People and places in project management research [1° ed.] 9781443866088, 1443866083

Table of contents :
Table of Contents
List of Illustrations
List of Tables
Foreword
Introduction
Part I Project Management Offices
Chapter One
Chapter Two
Part II Stakeholders
Chapter Three
Chapter Four
Part III Complexity
Chapter Five
Chapter Six
Chapter Seven
Part IV Risk Management
Chapter Eight
Chapter Nine
Chapter Ten
Part V Case Studies
Chapter Eleven
Chapter Twelve
Chapter Thirteen
Contributors

Citation preview

People and Places in Project Management Research

People and Places in Project Management Research Edited by

Michael Young

People and Places in Project Management Research Series: Project Management Research Series Edited by Michael Young This book first published 2017 Cambridge Scholars Publishing Lady Stephenson Library, Newcastle upon Tyne, NE6 2PA, UK British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Copyright © 2017 by Michael Young and contributors All rights for this book reserved. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the copyright owner. ISBN (10): 1-4438-4362-8 ISBN (13): 978-1-4438-4362-1

TABLE OF CONTENTS

List of Illustrations .................................................................................... vii List of Tables .............................................................................................. ix Foreword .................................................................................................... xi Introduction ................................................................................................. 1 Part I Project Management Offices Chapter One ................................................................................................. 5 The Role of Knowledge and the Project Management Office Shahram Sokhanvar and Dr. Bambang Trigunarsyah Chapter Two .............................................................................................. 21 The Project Management Office: Origins, Definitions and Nomenclature Anthony Wood and Dr. Mark Shelbourn Part II Stakeholders Chapter Three ............................................................................................ 35 Stakeholder Expectations Regarding Public Project Oversight Dr. Alexia Nalewaik and Dr. Anthony Mills Chapter Four .............................................................................................. 49 Engaging With Sponsors New to Projects: Using Visual Metaphor, Rich Pictures and Infographics to Communicate, Manage and Entertain Dr. Matthew Overton Part III Complexity Chapter Five .............................................................................................. 63 Humble Iconoclasts: Leadership for Complex Projects Dr. Kaye Remington

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Table of Contents

Chapter Six ................................................................................................ 77 Aspects of Project Complexity Prof. Vernon Ireland Chapter Seven............................................................................................ 87 Developing Valid and Reliable and Reliable Scales to Predict Success of Large Complex Projects Complex Dr. Roxanne Zolin Part IV Risk Management Chapter Eight ........................................................................................... 101 ‘Due Diligence’ for Precautionary Risk Management Approaches in Projects Conrad D'Cruz, Dr. Sam Fragomeni and Vinayaga Sarma Chapter Nine............................................................................................ 115 Analysis of Risk Impact on Road Development in Indonesia Lukas Sihombing Chapter Ten ............................................................................................. 131 Identification of Critical Risks Influencing the Application of Energy Efficient and Renewable Technologies in Australian Green Office Buildings: Preliminary Findings of a Survey Dr. Ibrahim Mosly Part V Case Studies Chapter Eleven ........................................................................................ 145 Delivering Australian Roads with PPP’s? Global Management of Business Risks Dr. Colin Duffield and David Wilson Chapter Twelve ....................................................................................... 165 Financing and Procuring Major Infrastructure: A Comparison of Three International PPP Style Projects Dr. Colin Duffield, Gigih Atmo and Hamzeh Zarei Chapter Thirteen ...................................................................................... 187 Student Engagement in Online Learning Environments: A Case Study Anthony Wood Contributors ............................................................................................. 199

LIST OF ILLUSTRATIONS

Figure 1-1: Significance of Proposed Research ......................................... 15 Figure 2-1: PMO labels in common use .................................................... 27 Figure 4-1: Matrix of representational methods and analytical approaches. Source: Overton (1993). ................................................... 50 Figure 5-1: Breakdown of interviewees by industry sector and role equivalent ............................................................................................. 65 Figure 8-1: Relationships between the Risk Management Principles, Framework and Process ..................................................................... 104 Figure 8-2: MANDATE & COMMITMENT: Framework for managing risk (based on ISO 31000):2009 ........................................................ 107 Figure 8-3: Risk Management Process .................................................... 108 Figure 8-4: Due Diligence in ERM incorporating WHS Act 2011, WHS Regulations 2011 & HB 254-2005 – Risk management and Control Assurance Standard. ....................................................... 110 Figure 11-1: Timing and outcomes of contentious Australian road projects ............................................................................................... 157 Figure 11-2: PPP Decision Support System ............................................ 159 Figure 12-1: Cirebon Coal-fired Power Project Structure (Indika Energy, 2012)..................................................................................... 170 Figure 12-2: Qatar Gas 2 simplified project structure (excluding condensate and LPG) ......................................................................... 171 Figure 12-3: Desalination plant project organisation structure ................ 172 Figure 12-4: Cirebon Power project financial structure .......................... 174 Figure 12-5: Qatar gas 2 project capital structure (Newendorp & Gajameragedara, 2005) .................................................................. 175 Figure 12-6: Desalination project, Victoria financial structure ............... 178 Figure 13-1: Student profiles ................................................................... 191 Figure 13-2: Student engagement behaviour during the delivery period ................................................................................................. 192

LIST OF TABLES

Table 1-1: KM processes frameworks ......................................................... 9 Table 1-2: PMMMs Models ...................................................................... 13 Table 1-3: Research questions ................................................................... 16 Table 2-1: PMO Classifications................................................................. 24 Table 2-2: Suggested PMO classifications and nomenclature ................... 29 Table 3-1: Impact of Direct and Indirect Stakeholders on Project Performance # ...................................................................................... 42 Table 5-1: A comparative summary of the relationship between communication characteristics and leadership style (from De Vries et al., 2010) .......................................................................................... 67 Table 5-2: Communication characteristics associated with productivity in conditions of uncertainty, comparing research data to our sample. .... 69 Table 7-1. Project success and failure factors and leading performance indicators of the project stakeholders .............................. 89 Table 7-2. Project Success Factor Scales................................................... 93 Table 7-3. Project Managers’ Perceptions of Stakeholder Satisfaction ..... 93 Table 9-1: Phases, Stages, and Steps in the Project Life Cycle (PLC) .... 118 Table 9-2: Toll Road Infrastructure Risks in Indonesia........................... 120 Table 9-3: Correlation Results from Validation r > 0.3 ........................... 123 Table 9-4: Result of Factor Analysis from 9 components ....................... 123 Table 9-5: Mix Variable X216 with X217............................................... 123 Table 10-1: Commonly implemented EERTs in Australian green office buildings, adapted from (Mosly and Zhang, 2010a) HVAC Lighting Solar Wind .......................................................................... 133 Table 10-2: Risks associated with EERTs, adapted from (Mosly and Zhang, 2010b) No. Risks ............................................................ 134 Table 10-3: Data reliability Data source Cronbach’s Alpha .................... 136 Table 10-4: Risk evaluation Level of Risk Impact Points Low level risk X ” 4 Medium level risk 4 < X ” 10 High level risk 10 < X ............. 137 Table 10-5: Critical risks of EERTs with its mean risk impact values Risk No. HVAC Lighting Solar Wind CB NV RS UFAD EELB MS ST PV WT ............................................................................................... 138 Table 11-1: Australian transport PPP projects ......................................... 151 Table 11-2: Sensitivity analysis of inputs into the 4 step Transport Planning Model .................................................................................. 159

x

List of Tables

Table 12-1: Risk allocation of PPP projects from different jurisdictions ... 168 Table 12-2: Comparison of Key Strategic drivers ................................... 180 Table 13-1: t-test results .......................................................................... 193 Table 13-2: Correlation analysis result .................................................... 193

FOREWORD

Project management continues to develop and evolve, as too does the use of project management across a range of industries, disciplines and domains. As the discipline continues to evolve, it is critical that we explore new ideas, develop new approaches and techniques and build the collective body of knowledge in the practice of project management. Research also provides a window into broader trends within our sector, and provides empirical data that helps us challenge the thinking of stakeholders for the paths they are choosing. The chapters within this monograph provide some of the current thinking, concepts and research within the Australian project management academic community. It is through such research that we re-examine our assumptions, uncover new applications and solve problems that may have been present for some time. I commend this monograph to you and in doing so I challenge you to broaden your thinking and understanding of project management and to help improve what is done in practice. Ian Sharpe 4-DM MAIPM CPPD Immediate Past National President Australian Institute of Project Management

INTRODUCTION

This book has been structured into five parts.

Part I The two chapters in Part I introduce and provide definitions for common terms surrounding Project Management (PM) and Project Management Offices (PMO). Chapter One, by Sokhanvar and Trigunarsyah, evaluates project management (PM) and offsets it against knowledge management (KM), demonstrating how PM and KM work both with and against each other in a project knowledge management environment. Chapter Two, by Wood and Shelbourn, aims to more deeply define the PMO concept in terms of current documentation in the literature coupled with industry understanding or acceptance of PMO nomenclature and its constituent parts and functions. Together, these two chapters provide a solid definitional foundation for the subsequent chapters.

Part II The two chapters in Part II focus on stakeholders, both who they are (Chapter Three) and an effective and convenient way to communicate with them (Chapter Four). Chapter Three, by Nalewaik and Mills, identifies and focuses on the various stakeholders in a project, and emphasises the importance of communicating clearly with stakeholders in order to establish reasonable project expectations. Chapter Four, contributed by Overton, extends this idea of clear communication with a focus on visual representations, including the power of visual metaphor to represent complex concepts simply.

Part III Part III addresses project complexity in its various facets. In Chapter Five, Remington discusses leadership for complex projects through distinctions of charismatic, human-oriented, and task-oriented leadership styles as established through interviews with senior leaders. In Chapter Six, Ireland presents multiple aspects of project complexity. Chapter Seven, contributed

2

Introduction

by Zolin, offers scales for measuring and monitoring the success of complex projects as developed from interviews with project managers and directors. Together, these chapters shed light on project complexity and how best to navigate the challenges complexity brings.

Part IV Part IV addresses risk management. Leading off this three-chapter section with a conceptual chapter, D’Cruz, Fragomeni and Sarma take on concepts of due diligence, the precautionary principle, and Enterprise Risk Management in Chapter Eight. Sihombing analyses risk impact on Indonesia road development in Chapter Nine, focusing on project risk management, commenting on the project life cycle, and concluding positive and challenging project impacts as based on survey data. Mosly focuses on critical risks involved in greening office buildings in Chapter Ten, identifying numerous critical risks related to Energy Efficient and Renewable Technologies (EERTs) in Australian green office buildings as indicated by survey responses. Thus, the three chapters in Part IV move from the conceptual to an industry-specific application of risk and risk management.

Part V Part V concludes this project management monograph with three chapters of case studies. In Chapter Eleven, Duffield and Wilson target Public Private Partnerships (PPPs) with an evaluation of the success of seven of Australia’s road projects. Duffield, Atmo, and Zarei then closely examine three large international PPP-style projects in Chapter Twelve, looking for similarities and differences among nations and national economic positions. Drawing our look at project management to a close and bringing our attention back to the classroom, where it all begins, Wood presents a case study of online graduate-level project management courses, illuminating tips for success in Chapter Thirteen. After a foray into various aspects of theory and application in the previous sections, this final section brings the reader’s focus to some very specific project management phenomena aimed to elucidate successful processes of project management education and practice.

PART I PROJECT MANAGEMENT OFFICES

CHAPTER ONE THE ROLE OF KNOWLEDGE AND THE PROJECT MANAGEMENT OFFICE SHAHRAM SOKHANVAR AND DR. BAMBANG TRIGUNARSYAH

Since Aristotle’s time, the importance of knowledge has been widely discussed by a plethora of authors (Drucker, 1993; Porter, 1985; Wiig, 1997b). Peter Drucker (1993), as a highly accredited academic, has strongly accentuated the role of individuals’ knowledge for improving organisational competitive advantages. In his latest publication he proposes “intellectual property” as a nonphysical and intangible asset of organisations (Drucker, 1993). It is widely accepted that individuals’ knowledge significantly impacts on improving the quality of services and products (Drucker, 1993; Wiig, 1997b). In the last ten years, decision makers have realised the crucial impact of human beings’ knowledge on organisational performance; therefore, organisations have changed their strategies from “being productoriented” to “adopting knowledge-driven” approaches (Wiig, 1997b). From another perspective, organisations have faced a number of challenges in order to both reduce their costs and respond to market demand in a timely manner (Project Management Institute, 2012). A project–oriented strategy has been adopted to not only tackle the mentioned problems but also to develop competitive advantages. This approach gives organisations the opportunity to act productively in various circumstances. Project is defined as the application of knowledge, skills, tools, and techniques to meet project requirements as well as objectives, whereas Project Management (PM) comprises methods, procedures and processes

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Chapter One

to utilize knowledge of project team members for delivering a quality product or service (PRINCE2 Foundation, 2008; Project Management Institute, 2012). The notion of the Project Management Office (PMO) has been recently proposed to institutionalize and develop PM practices within organisations. To do so, Project Management Maturity Models (PMMMs) have been developed for establishing and, then, improving PMOs as well as PM practices in enterprises. Current PMMMs (see Table 1-2) are comprised of a number of levels and criteria to determine the degree of quality of PM. The greater the level of maturity, the better the quality of project management. Similar to other maturity models, they entail a number of criteria from the PM point of view to examine the status of PM practices or processes against appropriate PM methodology. However, existing PMMMs do not analyse maturity of PM from the knowledge management (KM) point of view. This means that proper KM practices and processes have not been addressed for each level of maturity. We aim to cover this gap through both developing a framework to address KM practices in different levels of PMMM, and, ultimately, proposing appropriate criteria to assess the maturity of PMOs from a KM point of view. This chapter aims to discuss undertaken investigations of KM in both functional and project organisations. First, discussions in knowledge management are presented followed by existing arguments on project management and the project management office. This will be followed by current discussions of project knowledge management and findings. At the end, contributions and significances are explained.

The Emergence of Project Knowledge Management There are a number of definitions in the current literature that illustrate knowledge from different points of view. Some of these have epistemological perspectives while some others present ontological views of knowledge. Basically, data and information are two main constituents of knowledge in which "Data is a simple observation of states of the world" and "Information is data endowed with relevance and purpose" (Knight & Howes, 2003, p. 13). According to Knight and Howes (2003), knowledge is valuable information which comes from an individual’s mind.

The Role of Knowledge and the Project Management Office

7

From another point of view, Davenport and Prusak (2000, p. 5) define knowledge as "a fluid mix of experiences, values, contextual information, and expert insights that provides a framework for evaluation and incorporating new experiences and information." Nonaka and Takeuchi (1995) believe that knowledge is subjective, process-relational, and aesthetic which is created through human being interactions. To sum up, knowledge entails the followings characteristics (Alavi & Leidner, 1999; Arora, Owens, & Khazanchi, 2010; Davenport & Prusak, 2000; Nonaka, 1994; Wiig, 1997a): x Valuable information which comes from an individual’s mind, belief or values; x An individual’s ability to generate new knowledge from existing information, experience, insight or knowledge; and x Value creation for organisations to develop their competencies and, consequently, competitive advantages. Knowledge has two main dimensions: explicit and tacit. The first type of knowledge is articulated and codified in organisational documents, forms and instructions while tacit knowledge is embedded in an individual’s mind, beliefs and thoughts which could not be easily codified. In other words, tacit knowledge is known as the hidden side of an individual’s knowledge, deeply rooted in his/her actions, ideals, and commitments (Nonaka, 1994). In order to define knowledge management, Alavi and Leidner (2001) discuss five views of knowledge as: a state of mind; an object; a process; a condition of having access to proper information; and a capability. They illustrate that if knowledge is a process, then KM is defined as the process of creation, sharing, and distributing knowledge; in contrast, if knowledge is a capability, then KM is considered as the building of organisational core competencies and understanding of strategic knowhow (Alavi & Leidner, 2001). In conclusion, they (Alavi & Leidner, 1999, p. 6) define KM as “A systemic and organisationally specified process for acquiring, organizing and communicating both tacit and explicit knowledge of employees so that other employees may make use of it to be more effective and productive in their work.”

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Chapter One

From another perspective, KM could be classified into technical and non-technical enhancements. Technical development activities focus on improving the Information and Communication Technology (ICT) aspect of KM while a nontechnical approach deals with both social science and the managerial side of KM. From a process point of view, KM has been discussed by a number of authors. In order to propose a generic KM process, Nissen et al. (2000) conducted a comprehensive study, and they propose an “amalgamated KM process framework” which is comprised of creating; organizing; formalizing; distributing; applying; and evolving processes. Later on, a complementary work was undertaken by Lytras et al. (2002) to improve the previously mentioned model. This research team has developed a comprehensive framework which they believe is applicable for both academic and business organisations (Lytras et al., 2002). Despite their claim about validity of their model, however, it has not been examined yet for projectbased organisations. Project is a temporary activity and it requires different practices for managing project knowledge (Kasvi, Vartiainen, & Hailikari, 2003). Kasvi et al. (2003) defined three types of knowledge in project environments: technical knowledge; procedural knowledge; and organisational knowledge. This typology has been adopted and further developed by Wiewiora et al. (2010). They substituted “organizational knowledge” with “about customer requirement” in compliance with PMBOK (Wiewiora et al., 2010). In order to address KM processes in a project environment, Owen and Burstein (2005) have conducted research and then proposed a framework for addressing KM processes in project-based organisations. This model entails four major KM processes, namely: creation; capture; transfer; and reuse (Owen & Burstein, 2005). Although the mentioned framework was examined, it has not been accredited yet as a generic KM process framework. To summarise the current KM processes frameworks, Table 1-1 depicts proposed frameworks in two different contexts: functional and project-based organisations. In summary, knowledge is an important factor for developing organisations and delivering successful projects. From a process point of view, knowledge management is the process of creating, capturing, transferring and reusing project knowledge from initiation to the closing phase. In our research, the main focus has been on investigating

Acquire

Relate/value

Lytras et al. (2002) Capture

Administration

Create

Creation

Owen & Burstein (2005)

Kasvi et al. (2003)

Table 1-1. KM processes frameworks

Project–based Organisation

Organize

Create

Nissen et al. (2000)

Phase 2

Functional Organisations

Phase 1

Processes and their underpinnings

Authors

Proposed Context

Retrieval

Transfer

Organize

Formalize

Phase 3

Utilization

Reuse

Enable Reuse

Distribute

Phase 4

The Role of Knowledge and the Project Management Office

****

****

Transfer

Apply

Phase 5

****

****

Use

Evolve

Phase 6

9

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Chapter One

the managerial aspect rather than the technical point of view. Also, we have mainly investigated the process management aspect of KM in project environments.

Project Knowledge Management According to Koskinen et al. (2003), there is a strong correlation between knowledge management (KM) and project success/failure. This means that utilizing appropriate KM practices in projects contributes to exploitation of proper knowledge/experience in proper time, which improves performance of activities and, ultimately, success of the project (Davidson & Jillian, 2009; Kasvi et al., 2003; Owen, Burstein, & Mitchell, 2004). In other words, managing project knowledge significantly contributes to delivering quality products/services in order to achieve project objectives. Differences between a project and an organisation’s operation from a KM point of view have come into consideration since the early 2000s. Bresnen et al. (2003) discuss the following to emphasise differences of KM in mentioned contexts: x Projects are finite and their personnel disband or leave after project termination; therefore the created knowledge is not utilized in similar projects if: x There are difficulties to develop and disseminate knowledge within and between projects (inter and intra project). x Fragmentation of project team members into different groups causes a number of difficulties for flowing knowledge among groups. x KM and organisational learning across the projects and between individuals have many difficulties. Given the importance of KM for project success, the proposed KM practices for functional organisations are not necessarily appropriate for utilizing in project-based environments. The temporary nature of the project is one of the main reasons of the mentioned differences. This means that project-based organisations require proper solutions to tackle KM issues within project contexts. This issue has led a number of studies to investigate KM in project environments and its related challenges and issues. One of the earliest studies was carried out by Brown and Duguid (1998), by which they raised

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the issue of leakiness and stickiness of knowledge in project environments. In their study, the main focus was on single projects but this approach has been subsequently improved by considerations of investigating KM practices intra and inter projects. Despite the increasing attention of KM studies in project environments, however, the existing literature is not rich enough, in comparison to KM studies in functional organisations (Bresnen et al., 2003; Koskinen K U & Pihlanto, 2008; Owen et al., 2004). The following are major studies of KM in project–based organisations that have been undertaken to cover some recognized gaps in the existing literature: x Lack of appropriate knowledge sharing and acquisition systems (Koskinen et al., 2003) x Repetitive works or rework because of lack of effective knowledge reuse and transferring system (Desouza & Evaristo, 2006; Love, Irani, & Edwards, 2003; Owen et al., 2004); x Lack of wisdom in projects because of inappropriate knowledge management system in the project environment (Walker & Christenson, 2005) x Poor system to collect and assimilate lessons learned between and within projects (Goffin, Koners, Baxter & Van der Hoven, 2010; Newell, Bresnen, Edelman, Scarbrough & Swan , 2006); and x Lack of collaboration because of unsystematic KM in project environment (Davidson & Jillian, 2009); To sum up, managing knowledge in project environments is a relatively new subject and it could be investigated in several directions, from proposing the proper KM processes to designing practical systems to prevent knowledge loss and improve project success. In our study we have focused on proposing the proper framework to address the KM practices in PMOs which will be discussed later.

The notion of Project Management Office Given the importance of PM for improving organisational competitive advantage, the dramatic increase of attention to PM necessitates development of appropriate methodologies (Grant & Pennypacker, 2006). According to Kerzner (2009), PMO is the valid and practical solution to establish, develop and institutionalise PM methodologies within

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Chapter One

organisations. PMOs are responsible for (Desouza & Evaristo, 2006; Project Management Institute, 2008): x Aligning projects with organisational strategies; x Developing standards, processes, and methods of PM and improving organisational capacities; x Monitoring and controlling organisational projects; x Training project stakeholders, especially project team members and project managers and; x Managing project and team members' knowledge which is recognized as one of the main responsibilities of the PMOs. Anecdotal evidence reports that organisations have shown meaningful interest in launching and improving their PMOs in the last decade. According to Liu and Yetton (2007), a considerable number of companies established their PMOs in 2003 and they predict that this number will significantly increase in the future. Due to the importance of the PMO, it should be gradually developed through the following appropriate methods. Experts and practitioners advise utilising PM Maturity Models (PMMM) in order to properly develop the PMO in organisations. In other words, PMMM is an answer to the question of “how should PMOs be developed” (Kerzner, 2005). The basic idea of the maturity model is that "you must learn to crawl before you can learn to walk” (Andersen, Henriksen & Aarseth, 2007, p. 101). The PMMM is a framework to construct PM practices by improving from an immature level, i.e. initial or ad hoc, to a mature level, i.e. optimized through advising specific processes or practices (Jugdev & Thomas, 2002; Kerzner, 2005). There are a number of proposed PMMMs (see Table 1-2), a majority of which have adopted a process-oriented approach. A study by Gasik (2007) compares more than twenty PMMMs and recommends the subsequent factors for choosing appropriate methods for various organisations: method independency; public domain; publication; industry; independency; transparency; years of existence; and ease of use. Despite the fact that current PMMMs utilize both a process-oriented approach and PM best practices, there are a number of gaps which need to be covered and addressed (Desouza & Evaristo, 2006; Kerzner, 2005). In addition, Aubry and his associates (2008) discuss the usefulness and practicality of the existing PMMMs, but they emphasise that they have not

Table 1-2. PMMMs Models

CMMI- based model (Jugdev & Thomas 2002)

Maturity Model OPM3 (2008) P3M3 (PRINCE2 Foundation, 2008) Kerzner’s Model (2005)

Maturity Level

Measure Repeatable

Common Process Repeatable

Awareness

Common Language

Initial

Level 2

Standardize

Level 1

Refined

Singular Methodology

Defined

Control

Level 3

Managed

Benchmarking

Continuously improve Managed

Level 4

The Role of Knowledge and the Project Management Office

Optimized

Continues Improvement

Optimized

******

Level 5

13

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Chapter One

yet concluded PMMMs are the perfect solution from all aspects because they are still faced with a number of issues and challenges. Given the incompleteness of PMMM, knowledge management is recognized as one of the major challenges in the PMO and proposed PMMMs. In other words, existing PMMMs have not discussed the maturity of PMO from a KM point of view. This gap has been identified as the main problem for our research, which is mentioned in the next section, and we aim to construct a framework for addressing KM practices in each level of PMMMs.

Research Problem The Standish Group (1995) reports that, in 1995, only 16% of 175,000 Information Technology (IT) projects in the United States were successfully closed, 31% of them failed and 53% struggled with about 190% overrun cost. Lack of applying PM practices has been mentioned as the main cause of project failure and existing challenges. This report and its proposed recommendations was disseminated among organisations and proper advice was proposed to help them in developing PM practices (The Standish Group, 1995). In order to investigate the usefulness of the first Standish Group’s report, the same study was conducted six years later and interestingly, significant improvements were found. The project success rate was significantly raised to 34 % (100% improvement) while the failure rate reduced to 16 % (about 100% improvement) (The Standish Group, 2003). Utilising proper PM practices and, consequently, PMO has been mentioned as the main reason for mentioned improvements (Anbari, 2005; Kerzner, 2009; Project Management Institute, 2012; The Standish Group, 2003). As previously mentioned, knowledge management has been reported as a critical factor for managing successful projects (Kotnour, 2000). Inappropriate knowledge management within and between (intra and inter) projects has been recently discussed among a number of academics and practitioners as a “problematic issue in the project and project environments” (Kasvi et al., 2003; Koskinen & Pihlanto, 2008; Kotnour, 2000; Owen, 2004). A comprehensive survey study asserts that the cost of reworks in Australian construction projects is about 35% of the total cost of projects and, 50% of total overrun cost (Love et al., 2003). It could be

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clearly concluded that “reworks” happen when knowledge management is poor. Our investigation shows that KM issues in project-based environments have been recently considered and current literature suffers from a lack of studies. Particularly, proper KM practices not only have not been addressed in project environments, but also the existing PMO maturity models have not discussed the maturity of PMO from a KM point of view (see Figure 1-1).

Figure 1-1 Significance of Proposed Research

Therefore, an attempt to integrate KM practices in the PMO maturity models will contribute to both improving efficiency of PM and developing organisational competitive advantages. In addition, it will provide original insights to crystallize the role of KM in the PMO. To do so, research objectives were proposed and we are attempting to reach the following: x To explore and analyse the role of KM practices in the PMO; x To identify and analyse the PMO maturity and its challenges from a KM point of view; and x To develop a framework to address the PMO maturity levels from the KM perspective

Chapter One

16

Research Questions In order to achieve the research objectives, three questions and fifteen sub questions were designed which can be found in Table 1-3. To answer these questions, the proper research method was selected which will be explained subsequently. Research Questions 1. How are KM practices and processes employed in the PMOs and what are their challenges?

2. How do KM practices contribute to improve maturity level of the PMO?

3. How is Knowledge integrated in the PMO maturity model?

Questions’ elaboration 1.1. What are the challenges (in terms of People, Processes and Technology) of the PMO from KM perspectives? 1.2. What kinds of PM practices and processes are utilized at each maturity level of the PMO? 1.3. How are KM practices and processes utilized at each maturity level of PMO? 1.4. What are expectations of PMO stakeholders (PM Managers, PMO staff and Organisational Managers) from KM point of view? 2.1. What are similarities and differences of employed KM practices in various maturity levels of PMO? 2.2. What are expectations of PMO stakeholders in each level of maturity? 2.3. How have KM practices been considered during development of the PMO maturity level? 2.3.1. What are the key criteria to improve the maturity of PMO from KM point of view? 2.3.2. How have KM practices developed in order to increase maturity level of the PMO? 3.1. What kinds of KM practices are expected at each maturity level of PMO? 3.2. How is knowledge captured, created, applied, transferred and maintained in the each maturity level of PMO? 3.3. How should KM practices be employed at each maturity level of PMO? 3.3.1. What are the criteria of PMO maturity from KM point of view? 3.3.2. How the PMO should be assessed in terms of KM practices? 3.3.3. What kinds of KM practices should be employed to integrate KM at each maturity level of PMO?

Table 1-3. Research questions

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Research Progress Since the project’s nature is explorative as well as qualitative, a case study approach has been adopted as the research method for achieving the research objectives. For data collection, interviews, document analysis and questionnaires were chosen. Two enterprises were selected to be investigated via semi-structured interviews and document analysis. Data collection was undertaken and 15 interviews were conducted. At press time, the data is still being analysed. Grounded theory is being used as the main analysis technique alongside the others. Since the data analysis commenced, researchers have found very interesting results and they believe the outcomes will be very useful for: x Functional Organisations that intend to establish or develop their PMO; x Project-based Organisations; x The established PMOs; and x The PMO and PM consultants.

References Alavi M, & Leidner D E. (1999). Knowledge management systems: issues, challenges, and benefits. Commun. AIS, 1(2es), 1. Alavi M, & Leidner D E. (2001). Review: Knowledge Management and Knowledge Management Systems: Conceptual Foundations and Research Issues. MIS Quarterly, 25(1), 107-136. Anbari F T. (2005). Innovation, project management, and Six Sigma method. Current topics in Management, 10, 101–116. Andersen B, Henriksen B, & Aarseth W. (2007). Benchmarking of Project Management Office Establishment: Extracting Best Practices. Journal of Management in Engineering, 23, 97. Arora P, Owens D, & Khazanchi D. (2010). A Pattern-Based Tool for Knowledge Management in Virtual Projects The IUP Journal of Knowledge Management, VIII(3), 60-80. Aubry M, Hobbs B, & Thuillier D. (2008). Organisational project management: An historical approach to the study of PMOs. International Journal of Project Management, 26(1), 38-43. doi: DOI: 10.1016/j.ijproman.2007.08.009 Bresnen M, Edelman L, Newell S, Scarbrough H, & Swan J. (2003). Social practices and the management of knowledge in project

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environments. International Journal of Project Management, 21(3), 157-166. doi: Doi: 10.1016/s0263-7863(02)00090-x Brown A E, & Duguid P. (1998). Organizing Knowledge. California Management Review, 40(3), 90-111. Davenport H T, & Prusak L. (2000). Working Knowledge: how organizations manages what the know. Boston-USA: Harvard Business School Press. Davidson P, & Jillian R. (2009). Systematising knowledge management in projects. International Journal of Managing Projects in Business, 2(4), 561 - 576. doi: 10.1108/17538370910991142 Desouza K C, & Evaristo J R. (2006). Project management offices: A case of knowledge-based archetypes. International Journal of Information Management, 26(5), 414-423. doi: DOI: 10.1016/j.ijinfomgt.2006.07.002 Drucker F P. (1993). Post-capitalist society. New York: Harper Paperbacks. Gasik S. (2007). A Model of Project Knowledge Management. Utrecht University. Goffin K, Koners U, Baxter D, & Van der Hoven C. (2010). Managing Lessons Learned and Tacit Knowledge in New Product Development Research-Technology Management, 53(4), 39-51. Grant K P, & Pennypacker J S. (2006). Project management maturity: an assessment of project management capabilities among and between selected industries. Engineering Management, IEEE Transactions on, 53(1), 59-68. Jugdev K, & Thomas J. (2002). Project management maturity models: The silver bullets of competitive advantage: Project Management Institute. Kasvi J J J, Vartiainen M, & Hailikari M. (2003). Managing knowledge and knowledge competences in projects and project organisations. International Journal of Project Management, 21(8), 571-582. doi: 10.1016/s0263-7863(02)00057-1 Kerzner H. (2005). Using the Project Management Maturity Model Hobokon- New Jersey: John Wiley& Sons —. (2009). Project management , As system approach to planning, scheduling and controling. New Jersey: John Wiley & Sons. Knight T, & Howes T. (2003). Knowledge management: a blueprint for delivery: a programme for mobilizing knowledge and building the learning organization. Burlington -MA: Butterworth-Heinemann. Koskinen K U, & Pihlanto P. (2008). Knowledge Management in ProjectBased Companies Hampshire, UK: Palgrave Macmillan.

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Koskinen K U, Pihlanto P, & Vanharanta H. (2003). Tacit knowledge acquisition and sharing in a project work context. International Journal of Project Management, 21(4), 281-290. doi: Doi: 10.1016/s0263-7863(02)00030-3 Kotnour T. (2000). Organizational learning practices in the project management environment. International Journal of Quality & Reliability Management, 17( 4/5), 393 - 406. doi: 10.1108/02656710010298418 Liu L, & Yetton P. (2007). The Contingent Effects on Project Performance of Conducting Project Reviews and Deploying Project Management Offices. Engineering Management, IEEE Transactions on, 54(4), 789799. Love P E D, Irani Z, & Edwards D J, 34 (3), 13. (2003). Learning to reduce rework in projects: analysis of firm's organisational learning and quality practices. Project Management Journal, 34(3) Lytras M D, Pouloudi A, & Poulymenakou A. (2002). Knowledge management convergence - expanding learning frontiers. Journal of Knowledge Management, 6(1), .40 - 51. doi: 10.1108/13673270210417682 Newell, S., Bresnen, M., Edelman, L., Scarbrough, H., and Swan, J. (2006) Sharing Knowledge Across Projects: Limits to ICT-led Project Review Practices. Management Learning, 37(2), 167 Nissen, M, Kamel, M, and Sengupta, K. (2000) Integrated analysis and design of knowledge systems and processes. Infoformation Resource Management Journal, 13(1), 24-42 Nonaka, I. (1994) A Dynamic Theory of Organizational Knowledge Creation. Organization Science, 5(1), 14-37. Nonaka, I., and Takeuchi, H. (1995) The Knowledge-Creating Company: How Japanese Companies Create the Dynamics of Innovation. New York Oxford University Press, USA. Owen J, & Burstein F. (2005). Where knowledge management resides within project management. Case Studies in Knowledge Management, 138-153. Owen J, Burstein F., and Mitchell S. (2004) Knowledge reuse and transfer in a project management environment, Journal of Information Technology Cases & Applications;2004, Vol. 6 Issue 4, p21 Porter, M.E. (1985) Competitive advantage: Creating and sustaining superior performance. New York: Free Press. PRINCE2 Foundation (2008) Portfolio, Program and Project Office Norwich: TSO.

