Assignment 2 (DEV7SSD)

Strategic Sustainable Development

CEM 2013

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Assignment 2 CONTENTS INTRODUCTION POLITICAL RISKS Government Stability Taxation and Duties Legislation INVESTMENT RISKS Social-Political Risks Exchange Rate Risks Liquidity Risks Credit Risks DEVELOPMENT RISKS Pre-Construction Stage Construction Stage Post-Construction Stage RISK IDENTIFICATION, ASSESSMENT & MANAGEMENT RISK ALLOCATION FORMS OF CONTRACT: THE INSTRUMENT FOR RISK ALLOCATION QUESTION 2 THE IMPLICATIONS FOR REAL ESTATE PROFESSIONAL Suitability of Location for Development Project Size Project Layout Emission Environmental Safeguards TOOLS FOR MANAGING LAND USE AND ITS IMPACT ON THE ENVIRONMENT Regulatory Framework Capital Improvement Plans Responsible Public Ownership 3 4 4 4 4-5 5 5 5 5 5 6 6 6 7 7 7 8

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Public Private Partnerships Robust Legal Control Pollution Fines and Incentives List of Table Fig 1 Spectrum of Risks in Construction Conclusion References

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INTRODUCTION
The construction industry, whilst it is in so many ways similar to other industry is unique in its product offerings and in the process of delivering the products. Perhaps this uniqueness, the time and resource intensity that characterizes the industry and its products underpins the variety, magnitude and complexity of the risks involved in delivering its products. It is accepted that where work environment is concerned the exposure to hazards and risks are highest in the construction fields of activity. Bunni N. (2011). There has been differing attempt made at defining Risk. One such definition is that given in the British Standard No. 4778: Part 3, Section 3.1: 1991, which defines Risk as; A combination of probability, or frequency of occurrence of a defined hazard and the magnitude of the consequences of the occurrences This definition notwithstanding, It should be noted that the outcome of a risk event could be positive in that it could lead to some gain hence, an all-inclusive definition is that given by the Risk Management Standard of Australia and New Zealand which defines risk as inclusive of not just loss or damage but in some cases, gains.

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POLITICAL RISK
Given the background to the question, it is clear that, there exist some measure of considerable political risks that need to be identified, analyzed in terms of their probability and impact and managed accordingly. As the Project Manager, the following risks factor associated with the political climate will be identified, analysed and managed;

Governmental Stability Since the government of the island has not been democratically elected, there is
the tendency for some kind of organized internal opposition to the ruling class. This portends a serious risk to the project in that, as is most often the case in countries with undemocratic government, there is almost always a greater tendency for instability and regime change. It should be noted that the government of the island, notwithstanding how it was constituted would be the employer and most probably the conduit through which funds from the Sponsor (IMF) for the mixed-used development will be channeled. It is therefore important that critical appraisal of the political status quo and the tendency for any political upheaval be weighed and the impact of such to the project determined. The Central African Republic whose president was recently chased out of the capital (Bangui), reminds us all of the reality of the threats that risks associated with politics poses to international development initiative.

Taxation and Duties As one of the primary powers of government over the people, the impact of Tax is one area that the PM needs to fully look into especially within the context of the laws and regulations in the island nation. Taxes and tax laws varies both in types and percentage from country to country. As a remote island of some 100km from the mainland, it is reasonably right to assume that tax or taxation would probably be one very important means of generating income to run the government of the island. The PM must ensure that he does not only understand the tax laws and other statutory charges that may be imposed but also the frequency and procedure for reviewing such laws. As a relatively distant island, there is the prospect that most of the resources needed for the project will most probably be imported and that may mean paying a lot in taxes and duties. In the interest of proper funding, such costs need detailed assessment and should either be included as part of the funds or mitigated by seeking exemptions from the government. Legislation As the PM, another important consideration with respect to political risks is the issue of
Legislation. According to the information given, the fact that the government of the Island has not been democratically elected suggests that its system is still developing and as such may have a high frequency of changes to laws and regulations particularly as its affects developmental effort. In my experience on a recent project in Iraq, the requirement of the Employer imposed on the Contractor to recruit and include a certain percentage of the locals as part of the planned resources for the project did not only increased the overall budgeted cost to complete but also led to quality issues against which the Contractor was forced to execute expensive rework. Other examples of political risks include imposition of new controls (such as trade restrictions, exchange limitations or monetary controls). The following are other political threats to the project that would be consider, External foreign relation of the government especially with respect to sanctions which could adversely limit sources of quality resources thereby increasing the risk of technical failure.

