Construction Assured: Governance and Risk Mitigation on the Panama Canal Expansion

05/25/2011 13:36

When completed in 1914, the Panama Canal was the largest and most significant construction project in history. The 48-mile canal provides a vital maritime connection between the Atlantic and Pacific oceans, spanning the narrow, rocky Isthmus of Panama. Along the canal’s path, which took a decade to build, ships are raised a total of 85 feet to traverse the canal via system of locks, and then are lowered again. This engineering marvel, which will mark its centennial in 2014, cut maritime travel and shipping time in half – a marvel even in modern times. The Panama Canal’s famous history and its size are two factors that differentiate this project from all others. When it was first built, there were more than 152.9 million cubic meters of soil material removed. It is estimated more than one million vessels have passed through the canal since its opening in 1914. Today, many container ships have grown too large to use the canal. With concerns that the canal in its current state would not be able to compete in the ever-evolving shipping market, Panamanian officials embarked on a design and construction program to expand it. Planning began several years ago, and the expansion program was approved by Panamanian voters in a public referendum in 2005. Under the $5.25 billion project, a third lane of traffic is being added to the canal in each direction, more than doubling its capacity and effectively ensuring it can handle some of the biggest and most current vessels manufactured by the shipbuilding industry, up to double the size of current Panamax ships. Certain ‘Post-Panamax’ U.S. military vessels currently unable to traverse the canal will be able to do so through the new set of locks. The construction program is comprised of multiple discrete projects, including four excavation projects, three dredging projects and two new sets of locks. The new locks will be 427 meters long and 55 meters wide – the size of four football fields. Challenge Ground was broken for the massive construction program in 2010, and is expected to be completed in late 2014. During the expansion, the Panama Canal will continue to operate, 24 hours a day, seven days a week, with expectations that it will continue to handle the same amount of shipping traffic in order to maintain the revenue stream. This poses a significant challenge to the construction process, and could expose the program to conflicts, construction claims, and schedule delays. Benefits It is anticipated that the Panama Canal Expansion Program (PCEP) will modify trade patterns in the region, and Panama will consolidate its role as the most important logistics and transportation center in the Americas. The expansion program is expected to have far-reaching benefits for the entire country. Revenue from the canal will be invested in infrastructure, hotels and resorts, and upgrades of rail service between the Atlantic and the Pacific. The ACP Expansion Plans The Autoridad del Canal de Panama (ACP, or the Panama Canal Authority) is an entity of the Government of Panama, with exclusive charge of the operation, administration, management, preservation, maintenance, and modernization of the Canal, as well as its activities and related services. The planning for this construction program has been extensive, and the ACP is truly committed to delivering world-class infrastructure. The ACP is allowing the time to perform the expansion properly. The expansion program is expected to take 13 years from concept to operations, and is one of the largest and most high-profile infrastructure programs in the world. The program underwent a five-year feasibility study prior to the public referendum. Then, the ACP went through a three-year procurement process to select the design-build consortium. The actual design and construction process will take another five years to complete. With the locks model built in France, a construction joint-venture consortium that includes firms from Spain, Belgium and Panama, and a design consortium that includes firms from the U.S., Argentina, Italy and the Netherlands, the Panama Canal program is truly global and communication is of paramount importance. Stakeholder Satisfaction Mega- projects (those valued at greater than $1 billion) are becoming the rule rather than the exception. Governments and private firms around the world see new infrastructure investments, or “mega-projects,” as a way to invigorate local economies, get people back to work and spur investment. But the financial risks of those mega-projects can seem nearly insurmountable, especially in today’s economy. Mega-projects, once the exclusive domain of governmental agencies, are increasingly being funded by private investors, which have boards of directors and other stakeholders who are demanding better financial performance and lower risk. Governing boards and audit committees are no longer content with arms-length monthly status reports or dashboards to provide a measure of confidence. With complex and high-visibility projects exhibiting a norm of cost and schedule deviations, the need is clear for ever-vigilant monitoring, an approach that serves the objectives of key stakeholders, who demand the maximum benefit possible with available funds. Governance & Oversight Since the worldwide financial recession, there is a marked interest in fiscal responsibility, and the need for assurances of financial performance of capital investments, which is a full-pendulum swing away from the days of low interest rates and speculative over-building. Notably, Panama’s public referendum occurred before the financial