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Project Management Institute (2008) Organizational project managment maturity model. Pennsylvania: Project Management Institute. —. (2012) A guide to the project management body of knowledge : PMBOK Guide (4th ed.). Newtown Square, PA, USA: Project Management Institute The Standish Group (1995) The CHAOS Report. West Yarmouth, MA —. (2003) The CHAOS Report. West Yarmouth, MA Walker D.H.T., and Christenson D. (2005). Knowledge wisdom and networks: a project management centre of excellence example. Learning Organization, 12(3), 275-291 Wiewiora A, Liang C, & Trigunarsyah B. (2010) Inter- and intra- project knowledge transfer : analysis of knowledge transfer techniques. Paper presented at the PMI Research and Education Conference, Gaylord National Hotel & Convention Center, Washington DC. Wiig K M. (1997a) Integrating intellectual capital and knowledge management. Long Range Planning, 30(3), 399-405 —. (1997b) Knowledge Management: An Introduction and Perspective. Journal of Knowledge Management, 1(1), 6-14

CHAPTER TWO THE PROJECT MANAGEMENT OFFICE: ORIGINS, DEFINITIONS AND NOMENCLATURE ANTHONY WOOD AND DR. MARK SHELBOURN

Over the years, many institutions have established ‘Project Management Offices’ (PMOs) to provide high level advice and support for management of projects within their organisations. These PMOs are organisational departments that perform a range of functions, from design and maintenance of project procedures to strategic selection and initiation of projects; they are, effectively, organisational units developed to support the activities of organisational project managers (PMI, 2003; Kerzner, 2009). Whilst a great deal of theory has been written about PMOs, what they do and how to set them up, this has resulted in much inconsistency and contradiction amongst writers, particularly in terms of definition and nomenclature. The true origin of the PMO concept is practically lost in time, although some authors relate its history back to the 1930s when the US Air Corps developed a ‘Project Office’ function to monitor aircraft development (Morris, 1994). Over the next several decades, numerous iterations and developments culminated in a point where, by the end of the 20th century, interest in PMOs was such that articles were a common theme in industry journals, while texts on this topic were appearing on business bookstore shelves in growing numbers and with increasing frequency of publication. In the present decade, online ‘social’ media has seen the topic discussed at breadth, with special interest groups increasingly common. Despite this abundance of interest, there remains a wide variety of definitions for the ‘PMO’ and its functions and responsibilities, and recommendations for its hierarchical positioning.

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The aim of this chapter is to distil the key elements of the PMO story and to recommend a standardised nomenclature for the PMO entity.

Research Methodology A literature search was conducted across publicly-available textbooks, journals, e-journals, discussion forums and web sites. The objective of the search was to define the PMO concept in terms of current documentation in the literature and industry understanding or acceptance of nomenclature and its component parts and functions. The literature search method was used because it is the most effective means of establishing a foundation for assessment of take-up and influence of theory, as per the chapter topic and subsidiary issues. Importantly, a literature search can reveal the depth and breadth of the knowledge that currently exists, and allows identification of significant gaps and inconsistencies in the literature available to researchers and industry (Bryman, 2008). Whilst the nature of a literature review is such that no new original work will be developed, the categorisation and collation of data into themes has the benefit of facilitating the researcher’s familiarity with current literature, which in turn forms the basis for subsequent research.

The Origins of the PMO The earliest known PMOs were known simply as ‘Project Offices’. Perhaps the first recorded use of this term was in the 1930s when the US Air Corps developed a ‘Project Office’ function to monitor aircraft development (Morris, 1994). In 1942, during the Second World War, US Air Force project offices co-ordinated the development, production, and deployment of the B-29 bomber (Benson, 1997). Within the next ten years, the United States had entered the Cold War and by 1951 had created a Joint Project Office (JPO) to coordinate the B-47 project. The JPO considered not only the challenges of project management and contracting for aircraft design and manufacture, but also for the bombing and navigation procedures required for highspeed bomber aircraft such as the B-58. The B-58 Joint Project Office adopted a monitoring and coordinating role, which by 1954 encompassed other component systems as well (GlobalSecurity.org, 2011).

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During these turbulent years, the development of nuclear weapons stimulated two new technologies: Intercontinental Ballistic Missiles (ICBMs) and computer-based command and control systems. The development of these complex technologies demanded new processes for integrated system testing and operations, and for coordination with government and industrial funding sources; this demand was addressed in 1954 by the creation of a ‘Weapon System Project Office (WSPO)’, through which project management became the norm (Johnson, 1999). These project offices helped managers to centralise funding into program packages instead of separate components, thus improving budget predictions while allowing a phased approach to planning that allowed managers to identify and cancel weak projects before significant funds were committed. Throughout this period, the concept of the PMO was scarcely represented outside the United States, if at all. The Project Office concept remained in the domain of the defence sector for several decades, when the emergence of accessible and affordable computer technology saw a significant increase in demand for software projects. Crawford (2001) reports that a 1994 research project run by the Standish Group found that only 16% of projects were successful with regard to time, budget, and technical specifications, but in follow-up research in 1998, the success rate had increased to 26%. Amongst the reasons offered for the improved success rate is better project management and use of standard project procedures as a consequence of the implementation of the PMO. A further survey from the Gartner Group 2000 showed that 40% of project-oriented enterprises have established project management offices and that organisations with effective PMOs will reduce cost, time, and resource overruns by 50% (Crawford, 2001). The PMO concept that we know today had become well established by the late 1990s. In a two-year empirical study in 2004 that investigated the establishment and use of PMOs and the environmental conditions in which they operated, Dai and Wells (2004) found that 113 of 234 responses from a random sample indicated having a PMO or similar entity. Of these, “the overwhelming majority of PMOs were established in the mid-1990s to 2000.” The prevalence of PMOs at this time appears to be associated with increasing numbers and complexity of projects throughout the business world (Dai & Wells, 2004), which in turn has led to a need to centralise project coordination functions. The high diversity of implementing organisations and their divergent needs resulted in a large variety of

Chapter Two

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structures and functions; Crawford (2004) reports that research identified nearly 75 unique functions. A further study of 500 PMOs reported in 2006 confirmed the extreme variety, but was unable to identify systematic patterns or explanations (Hobbs & Aubry, 2006). Throughout this time, theorists and practitioners had begun looking for some common structures that could assist industry in the consolidation of concepts. As early as 2001, there was already discussion about the ‘next generation PMO’ (Duggal, 2001), in which the focus was shifted from tactics and science to strategy and innovation. Today, despite the ongoing diversity of PMO implementations, it is generally possible to classify PMOs into one or more of three types, as seen in Table 2-1 (Crawford & Cabanis-Brewin, 2011). PMO Type Type I: Project Office Type II: Departmental-level PMO

Type III: Enterprise/Strategic PMO

Primary Concern / Purpose Control and monitoring of schedule and budget functions of large and complex individual projects Integration of projects into one or more portfolios of projects; however it may also take on some or all of the functions of the Type I Project Office To facilitate corporate and senior management decision-making in the prioritisation and strategic alignment of projects

(adapted from Crawford and Cabanis-Brewin, 2011)

Table 2-1: PMO Classifications

The PMO Defined With a strong prevalence and diversity of PMO implementations across a wide range of industry sectors, it should come as no surprise that there is also a great variety of definitions for the PMO entity. The Project Management Institute (PMI, 2013) defines the PMO as “an organizational structure that standardizes the project-related governance processes and facilitates the sharing of resources, methodologies, tools, and techniques.” However, this definition and the stated range of

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responsibilities do not readily accommodate the function of the Type III PMO as described in Table 2-1. Dai and Wells (2004) describe a project/programme office as “an organizational entity established to manage a specific project or a related series of projects, usually headed by a project or program manager”; this definition aligns with the Type I or Type II PMOs introduced in Table 2-1. They also describe the PMO as “an organisational entity established to assist project managers, teams and various management levels on strategic matters and functional entities throughout the organisation in implementing project management principles, practices, methodologies, tools and techniques”; this definition aligns with the Type III PMO identified in Table 2-1, i.e. an enterprise or strategic PMO that facilitates management decision-making in the prioritisation and strategic alignment of projects. Further afield, there remains quite some differentiation in definitions. For example, Turner (2009) goes to some length in his description of the technical functions of a ‘Project Support Office’, however does not include a discussion of the merits of the mentoring services that are commonly provided within the office. Verzuh (2008) describes the changing status of projects in organisations, and their increasing willingness to rearrange the organisation to maximise the benefits of project management through formal structures. Meredith & Mantel (2000) dispelled any doubt as to the value of the PMO as they declared that “no single action is more telling than creating both an executive level Project Office as well as district / regional offices”. Glimpses of the experiences of practitioners in Australia can be found in industry journals such as Australian Project Manager, which is the Journal of the Australian Institute of Project Management (AIPM). According to Dobie (2000), a ‘management by projects’ structure is supported by a project office, which absorbs day-to-day project coordination, leaving the project managers to focus on their business objectives. Baccarini (2000) cites a number of organisations and references that demonstrate that the project office is not the same as a project management office, the difference essentially being the strategic positioning of the facility; however, the two terms seem interchangeable as both expressions are used throughout published literature.

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The AIPM dedicated most of its December 2003 journal to Project Office case studies. In this journal, Charters-Wood (2003) describes how a Project Support Office has aided the Australian Securities and Investments Commission, Loader (2003) expresses how a Project Management Office in AXA has provided a valuable supporting infrastructure, and Mihailidis (2003) describes the role of the Project Management Office in aligning project portfolios with strategic intent. The theorists’ perspectives offer all scales of advice, from quick-fix remedies to doctoral dissertations. For example, Dinsmore (2002) identified sixteen issues that reinforce the need to consider the project office strategy with diligence. These points identify some of the very issues that the project office is intended to overcome, including: hindering project manager initiative, diffusion of responsibility, stimulation of bureaucracy, and tendency to become process-focused rather than projectfocused. Similarly, Mullaly (2005) likens the prevalence of project management offices to ‘the latest silver bullet’ in the context of a magic solution to an organisation’s project management woes, and cautions that deploying a project management office as a solution without first identifying the problem will not necessarily bring about any real improvement. Research conducted by Wood (2008) included an examination of twenty-two publications and writings pertaining to the perceived and evidenced value of the project office. The writings were from numerous professional and industry journals, representing viewpoints from Australia, North America, Europe, and South-East Asia. The authors were variously academics, consultants, interested observers, or real-world practitioners. Ten critical factors, as illustrated in Figure 2-1, were identified from the literature review for detailed consideration. The frequency of positive factors was seen to indicate either a bona fide, overall benefit in deploying a project management office or a bias on the part of the authors to represent the project management office in favourable terms. The dominance of positive factors could also be symptomatic of an unbridled enthusiasm, a ‘band wagon’ per se, upon which organisations hungry for a quick fix eagerly embark, possibly finding out only after deployment how much true value can be derived from the project management office initiative. The latter proved also to be a concern to a number of respondents to a subsequent survey questionnaire conducted by Wood (2008), for which 241 responses were received. The proliferation of responses arising from the questionnaire provide a broad base of evidence

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that the collective experience of real-world practitioners is not clearly aligned with the messages of the general published theory. Demonstrably, the variation in the scope of definitions and breadth of contexts across a wide range of industries demonstrates that a simplistic definition or a one-size-fits-all approach is unlikely to find a foundation of support in Australia.

PMO Nomenclature In the discussion above, and in the articles and volumes referenced within, the acronyms within the general field of the PMO can become somewhat bewildering. The simple acronym, ‘PMO’, is commonly used across all manner of industries regardless of the hierarchical level of deployment, thus the intent of the entity, be it tactical or strategic, is not immediately apparent. Moreover, the approach will vary from organisation to organisation; a PMO in one organisation may serve a single project or programme, while in another organisation it may be the entity that acts as custodian for the corporate project management methodology, or it may be the business unit responsible for strategic selection and prioritisation of projects and programmes.

PROJECT OFFICE STRATEGY EXECUTION OFFICE

PROJECT MANAGEM ENT OFFICE

PROGRAM MANAGEM ENT OFFICE

STRATEGIC PMO

PMO RESULTS MANAGEM ENT OFFICE

PROJECT SUPPORT OFFICE

ENTERPRIS E PMO

Figure 2-1: PMO labels in common use

PORTFOLIO MANAGEM ENT OFFICE

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Perhaps a suitable foundation for classification is the three types espoused by Crawford and Cabanis-Brewin (2011), with a standardised subset of specialised contexts. Such a model would seek to provide support for specific projects, through to a high level, enterprise-wide, centralised management body. The PMO entity at the lowest level provides services within a single, complex project. There is little scope to introduce innovation in nomenclature at this level, besides a simple standardisation, as in Table 22. A significant number of PMOs exist at the mid-level, where responsibilities are generally focused on standardised methodology supported by training and mentoring across a department, or coordination and support for large programs of discrete projects. There is ample literature to support any number of mid-level PMO responsibilities; however there is a need for clarity of nomenclatures to differentiate between the methodology-based and program-focused entities. This may be resolved as readily as inserting a clarifying character into one of the acronyms, i.e. PgMO for the Program Management Office, as in Table 22. Whilst it may be tempting to apply similar treatment to the acronym for the project management office, the expression ‘PMO’ would appear to be so well entrenched that any attempt to shift to a new label would likely prove futile. At the higher, strategic level, the essential concept is one of benefit to the overall enterprise. Accordingly, an ‘enterprise’ PMO, or ‘EPMO’ would act as custodian of the organisation's strategic project interests, principally portfolio selection and prioritisation. The EPMO concept has been gaining ground in recent years, possibly due to current economic challenges faced by governments and industries around the world (Jordan, 2011). An effective EPMO may even be created to oversee multiple PMOs or PgMOs in organisations that have very large numbers of projects (Meredith, 2000). The principal difference between a PMO and an EPMO is that the former would have authority only as wide as a division in a large organisation, while the latter is enterprise-wide and would be responsible for policy making and organisational change (Meredith, 2012). These suggested PMO structures are summarised in Table 2-2.

The Project Management Office: Origins, Definitions and Nomenclature

PMO Type Type I: Project Office Control and monitoring of schedule and budget functions of large and complex individual projects

Type II: Departmental-level PMO Integration of projects into one or more portfolios of projects; however it may also take on some or all of the functions of the Type I Project Office

29

Suggested Nomenclature / Deployment Project Admin Office (PAO) Replaces ‘Project Office’ and ‘Project Support Office’ One PAO per large, complex project Reports to Project Director Project Management Office (PMO) Maximum one PMO per department/division May be shared across multiple departments Reports to departmental manager Program Management Office (PgMO) Maximum one PgMO per program Reports to program manager

Type III: Enterprise/Strategic PMO To facilitate corporate and senior management decisionmaking in the prioritisation and strategic alignment of projects

Enterprise Project Management Office (EPMO) Subsumes: ‘Strategic PMO’, ‘Portfolio Management Office’, and ‘Strategy Execution Office’ Maximum one EPMO per enterprise. Reports to executive management

Table 2-2: Suggested PMO classifications and nomenclature

Conclusions The research found many accounts and anecdotes that collectively distil the key elements of the PMO story and which lead to a recommendation for standardised nomenclature for the PMO entity.

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Today, the PMO concept is well established in project management organisations around the world. From the early days when the US Air Corps and later, the US Air Force, used Project Offices to assist with monitoring and controlling aircraft development projects, through the Second World War and Cold War periods, we have seen the PMO evolve to a high degree of sophistication in present-day practice. Numerous authors have attempted to define the PMO and to reduce the myriad of PMO variations to a set of basic classifications, with a degree of popular success. Nevertheless, there remains much differentiation, inconsistency, and contradiction in the literature. There appears to be a case for consolidation of some of these concepts within the broad framework proposed by Crawford and Cabanis-Brewin (2011), which provides a simple, three-level hierarchy that aligns neatly with well-documented PMO functions as evidenced in real-world application. There are numerous labels in common use that, although arguably relevant to the sponsoring organisation(s), could be reasonably adapted to fit a standardised model that would at the very least resolve the problems that arise from an undisciplined nomenclature. This chapter recommends a standardised set of four unique labels (Table 2-2) that collectively and unambiguously pinpoint the hierarchical position of each entity. In particular, this chapter supports the emerging concept of an Enterprise Project Management Office (EPMO) as a label for the Type III, strategic PMO, and recommends the use of this term as a global ‘norm’.

References Baccarini, D. (2000), 'The Project Office: a facilitator for organisational project management', Australian Project Manager, p. 26. Benson, LR. (1997), Acquisition Management in the U. S. Air Force and Its Predecessors, Bryman, A. (2008), Social research methods, 3rd edn., Oxford University Press, Oxford. Charters-Wood, D. (2003), 'From accidental project management to a professional and consistent project approach – a case study', Australian Project Manager, pp. 7-9.

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Crawford, J.K. & Cabanis-Brewin, J. (2011), 'The Strategic Project Office, Second Edition', CRC Press, pp. v-xlix. Crawford, J.K. & Cabanis-Brewin, J. (2011), 'The Strategic Project Office, Second Edition', CRC Press, pp. v-xlix. Crawford, K. (2001), The Strategic Project Office: A Guide to Organizational Performance, Center for Business Practices, New York. Crawford, L. (2004), 'Patterns of Support for Corporate Delivery Capability', PMSA Conference, Johannesburg, South Africa. Dai, C.X. & Wells, W.G. (2004), 'An exploration of project management office features and their relationship to project performance', International Journal of Project Management, vol. 22, no. 7, pp. 523532. Dinsmore, P. (2002), 'Sixteen Reasons Not to Implement a Project Office', PM Network, vol. 16, no. 2, pp. 24-25. Dobie, C. (2000), 'Management by Projects', Australian Project Manager, pp. 19-21. Duggal, J. (2001), 'Building a Next Generation PMO', Project Management Institute Annual Seminars & Symposium, Nashville, Tenn., USA, November 1–10, 2001. GlobalSecurity.org (2011), B-58 Development Problems. Retrieved from http://www.globalsecurity.org/wmd/systems/b-58-pro.htm. Hobbs, B. & Aubry, M. (2006), 'Identifying the structure that underlies the extreme variety found among PMOs', PMI research conference, Montreal, Canada. Johnson, S. (1999), 'The Organizational Roots of American Economic Competitiveness in High Technology', R&D Investment and Economic Growth in the 20th Century, University of California, Berkeley, March 26-28, 1999. Jordan, A. (2011), Putting the 'E' in PMO. Retrieved from http://www.gantthead.com/article.cfm?ID=262325. Kerzner, H. (2009), Project management: a systems approach to planning, scheduling, and controlling, 10th edn., John Wiley & Sons, Hoboken, N.J. Loader, R. (2003), 'Lessons learned from establishing project management offices in a corporate environment', Australian Project Manager, pp. 13-17. Meredith, J.R. & Mantel, S.J. (2000), Project management: a managerial approach, 4th edn., Wiley, Hoboken, NJ. Meredith, J.R. (2012), Project management: a managerial approach, 8th edn., Wiley, Hoboken, NJ.

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Mihailidis, P. (2003), 'The project management office as a project management integrator, innovator, and interventionalist', Australian Project Manager, pp. 18-20. Morris, PWG. (1994), The management of projects, Thomas Telford, London. Mullaly, M. (2005), 'The Silver Bullet?'. Retrieved from www.gantthead.com/article.cfm?ID=221599. PMI (2013), A guide to the project management body of knowledge (PMBOK® Guide), 5th edn., Project Management Institute, Inc, Newtown Square, Pa. Turner, J.R. (2009), Handbook of Project-based Management : Leading Strategic Change in Organizations, McGraw-Hill, Verzuh, E. (2008), The Fast Forward MBA in Project Management, John Wiley & Sons, Wood, A. (2008), 'Does Published Theory Add Value To The Project Management Office (PMO)?', AIPM Project Management Conference 2008, National Convention Centre, Canberra, ACT, Australia.

PART II STAKEHOLDERS

CHAPTER THREE STAKEHOLDER EXPECTATIONS REGARDING PUBLIC PROJECT OVERSIGHT DR. ALEXIA NALEWAIK AND DR. ANTHONY MILLS

Due to a combination of aging infrastructure, population growth, urbanization, and changing demographics, more than $40.0 trillion is needed globally over the next 25 years (Daltorio, 2010) to construct new and improve existing public capital assets. Very few industries experience the risks and volatility faced by the construction industry (Guo, 2004), in which project success is historically poor (Wood & Gidado, 2008); a high percentage of public projects fail to meet cost, schedule, quality and performance goals (Butts & Linton, 2009). Because construction projects often result in completion delays and budget inflation, careful oversight of these public expenditures and ongoing assessment of performance are demanded. Fiscal responsibility is the current global trend. Stakeholders require accountability and risk visibility throughout the project lifecycle, instead of at the end of the project. These stakeholders have certain expectations regarding monies spent; above all, they demand the maximum possible be constructed with available funds, such that the most benefit may be derived from it. Although performance audits (PA) are the most frequently used mechanism for validating the protection of public interest and ensuring common good, traditional methods barely scratch the surface of available cost and performance data. The question becomes one of how programme management, controls, and reviews need to evolve to appropriately address stakeholder concerns about the control and delivery of capital projects. In order to develop such a framework, stakeholder perspectives need to be better understood. Such is the objective of this literature review and discussion.

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Several Key Building Blocks There are a number of building blocks that inform the process of PA. In particular, the assessment of economy, efficiency and effectiveness is key; however, the nature of these elements is contextually defined, and consequently dependent on the perspective of the stakeholder. According to English et al. (2010), a number of key propositions need to be built, providing context on which the system can be designed Performance Audits are concerned with economy, efficiency and effectiveness (the three Es). English et al. (2010) state that in the UK, the National Audit Office (NAO) refers to the equivalent of a PA as ‘Value for Money Audit’ and also gives a more generic twist to the meaning of the three Es. Under the 1983 UK National Audit Act, the National Audit Office can examine and report on the economy, efficiency and effectiveness of public spending. We use the following definitions for the ‘three Es’: x Economy: minimising the cost of resources used and required – spending less x Efficiency: the relationship between the output from goods and services and the resources to produce them – spending well x Effectiveness: the relationship between the intended and actual results of public spending – spending for success. The three E’s of performance can be used to describe the primary focus of stakeholders’ concerns, and must be defined in the context of the particular project and audit. The success or otherwise of audits can only be determined by the perceptions and success definition of the various stakeholders. Further, stakeholders’ definitions may conflict with each other. The UK NAO also advocates a wider stakeholder engagement to seek current views on these same issues. Both are typical expressions of the ‘dialogic evaluation’ model that dominates their thinking (English et al., 2010). In particular the UK NAO state that one of the key ingredients of effective PA’s is the stakeholders’ support for the project’s progress. This is said to mean that relevant stakeholders should be engaged and be satisfied with the development of the project and the Authority must manage stakeholder interests appropriately.

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Construction projects can involve a diverse range of stakeholders and the success of the project depends very much on fulfilling their needs and expectations. According to Hong et al. (2009), it is important, therefore, to identify and recognise project stakeholders and develop a rigorous stakeholder management process. Traditionally, construction projects are considered to be successful if they fulfil the objectives of budget, schedule and quality (Chua, et al., 1999). Mallak et al. (1991) and Sanvido et al. (1992) argue that projects are also considered to be an overall success if they meet the expectations of their stakeholders, including owners, planners, engineers, contractors and operators. Stakeholder management is an important part of the strategic management of organisations (Cleland and Ireland, 2007). These tenets resulted from “demands by [the] public for information about the use of taxes in the aftermath of scandals concerning waste and corruption” (Halachmi, 2002). The implicit accountability discussed from the public stakeholder perspective is informal, and reaches beyond mere financial accountability (Glynn, 1996). “Formal mechanisms are based on judicial, legislative, and executive or hierarchical controls, whereas informal mechanisms derive from society’s mores, [and] its political and social philosophies” (Roberts, 2002). The concept of accountability implies prudence, judgment, and moral probity (Luke, 2010) on the part of those held responsible for the performance of the capital program, in accordance with agreed-upon expectations (Office of the Auditor General of Canada, 2004). The general public might not explicitly state their expectations, yet they expect the organisation to be prepared to explain and justify its judgments, intentions, acts, and omissions (Rasche & Esser, 2006).

The Performance Assessment Challenge Traditional audit and performance assessment methodologies prescribe review of a sample of expenditures in the belief that issues identified will be typical for the entire population of expenditures. The sampling mechanism itself pulls expenditures and actions out of sequence and out of context, and ignores both the schedule of values relationship between payment applications and any rationale in decision-making. This prevents visibility of activity over the course of the project, and limits the depth to which performance review can be conducted. Such relationships and fluctuations are key in the identification of potential stakeholder issues.

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There is little guidance in the specific area of capital project auditing, and no professional bodies are empowered to monitor performance auditors (Sloan, 1996). “There are still no comprehensive standards for performance reporting and auditing” (Holmquist & Barklund-Larsson, 1996) that equate to those established in the field of compliance monitoring. “Few generally accepted standards or performance measures exist for determining the quality, effectiveness, and efficiency of … organizations responsible for awarding and administering contracts” (Kestenbaum & Straight, 1995). Lacking well-defined methods, it is often up to the audit team to rely on industry best practices and peer benchmarking to approximate fair evaluation of project performance and effect positive change. What is clear from the research is that PA has a number of responsibilities to both direct and indirect stakeholders. The aim of PA is to go beyond the financial and (regulatory / contractual) compliance standards of the traditional audit role, and to embrace the opportunity for genuine improvement of the project outcomes. According to English et al. (2010), PAs involve going beyond a ‘watchdog’ to a ‘sheepdog’ role, particularly, but not exclusively, in relation to effectiveness. While the ‘systems-based’ or ‘watchdog’ elements of PA audit are not easy to undertake, it is the ‘sheepdog’ role related to performance review and (in particular, but not exclusively) the Value for Money (VFM) evaluation of effectiveness that cause the most difficulty both in concept and practicality. This is because judgment of performance is constrained by the traditional ‘watchdog’ role of audit, and it is an exceptionally complex concept to specify clearly, either at a theoretical or practical level. Effectiveness audits, like the economy and efficiency elements of VFM/PA audit, need to be reported to both parliament (or other regulatory body) and the public, as part of any auditor / inspector general’s accountability mandate. As suggested by ANAO (2008), reporting on the three E’s is, therefore, part of the ‘watchdog’ function, even though some of the insights, particularly relating to effectiveness, will be discovered through ‘sheepdog’ processes. This is precisely the tension that Ling highlights, leading to his recognition that ‘watchdogs do not make good sheepdogs’ (Ling 2003, p. 444). Even though this may be the case, and there may well be some inevitable tempering of the ‘sheepdog’ role because of the ‘watchdog’ override, this still should not mean that the PA can avoid moving out of the ‘comfort zone’ of being only a ‘watchdog’.

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Governance of Capital Projects The concept of governance “generally refers to the processes by which organizations are directed, controlled and held to account. It encompasses authority, accountability, stewardship, leadership, direction and control exercised in the organization” (Stretton, 2010). Internal controls for the organisation, project controls specific to the capital program, policies and procedures, software, systems, project management, reports, and organisational leadership – all these can be considered as governance mechanisms, and all are capable of being evaluated through audit. For large projects, a project team is created and organized to execute the project. This team is a temporary construct (Huemann, 2004) of companies and individuals dedicated to attaining a common goal (John, Wardle, & Fairhurst, 2008), who may also seek to satisfy their own objectives of profit and achievement. These companies and individuals, along with beneficiaries and overseers of the project, constitute the bulk of the stakeholder population. The hierarchy of accountability to both direct and indirect stakeholders creates a network of interdependencies and obligations. Where there are multiple stakeholders, the concepts of ‘success’ and ‘value’ become harder to define. Success is evaluated according to different definitions, and over different timeframes (Turner, Zolin, & Remington, 2009), consistent with the stakeholders’ interests (Mian, 2005). Indeed, the perspectives of owner and stakeholder may differ, and thus “a project can be both a success and a failure at the same time” (Klakegg, 2009).

Stakeholders, Expectations, and Accountability Stakeholder identification is widely regarded as the first step in stakeholder analysis (McElroy & Mills, 2000; Cleland & Ireland, 2007) and numerous approaches are available. According to Hong et al. (2009) the most popular is to categorize them into several groups depending on their relative position in the project, level of involvement in the project management process or legal relations between them and the project. Project stakeholders include project sponsor, end users, client, core project team, and the team members together with community and external groups and shadow team members – people who have informal relations with the project (Walker 2003). The stakeholders most frequently identified by participants in a study (Beach, Brown, & Keast, 2010) of public agencies are, in descending order:

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1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18.

Government departments and statutory authorities Peak bodies and lobby groups Staff Community and Citizens Other levels of government Politicians Central agencies Industry groups Networks Partners and alliances Business investors Clients Scrutineers Unions Universities Customers Interest groups Suppliers

Stakeholders can be categorized as direct or indirect, depending on the relationship between stakeholder and project (McElroy and Mills, 2000). According to Cleland and Ireland (2007), direct stakeholders include those who have legal relationships with the project and a responsibility in the project management processes – such as cost, time, and quality management. Both Cleland and Ireland (2007) and Lester (2007) agree that secondary or indirect stakeholders do not participate directly in the project. Included in this category are environmental, social and economic groups, media, and families. Stakeholders do influence projects in a variety of complex ways. In order to analyse the impact of stakeholders upon projects, it is necessary to identify and include the factors by which they do so (Hong et al., 2009). An approach of most concern for many scholars is the stakeholder classification proposed by Mitchell et al. (1997). Stakeholders are grouped by various combinations of attributes including power, legitimacy, and urgency. The levels of these attributes essentially drive the degree of stakeholders’ influence in projects. In order to optimise responsiveness to stakeholders, a system must be devised to identify the stakeholders of the project (Beach, Brown, & Keast, 2010), recognise expectations, engage stakeholders, and manage

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stakeholder relationships for results (Poister & Streib, 1999). This is similar to efforts undertaken in quality improvement initiatives (Wart, 1995), wherein organisations adopt a ‘stakeholder perspective’ to focus on goals and objectives (Klakegg, 2009). The list of stakeholders proposed by Beach et al. (2010) has been adapted and extended; this can now be prioritized (see Table 3-1), using as measures their power, and the legitimacy and urgency of their claims (Rasche & Esser, 2006). Here, ‘power’ is defined as “the ability to influence the actions of organizations, ‘legitimacy’ as the appropriateness of claims, and ‘urgency’ as an indicator of whether or not these claims require immediate attention” (Rasche & Esser, 2006). Stakeholder interests can be further defined in terms of “mission, mandates, values, and vision” (Poister & Streib, 1999). Once stakeholder interests are understood, their expectations can be defined and managed. One important group of direct stakeholders is the governing body of the organisation, such as a Board of Directors (also: Trustees, Governors, etc.). The Board’s role is different from the Chief Executive Officer (CEO), because the CEO serves in an administrative and management capacity with authority delegated by the Board. The Board serves “not only as a link between the organization’s staff … and its constituents … but also as the organization’s ambassadors, advocates, and community representatives” (Miller-Millesen, 2003). The Board has certain statutory responsibilities, and is responsible for ensuring adherence (by the organisation and those acting on its behalf) to legal standards and ethical norms. In the public sector capital project environment, there exists a principal-agent relationship between the Board and the project team, wherein those imbued with authority by the Board are obligated to behave in the organisation’s best interests and advise and report to their client accordingly (Morledge, 2010). Where the Board is charged with behaving on behalf of its constituents (Smith & Mize, 2011), the same responsibility is assigned to the project team. Board duties apply to each board member, individually, but responsibility is held by the Board as a whole (Smith & Mize, 2011). In certain jurisdictions and circumstances, when the construction project spirals out of control or is not formally completed, the Board may be held liable where they can be shown to have breached fiduciary duty and/or statutory responsibility (State of California, 2010). Thus the Board has a vested interest in the timely and economical completion of the capital asset, and the power to influence the project through decision-making.

