The Various Stages of Risk Management - Coursework Example

TABLE OF CONTENTS TABLE OF CONTENTS 1 EXECUTIVE SUMMARY 2 1.0 INTRODUCTION 3 1.1 Background 4 1.2 Purpose 5 1.3 Objectives 5 2.0 RISK MANAGEMENT PROCESS 5 2.1 Risk Identification 6 2.2 Risk Planning 7 2.3 Risk Monitoring 7 3.0 RISK ASSESSMENT 8 3.1 Initial cost 8 Estimated site specific capital cost for each option 8 Estimated Construction cost 9 3.2 Income generated from the Airport 10 Passenger handling charges 11 4.0 RECOMENDATION 16 BIBLIOGRAPHIES LIST 18 EXECUTIVE SUMMARY The purpose of this document is to provide a detailed risk report to the development consortium that is to build a new international airport in a Latin American State of san Miguel. The report will help the developers to know which amongst the three locations is the most viable for the construction of the international airport. The purpose and the objective of the report will be indicated. The report will also analyze the evaluation given in terms of site acquisition, construction costs, revenue-generation and socio-economic goals in each of the three sites identified by the government so as to identify the best location to build the airport. Because there are variations of the project risk management processes, this report will also briefly explain the Risk Management Process used in this report which are; Risk Identification, risk planning and risk monitoring. The risk assessment is also discussed in this report. In the risk assessment, we have looked at the advantages and disadvantages of constructing an airport in each of the three sites. We also indicate qualitative and quantitative risk assessments, developer’s budget and computation of construction cost. Afterward we have analyzed the site specific costs of each option. The report has also given recommendations to the construction consortium. 1.0 INTRODUCTION Risk can be defined as the mixture of the probability of an event and its costs (AIRMIC, ALARM, IRM 2002, p.5). In all types of tasks, there is the possible for events and consequences that represent opportunities for benefit (upside) or threats to success (downside). Risk Management is more and more recognized as being concerned with both optimistic and pessimistic aspects of risk. Therefore, this standard considers risk from both viewpoints. Risk management is an innermost part of any business strategic management. It is the course of action whereby organizations carefully address the risks connected to their activities with the goal of accomplishing sustained gains within each activity as well as across the portfolio of all activities. In this document, it shall be reviewed how the various stages of risk management can be applied to our project, The relevant stages in risk management are risk identification, risk planning and risk monitoring. Of course, no showing assessment could be entirely precise as risk management is a process that starts at the beginning of the project and continues throughout. For risk identification, it shall be examined what possible risks could have occurred as well as identifying the setbacks that did occur. For risk planning, it will be seen which risks could have been and can be avoided and what contingency plans could and have been made. For risk monitoring, it shall be looked out how we have monitored the risks throughout the project and how we shall continue to do this. 1.1 Background San Miguel is situated on the western coast of Central America in the belt of the northeast trade winds. It is largely mountainous with many of its peaks being permanently snow-capped. The state is heavily forested but, poor communications have deterred the development of this resource thus, most of its wealth is generated from the coastal strip. San Miguel has very significant geographical features which attracts or could attract tourism in the country. These geographical features are; the mountains which always have snow-capped, the igneous rocks found in the area. The economic activities in this area include fishing, mining of gold, silver and copper which started in the 17th century. Agricultural activities are not that popular but, it’s done by the native non-Indians. The most common transportation method of goods used in the area is by railway and by ship. The government appears fairly secure politically. They were brought to power by a military coup junior army officer 20 years ago. Since then