but soon reaffirmed support for the project.  Shortly thereafter, the Channel Tunnel Bill was introduced into  Parliament, required to ratify the Treaty and grant wide-ranging planning permission, which allowed the project to proceed without a public inquiry (New Scientist, 1986b).  The Treaty, followed by the Concession Agreement (dated March 14, 1986), outlined the terms and conditions granted to the Channel Tunnel Group and France-Manche, which could not subsequently be altered without the consent of all parties. The Concessionaires were granted the “right and obligation” to construct and operated a fixed link during a concession period expiring on July 23, 2042, or earlier if the Concessionaires’ default, at which time the ownership of the project and all facilities would revert to the governments with no further payment (New Scientist, 1986d; U.K. Parliament, 1986a, 1986b).  The governments promised not to finance or offer guarantees of any type to any other link during the concession period. pricing freedom.  The Concessionaires were granted full commercial and  If the governments were to interrupt the operation of the link, the  Concessionaires would be paid compensation. In deference to Thatcher, the consortium would be required to submit, by year 2000, a proposal for a drive-through link, and implement such a link by 2010. If the Concessionaires did not undertake such a link, the governments may proceed with award to a third party, however, in no event would a competing link be constructed before 2020 (Engineer, 1986).  Chapter 4. Case Study of the Channel TunnelBOTProject  Page 94  The British government justified the selection of the CTG/FM proposal on the grounds it offered the best prospect of attracting the necessary finance; it carried the fewest technical risks which might prevent it from proceeding to completion; it would be the safest project from the traveller’s viewpoint; it would present no problems to maritime traffic in the Channel during construction or operation; it would be the least vulnerable to sabotage and terrorist action; and it would have an environmental impact that could be contained and limited (New Scientist, 1986c; Sargent, 1988).  On July 1, 1986, the binational ‘Eurotunnel’ public company was born, with an inseparable parallel structure in both countries.  The founder shareholders were the five British  contractors, five French contractors, two British banks and the three French banks of the CTGfFrance-Manche consortium, who together contributed a total of £46 million in founder equity (Stock Exchange Press, 1989).  Soon thereafter, the two groups of  contractors formed national joint ventures, ‘Translink’ (British) and ‘Trans-Manche’ (French); additionally, these two groups formed the binational joint venture ‘TransManche Link’ (TML), to undertake the design, construction and commissioning of the works.  Eurotunnel was seen to have faced a formidable task:  “To raise risk capital for a tunnel that may not be built, in a railway system that may not exist, paying tolls that have not been set, for traffic that can only be guessed at.” (Economist, 1987d). In April 1986, the introduction of the Channel Tunnel Bill into Parliament served to focus the opposition on the project. Environmentalists and ruralists opposed the disruption of  Chapter 4. Case Study of the Channel Tunnel BOTProject  Page 95  the countryside and the environmental impact of the project and a high-speed London rail line, which, although strongly desired by Eurotunnel, was not as closely linked to the project as in 1974.  Opposition politicians and some unions attacked the project, and  claimed it would increase regional disparities and contribute to the loss of up to 40,000 jobs (New Scientist, 1986d). Harbour commissions and ferry operators, who had formed an opposition group ‘Flexilink’ in response to worries of the dramatic competitive advantage the tunnel would hold, mounted a vicious campaign against Eurotunnel.  A  vivid doomsday video was produced and distributed to MPs, which speculated about the effects of a fire in the tunnel (Management Today, 1986).  If that did not instill fear, Flexilink attempted to disrupt the raising of equity from institutional investors, and commissioned and widely circulated an analysis that showed the project would loose more than £250 million in the first years of operation, in stark contrast to Eurotunnel’s estimation of a £300 million profit for the same period (ENR, 1986b). Flexilink maintained the project was not needed nor wanted (Hall, 1987); other opposition focused upon the projected significant loss of employment (Gibb, 1987). The ferry companies tried to delay passage, or at least amend, the requisite legislation. They facilitated the lodging of a record number of petitions that cited objections and sought to give evidence to the committee which considered the bill. They later admitted petition forms had been distributed to ferry passengers with offers to pay the filing fee and other expenses (Jones, 1987).  Chapter 4. Case Study of the Channel Tunnel BUT Project  Page 96  In the face of an increasingly vocal opposition, public opinion turned against the project. Whereas in late 1985, prior to the announced selection of the Eurotunnel scheme, 51% of the British public had supported a fixed link, by July 1986 only 31% favoured the project, with 46% opposed (Economist, 1986c).  Eurotunnel negotiations with the banks regarding details of the financing package dragged out and delayed, until fall, the planned £206 million institutional equity offering. The lack of enthusiasm for the project encompassed the investment community, too. A Financial Times poli revealed 40% of major institutional investors were not prepared to consider investing in the project: only 25% were, with 36% undecided. Sceptical investors cited the very long term before any projected returns, coupled with the high risk of the project, for should it fail to proceed because of financing, legislative or any other problems, the entire investment would be lost (Financial Times, 1986).  In August 1986, Eurotunnel and TML signed the main construction contracts.  TML  agreed to undertake the design, construction, testing and commissioning of the works, splitting the work into three portions:  1. The design and construction of the terminal facilities and tracks; undertaken on a lump sum basis, for the amount £584 million plus Ffr5, 024 million, January 1987 prices, subject to escalation and scope adjustments.  Chapter 4. Case Study of the Channel TunnelBOTProject  Page 97  2. The design and construction of the tunnels; undertaken on a target cost basis, for the target cost of including a 12.36% fixed fee, £719 million plus Ffr5,864 million, subject to adjustments for escalation and scope revisions. Final cost savings are to be equally shared; 30% of cost overruns will be assessed against TML, to a maximum of 6% of the target cost.  3. The design and construction of the locomotives and rolling stock; undertaken on a procurement basis, of a provisional amount £116 million plus Ff1, 322, including TML ‘s procurementfee.  If a fully operational system was not delivered on May 15, 1993, TML would be fined £354,000 per day for the first six months, and £536,000 per day thereafter, to a maximum of £165,000,000  .  This pales in comparison to Eurotunnel’s costs for loss of usage,  estimated to be in excess of £2,000,000 per day. If intermediate Milestones were not met, Eurotunnel may issue public warnings to TML, require a detailed response as to TML’s plan to return to the original schedule, and assess penalties against TML that could be earned back if later Milestones are met (Euromoney, 1987; Kirkland, 1987; Smith, 1988). The contract included provisions which prohibited TML from any media contact without Eurotunnel’ s permission.  Although TML would be undertaking the design, approval of all design details rested with Eurotunnel.  An independent group of engineers, the ‘Maitre d’Oeuvre’ have the  Chapter 4. Case Study of the Channel Tunnel BOTProject  Page 98  responsibility to oversee the project design and execution, to answer enquiries from the banks, governments and investors, and to act as independent arbitrators between Eurotunnel and TML.  The Eurotunnel-TML construction contracts were negotiated and signed prior to the issuance of the institutional equity. At that point, the company became independent of the founder shareholders and the members of TML lost control of the Board of Directors. The banks and investors voiced concerns regarding TML’ s conflict of interest and the manner in which the contracts were negotiated—essentially by TML, with TML.  The  bankers criticized the cap placed on TML’ s financial risk in terms of potential cost overruns and late performance.  Even if they incurred the maximum penalties on the  tunnelling contract, it would be difficult for TML to loose money (Euromoney, 1987).  At the end of October 1986, £206 million was raised by Eurotunnel, although only after some difficulty including a one-week deadline extension and Bank of England intervention that prodded investors (Economist, 1987a; Institutional Investor, 1987; New Scientist, 1 986e).  The subsequent separation of the founder banks and contractors was described as “a painful divorce” (Economist, 1 987a). The new shareholders (some 101 corporations and institutions) insisted Eurotunnel’s few independent executives increase their influence and dilute the founders’ control, as Eurotunnel struggled to grow and evolve from tunnel building experts to a company that planned to finance and operate a complex cross-  Chapter 4. Case Study of the Channel Tunnel BOTProject  Page 99  channel service (Economist, 198Th; ENR, 1987a). Early 1987 was a time of turmoil and infighting on the Board; most Directors were replaced and Eurotunnel searched for a new British co-chairman.  