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Direct Indirect 9 Clients / End Users 9 Board of Directors / Trustees 9 Business investors 9 Regulatory agencies 9 Unions 9 Lobbyist groups 9 Scrutineers 9 Partners and alliances 9 Project team (companies) 9 Project team (individuals) 9 Government agencies 9 Vendors and suppliers 9 Contractors 9 Neighbors 9 Politicians 9 Other levels of government 9 Special Interest groups 9 General public 9 Industry groups 9 Networks 9 Universities 9 Future generations (Adapted from Beach et. al., 2010)

Economy Efficiency Effectiveness 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9

Table 3-1: Impact of Direct and Indirect Stakeholders on Project Performance The largest and least manageable group of stakeholders in the public capital project is ‘the general public’, which includes “…those with an interest…other than a proponent, operator or responsible authority” (Susilawati, Wong, & Chikolwa, 2010). Here, too, one may include those who have influence but no direct contractual ties, such as activist groups (Beach, Brown, & Keast, 2010). The general public can be considered to be one of the ‘owners’ of public assets, from which they benefit directly. The self-appointed defender of the public is the media, who can substantially affect the continuation and reputation of the capital project.

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Creating a construct of ‘scrutineers’ as an example, the general public and media may be surprised that the project costs so much. These groups can easily watch the construction progression (or lack thereof), but do not understand the complex process of construction, nor the long sequence of invisible events (including design, engineering, and regulatory approvals) that must occur prior to physical construction. Many of these indirect stakeholder groups are misinformed, which can lead to false assumptions and accusations (Angerbauer & Spencer, 2011). They understand implicitly that “government officials entrusted with public resources are responsible for carrying out public functions legally, effectively, efficiently, economically, ethically, and equitably” (U.S. Government Accountability Office, 2007). When these stakeholder groups perceive that the project is not achieving their expectations, they demand that someone fix the problem, be held accountable, and be punished. The stakeholder engagement process is affected by two key processes: firstly by the identification and classification of the stakeholder as either direct or indirect, and secondly by the selection of the strategy used to engage with the stakeholder Beach et al. (2010) describe the process of stakeholder engagement as key, operational or project. They suggest that, by incorporating the dimensions of stakeholder definition, classification and engagement style, a public management specific stakeholder classification model can be developed. This concept has been adapted by the authors to focus on the primary component of the three E’s that is impacted by the stakeholder group. Stakeholder education is vital to convey how certain factors (consultant team composition, sample size, standards, scope, methodology, and more) affect qualitative and quantitative performance review findings, such that internal stakeholders can 1) appropriately scope and procure audits and reviews to address perceived project and organisational risks and 2) manage stakeholder expectations of performance assessment.

Conclusion Stakeholders’ expectations of external independent performance reviews may exceed what is realistically achievable by the consultant team due to constraints of time and resources. A new mechanism is needed to improve review methods, and stakeholder education is warranted to appropriately scope and procure services to address and manage stakeholder expectations.

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Some organisations have tried to achieve this by expanding the review scope, or supplementing with additional audits, often under the supervision of a centralized body imbued with substantial authority, such as an Inspector General’s Office. The implications of this review of stakeholder literature and discussion are that additional study is needed, including investigation of a risk-based assurance approach, hoping that the modified performance review methods and scopes will generate findings that meet stakeholder expectations.

References American Society of Civil Engineers. (2009). Retrieved December 15, 2010, from Report Card for America's Infrastructure: http://www.infrastructurereportcard.org/ Australian National Audit Office (2008), The Auditor- General Annual Report 2007–2008, Australian Government Department of Finance and Administration and the Australian National Audit Office, Canberra. Angerbauer, G., & Spencer, G. R. (2011) Managing Stakeholder Opposition to Capital Projects. 2011 AACE International Transactions. Morgantown: AACE International Beach, S., Brown, K., & Keast, R. (2010). How Government Agencies Engage With Stakeholders. Public Administration Today, 34-41 Butts, G., & Linton, K. (2009) The Joint Confidence Level Paradox: A History of Denial. 2009 NASA Cost Symposium. Washington DC: NASA Chua, D.K.H., Kog, Y.C., and Loh, P.K. (1999) Critical success factors for different project objectives, Journal of Construction Engineering and Management, ASCE, 125(3), 142-150 Cleland, D.I. and Ireland L.R. (2007) Project Management: Strategic Design and Implementation, 5th ed. New York: McGraw-Hill Daltorio, T. (2010) The Global Infrastructure Boom. Retrieved December 16, 2010, from Investment U Research: http://www.investmentu.com/2010/July/the-global-infrastructureboom.html English, L. (2010) Performance audit of the operational stage of long-term partnerships for the private sector provision of public services. Australian Accounting Review, 20(1), 64-75 Glynn, J. J. (1996) Performance Auditing and Performance Improvement in Government: Public Sector Management Reform, Changing

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Accountabilities and the Role of Performance Audit. In Performance Auditing and the Modernisation of Government. Organization for Economic Co-Operation and Development Guo, W. (2004) Development of a Framework for Preliminary Risk Analysis in Transportation Projects. Worcester, MA Halachmi, A. (2002) Performance Measurement, Accountability, and Improved Performance. Public Performance & Management Review , 25 (4), 370-374 Holmquist, J., and Barklund-Larsson, U. (1996) New Public Management, Performance Auditing, and How Auditors Can Contribute to Performance Improvement. In Performance Auditing and the Modernisation of Government. Organization for Economic CoOperation and Development Hong, N, Skitmore, M, and Wong, J. (2009) Stakeholder impact analysis of infrastructure project management in developing countries: a study of perception of project managers in state-owned engineering firms in Vietnam. Construction Management and Economics, 27(11), 11291140 Huemann, M. (2004) Management Audits of Projects and Programmes How to Improve Project Management and Programme Management Quality. IPMA ICEC International Expert Seminar. Bilbao, Spain: IPMA.International Congress of Supreme Audit Institutions. Implementation Guidelines for Performance Auditing. INTOSAI Auditing Standards Committee John, G., Wardle, I., and Fairhurst, D. (2008) Enhancing the DecisionMaking Process of Project Managers in the Built Environment: An Integrated Approach. COBRA 2008. London: RICS. Kestenbaum, M.I., & Straight, R.L. (1995). Procurement Performance: Measuring Quality, Effectiveness, and Efficiency. Public Productivity & Management Review, 19(2), 200-215 Klakegg, O.J. (2009) Challenging the Interface between Governance and Management in Construction Projects. 5th Nordic Conference on Construction Economics and Organization. Reykjavik Lester, A. (2007), Project Management - Planning and Control, 5th ed, Elsevier Ltd Ling, T. (2003) Ex Ante Evaluation and the Changing Public Audit Function: The Scenario Planning Approach, Evaluation, 9(4): 437–452 Luke, B. (2010) Examining accountability dimensions in state-owned enterprises. Financial Accountability & Management, 26(2), 134-162

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Mallak, L.A., Patzak, G.R. and Kurstedt, H.A. (1991) Satisfying stakeholders for successful project management, Computers & Industrial Engineering, 21(1-4), 29-433 McElroy, B. and Mills, C. (2000), Managing Stakeholders, In Gower Handbook of Project Management, ed. J. R. Turner and S. J. Simister, Gower Publishing Limited, 757-775 Mian, D. M. (2005).Project Diagnostics - Innovative Tool for Project Health Check. In A. Sidwell (Ed.), The Queensland University of Technology Research Week International Conference. Brisbane: Queensland University of Technology Miller-Millesen, J. L. (2003) Understanding the Behavior of Nonprofit Boards of Directors: A Theory-Based Approach. Nonprofit and Voluntary Sector Quarterly, 32(4), 521-547 Mitchell, R.K., Agle, B.R. and Wood, D.J. (1997), Toward a theory of stakeholder identification and salience: Defining the principle of who and what really counts, The Academy of Management Review, 22(4), 853 Morledge, R. (2010) Seeking Construction Success - Approaches to Reducing Client Disappointment. COBRA 2010. London: RICS Office of the Auditor General of Canada. (2004) Performance Audit Manual. Minister of Public Works and Government Services Canada Poister, T.H. and Streib, G.D. (1999) Strategic Management in the Public Sector: Concepts, Models, and Processes. Public Productivity & Management Review , 22 (3), 308-325. Rasche, A., and Esser, D.E. (2006) From Stakeholder Management to Stakeholder Accountability. Journal of Business Ethics, 65(3), 251-267 Roberts, N.C. (2002). Keeping Public Officials Accountable through Dialogue: Resolving the Accountability Paradox. Public Administration Review, 62(6), 658-669 Sanvido, V., Grobler, F., Parfitt, K., Guvenis, M., and Coyle, M. (1992) Critical success factors for construction projects, Journal of Construction Engineering and Management, 118(1), 94-111 Sloan, N. (1996) The Objectives and Performance Measurement of Performance Audit. In Performance Auditing and the Modernisation of Government. Organisation for Economic Co-Operation and Development Smith, C., and Mize, R. (2011) Trustee Handbook. Sacramento: Community College League of California State of California (2010) Education Code Sections 15284-15288. Sacramento, CA, USA: State of California.

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Stretton, A. (2010) Notes on Program/Project Governance. PM World Today, 12(1). Susilawati, C., Wong, J., and Chikolwa, B. (2010) Public participation, values and interests in the procurement of infrastructure projects in Australia. 2010 International Conference On Construction & Real Estate Management. China Architecture & Building Press Turner, R., Zolin, R., and Remington, K. (2009) Monitoring the Performance of Complex Projects from Multiple Perspectives over Multiple Time Frames. 9th International Research Network of Project Management Conference. U.S. Government Accountability Office (2007) Government Auditing Standards. Washington, DC, USA: United States Government Walker, D. (2003) Implications of Human Capital Issues. In Procurement Strategies: A Relationship-based Approach, Walker, D. and Hampson, K. (eds), Blackwell Science, 258-295 Wart, M. v. (1995) The First Step in the Reinvention Process: Assessment. Public Administration Review, 55(5), 429-438 Wood, H., AND Gidado, K. (2008) Project Complexity in Construction. COBRA 2008. London: RICS

CHAPTER FOUR ENGAGING WITH SPONSORS NEW TO PROJECTS: USING VISUAL METAPHOR, RICH PICTURES AND INFOGRAPHICS TO COMMUNICATE, MANAGE AND ENTERTAIN DR. MATTHEW OVERTON

The interplay between the project manager and the sponsor is acknowledged to be an important determinant of project success (Nevan Wright, 1997). Based on project team experiences with consulting clients, it was observed that the executive(s) undertaking the role of the sponsor often had limited experience of project delivery. The consequence of this shortfall required the project manager to mentor their client in key governance activities. According to the Project Management Institute (2008), a project manager typically spends 75-90% of their time communicating, both formally and informally. It is contended that graphics – in the form of visual metaphors, rich pictures and infographics – can aid the project manager in the process of communicating key messages to sponsors and, consequently, improve the likelihood for project success.

The role of graphics Graphic depiction is an established method to present theoretical concepts; academics, policy-makers, the media and businesses have adopted a variety of visual expressions to achieve this purpose. A graphic can represent complex ideas simply, whether communicating abstract concepts from a symbolic or metaphorical perspective; graphing theories and relationships in the middle ground, whose purpose is to inform; or

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representing the mathematical methods of recording, describing, analysing and summarising detailed data and its transformation into information. Similarly, a graphic might be analysed using different criteria. Semanticists and visual sociologists (themselves coming from a tradition of visual anthropology) are interested in interpretation and the analysis of discourses (Latour, 1987). At the other extreme is the analysis of excellence, established by noted technique theorists, Bertin (1983) and Tufte (1983; 1990). A unifying style – that graphics convey visual arguments, after Macdonald-Ross (1977) and Simon (1981) – mediates between these two boundaries. Accordingly, graphic depiction may be viewed as a series of interlocking paradigms, based on the desired representational method and the chosen analytical approach, as demonstrated in Figure 4-1.

Figure 4-1. Matrix of representational methods and analytical approaches. Source: Overton (1993).

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Problem definition Bertin (1983) described a typology of retinal variables – that an object might vary by size, value, texture, colour, orientation and shape – and the designer could employ variation in any one of these to denote a difference in meaning. Additional to this is variation using the two planar dimensions (the x- and y-axis). Collectively, these are the visual variables. Bertin also provided typologies of construction, depending on the designer’s choice of a diagram, network or map and how the data are to be arranged on it. The visual variables, when combined with the typologies of construction, give the designer a multitude of options with which to communicate the data. A previous research study examined the graphic representation of communication networks from a practitioner’s perspective (Steward et al., 1993). It concluded that there was no standardised format or formalised graphic language deployed, and that the full range of visual variables had not been utilised. Extending this approach to consulting practice, an informal survey revealed that graphic expressions tend to be similarly limited in their usage and diversity of construction, and somewhat naïve in the information that was portrayed. Compared with exemplars of graphics practice put forth according to the principles of construction (Bertin, 1983) and deconstruction (Tufte, 1983; 1990), this was puzzling and believed to deserve further examination. It is acknowledged that designing a good graphic requires specialist knowledge, due to the complexity presented by the choice of options, and involves an investment of time, based on the evaluation of alternative designs. Despite this, and while accepting that there might be consequential savings in consumption (in that a good graphic can be read in less time than a paragraph of text or a table of numbers representing the same information), there is a suspicion that graphics can be manipulated in a way that numbers cannot (“the data don’t lie”). Accordingly, this demands an examination of the quality and effectiveness of graphic information since this has implications for users interacting with graphics and their visual literacy. Metaphor is a powerful medium to explain complexity and has been examined extensively in an organisational context, both in terms of imagery (Morgan, 1986) and as a mechanism to explore a company’s culture and organisational change (Cook, 2006). Indeed, Winter and Szczepanek (2009) have even focused on the use of metaphor within projects. In consulting, metaphor is commonly utilised in the development

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of both heroic and cautionary epics that are used as part of engagement selling and in project delivery. While some of this can be mythological, after Campbell (1968), metaphor can be used to narrate the project team’s ‘journey’, against which change might be more easily understood and to gain support from a wider constituency base. Visual aspects of metaphor are also used by project teams in the creation of graphic models that contrast current and future states, from architectural and organisational plans rooted in reality to more esoteric ‘black box’ models and idealised representations of alternate realities. While Hardy et al. (2004) have examined narrative and discourse within the organisation from a verbal perspective, there has been little consideration of the use of metaphorical visualisations that could be used to establish a shared common understanding between, for example, creative, business and technical teams, who use different terminology to refer to similar concepts, developing a non-tribalised visual lingua franca; as a cultural ‘lightning rod’ between consultants and a client team; or between a project manager and sponsor. The use of metaphor in the field of knowledge management has been studied (Andriessen, 2008), but this has not been extended to projects or to project management. While the importance of graphics in communication (Overton, 1998) and factors in influencing project success (Gareis & Huemann, 2000; Westerveld, 2003 – among others) have been considered, there has been no attempt to examine these two fields where they intersect.

Methodology This paper reports on practitioner-oriented, case-study research into graphics usage by consultancy project teams. A case-study research method, after Yin (2009), is dual purpose. Firstly, it allows practice to be described and evidence considered based on the outlier and key case approaches; outliers often provide an indication of how practice might evolve, while key cases permit the inclusion of domain-specific environmental information that might have affected behaviour and hence practice. Secondly, the case study also provides for explanatory analysis and, by adopting the local knowledge as the frame of reference, builds on the author’s experience in this field, following Fenno’s (1986) ‘soak and poke’ approach. The research focused on the adoption and use of visual metaphors, infographics and rich pictures, which were analysed according to the

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theoretical approach that a graphic conveys a visual argument as discussed above. In doing so, it attempts to answer four questions: 1. To what extent does the use of graphics in a specific domain vary against a more general sample sourced from academic journals and business magazines? This addresses patterns of information behaviour in different contexts; 2. To what extent do the two sets of graphic samples compare, based on Tufte’s (1983) principles of visual representation? This addresses the extent of information sophistication by graphic producers in the different user groups and hence visual literacy (based on information production); 3. Accepting that different patterns of information behaviour might be demonstrated by varying degrees of information specificity (from the strategic level – metaphorical – to the performance level – the recording and reporting of data), to what extent do the two sets of graphic samples compare? This again addresses visual literacy, but from the perspective of information consumption; and 4. To what extent could the results from the three questions above summarise the impact of graphics on people and organisations, particularly sponsors? This addresses the implications of engaging with information according to various outcomes, including economic, social, cultural and educational, and considers how requirements around information consumption affect information specificity.

Results Case study 1: US-based information technology company A project team was engaged to define a strategic roadmap for knowledge management within the product development process to increase productivity and reduce costs. The key message to convey to project sponsors was the extent of the additional organisational change required, in addition to IT considerations, to move from the current to the future state and to gain executive-level support for the proposal to achieve this. The project team used Microsoft Visio to depict workflows that described how interactions could be streamlined. This was supported by extensive financial modelling to quantify time and, consequently, cost savings to provide quantitative substance to the qualitative graphics.

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It was recognised that the role of the workflows was high-level, summative and illustrative. The Chief Financial Officer was a key stakeholder and, rather than focus on financial detail, the project team wanted to emphasise the intent of the change: that investing in a technology solution was required to realise long-term savings, though its success was symbiotically linked to cultural change occurring within the company, both as a mechanism and as an outcome. By concentrating on the lifecycle of knowledge within the enterprise, the sponsors’ attention was directed to the idealised future benefits using Tufte’s (1983) concept of small-multiples, where the same design is utilised to accentuate changes in the data. The aim was not to model the interactions in their entirety as would be standard in a business process reengineering exercise, but rather to use them as indicative potential scenarios to facilitate the conversation at the executive level.

Case study 2: Commonwealth government agency A project team was engaged to improve contract management by increasing compliance and adopting mandatory undertakings. The key message to demonstrate to the sponsors was that, while initial changes to policies and procedures were relatively straightforward to undertake, it was their roll-out and adoption across the wider organisation that required deeper consideration. Again, Microsoft Visio was deployed to visualise before-and-after scenarios to encourage stakeholder engagement and advocacy, to communicate a high-level implementation plan to demonstrate the holistic nature of the changes and to provide reassurance to stakeholders around the inclusive approach to the changes that were being proposed. While sponsor support was of primary importance, the project team realised that gaining the trust of and engaging with the end-user contract managers would provide significant benefits around the piloting and subsequent implementation of the new policies and procedures. As the end-users were not part of the main project team, graphics provided an executive briefing that allowed information to be conveyed in summary form, without the impost of additional textual exposition, to an outcomesensitive constituency that was time-limited. The endorsed current and future states were summarised on one A3-page that could be printed and shared. Similarly, with limited understanding of project management artefacts and specifically of outputs from Microsoft Project, the detailed project plan was realised as a plan-on-a-page. Rather than focus on dependencies and variances at the task level, its intent was to communicate

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key themes by work streams and convey the management of complexity to sponsors and contract managers, while providing reassurance of progress towards the end-state.

Case study 3: US sports league A project team was engaged to develop an enterprise content management solution that would be used to host a suite of consumer web sites. The existing properties would be rearchitected in an extensive process where the design, content and functionality were reconsidered. There were two key features of the redesign for which sponsor endorsement was sought: demonstrating the theoretical design principles in practice and adopting a more graphical approach to the communication of information to increase end-user interaction and retention. The first challenge was resolved by building a high-level conceptual model, using metaphor, and extending it to increasingly detailed levels of specificity to explain its application, similar to the use of tiers as business processes are decomposed. The extension from theoretical principles at the top tier using the exposition of specific worked examples at the third and fourth tiers provided sufficient confidence in the proof of concept for the sponsors to agree to move to the architectural design stage. A number of novel solutions were proposed for the second challenge. While these were visually sophisticated and user testing demonstrated increased satisfaction with the data and the ways it could be manipulated, the sponsors maintained that existing depictions were sufficient and that the majority of end users would not make the additional investment in time to learn these new formats or would not want to experiment with the data. Consequently, the project team focused on enhancing the existing interactions, whose formats were established, standardised depictions of performance.

Summary The case studies described above, as well as other situations considered, revealed that there was limited variation in graphic usage by domain, and the samples considered for this study demonstrated less variation in format than a population derived from more extensive sources. Similarly, there was less information sophistication exhibited in the graphics from the case studies. While it was evident that there was adherence to Tufte’s (1983) principles of visual representation, this was

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countered by a lack of novelty in the depictions when compared with a broader sample. The lack of information sophistication might be a dependent factor as the audience could be perceived as being less visually literate (though this is an assumption, since the visual literacy of the audience for the wider sample was not assessed). The rationale for this contention is based on the limited novelty exhibited in the sample of case study graphics and the perspective that images were produced for the needs and level of the readers. This extends to the sponsors’ requirements around information consumption; the graphics referenced by the case studies were categorised as being visual metaphors, rich pictures and infographics, while the general sample of graphics sourced from academic journals and business magazines included more informing and performance-level depictions.

Conclusions According to Wysocki and Lewis (2001: 30), “being a project manager is easy, but being a successful project manager is very difficult.” It was originally contended that graphics would aid the project manager since they would enhance the communication process, particularly with sponsors, and, as a consequence, improve the likelihood of project success. In the case studies considered for this research project, this hypothesis was proved partly correct in that communication was enhanced, though it is more difficult to assess whether project success was a direct beneficiary. (It should also be noted there was no significant difference in the adoption or understanding of graphics deploying metaphor, rich pictures and infographics.) However, the hypothesis attracts the following conditions, which may be considered as practitioner-oriented, project-based recommendations. Firstly, for most people, their visual grammar is not as well established as their textual grammar. The understanding of visual language lags behind verbal language, which detracts from comprehension in two aspects. More mistakes are made in the construction of depictions, particularly since the graphic producers do not tend to be trained in design, as well as the audience for those graphics finding it harder to ‘read’ them due to the lack of design training. This also impacts in the time it takes to understand graphics, with either misunderstanding or abandonment as possible outcomes. Therefore, images should be checked for their meaning and ease of reading with key audience constituencies.

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Secondly, reduced graphical sophistication, again on the part of the designer and audience, means that graphics should err on the side of simplicity over complexity. While a well-constructed depiction can incorporate six variables without affecting readability, an untrained reader is likely to be overwhelmed with these messages. Accordingly, the designer might need to produce more than one graphic to convey multiple ideas. Colour is both misunderstood and misrepresented by audiences; the reader may seek similarity or difference where this is none. Accordingly, the graphic producer should adhere to Bertin’s (1983) retinal variables and avoid the combination of two or more to depict one variable to reduce the consequences of the lack of graphical sophistication. Thirdly, while there was a lack of variety in the use of formats, there was a degree of standardisation in the depiction of key messages. For time-series plots, time flowed across the page from left to right, following the Western tradition, while progress was typically represented in depictions as moving from the bottom left to top right. Flow charts started at the top of the page and developed downwards; for circular representations, the cycle progressed in a clockwise direction after starting at the top (or noon). For information dashboards, status reports or progress updates, the traffic light analogy was commonly utilised, with red denoting a problem, yellow or amber indicating possible caution and green signifying progress or no impediment. Therefore, the designer would be advised to adopt these standardised practices to maximise understanding and reduce the investment in learning new formats. Finally, there was a general lack of understanding of what might be considered to be other established graphic conventions. For flow charts, the significance of the different shapes was not appreciated; the ability to read project plans was not well developed. While graphics are useful to communicate key information, as well as their capacity to engage and entertain, their use should be carefully considered. Meanings derived from graphics are subject to more variation than they are from text (although the extent to which this compares with quantitative data was not assessed). Due to these limitations, graphics should not be considered as illustrations to divert the reader’s attention and time should be invested in graphic production to maximise their communicative power. It is good practice to explain, verbally or textually depending on the context, the composition of the graphic before exploring the content of the message it is conveying.

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References Andriessen, D.G. (2008) Stuff or love? How metaphors direct our efforts to manage knowledge in organisation. Knowledge Management Research & Practice, 6, 5-12. Bertin, J. (1983) Semiology of graphics: diagrams, networks, maps. Translation of Sémiologie graphique, 2nd ed. rev. Paris: Editions Gauthier-Villars; Paris-La Haye: Editions Mouton & Cie; and, Paris: Ecole Practique des Hautes Etudes, 1973, by W.J. Berg. Madison, WS: University of Wisconsin Press. Campbell, J. (1968) The hero with a thousand faces, 2nd ed. Princeton, NJ: Princeton University Press. Cook, P. (2006) Sex, leadership and rock ’n’ roll: leadership lessons from the Academy of Rock. Carmarthen: Crown Publishing. Fenno, R. (1986) Observation, context, and sequence in the study of politics. American Political Science Review, 80(1): 3-15. Gareis, R. and Huemann, M. (2000) Project management competences in the project-oriented organisation, in Turner, J.R. and Simister, S.J. (eds.) The Gower handbook of project management. Aldershot: Gower. Hardy, C., Grant, D., Oswick, C. and Putnam, L. (eds.) (2004) Handbook of organizational discourse. London: Sage Publications. Latour, B. (1987) Science in action. Cambridge, MA: Harvard University Press. Macdonald-Ross, M. (1977) Graphics in texts. Review of Research in Education, 5: 49-85. Morgan, G. (1986) Images of organization. Beverly Hills, CA: Sage Publications. Nevan Wright, J. (1997) Time and budget: the twin imperatives of a project sponsor. International Journal of Project Management, 15(3): 181-186. Overton, M.G. (1993) Innovating envisioning: methodological approaches to the graphic representation of technological innovation. (DWPS; 13 NS). Birmingham: Aston Business School. —. (1998) Envisioning innovation: the communication of technological change through graphic representation. Unpublished PhD thesis. Birmingham: Aston Business School. Project Management Institute (2008) A guide to the project management body of knowledge (PMBOK guide), 4th ed. Newtown Square, PA: Project Management Institute. Simon, H.A. (1981) The sciences of the artificial, 2nd ed. Cambridge, MA: MIT Press.

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Steward, F., Conway, S. & Overton, M.G. (1993) Relationships and representations in innovation networks. Paper presented at Management and (New) Technology, COST A3 Workshop, European Network on the Management of Innovation sponsored by DG XII of the Commission of the European Communities, Copenhagen, Denmark, 23 December. Tufte, E.R. (1983) The visual display of quantitative information. Cheshire, CT: Graphics Press. —. (1990) Envisioning information. Cheshire, CT: Graphics Press. Westerveld, E. (2003) The project excellence model: linking success criteria and critical success factors. International Journal of Project Management, 21(6): 411-418. Winter, M. and Szczepanek, T. (2009) Images of projects. Farnham: Gower. Wysocki, R.K. and Lewis, J.P. (2001) The world class project manager: a professional development guide. New York, NY: Perseus Publishing. Yin, R.K. (2009) Case study research: design and methods, 4th ed. London: Sage Publications.

PART III COMPLEXITY

CHAPTER FIVE HUMBLE ICONOCLASTS: LEADERSHIP FOR COMPLEX PROJECTS DR. KAYE REMINGTON

Humility is to make a right estimate of one's self. —Charles Spurgeon (1834-1892) Rough work, iconoclasm, but the only way to get at the truth. —Oliver Wendell Holmes (1809-1894)

Uncertainty has been linked with complexity in the project context by a number of authors (Turner & Cochrane, 1993; Williams, 2002; Alessandri, Ford, Lander, Leggio & Taylor, 2004; Remington & Pollack, 2007; Girmscheid & Brockman, 2008; Leijten, 2009). Communication during uncertainty has also been explored by several authors (Driskill & Rymer, 1986; Eisenberg, 1987; Fox & Irwin, 1996; Friedman et al., 1999; Brashers, 2001; Kitchen & Daly, 2002; Carson et al., 2006). Communication characteristics have also been connected with leadership styles (Awameh & Gardner, 1999; Den Hartog & Verburg, 1997; Frese, Beimel & Schoenborn, 2003; Kirkpatrick & Locke, 1996; Riggio et al., 2003; Shamir et al, 1994; Spangler & house, 1991; Towler, 2003). Still others have linked certain leadership communication characteristics with productivity during conditions of uncertainty (Awamleh & Gardner, 1999; Dewan & Myatt, 2008; Naidoo & Lord, 2008). Effective communication during periods of uncertainty might mean the difference between successful project delivery or otherwise. Uncertainty is often associated with not knowing specific information. However, access to information alone will not enable people to manage uncertainty (Cyert & March, 1963; Crozier, 1964; Pascale & Athos, 1981; Eisenberg, 1984). The ability to receive, interpret and use information is contextually dependent. Even if people possess the appropriate information they may

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not have the requisite beliefs, attitudes, confidence, authority or motivation to carry out the task adequately (Driskill & Goldstein, 1986). Research teams have investigated verbal communication with respect to three well-defined styles of leadership: charismatic, human-oriented and task-oriented (De Vries, Bakker-Pieper, Alting Siberg, Van Gameren & Vlug, 2009; De Vries, Bakker-Pieper & Oostenveld, 2010). Also, the assumption in much of the leadership literature is that leaders have a preference for one style or another (Penley & Hawkins, 1985; Daft, 2003; McCartney & Campbell, 2006). Applying these categories (charismatic, human-oriented and task-oriented), researchers have concluded that charismatic and human-oriented leadership is mainly communicative, while task-oriented leadership is much less so. This makes common sense because human-oriented leadership focuses on building relationships, implying communication that promotes warmth, concern and trust. Taskoriented leadership, on the other hand, is much more concerned with the actual content of the information in relation to the needs of the task at hand. Nevertheless, task-centred leadership is also revealed though communication characteristics. De Vries, Bakker-Pieper, Alting Siberg, Van Gameren and Vlug (2009) investigated verbal communication characteristics of all three leadership styles by analysing the words used during communication. From this they developed a number of communication characteristics which were labelled: Expressiveness; Preciseness; Niceness; Supportiveness; Verbal Aggressiveness; Assuredness; Emotional Tension (expressed) and Argumentativeness. If we assume that project leadership is different in certain distinct ways from leadership in general management contexts, project leadership would be expected to be more task-oriented, because of the short-term, goaloriented nature of projects themselves. Therefore it is reasonable to assume that task orientation might be reflected in the kind of communication used by project leaders, with the tendency to focus on information content rather than relationship building.

Research method Research questions The research questions that guided this part of the larger study were:

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ƒ Which, if any specific, shared, communication characteristics emerge from our sample of senior project leaders of successfully delivered complex projects? ƒ How might those communication characteristics contribute to their leadership styles in relation to complex projects where uncertainty abounds? A qualitative, phenomenographic approach was selected for this study because it would best capture participants’ subjective interpretative patterns, experiences, positions, processes and meanings that are not easily examined through other means (Strauss & Corbin, 1998; Denzin & Lincoln, 2003).

Sample 8 7 6 5 4 3 2 1 0

ES PD SC PM

Role equivalent

#

Executive sponsor (ES)

23

Program director (PD)

9

Senior consultant (SC)

10

Senior Project manager (PM)

28

Figure 5-1: Breakdown of interviewees by industry sector and role equivalent

Project leaders were sought who represented a broad range of industry sectors. Interview subjects were selected on the basis of acknowledgement

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by their peers and other key stakeholders as having taken effective leadership roles in projects that were agreed to be both complex and successful. Sample bias and subsequent reliability and validity associated with sample selection and process was considered. Mitigation was through sample size and heterogeneity of industry sectors (Figure 5-1), and consistent use of two researchers in collection and analysis (Bowden 1994; Trigwell, 2000; Akerlind, 2002).

Data Collection and Analysis Data was gathered ahead of each interview, in this case through preparatory conversations with the interviewees and other key stakeholders, followed by in-depth semi-structured interviews, with two researchers who each took separate notes. The interviews were recorded and lasted from 50 minutes to 90 minutes. Following data collection and analysis a further literature study was conducted in order to ground findings in relation to the current body of literature. The analytical approach used in this study was iterative, involving continual sorting by two researchers independently followed by comparison of data to establish descriptive categories (Bowden 1994; Trigwell, 2000). Phenomenography, by its very nature, makes replicability problematic. Kvale (1996) argues that research reliability is enhanced through the use of more than one researcher to analyse the data. First the transcripts were read by both researchers in their entirety for the purposes of highlighting main themes, interesting and unusual comments, and similarities and differences between transcripts (Akerlind, 2002; Bowden, 1994). The second reading of the transcripts involved a process of identifying a range of sub-themes relating to particular areas of investigation. The third part of the analysis involved comparison of subthemes with other studies from the literature, supported by key word analyses. Similarities and differences were identified and discussed.

Results and discussion Communication characteristics and leadership styles Communication characteristics of senior leaders in our sample were mapped against the categories established by De Vries et al., (2010) and consistent with studies by Awamleh and Gardner (1999) and Pennebaker, Rimé and Blankenship (1996) (see Table 5-1).

Humble Iconoclasts: Leadership for Complex Projects Communication characteristic

Leadership style most frequently associated

Charismatic Argumentativeness

Yes

Humancentred No

Taskcentred Somewhat

Assuredness

Yes

Yes

Yes

Preciseness (clarity)

Yes

Not observed

Yes

Supportiveness

Yes

Yes

Possibly

Expressiveness

Varies with context

Somewhat

No

Niceness (friendliness of itself as in caring for others)

No

Yes

No

Emotional Tension (expressed)

Somewhat

No

Somewhat

Aggressiveness

Somewhat

No

Somewhat

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Communication characteristic of this sample of project leaders

No (most interviewees stated that they convinced others through providing sound information) Yes (strongly indicated) Yes (strongly indicated) Yes (strongly indicated) Somewhat but varied considerably No (focus on factual information might predominate over niceness) No (not apparent from interviews) No (not apparent from interviews)

Table 5-1: A comparative summary of the relationship between communication characteristics and leadership style (from De Vries et al., 2010)

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This comparison revealed a preference for communication characteristics that correlate with human-oriented leadership styles; however this was underpinned by a strong focus on task and achievement, supported with information and pragmatism: a dual focus. A keyword analysis, using the linguistic analysis tool WordSmith, revealed that the word people was the most frequently used noun, and far outweighed other nouns in the texts analysed. Other human-oriented words such as relationships, teams, team members, clients also featured strongly in the keyword analysis. Reports of interactions with people vastly outweighed the references to task, structure and organisation. The category human-oriented applied to all virtually interviewees. A few leaders exhibited characteristics that could be called charismatic but these were not as clearly distributed as were those characteristics associated with human-oriented leadership. Task-oriented leaders are characterized by assuredness more than the other styles, by preciseness (Awamleh & Gardner, 1999) and also by the presence of (some) verbal aggressiveness (De Vries et al., 2010). An explanation of this finding may be the assumption that communication content for task-oriented leaders, reflects content (such as rules, procedures, planning, and goal-setting) instead of relationship (such as friendliness, trust, and inspiration) pertaining to human-oriented leadership and charismatic leadership communication. There was strong evidence of task-orientation but little evidence of verbal-aggressiveness in our sample. Interviewees consistently reported that they convinced others through providing sound information: "laying the facts on the table."

