RISKS INVOLVED IN METRO RAIL PROJECTS

PART IV
RISKS INVOLVED IN METRO RAIL PROJECTS

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CHAPTER 9

RISKS INVOLVED IN METRO RAIL PROJECTS

9.1 Introduction
9.1.1 With time, the cost and duration of the construction projects has increased and
increased cost and duration means more chances of facing problems that are never
faced. Foreign projects like CHANNEL TUNNEL PROJECT, etc and domestic
projects like Coimbatore by-pass, etc. shows that if the risks involved in the
project are not predicted beforehand and suitable and effective risks mitigation
plan is not prepared than it may hurt the healthy growth of the project and may
lead to cost and schedule over run.
9.1.2 Current scenario of the construction industry in India is showing that there are
very few projects involving huge investments and are getting completed within
schedule and within budget. Indian construction industry which are experimenting
with new contracts like BOT, BOOT, etc are facing risks which they have never
come across and thus are not fully prepared.
9.1.3 The types of exposure to risk that an organization is faced with are wide-ranging
and vary from one organization to another. These exposures could be the risk of
business failure, the risk of project financial losses, the occurrences of major
construction accidents, default of business associates and dispute and organization
risks. It is desirable to understand and identify the risks as early as possible, so
that suitable strategy can be implemented to retain particular risks or to transfer
them to minimize any likely negative aspect they may have.
9.1.4 One more problem with the understanding of risks is that the notion that all risk is
bad is totally wrong. Risk is simply the eventuality that unknown things can
happen. Risk is further divided into good risks, called opportunities, and bad risks,
referred to as threats. One should be prepare to handle the threats but those risks
that have huge opportunity to earn fair amount of profit should be ventured out.
Always remember the old saying:

"Nothing ventured, nothing gained,"

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9.2 Definition of risk

 Risk is defined as the uncertainty inherent in plan which has a possibility of happenings
that can affect the prospects of changing project goal.

 Mr. Newton Richard has described it as “prediction that an issue that has not yet
occurred, will occur in terms of probability and impact if it does”.

 Risk is an exposure to the possibility of economic and physical damage or injury or

delay as consequence of the uncertainty associated with perusing a particular course of
action.

9.3 Types of risks

Risks are classified into many types and on many basis, these are as follows:
a) On the basis its identification and prevention:
 Known-known: the things that have ceased to be risks, because they have
happened and it is not possible to prevent them
 known unknowns: the risks that have been identified and it may be possible to
mitigate its effect if it does arise
 Unknown unknowns: these are the risks that have not be identified and its
adverse effects are not foreseeable by even the most experienced professional.

b) On the basis on surety of type of impact:

 Pure risks: if the occurrence of an event results in no change in the situation

or a loss with no possibility of gain, this risks is termed as pure risks.
 Speculative risks: when the outcome may be either loss or profit, the risks is
called a speculative risks.

c) On the basis of risks associated with particular project:

 financial risks
 legal risks
 technology risks

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 political risks
 commercial risks
 market risks
 cost and time over run
 environment risks
 construction risks
 operation and maintenance risks
 force majeure risks

9.4 Major risks in metro projects

 risks of financial closure

 type of contract/contractual risks
 competent contractor/consultant risks
 new technology risks
 financial feasibility risks
 competent supplier
 cost and time over run
 Land acquisition
 Compensation or Resettlement and rehabilitation
 Risks of traffic forecast and revenue forecast
 End user perception
 Commercial and market risks
 Political risks
 Utility diversion risks
 Risks of less revenue from property development
 Construction risks
 Cost escalations
 Non-availability of model concession agreement
 Selection of type of alignment elevated or under ground

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9.5 Global Risks in metro projects

As finances are arranged from JBIC, supply of rolling stock etc require global
purchasing and if a company is preparing to bid for a project in other country than
following expert comments should be kept in mind.