At the end of February 1987, Alastair Morton was appointed co-chairman and soon announced the postponement, from July to the fall, of the planned £750 million public equity offering (Economist, 1987c). He set about resolving the major uncertainties that would impede the issue; attempted to gain government support, in both Britain and France, for a high-speed rail link; negotiated the toll agreement with the railways; and although an agreement in principle had been reached with 32 lead banks, finalized the complex details of the bank loan facility (Economist, 1987d).  In March, 1987 the Herald of Free Enterprise cross-channel ferry sunk with the loss of almost 200 lives. Ferry operators, who had been very vocal opponents on the basis of safety, clearly loose momentum, and safety issues become less contentious.  In May 1987 the European Investment Bank agreed to a credit facility of £1,000 million (Euromoney, 1987); in June, construction work commenced on the French side. Work on the British portion had to await legislative approval (Civil Engineering, 1987).  The  Channel Tunnel Bill slowly made its way through committee hearings overwhelmed by petitioners, and on July 23, 1987, received Royal Assent.  Shortly thereafter, with the  political risk of cancellation finally overcome, about 50 international lead banks agreed to underwrite the loan facility. After a world tour where Eurotunnel executives visited 531  Chapter 4. Case Study of the Channel Tunnel BOTProject  Page 100  banks encouraging participation, the final loan agreement was signed, and the loan eventually syndicated to a record 209 banks (ENR, 1987b; Institutional Investor, 1987).  The loan consisted of a £4,000 million main credit and a £1,000 million stand-by facility. Japanese banks contributed 30% of the original loan; British and French, 25% each, with only two of the banks American. The facility allowed Eurotunnel to draw upon it directly or to support other methods of financing should they prove less costly, and was composed of six tranches in four currencies (Sterling, French francs, Belgian francs and US dollars). Repayment had a term of eighteen years at 1.25% over the London Inter-bank Agreement Rate on the main facility and 1.75% on the standby facility. Upon completion of the project, the rate would drop to 1.00% over. It was intended upon opening to refinance the debt through the progressive issuance of long-term bonds, which would be repaid from a dedicated percentage of Eurotunnel’s revenues (Institutional Investor, 1987).  Under the terms of the facility, Eurotunnel must expend £700 million of equity before the first tranche of the loan would be released. Twice per year, the banks would review a number of ‘cover ratios’, including the discounted future net income/total costs ratio, which must remain above 120%. If Eurotunnel failed to meet the minimum ratios, or did not have in place, at all times, adequate finance to complete the project, the banks could declare Eurotunnel in default.  With the loan facility arranged, Eurotunnel’s attention turned to the previously postponed public equity issue, which required the raising of £750 million.  One week after  Chapter 4. Case Study of the Channel Tunnel BOTProject  Page 101  international stock markets crashed (October 31, 1987), Eurotunnel proceeded nervously but undaunted, and released a share prospectus that downplayed the project’s technical and economic risks but pointed out the project was three months behind schedule because of financing and other organizational delays, using half of the planned six-month slack (Investors Chronicle, 1987a, 1987c). Analysts debated the appropriateness and robustness of revenue and return forecasts, but nevertheless, in mid-November financial institutions agreed to underwrite the issue (Investors Chronicle, 1988a, 1988b). To encourage longterm holding, free travel for life through the tunnel was offered to original shareholders.  Estimating the project’s return to shareholders was a unique challenge, involving a multitude of uncertainties, forecasts and assumptions. The project would rely both on diverting traffic from existing ferry and air services, and generating new traffic because of time or cost savings.  The uncertainties associated with the traffic forecasts, their  associated long-term growth over the concession period, and the behavior of the competition—all ultimately influencing revenue forecasts—were indisputably large.  Eurotunnel stated they hoped to carry 26.9 million cross-Channel passengers in its first year of operation, initially paying a return of around 16% to shareholders. Revenue and return would be heavily dependent upon interest rates during construction and inflation, with the worst scenario being high interest rates (escalating capitalized interest charges) but low inflation (depressing fUture revenue forecasts).  Chapter 4. Case Study of the Channel Tunnel BUT Project  Page 102  When the shares commenced trading on the London stock exchange one month after their issue, they immediately dropped 30% in value, attributed to dumping by institutions and underwriters (International Management, 1988; Investors Chronicle, 1 988a). By year end share values had drifted to around two-thirds of their issued price.  With over £1,000 million raised in equity, Eurotunnel hoped it would not draw upon the bank loans until late 1988.  Tunnelling commenced in December 1987, as Eurotunnel  continued attempts to facilitate government participation in a high-speed rail link (ENR, 1987c).  Stock analysts, in early 1988, recommended selling Eurotunnel shares amidst  dropping ferry fares and a bout of price-cutting on short haul air fares (Investors Chronicle, 1988b).  In the first half of 1988, TIvIL’s tunnelling progress was slow, plagued by break-downs and exacerbated by difficult-to-resolve start-up problems. Although Eurotunnel had often cited the construction risks were low and based on proven techniques, it became clear the project was pushing tunnelling technology to the limits. The boring machines utilized had never been required to hold back such high water pressures, nor had the organizational challenges of operating twelve simultaneous tunnelling operations ever been met (ENR, 1988a; Matheron, 1987). By August 1988, TML had missed Milestones Two and Three, and it appeared unlikely to meet Milestone Four. Eurotunnel publicly served notice on TML and required a detailed plan indicating how TML planned to bring the project back on schedule (Investors Chronicle, 1988c).  Chapter 4. Case Study of the Channel Tunnel BOTProject  Page 103  While a good part of these public pronouncements may have been for the benefit of the banks and investors rather than TML, it did signal the start of Eurotunnel’s (primarily co Chairman Morton’s) heavy public criticism of TML, who, subject to a contractual muzzling order, could not reply (Economist, 1988; Investors Chronicle, 1988d; Railway Gazette International, 1988a). However, the French executives of TML could only take so much, and later called a press conference where they expressed their “private”, non TML views of the situation (ENR, 1988c).  In early October 1988, with tunnelling behind schedule, the banks agreed to release the first £350 million tranche of the loan facility. Eurotunnel announced updated cost and revenue forecasts, anticipating 6% higher revenues once the tunnel opened but estimating construction costs at 7% higher, attributed to TML’s inefficiencies and equipment and management problems. TML, in response, filed eighty claims for time and cost extensions and blamed Eurotunnel for financing and other delays (ENR, 1988c).  By year end,  tunnelling efficiency had improved but was still 30% less than required. As a result, the work was some five to six months behind schedule (ENR, 1988d; Railway Gazette International, 1 988b).  In early 1989, jittery shareholders reacted to every bit of news about progress and costs, causing Eurotunnel share prices to see-saw: up 28% with news Milestone Four had been reached, albeit three months late (Investors Chronicle, 1989a); then soon down 9% with news the May 1993 opening might not be met (International Business, 1989).  Chapter 4. Case Study of the Channel Tunnel BOTProject  Page 104  In June 1989, after nine months of tense negotiations, Eurotunnel and TML agreed to a revised completion date of June 15, 1993, with additional incentive payments of £106 million if this date is met. The banks insisted more changes would be necessary if loans were to continue. Eurotunnel announced the estimate for construction costs grew to £5,500 million (ENR, 1989a; Investors Chronicle, 1989b). TML appointed a new head, an American who, over the next two years, successfully overhauled the management and organization, controlled costs, and boosted productivity (ENR, 1991 c).  Although good tunnelling progress was maintained throughout the last half of 1989, relations between Eurotunnel and TML continued to deteriorate (ENR, 1989a).  By  October 1989, the banks refused to release more fUnds until the Eurotunnel-TML impasse was resolved. As construction costs had risen over 20%, Eurotunnel was technically in default of the loan agreement, which required sufficient finance for completion be in place at all times (ENR, 1989b). By this time, TIVIL claims for increased costs due to design changes exceeded £500 million.  The dispute went to arbitration by the independent  Maitre d’Oeuvre, who, to the bankers’ relief, ruled “broadly” in Eurotunnel’s favour, although TML is expected to advance to international arbitration upon completion of the project (Economist, 1989; Investors Chronicle, 1 989c). The banks sought a new accord, as TML’s tunnelling contract had incurred every possible penalty with no incentives remaining (Economist, 1990a). Share values plummeted to 50% of their 1989 high.  