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1101528 Red tape bureaucracy especially with respect to permits and compliance with country specific standards Attitude to bribe and the disposition of the law to the issue of gift

INVESTMENT RISK
On their website, the IMF described its key functions as (i) Surveillance (ii) Lending, and (iii) Providing member nations with technical advice. It therefore reasonable to conclude that, my Employer, IMF is the Sponsor for the project with some form of economic interest in the outcome of the project. Perhaps, it is may be correct to refer to the IMF as an investor who is entitled to some form of reward for the risks to which it is exposed as a result of the project. As the PM for the project, I will consider the following sources of investment risks

Social-political Risks The question need to be asked if the development is suitable for the location and
more importantly, if the citizens consider the project as a value adding endeavor in the first place. There have been occasions where investments of international magnitude as the one under consideration here has met with stiff rejection from the citizens just because, as a group, such project was simply judged as not been a people oriented project.

Exchange Rate Risks - The constant fluctuations in the foreign currency in which an investment is
denominated vis--vis the Islands currency may add risk to the value of the project and escalate the total cost of the project. Over the duration of the project and with the tendencies that most of the resources for the project may have to be imported, it is important to access the frequency and the impact of currency fluctuations on the project success.

Liquidity Risks Given the remoteness of the island, the opportunity to quickly turn the investment in to
cash should the need arises appears to be quite narrow.

Credit Risks The risk of not being able to retrieve back the money from the debtor as at when due will be critically considered. One way is to look at the past performance of the island country with respect servicing and paying back loans. As a mitigating measure, such risk can be reduced through some form of insurance facility as credit shield.
Other sources of investment risk that will be considered include Interest rate Inflationary trend which drastically shrink or erase the returns on the investment

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DEVELOPMENT RISK
To understand the development risk, it is worthwhile to address it in three dimensions as follows;

Pre-Construction stage
a. The Feasibility Stage b. The Design Stage At the preconstruction stage of the project, a lot of uncertainties exist. Questions need to be asked and detailed analyses of all possible scenarios need to be done. How feasible is the whole idea of the project with respect construction cost and the expected returns especially given the relative remoteness of the island? The following questions may reveal a lot at this stage particularly with regards to feasibility. 1. The owners choice of the professional team if they have been formed 2. The choice of the Site and the adequacy of Soil investigation done 3. Adequacy of finance and the premise upon which the estimates are based Are we missing something with regards to, a. War b. How threatening is the risk of Sea level rise c. The Owners brief, was it adequately captured and under Further sources of development risks from design include 1. 2. 3. 4. 5. 6. 7. The adequacy of the design and its impact on the environment or other pre-existing structure Failure to take account of foreseeable Problems Constructability of the design. The inclusion of untested and unproven techniques Performance of Mechanical Electrical Equipment The availability of capable Contractor with efficient supply chain. The duration of the project

Construction Stage
c. The weather condition of the location including issues such as annual rainfall, wind, storm and hurricane trend as well as Volcano. d. The risk of flood and inundation. e. Extended duration of construction as a result of change orders and/or other events f. Removal of funding support may be as a result of sanctions g. Defective material and workmanship h. Damage to third party property as a result of construction activities

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Post Construction Stage Just as the development of any project goes beyond the pre and construction stages so are the risks the need to accessed and managed. The idea of project life cycle encompasses both the initial conception, construction and the operation of a project. Consideration must be given to the risks associated with the project after the handing over and during its operational live. It should be noted that the solutions to most of the post construction risks are best designed and planned at the pre-construction stage. As the PM for the project, the following would be considered;
1. Risk associated with safety As a mixed use facility this should be properly assessed and mitigated partly by adequate design measures 2. The risk associated with Serviceability of the facility during use. It is not just enough to build to budget and deliver a project in time, it is equally important to do so with keen foresight with respect serviceability and maintenance. 3. The risk associated with fitness for purpose 4. The risk associated with wear and tear particularly given the weather in the location of the project

RISK IDENTIFICATION, ASSESSMENT, ANALYSIS & MANAGEMENT

It is generally accepted that the Construction and development industry are generally prone to high levels of risks as a result of internal and external factors that surround the activities of the industry. In managing these high level risks among the contracting parties, it is important to note the logical flow from Risk to Responsibility to Liability to indemnity and to Insurance. The process begins with identifying the possible sources of risks to a project in both general and specific terms. This process also entails assessing, analyzing and classifying the consequences of each risk. It is important for the PM to critically examine risk events with minor consequences individually and in relation to others in order to fully understand the bigger picture. Having identified and assessed the impact and probability of the risks, it is my duty to decide which risk need to manage and who among the contracting parties is best positioned to handle the risk. It should be noted that the risk scenario of a project continue to change throughout the life of the project, as a result, risk management will continue throughout this period as well.