consolidated their position with the support of the mining union and felt sufficiently strong to call and to win a general election. Because of the arrival of new oil and mineral income to the government this it makes urban development possible. With the historical sites, the indigenous culture of the Indian community and the beautiful snow capped mountains which can be used for sports also makes it possible for the government to make initiative to the tourism industry. With all this improvement, it is in a favorable condition for the construction of a new airport. Dempsey (2000, p. 235), states that early airports were build away from the cities they served on inexpensive land and where a minimum number of obstructions allowed maximum flexibility and safety in flight operations. Small aircrafts flying infrequently posed little objection on grounds of noise. But the growth of air transport in terms of size and range of aircrafts and frequency of takeoffs and landings, coupled with the expansion of cities to engulf airports, has caused the airport’s need for land and the aircraft’s bombardment of noise to collide with interest of surrounding land owners. Airports are therefore challenged by the need to acquire sufficient airspace for access and sufficient land for ground operations. The problem is exacerbated by the fast that aviation is the fastest growing mode of transport. That has raised the profile of environmental issues such as noise, land use, air and water pollution, climate change and energy efficiency. 1.2 Purpose The purpose of this report is to help the development consortium in locating the best location amongst the three locations in Latin American state of San Miguel to construct an international airport. 1.3 Objectives The main objective of this report is to ensure that the development consortium constructs an airport in the most viable location. 2.0 RISK MANAGEMENT PROCESS There are many differences of the project risk management process which have been recommended but no general concurrence has been reached concerning what ought to be included in the procedure. Risk management process involves the following; 2.1 Risk Identification According to Merna, Chu & Al-Thani (2010, p. 78), risk identification is decisive which risks are likely to have an effect on the project and recording their distinctiveness. Risk identification is the first step of risk management. The risk identification process involves identification of the Major potential sources of risk associated with the project objective. In this project, there are several risks, which are seen in each of the sites identified by the government to construct the airport. Site A The risks identified in this site are; Destruction of natural resources Future congestion in the area because the sea port will also expand if the airport is built in this site. Negative environmental impact on the marine if they decide to extend the airport by acquiring the land from the sea. Site B The risks identified in this site are; Destruction of historical sites Displacement of people living there High cost of buying the land from the owners The area is know of aircraft accidents at the mountains Site C The risks identified in this site are; High cost on acquiring the land Environmental distress e.g. noise 2.2 Risk Planning According to Heldman (2005, p. 13), risk planning is the procedure of deciding what actions to take to decrease threats in particular in cost while taking advantage of the opportunities other than threat. Risk planning engages deciding what actions to take to decrease threats while making the most of the opportunities discovered during the presentation of the risk processes. Planning for risk involves concentration. 2.3 Risk Monitoring The reason of risk monitoring and control process is to act in response to risks as they happen, track and observe identified risks, assess risk response plan for efficiency, identify new risks and make certain proper risk management procedures are being followed (Helman 2005, p. 17). The monitoring process systematically goes after and assesses the effectiveness of risk-handling measures against established metrics. Monitoring consequences may also offer a foundation for increasing additional management alternative in addition to identifying new risks.  The key to the monitoring process is to set up a cost, program, and performance management gauge system over the whole program that the performance management uses to assess the position of the program.  