Negotiations between the banks, Eurotunnel and TML continued, with Eurotunnel “on the brink of bankruptcy” (Economist, 1990a). In January 1990, a new accord was announced  Chapter 4. Case Study of the Channel TunnelBOTProject  Page 105  by Eurotunnel (somewhat prematurely, it is later revealed), whereby the banks agreed to release £400 million in interim loans, and give Eurotunnel until May 1990 to arrange for a further £1,500 million in financing with a minimum of 25% in additional equity. Construction costs were again revised upwards and estimated at £7,200 million (Construction Weekly, 1990a; Economist, 1990a; ENR, 1990a; Investors Chronicle, 1 990a; Time, 1 990a) amidst some uncertainty, as the banks’ technical advisors estimated final costs would be much higher, at £8.1 billion and a six month delay in the tunnel’s opening (Grayson, 1990).  Many points of contention remained. In February, the Bank of England attempted to mediate the very public row, for TIVIL refused to sign the new accord and threatened to abandon the project unless Eurotunnel removed co-chairman Morton (ENR, 1990b; ENR, 1990h; Construction Weekly, 1990b, 1990c); the banks refused to release further funds to Eurotunnel unless TML signed (Investors Chronicle, 199Gb); and Eurotunnel, in response, withheld TML’s monthly progress payments, despite being ordered, twice, by French courts to release them (ENR, 1990c).  By February 21, 1990, it appeared most disagreements were resolved (Investors Chronicle, 1990b). Eurotunnel agreed to remove Morton from dealings with TML; the banks released interim financing; Eurotunnel and TML agreed to design changes producing £100 million in savings including a reduction in the shuttle train speed—from 100 mph to 80 mph—with TIvIL pushing for further speed reductions; and Eurotunnel trimmed its project supervision staff by 25%. Significantly, TML agreed to remove the  Chapter 4. Case Study of the Channel Tunnel BOTProject  Page 106  ceiling on tunnelling cost overruns, and would thus be liable for 30% of all overruns with no limit, although in return the base cost was increased by £87 million, the amount of the original penalty payable. Disagreements still remained as to the fixed price portion of the contract covering terminals and operating equipment, and the two parties entered arbitration (Construction Weekly, 1990b). Most claims were later resolved in TML’s favour (ENR, 1991b; Construction Weekly, 1991b; 1991c) amidst much acrimony.  In mid-April 1990, Eurotunnel announced further cost escalations to £7.6 billion, and sought to raise a further £2,500 million in financing on top of the £6,000 million in equity and loans already in place (Economist, 1990c).  Although tunnelling progress had  improved to a record pace—amidst concerns about safety and a political outcry over a rising death toll (Construction Weekly, 1990f, 1990g; 1990h)—costs for construction were estimated to have increased by £500 million and thus invoked TML’ s penalty clauses (Construction Weekly, 1990d; 1990e).  The escalations did not, however, include  provision for over 100 potential claims by TML, valued at £1.1 billion (at 1985 prices); their resolution is expected to take years after the project’s completion (ENR., 1990f, Construction Weekly, 1990h, 1991e; ENR, 1990h). To raise the extra equity, a further £2 billion in credit would be required in addition to a rights issue of £500 million (Investors Chronicle, 1990c).  Cost estimates continued to creep upwards, for by June 1990, the project’s total cost was forecast at £7.66 billion, with the £530 million rights issue planned for the fall of 1990 to coincide with the breakthrough of the service tunnel (the central of the three tunnels).  Chapter 4. Case Study of the Channel Tunnel BOT Project  Page 107  Investors, however, noted dividends were now forecast to be paid starting in 1998, a dramatic change from the 1994 once predicted (Investors Chronicle, 1990d).  Bank  syndication of the additional £2 billion loan proceeded slowly, with almost half of the banks involved in the original financing loan refusing to participate further, raising concerns the rights issue might be delayed or indeed the project may be halted.(Globe & Mail, 1990a; Construction Today, 1990; Economist, 1990e; Investors Chronicle, 1990e). Technically, the project was in default, for the banks required sufficient finance for completion to be in hand at all times (Economist, 1990e). Share prices slipped to onethird their peak in 1989.  In early October 1990, the banks reluctantly agree to provide an additional £1.8 billion in financing (Financial Post, 1990), followed by the meeting of the French and British service tunnels at month-end (Globe & Mail, 1990e; Time, 1990b). New shares, offered at an unexpectedly low price, offered travel discounts to lure investors (Globe & Mail, 1 990f, with some analysts predicting the “shareholders will be wiped out, and the banks will end up owing the Chunnel” (Time, 199Gb).  As the stock price continued to slide, others  recommended buying, noting that although dividends cannot be expected before 2000, it should be profitable by then (Investors Chronicle, 1991a).  In May 1991, tunnelling was completed three months ahead of schedule on the north main running tunnel (ENR, 199 if), and one month later, the final tunnel was completed (Construction Weekly, 1991g).  Attention then turned to the critical, and complex,  electrical and mechanical installation work (Railway Gazette International, 1991 a), which  Chapter 4. Case Study of the Channel Tunnel BUT Project  Page 108  was behind schedule (ENR, 1991j), reflected in the announcement of further delays in dividend payments (to 2000) and a phased opening of the tunnel in mid-1993, initially utilizing smaller and slower trains (Globe & Mail, 1991d). The delay in achieving full operation is primarily due to train shuttle design changes, expected to add US$187 million to costs, as well as resulting in over US$507 million in lost income and interest charges (ENR, 1991k).  With interest costs projected at £2 million per day upon opening  (Economist, 1990±), the project has many difficult challenges ahead; any further delays or cost escalations will have a major impact on the project’s profitability, and further diminish the prospect of paying dividends. It again appears uncertain whether the project can be completed with the current financing (Globe & Mail, 1991d), quite apart from whatever further claims remain to be resolved. The contractors have stated in October 1991 they are “no longer willing or able to finance the epic project by swallowing cost overruns linked to changes in design or scale”, stating they could not guarantee the tunnel will open on schedule, and hinted of further action, including work stoppages, unless a settlement is reached (Globe & Mail, 1991e; Financial Post, 1991; Construction Weekly, 1991k). Eurotunnel took the dispute into the courts in an attempt to prevent TML from stopping work (ENR, 1991k).  Two other components of the project, vital to attracting passengers and thus financial success but independent of Eurotunnel, are the high-speed rail links from the respective tunnel portals; 109 km to London and 333 km to Paris. While the French link is well under construction and will be ready for the tunnel opening (Railway Gazette International, 199 ib); agreement on the routing of a prospective British link is elusive and  Chapter 4. Case Study of the Channel TunnelBOTProject generating intense controversy (Railway Gazette International, 1991c).  Page 109 Plans for a  private-sector link have stalled by rising cost forecasts and the lack of government subsidies (Economist, 1990b; 1990d). Political controversy has delayed route selection such that a link will be unlikely before 2001, with elections injecting additional uncertainty and prompting further delays during late 1991 and early 1992 (Railway Gazette International, 1991c). Four possible routes were proposed, studied and rejected amidst much debate.  As the banks nervously watch project costs escalate with the possibility of their loan commitments increasing once more, Eurotunnel must walk the fine line between avoiding default on the outstanding bank facility, persuading the same banks to lend even more, and putting on a brave front to bolster shareholder confidence in possible further investments. The unanticipated growth in cross-Channel traffic—Eurotunnel’ s 1993 projections were surpassed by 1989—has sustained the project thus far in the face of delays and rising costs (Economist, 1990b; 1990c).  Success is still not certain. The organizational challenges which still face the project are considerable and complex. As a recent example, in March of 1993, production of the shuttle train cars was halted by Bombardier and 500 employees laid off for an indeterminant length of time. Bombardier cited total congestion of the production line as the reason, brought about by the failure of TIVIL to grant timely approvals and authorizations, as well as disruptions from “numerous and unpredictable requests for modifications” (Globe & Mail, 1993a). The claim was finally settled in December, 1993,  Chapter 4. Case Study of the Channel Tunnel BOTProject  Page 110  with Bombardier receiving $157 million in cash and 25 million Eurotunnel shares, to be issued sometime in the spring of 1994 (Globe & Mail, 1993d). Bombardier had previously written off $225 million of costs incurred on the project. As a result of the settlement, Bombardier has found itself evolving from a conventional supplier to that of one of the major shareholders of the project, with the result of a complete shift in attendant risks and uncertainties.  The origin of many of the project’s problems can be traced to the manner in which the project was originally structured and organized contributed to an almost fatal conflict of interests amongst the participants. For example, while contractors advanced the initial proposal, they then negotiated the construction contracts, in effect, with themselves, amidst concerns from the financiers and investors about such a conflict.  