RISK ALLOCATION:
As noted earlier, the logical flow of risk, responsibility, liability indemnity and insurance most often define the process of risk allocation. According to Bunni (2011), risk allocation between the contracting parties should be based on the following criteria 1. The ability of a party to control the arrangement which might be required to deal with the hazard or any triggering incident relating to it 2. The ability of a party to control the risk or to influence any of its resultant effects; 3. The ability of a party to perform a task relating to the project such as obtaining and maintaining insurance cover 4. The ability of a party to benefit from a project.

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FORM OF CONTRACTS: THE INSTRUMENT FOR RISK ALLOCATION.

There is a myriad of Conditions of Contract out there designed to help in allocating the general risks associated with the Construction industry between the parties to the contract. The point is to ensure that risks are fairly allocated between the parties, it imperative for the success of any project that no party to contract is unduly over burden with responsibilities which are not within his capacity to adequately bear. It is important when allocating risk through contract agreement to ensure that the parties to which a particular risk has been allocated is willing to take on the risk. The allocation of project risks generally lies in the remit of the client. It is sometimes possible that the client, not willing to take on a risk source may pass such responsibility to the Contractor or Consultants at a price. Such Contractor/Consultant is open to some options with regards to managing such risk 1. Pass the risk on a third party such as insurance companies. 2. Accept liability and continue to bear the risks, of course at a price 3. Recover costs from others should the risk eventuates

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THE IMPLICATIONS FOR REAL ESTATE PROFESSIONALS

Real estate professional are faced with more and more difficult decisions on how to manage the finite land resources and protect the environment while at the same time ensuring that they create the much needed stock of housing and improved infrastructure to sustain the ever increasing human population. To do this, these professional are faced with some dilemma with respect to balancing needs with available resources in a manner that is sustainable. These implications are as follows;

Suitability of a Location for a Particular Development The nature of the available stock of land
and sometimes their importance to the sustenance of the ecosystem subsisting on them may be the determinant factor in deciding whether a developmental project can be sited on or even close to it. The implication here is that real estate professional are most often required to weigh the trade-offs and ask the question to determine if in the end analysis there is enough benefit to sacrifice the sustainability of a system for development. A good example is the Everglades in the United States which is believed to be sitting on a massive reserve of crude.

Project Size There seem to be a direct relationship between the size of a project and the magnitude of its
impacts on the environment. However, with constant improvement in technology and the work method for most construction activities, it appears that the detrimental impact of construction or a development as a result its size can be reduced through the use of the appropriate methods and tools. This of course is sometimes at some additional cost to the overall project budget.

Project Layout relative to existing Infrastructure Just as the spatial arrangement of individual
spaces within a building affect the quality of life of the occupants, the layout of a development relative to existing structures and the specific characteristics of the land pose some challenges to real estate professional in that, they are now required to meet the increasing need of say housing and better infrastructure without compromising the quality of life whilst using the available resources optimally or in the best possible way.

Emission Control As the need to expand the stock of housing, roads and other infrastructure increase
particularly in developing countries such as Nigeria, the buffer between industrial zones and residential area may continue to shrink thereby erasing the boarder separating these regions of specific type of development. In that case, it becomes a challenge to the professional to continue to improve on the laws governing emissions as well as devise and advice new methods of ensuring that the cost of industrial effluent on the environment is reduced to a sustainable level. A recent case in Nigeria where, at the time of siting a steel industry in Ikeja, there was a considerable buffer separating the industry from residential area highlights this risk. However, as the population increased so were housing, roads and other infrastructure thereby consuming substantial part of lands too close to the industry only to realize that they have been exposed to some pollutants from the industry leading to high levels of some heavy metal in their system.