9.5.1 Faulty assumptions about a country or project are very dangerous for its
successful completion.
9.5.2 We use many workarounds intuitively as a response to newly emerging or
previously unidentified risks.
Of course, workarounds (quick-fixes) are many a times are not effective
responses. But, we do not document them in the risk register and share the lessons
learned with the peers. Documentation-archive-institutionalization of
workarounds so that the workarounds can become a well planned effective
response for the next phase of the project or next project. An organization that
continuously learns from its own (and others) risks management practices can
only survive the global project management threats and exploit the opportunities.
9.5.3 It is important to be culturally sensitive when identifying risk. Practically
speaking: a brainstorm session is often one of the best (if not the best) instruments
for risk identification, but if you use it in a context where open communication are
not possible, for instance because of hierarchical (or age, gender, social or formal
position) differences between participants, the results of the session will be of low
quality. In some situations it may be better to choose for INTERVIEWS or for
tools like DELPHI TECHNIQUE.
9.5.4 It is necessary, Global Project Management to harness team building first to
establish rock solid trust among the team members. Once this is accomplished, the
team comfortably will do the brainstorming to identify risk. In Global project it
immensely beneficial to do a site survey of the location and interview local people
as well to find out if their interest is respected and how much they are involved in
initiating the project. A good case in point is the Malaysian petroleum company;
Petronas, left their E.Africa project site due to security and social issue.

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9.5.5 Mostly people fall victim to their assumptions about where the risks lie. This
might be in legal areas, for instance when project managers are baffled by
restrictions on work hours, job security protection laws, or provision of mandatory
overtime/holiday payments, all of which can impact budgets and timelines. Or
think of logistics and security risks, from how long it might take to get something
into and out of a country to the risk of your product being copied or simply sold to
others without your permission.
9.5.6 There may be some universal set of risks. But, in Global Projects, the risks are
company & country specific. For examples, lack of transparency and inadequacy
of information on the Company we want to deal with in some of the Countries,
apart from issues related with cultural aspects. We must try to seek required
information before finally entering into business with such Company's.
9.5.7 Time management is different in different countries and therefore, it’s very
difficult to keep time commitment in many Countries because of complexities in
the local scenario of labor laws, local aspirations, political support for the Project,
availability of workforce of required skill, availability of competent local civil &
erection contractors, availability of cranes & heavy machinery, Transportation
logistics etc.
9.5.8 Safety training need assessment is very important for critical erection jobs. There
has been serious setbacks in the projects due to improper safety implementation in
many projects.
9.5.9 If the "common interests" or the "common goals" are clearly communicated and
embraced, GPM can facilitate the risk discovery with country participants who are
the best authority for identifying local risks pertaining to the culture, business &
government rules, and policies.
9.5.10 To identify global risk: a) start from a general framework of risk classification
(internal/external; technical/economic/financial) b) adapt the framework to your
project c) for each class of risk define probability and impact d) define your risk
policy. However, this is a very theoretical approach, without the understanding of
the real risk and the discretionality of the project director/manager we can't do
anything real.
9.5.11 Tunnelling projects are such if not addressed in planning process, attract huge
third party liability. In jurisdictions such as Abu Dhabi, there are additional legal
issues not present in other legal systems, such as ‘decennial liability’. In summary,

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the contractor will be strictly liable for 10 years (this can be extended by
agreement) from completion of works for any total or partial collapse of a
building or installation and for any defect that threatens its stability of safety.

9.5.12 Types of global risks

 Security

 Corruption

 Social risks

 Different assumptions (+ presumption and mix-matched expectations)

 Different cultures

 Legal

 Different work hours

 Job security protection laws

 Overtime/holiday payments

 Logistics

 Common interests (or the lack of)

 Risk attitude of the stakeholders

 Lack of transparency

 Inadequacy of information (on partner companies)

 Time management

 Political support

 Availability of workforce

 Availability of competent local civil & erection contractors

 Availability of cranes & heavy machinery

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 Safety

 Work habits

 Communication

 Stakeholders missing information

 Distance.

 Relationships with governments

 Geographical distance between team members

 Language

 Business environment

 Lack of flexible leadership

9.6 Risks mitigation

To mitigate risks many tools and techniques have been evolved and will be evolved as
the industry is become more and more vulnerable to different type of risks. But we
will be concentrating our study on three main tools used in the construction industry
to mitigate risks.