The participants tended to focus on construction and tunneling risks, whereas the major risks, as became more apparent as the project progressed, were associated the design, testing, construction and commissioning of a new type of complex railway system. Early efforts also focused upon the equity issue rather than the vital planning and design issues. This rushed and inadequate planning, in response to an attempt to meet the window of political opportunity associated with the concession award, compounded the major problems with the project’s organization, in terms of relationships and complexity. Participants had no experience in the hatching and the total organization from the ground floor up, of such a major enterprise (Jones, 1987).  Chapter 4. Case Study of the Channel Tunnel BUT Project  Page 111  The structure of the project, and the goals of the original contractor participants, can be sharply contrasted with those of the Dartford Bridge BOT project, whereby the participants formulated the project simply as a means to generate construction and financing returns, rather than operational profits. The project will be transfered to the government as soon as the consortium has recouped their costs (ENR, 199 Ia).  To some extent the weaknesses in the Channel project have been counterbalanced by the tremendously underestimated revenue potential of the project and the hard-headedness of Eurotunnel in negotiating and controlling costs with TML (Economist, 1990f), however, costs continue to rise and the completion date continues to be delayed. In April, 1993 Eurotunnel will reportedly require an additional £1 billion in financing with the tunnel opening delayed until early 1994. The total cost of the project is estimated at over £10 billion (Globe & Mail, 1993b) with total financing needs at over US$17.2 billion.  A  fhrther issue of shares is planned for the spring of 1994.  Nevertheless, the banks are seen as having few options other than continuing to thither lend all finds necessary less they loose their original loans (Economist, 1990e); receivership would offer few advantages to the financiers (at least, until the project is completed), as further funds would be required to complete in any event. Eurotunnel is also under pressure from TML, backed by threats to delay opening, to resolve the over £1 billion in claims. It would thus appear Eurotunnel has limited leverage with either the financing institutions or TML.  Chapter 4. Case Study of the Channel TunnelBOTProject  Page 112  After 200 years, as the project nears its official opening date of May 6, 1994, the words still ring true:  “That the Channel Tunnel would have been a big thing from the promoter ‘s standpoint is not to be denied; that it would have paid anything like an adequate interest upon the capital sunk is a matter we regard as altogether doubtful....” (Economist, 1884).  4.2  A SUMMARY OF CHARACTERISTICS OF THE CHANNEL TUNNEL PROJECT  The Channel Tunnel project, as well as being one of the largest civil engineering projects ever undertaken, is the largest BOT project recently attempted. A summary of the project and relevant lessons is discussed in following sections.  A more detailed chronology and description of the financial milestones covering the period from 1802 to 1990 is provided in Appendix A and Appendix B, which summarizes information compiled from over 190 sources.  Appendix A will be of use, for example, to those seeking further sources of information respecting specific aspects of the project or specific time frames. Similiarly, Appendix B provides further details of cost estimates and sources of further information. Example entries from Appendix A and Appendix B are provided in Table 4.1.  Chapter 4. Case Study of the Channel Tunnel BUT Project  Page 113  Example entry from Appendix A, Channel Tunnel Project Timeline: 09/1883: Although the tunnel “scheme is shelved for the present”(78), discussions continue. The Association for a Submarine Railway estimates the costs of the tunnel railway at £3 million or 75 million francs. It was stated “the cutting of it through the grey chalk presented no difficulty, and nothing could be more easy than the ventilation.”(78) Potential benefits were spoke in glowing terms; “From the standpoint of politics and political economy, no work more useful to humanity had ever been attempted; it was one of peace and civilisation, of international fraternity; it would save transhipment and insurance, and gain an hour for passengers, and two hours for merchandise.”(78) Traffic capacity was estimated at 250 trains per day (78). Example entry from Appendix B, The Growth ofthe Channel Tunnel Budget: 10/1988: £5,227 million construction costs, 7.2% higher than the November 1987 estimate (149). “Costs.. .are expected to be 7% higher, in large part because of the expenses associated with closer supervision of TML” (147). “80 million of the new costs are put down to Eurotunnel’s new project information system to monitor progress and cost.”(148) “...higher costs reflect recruitment of American consultants Bechtel to strengthen Eurotunnel’s project management, tunnelling delays, rising construction costs, and extra facilities now deemed necessary.”(149)  Table 4.1 Example entries from Appendices A and B  The project’s important characteristics, which can be surmised based upon the previous section’s description of the project, are summarized in Table 4.2. The Channel Tunnel Project displays all of the important characteristics of large engineering projects—as outlined in Chapter many of the  2 and used here with specific reference to the project—as well as  unique aspects of the PEN-BOT project environment.  Chapter 4. Case Study of the Channel Tunnel BOTProject  • • • • • • • • • • • • • •  Page 114  The project is unique and complex. The project presents appreciable organizational challenges. There are novel risk allocation considerations. Multiple stakeholders. Participants have adopted new roles and objectives, The risks are numerous and large. There are many new risks. The project has a very broad impact. The project is indivisibile. The project has a very long execution time. Participants are involved over a long time frame. The project requires large financial outlays. The project has a high vulnerability. There are difficult logistics.  Table 4.2 Characteristics of the Channel Tunnel Project  The project is unique and complex, by virtue of its size, scope and resource requirements. The large scope contributes to difficult logistics, in terms of personnel and materiel, as well as organizational challenges, whereby joint ventures, and joint ventures of joint  ventures, became necessary.  This greatly increased the number of participants, their  diversity of perspectives, the potential for conflicts and significantly widened the range of objectives which must be satisfied and risks which must be identified and managed. Participants adopted many new roles and objectives; for example, contractors turned project owners/promoters.  The complexity of the project and the organization, and the fluidity of the organization are significant risks in themselves. Project teams were drawn together from the constituent organizations, but many of the assembled participants owed a first allegiance not to the project, but to their original firm. Additionally, the project placed great time demands on senior personnel, who were executives of the participant firms. They must balance the  Chapter 4. Case Study of the Channel Tunnel BUT Project  Page 115  intensive demands of the project with the normal demands of their firms’ ongoing operations.  The project’s multiple stakeholders have conflicting objectives, with some diametrically opposed and related to stakeholder economic and social well-being such as the ferry workers. Indeed, all the participants may not share a common project driven-objective; for example, the contractors who originally proposed the project did so as a method of generating opportunities for construction work but now have exposed themselves to complex financial, design and operational risks with which they have no experience nor had anticipated.  The risks are numerous and large, and many are novel. The project is non-repetitive such that losses cannot be balanced against gains on the next repetition. The participants, when considering risks can gain no refuge in ‘average’ losses or gains. The range of risks is large and varied; there are a myriad of legal, contractual, regulatory and institutional requirements.  The project has a very broad impact, contributing to a host of political, socioeconomic, and financial primary, and secondary ripple effects, with each effect potentially impacting upon or involving another direct or indirect project participant. Making risk planning difficult, the project is ‘self-disturbing’ in that it can significantly change its own environment in any area from demand for labour and materials to the socioeconomic environment of surrounding regions or indeed entire countries.  Chapter 4. Case Study of the Channel Tunnel BOT Project  Page 116  The project is unquestionably indivisible, such that it has no value unless completed virtually in its entirety.  This indivisibility encourages potential distortions of project  participants’ perspectives. It may also distort the analysis of the economics of the project, which, with escalations, may defj rational explanation.  Ever increasing efforts and  resources are often required, with the success of ultimate completion eventually being measured using criteria other than normal objectives.  