Leader communication during uncertainty As complex projects are generally characterised by high levels of uncertainty, we also compared communication characteristics in our sample of leaders with those revealed in a number of studies investigating communication and leadership style during conditions of uncertainty. Findings from studies by Awamleh and Gardner (1999); Dewan and Myatt (2008); and Naidoo and Lord (2008) are represented in the following table (Table 5-2).

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Communication characteristics found to be effective during uncertainty

Relevance to leadership style

Present in communication characteristics found in interview sample

Clarity (preciseness)

Yes (all styles)

Yes

Direction

Less important than clarity if direction unclear

Yes - frequently mentioned in terms of 'a few clear goals'

Brevity of message/ preciseness

Yes (all styles)

Yes

Repetition of key message

Yes (all styles)

Yes (reinforcement of key messages)

Speech imagery and metaphor

Yes (all styles for communicating vision )

Yes but mostly via narrative (anecdotes/stories).

Argumentativeness

Only effective with some charismatic styles

No

Supportiveness

Associated with performance (not with perceptions of effective leadership)

Yes

Niceness

Associated with performance (not with perceptions of effective leadership)

Niceness (friendliness) appeared to be strongly linked to task achievement

(friendliness for its own sake as caring for others)

Table 5-2. Communication characteristics associated with productivity in conditions of uncertainty, comparing research data to our sample. Categories from earlier research into effective leadership communication and productivity under conditions of uncertainty are validated to some extent by this research. The organisational leadership research stresses that communicating clarity is more important than direction if direction is unknown. Plowman and Duchon (2008) question the idea that leaders can actually specify desired futures at all. However, the importance of providing direction in terms of 'a few clear objectives' or 'a clear goal' was cited frequently. The focus on providing direction reflects the comparatively

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short life cycles for projects when compared with organisational life cycles.

Additional characteristics for exploration from this study The characteristics derived from the literature relate to quality dimensions of the communication. This research revealed other categories that have not been exposed in earlier studies and that might be specific to projects. During coding of the interviews for this study, two other subthemes emerged within the overall theme of communication. They were labelled separately as content and delivery expression, though they are interlinked categories. The frequency of appearance of the items within the sub-themes suggested that these characteristics were important in developing a fuller picture of how these project leaders communicated.

Content (of the communication) x Information lead: Seeking sound information and trusting in its effectiveness for decision-making and influencing outcomes was a recurring theme. x Appropriateness: Interviewees emphasised repeatedly that delivery of the message must be appropriate to the recipient (as well as being delivered in the right form). Interviewees reported taking the trouble to select the content and the means of delivery of information appropriate to each group of stakeholders. x Self-knowledge (of limitations): A number of interviewees stressed that the leader could not know everything and must rely on others, particularly the teams. Others stressed the importance of selfknowledge. x Narrative: Use of narrative structure to communicate was widespread. Whereas the use of imagery and metaphor, in a more abstract sense, was less apparent. To illustrate points, conversations were peppered with anecdotes, which had a clearly defined narrative structures with beginnings, middles, ends, a moral or message and stories which were populated with characters and their actions.

Delivery expression (of the communication) x Inclusiveness: A number of leaders placed strong value on the importance not only of supplying teams with "all the information

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they need to do the job", but in trusting that teams would know what to do at a local level if they had sufficient and robust information. There was repeated validation of the team contribution and the importance that information played in allowing teams to function effectively. This trust in inclusiveness was qualified by other requirements, such as building and maintaining highly effective teams, at all levels of the project. x Transparency (where possible and appropriate): This relates to inclusiveness and it also influences communication content. It was coded in several interviews. x Resilience: From an analysis of the interviews, these leaders seemed to approach barriers, technical and organisational, as exciting challenges. If this exemplifies the style adopted when they are communicating with teams and other key stakeholders, it would have a motivating effect.

Limitations of the study Apart from the limitations discussed above, in relation to validity and reliability, it is important note that we were unable to conduct 360 degree interviews and the data was based on leaders' self-reporting. Limitations associated with self-reflection were mitigated to some extent through the process of selection of interviewees (interviewees were invited based on key stakeholders' assessment of their effectiveness) and through use of subsequent language analysis tools to interrogate the dominant language forms used by interviewees.

Conclusion This chapter reports the first stage of a full analysis of the data from 70 in-depth interviews with people taking senior leadership roles in complex projects. Internationally and across industry sectors, remarkable consistency emerged from the data. In many respects the themes from this study support other organisational research. However, instead of a dominance of one leadership style, this research suggests that leaders of successful complex projects employ a predominantly human-oriented style of leadership, strongly underpinned by task-oriented leadership, but minus some of the more negative aspects associated with task-orientation, such as verbal aggression. These leaders seem to have combined the best of two paradigms. The extraverted communication characteristics usually associated with charismatic leadership styles were not strongly represented.

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Some additional communication characteristics were consistently observed, including a focus on: the quality of information; delivery of information in ways different groups could best understand and use; an inclusive approach to information distribution and team problem solving; a willingness to trust the teams to work with the information once teams had been properly established; and finally communication was peppered with 'stories from the front', or didactic narratives. The full complement of communication characteristics observed in this study led the research team to describe these project leaders as 'humble iconoclasts': humble relating to understanding the limitations of their own knowledge - although quite apparently proud of their achievements, they constantly referenced their teams; iconoclasts due to the resilience communicated and an apparent delight in overcoming seemingly impossible odds.

References Akerlind, G.S. (2002) Principles and practice in phenomenographic research. Proceedings of current issues in phenomenography symposium. Canberra. Centre for Educational Development and Academic Methods. Retrieved 12/12,/2004, from http://www.anu.edu.au/cedam/ilearn/syposium. Alessandri, T.M., Ford, D.N., Lander, D.M., Leggio, K.B. and Taylor, M. (2004) Managing risk and uncertainty in complex capital projects, The Quarterly Review of Economics and Finance, 44, 751-767 Awamleh, R., & Gardner, W.L. (1999). Perceptions of leader charisma and effectiveness: The effects of vision content, delivery, and organizational performance. The Leadership Quarterly, 10(3), 345– 373 Bowden, J. (1994) The Nature of Phenomenographic Research. In J.A. Bowden & E. Walsh (Eds.), Understanding Phenomenographic Research: The Warburton Symposium, RMIT: EQARD, Melbourne, RMIT, 1-16. Brashers, D.E. (2001) Communication and Uncertainty Management, Journal of Communication, International Association, Sept. 477-497 Carson, S.J., Madhok, A. and Wu, T. (2006) Uncertainty, opportunism and governance: The effects of volatility and ambiguity on formal and relational contracting. Academy of Management Journal. 49(5). 10581077 Crozier, M. (1964) The Bureaucratic Phenomenon, University of Chicago Press, Chicago

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Cyert, R.M. and March, J. (1963) A Behavioral Theory of the Firm, Prentice-Hall, Englewood Cliffs, NJ Daft, R. L. (2003). Management (6th ed.). South-Western, Cincinnati, OH Den Hartog, D.N. & Verburg, R.M. (1997) Charisma and rhetoric: Communicative techniques of international business leaders. The Leadership Quarterly. 8(4). 255-391 Denzin, N.K. & Lincoln, Y.S. (2003). The Landscape of Qualitative Research: Theories and Issues. (2nd Ed.). Sage Publications, Thousand Oaks, California. De Vries, R.E., Bakker-Pieper, A. & Oostenveld, W. (2010) Leadership = Communication? The Relations of Leaders’ Communication Styles with Leadership Styles, Knowledge Sharing and Leadership Outcomes. Journal of Business Psychology. 25. 367–380 De Vries, R. E., Bakker-Pieper, A., Alting Siberg, R., Van Gameren, K., & Vlug, M. (2009). The content and dimensionality of communication styles. Communication Research, 36, 178–206 Dewan, T. & Myatt, D.P. (2008) The Qualities of Leadership: Direction, Communication and Obfuscation. The American Journal of Political Science Review. 102(3), 351-368 Driskill, L.P. and Goldstein, J.R. (1986) Uncertainty: Theory and Practice in Organizational Communication. Journal of Business Communication. 23(3). 41-46 Eisenberg, E.M. (1984) Ambiguity as Strategy in Organizational Communication. Communication Monographs. 51, 227-242 Fox, C.R. & Irwin, J.R. (1998) The role of context in communication of uncertain beliefs. Basic and Applied Social Psychology. 20. 57-70 Frese, M., Beimel, S. and Schoenborn, S. (2003) Action training for charismatic leadership: Two evaluations of studies of a commercial training module on inspirational communication of a vision. Personal Psychology. 56(3). 671-697 Friedman, S.M., Dunwoody, S. & Rogers, C.L. (1999) Communicating uncertainty: media coverage of new and controversial science. Erlbaum. Mahwah, N.J Girmscheid, G., & Brockman, C. (2008) The inherent complexity of large scale engineering projects. Project Perspectives. 22-26. Kirkpatrick, S.A. & Locke, E.A. (1996) Direct and indirect effects of three core charismatic components on performance and attitude. Journal of Applied Psychology. 81. 36-51. Kitchen, P. J. & Daly, F. (2002) Internal communication during change management. Corporate Communications: An International Journal, 7(1). 46-53.

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Kvale, S. (1996) InterViews: An introduction to Qualitative Research Interviewing. Sage Publications, Thousand Oaks, CA Leijten, M. (2009) Manageablity of Complex Construction Engineering Projects: Dealing with Uncertainty. Second International Symposium on Engineering Systems. Cambridge, Massachusetts: MIT Press. 1517. McCartney, W. W., & Campbell, C. R. (2006). Leadership, management, and derailment: A model of individual success and failure. Leadership & Organization Development Journal. 27(3), 190-202. Naidoo, L. J., & Lord, R. G. (2008) Speech imagery and perceptions of charisma: The mediating role of positive affect. The Leadership Quarterly. 19. 283–296 Pascale, R.T. & Athos, A.G. (1981) The Art of Japanese Management. Simon and Schuster, New York Penley, L. E., & Hawkins, B. (1985) Studying interpersonal communication in organizations: A leadership application. Academy of Management Journal. 28(2), 309–326. Pennebaker, J. W., Rimé, B., & Blankenship, V. E. (1996) Stereotypes of emotional expressiveness of northerners and southerners: A crosscultural test of Montesquieu’s hypotheses. Journal of Personality and Social Psychology. 70(2). 372–380. Plowman, D. A. & Duchon, D. (2008) Dispelling the Myths About Leadership: From Cybernetics to Emergence. In M. Uhl-Bien & R. Marion (Eds.). Complexity Leadership. Part 1: Conceptual Foundations, Information Age Publishing, Charlotte, Nth Carolina Remington, K., & Pollack, J. (2007) Tools for Complex Projects. Gower Publishing, Aldershot Riggio, R.E., Riggio, H.R., Salinas, C. & Cole, E.J. (2003). The role of social and emotional communication skills in leader emergence and effectiveness. Group Dynamics: Theory, Research and Practice, 7, 83103. Shamir, B., Arthur, M.B., and House, R.J. (1994). The rhetoric of charismatic leadership: A theoretical extension, a case study, and implications for research. The Leadership Quarterly. 5. 25-42. Spangler, W.D. and House, R.J. (1991) Signaling participation through relational communications: A test of the leaders interpersonal influence model. Journal of Personal and Social Psychology. 60. 439-455 Strauss, A.L., & Corbin, J. (1990). Basics of qualitative research: Grounded theory procedures and techniques. Sage Publications, London

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Towler, A.J. (2003) Effects of charismatic influence training on attitudes, behavior, and performance. Personal Psychology. 56(2). 363-381 Trigwell, K. (2000) A phenomengraphic interview on phenomenography. In J. Bowden & E. Walsh (Eds.). Phenomenography, RMIT Melbourne: University Press. 62-82 Turner, J.R. and Cochrane, R.A. (1993) Goals-and-Methods Matrix: Coping with Projects with Ill Defined Goals and/or Methods of Achieving Them. International Journal of Project Management. 11 Williams, T. (2002) Modelling Complex Projects, John Wiley & Sons. Sussex, UK

CHAPTER SIX ASPECTS OF PROJECT COMPLEXITY PROF. VERNON IRELAND

A recent PMI study identifies that projects are becoming more complex and that this needs to be recognised (PMI 2013b). The report identifies complexity in terms of: multiple stakeholders (57%); ambiguity of project features, resources, phases, etc.(48%); significant political/authority influences (35%); unknown project features, resources, phases, etc. (33%); dynamic (changing) project governance (29%); significant external influences (28%); use of a technology that is new to the organisation (26%); use of a technology that has not yet been fully developed (25%); significant internal interpersonal or social influences (23%); highly regulated environment (18%); project duration exceeds the cycle of relevant technologies (10%). However, the System of Systems Engineering community, of which there are many members, primarily recognises another primary characteristic of complex projects: that of inclusion of autonomous and independent systems.

What is a complex project? As has been stated, the view of the System of Systems (SoS) community is that inclusion of autonomy and independent systems is the primary reason for complexity. This can include traditional military system of systems (SoS), the extreme of which is Norman and Kuras (2006) describing the Air Operations Centre of the US DoD which includes 80 autonomous independent systems, including communication balance, application, servers, and databases. The systems: x Do not share a common conceptual basis;

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x Are not built for the same purpose, or used within specific AOC workflows; x Share an acquisition environment which pushes them to be standalone; x Have no common control or management; x Do not share a common funding which can be directed to problems as required; x Have many customers in which the AOC is not the only one; x Evolve at different rates subject to different pressures and needs; SoSs have been further described as having: x Operational Independence of the Individual System; x Managerial Independence of the Individual Systems (Morganwalp & Sage, 2003). The inclusion of emergent behaviour from these autonomous and independent systems creates systems which are not linear. SoSs have been described as having the characteristics of: autonomy and independence, belonging, connectivity, and diversity and emergence. In my view, the most important characteristic of the systems which form part of a SoS is their autonomy and independence.

Complicated and complex systems Recognition of the characteristics of complex systems, of including autonomous and independent characteristics, requires a further distinction between complicated and complex systems. Karmensky (2011) comments: Basically, a complicated problem is predictable and linear in nature. With complicated problems, it is possible to identify and model the relationship between the parts. Furthermore, the relationships among the parts can be reduced to clear, predictable interactions. For example, building an aircraft engine is complicated, but if done right, the inputs and results are highly predictable and repeatable.

In contrast, a complex problem possesses sufficient intricacy that behaviour cannot be predicted via linear relationships; such problems are also marked by a high degree of self-organising behaviour. This occurs in areas as diverse as recovery from Hurricane Katrina and the implementation of health care reform legislation. Similar positions are taken by Kurtz and

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Snowden (2003), Glouberman and Zimmerman (2002), Cotsaftis (2007) and the OECD Global Science Forum (2009).

How does this align with PMI? The answer to the question is that it does not. The notion in the PMI report (2013b) is in stark contrast to those of the System of Systems community which recognises autonomous and independent systems, which have other purposes and roles to fulfil, and which continue to fulfil these while operating in another SoS. A large community operates in this SoS world and a recently published set of 23 case studies, of which the author was one of the editors, illustrates this point (Gorod et al., 2014).

Some aspects of SOS complex systems There are a number of aspects which make SoS complex systems distinctive. Some of these are: The most innovation occurs on the edge of chaos; Kuhn (2007) describes this edge of chaos as far from equilibrium and between order and disorder. The order is produced by Ashby’s Requisite variety (Ashby 1956). It is where complex self-organising systems or entities tend to naturally gravitate (Bak & Chen, 1991; Packard, 1988; Langton, 1986). Kuhn comments that it is here that processes of organisational adjustment, adaptation and development are most supported and fostered. Zhu comments that this concept normally applies to whether the organisation is too structured, which produces rigidity, or too little structured which produces chaos (2007). McKelvey (2010), in analysing the work of Jack Welch as CEO of General Electric, recognising his role as the CEO who added more value to a company than any other in the 20th century, generally endorses operating in this complexity space, through his defining critical values on the edges of order and chaos. McKelvey defines Rc1 and Rc2, the critical values defining the edge of order and the edge of chaos. In General Electric Jack Welsh increased the adaptive tensions which encouraged phase transitions to a new order; the tension needs to be above the first critical value. McKelvey comments that below the first critical value bureaucratic behaviour prevails, whereas above the second critical value chaos prevails (Brown & Eisenhardt,

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1997). Employee training and experience work to lower resistance to change so that adaptive tensions may take effect at lower values. McKelvey (2010) comments that Jack Welch injected adaptive tension at all levels through his comment, whether at number 1, or 2, or elsewhere. In this zone between order and chaos, called the melting zone of maximum adaptability, organisations maintain themselves in a state of self-organised criticality near the edge of chaos. The signatures of the melting zone are self-organisation, emergence and nonlinearity (Andriani & McKelvey, 2008).

Chaordic systems Kerr (2013: 28) comments: The far from equilibrium state described above is often referred to as a dissipative structure as it is unstable, exchanging high levels of energy with the environment and travelling through multiple transitions to higher levels of complexity and new states rather than back towards equilibrium (Baker & Cullen, 1993); (Mathews, White, & Long, 1999)

Chaordic systems blend order and chaos. The concept adds useful detail regarding the mix of chaos and order (equilibrium states) that coexist within one system (organisation), and the path towards bifurcation, dissipation and the step to the next level of complexity. Dee Hock, founder and former CEO of Visa Card International, introduced the term “chaord”, being an amalgamation of chaos and order (Hock, 1996; 1999). Van Eijnatten (2007) wove the concepts of chaordic systems with the complexity of multiple equilibrium states, diffusion, and transformation: the interweaving of holonic and panarchic concepts. ‘According to The Chaordic Alliance (1998) the term “chaordic” means: (1) anything simultaneously orderly and chaotic; (2) patterned in a way dominated neither by order nor chaos; and (3) existing in the phase between order and chaos (van Eijnatten 2007:431). Panarchic systems (Holling & Gunderson, 2002; van Eijnatten, 2004) add a further level of detail which is the different time frames of evolving hierarchical systems with multiple interrelated elements that sit within each other and act upon each other in an organisation, creating the

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possibility for a ‘revolt (innovation) and remember’ loop that allows small scale local change to quickly effect the much larger evolutionary path. When a chaordic system approaches its growth limits, the system starts to bifurcate (the act of dividing into two parts or branches), and enters a period of relative instability, in which the system ‘changes’ in a non-linear way (transformative change), and is very susceptible to external variations (Sensitive Dependence on Initial Conditions -- SDIC) (van Eijnatten, 2004; Aaltonen & Sanders, 2006; Aaltonen, 2007). It then hits its limit to growth and either dies or transforms by leaping to the next level of complexity, to start a new cycle (Kerr, 2013). Holonic potential, then, is the ability to attain the “leap to a higher order of coherence … that is more complex and more effective”, (van Eijnatten, 2004, p. 441) and it is this capability that stops that organisation from having to go into a dissipative state. The implications are not so relevant for individual projects but more for choice of project type. For example, there have been three stability levels in the global finances since the mid-1990s. On the one hand avoiding conducting a project as the stability levels change would be wise; however, one could benefit by having projects which spanned the stability level change, as some of the large US banks have done.

Scale free and fractal behaviour Fractal geometry was developed by Mandelbrot (1982). Andriani and McKelvey (2011) comment that: “fractals introduce scaling laws - the idea that simple generative mechanisms generate complex patterns by operating at multiple nested levels” (p. 259). McKelvey and Andriani (2010) point out that the mathematical equation is the same at multiple levels of a mathematically created fractal; the adaptive response of a biological agent depends on the same causes operating at multiple levels of a bio-fractal. Even though the call is the same at multiple levels, the consequences can be non-linear.

Why Fractals are Relevant 1. Phase transitions from the edge of order to the edge of chaos speed up the dissipation of imposed energy differentials by creating new intersystem order (Nobel Laureate Progogine);

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2. This creates a disequilibrium between the entrepreneur and the market, which creates new order; 3. The entrepreneur identifies a bundle of potential resources which can be transformed into new value; 4. A self-producing fractal is created which echoes up the organisation and reinforces success (autopoiesis in biology)

Systemic and cascading risk and Black Swan events Helbing (2013) recognises systemic risk, which is the risk caused by multiple systems which interact and combine and thus cascade and create major disasters. An example is provided by the World Bank which concluded that nearly 1 million children had died as a result of the global financial crisis. The Fukushima earthquake, tsunami, meltdown of the nuclear reactors and poor management by the company responsible, provides an example. Bushfires in Sydney on 5 October 2013, in which a number of unrelated and loosely related systems, including temperatures of 38° and winds exceeding 80 kph, a warmer than normal winter by 1°, lack of clearing of dead timber in national parks, trees which had not been pruned and thus touched powerlines, the Department of Defence exploding ordinance (there were no restrictions in place), and lack of clearing of previously unexploded ordinance for 20 years and thus inability to fight the fire, all contributed to the loss of over 200 homes and over 100,000 ha of land. The concept of systemic risk is in stark contrast to dealing with individual risks, as required by ISO 31,000, which involves identifying the likelihood and consequence of each risk, then ranking them in order of size, and then dealing with the Black Swan event. These are based on Taleb’s (2007) concepts which are rare, with extreme impacts, and with retrospective predictability. Black Swan events obey power laws. The logics of Black Swans are defined in Taleb (2010, p.xxii). 1. What we do not know is far more relevant than what we know. 2. We act like we can predict the future and we are unaware that due to “Black Swan” nature, actually we can’t. 3. We tend to focus on what we know. 4. Our social life is produced by rare but consequential shocks and jumps. 5. Ideas are hidden and re-written; we need to focus on what is relevant to us.

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There are 5 peculiarities of human behaviour responsible for blindness to “Black Swan” (Nafday, 2009: 192). 1. Humans prefer to categorize, focusing on preselected believing information rather than contradiction – Astronomy trying to fit observations to model overthrow by rejected Copernican revolution till Galileo’s ideals which confirmed their validity. 2. Explanation events are constructed – NASA managers launch space shuttle challenger during 30o F when it was not designed for that temperature. 3. Human nature cannot imagine “Black Swan” events – Crew members falling asleep while holding classified launch code devices in July 2008 (Nafday, 2009). 4. Humans tend to ignore salient evidence and only focus on failures and success – Questions posed in wrong manner or based on wrong sampling. 5. Humans overestimate and focus only on their expertise (Nafday, 2009).

Phase space This is a representation of where the organisation or project sits in terms of all possible positions it could occupy, such as a phase state. In a phase space, every degree of freedom or parameter of the system is represented as an axis of a multidimensional space. The particular phase space occupied by the enterprise, system or project is strongly influenced by the initial conditions under which it was initiated. This applies to project producing organisations.

Path History The system's evolving state over time traces a path or a phase space trajectory. Documenting the phase trajectory can often provide useful clues to current behaviour of the enterprise, system or project. Complex systems are sensitively dependent on the initial conditions, often called the butterfly effect. Often wars fall into this category. Again this applies to project producing organisations.

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Attractor cages Kuhn (2007) describes attractors as energies that motivate. For most people, working life is a strong attractor. Politics, religion and environmentalism may all act as attractors in someone’s dynamics. An attractor cage is a term used to describe initiators and inhibitors of significant change in organisations. The main application in complex systems is the identification of which factors are locking organisations into existing patterns, such as: structure, hierarchies, rules, controls, culture, defensive routines, power relationships, psychic controls.

Conclusions Space has not allowed a proper investigation of why the SoS world and the PMI world of complexity differ. Some useful aspects of large SoS world have been explored.

References Aaltonen, M. (2007) The Third Lens: Multi-Ontology Sense-Making and Strategic Decision-Making, Ashgate Publishing Limited, Aldershot Aaltonen, M., and Sanders, T.I. (2006) Identifying systems’ new initial conditions as influence points for the future. Foresight, 8(3), 28-35 Andriani, P., and McKelvey, B. (2010) Using Scale-free Theory from Complexity Science to Better Manage Risk. Risk Management, 12(1), 54-82 Andriani, P. and Mckelvey, B., (2011a) Using scale free processes to explain punctuated change in management-relevant phenomena, International Journal of Complexity in Leadership and Management, 1(3), 211-249 Andriani, P. & Mckelvey, B., (2011b), From Skew Distributions to Power Law Science, in Allen, P, Maguire, S. & McKelvey, B., (2011), 254273; Ashby, R.W. (1956) An Introduction to Cybernetics, Methuen London Bak, P. & Chen, K. (1991) Self-Organised Criticality, Scientific American. January Baker, D.D., & Cullen, J.B. (1993) Administrative Reorganization and Configurational Context: The Contingent Effects of Age, Size and Change in Size. The Academy of Management Journal, 36(6), 12511277

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Brown, S.L. & Eisenhardt, K.M. (1997) The art of continuous change: linking complexity theory and time-paced evolution in relentlessly shifting organisations, Administrative Science Quarterly, 42, 1-34 Cotsaftis, M. (2007) What makes a system complex? An approach to selforganisation and emergence Glouberman, S. and B. Zimmerman, B. (2002) Complicated and Complex Systems: What Would Successful Reform of Medicare Look Like?, Discussion Paper 8, Commission on Future Health in Canada. Gorod, A., White, B.E., Ireland, V., Gandhi, S.J., and Sauser, B. (2014) Case Studies in Enterprise Systems, Complex Systems, and System of Systems Engineering, New York, CRC; Gunderson, L.H. and Holling, C.S. (2002) Panarchy - Understanding Transformations in Human and Natural Systems, Washington, Island Press, Washington. Helbing, D. (2013) Globally networked risks and how to respond, Nature, 497(7447) Hock, D. (1999) Birth of the Chaordic Age (1st ed.), Berrett-Koehler Publishers, San Francisco Hock, D.W. (1996) The Chaordic Organization: Out of Control and Into Order. World Business Academy Perspectives, 9(1), 5-21 Holling, C.S, & Gunderson, L.H. (2002) Resilience and Adaptation Cycles, Washington DC. Karmensky, J., (2011) Managing the Complicated vs. the Complex, IBM Center for The Business of Government, www.businessofgovernment.org Kerr, F., (2013) Creating and Leading Adaptive Organisations: The nature and practice of emergent logic, PhD thesis, The University of Adelaide Kuhn, L. (2007) Why utilise complexity principles social enquiry? World Futures, 63: 156–175, New York, Routledge Kurtz, C.F. and Snowden, D.J., (2003) The new dynamics of strategy: Sense-making in a complex and complicated world, IBM Systems Journal, 42(3), 462-483 Langton, C., (1986) Studying Artificial Life with Cellular Automata, Physica 22D: 120-149 Mandelbrot, B. (1982) The Fractal Geometry of Nature, New York, W.H. Freeman & Co. Mathews, K.M., White, M. C., and Long, R.G. (1999).Why Study the Complexity Sciences in the Social Sciences? Human Relations, 52(4), 439-462

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McKelvey, B, (2010), Complexity leadership: the secret of Jack Welsh’s success; International Journal of Complexity in Leadership and Management, 1(1), 4-36 McKelvey, B. and Andriani P. (2010) Avoiding Extreme Risk Before it Occurs: a Complexity Science Approach to Incubation, Risk Management, 12(1), 54-82 Mil-STD-499B (2003), Definition of system of systems, a specification developed in the United States Nafday, A.M. (2004) Strategies for Managing the Consequences of Black Swan Events, Leadership and Management in Engineering, 9(4), 191197 OECD (2009), OECD Global Science Forum, Applications of Complexity Science for Public Policy, www.oecd.org/sti/gsf; accessed 12 September, 2014 Packard, N. (1988), Adaptation Towards the Edge of Chaos, Technical Report, Centre for Complex Systems Research, University of Illinois, CCSR-88-5 PMI (2013a), A Guide to the Project Management Body of Knowledge (PMBOK® Guide)- Fifth Edition, The Project Management Institute, Newton Square, PA, USA —. (2013b), Navigating Complexity – PMI’s Pulse of the Profession InDepth Report, The Project Management Institute, Newton Square, PA, USA Taleb, N.N, (2007), The Black Swan – The impact of the highly improbable, London, Penguin van Eijnatten, F.M. (2004). Chaordic Systems Thinking: Some Suggestions for a Complexity Framework to Inform a Learning Organization. The Learning Organization, 11(6), 430-449 —. (2008). A Toolkit for Phase Transitions. Proceedings of European Chaos and Complexity in Organisations Network (ECCON) Annual Meeting, 17-19 October. Bergen-Ann-Zee Zhu, Z. (2007). Complexity Science, Systems Thinking and Pragmatic Sensibility. Systems Research and Behavioural Science, 24(4), 445464

CHAPTER SEVEN DEVELOPING VALID AND RELIABLE SCALES TO PREDICT SUCCESS OF LARGE COMPLEX PROJECTS DR. ROXANNE ZOLIN

There are well-known cases of projects that were substantially late and overspent which were later perceived to be very successful. The Sydney Opera House and Thames Barrier (Morris & Hough, 1987) are two examples. Meanwhile other projects have been completed on time and cost, but have left their investors dissatisfied because they have failed to deliver the desired benefits. The Sydney Cross-City Tunnel for road traffic is an example of this. What this illustrates is that the golden triangle of project success (time cost and quality) is an inadequate indicator of project success, and that success is not just related to completion of the project’s scope of work, but also that different stakeholders assess these different levels of project success over different timeframes. The focus of this research is to develop leading performance indicators that can be measured during project delivery to predict project success, as assessed by different stakeholders. The leading performance indicators may (as suggested by Turner, 2002) be measures of the success criteria that can be monitored during project delivery, but may also be related to the project’s success factors (or failure factors) and be symptoms that the project is on track or going off the rails. I am undertaking this research project to address the following research question: •What measures of performance during project delivery (leading performance indicators), will provide a valid and reliable forecast of stakeholder satisfaction during project delivery? In order to undertake this work I undertook several steps:

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1. Develop a model of project success reflecting the different stakeholders’ perception of the performance of the project’s outputs, outcomes and impact by different stakeholders over different timescales. 2. Evaluate the ability of success and failure factors, as perceived by the project team and other key stakeholders at key stages during the project life cycle to predict leading performance indicators in complex projects. This paper describes work in progress. It develops the model of project success for step 1, and describes the results of step 2.