These tools are as follows:

9.6.1 Insurance:
Concept of insurance is very old, if we go thousands of years back, there also we
can see the application of insurance.
 Insurance is the science of spreading of the risk.
 It is the system of spreading the losses of an Individual over a group of
Individuals.
 Insurance is a method of sharing of financial losses of a few, from a
common fund formed out of contribution of the many, who are equally
exposed to the same loss.
 It involves transfer or sharing of risks between the insurer and the insured
party for a consideration where a premium is charged by insurer. Risks

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insurance is the most favoured risk mitigation method adopted by Indian

construction companies. Insurance is an economic institution that reduces
risk by combining under one management a group of objects so situated
that the aggregate accidental losses to which the group is subjected become
predictable between narrow limits.

Types of insurance policies generally preferred by contractors are:

 Contractors all risks policy(CAR)

 Erection all risks policy(EAR)
 Third party liability policy
 Machinery breakdown policy
 Advanced loss of profit(ALOP)
 Contractor’s plant and machinery policy(CPM)
 Civil engineering completed risks(CECR)
 Employer's liability insurance
 Professional indemnity insurance

These policies cover many things and extension is also allowed to some extent
with increase in premium, but the best policy is the tailor made policy that suits
your project conditions. People should know about the risks that can be insured
and that cannot be insured. For example

 Insurable risks -
i. Pure Risks : Risks where there is loss or gain
ii. Personal – death, disability, sickness, old age, loss of income and
employment
iii. Social –theft, fraud negligence, etc.
iv. Technical – Machinery breakdown, Erection of Machinery, Boiler
explosion, Construction risk, etc.
v. Natural – Flood, earthquake, cyclone Chemical – Fire, explosion.

 Non- insurable risks –

i. Technical risks – New Technology.

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ii. Speculative Risk: Risks where there is loss, gain or no gain.

Examples- Share trading.
iii. Social – consumer behavior, industrial unrest,
iv. Economic – inflation, tax policy, competition,
v. Political – war, nationalization,

Non-insurable risks can be avoided / controlled by General Management /

functional management in the areas of production, marketing, finance, R&D.

9.6.2 Contract clauses

9.6.2.1 Contract clauses are the most important and effective way of mitigating many
project risks. Contract documents are so prepared that the risks is transferred
to the party best placed to mitigate that particular risk.

9.6.2.2 Up to now, no fixed concession agreement have been finalised exclusively for
metro rail projects. Different metro projects have used different type of
agreement for example Mumbai metro phase-1, based on Model Concession
Agreement implemented by NHAI for road projects, modified and adopted to
suite requirements for implementing a rail based system. For Mumbai metro
phase-2, Concession Agreement finalized based on Bid Documents of
Hyderabad Metro and drafts of Planning Commission. The documents
submitted to Department of Economic Affairs (DEA).

9.6.2.3 Mass rapid transit system is the demand of today’s world and PPP and DMRC
is the preferred mode of financing. Companies are not willing to invest in such
project due to long gestation period and non-reliable traffic and revenue
forecast, therefore before finalizing the alignment and contractual document
views of the contractor, consultant, citizens, lenders, environmentalists etc
should be considered. Final document should end up not as a one sided
contract but should provide win- win situation for all stakeholders so that more
party come up to bid for the upcoming projects.

Risks in different contractual framework

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Client’s Risk Contractor’s Risk

PPP MODEL

EPC MODEL

Some Important clauses that forms part of concession agreement are as follows:

i. Competition risk clause

ii. Clause for change in laws or political disturbances
iii. Force majeure clause
iv. Insurance requirement
v. Regulatory framework to follow
vi. Clause for liquidated damages
vii. Clause of retention money, performance guarantee and bid security
viii. Clause for fraud, suspension or termination
ix. Testing and commissioning clause
x. Material specification and procurement clause
xi. Business interruption clause
xii. Liasoning and arbitration procedure
xiii. Payment terms and conditions
xiv. Communication channel
xv. delay in approvals
xvi. utility diversion
xvii. cost and schedule over run clause
xviii. safety and quality clause
xix. clause for financial closure
xx. change of scope clause

9.6.3 Legal framework

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Different types of acts have been passed from time to time to take care of the legal
aspects of the metro rail project.