The project has a long execution time, particularly from the perspective of the project participants, who will have been involved in all phases of the project cycle, including planning, development, construction, and operation. There is considerable overlap of the project phases, and some phases had (and still have to some degree) competing participants undertaking parallel activities. There will also be a much longer than normal time between the large financial outlays and the revenue flows, necessitating considerable financial fortitude on behalf of the financing participants.  These large capital outlays  coupled with the long delay before revenues are realized, generate considerable financial pressures on the participants.  The project has a high vulnerability; protracted timelines also cause difficulties when attempting to move BOT projects from the propose-promote phase to award of an official concession, as the phases extend through the life of any one government.  As major  project advocates are often politicians, their political enthusiasm and resulting momentum of the project will vary greatly, usually in synchronization with general elections. The project is highly dependent upon global-scale externalities; thus it becomes very difficult to  Chapter 4. Case Study of the Channel TunnelBOTProject  Page 117  forecast, with confidence, future demand, revenue and operating cost components of the project. To date, it has been the unforeseen, but large, increases in cross-Channel traffic, allowing substantial upward revisions in tunnel traffic projections, which have kept the project attractive to lenders in the face of substantial construction cost overruns.  It is suggested that one important dimension of project complexity may be the number and diversity of stakeholders, with their associated objectives, risk perspectives, failure and success criteria, and potential for conflicts. Often unidentified risks flow from stakeholder conflicts. It is noted the project environment is evolving and increasing in complexity, with the successful implementation of projects becoming more difficult: this may be due in no small part to the growth of the influence and the number of stakeholders.  Could the project environment become so complex so as to preclude the successful implementation of a project? That may be so; for example, it can be observed that the ‘WHPPS’ debacle demonstrated that the complexity of a project, in terms of its regulatory  environment and technical requirements, can overwhelm the organizational capabilities of the participants (Leigland, 1987).  Presently, the diversity and strength of stakeholder  opposition have effectively halted the flirther implementation of nuclear power projects. Projects in less developed countries often fail because they exceed the country’s institutional capacity for complexity.  Historically, an interesting question is how were the large projects accomplished—why did they not exceed the executional capacity of the time? The difference may have been in  Chapter 4. Case Study of the Channel Tunnel BOT Project  Page 118  terms of the project objectives, which were much simpler with fewer conflicting stakeholders and perspectives. Often the sole relevant perspective was that of the project proponent, who would have been the financier and owner. It was unlikely that competing criteria or objectives had to be considered or balanced to the degree they now must.  In the case of the Channel Tunnel project, it has encountered certain problems whereby it cannot successfully be accomplished in accordance with the original objectives. Accordingly, the criteria are changed and thus the measures of feasibility and success are altered. For example, the project cannot meet the target opening date of June 1993 (to say nothing of the target cost). In response, initial operations will now be phased, with partial operations commencing in June and full operations planned by the end of 1993 or even later. A further example of changing the criteria to ensure success can be observed relating to the shuttle trains.  It had been discovered the shuttles could not meet the  desired performance objective of 100 mph design speed, therefore, this performance criterion was reduced to 80 mph (ENR, 1990a) amidst pronouncements of no effect on revenue or operations (Time, 1990a), while some participants argued for still further reductions (ENR, 1990b).  While much of the uncertainty in the Build phase has been resolved, although significantly, issues of claims and thus final construction costs may not be settled for several years, the Operate phase presents the next challenges and new uncertainties. The initial payback has been delayed, and although the growth in cross-Channel traffic has been stronger than  Chapter 4. Case Study of the Channel Tunnel BOTProject  Page 119  expected, the market share that Eurotunnel can win from the ferries, and thus ultimately, financial viability, will remain uncertain for many years.  The stock markets reacted favourably as the Build phase was finally completed and the initial pricing structure for the Operate phase was announced (Globe & Mail, 1994). Many uncertainities with respect to claim disputes between Eurotunnel and TML (over construction costs), and Eurotunnel and the British and French railways (over delays in building new high-speed tracks and guaranteed levels of usage) are not yet resolved. Nevertheless, in late December, 1993, Eurotunnel settled a claim against the British and French governments in exchange for an a ten year extension of the Operate phase, which will now be 65 years. This extension of the payback period is another example of how the project’s criteria was adjusted to help achieve “success”.  CHAPTER 5. How PROJECT PARTICIPANTS VIEW RISK PLANNING The previous Chapters present a discussion of large projects and the evolution of the Channel Tunnel project as an example of a unique BOT project.  Shifting from the  perspective of the project, this Chapter examines primarily the perspective of participants and how they view and react to risk and risk planning issues.  In order to gain additional insights into such issues as they are perceived by professionals active in the engineering construction field, and fUrther strengthen the understanding of risk planning issues and the foundation of the proposed framework, further data gathering and analysis was undertaken. This lead to the development of a number of postulates related to risk planning which are described in this Chapter.  5.1  THE PROJECT PLANNI]G ISSUES QUESTIONNAIRE  Gaining access to meaningfUl risk planning situations and participants is extremely difficult. Participants involved in ongoing BOT projects are particularly difficult to access due to the demands typically imposed by the projects themselves. Additionally, the nature of the risk planning information which was of interest requires considerable reflection on the part of participants.  A number of approaches to gathering information and project situations were considered. As previously noted, it was not possible to access a sufficient number of participants of ongoing BOT projects; so it was decided to access a group of project participants who 120  Chapter 5. How Project Participants View Risk Planning  Page 121  have significant project delivery experience in the infrastructure field. These candidates were selected for a number of reasons. First, the infrastructure projects they are typically involved with were judged to be good candidates at some point in the future for a BOT approach, and thus it was felt appropriate to examine their views of risk planning. Second, it was possible to gain access to a number of participants vertically through an organization, from a smaller number of participants (essentially members of the same project team) respecting the same projects and types of projects rather than from a greater number of participants, in a large number of organizations and thus dealing with many different types of projects. Third, the project participants which were ultimately selected had extensive experience on all phases of projects, as would be required by BOT participants, including project identification, planning, budgeting, design, construction and operation. Fourth, given the nature of the risk planning issues, a broader “mail out” approach may not yield sufficient completion rates.  Fifth, one purpose of the  questionnaire was to test the feasibility of the methodology for gathering information on risk planning issues.  The purpose of the questionnaire was to test the feasibility of gathering information on issues respecting project risk; to explore issues of project risk perception and propensity, and measures of project failure and success criteria; and explore the variability of attitudes and perceptions amongst the full spectrum of project participants and across levels of management responsibility and accountability, i.e. amongst participants who deal with the same projects but from different perspectives—senior management, project managers, designers and field inspectors.  Chapter 5. How Project Participants View Risk Planning  Page 122  A questionnaire exploring issues of project risk perception and planning, and measures of project success and failure, was designed and distributed in the summer of 1990. The questionnaire required about 30 to 45 minutes to complete; it originally consisted of 40 questions but was reduced to 27 questions after a pretest.  The questionnaire was  distributed throughout a section of a government department which plans and implements an annual engineering capital program consisting of over one-hundred, small to mediumsized municipal infrastructure projects.  These projects typically require multi-year  budgetary allotments and range in size up to approximately $5,000,000, with the largest project being around $25,000,000. Because most projects are located in northern and remote locations, in addition to logistical and climate challenges, the projects are faced with the additional challenges of cross-cultural settings; a rigorous regulatory environment; high public visibility and often, public criticism or opposition, and a high degree of political scrutiny at a number of levels.  