meltdown in 2005, and the PCEP began mid-crisis in 2008. The scrutiny over the PCEP in Panama and throughout the world became a crucial factor in the ACP’s careful, conservative approach to developing their program. This conservatism led the ACP to retain Hill International last year to provide program oversight and construction assurance services for the expansion effort. Construction Assurance is an independent, objective consulting service that is designed to add value to, and improve the overall performance of, clients’ capital investments. The assurance role has evolved well beyond traditional auditing for compliance with accounting standards and internal controls. Assurance professionals perform standard audit roles, but are also tasked with assessing and mitigating corporate risk at all levels. They report directly to the Audit Committee of the Board of Directors, are necessarily independent and objective, and must be beyond influence of executive management – this is an important distinction. It creates a counter-balance to a singular management model, creating a binary governance model. The ACP is following the binary governance model by combining ACP management with CH2MHill to form the Program Management Team, and the ACP Office of Inspector General with Hill International to form the Assurance Team. Construction assurance services statistically increase a project’s chances for success by reducing risk and cost, and addressing the inefficiencies, waste, and fraud that impact so many mega-projects. It is also expected that the ACP will benefit from reduced risk of significant claims and litigation. Team Composition The PCEP is essentially a massive civil engineering operation that requires the application of many disciplines, and the assurance team provides the global expertise requirements for such a large complex program. The team has a truly unique breadth and depth of experience, including skill-sets in engineering, construction, construction and program management, quality control, claims, scheduling, project controls, accounting, finance, quantity surveying, law and audit. Staff has been brought together from Hill offices and subsidiaries around the world, along with select executive consultants. The diversity and scale of the PCEP requires that team members travel around the world, to work with the various design and engineering firms, manufacturers and international construction consortia that together are bringing the capital mega-program to fruition. Risk Mitigation Hill began providing construction assurance services to the PCEP in July 2010 with a detailed risk analysis that took into account the entire construction program, determining the scale and potential impact of both known and previously unknown risks. In conjunction with the client (the ACP’s Office of the Inspector General (OIG)), the Hill team then developed a five-year audit plan, which focuses on mitigating the specific identified risks. In addition to working closely with the OIG audit team, and augmenting the skill-sets already found in the OIG department, Hill’s team is also providing assurance training to ACP OIG staff, reflecting the ACP’s commitment to continuous improvement as a learning organization. A cyclical risk-analysis component enables the team to identify secondary risks and new risks, in response to changing circumstances. Each identified risk is scheduled to be audited, in order of priority; targeted audits began in January 2011. Hill’s construction assurance services benefit the ACP by providing increased certainty for successful completion of the PCEP. The Assurance Team’s audit findings are integrated by the Program Management Team to constantly improve the PCEP operations and reduce risk as the program progresses and evolve. The PCEP appears, thus far, to be performing as a model mega-program. Many large mega-projects of the past century – as substantiated by underperformance of their planned scope, schedule, cost, quality, and operational viability – have not performed well. While there very well may be some unavoidable cost overruns, schedule delays and disputes, the operational viability of the PCEP is certain. It is expected that the binary governance model will yield a higher performing mega-program than the singular management models and management failures of the past. -- Alexia Nalewaik FRICS CCE Alexia Nalewaik FRICS CCE Ms. Alexia Nalewaik FRICS CCE is an executive consultant to Hill on this project. She is an independent consultant with 20 years of broad construction industry experience in both public and private sectors, specializing in international high-risk and troubled mega-programs. Her work focuses on cost management, change/claims analysis, owner representation, contract negotiation, and risk mitigation. She is a globally published expert in construction audit, governance, and accountability. Ms. Nalewaik is currently serving on the RICS Americas Construction Council, and also holds positions with AACE International as Vice President Administration and ICEC as Administrative Vice Chair. About Hill International Hill International, with 3,000 employees in 100 offices worldwide, provides program management, project management, construction management and construction claims consulting services. Engineering News-Record magazine recently ranked Hill as the 8th largest construction management firm in the United States. For more information on Hill, please visit the website at www.hillintl.com. RICS distributes Construction Briefs to practitioners in the Construction profession to inform them of timely industry matters, regulatory issues, research findings and professionals' points of view.