Environmental Safeguards According to CEM (2013), the use of tall chimneys may solve the problem in
one area but might lead to other environmental problems elsewhere. The challenges to the environment are dynamic and ever changing, as such the professionals involved must also continuously evolve new ways and strategy in addressing the need to continue to protect the environment and improve the quality of our lives especially in the urban areas. 9|Page

Spectrum of Risks in Construction

Owner

Professional

Contractor

Pre-Construction Stage Construction Stage

Post-Construction Stage

Feasibility Stage Design Stage Site of the Project/ Location

Technical Aspect of Project

Acts of Man

Post Defects Notification Stage

Defects Notification Stage

Fig 1 Spectrum of Risks in Construction

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TOOLS FOR MANAGING LAND USE AND ITS IMPACT ON THE ENVIRONMENT Regulatory Frameworks - established at the national level should recognize that environmental
management will be largely implemented at the local level, and thus should grant some flexibility to local governments. For example, a city can enforce strict environmental standards in residential areas and simpler standards in zones where adverse impacts are not as great. This is particularly important for countries such as Nigeria or any developing nation for that matter. The tendency to use different stroke for different people at different times is a bane to the effectiveness of regulatory framework in this places. It is therefore important to divest power from the center to the local authorities who are most often at the receiving ends of the impact of improper land use and consequences of inaction at the top.

Capital Improvement Plans must be linked to the budget and must consider protecting ecosystems
when planning for new roads and other infrastructure. The placement of trunk infrastructure will largely determine where industries and residents locate. As noted elsewhere in this paper, the provision of and/or improvement of housing stock or other infrastructure by the public sector and may be in partnership with the private sector, is good however, doing so in a way that is social responsible and environmentally conscious is even better and should be pursued.

Responsible Public Ownership of Land Whilst many have argued in favor of public ownership of
land, evidences abound of many cities holding surplus land that could be used more efficiently by the private sector, while slowing the encroachment of vulnerable ecosystems in outlying areas. In these land deals, the city should dictate that the buyer use the land in an environmentally sensitive manner. If the government must hold the land in trust, they must do so responsibly in a balance way that would not compromised investment and the productive use of the land by others.

Public/Private Partnerships If packaged properly within the right legal framework, the use of PPP
arrangement can be developed to establish and achieve mutually agreed upon benchmarks on pollution abatement. After all, in the long run the responsibility to protect our environment is a collective duty just as the benefits that accrue from it. We must engage (The public and private) and continue to do so in the interest of our future and children.

Robust Legal Control This tool is directly tied to the public ownership tool but in a way could be used to
ensure that Land use especially by the private sector, who, in most cases is more likely to make decisions based only economic benefit and not the associated environment impact. It should be noted that in a country like Nigeria, the government must be willing not only to put the requisite law in place but also to execute it without regard for personality or ethnic extraction of the individual concerned.

Pollution Fines and Incentive - based programs can be designed to correct for market failures, increase
the accountability of polluters and increase efficiencies at the production sites. If the government does not have the capacity to enforce compliance or if polluters cannot be not clearly identified, the inputs used in production can be taxed as an indirect way of making the polluter pay. Subsidies and capital grants can be distributed for pollution-control equipment.

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CONCLUSION
In this paper, within the limit of available information and the scenario described in the question, an attempt has been made to identify and discuss, the risks associated with development particularly from political, investment and development point of view. The construction industry is resource intensive and one in which, in the interest of successful project delivery, risks must be identified, assessed, allocated, quantified and mitigated at the early stage and also continue to do so throughout the construction period and even during the operational live of a project. The paper goes further to describe the processes required to effectively manage the identified risks. In the second part, with the paper looks at the challenges faced by real estate professionals especially within the context of an ever-expanding population and the need for continuous development and urban regeneration. Focus is placed on discussing the implication for the professionals in the real estate industry of the challenge posed by inevitable need for development and the optimal sustainable use of scarce or finite resources. A discussion on the available tools to surmount these challenges is also discussed.

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References
Nael Bunni & Edward Corbets (2011), The FIDIC Contract A Practical Guide to Understanding and Using the FIDIC Conditions of Contract 1999. An outstanding two-day FIDIC Contract Workshop in Partnership with Cornerstone Seminars. Roger K. (1998) Australia/New Zealand Risk Management Standard Presented as part of a book Owning the Future, published by the Centre for Advanced Engineering, University of Canterbury, Christchurch, New Zealand. The College of Estate Management (2013). Strategic and Change Management Analysis of change: Introduction to change, MAN7SCM December Semester 2012: P10208 V1 -0 Nael Bunni (2009). The Four Criteria of Risk Allocation in Construction Contracts. International Construction Law Review, Volume 26, Part 1. Pages 4 23. Rita Mulcahy (2009) PMP Exam Prep Human Resources Management RMC Publication ISBN 978-1-93273518-5 N.J Smith (2008) Engineering Project Management, Third Edition, Blackwell Publishing Ltd, ISBN 978-1-40516802-1

Total number of words excluding References and Table Content is 3498.

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