9.6.3.1 Existing Legislations

Calcutta (now Kolkata) Metro Railway was the first metro system
undertaken in our country. To facilitate construction of Calcutta Metro
Railway, legislation under the title ‘Metro Railways (Construction of
Works) Act, 1978 was enacted. This Act was initially applicable to
Calcutta but there is a provision in this Act that, by a notification in the
Official Gazette, the Central Government may also extend it to the
metropolitan cities of Mumbai, Chennai and Delhi. In fact, in the year
2000, the Central Government did extend this Act to the city of Delhi.
This Act, however, suffers from several deficiencies.
 Firstly, there is no provision in this Act to extend it to cities, having
population of a million or more other than the four metro cities
mentioned above.
 Secondly, this Act covers only the construction stage of Metro
Railways and does not provide legal cover to their operation and
maintenance stage.

‘Calcutta Metro (Operation and Maintenance) Temporary Provisions

Ordinance, 1984’ promulgated. This Ordinance was converted next
year into Calcutta Metro Railway (Operation and Maintenance)
Temporary Provisions Act, 1985. This latter Act also suffers from
several deficiencies. As its very title indicates it is applicable to
Calcutta Metro only, there is no provision in it to enable the Central
Government to extend it to other cities of the country. Besides, it
contains only bare minimum provisions, which were essential to enable
commissioning of Calcutta Metro Railway for public carriage of
passengers. The Central Government’s intention probably was that
after sufficient experience in operating and maintaining Calcutta Metro

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has been gained, many more provisions would be included in this Act
to make it self contained and the word ‘Temporary Provisions’ would
be dropped there from. This has, however, not happened even after
expiry of 18 years since the passing of this legislation by the
Parliament. Construction of Delhi Metro is being done under the
Metro Railways (Construction of Works) Act, 1978, after the same
was extended to the city of Delhi. The Central Government had,
however, to enact another legislation titled ‘Delhi Metro Railway
(Operation and Maintenance) Act, 2002.We have also examined
whether the Indian Tramways Act, 1886 can provide legal cover to
Pune Metro. We do not find this approach feasible for the following
reasons:
 Pune Metro, does not qualify for being designated as ‘Tramway’
since ‘Tramways’ do not have the right–of–way, their coaches
operate either singly or in consists of two’s, they have low
maximum speed (as they have to operate along with road vehicles
on the right-of-way), they do not have signalling system, etc.
 As per the definition of ‘Tramways’ given under Article 366 of the
Indian Constitution, a ‘Tramway’ lies ‘wholly’ within a single
Municipal area. The Indian Tramways Act, 1886 cannot provide
legal cover for Pune Metro, as the line is planned in two
Municipalities.

Hence a separate legislation will need to be enacted to give legal cover

to Pune Metro.

9.6.3.2 Legal Cover For Pune Metro :

Construction of Pune Metro should commence soon. Thus there is immediate

need to have a legislation to provide legal cover to the construction stage of
Pune Metro.
Metro comes under the definition of Railway and Pune Metro will be a non–
Government Railway under the Railways Act, 1989. Construction of Pune

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Metro can, therefore, commence under the Railways Act. In the meanwhile a
comprehensive Metro Act to cover all Metros is now with the Ministry of
Urban Development, Government of India. When this Act is processed and
enacted, it will give the required legal cover for the Operations & Maintenance
of Pune Metro.

9.7 Different type of risks involved in metro project and its mitigating techniques

Table 9.1 Different Types of Risks in Metro Project

Sr. Risk category Description/perception Risk mitigation

no.

1. Construction risks a) Contractual risks  SWOT analysis of the

 Different types of company or any other analysis
contracts like PPP or EPC that will define its capacity and
require different amount of ability.
risk sharing.