Measuring and Monitoring Project Success The success of the project can only be fully evaluated by the stakeholders after the project, in the days, months and years following. However, my aim is to develop leading performance indicators, metrics that can be used to predict project success during the life of the project. There are at least two reasons for doing this: 1. To monitor and adjust the performance of the project team, contractors and subcontractors and project management. I wish to measure project performance against success criteria during the life of the project to identify areas that may not achieve project objectives and implement changes in the project plans. 2. To identify as early as possible if it is unlikely to achieve the project goals within the range of resources the stakeholders are willing to commit. In other words, if the project goals cannot be achieved the sooner the project is cancelled, the fewer resources will be expended. The level of ongoing success of existing projects can be evaluated against milestone data in time, cost, forecast functionality and scope, but I argue that the perceptions of multiple stakeholders regarding a range of success criteria are also critical to this determination. For instance, the assessment of the ongoing success of an existing project is necessary for the ongoing evaluation and management of the prime contractor, subcontractors, project teams, and team member’s performance. Inappropriate evaluation of the success criteria of an existing project could misdirect the project’s decision making, de-motivate employees and establish an unproductive organisational culture. I argue that to effectively ascertain

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the success or otherwise of large complex projects, the perspectives of multiple stakeholders need to be evaluated, such as the owners, consumers, users, the sponsors and project executive, project managers and project team members, suppliers, and very importantly, public stakeholder groups, such as the media (Turner, 2009). I further argue that evaluations of ongoing success criteria during the lifecycle of a project will act as an early warning system for the ultimate success or failure of projects. Current practice confirms, however, a comprehensive, holistic evaluation of ongoing success criteria is rarely done taking into consideration the perspectives of stakeholder groups. I also propose that assessments of a project’s success factors and its level of complexity are critical to determining the ongoing and ultimate success or failure of major projects. Research has shown that for projects in the construction, military, and IT industries, project success factors will predict project outputs, such as project performance (time, cost, quality) (Turner, 2002; Turner & Müller, 2005). Similarly, project failure factors are designed to predict the likely failure to meet project success criteria. No research, however, exists that examines the link between project success and failure factors and a comprehensive assessment of project success criteria across stakeholder groups and time frames, including outputs, outcomes and impacts. Table 7-1 shows the model of project success and failure factors and leading performance indicators across stakeholder groups. Project Stakeholders Investor or owner

Open communications

Consumer

Success and failure factors (Jacobson & Choi, 2008) Clear & accepted purpose Specific plan

Stakeholder endorsement Early stakeholder influence Interested Owner (Andersen et al., 2006; Kang & Moe, 2008; Müller, 2003) Clear specifications Open communication Acceptance (Pinto & Slevin, 1988)

Leading performance indicators (Yu et al., 2005) Satisfaction with specifications Relationship with prime contractor Prototype performance Earned value Net project execution cost

Satisfaction with specifications Relationship with sponsor Prototype performance

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Project executive or project sponsor

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Senior supplier (design and/or management)

Open communications Risk awareness Open communications Respect and trust Collaboration

Project manager and project team

Clear and accepted purpose Specific plans Commitment Open communications Respect and trust Collaboration Political support Expert advice and review Risk awareness Clear roles & responsibilities Leadership Style (Pinto and Slevin, 1988; Müller & Turner, 2007; Turner, 2009) Commitment Open communications Respect and trust Collaboration Transparency Accountability Community outreach Political support

Other suppliers (goods, materials, works or services) Public

Satisfaction with specifications Prototype performance Stakeholder satisfaction Efficiency and effectiveness Profits Strategic goals Organisational learning Managed risk Safety record Stakeholder satisfaction Efficiency and effectiveness Contract compliance Profits Strategic goals Organisational learning Reduced waste (Atkinson, 1999) Pride in work Job satisfaction Recognition Personal growth Skill growth Contacts Reputation Top Management support Retention Morale Stress, frustration & time pressure (Bryde, 2005; Turner et al., 2008) (Atkinson, 1999) Business goals Contract compliance Profit Opportunity cost Social impacts Environmental impacts (Atkinson, 1999; Yu et al., 2005)

Table 7-1. Project success and failure factors and leading performance indicators of the project stakeholders

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Methodology In this section I test the dimensions of project success found in theory and practice to develop a scale that measures project complexity with internal and external validity. I conducted a scale development study to address the research question: How can we measure project success factors and perceptions of stakeholders? Hence, my objective was to develop and test new measures of project success via a scale development process. I started with the identified dimensions.

Scale Development Process In developing new scales and the questions used to measure them, I followed DeVellis’ (2003) eight-step guide for scale development. Project success items were populated based on a model of project success across timeframes and stakeholders (Turner, Zolin & Remington, 2007). Project success items were compiled based on an expanded version of Turner and Muller’s 10 criteria for judging project success criteria (2006), and incorporating Turner’s project governance model (2009) and Shenhar and Dvir’s project success model (2007). The survey contains a larger number of items that are relevant to the content of interest so it can function as a rich source from which a scale can emerge. I also included some additional questions in the same questionnaire to help detect various response biases (e.g., negative affect) and determine the validity of the final scale. In most cases, a five or seven point Likert scale was employed.

Pilot Study The purpose of the pilot study was to ascertain the readability and appropriateness of survey questions. The pilot study involved eight DMO Project Managers/Program Directors and was conducted in a telephone interview format. The questionnaire was refined based on comments received from pilot study participants. The final questionnaire was again checked by two DMO staff at senior management level and management support level prior to execution for the main study.

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Main Study Data collection was carried out in September and October 2009. An online survey tool, Zoomerang, was used in this study. Study 1 involved project managers/directors of Military ACAT-defined I to IV projects, nominated by DMO. Questions relating to project complexity, project success factors and project success criteria were collected. A total of 237 DMO project managers/directors were invited to participate in the questionnaire survey. After two email reminders (sent on 24th September and 1st October 2009), I received 152 completed questionnaires; the overall response rate was about 64%. The 152 returned questionnaires consisted of 50 respondents from air projects, 40 from joint projects, 31 from land projects and 31 from sea projects.

Factor Analysis Exploratory factor analysis was used to reduce the number of items in the complexity and output criteria scales. The project complexity data was used to ascertain the construct validity and reliability of the complexity scales. Questions that detract from Cronbach’s alpha measure of the scale or those which do not load optimally on the scale’s factor were dropped from the scale. I conducted a rotated Varimax factor analysis using all success factor items. I then repeated the process using the perceptions of stakeholder success items. These analyses were done using eigen values greater than 1. This analysis converged within 11 iterations and provided the data shown in Table 7-1. I then took each factor and tested it to ensure they loaded on one factor and calculated the Cronbach’s alpha. Where a scale loaded on more than one factor I tested the loadings and Cronbach’s alpha for each subscale. The resulting Project Success Factor scales are reported in Table 7-1 and the Stakeholder Satisfaction Scales are reported in Table 7-2.

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Table 7-2. Project Success Factor Scales

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Table 7-3. Project Managers’ Perceptions of Stakeholder Satisfaction

Summary of Results In conclusion I found two Project Success Factor scales: 1. Success in Project Planning 2. All Key Stakeholders Engaged

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I also found seven Stakeholder Satisfaction Scales: 1. 2. 3. 4. 5. 6. 7.

Stakeholder Satisfaction Supplier Profitability Contractor Satisfaction Product Efficiency Project Executive Satisfaction Satisfaction with Specifications Public Stakeholder Satisfaction

Discussion of Implications There are a number of practical implications of this study. First, the evaluation of project success will be more difficult due to the necessity of considering the perspectives of stakeholder groups. But this cost is offset by the second major implication, better management decisions and more importantly, better “Go/NoGo/GoBack” decisions during the life of the project. After project closeout, using this richer method of evaluating project success will provide more perspicacious post action reviews and lessons learned. Finally, it is hoped that this more sophisticated method of evaluating project success will create greater appreciation of actual project achievements among stakeholders and the general public. There are a number of potential benefits of this research. First, there is a benefit to academia and the complex project manager community in understanding how project complexity and project success factors influence leading performance indicators in the context of complex projects; Secondly, there is a benefit to the academic and the complex project manager community by providing freely available, valid and reliable new measures to assess project complexity and ongoing project success. Finally, there are practical benefits to policy development in improving the way project complexity, project success factors and project success are assessed by stakeholders.

Conclusions Project success cannot be evaluated from only one perspective at one point in time. This paper develops a model of project success across

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different time frames and stakeholders’ perspectives and describes a methodology to begin testing the model. I propose that the critical stakeholder groups include: project management and team members, investors and/or owners, consumers, operators and/or users, project executive and/or project sponsor, suppliers, and public stakeholders. I further propose that the critical times for assessing project success are during the project, at the end of the project, and months or even years after the end of the project. During the life of an existing project, success and failure factors and leading performance indicators should be assessed. At the end of the project outputs can be assessed. Months after the end of the project, project outcomes should be assessed. Finally, years after the end of the project impacts can be assessed. I describe a methodology for assessing this model of project success during the life of the project, which compares the project managers’ assessment of stakeholder satisfaction with their assessments of the projects’ success and failure factors and leading performance indicators. This study will contribute to the better understanding and measurement of project success by project management, stakeholders, policy makers and academics.

References Andersen, ES, Birchall, DA, Jessen, SA and Money, AH. (2006): Exploring project success. Baltic Journal of Management, 1(2), 127147. Atkinson, R. (1999): Project management: cost. time and quality. two best guesses and a phenomenon. its time to accept other success criteria. International Journal of Project Management.,17(6), 337-342. Bryde, DJ. (2005) Methods for managing different perspectives of project success. British Journal of Management.,16, 119-131. Jacobson, C and Choi, SO (2008): Success factors: public works and public-private partnerships. International Journal of Public Sector, 21(6), 637-657. Kang, DB and Moe, TL. (2008.): Success Criteria and factors for international development projects: A life-cycle-based framework. Project Management Journal, 39(1), 72-84. Morris, PWG. and Hough, G. (1987) The Anatomy of Major Projects: a study of the reality of project management. Chichester: Wiley.

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Müller, R. (2003) Communications of IT project sponsors and managers in buyer-seller relationships. unpublished DBA thesis. Henley Management College. Henley-on-Thames. UK. Müller, R. and Turner, J.R. (2007a): Project success criteria and project success by type of project. European Management Journal, 25(4), 298309. Müller, R. and Turner, J.R. (2007b): Matching the project manager’s leadership style to project type. International Journal of Project Management, 25(1), 21-32. Pinto, JK and Slevin, DP. (1988): Critical success factors in effective project implementation. in Cleland. D.I. and King. W.R.. (eds.). Project Management Handbook, 2nd edition, New York. NY: Van Nostrand Reinhold. Shenhar, A.J. and Dvir, D. (2007): Reinventing Project Management: the diamond approach to successful growth and innovation, Boston. MA: Harvard Business School Press. Turner, JR. (Ed.). (1995): The Commercial Project Manager, London: McGraw-Hill. Turner, JR. (2002): Project success criteria in APM Project Management Pathways. ed M.Stevens. High Wycombe: Association for Project Management. Turner, JR. (Ed.) (2003): Contracting for Project Management, Aldershott: Gower. Turner, JR. (2009): The Handbook of Project-based Management: leading strategic change in organizations, 3rd ed., London. UK: McGraw-Hill. Turner, JR and Cochrane, RA. (1993): The goals and methods matrix: coping with projects with ill-defined goals and/or methods of achieving them. International Journal of Project Management. 11(2), 93-102. Turner, JR, Keegan, AE and Crawford, L. (2003): Delivering improved project management maturity through experiential learning. In Turner. JR (ed). People in Project Management. Aldershot: Gower. Turner, JR and Müller, R. (2005): The Project Manager’s Leadership Style as a Success Factor on Projects: A Review. Project Management Journal. 36(2), 49-61. Turner, JR and Müller, R. (2006): Choosing Appropriate Project Managers: matching their leadership style to the type of project. Newtown Square. PA: Project Management Institute. Turner, JR Huemann, M and Keegan, AE. (2008): Human Resource Management in the Project-Oriented Organization. Newtown Squre. PA: Project Management Institute.

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Yu, AG, Flett, PD and Bowers, JA. (2005)L Developing a value-centered proposal for assessing project success, International Journal of Project Management, 23(5) 428-436.

PART IV RISK MANAGEMENT

CHAPTER EIGHT ‘DUE DILIGENCE’ FOR PRECAUTIONARY RISK MANAGEMENT APPROACHES IN PROJECTS CONRAD D'CRUZ, DR. SAM FRAGOMENI AND VINAYAGA SARMA

Every facet of life is risky and all types of human endeavour are undertaken in order to achieve objectives, whether personal, project or corporate. Since the settings in which these endeavours are undertaken are intrinsically uncertain, there is risk. Risk is broadly defined in the ISO Guide 73 as “…an uncertainty that could affect one or more objectives.” Risk is almost always linked to an event and offers a change in circumstance or a consequence, the effect being positive, negative or a deviation from the expected as is evident in a project environment which integrates various services and skills that go to generate an asset. The presence of risk poses both threats and opportunities to the participants. In pursuing positive outcomes of objectives, participants are subjected to market influences and circumstances that bear on their decisions which consequently affect the project. Thus, corporate governance in an organisation calls for due diligence in decision making. The nuances of due diligence reveal many aspects in today’s organisational environment where accountability plays a significant part. In Australia, due diligence is embodied in various Acts of Parliament and statutes, standards and codes of conduct and enforced through statutory bodies and the judiciary. The Work Health and Safety Act 2011 (WHS), which came into effect 1st. January 2012, clarifies but not limits the various participants, and defines the responsibility and duties of care more clearly when compared to existing Acts of the 9 jurisdictions of States, Territories and Commonwealth, aiming to bring about ‘harmonisation’ into one common Act applicable to all 9 jurisdictions. Also defined are the roles and responsibilities of a ‘Person Conducting a Business or Undertaking’

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(PCBU), officers and workers. For the purposes of the WHS, a PCBU is ‘a person who conducts a business or undertaking whether or not for profit or gain’. The WHS also broadly defines risks and hazards in terms of health, safety and a safe workplace/ working environment where a PCBU or a project manager (PM) either influences or, being in control, shoulders this responsibility. Besides, there are other risks in projects such as business risk, strategic risk, market risk, operational risk, environmental risk, etc., where a PCBU may still be liable. In exhorting the approach of due diligence, risk management (RM) standards and WHSR provide generic guidance. However, to achieve an organisation’s objectives a precautionary approach needs to be articulated and validated. This paper suggests some aspects of precautionary risk management techniques in business and project management.

Background In an organisation, when due diligence is applied to risk management, outcomes are examined as to whether the objectives can be achieved. At the same time, uncertain risk is examined to discern what is ‘reasonably practicable’. The WHS defines ‘reasonably practicable’ in relation to a duty as … that which is, or was at a particular time, reasonably able to be done in relation to ensuring health and safety, taking into account and weighing up all hazard or risk …. the degree of harm that may result, what the person ought to have known, the availability and suitability of resources to eliminate or minimise that risk…”.

This translates to a precautionary approach to risk management and moves away from the traditional approach of investigative procedures and resultant after-the-event protocols, commonly known as bottom-up techniques such as Fault Mode Error and Criticality Analysis (FMECA) and Hazard Operability (HazOps). Bottom–up techniques examine how an element could fail and then the impact of this failure on the whole is assessed. Importantly, the assessment is done by the people who use it or who have intimate knowledge of it. Each piece is examined one piece at a time through a systematic process and then having prioritised risks, is documented. Present day contracts are risk averse, so in cases of uncertain risk it is common to transfer risk. From a recent industry survey conducted by Waldron (2006), respondents have opined that due to the competitive

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tendering market some constructors accept inappropriate risk profiles to obtain work-risks such as delay events, site conditions and approvals and “…when faced with imposed or inappropriately allocated risks, constructors appear to back these risks down onto their subcontractors, some of whom have no idea of the consequences” shifting risk to the bottom of the food chain where it cannot be controlled. The risk remains to the detriment of the project. The other alternative is the ‘top down’ approach to RM – through due diligence, which involves the organisation’s board, its executives and everyone in between them, and the worker at the coal face. The process and framework is laid out in the standard below.

AS/NZS ISO 31000: 2009 Risk Management – Principles and Guidelines This risk management standard requires that compliance of its principles at all levels is required for RM to be effective. This calls for RM to be part of decision making, explicitly addresses uncertainty and is systematic, structured and timely, based on best available information. It also takes the human factor into account is transparent and inclusive. The RM standard provides for a generic form that can be applied for managing any form of risk within any scope and context. Importantly it increases the likelihood of obtaining objectives through proactive management. This is highlighted in the Principles (Fig.8-1 Clause 3). Through the Framework (Fig.8-1 Clause 4) of a continuous cycle of designing, implementing monitoring and improvement, decisive objectives can be met. The Process (Fig.8-1. Clause 5) calls for establishing the context: risk assessment – identification analysis and evaluation and finally risk treatment with communication through all phases of the process. Risk management process takes place within the risk management context of the organisation while the key stages of assessment and treatment is effectively dealt with in enterprise risk management (ERM). To establish the context would mean doing a pre-assessment and filtering down of essential components that may be deemed as a risk to the given objectives of the organisation or project. This is followed by prioritising the deemed risk followed by the assumptions and procedural rules of this pre-assessment to assess “…both the risk and emotions associated with this” (Bouder et al., 2009).

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Figure 8-1. Relationships between the Risk Management Principles, Framework and Process Source: AS/NZS ISO 31000: 2009 Risk Management- Principles and Guidelines

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This stage leads to appraisal and is important for it provides the basis of allocating known protocols or methods to address these risks with its social and economic implications. In the appraisal, the assessment process of identification, analysis and evaluation considers the source of risk or hazard and the consequences thereof – even its residual risk potential. Finally comes the risk treatment which includes plans for treatment and reasons for selection of treatment options and expected benefits, those accountable for approval of these plans and those responsible for implementing them; also included would be proposed actions, required resources, performance measures, reporting and monitoring methods, timing and schedules. Based on knowledge from the appraisal stage and having considered risk responses based on tolerability or acceptability of risk and trade-offs, various options may be selected based on effectiveness etc. What is being ensured at this time is that risk is being reduced ALARP (As Low As Reasonably Practicable) weighing the risk against the cost to reduce it.

Precautionary Risk Management One is led to believe that having adopted all measures as advised by the regulations and codes of practice, the PCBU or duty-holder has fulfilled his obligations; however he still has a duty to look for and implement something better – if it is reasonably practicable. This balance of ‘practical reasonableness’ remains subjective and is something that must be well scrutinised during the context stage and implementation stage. Most risks could be dealt with through “risk-informed and robustness-focussed strategies…” (Garlick, 2007: 52); however, sometimes there are uncertain risks and these have to be dealt with ‘precaution-based’. The ‘precautionary principle’ which views that “…where there are threats…. lack of scientific knowledge shall not be used as a reason for postponing cost effective measures ...” (Garlick 2007: 53). Though the official document of the 1993 Earth Summit: United Nations Conference on Environment and Development (UNCED) related to Environmental Risk, this principle has been adopted through various disciplines including risk. In practice, the precautionary principle proposes several layers, by being conservative and overestimating the risk. Precautionary principles as a standard has been both criticised and defended for its approach to risk management as in Ahteensuu (2007) and Hughes (2006). Critics of the principle, Turner et al. (2007) have stated that it is prejudicial and

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“…fraught with vagueness and ambiguity, and that there is no way of gaining precision and conceptual clarity without sacrificing plausibility…” (p. 102). Several documents such as the CEC (2007) caution that because of its complexity and uncertainty in RM, ‘precautionary measures’ need to be broadly linked to austerity. In applying the precautionary principle, the core of the principle is seen as common-sense and a rule of thumb that the idea of care and foresight are required in the face of “… uncertain future is universal and of all times …” (Throuwborst 2002: 7). While not weighing into the debate of ‘precautions’ and ‘precautionary principles’ this paper borrows the common-sense and ideological dimensions of the principle and is stated as such. “If there is (1) a threat, which is (2) uncertain, then (3) some kind of action (4) is mandatory”, (Sandin 1999: 891) which required four dimensions – threat dimension, uncertainty dimension, action dimension and command dimension. Other versions of classifying the precautionary principle are: (1) rules of choice, where such a rule is an action or set of actions that should be chosen or not chosen (cf. Peterson 2003) (2) procedural requirements, where not the action but conditions or criteria of how a choice of action is made, and, (3) epistemic rules or principles where the issue is not about how an action should be made or how decisions are made but about what should be believed, in other words moving from risk management terminology to risk assessment. In terms of risk management the precautionary principle can be applied when a risk having been identified, has underlying uncertainty either by way of not being able to be quantified and or the magnitude of the risk is unknown. Goldstein and Carruth (2004) have stated that in considering the precautionary principle at the level of risk assessment, “…the principle works not only as a management principle /tool, but it also affects the way in which risk assessment is conducted.” (p73) Thus, we see that RM is a strategy which becomes inherently linked to the objectives of an organisation. Within these defined objectives from different silo perspectives in decision-making, enterprise risk management (ERM) becomes a tool and method for strategic risk management.

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Enterprisse Risk Ma anagement (ERM) Enterprisse Risk Mannagement (ER RM) is an inntegrated app proach to achieve the goals of an organisation o th hrough accepttable risks. Itt is a topdown proceess that filteers down th hrough all bbusiness unitss of the organisationn and since it encompasses processess, controls, corporate governance,, and culture and strategy decisions it rrequires a com mmitment by the orgaanisation to an a all-encomp passing framew work with a common vision of rrisk awareneess and decision making . The frameework as contained inn AS/NZS IS SO 31000: 20 009 advocatess the implementing of risk manageement framew work to supporrt the risk mannagement proccess. This framework iis set out by an a organisation’s objectivess and risk man nagement strategy; it is the policiees and protoccols of how tthe strategy would w be implementedd. Since riskk is governed d by markett or even staakeholder influences, R Risk Appetitee Statement (R RAS) should bbe constantly reviewed which is higghlighted in Figure F 8-2; this also emphassises the cycliic system of designingg, implementinng, monitoring and reviewiing of the man ndate and commitmentt to the risk management m prrocess.

Figure 8-2. M MANDATE & COMMITMEN C NT: Framework for managing risk r (based on ISO 310000):2009 Source: A SStructured appproach to En nterprise Risk Management and the requirements of ISO 31000: AIRMIC, Alarm m, IRC

Risk maanagement in today’s t context is envelopeed in complex xities and since every risk cannot bee eliminated, organisationss try to cope with w some risk in wayys they have developed, or o discern w ways to appro oach risk, perhaps to thheir advantagee. ISO Guide 73 states that the “amount of risk an

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organisationn is prepared to take” or acccept in to acchieve its objectives is known as “rrisk appetite” (2009: ( 8). Thiis translates innto opportunitties and is the positive risk an organnisation is willling to consideer which is seet out in a Risk Appetite Statement (RAS) ( and is incorporated i iinto the frameework. Chapmann and Wardd (2004) hav ve stated thaat developmeent of a framework iis not just aboout the processs to achieve bbest practice but b about making suree that the righht questions arre asked and aanswered, as well. w It is also about m making sure thhat everyone who w needs to know undersstands the answers.

  ǡ  ǡ   Ƭ

       

   Ǧ   

  



   

Figure 8-3. R Risk Managemennt Process

Figure 88-3 outlines the t process of o how risk appetite is seet out to achieve the organisation’s objectives. The RAS how wever will ideentify the level and tyype of risk annd the variancce that could bbe acceptablee to make risk appetitee viable and a commensurrate reward foor the risk un ndertaken. While manyy organisationns do have an articulated RA AS, they do so s only in certain secttors which have h regulato ory pressure,, mostly in financial services. Haaving identifieed risks, a mattrix of likelihoood and impacct as well as frequencyy versus seveerity matrices are tools thaat help visuallly depict data, prioritising or rankiing high risk through to loow risk catego ories, and for each riskk identify a caategory to be assigned. a

Due Diliigence If this w were to be im mplemented in n the project m management field one would havee to brainstorrm, use the Delphi D methood or SWOT T analysis (strengths, w weaknesses, opportunities o or o threats) tecchniques or th he use of historical daata if availablee. In a white paper p of Austrralian Constru uction and Infrastructurre Projects by b Blake Dawson Walddron (2006), 61% of respondents expressed diissatisfaction of risk alloc ation in conttracts and

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identified risk as a ‘pressure point’ that delays events accounted for 44% of risk, site conditions 35% and approvals 30%. Respondents have also opined that “constructors appear to be willing to continue …taking all project risks without due diligence or evaluation of the downside.” Consequently, the contractual risk is then off loaded to the builder/ contractors where it reaches a point difficult to be controlled and easily results in design errors, ambiguities and discrepancies. Organisations express this as being risk averse when they can transfer risk – expressing the mantra of due diligence. Due diligence does not mean that the transfer of all risk to another party leads to a project success, for the problem remains, impacting the project perhaps in unforeseen ways. Instead a workshop to identify and prepare a matrix of likely risks and the impact on project delivery constitutes ‘due diligence’. Project Management Body of Knowledge (PMBOK) and the similar Project Risk Analysis and Management (PRAM) of the United Kingdom have categorised risk analysis in much the same way as ISO 31000: 2009 of planning, risk identification, risk analysis – both qualitative and quantitative, risk response planning and monitoring. The workshops of key stakeholders to establish the context of risk management in the project set the tone for enterprise risk management and becomes crucial in the practice of due diligence in the project. Broadly in the legal sense, the term ‘due’ means immediately enforceable, and ‘diligence’ involves care, attention and application. When risk and due diligence are examined together, it will involve the organisational and operational structures in the context of key issues. These involve RM strategy, health and safety programmes, crisis management, asset protection, policies and procedures and protocols as well as risk financing and risk retention. Due diligence supports an organisation’s structure and culture, it promotes consumer satisfaction and confidence and advocates compliance. In the more recent years, due diligence incorporates risk management with corporate governance. Since the 1990’s with the collapses of various companies such as the HIH Insurance in Australia and Enron and Worldcom in the USA due to poor governance, corporate governance has become a major issue. In Australia, the Corporate Law Reform Program (CLERP) has been legislated as have similar ones in other countries. Corporate governance is not about avoiding risks but that risk challenges and strategies are properly assessed, evaluated and transparent.

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‘”‡ ‡ƒŽ–Š ƒ†ƒˆ‡–› ›…– ʹͲͳͳ ͳ

ʹͷͶǣʹ ʹͲͲͷ ‘˜‡ƒ…‡ǡ ‹•ƒƒƒ‰‡‡–ƒ† ‘–””‘Ž••—”ƒ…‡ –ƒ†ƒ”†Ǥ

—‡‹Ž‹‰ ‰‡…‡ ‹ –‡”’””–‹•‡ ‹•  ƒƒ‰‡ ‡–

‘”‡ƒŽ–Š Šƒ†•ƒˆ‡–› ‡‰—Žƒ–‹‘ ‘•ǡʹͲͳͳ

Figure 8-4: Due Diligencce in ERM incorporating W WHS Act 2011, WHS Regulations 22011 & HB 254-2005 – Risk managementt and Control Assurance Standard.

The Staandard AS 8000: Corpo orate Governnance outlin nes good governance principles annd advocates that it is “… ..the system by b which entities are directed andd controlled… … is concerneed with impro oving the performancee of companiies for the beenefit of sharreholders, stak keholders and econom mic growth… … encompaassing accounntability… providing p direction annd control in the organisattion HB 254::2005 in defiining risk managemennt clarifies thaat controls are “…the efficieency and effeectiveness of the organnisation’s opeerations… and d the associateed processes and risks that impact on the achievvement of its objectives…”” The processs involves communicattion and consuultation with key stakeholdders with own nership of risk and conntrols by all members m of th he organisatioon. This is followed by establishing the context both b internallly and externaally and occu urs within the framew work of the organisation’s o strategic, orrganisational and risk managemennt context wheere parameterss are defined within which h the risks are examineed and managged. A white paper by Pricce Waterhouse Cooper (PWC) (20007) advocattes that tech hnology is the key en nabler of transformingg Governancce, Risk man nagement andd Compliance (GRC) activities to respond with flexibility to changing dem mands. Howev ver, when trying to proomulgate GRC C, initiatives could c become fragmented or o booby– trapped by: onses in tookenism insstead of x Corpporate goverrnance respo ‘mannagement strucctures and pro ocesses’. x Risk managementt concentratin ng on operatiional risks in nstead of suppoorting strategiic decision pro ocesses and,

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x Compliance to legal regulations instead of compliance with initiatives. The GRC framework as advocated by PWC is the creation of a company-wide, uniform standard across all GRC initiatives and includes a vision, strategy and goals of the organisation that would reflect the stakeholder requirements. Roles and responsibilities are defined for the processes and activities of the organisation not only at the corporate level but also at the operational level and are implemented through training, employee development measures and performance target agreements. This translates to having a holistic approach to risk management, encompassing the whole organisation to ensure the organisation’s objectives are in focus. But it is not just this – it is more. In summarising Mr. Justice Owen in his role as Commissioner of the HIH Royal Commission ”… the key to good corporate governance lies in substance, not form. It is about the way directors of a company create and develop a model to fit the circumstances of that company and then test it periodically for its practical effectiveness…”

Conclusion The WHS in expounding the responsibilities of a PCBU as one who controls or influences control, and is admonished to practice due diligence in a field of mostly uncharted risk in projects. Risk Management Standard AS/NZS ISO31000:2009 in providing generic guidelines of framework and context is given impetus by Enterprise Risk Management and is presented in this paper. While it is not possible to cover all aspects of due diligence within the scope of this paper, it does however highlight some aspects of due diligence and governance within the contextual framework of Enterprise Risk Management which is important to a PCBU or Project Manager.

References Ahteensuu M. (2007) Defending the Precautionary Principle against three criticisms; TRAMES, 11(4), 366-381 Blake Dawson Waldron (2006) Scope for Improvement: A Survey of pressure points in Australian construction and infrastructure projects, Melbourne. Bouder, F.; Slavin, D., Lofstedt, R. E. (2009) The Tolerability of Risk: A new framework for Risk, Earthscan London

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Commission of European Communities (2000) Communication on the Precautionary Principle. Chapman, C. and Ward S (2004) Project Management Processes, Techniques and Insights: An overview of generic risk management processes, Wiley & Sons, Hoboken Garlick, A. (2007) Estimating Risk: A Management Approach, Gower Publishing Ltd. England Goldstein B. and Carruthers, S. (2004) The precautionary principle and /or risk assessment in world trade organisation decisions: a possible role for risk perception, HB254 (2005) Governance, Risk Management and Control Assurance; p16; downloaded http://www.standards.com.au. 30 April 2012. Hillson, D. and Murray-Webster, R. (2007) Understanding and Managing Risk Attitude, Gower, London Hughes, J. (2006) How not to criticize the Precautionary Principle, Journal of Medicine and Philosophy, 312, 447-464 ISO Guide 73: 2009 - Risk Management- Vocabulary- Guidelines for use in Standards Mr. Justice Owen: HIH Royal Commission pg. 133. as cited from Spedding , L (2008); Due Diligence Handbook: Corporate Governance, Risk Management and Business Planning, Burlington. Petertson, M. (2003) Transformative decision rules. Erkenntnis as cited from Ahteensuu and Per Sandin, (2012) Handbook of Risk Theory, Springer Science B.V. 2012 Sandin, P. (1999) Dimensions of the precautionary principle, as cited from Ahteensuu and Per Sandin, (2012) Handbook of Risk Theory, Springer Science B.V. 2012 Trouwborst, A. (2002) Evolution and status of precautionary principle in international law. Kluwer law International, London as cited from Ahteensuu , Per Sandin, (2012) Handbook of Risk Theory, Springer Science B.V. 2012 Turner, D. and Hartzell, L. (2004) The Lack of clarity in the Precautionary Principle, as cited from Ahteensuu, M . Defending the Precautionary Principle against three criticisms; TRAMES, 2007, 11(61/56), 4, 366381 Price Waterhouse Cooper and SAP (2007). Governance, Risk Management and/Compliance: Sustainability and Integration supported by Technology, Melbourne. p12-13. Work Health and Safety Act 2011 No 137, 2011, Com Law Authoritative Act C2011A00137, Canberra.

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Work Health and Safety Act 2011, No 137, 2011; Part 2 , Division 4 Section 27: Duty of Officers, pp. 35-36. Work Health and Safety Regulations 2011, Select legislative Instrument 2011 No 262; Federal Register of Legislative Instruments F2011LO2664.

CHAPTER NINE ANALYSIS OF RISK IMPACT ON ROAD DEVELOPMENT IN INDONESIA LUKAS SIHOMBING

What is risk? The Oxford English Dictionary tells us that risk is “hazard, change of, or of bad consequences, loss.” Not until the mid 17th century, did the word “risk” enter the English language. The dictionary definition may satisfy notion scientists when they talk about risk, but it is too narrow when also looking at risk taking. Risk and risk taking, both forming the basis of risk management, can be viewed from a multidisciplinary perspective. Several studies have attempted to discuss this issue. Yates and Stone (1992) looked at the elements that can be the building blocks of risk constructing. Psychologists examined the personality correlates to risk (Kogan & Wallach, 1964). Researchers in economics (Knight, 1921), sociology (Heimer, 1988), and management (Sitkin & Pablo, 1992) have examined the role of risk in each specific area (Hsiao, 2000, pp9-11). The most important issues that risk management helps to resolve are usually related to objectives and relationships between project parties. There are six basic questions that need to be addressed (Chapman and Ward, 2003): 1. Who 2. Why 3. What 4. Which way 5. Wherewithal 6. When

Who are the parties ultimately involved? What do the parties want to achieve? What is it the parties are interested in? How is it to be done? What resources are required? When does it have to be done?

(parties); (motives); (design); (activities); (resources); (Timetable).

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The goals of risk management, therefore, are to identify project risks and develop strategies which either significantly reduce them or take steps to avoid them altogether. At the same time, steps should be taken to maximize associated opportunities. In essence it involves planning, which minimizes the probability and net effects of things going wrong, and carefully matches responsibility to residual risks which are unavoidably retained. It is a very constructive and creative process. In short, the purpose of project risk management is to: x Specifically identify factors that are likely to impact the project objectives of scope, quality, time and cost x Quantify the likely impact of each factor x Give a baseline for project non-controllables x Mitigate impacts by exercising influence over project controllable. (PMI, 2008) Project risk management includes the processes of conducting risk management planning, identification, analysis, response planning, and monitoring and control on a project. The objective of project risk management is to increase the probability and impact of positive events, and decrease the probability and impact of negative events in a project. (PMI, 2008). Project risk management processes are as follows: x Plan Risk Management – The process of defining how to conduct risk management activities for a project. x Identify Risks – The process of determining which risks may affect the project and documenting their characteristics. x Perform Qualitative Risk Analysis – The process of prioritizing risks for further analysis or action by assessing and combining their probability of occurrence and impact. x Perform Quantitative Risk Analysis – The process of numerically analysing the effect of identified risks on overall project objectives. x Monitor and Control Risks – The process of implementing risk response plans, tracking identified risks, monitoring residual risks, identifying new risks, and evaluating risk process effectiveness throughout the project. According to Chapman and Ward (2003) the Project Life Cycle (PLC) is a convenient way of conceptualizing the generic structure of projects

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over time. It is often described in terms of four phases, using terms like conceptualization, planning, execution, and termination (Adams & Barndt, 1988). Alternative phraseology may be used, such as formation, build-up, main programme, and phase-out (Thamhaim & Wileman, 1975), but the underlying phases identified are essentially the same. These phases are commonly described in a manner emphasizing the extent to which they differ in terms of the level of resources employed (Adams & Barndt, 1998), the degree of definition, the level of conflict (Thamhain & Wileman, 1975), the rate of expenditure, and so on. This can help to show how management attention to the factor being considered needs to vary over the life of the project. Useful recent references to the PLC literature include Bonnai et al. (2002) and Tummala and Burchett (1999). A similar argument applies to sources of uncertainty and their management. However, an appreciation of the scope for risk management and how to approach it requires consideration of the differences between phases of the PLC in a greater level of detail than the typical four phase structure. Table 9-1 breaks down the typical four phase characterization of the PLC into eight stages. I use the term ‘stage’ rather than ‘phase’ to emphasise the difference and to reserve the word ‘phase’ for the decomposition of the Risk Management Processes (RPM). Table 9-1 also breaks each stage into steps. The breakdown into eight stages goes some way toward highlighting sources of uncertainty and facilitating their management. However, the still more detailed description of the PLC provided by steps is useful to underline where particular sources of uncertainty arise in the PLC and how risk management might be most effective. In the early stages these steps imply a process of gradually increasing detail and a focus on the nature of a product or service deliverable, as distinct from the later focus on its delivery and then its operation (Chapman and Ward). Meanwhile according to Fisher and Babbar (1996) the main risks facing private toll road projects include pre-construction, construction, traffic and revenue, currency, force majeure, tort liability, and political and financial risks; these risks must all be addressed in a manner satisfactory to debt and equity investor before they will commit to project funding.