The questionnaire was completed by eleven participants (an over 80% completion rate), which included the Department’s senior management at the Assistant Deputy Minister and Engineering Director level; program and project managers, typically engineers; through to project designers and field inspectors, typically engineering technicians. Most had ten to twenty years experience respecting project implementation. The high response rate was a measure of the importance the participating Department placed on risk planning issues. Because of the small sample size no statistical testing was undertaken on the results.  Chapters. How Project Participants View Risk Planning  Page 123  The participants were responsible for a number of aspects related to the projects. There was a high degree of accountability respecting the perceived failure and success of the projects; as previously noted, the projects are delivered in a highly visible environment and promotions, terminations and increases in remuneration were generally seen to be performance-based. Project managers are typically responsible for all facets of the project, from prefeasibility planning, through regulatory approvals, design, construction and commissioning. Often there is ongoing involvement in the operations and maintenance of the project, so there is a strong motivation to deliver projects which can function economically and problem-free.  A copy of the questionnaire is included as Appendix C. The complete, detailed results are tabulated and included as Appendix D.  5.2  ROW PARTICIPANTS VIEW PROJECT RISKS  Most participants self-rate the projects undertaken as embodying medium risk—the middle choice between “not at all risky” and “extremely risky”—with perhaps a slight weighting towards “extremely risky”. A “risky” project was thought of by participants as one which may fail, in terms of not meeting goals, objectives, financial and technical targets; one which embodied uncertainties or unknowns; or one which may not meet more qualitative goals, such as client or community acceptance. Senior management, as could be expected, tended to view riskiness more in terms of qualitative dimensions, while project managers,  Chapter 5. How Project Participants View Risk Planning  Page 124  and particularly designers and field inspectors, focused more on financial or technical aspects.  5.2.1  Sources of Risk  Important sources of project risk were cited as lack of time (e.g. haste, rushing, inadequate planning); lack of information (e.g. unknowns, incorrect assumptions); technical (e.g. poor design or specifications, material failures); outside factors (e.g. weather); the contractor (e.g. inexperienced, uncooperative, claims-oriented) and qualitative factors such as “political interference”, improper planning (e.g. failure to establish appropriate expectations) and improper management of the project and resources.  These cited sources of risk could be compared to MacCrimmon & Wehrung’s (1986) study of managerial risk, whereby the three determinants of risk were noted as “lack of control”, “lack of information” and “lack of time”.  From an engineering project  perspective, cited sources of risk such as “the contractor” could be viewed as a “lack of control”; “lack of time” was identified in terms of improper or rushed planning; and “lack of information” was cited in terms of unknowns or incorrect assumptions.  Of note, senior management identified “false/mixed expectations” (referring to those of stakeholders, the public or other participants including their political masters) as an important source of project risk. This highlights the importance of correctly identif,iing a  Chapters. How Project Participants View Risk Planning  Page 125  project’s goals and objectives and ensuring all stakeholders share a common vision of the project.  Specific project risks which were cited included stakeholder reactions to the project; unknowns; third-party and regulatory approvals and relations; physical risks such as weather, soil conditions, technical performance of the project and safety; poor management and interpersonal conflict; unskilled and unqualified contractors (most often cited); and financial (overruns or insufficient funding).  Overwhelmingly, the “most  important” risk named was the “contractor”, specifically in terms of performance or attitude; and the risk of “project management failures”. Designers and field inspectors cited personal and safety risks (e.g. jobsite hazards) as most important.  5.2.2  Measures of Risk  Measures of project risks or indicators of a project’s riskiness were varied.  Senior  management cited levels of public controversy, novelty of approaches and limitations on time or budgets; project managers tended to focus upon the management team and contractor’s experience and track record, as well as cues from the number of bidders and bid spread. While a “risky” project is generally understood to be one which has a high chance of failure, or may not meet objectives or be accepted, developing measures of such riskiness, and relating them to historical performance data, is a difficult problem.  For example, there was little agreement on what would constitute an appropriate measure of a project’s riskiness. When asked if the spread of bid prices is a good indication of a  Chapter 5. How Project Participants View Risk Planning  Page 126  project’s riskiness—with a greater spread between the lowest bidder and all others indicating greater risks—there was little concurrence and a wide range of views were expressed, from agreement through indifference to disagreement.  5.2.3  Reducing Project Risks  When faced with project risks, specific actions to reduce risks on projects included: increase stakeholder consultations (perhaps oriented towards clarifying objectives and stakeholder support); reduce time pressures; reduce technical unknowns; increase management attention and control; risk-sharing through insurance and other strategies; and reduce financial risks through adequate budgets and project monitoring. In general, senior management actions tended to address their previously-cited sources of project risk; while project managers, designers and inspectors tended to focus on reducing risks during the implementation or construction phases. These perspectives reinforce the viewpoint that although project managers may appreciate major sources of risk arise from non traditional sources, their actions and responses are, by and large, restricted to dealing only with risks from their limited perspectives—risks they feel most comfortable attempting to control.  When asked to what degree can control over the risks be exercised, there was somewhat of a dichotomy across the management structure:  senior management felt “to a great  degree”, but project managers and designers tended to feel less control, mostly “to a moderate degree”.  This is somewhat interesting, in that senior management may be  Chapter 5. How Project Participants View Risk Planning  Page 127  placing more confidence in, and thus have greater expectations respecting the project management team’s ability to successfully deal with risky situations. The divergence in perspectives is further emphasized by senior management’s somewhat different view of major sources of project risks (qualitative, stakeholder-related risks) when compared to that of the project manager’s (implementation and construction phase risks).  This  incongruity could prove to be a potentially major source of conflict within the organization.  5.3  MEASURES OF PROJECT SUCCESS AND FAILURE  Measures of project success cited included technical measures (e.g. performs and functions well, workmanship); financial (e.g. met capital and O&M budgetary expectations); schedule (e.g. completed on time) as well as a recognition at all levels of the importance of more qualitative aspects of success, such as acceptance, end user satisfaction, and meeting objectives (e.g. the intent of what was intended). One project manager noted it is not enough to successfully deliver a project; it is important that the project should have been undertaken in the first instance and that it properly meets a legitimate need. This may be interpreted as ensuring the objectives of the project are legitimate.  The named indications of project failure were generally the converse of the criteria for success—technical (e.g. fails to perform and unreliable; unsafe); financial (e.g. high capital and operating costs; poor budget control); schedule (e.g. significantly late completion);  Chapter 5. How Project Participants View Risk Planning  Page 128  and more qualitative issues (e.g. user dissatisfaction, non-acceptance, disputes and disinterest) including failure to meet expectations (i.e. objectives).  5.3.1  Precursors of Success and Failure  Many qualitative and management-oriented characteristics of a project which may contribute to failure were identified, generally similarly across all levels of the organization. This included poorly defined or unclear expectations; poor preplanning; lack of adequate definition of need, roles or scope; power struggles amongst participants; “political interference”; lack of communication; strained relations; and poor management team. In addition, project managers and field inspectors cited many characteristics of the contractor as contributing to failure, including inexperience, uncooperativeness, poor management, and too low a bid.  