 One sided contract may lead 

to many risks like delay
approval, litigation, etc.
 Modifications in contract
conditions may lead to delay
and cost over-run.
b) Erroneous assumption
 Error in assumptions may lead
to underestimation of cost of
project, time and type of work
required to be executed.
Clear communication of
scope of the project and
expectations from the project.
 Discussions at pre-bid
meeting and even before
finalising the concession
document.
 Claims to concessioning
authority.
 ensuring contract to be based
on FIDIC contract
 Experienced developer and
consultant will reduce this risk.
 Detailed study of the project
helps in solid base for any
projections.
 Effective past data plays a vital
role in making projections.

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c) risk of land acquisition
 Land acquisition may lead to
delay and people agitation.
d) risks of failing of new
technology
 Use of any new technology
brings improvement in over-
all project control but its
failing leads to disaster.
e) Suspension risks
 Work suspended due to some
reason cut short the revenue
due to late in COD.
f) Risks of faulty erection
 Any faulty erection may cause
damage and send the project
days/ months back.
g) Risks of Misinterpretation
 Due to improper
communication or unclear
scope, many disputes related
to quality, etc may occur
which affect the timeline and
lead to inferior quality of
work or even litigation and
termination
h) Risks of machinery failure
 Frequent breakdown of
machinery affect the timeline
of the project.
 Breakdown or failure of major
machinery like batching plant
or TBM is detrimental to the
project cost.
i) Change in alignment
 If there is any change in
alignment then it will affect
the cost and timeline both to a
great extent.
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 Metro being government
promoted project they should
take the responsibility for it.
 Appointment of experienced
consultant.
 Underwriter arrangement can
mitigate this risk.
 Clauses in concession
agreement like Liquidated
damage, retention money or
the recovery clauses.
 EAR insurance policy.
 Good and predefined
communication channel.
 Liasoning mechanism to take
care of any disputes arising out
of it.
 Machinery breakdown policy,
contactor plant and machinery
policy.
 Plant and machinery
management, regular repair
and maintenance, preparation
of checklist.
 Order SPECIAL
EQUIPMENT like TBM as
early as possible keeping lead
time in mind.
 Claim under contract clauses.
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j) Risks of incompetency
 Risks of incompetent
contractor, consultant,
subcontractor is always their
which can harm the project.
k) Risks of strike and agitation
 Labor agitation/ strike may
hurt the completion deadlines
and loss of trained labor
which affect the project cost.
l) termination risks
 Risks of termination from the
concessioning authority side.
2. Regulatory risks  No concession document
have been finalised yet for
metro systems.
 No governing authority at
central level particularly for
metro rail project.
3. Environmental risk  Delay in environmental
approval,
 Damage to surrounding
environment and heritage
protection.
4. Financial risks a) Delay in financial closure.
 Time given to get financial
closure is generally 180 days
If not achieved extended and if
then not achieved may be
terminated.
b) Risks of inflation
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 Professional indemnity
insurance
 Insurance under CAR, EAR.
 Guarantee from concessioning
authority.
 Clauses in contract document
for recovery of lose.
 Concession document
applicable to all metro should
be prepared as quick as
possible.
 Governing authority at central
level for fast approvals and
mitigation of related problems.
 Concessioning authority
should be responsible for such
approvals through government
support.
 EIA report, environment
management plan
 environment friendly design
and construction practices,
 Change in alignment or
structure positions.
 Promoting the project by
proving the revenue stream
reliable and bankability of the
project, government
promotion.
 Supported clause in contract
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 Affect the cost of
construction.
c) Risks of change in exchange rate.
 Product like rolling stock etc
is required to be imported and
huge fluctuation in exchange
rate may affect the cost of the
project.
d) Risks of interest rate fluctuations
 Huge fluctuation in interest
rate may affect the cost to a
great extent.
 Interest repayment forms
major part of expenditure.
 Very high interest rate at the
time of borrowing may also
affect the project’s yearly net
revenue.