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118 Phases conceptualization

Stages Conceive The product

planning

Design The product strategically

Plan The execution strategically

Allocate Resources tactically

execution

Execute production

termination

Deliver The product

Review The process Support The product

Steps Trigger event Concept capture Clarification of purpose Concept elaboration Concept evaluation Basic design Development of performance criteria Design development Design evaluation Basic activity and resource-based plans Development of targets and milestones Plan development Plan evaluation Basic design and activity-based plan detail Development or resource allocation criteria Allocation development Allocation evaluation Co-ordinate and control Monitor progress Modification of targets and milestones Allocation modification Control evaluation Basic deliverable verification Deliverable modification Modification of performance criteria Deliver evaluation Basic review Review development Review evaluation Basic maintenance and liability perception Development of support criteria Support perception development Support evaluation

Table 9-1. Phases, Stages, and Steps in the Project Life Cycle (PLC)

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119

For Estache, Romero, and Strong (1998) risk allocation is a complex and difficult process, and for all practical purposes, it is a negotiated process. Unfortunately, these initial negotiations seldom involve the future regulators, even when their outcome is critically important to regulatory decisions. This is why one of the first tasks a new regulator has to address in its new position is to understand the distribution of risks to which each party is committed through the contract, since in many renegotiation or regulatory disputes the responsibility will be based on the assignment spelled out in the contract. The main risks facing toll road projects are pre-construction activity, construction, traffic and revenue, currency, force majeure, tort liability, political risk and financial risk. These risks must be addressed in a satisfactory manner before debt and equity investors will commit to project funding. The standard risk identified in contracts is: preconstruction, construction, traffic and revenue, financial, regulatory and political. In addition, force majeure and legal liability are commonly addressed in contracts since they have proven to be serious sources of cost overruns in the sector (Estache, Romero and Strong, 1998).

Literature Study of Toll Road Infrastructure Risks in Indonesia Based on literature study, toll road infrastructure risks in Indonesia can be described as seen on Table 9-2.

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120 No 1

Risks Private Equity Risk

2

1.1. Long–term investment Risk 1.2. Employment Risk Financial Risk

2.1.

World Financial Crisis Risk

2.2.

3

4

5.

East Asia Financial Crisis Risk 2.3. Banking Stability Risk Economic Crisis Risk 3.1. World Economic Crisis Risk 3.2. East Asia Economic Crisis Risk Planning Risk 4.1. 4.2. 4.3.

Source of Fund Risk Market Risk Credit Risk

4.4. 4.5. 4.6. 4.7. 4.8.

Currency Risk Equity Risk Partnership Pattern Risk Government Support Risk Regional & Landscape Risk

4.9. Permission Risk Design Risk 5.1. Alignment Risk 5.2. Final Engineering Design

Literature Lerner and Gurung (2008); Kiwoong (2004); Stromberg (2008) Lerner and Stromberg (2008) Davis et. al. (2008) Nural (2008); Sachs (2008); Soros (1994); Keynes (1936); Bulow, Geanakoplos and Klemperer (1985); Cooper and John (1988); Diamond and Dybvig (1983); Obstfeld (1996); Eichengreen and Hausmann (2005); Eliazon (2006); Strauss (2008); Anonymous (2008); Gordy and Howells (2004); Anonymous (2008b); Kaufman and Scott (2003); Burnside, Eichenbaum and Rebelo (2008) Committee on Capital Markets Regulation (2009); Bossworth and Flaaen (2009); GAO (2009); Provitivi (2008) Sharma (2003); Grenville (2004); Djiwandono (2004) Bank Indonesia (2009) UN (2009); Stiglitz (2009) Munoth (2008); Von Mises (2006) Das (nd) Rajan (2005); Alex (2008); Banks and Dunn (2003) Fisher and Babbar (1996) Banks and Dunn (2003) Jorion (2003); Horcher (2005) Gerosa and Spazio (2001); Van Greuning and Bratanovic (2003) Jorion (2003) Jorion (2003) Jorion (2003) Dailami and Klien (1997) Ruang and Ruan (2005); Ruang and Tol (2010); Newton (2005) x x; Elvik and Vaa (2004) Chen and Liew (2003) Khandani (2010)

Analysis of Risk Impact on Road Development in Indonesia No

6.

7.

Risks

8.

Literature

Risk 5.3. Traffic Forecast Risk 5.4. Construction Cost Estimate Risk Procurement Risk 6.1. Land Acquisition Risk 6.2. Contract Type Determination Risk 6.3. Investor Winner Determination Risk 6.4. Politic Risk at Procurement Construction Risk 7.1. Investment Risk 7.2. 7.3. 7.4. 7.5. 7.6. 7.7.

Default Risk Credit Exposure Risk Credit Derivative Risk Cost Overrun Risk Material & Equipment Risk Technology Risk

7.8. 7.9. 7.10.

Force Majeure Risk Environment Risk Time Risk

7.11.

Quality Risk

7.12. 7.13.

121

Politic Risk at Construction Contractor Performance Risk 7.14. Consultant Performance Risk 7.15. Economic Social Risk Operational Risk 8.1. Operation Financial Risk 8.2. Operation Settlement Risk 8.3. Fraud Risk 8.4. Misselling Risk 8.5. Legal Risk 8.6. Cost Overrun Risk at Operational 8.7. Traffic Realization Risk 8.8. Tariff Adjustment Risk

Ward (2005); Lozano (1996) El-Amm (2003); Van der Ven (1996) Lozano (1996) World Bank (nd); El-Amm (2003) Lozano (1996); World Bank (nd) El-Amm (2003); Lozano (1996) Ward (2005); Baxandall (2000); ElAmm (2003) World Bank (nd) Wood (2002); El-Amm (2003) Horcher (2005) Jorion (2003) Jorion (2003); El-Amm (2003) Van de Ven (1996) El-Amm (2003) Munroe, Schmidt and Westwind (2006) El-Amm (2003) World Bank (nd) Kurunami, Winston and Sriver (1999) Kurunami, Winston and Sriver (1999) Fisher and Babbar (nd) El-Amm (2003) World Bank (nd) World Bank (nd) Jorion (2003) Jorion (2003) Galati (2002); Horcher (2005) Banks and Dunn (2003) Irwin et. al. (1997) El-Amm (2003) El-Amm (2003)

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122 No

9.

Risks 8.9.

Toll Collection Technology Risk 8.10. Treatment and Maintenance Management Risk 8.11. Environment Risk at Operation 8.12. Politic Risk at Operation Concession Risk 9.1. Transition Risk 9.2. Ownership Status Risk 9.3. Treatment and Maintenance Management Risk After Concession 9.4. Occupation by Government Risk 9.5. Government Guarantee Risk

Literature El-Amm (2003) World Bank (nd) El-Amm (2003) Fisher and Babbar (nd) El-Amm (2003) Van de Ven (1996) Zhang (2008) Zhang (2008)

El-Amm (2003) El-Amm (2003)

Table 9-2. Toll Road Infrastructure Risks in Indonesia

Methodology The method of this paper was questionnaire survey, where there are 45 selected persons. Respondents represented the following demographics: 23 persons from Government Sector; 22 persons from Private Sectors; from education, with experience 10-15 years, 12 persons; experience 15-20 years, 11 persons; experience above 20 years, 9 persons; and experience under 5 years, 9 persons. In terms of their education levels, undergraduate=12 persons; post-graduate=30 persons; and doctoral=3 persons. These data are analysed by statistical software SPSS®.

Results With statistical steps, based on reliability and validation that 346 factors impact of risks becomes 25 factors, where Cronbach’s Alpha is 0.915. Then results of those 25 factors were calculated by correlation method, so the results become as shown in Table 9-3.

Analysis of Risk Impact on Road Development in Indonesia

No 1 2 3 4 5 6 7 8 9 10

Var.

r

Y

1

X3

.381**

X4

.323*

X18

.379*

X81

.297*

X216

.380*

X289

.454**

X290

.376*

X302

.320*

X304

.310*

X317

.366*

123

Table 9-3. Correlation Results from Validation r > 0.3

No 1 2 3 4 5 6 7 8 9

Var. X290 X4 X216 X81 X18 X317 X304 X302 X3

Table 9-4. Result of Factor Analysis from 9 components

No. 1 2 3 4 5 6 7 8 9

Var. X290 X4 X81 X216_217 X18 X304 X317 X302 X3

Table 9-5. Mix Variable X216 with X217

After that, we calculated the analysis factor. With 9 components, the results are represented in Table 9-4. However, because variable X217 is a land acquisition variable not included in the results of the factor analysis (Table 9-3) but included in the result of validation and reliability, we re-calculated the factor analysis with X217 variable becoming 11 components; the results are represented in Table 9-5.

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With 9 variables as mentioned above in Table 9-5, we calculated multiple linear regression, with Y as investment performance of toll roads in Indonesia. From Table 9-5, we calculated multiple linear regression where the result of R square is 0.265. Because R square is under 0.5, we then recalculated with the outliers removed. After removing 24 outliers, the R square became 0.918, and the model became: Y = 2.460 – 0.15X3 + 0.54X4 – 0.079X18 – 0.183X81 - 0.016X216_217 – 0.278X290 + 0.152X302 + 0.076X304 + 0.375X317 where, Y

Investment performance of Toll Road Development

X3

Leverage Buyout/LBO)

X4

Takeover of the funds of private equity capital is more experienced

X18

failure of financial institutions

X81

contraction in bank credit extension.

X216_21 7

long and complex process of project preparation and negotiation x land acquisition

X290

Consultant performance

X302

settlement payments

X304

inability to survive on the full value

X317

dependence on the structure of roads maintained

Discussion The model of impact risks to investment performance of toll road development said that there are negative impacts such as leverage buyout, contracts in bank credit extensions, long and complex processes of project

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preparation and negotiation for land acquisition, and consultant performance. There are also positive impacts such as more experienced takeover of the funds of private equity capital, settlement payments, inability to survive on the full value, and dependence on road maintenance.

References Anonymous (2008): 'Don't blame the New Deal', New York Times, September 28, 2008 Anonymous (2008): 'FBI probing bailout firms', CNN Money, September 23, 2008 Bank of Indonesia (2009): Financial Stability Review, No. 12, March, 2009. Banks, E., and Dunn, R. (2003): Practical Risk Management: An Executive Guide to Avoiding Surprises and Losses, John Wiley & Sons Ltd Baxandall, P. (2000): Private Roads, Public Costs: The Facts about Toll Road Privatization and How to Protect the Public, U.S. PIRG Education Fund Bossworth, B. and Flaaen, A. (2009): America’a Financial Crisis: the End of An Era, Paper to be Presented at ADBI Conference: Global Financial and Economic Crisis: Impacts, Lessons and Growth Rebalancing, April, Tokyo Bulow, J.; Geanakoplos, J.; and Klemperer, P. (1985): “Multimarket oligopoly: strategic substitutes and strategic complements”. Journal of Political Economy 93 Burnside, C.; Eichenbaum, M.; and Rebelo, S. (2008): 'Currency crisis models', New Palgrave Dictionary of Economics, 2nd ed, Palgrave Chapman, C., and Ward, S. (2010): Project Risk Management: Process, Techniques and Insights, Second Edition, John Wiley & Sons, Ltd. Chen, W. and Liew, J. (2003): The Civil Engineering Handbook, Second Edition, CRC Press Committee on Capital Markets Regulation (2009): The Global Financial Crisis: A Plan for Regulatory Reform Cooper, R. and John, A. (1988): “Coordinating coordination failures in Keynesian models,” Quarterly Journal of Economics 103 (3) Dailami, M. and Klein, M. (1997): “Government Support to Private Infrastructure Projects in Emerging Markets, Dealing with Public Risk in Private Infrastructure,” The World Bank

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Das, T. (2001): East Asian Economic Crises and Lessons for Debt Management Davis, S. (2008): Private Equity and Employment, The World Economic Forum Diamond, D. and Dybvig, P. (1983): “Bank runs, deposit insurance, and liquidity”. Journal of Political Economy 91 (3), pp. 401-19 in Federal Reserve Bank of Minneapolis Quarterly Review 24 (1). Djiwandono, J. (2007): Indonesian Financial Crisis After Ten Years: Some Notes on Lessons Learned and Prospects, Nanyang Technological University, Singapore Eichengreen and Hausmann (2005): Other People's Money: Debt Denomination and Financial Instability in Emerging Market Economies El-Amm, L. (2003)” Risk Management in Toll Road Concessions, Thesis MIT Eliazon, T. (2006): Om Emotionell intelligens och Œcopati (ekopati) Elvik, R. and Vaa, T. (2004): The Handbook of Road Safety Measures, ELSEVIER Estache, A.; Romero, M.; and Strong, J. (2008): The Long and Winding Path to Private Financing and Regulation of Toll Roads, World Bank, Fisher, G., and Babbar, S. (1996): “Private Financing of Toll Roads, “ RMC Discussion Paper Series 117 Galati, G. (2002): “Settlement Risk in Foreign Exchange markets and CLS Bank,” BIS Quarterly Review Gerosa, S. and Spazio, F. (2001): “Project Financing and Risk Management: a new challenge for program management in the space industry of the third millennium,” Presented at the Fourth European Project Management Conference, PMI Europe 2001, London UK Gordy, M., and Howells B. (2004): 'Procyclicality in Basel II: can we treat the disease without killing the patient?’ Grenville, S. (2004)” “The IMF and the Indonesian Crisis,” International Monetary Fund BP/04/3 Horcher, K. (2005): Essentials of Financial Risk Management, Mc GrawHill Hsiao, H. (2000): Risk Management in BOT Project, MIT Thesis http://www.bis.org/publ/bcbsc1310.pdf, cited on 16 July 2010, Supervisory Guidance for Managing Settlement Risk in Foreign Exchange Transactions http://www.presidenri.go.id/DokumenUU.php/100.pdf, cited on 24 July 2010

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http://www.tankinlian.com/files/prevent%20misselling.pdf, cited on 16 July 2010. Irwin, T.; Klein, M.; Perry, G.; and Thobani, M. (1997): Dealing with Public Risk in Private Infrastructure, The World Bank Jorion, P. (2003): Financial Risk Manager Handbook, Second Edition, John Wiley & Sons, Inc. 2003, pp. 418. Kahn, S. (2008): “A systemic crisis demands systemic solutions,” The Financial Times, September 25, 2008. Kaufman, G., and Scott, K (2003): 'What is systemic risk, and do bank regulators retard or contribute to it?' The Independent Review 7 (3) Keynes, J. (1936): The General Theory of Employment, Interest and Money, Chapter 12, Harcourt Brace and Co., New York. Khandani, S. (2005): Engineering Design Process, http://iisme.org/etp/HS%20Engineering-%20Engineering.pdf, last accessed on 26 July 2010 Kiwoong, B. (2004): Economic Modeling of Korean Private Equity Market Through Comparisons of market Structures and Investment Strategies Between the Korean and American Private Equity Market, Thesis Master MIT. Kuranami, C., Winston, B., and Sriver, J. (1999): Asian Toll Road Development Program: Review of Recent Toll Road Experience in Selected Countriess and Preliminary Tool Kit for Toll Road Development, PADECO Lerner, J., and Gurung, A. (2008): “The Globalization of Alternative Investments”, Working Papers Volume 1: The Global Economic Impact of Private Equity Report 2008, The World Economic Forum Lerner, J., Strömberg, P. and Sørensen, M. (2008): Private Equity and Long-run Investment: the Case of Innovation, The World Economic Forum Lord Newton of Braintree (2005): “Recommendations on Land Use Planning and the Control of Societal Risk Around Major,” Buncefied Major Incident Investigation Board Lozano, F. (1996): Privatizing Infrastructure: From Theory to Practice. The Colombian Toll Road Case, Thesis MIT Michael, A. (2008): “Financial Risk Management”, Financial Management; Nov; ABI/INFORM Global Munoth, P. (2010): Project on Global Economic Crisis Munroe, T.; Schmidt, R.; and Westwind, M. (2006): Economic Benefit of Toll Roads Operated by the Transportation Corridor Agencies, LECG

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Nurul, K. (2008): Dismantling Financial Crisis:’Saving & Loan Debacle’ and ‘Subprime Mortgage Crisis’ In The Light of Minsky, Thesis Asia Pacific Management, Risumeikan Asia Pacific University Obstfeld, M. (1996): “Models of currency crises with self-fulfilling features,” European Economic Review 40 (3-5) Padiyar, V.; Shankar, V. and Varma, A. (nd): Risk Management in PP Pedoman Pemanfaatan Ruang dan Pengendalian Pemanfaatan Ruang di Sekitar Jalan Tol (2010): http://www.penataanruang.net/ta/Lapak04/P1/JalanTol/Ped-isi.pdf, viewed on 24 July 2010, Project Management Institute (2008): Project Management Body of Knowledge (PMBOK) - Guide, Fourth Edition Provitivi (2008): The Current Financial Crisis: Frequently Asked Questions, Global Financial Crisis Bulletin, November 13, 2008 Rajan, R. (2005): “Has Financial Development Made the World Riskier?,” National Bureau of Economic Research, Working Paper 11728 Ruang, P. and Ruan, P. (2005): (Permasalahan, Tantangan, Kebijakan, Strategi, dan Program Strategis), Depertemen Pekerjaan Umum. Sachs, J. (2008): The Roots of America’s Financial Crisis, Project Syndicate Sharma, S. (2003): The Asian Financial Crisis: Crisis, Reform and Recovery, Manchester United Press Soros, G. (1994): 'The Theory of Reflexivity', speech by George Soros, April 1994 at MIT. Stephen Marshall and David Banister, “Land Use and Transport: European Research Towards Integrated Policies,” Elsevier, 2007,hal. 10 Stiglitz, J. (2009): The Economic Crisis Capitalist Fools Strömberg, P. (2008): The New Demography of Private Equity, The World Economic Forum United Nations (2009): The Global Economic Crisis: Systemic Failures and Multilateral Remedies, Report by the UNCTAD Secretariat Task Force on Systemic Issues and Economic Cooperation United States Government Accountability Office (GAO) (2009): Financial market Regulation: Financial Crisis Highlights Need to Improve Oversight of Leverage at Financial Institutions and across System, Report to Congressional Committees Van der Ven, J. (1996): “Effective Private Participation in Toll Road,” Indonesian Discussion Paper Series Number 7, East Asia and Pacific Region Country Department III, The World Bank

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Van Greuning, H., and Bratanovic, S. (2003): Analyzing and Managing Banking Risk: a Framework for Assessing Corporate Governance and Financial Risk, Second Edition, The World Bank Von Mises, L (2006): The Causes of the Economic Crisis: and other Essays before and After the Great Depression, The Ludwig von Mises Institute Ward, J. (2005): Toll Road Public-Private Partnership in Malaysia: Using the CLIOS Process for Policy Improvements, Thesis MIT Wideman, R. Max (1992): Project and Risk Management: A Guide to managing Project Risks, PMI, Wood, W. (2002): “Private Public Partnerships in Toll Roads in PRC,” A Paper Prepared for the ADB/PPIAF Conference, Manila, Philippines Zhang, X. (2008): An Analysis of the Current Investment Trend in the U.S. Toll Road Sector, Thesis Master MIT

CHAPTER TEN IDENTIFICATION OF CRITICAL RISKS INFLUENCING THE APPLICATION OF ENERGY EFFICIENT AND RENEWABLE TECHNOLOGIES IN AUSTRALIAN GREEN OFFICE BUILDINGS: PRELIMINARY FINDINGS OF A SURVEY DR. IBRAHIM MOSLY

Many governments are providing incentives to those who are willing to install Energy Efficient and Renewable Technologies (EERTs) in their buildings, which assess the spread of EERTs in both residential and commercial buildings in Australia. This is because of the high consumption of energy from buildings and the increased load on natural resources that produce energy. It is estimated that 40% of the total annual global consumption of energy is caused by buildings (Omar, 2008). To reduce building energy consumption, it is advisable to design buildings that are more economical in their energy use: lighting, heating, ventilation, cooling and hot water supply (Omar, 2008). Accordingly, EERTs are taking part in transforming conventional buildings into what is today known as green buildings. It is true that, in some cases, the energy bill is decreasing. However, is that the case for all installed EERTs? Uncertainty and risks related to new green technology are widespread (Lam et al., 2010). Therefore, general concerns exist when these technologies are to be put into practice. Consequently, solutions to these issues must be found to increase confidence in these technologies and boost their implementation in the built environment. To reduce or eliminate uncertainty and risk, more research on risk management for new green technologies should be carried out. The risk management process is comprised of seven key elements: communicate and consult, establish the context, identify risks, analyse risks, evaluate

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risks, treat risks, and monitor and review (AS/NZS, 2004). The adoption of this process will provide benefits such as fewer uncertainties, the exploration of opportunity, improvised planning, performance, effectiveness, improved information and decision making, and enhanced reputation (AS/NZS, 2004). As a result, this reduces risks or eliminates them entirely. The contribution of this study will be the identification of a number of critical risks related to EERTs. This is a first step in a comprehensive risk management process for the implementation of EERTs in Australian green office buildings. Primary data for this study were collected using an online survey questionnaire which was circulated among different green building industry experts: stakeholders. These were mainly architects, engineers, project managers, and contractors. These stakeholders took part in evaluating a number of EERT risks with an aim of coming up with the most critical risk according to them. This study presents the outcome of the online survey from the questionnaire analysis and provides discussion on the results.

EERTS for Green Office Buildings The focus in this study was given to both energy efficient and renewable technologies. This is because energy efficiency is considered the most cost effective approach of reducing carbon dioxide emissions and enhancement to households and business (Omar, 2008). The utilization of renewable energy in buildings, on the other hand, can contribute significantly in reducing dependency on fossil fuels (Omar, 2008). Both energy efficient and renewable energy sources can reduce the load on the current natural resources used for the production of energy. Nine EERTs formed the basis of this study. These EERTs were selected because of their wide implementation in Australian green office buildings. The EERTs were categorised into four groups. Two of these groups included energy efficient technologies, comprised of Heat Ventilation and Air Conditioning (HVAC) and lighting. The other two groups were renewable energy technologies, comprised of solar and wind (Mosly & Zhang, 2010a). HVAC and lighting were selected as the ideal two groups for energy efficient technologies because they consume a significant portion of energy in Australian commercial buildings: 70% for HVAC and 15% for lighting (AGO, 1999). Renewable energy technologies can be categorised into on-site and offsite supply sources. On-site supply sources refer to technologies that use renewable energy sources available at the site, while offsite sources refers to technologies that use renewable energy

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sources offsite to generate energy on-site (Torcellini et al., 2006). Solar and wind were selected as the two groups for on-site renewable energy technologies as they can be implemented at the roof of an office building without being very much concerned with the topography and location of the building. Table 10-1 shows a summary of the selected EERTS.

Table 10-1: Commonly implemented EERTs in Australian green office buildings, adapted from (Mosly & Zhang, 2010a)

Risks associated with the implementation of EERTS The risks evaluated in this study were adopted from a previous study that explored the risks of EERTs. The study examined a total number of 66 research sources that covered all nine EERTs listed in Table 10-1 (Mosly & Zhang, 2010b). The result of the literature review process was the identification of 30 risks shown in Table 10-2. These risks where accumulated from different studies on several EERTs. Many of them were mentioned in more than one study, and a number of these risks are general and may apply to any technology. This was done to make the risk list as comprehensive as possible with regard to EERT risks. Some risk factors identified can apply to all nine technologies while other risks may apply to certain technologies or certain technology groups. For instance, hidden costs can apply to all technologies. On the other hand, glare risk might apply only to technologies listed under the solar group EERTs (Mosly & Zhang, 2010b).

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Table 10-2: Risks associated with EERTs, adapted from (Mosly & Zhang, 2010b) No. Risks

Methodology In this exploratory research, data collection on the risks associated with the implementation of EERTs was carried out using an online survey questionnaire. The questionnaire was piloted on two senior researchers and an engineer. The outcome and feedback from this initial questionnaire improved understanding of the questions included in the survey questionnaire. Based on the pilot study outcome, an online questionnaire

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was produced, and invitations were sent to participants by email. The sample size was 400 and included green building industry practitioners. The survey sample mainly included architects, engineers, project managers, and contractors who are considered knowledgeable in the field of green buildings. A response rate of 41.25% of the invitations was achieved at the end of the data collection period, which is measured to be acceptable. Approximately 94% of the online survey questionnaire respondents were Green Star Accredited Professionals by the Green Building Council of Australia. This study’s aim is to respond to the question: “What are the critical risks associated with the implementation of EERTs in Australia’s green office buildings?” To answer the above-mentioned question, descriptive statistics were used to analyse the results. The Statistical Package for the Social Sciences (SPSS) software was used to analyse the responses. At the end of this chapter, a discussion and conclusion is included to comment on the results of the online survey questionnaire analysis.

Questionnaire Profile of participants In total, 165 industry practitioners took part in this online survey questionnaire. The sample consisted of 40 architects, 67 engineers, 42 project managers, and 16 contractors. From the sample components, this study enjoyed a significant contribution from engineers, whose number was the highest, compared to contractors, whose number was the least. Their level of education varied, from secondary school to post-graduate studies, and included 3 secondary school certificate holders, 12 with TAFE/college diplomas, 80 undergraduates, 68 post-graduates, and 2 holding other degrees. As expected from the majority of professionals working in the field of buildings, experts holding undergraduate certificates were the most to take part in this study. With regard to their length of work experience, 39 had 1-5 years, 31 had 6-10, 29 had 11-15, and 66 had more than 15 years of practical knowhow in the construction industry. A larger number of participants had more than 15 years of experience, which empowers the findings of the research. The three other participants who did not receive a higher degree had over 15 years of work experience. Therefore, their feedback was valued as well. The number of green building projects that these practitioners were involved in was as follows: 12 had limited experience with green buildings projects, 73 with 1-4, 30 with 5-10, and 50 with more than 10 green buildings projects. A

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large number of participants were involved in more than 10 green buildings projects. Again, their contribution in this study enriched the findings and increased its soundness.

Data reliability A data reliability test called Cronbach’s Alpha, which is a coefficient of consistency, was carried out on the data collected from the online survey questionnaire. This test is considered to be the most accepted method for examining data reliability because of its wide use in business social sciences and other sciences (Hinton et al, 2004). The following cutoff points were used as a guide to interpret the test results (Hinton et al, 2004): 1) Equal or above 0.90 designates excellent reliability, 2) 0.70 to 0.90 designates high reliability, 3) 0.50 to 0.70 designates moderate reliability, and 4) Below or equal to 0.50 designates low reliability. The data reliability test results are shown in Table 10-3. The Cronbach’s Alpha coefficients for all of the collected data for all nine technologies were above 0.90, which designates an excellent reliability outcome for all of the data held in this study. Having reliable data would help in strengthen the findings of the analysis and its quality.

Table 10-3: Data reliability Data source Cronbach’s Alpha

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Data analysis and results The online survey questionnaire participants were requested to evaluate the risks for each of these technologies based on the likelihood of risk occurring and its consequence on stakeholders. Five options were defined to measure the likelihood of occurrence; these included: rare, unlikely, possible, likely, and almost certain. Similarly, five options were defined to measure the consequence on stakeholders; these included: negligible, minor, moderate, major, and severe. Each participant according to their risk perception evaluated a total number of 30 risks. A semiquantitative approach was used to identify the critical risks, where the level of risk impact was calculated using Equation 1 (AUS/NZ, 2004). Level of risk impact = Consequence x Likelihood (1) Equation 1: Level of risk impact To determine the level of risk impact, for each risk of each technology, and to know whether they were critical or not, a risk matrix was created as shown in Table 10-4. The reference is a study undertaken by John Mankins, where he described a new concept for the integration of the technology readiness levels and the concept of a risk matrix for new technologies (Mankins, 2009).

Table 10-4: Risk evaluation In this study, risk evaluation was made based on the level of risk impact achieved for each risk, by each participant for each EERT. According to the developed risk matrix, if the level of risk impact for a given risk is less than or equal to 4, then this risk will be deemed to be having a low degree of risk impact. If the level of risk impact is greater than 4 and less than or equal to 10, then this risk will be deemed to have an average degree of risk impact. Finally, if the level of risk impact is greater than 10, then this risk will be considered to have a high level of risk impact and thereby be critical.

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Table 10-5: Critical risks of EERTs with its mean risk impact values Out of 30 risks, 14 showed to be critical in this study. Table 10-5 shows the final mean risk impact values for the 14 critical risks identified. Not all EERTs covered in this research where found to be subject to critical risks. NV, EELB, and MS were not part of those EERTs influenced by any of the 14 critical risks. The critical risks with the highest mean risk impact value were found to be uncertain government policies; it had a value of 14.35. Two critical risks were found to be possibly potential for six out of nine EERTs. These critical risks are: lack of access to funds, and presence of system constraints. From Table 10-5, it is clear that

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renewable energy technologies were potentially subject to critical risks compared to energy efficient technologies.

Discussion and conclusion Table 10-5 shows that critical risks were potential in six out of the nine EERTs, and these technologies were part of three EERT groups, which are HVAC, solar, and wind. None of the lighting technologies were found to be significantly subject to any of the critical risks. This might signify the maturity and development of these technologies compared to other EERTs. Similarly, with NV in the HVAC group, no critical risks were associated with this technology. In general, the results show that the majority of renewable energy technologies were potentially subjected to critical risks. The EERTs subjected to the most number of potential critical risks were wind turbines. On the contrary, UFAD systems under the HVAC group had the least number of identifiable critical risks out of the six different technologies. This demonstrates that industry practitioners perceive renewable energy technologies as riskier compared to energy efficient technologies. Unlike energy efficient technologies, renewable energy technologies share a number of critical risks among them, giving a sense that these technologies might not be ready to take off in the Australian market now and that thorough investigations are required to find new methods of managing these critical risks. Future change in regional climate and weather fluctuation was found to be the critical risk for the two renewable technologies; PV and WT. Conversely, the same risk was not identified as potentially critical for ST, although it is a renewable energy technology. This is possibly because both PV and WT generate electricity, whereas ST generates heat and the impact of the loss or shortage in electricity is superior to the impact of the loss or shortage in heat because of climate change or weather fluctuation. Two critical risks, lack of access to funds and presence of system constraints, were identified to be potentially critical for all six EERTs. Despite the Australian government’s measures to resolve the issue of funding for green buildings, for example, by offering a green building fund, industry practitioners are still considering this risk as potentially critical for EERTs. The risk of presence of system constraints usually reflects the limitations in the use of a technology. This indicates that these

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technologies have not yet reached a mature level of operation, and thus additional in-depth solutions to this critical risk should be found. The critical risk with the highest mean risk impact value was uncertain governmental policies. This might indicate that the majority of green industry practitioners are not convinced with their government policies, or the way these policies are structured or enforced. Concurrently, they are concerned about the consequence of these uncertainties. This could also explain the high mean risk impact value for uncertain availability of incentives, which is actually a significant part of government policies in helping any sector thrive. Generally, EERTs are needed for implementation of green office buildings. However, the uncertainties and risks associated with these technologies are acting as barriers for their execution. This study showed that energy efficient technologies can be a better option for implementation in green office buildings as compared to renewable energy technologies counterparts, especially lighting because there were no potential critical risks that were identified for this group. This study also unravelled the high concerns of industry practitioners towards the government policies related to renewable energy technologies. Effective measures should be set to encourage the use of EERTs in green office buildings. Research and development can assist in eliminating or reducing these implementation barriers by identifying and proposing measures to manage these barriers. As a result, EERTs chances for adoption by the public and private sectors will increase. This study has evaluated 30 risks for nine EERTs in an effort to increase awareness, and facilitate future research to advance the implementation of EERTs in Australian green office buildings.