These observed characteristics, with an emphasis on management-oriented factors, generally agree with many of the “precursors of success and failure” previously discussed in Section 5.2 of the thesis. It is interesting to note, however, that again and again “the contractor” is cited as a major source of risk, and a major factor contributing towards the possible failure of a project. Yet because of the nature of the public tendering process and the principle of virtually always selecting the lowest bidder, this most important factor is one over which the project team can exercise a very small amount of control. These and other related considerations are fhrther discussed in a following section.  Chapter 5. How Project Participants View Risk Planning 5.3.2  Page 129  Judging Success and Failure  A very high percentage of all projects executed were judged by participants as “successful”; ranging from senior management’s view that 100% were successful, to a slightly less optimistic view by the project managers, who generally estimated upwards of 90% as successful.  When subsequently asked a similar question, participants felt that up to 50% of their projects were judged as only “marginally satisfactory”, with most judging around 10% of their projects as marginally satisfactory but with a large spread—from 0.5% through to 50% of the projects—and around 90% judged as “satisfactory”, again with a large spread, from 33% to 99.9%. Between 0% and 33% of projects were judged “not satisfactory”, with most generally feeling less than 5% were not satisfactory.  The great spread of the replies, particularly with respect to “marginally satisfactory” suggests there is a large ‘grey area’ with respect to evaluating judgements of a project’s “success” or “satisfactory” execution.  This underscores the difficulty in choosing  objective measures of success, and conversely, if the chosen measures are sufficiently subjective, a degree of “success” or “satisfaction” can be found in virtually any project. It is also interesting to note those directly executing the projects—primarily the project managers—tended to be far more pessimistic than senior management with respect to judging projects as “not satisfactory”. This may indicate they are more critical of their own performance or respecting the manner in which the project was implemented; or they  Chapter 5. How Project Participants View Risk Planning  Page 130  are aware of problems on the project which senior management either is not aware or has judged not sufficiently important to threaten the project’s success.  A series of questions were posed in order to examine the different perspectives on specific measures of a project’s failure.  Major dichotomies between the attitudes of senior  management and project managers were revealed.  Senior management felt completing a project over budget (10% to 33%) was a moderately-to-extremely important indicator of project failure, yet project managers consistently displayed far less concern.  This contrasts somewhat with senior  management’s previous assessment of a 0% project failure rate.  Project managers,  however, often informally adjust a project’s budget before and during implementation, with considerable zero-sum flexibility between projects within the same program. Senior management’s perspective may display a concern that budget overruns attract public scrutiny and criticism in the Legislature.  Conversely, project managers displayed more concern than did senior management respecting completing a project later than scheduled as an indicator of project failure. For example, completing a project one season late was considered by all except senior management, as an important to extremely important indicator of project failure, while senior management remained unconcerned, possibly demonstrating a preference to trade off late completion, with little or no budget increase, versus large budget increases to expedite a project’s completion (reinforced in a later question). Also reflecting budgetary  Chapters. How Project Participants View Risk Planning  Page 131  and accountability concerns, small increases in estimated O&M costs were judged of greater concern by senior management; large increases (50% to 100%) were equally judged by all as an extremely important indicator of project failure.  All parties were  generally equally concerned respecting reductions in a project’s planned capacity.  Project managers displayed somewhat less concern than either senior management or field inspectors, respecting several characteristics related to public scrutiny of projects as expressed through caseworks (formal Ministerial requests for information or replies to letters and questions); and criticism in the Legislature, by the media or by the public. Field inspectors displayed a high concern because they may personalize the scrutiny and criticism; senior management may display high concern because often they are the party which must directly answer any criticism.  Project managers may be somewhat less  concerned because they may have more confidence in their actions with respect to the project; as well, they are somewhat removed from direct criticism, although certainly not insensitive to  it.  Project managers appeared to be much less concerned about late completion of projects in comparison with senior management and all others. For example, senior management felt a 10% chance of not completing a project on time was acceptable, in sharp contrast to project managers’ view that upwards of a 60% chance (with a range from 5% to 90%) would be acceptable.  Somewhat in contrast, however, project managers previously  displayed more concern than others respecting late completion as an indicator of project failure.  Chapters. How Project Participants View Risk Planning  Page 132  Similarly, a marked dichotomy was also observed regarding project managers’ attitudes towards completing a project over budget—project managers displayed much less concern than all others. For example, senior management stated only a 1% chance of a 25% budget overrun would be acceptable, in sharp contrast to the views of project managers, who felt up to a 50% chance would be acceptable. These attitudes are congruent with the project managers displayed less concern than others respecting budget overruns as indicators of project failure.  5.4  PROPENSITY TO ACCEPT PROJECT RISKS  With one exception, all those throughout the organization appeared well calibrated with respect to their own willingness to accept project risks compared with their supervisors, co-workers and others.  However, one member of the senior management team  consistently misjudged his own risk propensity when compared with the judgement of others. For example, the project managers uniformly self-judged themselves as “more willing to accept risks” than their supervisor, while their supervisor self-judged himself as “much more willing to accept risks” than the project managers which reported to him; similarly, he misjudged his propensity when compared to his supervisor.  5.5  BUDGET UNCERTAINTIES  Participants are responsible for preparing a “Capital Plan”, which, once approved by the Legislature, establishes project budgets for the following five year period. Theoretically it  Chapter 5. How Project Participants View RiskPlanning  Page 133  is subject to annual refinement, but often it is not adjusted, thus, because of its five-year nature, the capital plan tends to embody increasing degrees of uncertainty associated with future budgets.  When questioned respecting the chances of exceeding Year 1 (current) through Year 5 (far future) project budgets, there was considerable variability in attitudes throughout the organization. For example, senior management felt there should be about a 95% chance of not exceeding a Year 1 project budget, in sharp contrast to the perspective of the project managers, who felt there was generally about a 60% chance of not exceeding the budget—with a considerable range of responses, from 5% to 80%. Senior management displayed a similarly higher expectation with respect to Year 3 projects.  However, considering the Year 5, far future projects, senior management felt there was only a 5% chance of not exceeding project budgets, while project managers and designers uniformly demonstrated a great deal more confidence in the estimates, and felt there was generally about a 60% chance of not exceeding the budget, again with a considerable range of responses, from 20% to 80%.  Generally, project managers and designers  displayed a similar confidence in all present and future budgets, perhaps indicating that future unknowns were handled not with greater uncertainties and chances of exceeding, but with greater contingencies. If this is so, senior management certainly does not share this confidence, and these differences could foster a potentially dangerous source of organizational misunderstandings.  Chapter 5. How Project Participants View RiskPlanning  Page 134  Similar dramatic differences between the attitudes of senior management, and project managers and others were revealed respecting late completions, budget overruns and project objectives, as illustrated in Table 5.1.  Respecting other attitudes and project characteristics, most throughout the organization shared similar views. For example, most agreed it is more important to maintain a project on budget rather than on schedule; and most agreed problems can be expected when the contractor bids too low.  Senior Management:  Project Managers:  “Budget overruns can usually be justified.”  Disagree  Agree  “Most reasons for budget overruns are usually out of my control.”  Disagree  Indifferent! Disagree  Attitude & Characteristic ofProject:  “Most projects, when completed, exceed their originally estimated budget.” “Late completion of a project can usually be justified.” “Most reasons for late completion are out of my control.” “End-user acceptance is the most important project goal.”  •  Strongly disagree  Indifferent! Disagree  •  Disagree  Indifferent /Agree  •  Disagree  Agree  Strongly disagree  Indifferent! Agree  •  Table 5.1 Some differences in attitudes of senior management compared with project managers with respect to selected project characteristics.  