The indicator scheme should be calculated to provide early caution of potential troubles to allow management actions.  Risk monitoring is not a problem-solving method, but rather, a proactive method to observe the results of risk management and identify new risks.  3.0 RISK ASSESSMENT According to Heldman (2005, p. 13), risk assessment is an action in a risk management process. Risk assessment can be defined as the determination of quantitative or qualitative value of risk related to a solid situation and a predictable threat. Risk assessment techniques may be different whether it is about general economic decisions or environmental, biological, public health or even in our case of airport construction. Heldman (2005, p. 14), states further that the purpose of Qualitative risk analysis is to determine the consequences the risks identified in the risk identification process may have on the project objective. The quantitative risk analysis process evaluates the impact of risk and quantifies the overall risk exposure of the project. In determining whether a new airport should be built and assessing which potential sites should be chosen, the U.S Federal Aviation Administration has summarized the criteria as; airspace capacity, airfield and ground access cost, aircraft operational costs, environmental impacts, financial feasibility and long term viability (Dempsey, 2000, p. 236). In our report, we will use these same criteria to assess which of the three provided sites is viable for the construction of an airport. 3.1 Initial cost Estimated site specific capital cost for each option Site A Site B Site C Costs of land purchase 1,000,000 Esc. 10,000,000 Esc. 90,000,000 Esc. Cost of land clearing and preparation 10,000,000 Esc. 15,000,000 Esc. 15,000,000 Esc. Cost of infrastructure and services 50,000,000 Esc. 55,000,000 Esc. 45,000,000 Esc. Cost of landscaping 3,500,000 Esc. 2,500,000 Esc. 4,500,000 Esc. Cost of transportation links 15,000,000 Esc. 65,000,000 Esc. 75,000,000 Esc. TOTAL COST 79,500,000 Esc. 145,500,000 Esc. 229,500,000 Esc. Estimated Construction cost The consortium has prepared the indicative costs for the main elements on each site. These are tabulated below. They are given in local currency. Item Units Indicative Cost Reliability Grade Runway construction including lighting m length 80,000 Esc. B Taxiway construction m2 area 1,600 Esc. B Apron construction m2 area 1,500 Esc. B Terminal construction m2 area 24,000 Esc. B Airport piers/satellites including air bridges m2 area 30,000 Esc. B Control tower and pod m height 1,000,000 Esc. B Control tower base m2 area 20,000 Esc. B Car parking m2 area 750 Esc. B Roads m length 5,000 Esc. B Bus and rail terminal Item 1,250,000 Esc. B Factories and warehouses m2 area 8,000 Esc. B Air traffic control equipment Item 8,000,000 Esc. A Other equipment (wind sock etc.) Item 750,000 Esc. A Vehicles (Bowsers, fire engines, tractors) Item 2,500,000 Esc. A Fuelling facilities Item 4,750,000 Esc. B TOTAL COST 18,420,850 Esc. From the above data given on the site specific cost and estimated construction cost, Site A, B and C have the total of cost of acquiring the site and estimated cost of 97,920,850 Esc, 163,920,850 Esc and 247,920,850 Esc respectively. From these computations, Site A has the lowest Initial cost. The reason why the costs are extremely lower compared to site B and C is because the government owns most of the land that is obligatory to construct the airport. The initial cost is vital in this project this is because the government does not have the capital therefore it has opened up the project to private foreign capital. The government will undertake the highest risk in acquiring Site C. Airport Operating Cost Site A Site B Site C Staff costs: Managerial staff 4,500,000 Esc. 4,500,000 Esc. 4,500,000 Esc. Air traffic control staff 12,500,000 Esc. 12,500,000 Esc. 12,500,000 Esc. Duty crew 10,000,000 Esc. 10,000,000 Esc. 10,000,000 Esc. Car parking staff 500,000 Esc. 500,000 Esc. 500,000 Esc. Maintenance costs of fabric and equipment 38,875,000 Esc. 38,875,000 Esc. 38,875,000 Esc. TOTAL 66,375,000 Esc. 66,375,000 Esc 66,375,000 Esc. From the table above, the airport operation cost for all the three sites are the same therefore there is no preference in this area. 3.2 Income generated from the Airport The Airport will