References AGO, (1999). Australian commercial building sector greenhouse gas emissions 1990–2010. Australian greenhouse office (AGO). Canberra, Australia. AS/NZS, (2004). Risk management guidelines companion to AS/NZS 4360:2004. Australia/New Zealand Standards. Wellington, New Zealand. Breeze, P. (2005). Power generation technologies. 1st ed., Newnes publications. Oxford, UK. Hinton, P.; Brownlow, C.; McMurray, I.; Cozens, B. (2004). SPSS Explained. Routledge. Hove, United Kingdom.

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Lam, P, Chan, E, Poon, C, Chau, C & Chun, K. (2010). Factors affecting the implementation of green specifications in construction. Journal of Environmental Management, 91(3), 654-661. Mankins, J. (2009). Technology readiness and risk assessment: A new approach. Acta Astronautica, 65(9), 1208-1215. Mosly, I & Zhang, G. (2010a). Review of risks for the implementation of energy efficient and renewable technologies in green office buildings. Proceedings of the Sustainable Building Conference, Wellington, New Zealand, May 26 – 28, 2010. Mosly, I & Zhang, G. (2010b). Study on risk management for the implementation of energy efficient and renewable technologies in green office buildings. Proceedings of the Transition to Sustainability Conference, Auckland, New Zealand, November/December 30 – 03, 2010. Omar, A. (2008). Energy, environment, and sustainable development. Renewable and Sustainable Energy Reviews. 12(9), 2265-2300.

PART V CASE STUDIES

CHAPTER ELEVEN DELIVERING AUSTRALIAN ROADS WITH PPP’S? GLOBAL MANAGEMENT OF BUSINESS RISKS DR. COLIN DUFFIELD AND DAVID WILSON

Public Private Partnerships (PPPs) are complex organisational structures involving a multitude of actors with very different objectives, but perhaps what the actors in road projects have in common is a desire to bring the best professional outcome to road construction. PPPs combine the best and latest thinking and practice in the engineering, finance, legal and governance disciplines (Grimsey & Lewis, 2007; Asenova & Beck, 2009). Some PPPs are successful by any engineering, financial or social measure but some can fail as is evidenced by several road projects in Australia becoming insolvent. Over the past two decades in Australia many state governments have used public private partnership as procurement vehicles to deliver major road infrastructure projects in capital cities. Rhetoric purports that some have been delivered successfully whilst others have not resulted in what was originally expected by the parties to the PPP. This chapter proposes that success of PPPs requires more deliberate assessment. It presents an assessment of project success through a range of stakeholder lenses of design, service and finance from five projects: the Cross–City Tunnel and Lane Cove Tunnel in Sydney, Clem 7 in Brisbane, and East-Link and upgrades to City Link in Melbourne. This paper builds on an earlier review by Duffield and Wilson (2011) of the success and perceived failure of some recent Australian PPP road projects and postulates the cause driving these particular projects’ outcomes. The role of context and governance structures has also been considered. It is concluded that the main society has achieved excellent outcomes in terms of project design and service delivery; however, the financial returns to the private sector have been unsuccessful due to inappropriate demand forecasting.

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This paper considers some PPP road projects in Australia that have been successful and some that have failed using a financial measure. A key component of the PPP’s has been the traffic projections for toll roads which form the basis of the financial calculations upon which the investors make their investment decisions. How traffic demand is determined is critical to these calculations.

Evaluation of project success Assessment of and forecasting project success has been refined over recent years, (e.g. Van Der Westhuizen & Fitzgerald, 2005; Baccarini, 1999). In the context of PPPs, Duffield and Wilson (2011) proposed additional refinements to encapsulate the complexity of these long term agreements and proposed inclusion of not only project management deliverables such as time cost and quality but also value for money, and whole of life stakeholder perceptions, encapsulated by equation 1. Project success = project management success + functional success + client/user satisfaction............(Eqn 1) Fitzgerald (2008) consolidated prior research findings as to what major risks cause cost overruns on projects and proposed a risk-based framework. An enhanced version of this framework that incorporates finance risk was developed (Duffield & Wilson, 2011) and by taking only the causes deemed to be of the highest risk the framework can be condensed to the following key factors: a. Project specific: Inadequacy of business case (ill-defined scope); inefficient project management processes; ineffective governance structures; lack of technical expertise. b. Economic: Demand change (change in funding priorities). c. Finance: Availability of debt finance and/refinance; market appetite for syndication; hedging and or wrap insurance. Targeting specific PPP issues relating to project success, it is generally accepted that Australian road projects have on balance been successful in terms of delivery. However, debate continues regarding success in terms of what is physically designed, its functionality and user acceptance along with the commercial robustness of the arrangements in terms of financial winners and losers. The project assessments presented later in this chapter concentrate on these contentious issues.

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Whilst design matters are very project specific, economic and finance matters relate to business risk. Because PPPs involve global input, a review of the Australian market can provide relevant lessons on project structuring. Generic lessons by inference are to be found by detailed consideration of demand management and project commercial viability.

Demand forecasts of road projects in Australia The viability of user pay PPP projects is dominated by the volume of use predicted and thus this is one of, if not the largest risk associated with such projects. It is generally acknowledged by transport planners that travel demand modelling is an imprecise science, possibly more of an art than a science. The standard four-step travel demand model (trip generation, trip distribution, mode split and route assignment) that is used by many traffic engineers and planners is effective at a strategic or regional level but becomes less effective when used for individual network links. There is significant variation as observed by many authors (Bain, 2009; Li & Hensher, 2013; Vassallo 2006). Zhao and Kockelman (2002) identified three sources of uncertainty that make travel forecasting fundamentally risky: a. Inherent uncertainty – traffic volume is a random variable that varies by time and location. It has a distribution (often complex) with a mean and variance. b. Input uncertainty – economic, demographic and land-use data are projected so as to arrive at future travel patterns. The future projections by definition will have errors. c. Propagation uncertainty – the models are multistage and sequential so errors can be magnified. The first and third points are significant and appear to have escaped the necessary detailed consideration warranted for the large risk associated with travel demand forecasts used on some recent Australian PPP projects. Much work done on travel forecasting has been done by planners with an engineering or planning background who are possibly less versed in statistical analysis than those with econometric or statistical backgrounds. There may have been, in general, a lack of understanding of the importance of statistical error analysis, a point made clear by Bain (2009) and Oxera and RBconsult (2012) in the Australian government’s investigation into overbidding on toll roads. This is compounded when

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using cascading models like the standard four step modelling approach – resulting in propagation uncertainty. Many academic studies confirm that traffic forecasts are inherently subject to errors with biases often optimistic (Flyvberg et al., 2005; GHD, 2011). These errors can be significant in over-predicting traffic volumes and have had disastrous financial consequences for several road PPP projects in Australia. These predictions are of course influenced by the assumptions made on input data and the dynamic nature of the economy. Bain’s (2009) research has shown that predicting traffic for tolled roads is more risky than for non-tolled roads. Investigations conducted by the Federal Department of Infrastructure and Transport in Australia into inaccurate traffic forecasting saw them commission an in-depth analysis of the errors (GHD 2011; Department of Infrastructure 2011). The GHD report, which evaluated the traffic forecasts of several toll roads in Sydney, Melbourne and Brisbane confirmed the difficulties of accurately predicting traffic and the potential consequences if international investors withdrew their funds. Among the suggested remedies were the use of a longer term perspective and the use of a more conservative and careful approach to travel demand modelling. Governance of the whole forecasting process needed to be restructured to incorporate independent audit and the testing of land use and population assumptions including ranges rather than point values for sensitivity testing. It is clear from the results of traffic projections for the early years that there have been over-estimated travel volumes and therefore revenues, but in all cases, traffic volumes have gradually increased over time. Essentially project viability is time dependent. Eventually road projects do carry the volumes necessary to generate revenues for financial success. However, this is cold comfort when banks require the expected return on their loans to be met from day one and investors are expecting to make a profit.

Market conditions and financing of PPPs PPP finance is arranged via a combination of debt and equity and typically many Australian road projects have had a debt-to-equity ratio of 90:10 (Duffield & Clifton, 2008). If one breaks a PPP into phases of prefinancial close, construction and then operation, the order of risk in the transaction is greatest pre-financial close, high during construction and

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then moderate to low once the road has been in operation for a period of time, such that traffic volumes have developed predictable patterns. Within a Special Purpose Vehicle (SPV) arranging and bidding for a PPP, equity is called upon heavily to underwrite the pre-financial close cost; project financing is dominated by bank loans and the raising of some bond capital; and once operational, a raft of more conservative investors such as superannuation funds are attracted to the long term and relatively stable returns possible from investment in transport assets. Like many debt dominated investments, the early period of a PPP deal is structured to simply cover interest payments (and possibly a little sweetener for equity investors) with real return coming over time as reduction in debt exposure (and the project risk profile) facilitates the creation of some wealth for the original investors. The market conditions for financing PPPs pre and post the Global Financial Crisis (GFC) of 2007-08 is starkly different. Before the GFC, debt was freely available in the market via multi syndication of debt providers and the practice of organisations loaning their credit rating to reduce the overall financial risk rating. Wrap insurance was common, thus finance was readily available with a relatively low spread between the cost of finance and the rate for ten-year government bonds. Concurrent with this relatively easy access to finance was the range of long term bonds available such that SPVs could engineer the terms of finance to mirror the risk profile of projects thus optimising the cost of finance to the project. Further, there was strong appetite for involvement in PPPs from the equity market and a number of projects were underpinned in their equity arrangements by Initial Public Offerings of shares via the stock market and/or placements to sophisticated investors. After the GFC, caution dominated the finance market as banks were averse to too much cross lending for the fear of other banks defaulting, the wrap insurance market collapsed and was unavailable and the bond market greatly reduced the maximum term available for bonds. The consequence of these changes was that the spread of financing costs increased relative to the ten-year government bond rate and the shorter term of loans exposed projects to the risk of refinancing. This has made accessing the capital necessary to finance infrastructure in Australia that meets a value proposition harder to achieve, possibly delaying construction of key public sector projects.

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Which Australian road PPPs have been successful? The modern era of Australian road PPPs commenced in the late 1980s/early 90s with a flurry of Build Own Operate Transfer (BOOT) style arrangements, whereby nearly all risk was transferred to the private sector (Odgers & Wilson, 1999). Commensurate commercial arrangements were struck with SPVs so that the risk and outcomes generally were positive but there was the occasional project where the risks materialised and anticipated profits were not achieved. In raising the concept of success in this context it is important to understand from whose perspective the judgement is being made: users, government or the private sector. As the PPP market matured so did governments’ skill, and desire to ensure maximum value was achieved for the community and thus the PPP market experienced a drive toward optimal risk allocation and very robust commercial negotiations leading to detailed and extensive concession agreements. A summary of PPP road projects undertaken in Australia is presented in Table 11-1. Projects are located in their respective capital cities of Sydney, Melbourne and Brisbane.

1997

2000

M2 Motorway (NSW)

Eastern Distributor (NSW)

2

BOOT – Build Own Operate Transfer FBO – Finance Build Operate

1992

M5 East (NSW)

1

1992

$525 million

$650 million

$380 million

$295 million

$246 million

1992

M5 S-W (NSW)

$738 million

1992

Sydney Harbour tunnel (NSW) M4 Western Motorway (NSW)

Capital Cost

Construction completion date

Project

10km of new dual carriageway expressway, 21 major bridge structures 14.5km of tolled motorway connecting Moorebank with Beverly Hills in the south-western region of Sydney. (Stage 1) Extension to M5 Beverley Hills to Airport (Stage 3) North West Freeway link, 21 km motorway – Hills Review 5km motorway, 600m tunnel underpass Audit report, contract summary

4 lane 2.3 km road/tunnel

Description

Delivering Australian Roads with PPP’s?

FBO2

BOOT

BOOT

BOOT

BOOT

BOOT1

Procurement

151

2007

2000

Lane Cove Tunnel (NSW)

CityLink (VIC)

Chapter Eleven

$2 billion

$1 billion

$1.5 billion

$680 million

DCFOM –Design, Construct, Finance, Operate, Maintain

2006

Westlink M7 (orbital ring road) (NSW)

3

2005

Cross City Tunnel (NSW)

152 Twin two-lane tunnels under the Sydney CBD between the Kings Cross Tunnel and the Western Distributor, with connections to the Eastern Distributor. Audit report, contract summary 39 km motorway of two travel lanes in each direction and wide central median linking the Hume Highway / M5 at Prestons with M4, and the M2 at Baulkham Hills. summary Twin road tunnels linking the M2 Motorway at East Ryde and the Gore Hill Freeway at Artarmon, running substantially under Epping Road. The project also includes a range of surface works to improve the operation of the road network in the vicinity of the tunnels. Audit report, contract summary 22km of tolled motorway and elevated roadworks, tunnels, major bridgework and electronic tolling. BOOT

DCFOM

DCFOM

DCFOM3

2013

1987

2010

Peninsula Link (Vic)

Gateway Bridge (Qld)

Clem 7 tunnel (Qld) BrisConnect

$2.89 billion

$849 million (NPV Feb June 2010) $82 million

$2.5 billion

4

DBFOM – Design, Build, Finance, Operate, Maintain

Table 11-1: Australian transport PPP projects

2008

EastLink (VIC)

4.8km tunnel

1.63km crossing of Brisbane River

39km of tolled motorway that incorporates twin, three-lane carriageways, 1.6km of tunnels and 103 structures. 27 km four lane road

Delivering Australian Roads with PPP’s?

DBFOM4

BOOT

DBFOM

DBFO

153

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Of the projects detailed in Table 11-1, the most contentious in terms of success are those developed and constructed immediately pre and post the GFC. Of particular note are the two tunnel projects in NSW, namely Cross City Tunnel and the Lane Cove tunnel and the Brisbane projects of North South Bypass (Clem 7) and the Airport Link. Questions are also raised about the commercial performance of the Victorian Eastlink project. The underpinning reasons for questioning the success of these projects are different and therefore closer investigation is appropriate; additional project analysis is available in Duffield and Wilson (2011). The timing for the phases of these projects and high level outcomes for each project is presented as Figure 11-1. It is evident from review of the projects in Figure 11-1 that the NSW projects were developed and constructed prior to the GFC. These projects were initiated using NSW guidelines (pre National Guidelines) and the policy required bidders to offer government an upfront payment from the winning bidder to offset government’s costs associated with project preparation, termed a Project Consideration Fee. This practice encouraged optimistic forecasting of traffic demand and also encouraged arrangements to attempt to encourage greater volumes of traffic to the toll road by redirecting and/or constraining alternate traffic routes (Chung, 2009; Haughton & McManus, 2012). The consequence was not only optimistic traffic forecasting but also avoidance of the toll road by the public as a protest to the loss of alternate transport routes. The lack of revenue from tolls saw the initial SPVs on both the Cross City Tunnel and the Lane Cove tunnels fall into liquidation and the concessions were sold by the financiers. The practice of government seeking a Project Consideration Fee ceased in NSWs post these projects and the government adopted the National Guidelines when released in 2008. It is also interesting to note that there was a deal of goodwill in the market as the road operated for a few years prior to financial collapse. The Brisbane road projects suffered from very optimistic traffic forecasts. There are current legal proceedings surrounding the traffic estimates for the projects and allegations as to the cause of the optimism range from inaccurate modelling to poor assumptions and overly keen commercial behaviour in efforts to get a commercial transaction. The Clem 7 project suffered a range of financing issues and at one stage it appeared that share market options trading may have severely damaged the SPV’s viability to lead the consortium. Difficulties with this project appear unrelated to the implementation policy but rather to the behaviour of the

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market. Again the projects limped on for a few years with less than expected revenue until the banks stepped in and sold the roads. Difficulties experienced on the Victorian Eastlink project are much less obvious as the SPV never failed but rather directors accepted a take-over offer (albeit at a reduced price to the initial public offering). The optimistic traffic projections for this project may well be a poor judgement in the uptake of road use. Worthy of note is that there were underlying constituent matters with this road as there had been a political promise that the road would not be tolled and potential users were upset at the change in political policy. The pursuant hostility may explain some of the slow build-up of traffic volume. From each of these examples of road projects facing difficulties it is apparent that discussions centre around commercial viability of the SPV and to some extent on the embarrassment caused to governments by having communities and road users question the approach adopted by government. Interestingly from the perspective of the public(s) the actual product designed and delivered has been done to the highest standard. There are also consistently good outcomes in the context of project management with projects typically finishing early and within budget. In all cases the standard of the services delivered has been excellent. Having modified the NSW government’s policy approach to PPPs it appears the overall delivery model should be useful into the future provided demand forecasting can be improved and commercial arrangements struck between the public and private sectors in a more rational manner. The biased (or optimistic) behaviour in the market has resulted in an overall truncating of the pipeline of PPP road projects. It is evident that post the NSW and Brisbane commercial failure the market have not been prepared to accept demand risk and post the GFC the structuring of deals that offer sufficient value for money have been more difficult to identify. Projects successfully undertaken since these failures have adopted quite different mechanisms such as availability payments, and/or co-financing of the capital expenditure and integration with existing operating toll roads that provide a level of revenue stability in an attempt to reduce the private sector’s overall risk exposure.

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One of the strengths of the PPP process has been the efficiency, innovation and value driven by the private sector as they seek to minimise the materialisation of risks, and their entrepreneurial behaviour for continued improvement optimises profit. Exposing the private sector to demand risk has provided an incentive for such ongoing positive behaviour, provided profits are possible and the commercial arrangements are reasonably balanced between risk exposure and reward. Taking the wider view of what constitutes project success, as described by equation 1, it would appear that in all cases the projects have ultimately been successful for the public. The difficulties experienced by governments and the private sector appear related to a more general market failure. The root difficulties do not now appear to be associated with the PPP process but rather with market appetite to assume some demand risk, the accessibility of reasonably priced finance post the GFC, the desire for governments to live within their funding means and commercial arrangements that add value and controlling techniques to limit excessive biased behaviour by the market. It would appear solutions lie in establishing sustainable deals that are fair to all parties and that consider how to forecast traffic demand under changing commercial and economic conditions in a new and more integrated manner. By inference demand risk modelling cannot be done in isolation, it must be integrated with the commercial arrangements of the PPP transaction and thus alternate approaches from the traditional traffic forecasts are required.

Highly profitable

Cross City Tunnel

Insolvent initial SPV, on sold at a discount to initial IPO in 2007 Insolvent initial SPV, on sold at a discount to initial IPO, May Lane Cove Tunnel 2010 On sold at a discount to initial EastLink IPO in 2011 Commercial difficulties under North South Bypass (Clem7) receivership since 2011 Commercial difficulties went Airport Link [incl Busway Qld]into voluntary liquidation in Peninsula Link Availability M2 Motorway widening Extension Gold Coast Rapid Transit Co-funds Westlink M7 Extension F3-M2, co funds North West Rail Link Operations , train system

Melbourne City Link

Toll road Availability PPP Existing traffic Demand with Gov Existing traffic Availability PPP

Toll road

Toll road

Toll road

Toll road

Toll road

- Preparation and bidding - Construction phase - Operational

ј ј | National PPP policy introduced 2008 Global Financial Crisis late 2007

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Delivering Australian Roads with PPP’s? 157

Figure 11-1: Timing and outcomes of contentious Australian road projects

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Proposed framework for PPP roads in Australia The creation of PPPs requires input from several knowledge domains: law, finance, economics and engineering. To be successful each of these areas needs to be integrated into a decision making framework that is something like a Decision Support System designed for a PPP. The current development of a PPP is effectively linear and spread over many months or years from the initial idea to going to the market for capital and then construction. Whilst there may be some sensitivity testing in various parts – such as traffic engineering or finance – they do not appear to be integrated. The current development process of a PPP is essentially sequential, much like the four-step transport model. Each of the domains has models that are developed effectively in isolation and assembled toward the end of the creation of the market proposal documents. There are good reasons for this: a. The traffic, finance and economic models are complex and expensive to produce b. Different companies from the disciplines of law, engineering, economics and finance create different models and documents c. There is little time or space for iterating through different scenarios to evaluate alternate outcomes. d. There is limited sensitivity testing in each of the discipline areas. Regarding the traffic engineering forecasts for example, whilst there is some testing of parameters, these tend to be limited to testing different networks or in the financial models, different discount rates. Table 11-2 describes some of the significant variables in the models that will affect traffic volumes. Typically only a few of these variables are tested in the forecast of traffic volumes. It is argued to be important to develop an integrated Decision Support System which contains the legal, economic, financial and traffic models so that different scenarios may be systematically tested. There are enough studies of road PPPs that probabilities may be assigned to different parts of such a model. This would enable a decision theoretic model to be developed that would facilitate the introduction of risk profiles.

Deliverring Australian Roads with PPP P’s?

Trip generaation Land use paatterns

Employmennt forecasts Economic growth scenarios

Trrip disstribution Usse 2 models – graavity + disscrete choice vallue of time

oriigin and destination esttimates

disstance decay funnctions

Mode split it assumptionns on travel times assumptionns on reliabiliity of timetablle trade-off’ss between utility of private v public transport Travel costts – petrol and fares

159

Trip assignm ment Alternaate network k link structurres Alternaate link capacitties Alternaate assignm ment modelss differen nt algorith hms Robusttness of network k to link failuress

T Table 11-2: Sensitivity analysis of inputs into tthe 4 step Transport Model Planning M

Fig gure 11-2. PPP Decision Suppport System

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As part of this process, it is proposed that consideration be given to using a set of theories in public policy analysis which would include Stakeholder Analysis (Mitchell et al., 1997) and Moore’s Strategic Triangle (Moore, 1995). The following theories/models need to be embedded into a DSS framework which itself is flexible and iterative. It should allow the organisations involved in the creation of a PPP a common platform which can be used to test alternate structures and assumptions, and facilitate communication. 1. Monte Carlo Simulation - incorporated into the DSS to develop risk profiles 2. Decision Theory – Prospect Theory, Bayesian Analysis, Game Theory 3. Scenario Analysis 4. Stakeholder analysis, Public Policy Theory (Moore’s Strategic Triangle) 5. Incentives and commercial structuring Considerable thought and market soundings have gone into improving mechanisms to access reasonably priced finance post the GFC through studies such as the Department of Treasury and Finance’s (DTF) (2012) where consideration was given to: partial capital contributions; greater risk sharing; guarantees for specific projects; deferred funding; guaranteed revenue; interest rate risk sharing; differential payment profiles and government raising senior debt. Of these options in its updated policy, DTF (2013) expressed the need for flexibility and that consideration be given to full financing by the private sector (as was the case for earlier road projects), partial public financing provided the private sector remained incentivised, and openness to consider other alternatives for specific projects. This changed DTF policy does not appear to preclude the use of incentives, caps and risk sharing on how demand risk is managed and the linking of such specific commercial levels has the potential to incentivise, control and protect the private sector from failure such as described for earlier projects in NSW and Brisbane.

Conclusions This paper has critiqued recent PPP road projects in Australia and established that in general the PPP process developed and implemented by governments (and consolidated as National Guidelines within Infrastructure Australia) delivers successful projects. In the years immediately preceding

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the Global Financial Crisis (GFC) there is evidence that the market behaved optimistically and this was particularly evident on Sydney’s Cross City Tunnel and Lane Cove tunnel projects and on Brisbane’s Clem 7 tunnel and Airport Link projects. It has been argued that the root cause of the NSW project difficulties lay with a flawed policy that encouraged biased behaviour by the market; this has been rectified by the National Guidelines for PPPs. It has been further argued that the Brisbane project difficulties lay with traffic projections and very optimistic behaviour by the market in its desire to close the financial transaction. Interestingly, when the longitudinal history of recent road PPPs is considered it is evident that post the GFC the market has changed markedly both in terms of the traffic projection issues outlined above and the changing cost and availability of finance in the market place. The consequence of these constraints is that the limited number of road PPP projects commenced since the GFC have all implemented conservative mechanisms to address demand risk and financing costs. Such approaches do not necessarily serve in the best interest of the community or the market. The review presented in this paper has identified that the collective professions involved in PPPs are working to redress the difficulties associated with traffic forecasting and also to create more flexible mechanisms for cost effective financing such as partial public financing. However, improvements to greater integration of the overall revenue evaluation of PPPs has been proposed that build on the concepts recently brought to the market by the Victorian Treasury. The concept for enhanced evaluation of revenue risk (and reward) is founded on the idea of an integrated decision support system containing traffic projections, market appraisal, commercial incentives and prudent governance control. The framework for such an approach has been outlined. The following generalisations have been drawn from this investigation: x Demand risk is a critical factor in the structuring of a PPP deal. Skewed traffic forecasts frequently result in failure of the deal and this has led to reluctance by the finance market to participate. x The arrangement of PPP deals is far smoother where governments have clear and mature policies, guidelines, commitment and clarity

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in decision processes, and a flexible approach to move and shape the market. x Success of PPP deals does not appear constrained to any particular risk allocation or payment regime. x The direct linking of large value capital projects to the finance market exposes these projects to financial opportunism, manipulation, and market machinations that sometimes occur around major financial transactions and markets. x An integrated, iterative approach to the development of PPPs involving the creation of a DSS may improve the outcome for the stakeholders.

References Asenova, D. and Beck M. (2009) Obstacles to Accountability in PFI Projects in Akintoye A., and Beck M. Ed. (2009) Policy, Finance & Management for Public-Private Partnerships, Wiley Blackwell. Baccarini, D. (1999), The Logical Framework Method for Defining Project Success, Project Management Journal, 30(4), 25-32. Bain R. (2009) Error and optimism bias in toll road traffic forecasts, Transportation, 36, 469 -482. Chung, D. M. (2009). Private provision of road infrastructure: Unveiling the inconvenient truth in New South Wales, Australia. Road & Transport Research, 18(1), 68-85. Department of Infrastructure (2011) Review of Traffic Forecasting Performance Toll Roads, Bureau of Infrastructure Transport and Economics, Australian Government, June 2011. Available from: http://www.infrastructure.gov.au/infrastructure/public_consultations/fil es/attach_a_bitre_literature_review.pdf [Accessed 12/6/2013]. Department of Treasury and Finance (2012) Future directions for Victorian public private partnerships: Request for public comments, State of Victoria. Department of Treasury and Finance (2013) Partnership Victoria requirements, State of Victoria. Duffield, CF. and Clifton, CJ. (2008), Chapter 17: Combining finance and design innovation to develop winning proposals, In Beck, M and Akintoye A (Eds), Policy, Finance & Management for Public-Private Partnership, Wiley Blackwell, Chichester, pp 327-345. Duffield, CF. and Wilson D. (2011) What went wrong, what went right? Lessons from PPP’s in Australian Road Transport, IPMA 25th World Congress – Brisbane, Queensland.

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Fitzgerald, J. (2008) Estimation bias in public infrastructure projects and procurement selection and performance, Masters Thesis, The University of Melbourne. Flyvbjerg B, Holm, M., and Buhl, S. (2005) How (in)accurate are demand forecasts in public works projects? Journal of American Institute of Planners Association, 71(2), 131-146 GHD (2011) Revised Final Report, Department of Infrastructure and Transport; An investigation of the causes of over-optimistic patronage forecasts for selected recent toll road projects, Department of Transport and Infrastructure, Canberra. Available from: http://www.infrastructure.gov.au/infrastructure/infrastructure_reforms/ files/Attach_C-GHD_Report.pdf [Accessed 12/6/2013]. Grimsey, D. and Lewis, M.K. (2007) Public Private Partnerships: the Worldwide Revolution in Infrastructure Provision and Project Finance, Edward Elgar. Haughton, G., & McManus, P. (2012). Neoliberal Experiments with Urban Infrastructure: The Cross City Tunnel, Sydney. International Journal of Urban and Regional Research, 36(1), 90-105 Li, Z. and Hensher, D. (2010) Toll Roads in Australia: An Overview of Characteristics and Accuracy of Demand Forecasts, Transport Reviews, 30(5), 541-569. Mitchell, R. K.; Agle, B. R.; Wood, D. J. (1997). Toward a Theory of Stakeholder Identification and Salience: Defining the Principle of Who and What Really Counts. Academy of Management Review (Academy of Management) 22(4): 853–886 Moore, M. H. (1995) Creating Public Value; Strategic Management in Government, Harvard University Press. Odgers, J. and Wilson, D. (1999) A Systemic Analysis of the City Link Project, Melbourne Australia, Australasian Transport Research Forum, 23(2), Perth. Oxera and RBconsult, (2012) Disincentivising overbidding for toll road concessions, Commonwealth Department of Infrastructure and Transport, Canberra. Van Der Westhuizen, D. and Fitzgerald, E.P. (2005) Defining and measuring project success. In: European Conference on IS Management, Leadership and Governance, 07-08 Jul 2005, Reading, United Kingdom. Vassallo, JM. (2006) Traƥc Risk Mitigation in Highway Concession Projects, Journal of Transport Economics and Policy, 40(3), 359–381.

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Zhao Y. and Kockelman K.M. (2002) The propagation of uncertainty through travel demand models, Annals of Regional Science, 36, 14563.

CHAPTER TWELVE FINANCING AND PROCURING MAJOR INFRASTRUCTURE: A COMPARISON OF THREE INTERNATIONAL PPP STYLE PROJECTS DR. COLIN DUFFIELD, GIGIH ATMO AND HAMZEH ZAREI

This chapter explores lessons learnt from three international mega projects, all with their different problems but which ultimately delivered successful outcomes. It highlights the structure and strategies used to manage finance, market, and risk to identify features of these project structures that may be adapted for the future. The chapter establishes the context for large Public Private Partnerships (PPP)-style projects and then critiques and compares each of the case studies under the broad headings of: procurement concession arrangements, guarantees provided, procurement structuring, project participants, legislative and approval regimes, risk management, finance, and market and commercial structuring. It then cross-analyses these projects for similarities and differences and identifies innovative solutions to the specific difficulties encountered in order to form a view as to which of these innovations may form a platform for future investment.

Background Governments’ key determining factors in adopting PPPs vary between developed and developing nations. Industrialised economies such as Australia, the UK, and Hong Kong are using PPPs to improve project outcomes and to seek value for money (Cheung, Chan, & Kajewski, 2009). On the other hand, developing countries, due to constrained

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government budgets, are focusing on enabling access to the private sector financial sources (Jiang & Wamuziri, 2008). This different motivation determines the strategies and expectations from infrastructure projects through PPPs. However, motivation to gain access to the private sector financial resources should not be the key driver for adopting a PPP as it may lead to substandard project performance (Duffield, 2010). More importantly, when revenues generated from user charges cannot be assured, a private consortium may not be able to secure the required loans (Regan, Smith, & Love, 2011b). The complexity of undertaking PPP projects in developing countries and in particular power generation projects requires a high level of government support (Ye & Tiong, 2000). Government guarantees are generally required to enhance financial viability (Voelker, Permana, Sachs, & Tiong, 2008). Discussions of government support for PPP projects have re-emerged post the 2008 Global Financial Crisis (GFC). The current capital market is characterised by a limited liquidity and riskaverse behaviour from private investors to invest in long-term assets such as infrastructure projects (Regan, Smith, & Love, 2011a). Support from government for PPP projects is expected to be able to restore confidence among infrastructure investors through the financial market and help the project consortium to reach financial close. Government support post the GFC mainly concentrates on financial assistance either directly or indirectly to the project consortium such as debt guarantee, debt contribution or even equity participation (Acerete, Shaoul, Stafford, & Stapleton, 2010). However, it is important to note that the provisions of government support change the structure of risk allocation between the public and private party and ultimately influence the project Value for Money (VfM) evaluation (Fitzgerald & Duffield, 2009). It can be concluded that the context of global environment as well as the country- and project-specific environment determines whether provision of government support is strategically important for project viability assessment. The private sector perceives risks in infrastructure projects differently in different countries. Comparison of risk allocation in PPP projects from different countries provides a basis for understanding the private sector’s risk appetite for such projects. Theoretically, risk is allocated to the party which is best able to manage such risk at the least cost. Nevertheless, risk allocation is also determined by the level of risk appetite from the private sector. Table 12-1

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167

shows the different risk allocation between PPP projects from developed economies and from developing ones. The quantum of risk transfer in PPP projects from the emerging economies is significantly higher than those from developed economies, particularly those associated with systematic risks. The private sector prefers the public party to retain systematic-type of risks namely political and macroeconomic stability in PPP projects from the developing economies. Provision of a government guarantee is commonly required to cover political risks, whereas a contractual concession agreement is typically deemed sufficient for ensuring commitment from the public sector in mature PPP markets. The largest difference is the allocation of project-specific risks, particularly demand risk (Table 12-1). Demand risk allocation has proven critical for all user-pay PPPs. For example, stable cash flow from power project risk may be at risk if the end-user electricity tariff is determined by the government. For liquefied natural gas, (LNG), while the demand risk in oil projects can be reasonably mitigated as the products are commercially tradeable on the international markets, lack of such a widely commercialized market for LNG pricing requires a long-term contract between buyers and suppliers to secure supply/demand positions for both. Hence, contractual risk allocation between the public and private sector in PPP projects is influenced by the political and economic background of the country. Clearly, country and project-specific risk profiles will determine the availability of finance and contractual arrangements. These factors influence the financial structure of the PPP. Before the GFC, ready access to finance and willingness for banks to syndicate loans with other financiers expanded the attractiveness of PPPs in which the private sector accepted significant levels of project risk, including demand risk. In the UK, Canada, Australia and South Africa these PPPs took the form of contracting relationships whereby the public agency entered an agreement with a private company to provide long-term services; Alfen et al. (2009) coined this approach of a vertical partnership. Alfen and colleagues (2009) also tabled the concept of a horizontal partnership within a PPP whereby the public entered a concession with a Joint Venture (JV) company to deliver the services. In such horizontal partnerships it is common for the public and private participants to jointly share direct responsibility for service delivery.