Chapters. How Project Participants View Risk Planning  Page 135  How do such attitudes and perceptions compare to actual project performance? A review of the Department’s historical project budget information revealed, on average, 28% of projects eventually overran their initial Legislature-approved budgets by an amount typically 10% to 15% of their original budget. However, more recently, the number and magnitude of overruns has been greatly reduced as formal program budget adjustments are made mid-way through the fiscal year. It could be argued that indeed, at least on paper, projects are not likely to overrun, but it is because of closer monitoring and budget adjustments rather than skillful project management and effective cost control.  Other  issues related to cost control and overruns are discussed in Section 5.8.  5.6  PROBLEMS ON PROJECTS  There was a wide range of viewpoints on the source of problems on projects—whether from events or scenarios that could have been anticipated or could not have been anticipated. Senior management felt the majority of problems arose from scenarios which could have been anticipated; project managers generally agreed, although there was a wide range of views (for example, project managers felt between 5% and 80% of problems could have been anticipated). Generally speaking, however, most project participants felt the majority of problems could have been anticipated.  Exploring which parties could have or should have controlled project problems, senior management felt control of problems is generally equally attributable between the contractor; the consultant; the government’s project management team; other parties; and  Chapter 5. How Project Participants View Risk Planning outside the control of anyone.  Page 136  Project managers and field staff, however, tended to  attribute control of around 50% of problems to the contractor; around 20% of problems to the consultant; slightly less to the government’s project team, and smaller amounts about equally between third parties and outside the control of anyone. These attitudes reinforce the previously expressed viewpoints respecting the direct linkage between contractors and project risks and problems.  5.7  MINIMIZING RISKS: THE PROBLEMS OF CONTRACTOR SELECTION  An important source of project risk and potential problems, as revealed by the questionnaire, was the selection and potential performance of the contractor. Contractors were viewed, particularly by project managers and those who are directly involved in the implementation phase of projects, as a major unknown; a significant source of potential project failure; and the party which should or could control the majority of project problems.  The expressed (and observed) difficulty in addressing this perceived source of project risk is the dilemma inherent in the system of selecting a contractor by lowest public tender. The challenge becomes one of balancing non-financial, qualitative criteria such as those associated with contractors characteristics (e.g. possible performance, possible claims, workmanship and quality, possible insolvency, project management and inspection efforts necessary) with the traditional qualitative (e.g. financial) criteria. It should be noted there  Chapters. How Project Participants View Risk Planning  Page 137  are instances where award is not to the lowest bidder and other criteria may govern, usually associated with clearly defined schedule or methodology constraints.  Notwithstanding, award to the lowest bidder is an entrenched principle of publicly-funded tenders. Generally speaking, if any other than the lowest bidder is selected (other than for instances of incomplete or otherwise improper bids), the award decision must be made at the highest level in the organization (a Deputy Minister or Minister) or at the Cabinet, ‘Management Board’, or ‘Treasury Board’ level.  This automatically results in a  considerable delay in awarding the contract for a construction phase which is often already under time pressures.  A decision at these levels requires substantial documentation  including a comprehensive justification of the reasons. The process often results in vocal complaints and protests from those not awarded the contract (primarily from the lowest bidder); requests for political intervention; representations to a court; threats of lawsuits, and generally, much unpleasantness.  Thus, it is not surprising that project managers  become frustrated and seek to avoid award to other than the lowest bidder. Rejection of the lowest bid leads to questioning the legitimacy and fairness of the process.  For  example, based upon the author’s fifteen years of involvement in public sector project management, it was only exceedingly rarely, and with the greatest difficulty, that the lowest bidder was rejected on qualitative criteria (e.g. potential poor performance, etc.), yet in about 20% of the projects the lowest bidder was greeted with trepidation and dread (i.e. another bidder would have been preferred even at a higher bid). In many cases, the trepidation and dread was borne out.  Chapter 5. How Project Participants View Risk Planning  Page 138  However, if there were a manner in which the important qualitative criteria of contractor characteristics could readily be made more quantifiable, it could facilitate and add credence to the selection and decision-making process yet not erode the principles of public tendering.  Such an approach would involve quantifying the risk associated with a number of contractor characteristics, allocating a “risk premium” or “performance rating” for each characteristic. The premium or performance rating, when combined with the financial aspects of the bid, would enable bids to be compared on an equitable, equi-performance level, accounting for qualitative issues related to potential performance and chance of meeting required milestones; potential for unwarranted claims; level of workmanship and possible poor quality; project and construction management efforts required; possible insolvency and issues of local hire, etc.  Integrating qualitative criteria in the selection process is also an important consideration in other situations, such as the awarding of BOT concessions; and selection of consultants. Such decisions are often substantially based on non-financial criteria and thus become subject to criticism from perceived inequities, political biases and other interferences.  The difficulty, of course, is how to document historic experiences and appropriately account for these risk factors.  It may be somewhat easier to do so for traditional  contracting approaches, in light of their repeatability, and in project implementation  ChapterS. How Project Participants View Risk Planning  Page 139  environments where the participants are generally the same from year to year, than for ‘one-shot’ types of projects large or BOT projects.  The challenge essentially becomes how to quantify unknowns—how to quantify qualitative risks.  Deviations against ‘norms’, expectations and objectives must be  measured and documented, such as project management and construction administration efforts required (e.g. may be reflected in inspection hours, senior management attentions, etc.); level quality and workmanship, recognizing higher quality often translates into lower long-term maintenance and life-cycle costs; and unwarranted or dubious claims translate into higher administration, legal or construction costs.  Agencies and owners which could benefit the most, in the long run from the quantification of qualitative risks are those which undertake annual programs involving many projects of a similar type, such as the British Columbia government’s Ministry of Transportation and Highways (‘MoTH’).  By way of example, MoTH, in late 1991 and early 1992, found it a formidable and challenging task to select and award a large number of highway maintenance contracts where qualitative criteria relating to potential contractor performance and responsiveness under a wide range of possible climatic and operational scenarios, are paramount.  The key to successfully approaching the quantification of qualitative risks lies in attention to clearly defining project objectives; participant objectives; and project and participant failure and success criteria. Through an understanding of such objectives and criteria,  Chapter 5. How Project Participants View Risk Planning  Page 140  tradeoffs amongst qualitative and quantitative criteria can more readily be accomplished. Project managers may find that while ‘minimize project implementation costs’ is a readily quantifiable objective, translated into accept lowest bidder; other objectives pertaining to project management, construction administration and inspection efforts may warrant consideration and quantification.  Objectives and criteria should also be periodically revisited, for adjustments to them may sometimes be warranted. For example, on the Channel Tunnel Project, adjustments were made to the train design speed objective, which was lowered in the face of substantially increased costs.  5.8  THE UBIQUITOUSNESS OF COST OVERRUNS  As discussed in Section 5.5, budget uncertainties and cost overruns are an important risk and dimension of project failure yet appear to be virtually universally accepted as inevitable on many projects. For example, Baum & Tolbert (1985) noted underestimating costs as well as the time required, is pervasive and attributed it to the optimism on the part of planners, found on all projects and in all countries. Morris (1985) cited common causes of overruns as technical problems and the tendency to underestimate costs.  It is useful to examine why cost overruns are so ubiquitous.  Those undertaking cost  estimating for a project may consciously or unconsciously inje