generate its income from; the weights of the aircraft, the passenger-carrying capability, together with the landing fee category are also tabulated. Landing fees The landing fees are based on the weight of the plane landing. These charges are banded into four categories. This fee varies with the type of planes. Plane category Weight Landing charge Heavy planes Over 150,000 kg 80.00 Esc. /1,000 kg US$ 8.00/1,000 kg Large planes 75,000 – 150,000 kg 70.00 Esc. /1,000 kg US$ 7.00/1,000 kg Small planes 20,000 – 75,000 kg 60.00 Esc. /1,000 kg US$ 6.00/1,000 kg Light planes Less than 20,000 kg 50.00 Esc. /1,000 kg US$ 5.00/1,000 kg Minimum charge 150.00 Esc. US$ 15.00 Passenger handling charges The passenger handling charges are levied as a flat fee according to the size of the aircraft. These charges are also tapered with the larger planes paying more per passenger than the smaller aircraft. This is because the large numbers from a wide-bodied jet plane put a lot of strain on the terminal facilities than two or three smaller planes landing over a period of time. The figures are given as the expected numbers of landings per day of each aircraft type. This is based on the assumption that the airport is operational seven days a week for fifty weeks a year totaling to 350 days. Assume that the airport will close for essential maintenance for two weeks a year that is 14 days therefore the number of days the airport will generate income from landing is 336 days. Aircraft type Weight Category Passenger band Landings/day Site A Site B Site C Wide bodied jet 396,000 kg Heavy 400+ 2 3 2 Large jet aircraft 150,000 kg Large 300+ 3 4 3 Medium jet aircraft 100,000 kg Large 250+ 6 7 7 Small jet aircraft 68,000 kg Small 200+ 12 13 14 Small turboprop aircraft 50,000 kg Small 75+ 13 12 12 Large business jet 68,000 kg Small 25+ 6 5 7 Small business jet 33,000 kg Small 10+ 25 16 25 Light plane 4,500 kg Light 3 35 25 35 Freightliner 100,000 kg Large 0 18 16 25 TOTAL 120 101 130 Total income from landing fee for all the airplanes per day per site is as computed below; Aircraft type Landing fee Landings/day Landing fee/day in Esc. Site A Site B Site C Site A Site B Site C Wide bodied jet 31,680 Esc 2 3 2 63,360 95,040 63,360 Large jet aircraft 10,500 Esc 3 4 3 31,500 42,000 31,500 Medium jet aircraft 7,000 Esc 6 7 7 42,000 49,000 49,000 Small jet aircraft 4,080 Esc 12 13 14 48,960 53,040 57,120 Small turboprop aircraft 3,000 Esc 13 12 12 39,000 36,000 36,000 Large business jet 4,080 Esc 6 5 7 24,480 20,400 28,560 Small business jet 1,980 Esc 25 16 25 49,500 31,680 49,500 Light plane 225 Esc 35 25 35 7,875 5,625 7,875 Freightliner 7,000 esc 18 16 25 126,000 112,000 175,000 TOTAL 432,675 444,785 497,915 From the table above, Site C will be having the highest number of landing aircrafts thus leading to a higher landing fee income. This is because it is a well know area and has the advantage of already holding the only airfield the country has. Total income from passengers handling fee for all the airplanes per day per site is as computed below; Aircraft type Passengers handling fee Landings/day Passengers handling fee/day in Esc. Site A Site B Site C Site A Site B Site C Wide bodied jet 20,000 Esc. 2 3 2 40,000 60,000 40,000 Large jet aircraft 15,000 Esc. 3 4 3 45,000 60,000 45,000 Medium jet aircraft 10,000 Esc. 6 7 7 60,000 70,000 70,000 Small jet aircraft 7,500 Esc. 12 13 14 90,000 97,500 105,000 Small turboprop aircraft 3,000 Esc. 13 12 12 39,000 36,000 36,000 Large business jet 1,000 Esc. 6 5 7 6,000 5,000 7,000 Small business jet 600 Esc. 25 16 25 15,000 9,600 15,000 Light plane 400 Esc. 35 25 35 14,000 10,000 14,000 Freightliner - 18 16 25 - - - TOTAL 309,000 348,100 332,000 Yearly Income from both the landing fee and passengers handling fee is as computed below; Aircraft type Landing fee/day in Esc. Passengers handling fee/day in Esc. Landing fee + passengers handling fee x 336 days in Esc. Site A Site B Site C Site B Site C Site C Site A Site B Site C Wide bodied jet 63,360 95,040 63,360 40,000 60,000 40,000 34,728,960 52,093,440 34,728,960 Large jet aircraft 31,500 42,000 31,500 45,000 60,000 45,000 25,704,000 34,272,000 25,704,000 Medium jet aircraft 42,000 49,000 49,000 60,000 70,000 70,000 34,272,000 39,984,000 39,984,000 Small jet aircraft 48,960 53,040 57,120 90,000 97,500 105,000 46,690,560 50,581,440 54,472,320 Small turboprop aircraft 39,000 36,000 36,000 39,000 36,000 36,000 