Chapter Twelve Risk factor: Summarised and adapted. (Bing, Akintoye, Edwards, & Hardcastle, 2005)

The UK: PFI projects risk allocation preferences. (Bing, Akintoye, Edwards, & Hardcastle, 2005)

Australia: Based on risk allocation for transport ation projects. (Mandiar -tha, Duffield, & Atmo, 2011)

Hong Kong: PPP projects risk allocation preferences. (Ke, Wang, & Chan, 2010)

Typical risk allocation for independent power producer projects (Sakya, Schavem aker, & Sluis, 2007)

Macroeconomic risks

Ƒ

Ƒ

Ƒ

Ŷ

Legal and political risks

Ƒ

Ƒ

Ƒ

Ŷ

Natural/ Force majeure

ž

ž

ž

ž

Project financing risks

Ƒ

Ƒ

Ƒ

Ƒ

Design risks

Ƒ

Ƒ

Ƒ

Ƒ

Construction risk

Ƒ

Ƒ

Ƒ

Ƒ

Operation risk

Ƒ

Ƒ

Ƒ

Ƒ

Revenue/ demand risk

Ƒ

Ƒ

Ƒ

Ŷ

Fuel supply risk

NA

NA

NA

ž

Risk meta-level Macro level risks Meso level risks

Unsystematic Risks

Systematic Risks

Main risk classification

168

Ƒ Private sector

Ŷ Public sector

ž Shared

Table 12-1: Risk allocation of PPP projects from different jurisdictions Post the GFC, countries are seeking alternate mechanisms to facilitate private investment in major infrastructure projects. The horizontal partnership model brings the potential for governments to provide capital

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to offset financial market borrowing constraints. Such an approach brings a very different risk profile to the vertical partnership model. To avoid the difficulties of being jointly and severally liable, within most JVs the concept of direct project financing has also gained some level of attractiveness. To approach the risk transfer benefits of PPPs, non-recourse financing would be attractive but the lack of security in these arrangements often necessitates the underpinning of arrangements with guarantees or at least secure payment streams. In a sense, financial structuring arrangements previously only seen in emerging economies are now being considered more broadly as a part of the financier’s due diligence and their lack of appetite for too much exposure in a difficult market. To understand these issues in greater detail this chapter critiques case study projects that have been structured with a vertical partnership and horizontal partnership (via a state enterprise – private arrangement), and provides an example where underpinning governmental guarantees create the opportunity. The aim is to establish features from different projects that may be more broadly adopted to enhance major private infrastructure investment by considering the links between commercial structuring, governmental support and finance structuring.

Case study investigation Critical strategic drivers are established as the basis to reflect on the applicability of project structuring. A case study methodology has been used to gather information on three different styles of private financing of large infrastructure projects using publicly available project data. The projects have been selected on the basis of collecting a representation of large projects undertaken in the Middle East/Asia/Pacific region with the following criteria: They provide examples of differing levels of private participation; are dissimilar in country economic conditions; are unlike commercial structuring; and all have been undertaken in recent years. The chosen case study projects are: a privately procured power station in the emerging economy of Indonesia (Cirebon Coal-fired power project, US$850 million); a commercially developed gas project in the Middle East (Qatargas 2 LNG project, US$9,300 million) and a typical Australian PPP (The Victorian desalination project, AUD 5,720 million). An introduction to each of these case study projects is provided prior to cross comparison of the commercial structures, governmental support provided and the financial structuring for each project being outlined.

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Case study project details The Cirebon project was the first green-field private power project delivered by the government of Indonesia since its economy recovered from the 1997 Asian financial crisis. An expression of interest was released in 2005 and it was not until 2010 that the project eventually reached financial close. The selected project consortium did not request a government guarantee but the financier insisted on such a guarantee. The project utilizes advanced clean coal technology but this introduces a high technological risk. Furthermore, the equipment is supplied from South Korea, a relatively new power developer compared with the traditional players, namely Japan, the US, and Europe-based power companies. The investors were particularly concerned with these risks and their influence on cash flow. The commercial participants in this project are summarised in Figure 12-1.

Figure 12-1: Cirebon Coal-fired Power Project Structure (Indika Energy, 2012)

The Qatar Gas 2 LNG project is a joint venture between public and private entities where every risk and return is shared. The project involves over forty new innovative designs and is the largest Qatari LNG facility. Commercially the project also sought to integrate the whole international

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LNG supply chain, which is different to existing fixed long-term contracts between suppliers and buyers. In June 2002 the HOA was signed between the parties, and the Front End Engineering and Design (FEED) was initiated in July 2003. In April 2009 both trains of the liquefaction plant were in service (Qatar Gas, 2009). Qatar Gas 2 is part of a programme that entails whole chains of LNG industry undertaken by the same venturers for the first time in this scale. The project structure is quite complex; a simplified structure is depicted in Figure 12-2.

Figure 12-2: Qatar Gas 2 simplified project structure (excluding condensate and LPG)

In response to a major drought, in 2009 the Victorian government initiated a desalination plant project to be delivered via a PPP capable of supplying 150 gigalitres (GL) of water a year. The facility was to have the capability of being upgraded to supply 200 GL in the future. The contract specified that the facility was to be commissioned by 19 December 2011; however, construction occurred and completion was achieved in December 2012 (AquaSure, n.d.). The commercial participants in this project are summarised in Figure 12-3 along with their interface to key providers such as the power companies.

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The originally forecast capital cost of the project was $3.5 billion and included not only the desalination plant but also complex inlet and outlet tunnels that pass through sand dunes and sensitive marine environs, with the provision of high voltage alternating current power transmission line. Government reported that the project’s overall net present cost (NPC) of $5,720 million was the equivalent of a 14% saving over the public sector comparator NPC (The Department of Treasury and Finance, 2009). The contract also provided flexibility as the volume of water that would be procured in any year ranging from 0 GL up to the full capacity in increments of 25 GL. As of August 2012 the drought ended and significant rainfall replenished the water reserves to an excess of 70% capacity; in short, water is not currently needed from the desalination plant.

Figure 12-3: Desalination plant project organisation structure

Analysis of case study projects The cross analysis of the case study projects has enabled the postulation of improvements to current project structuring. The projects are analysed for their commercial structuring, governmental support, and financial arrangements:

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Cirebon Power project Commercial structuring In addition to the revenues from the electric power production, project sponsors receive profits from coal supply contracts and operation and maintenance contracts. This commercial arrangement has a long-term business focus which enables whole-of-life consideration by project sponsors to ensure that the plant’s performance target is met and the targeted coal fuel consumption is reached.

Government support The project sought finance from the international markets in 2008 when the GFC occurred. Due diligence from the Export Credit Agency (ECA) insisted on a government guarantee and they provided the debt providers (commercial banks syndicates) a political guarantee. In this case the ECA involved Korean Exim Bank and Japan Bank for International Cooperation. This project demonstrates that a mechanism to facilitate government support becomes a key determining factor to access finance in the risk-averse finance market conditions.

Project financial structure Figure 12-4 presents the financial structure for Cirebon and it is evident that the project debt is dominated by loans from ECAs. The participation from commercial lenders contributes only to twenty-four percent of the total project loans. Although it is recognised that export credit agencies’ primary motivation is to support export of goods and services from a country’s creditor, the availability of finance from such institutions becomes a critical success factor for an infrastructure project in emerging economies such as Indonesia. This is because the perceived high investment risk prevents larger exposure from foreign financiers operating on a commercial basis.

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Figure 12-4: Cirebon Power project financial structure

Qatar Gas 2 Project Commercial Structuring In LNG projects, stakeholders are formed in horizontal partnerships and the number of players is limited to few international oil companies. Each segment has technology licenses while all segments ultimately have to satisfy the market demand of natural gas with utmost harmony. On the other hand, while at a disadvantage when it comes to technology and market influence, developing gas exporting countries got the advantage of having reservoir ownership which is usually nationalized and exclusively exploitable by a state company. Consequently, there have been unwritten boundaries in the realm of state and international firms, the former to extract and sell the product, the latter to participate in up-stream but focus on downstream which is mainly marketing. Qatar Gas 2 however changed the traditional arrangement by maintaining the ownership throughout the chain, i.e. segmented participation was altered for integrated. The QG 2 is responsible for long-term sales and purchase agreement of natural gas with its international partners and indexing of prices to the local UK market. This can boost the revenue for the partner having the whole chain but at the same time expose them to commercial risk of price change in the local market irrelevant to international reference prices.

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Government Support The Qatari government set forth the necessary infrastructure for these mega projects. In 2010, it succeeded to get AA rating from Standard & Poor’s (QNB Capital LLC, 2010). The provision of access to the largest gas reservoir in the world and an equity contribution from the Qatari government via Qatar Petroleum (QATARGAS Operating Co. Ltd., 2009) is significant. While no direct guarantee is given to the QG2 project by government, the main partner is Qatar Petroleum, the state company who share risk and return with other venturers in the QG 2 Joint Venture.

Project Financial Structure The capital structure of the liquefaction plant is illustrated in Figure 12-5. The presence of ECA assured other lenders in case of any political instability though Qatar proved stability as host country in previous projects. The main area of risk however is the sale of gas and the revenue volatility due to indexing to UK market prices. As a result, some level of sponsor loan is inserted to assure the commercial banks and other lenders seniority in case of default.

Figure 12-5: Qatar gas 2 project capital structure (Newendorp & Gajameragedara, 2005)

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Victorian Desalination Project Commercial structuring A contract for the desalination project was awarded to AquaSure in July 2009 to finance, design, construct, commission, operate and maintain the facility for a thirty year term ending in September 2039. The agreement is structured as a vertically integrated PPP with service obligations for the provision of water in requirement of government’s predetermined needs. Government is required to make service payments to AquaSure on the basis of the water it receives up to the amount ordered within particular periods. Monthly service payments commence once Preliminary Commercial Acceptance of the facility is reached after the plant has undergone detailed reliability testing as part of the commission phase of the project. These service payments include a security payment that is based on the plant’s capability of delivering the required water at the required quality plus a payment based on the specific volume of water delivered within the month. Performance and quality is monitored and a mechanism exists whereby the computed service payment can be reduced or abated if performance is not as specified.

Government support This project was procured in accordance with the Partnership Victoria policy and as such governmental support for the project is paramount to the success of the project. This support commences with the government being very clear to the market that it requires the project and that decisions have been taken that government plans to implement the procurement regardless of the procurement strategy; the project is budgeted for in the normal manner and the final decision as to whether the project will progress as a PPP is whether the bids tendered by the private sector demonstrate that they add improved value to the state over the state doing the work itself (as measured by a so-called Public Sector Comparator). Clarity is also provided on how the procurement process will be conducted; this again provides certainty to the private sector. Tangible levels of support for the desalination project come in a commitment to pay for the services provided in accordance with the contract, provide the land for the project, and actively assist the project in its interface with other operating systems, agencies and legislative

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requirements. There is also a sharing of some risks, e.g. force majeure and extension events, power supply risk, some changes in law, interest rate and foreign exchange risk and some changes in price of operating insurances. Given that this project went to market during the difficult financing period post the GFC, the State offered bidders a form of guarantee whereby the State would effectively act as the bank of last resort if the debt was not fully sold down as anticipated to banking syndicates as expected. This facility was not required as banking syndicates took all the debt on offer.

Project financial structure Finance for the Victorian Desalination Project was arranged by AquaSure through a combination of senior commercial debt and mezzanine debt in the form of nominal bank debt. The equivalent of equity was also brought to the project by AquaSure; refer to Figure 12-6 for the breakdown between debt and equity. By way of a media release on 19 November 2009, AquaSure advised that senior debt had been successfully arranged by the book running lead bankers of the National Australia Bank and Westpac Banking Corporation. Total finance of some $3.5b was raised of which the syndication raised $1,746m and this was more than fifty percent oversubscribed. Final arrangements included AquaSure’s original twelve mandated arrangers being joined by an additional twenty-two banks and funds. Interest was shown not only from banks but from select Australian superannuation funds and banks from Australia, Europe and Asia.

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Figure 12-6: Desalination project, Victoria financial structure

Discussion of case study project drivers Each of the case study projects has been reviewed and compared and then the key differences identified. Of particular relevance is the structuring of demand risk and debt.

Demand risk management Comparison of project equity structure among the three case studies reveals different strategies and risk appetites from the equity providers. The Qatar Gas 2 project (Qatar) has the most complex scope of work and equity arrangement compared with the other two cases whereby the project includes not only creation of the products (in this case the liquefaction plant), but also transmission and distribution of the products to the buyers. Two project sponsors, ExxonMobil and Total, also act as the ultimate buyers of the LNG products from the project, and hence absorb commercial risk associated with demand for the gas. Different risk appetites, however, can be observed from the desalination project in Victoria, Australia and the Cirebon coal-fired project in Indonesia. AquaSure, project consortium of desalination project, is insulated from the uncertainty of demand risk through leases and licenses agreement with the state of Victoria. Similarly, Cirebon power consortium transfers demand risk to the Indonesian electricity company through Power Purchase Agreement between the public party and private consortium.

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The case studies show different risk appetites toward demand risk associated with the services or products delivered from the projects. If the product is commercially tradable in the international market such as LNG product from the Qatar Gas 2 project, the equity providers are willing to retain demand risk. On the other hand, when there is uncertainty about demand either volume (Victorian desalination project, Australia) or price (Cirebon Power project, Indonesia), the private consortium requires assurance from the public partner that the projects provide stable cash flow. This arrangement is essentially achieved through shifting commercial demand risk to the public parties. Furthermore, for the Indonesian case, government commitment through provision of a guarantee is required to ensure the state electricity company has adequate financial resources to service its contractual obligation in the Cirebon project.

Debt structure There is a significance difference of debt structure between the three projects. In a mature PPP market such as in Australia, commercial financial markets have the confidence to finance desalination project from the early stage of the project. The public and private partnership is governed primarily by a concession contract between the two parties. Government guarantee is not considered a key element for the financiers’ due diligence process. This reflects risk appetite from the financiers toward the project. On the other hand, the Power Purchase Agreement of the Cirebon power project which is designed to govern contractual relationships between the contracting parties is not considered adequate by the financiers. Hence, the provision of a guarantee from international finance institutions is required by the foreign commercial banks prior to committing loans to the power project. Different arrangements, however, can be overlooked from the Qatar Gas 2 project whereby foreign project sponsors are not only contributing to the project equity but also significantly provide loans to this project i.e. twenty percent of CAPEX (Capital Expenditure). Confidence from the project sponsors is such that the products delivered by the project are commercially feasible to provide returns on the investment and assure stable cash flow for servicing debt. On the other hand, a very different debt structure can be seen in the Cirebon power project in Indonesia where the majority of finance is arranged by foreign sovereign loan. Loan contributions from foreign commercial banks are enabled through provision of guarantees from export credit agencies.

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Analysis of key strategic drivers Based on the earlier assessment of project structuring that included consideration of the differing demand risks of the projects and their underlying drivers, it emerged that the key strategic drivers that appear of greatest interest require further evaluation. A comparison of the three case study projects has been undertaken under the broad headings of: procurement concession arrangements; guarantees provided; procurement structuring; project participants; legislative and approval regimes; risk management; finance; and market and commercial structuring. The findings are summarised in Table 12-2. Performance Drivers

Cirebon Coalfired Power Project (CFPP), Indonesia

Qatar Gas 2

Victorian Desalination Project

Concession arrangements

Long-term 25 year, Build-OwnTransfer concession contract

Long term 25 years Joint Venture of state and international private partners to Build-OwnOperate-Transfer.

Guarantees*

Loans from commercial syndicated banks guaranteed by foreign export credit agencies Counter-guarantee from the government of Indonesia No provision of equity guarantee

No guarantees given from the government while the state company shares all the risks and return as main shareholder.

Long term 30 year contract to finance, design, construct, commission, operate and maintain the facility. State offered to be lender of last resort but this was not required. No guarantees provided but contractual commitment to make service payments.

Financing and Procuring Major Infrastructure Structuring for procurement*

Procurement was structured to adopt international competitive tendering process (Expression of Interest, Request for Proposal, and negotiation to award)

Proponent led initiative from international private companies (ExxonMobil and later Total).

Project participants*

A mixture between foreign experienced sponsors, foreign emerging sponsors, and a local sponsor.

Joint Venturers with capacity to contribute along the complete supply chain of LNG industry and bring financial capacity to raise external finance.

Legislative and approval regimes

Legal and regulatory framework is established. Political support is high.

Risk management*

Public party retains political risk and commercial demand risk

The government established many forms of incentives that are captured in legislation to facilitate project initiatives, including no control limitations on foreign exchange. The risk is shared among the partners in the sense of their equity share in JV.

181

Done in accordance with Partnerships Victoria policy that in short involves an international tendering competitive process (EoI, RFP, negotiation to award) A mixture of foreign and Australian participant in a consortium that include equity participants, contractors, facility managers and financiers. Standard project legislative and approval regimes.

A detailed allocation of risks between the parties with the majority of risks being transferred to the private consortium.

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Equity structure is Intense due AquaSure dominated by diligence by arranged equity foreign investors financiers due to and debt from the Local strategic many risk factors international partner constitutes mainly stem from market as twenty four percent technical traits of arranged by of equity the project and the Australian banks. Export credit linkage of product agencies provide price to local gas the majority of prices which loans caused moderate International level of debt ratio commercial banks with significant syndicate provides contribution from less than thirty sponsor. percent of loans As the electricity The international A mixture of Market and tariff is controlled partners are the availability commercial by the government, buyers via longpayments and structuring* the commercial term sales and volume based demand risk is purchase payments. allocated to the agreement for 25 Demand state electricity years. requirements are company. controlled by In addition to the Unlike previous government. electrical power LNG projects the station profits the price formula is Project sponsors not linked to oil also obtain but to UK gas additional profit market price. from locking in coal-supply contracts. They may also have locked in exclusive machinery maintenance arrangements. * Items are where there are significant differences between the case study projects Finance*

Table 12-2: Comparison of Key Strategic drivers

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Major differences identified between the case study projects are considered below: Guarantees: The extent of guarantees provided by a government appears to impact on the overall risk profile of the project. The requirement for a guarantee linked to the economic strength of the country yet the mechanism to overcome systematic risks has been dealt with in one case by provision of a guarantee and in another case by joint venturing directly into the commercial interests of the project. Treating the PPP contract as a business, the differences brought by guarantees were stark. For the situation of a direct government guarantee the government effectively holds the ultimate downside risk of the project; the joint venture arrangement provided opportunity for both up and downside outcomes, whilst the case with no guarantee government is a step removed from the business risk. Consideration of the product being delivered casts further insight into these different models; sharing of risk in a profit making gas venture may be profitable. The Indonesian electricity project is procured in a regime involving tariff subsidies and thus a decision to guarantee a project may be sensible simply to procure access to power on social grounds. The no guarantee/no joint venture arrangement is risk averse but brings a high level of confidence of delivery. Risk allocation: The different projects had markedly different risk profiles but these profiles appeared consistent with the commercial frameworks adopted and did not appear directly linked to simplify the profile of the demand risk. Commercial, governmental and financial drivers: Comparison of project organisation structures and financial structures between the three projects results in identifying a correlation between the financial drivers from project participants and project commercial structuring. Loans from commercial banks and syndication dominate debt structure for the Victorian Desalination project whereas foreign export credit agencies provide the majority of loans for the Cirebon power project in Indonesia. Hybrid financing can be seen from Qatar gas 2 project where the project financial structure is a hybrid between sovereign loans from foreign export credit agencies, international commercial banks, and local banks. It can be argued that the country environment where a PPP-type project is procured as well as the project pose a specific risk especially in relation to demand risk and determination of the availability of finance.

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The other performance drivers identified in Table 12-2 are not materially linked to the form of PPP.

Conclusions This chapter has considered what can be learnt from large differently structured finance deals for recent infrastructure projects delivered in Australia, Indonesia and Qatar. Each of the projects reviewed has successfully achieved the required outcome in difficult situations. It sought to identify features from the structuring of these project structures that may be adapted for future projects. We concur with the literature that systematic risk profiles make a difference based on a country’s economic position but raise some uncertainty as to whether the other differences are in fact in country differences or actually differences in the commercial structuring of a particular deal. The styles of project structure considered have been established as: i) Vertical partnership PPP style contracts; ii) Horizontal partnership PPP contracts that incorporate joint venturing between the state company and the private sector; and iii) Direct project financing. The case study projects are primarily based around either the vertical or horizontal PPPs but the direct finance arrangement becomes intertwined where government guarantees are under consideration. All projects were successfully brought to market, financed and procured. It would appear that if project drivers are assured, political support is high and a marketable solution is possible then creative solutions appear to emerge to make the project a reality. We found that provision of government support is considered essential for enabling access to project financial sources and that treatment of demand risk is critical to the commercial robustness of the project. However, the form of government support changes depending on the project and maturity in delivering PPP projects. In terms of PPP structuring, participant involvement and the motivation of international financial markets there does not appear to be a significant difference between the three case study projects. In conclusion, it would appear that sound project arrangements can be struck regardless of international location but the style of deal and the level of governmental direct involvement influence the commercial

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structure and risk profile of the deal. Concepts like joint venturing provide an alternate mechanism to simple provision of guarantees in some situations yet the fundamental concept of the private and public sectors working together appears to have a place in the future.

References Acerete, J. B., Shaoul, J., Stafford, A., & Stapleton, P. (2010). The Cost of Using Private Finance for Roads in Spain and the UK. Australian Journal of Public Administration, 69, 48–60. Alfen, H. W., Kalidindi, S. N., Ogunlana, S., Wang, S., Abednego, M. P., Frank-Jungbecker, A., Jan, Y.-C. A., et al. (2009). Public-Private Partnership in Infrastructure Development Case Studies from Asia and Europe. Bauhaus-Universität Weimar AquaSure. (n.d.). AquaSure the consortium. Retrieved August 3, 2012 from www.aquasure.com.au Bing, L., Akintoye, a., Edwards, P. J., & Hardcastle, C. (2005). The allocation of risk in PPP/PFI construction projects in the UK. International Journal of Project Management, 23(1), 25–35 Cheung, E., Chan, A. P. C., & Kajewski, S. (2009). Reasons for implementing public private partnership projects: Perspectives from Hong Kong, Australian and British practitioners. Journal of Property Investment & Finance, 27(1), 81–95 Duffield, C. F. (2010). Different Delivery Models. In G. Hodge, C. Greve, & A. Boardman (Eds.), International Handbook on Public-PrivatePartnerships (PPPs). Edward Elgar. Fitzgerald, J. P., & Duffield, C. F. (2009). Value for Money in a changing world economy. CIB TG72 on PPP Revamping PPPs ’ From “ Revisiting and Rethinking ” to “ Revamping and Revitalising ” PPPs (pp. 3–14). The University of Hong Kong. Indika Energy (2012). 'Investor's exposure to an IPP development in Indonesia’. the International Conference on the Public Private Partnership for Power Projects in Indonesia. Jakarta, Indonesia. Jiang, M., & Wamuziri, S. (2008). Role of export credit agencies in PFI/PPP projects. Proceedings of the ICE - Management, Procurement and Law, 161(4), 163–169 Ke, Y., Wang, S., & Chan, A. P. C. (2010). Risk Allocation in PublicPrivate Partnership Infrastructure Projects: Comparative Study. Journal of Infrastructure Systems, 16(4), 343–351. Mandiartha, P., Duffield, C. F., & Atmo, G. (2011). Project financing and risk management in transportation projects: A public-private

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partnership framework. The 3rd International Conference of European Asian Civil Engineering Forum (EACEF). Newendorp, T., & Gajameragedara, S. (2005). Carefully structured integrated LNG chains offer best template for project finance. LNG Focus, (June 2005), 22–26. Qatar Gas. (2009). Annual review: A milestone closer to realising our vision. Retrieved July 9, 2012 from www.qatargas.com.qa QATARGAS Operating Co. Ltd. (2009). The Pioneer. Issue No.128 QNB Capital LLC. (2010). Qatar Economic Review. Retrieved July 9, 2012, from www.qnbcapital.com.qa Regan, M., Smith, J., & Love, P. (2011). Infrastructure procurement: Learning from private - public partnership experiences “Down Under”. Environment and Planning C: Government and Policy, 29(2), 363-378 Regan, M., Smith, J., & Love, P. E. D. (2011b). Impact of the Capital Market Collapse on Public-Private Partnership Infrastructure Projects. Journal of Construction Engineering & Management, 137(1), 6-16 Sakya, I. M. R., Schavemaker, P., & Sluis, L. Van Der. (2007). Evaluation And Risk Assessment Of Independent Power Producers In Indonesia. Proceedings of the International Conference on Electrical Engineering and Informatics (pp. 979–800). Bandung Institutute of Technology, Indonesia. The Departement of Treasury and Finance. (2009). Partnerships Victoria Project Summary. Retrieved August 3, 2012 from http://www.partnerships.vic.gov.au/CA25708500035EB6/WebObj/Pro jectSummaryforVictorianDesalinationProject/$File/Project Summary for Victorian Desalination Project.pdf Voelker, C., Permana, A., Sachs, T., & Tiong, R. (2008). Political risk perception in Indonesian power projects. Journal of Financial Management of Property and Construction, 13(1), 18–34 Ye, S., & Tiong, R. K. L. (2000). Government support and risk-return trade-off in China’s BOT power projects. Engineering, Construction and Architectural Management, 7(4), 412–422

CHAPTER THIRTEEN STUDENT ENGAGEMENT IN ONLINE LEARNING ENVIRONMENTS: A CASE STUDY ANTHONY WOOD

Engagement is defined by the Oxford Dictionary as “an arrangement to do something or go somewhere at a fixed time.” (2012). The Australian Council for Educational Research defined student engagement as students’ involvement with activities and conditions likely to generate high-quality learning… provides a practical lens for assessing and responding to the significant dynamics, constraints and opportunities facing higher education institutions (ACER 2010: 32).

Marks points out the student engagement is “a psychological process… the attention, interest, investment, and effort students expend in the work of learning” (Marks, 2000: 61). It has become a popular research topic to investigate student engagement issues in various sectors, e.g. school education and higher education. Appleton and colleagues (2006) surveyed 2577 high school students in the United States, where students’ learning outcomes (measured by GPA and suspension) were found statistically positively correlated with the level of engagement. They consequently developed a model to assess the level of student engagement, i.e. teacher-student relationships, control/relevance, peer support, aspirations, family support and extrinsic motivation. Engagement of school students is affected by transformational leadership, school conditions, student identification and family educational culture (Leithwood & Jantzi, 2000). Fredricks, Blumenfeld and Paris (2004) added that school engagement is influenced by both individual trait and the general context. In return, student

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engagement affects the peer social capital and school dropout (Ream & Rumberger, 2008). There are also a number of studies looking at student engagement issues at the higher education sector. Coates (2005) argued that student engagement should be taken into consideration for the quality assurance system for higher education. A study by Ahlfeldt, Mehta and Sellnow (2005) found that student engagement can be enhanced by means of incorporating problem-based learning components in university classes. Schaufeli, Martínez, Pinto, Salanova and Bakker (2002) conducted a survey with 1661 university students in Spain, Portugal and the Netherlands. Their results showed that the level of engagement to some degree explains the student’s academic performance and negatively correlated with burnout. The class size is found negatively associated with the level of student engagement (Ahlfeldt et al., 2002) According to Loftin et al. (2010), the instructor plays a critical role to set up an appropriate classroom environment which encourages students to participate in class activities, e.g. asking questions or making comments. A study by Carini, Kuh and Klein (2006) found that student engagement is positively correlated with desirable learning outcomes such as critical thinking and grades. Numerous studies have been undertaken to identify effective tools and mechanisms to motivate student participation in learning. For instance, Bentley, Brewer and Eaton (2009) pinpointed that the hot seat teaching methodology is an effective approach to motivate students’ engagement, such as preparing for class and participating in classroom discussions, particularly in large size classes. A variety of tools and techniques can be used to motivate students’ participation in online learning. Web based technologies such as online discussion forums is a popular approach that has been adopted in practice. The online discussion forum is asynchronous, which allows flexibility of learning. According to Cheng, Paré, Collimore and Joordens (2010), participation in voluntary online discussion forums helps undergraduate students to achieve better course performance, particularly in exams. Chen, Lambert and Guidry (2010) argued that the utilization of web technologies motivates students to have in-depth learning such as reflective learning and integrative learning. Morris, Finnegan and Wu (2005) used student-access computer logs to analyse student behaviours in online courses. Their study indicated that successful online learning relied on the frequency of participation and the time spent on online discussion forums.

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Purely online course delivery is an emerging approach in contemporary education. It presents a significant challenge to educators to engage students in online environments compared to conventional course delivery mode in the classroom. Significant challenges are presented when teaching project management post-graduate courses online. Although it is not technically difficult to teach the theory of topics such as project management through electronic media, it is a much greater challenge to teach the practice. Contention arises when competent practice skills are lacking, thus compromising the realised value of the theory. For example, a course delivered in a traditional class-room environment may be intentionally designed to maximise students’ learning by active engagement in collaborative activities such as tutorials. A simple adaptation of such a course into an online environment might fail in the first instance because real-time discussion would be replaced by asynchronous discussion forums, where students may be contributing from different time zones and possibly over an elapsed period of several days. The aim of this research is to investigate students’ behaviour in online, asynchronous learning environments. In particular, the impact of the level of student engagement in academic performance is examined.

Method A case study approach was adopted in this research to investigate student engagement issues in online project management post-graduate courses. As Yin (2003) pointed out, the case study approach is most appropriate for those studies with “how” and “why” questions. A large university in South Australia which offers post-graduate project management courses purely online was chosen for this research purpose. One first year course, Principles of Project Management, was selected. The aim of this course is to provide students with an overview of the principles, skills and techniques required for management of projects throughout the project life cycle from inception to completion. On completion of this course, students should be able to: x demonstrate the principles of project management and project life cycles with reference to the Guide to the Project Management Body of Knowledge; x identify the difference between functional management and project management;

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x appreciate the application of management and organisational behaviour theories within the organisation; and x describe the qualities and functions of a project manager within a project team. Assessment in this course comprised a combination of individual work (essays), collaborative work (group report), and tutorials (via discussion forums), as follows: x Portfolio of short essays, 1800 words, weight 40% x Group report, 1350 words per student, weight 30% x Participation in online tutorials, 20 topics, weight 30% This research was undertaken throughout the delivery period, July – November 2010. The cohort was with 92 students. Along the delivery, 16 students withdrew from the course. Therefore, 76 students’ data, e.g. engagement behaviour and academic performance, are retrieved and analysed consequently. The engagement mechanisms adopted in this course and students’ feedback are visited. The Learning Management System used for this course is ‘Moodle’. Developed in Perth, Australia, Moodle has an open source license and modular design which allows universities to develop additional functionality to meet their specific requirements. It has gained wide acceptance and implementation in universities in Australia and overseas.

Case Study Profile of students The cohort size is 92 students. All these students are Australian Citizens or Permanent Residency Visa holders. 94.6% of these students are studying part time. In terms of location, most of them are studying in NSW, VIC, QLD and SA (see Figure 13-1).

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Oman, 1 Singapore, 1 United Arab United Hong Lebanon, 1 Kong, 1 Emirates, 1 Kingdom, 1 Fiji Islands, 1 ACT, 2 NT, 3 NSW, 23 WA, 5 SA, 14 VIC, 23 QLD, 15

Figure 13-1: Student profiles

Engagement mechanism The engagement mechanism adopted in the delivery of this course is principally student-lecturer in orientation. Students receive feedback on their activities progressively through the semester. Evaluation of the course and the teaching occurs across the teaching period by means of simple, informal feedback questionnaires mid-semester and formal questionnaires at the end of the semester.

Students’ participation in online learning activities Morris et al. (2005) used a number of indicators to measure the level of student engagement in online environments, such as the number of discussion posts viewed, number of original posts, hours spent viewing and hours spent posting. For this research purpose, student engagement is defined as the participation of students in online learning activities. Two indicators were adopted to measure the level of student engagement, i.e. total views of content pages and total posts in the course discussion forum. Information with regards to hours spent on viewing others’ posts and adding own posts are not available from the learning management system. The academic performance of individual students is measured by means of the final marks.

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Figure 13-2 describes the behaviour of student engagement in terms of total views of content pages and total posts in the course discussion forums. It shows that students are highly engaged in first three months of the delivery. It seems that students spent less time on viewing content pages and posting to the discussion forum when heading towards the completion of the course.

30,000 25,000 20,000 15,000 Total views 10,000

Total posts

5,000 -

Figure 13-2: Student engagement behaviour during the delivery period

T-test A t-test was undertaken to compare the number of total posts and the number of total views. The results showed there is significance between unsuccessful completers and successful completers on both indicators of student engagement (see Table 13-1).

Student Engagement in Online Learning Environments: A Case Study

Student engagement indicators

Unsuccessful completers

Successful completers

(N=5)

(N=71)

193

t

p

Mean

SD

Mean

SD

Total posts

21.00

12.94

52.18

22.59

3.04*

.00

Total views

211.60

175.66

534.97

120.91

3.25*

.01

*p