g) change in insurance premium
 If due to some reason
considerable change in
insurance premium occurs
than it may lead to increase in
cost.
h) high escalation
 If do not given proper
consideration it affects the cost
of project considerably.
i) Revenue loss in property
development
 If the revenue earned is not
equal or greater than the
estimated, it will cut short the
revenue.
5. Political risks  Change in ruling party may
change state law.
 Many restrictions like import-
export.
6. Operation and a) Business interruption
maintenance risks  Loss of profit due to delay in
COD.
 Competing corridor of BRTS
or INDIAN RAILWAYS that
may cut down the
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document for any extreme
fluctuations.
 Hedging instrument by
financial instruments or
MIGA.
 Pass-through to end user’s
tariff,
 hedging instrument by
financial institutions.
 Maintaining cash availability
and inflow.
 Availability of Schemes like
balloon payment.
 Soft loan from JBIC,
 Government scheme like VGF,
etc.
 Fixed insurance premium
instead of fluctuating
premium or premium rate that
depend on some other
variables.
 Proper market analysis will
eliminate the risks to some
extent,
 Insurable up to limit of 10%.
 Proper market analysis of the
land under consideration for
development.
 Claim to concessioning
authority.
 Supporting clause in contract
document
 Business interruption
insurance, ALOP insurance
policy.
 Clause in concession
document.
 Prefer EPC than BOT-PPP.
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revenue/profit.
b) End user perception
 Low revenue due to less
preference to the metro rail if
it is unable to fulfil the
expectation.
 Agitation mainly during
demolition for land
acquisition, etc.
c) defective revenue forecast
 Complete revenue generation
depend on this forecast so if
this fails it will prove
catastrophe to the party’s
expectation.
7. Risks of Force a) Risks of unforeseen heavy rains
majeure
b) fire risks
c) Earthquake/volcanic risks
d) Land slide/rock slide
e) Flood/inundation
f)Hurricane/typhoons/storms/cyclo
ne
g) Collapse/explosion
8. Risks of Accidents a) risks of asset damage
 If some damage occur to the
assets at project site which is
insured.
b) labor risks
 Labor working at the site met
with accident during working
hour
c) third party risks
 Damage to any third party or
third party property at the
project site or damage to
surrounding property
9. Risks of Fraud or a) joint venture risks
default.  Joint venture attracts a lot of
risks of default or default from
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 Citizen, environmentalist
views before finalising route
and concession document.
 Developer should not depend
on the provided forecast and
should do estimate of all this
forecast at its own level.
 Force majeure clause should
be included in the contract
agreement.
 Available and tailor made
insurance policy.
 Safety plan and CAR
insurance policy.
 CAR, EAR, CECR insurance
policy.
 Car insurance policy
 CAR, EAR and CECR
insurance policy.
 Labor compensation policy.
 Damage to surrounding
property can be insured under
extension under EAR,MLOP
AND some other insurance
property.
 Use of Hedging instrument
provided by financial
institutions is important means
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companies who is not having of securing it.

enough expertise or facing  partnering experienced and
financial downturn. reputed firm

b) default or fraud from supplier or  Guarantee and strict clauses in

subcontractor agreement.
 Default from any party may
affect the progress of the
project and quality of the
work.

9.8 Comments

1. Each and every risk cannot be mitigated through risk mitigating tools but the effect
cause by those risks can be reduced.
2. Cost of mitigating some risks are more than retaining them as they may be passive
risks and with time hold chances of mitigate by itself, these risks can be retained.
3. Every company should have risk mitigation plan to take care of the eventuality so that
any such circumstances can be taken care of.
4. Insurance policy is an important and most preferred tool of risk mitigation but policy
offered limited insurance therefore it is always advisable to go for tailor made policy
with extensions.
5. Contract document should be made to address as many eventualities as possible
during the complete project. Before finalising clauses and alignment, opinions of
citizen, environmentalists, experts (local citizen), developer, consultant and financial
institution should be take and given due considerations.
6. Proper legal framework should be made to secure such projects legally.

NATIONAL INSTUTUTE OF CONSTRUCTION MANAGEMENT AND RESEARCH, PUNE Page 123