26,208,000 24,192,000 24,192,000 Large business jet 24,480 20,400 28,560 6,000 5,000 7,000 10,241,280 8,534,400 11,948,160 Small business jet 49,500 31,680 49,500 15,000 9,600 15,000 21,672,000 13,870,080 21,672,000 Light plane 7,875 5,625 7,875 14,000 10,000 14,000 7,350,000 4,536,000 7,350,000 Freightliner 126,000 112,000 175,000 - - - 42,336,000 37,632000 58,800,000 TOTAL 249,202,800 265,695,360 278,851,440 Estimates for the other income-generated Site A Site B Site C Franchise payments: airport shop & catering 27,482,500 Esc. 26,848,750 Esc. 28,782,500 Esc. Ground rent from hotel on the airport site 350,000 Esc. 350,000 Esc. 350,000 Esc. Rental income from industrial units 4,500,000 Esc. 4,000,000 Esc. 5,000,000 Esc. Car park revenue 5,000,000 Esc. 5,000,000 Esc. 5,000,000 Esc. TOTAL 37,335,500 ESC. 36,198,750 Esc. 39,132,500 Esc. Total Annual Income that estimated for the Airport Site A Site B Site C Landing fee and passengers handling fee 249,202,800 Esc. 265,695,360 Esc. 278,851,440 Esc. Franchise payments: airport shop & catering 27,482,500 Esc. 26,848,750 Esc. 28,782,500 Esc. Ground rent from hotel on the airport site 350,000 Esc. 350,000 Esc. 350,000 Esc. Rental income from industrial units 4,500,000 Esc. 4,000,000 Esc. 5,000,000 Esc. Car park revenue 5,000,000 Esc. 5,000,000 Esc. 5,000,000 Esc. TOTAL 286,538,300 Esc 301,894.110 Esc. 317,983,940 Esc. Site A Advantages of this site Availability of land that is already owned by the government therefore low cost on acquiring an additional land. Availability of other transportation link at Puerto. Disadvantages of this site Will have negative environmental impact when acquiring extra land from the marshy land and sea. The construction of the airport here will also lead to construction of a large seaport which will bring congestion in the area. Site B Advantages of this site There are a lot of historical site and indigenous Indian culture here that can promote tourism. Disadvantages of this site Displacement of an Indian village population who live there Previous aircraft crashes /accidents in the mountain range nearby. The possibility of historical remains which has religious meaning to the Indian to be destroyed with the construction of the airport is high. Destruction of igneous rocks that can be mined and bring income to the government. By selecting this site, the development consortium might encounter resistance form the Indian community because of displacement of the village and their historical remains which is located near the construction area which have a religious meaning to them. This site will also not be very suitable because of the history of airplanes crashes which have occurred in past in the mountain area near the site where the construction is to me done. Even though it is not scientifically proven why the accidents happen most airlines might not want to take the risk of using the airport therefore less traffic thus less revenue for the government. Site C Advantages of this site Available land in the market The area is already famous because it holds the only airstrip in the country Availability of investors in the area. Disadvantages of this site It will be expensive to acquire the land from the owners Destruction of the farm land Environmental damage e.g. noise The reason this area could be viable is that it currently contain the only country’s airfield, which was constructed by the plantation owners. This is an advantage because people already know of the airfield and the construction consortium will only have to modify the airfield to meet the government’s criteria. 4.0 RECOMENDATION We would recommend the construction consortium to consider site A. this is because; The cost of acquiring the land is reduced because the government owns most of the land in this area. The area being near the sea that means it is a flat are therefore construction of the airport will be faster and cost effective. The issue of negative environmental impact on acquiring the sea land when future second runway is to be constructed can be avoided by instead buying land from the private estates from the national and foreign ownership. The availability of a fishing village already a ready market for the airport this is because this are perishable goods and therefore the fishing companies will have improved and quick transportation available. 5.0 CONCLUSION To summarize, we think as consultants that although many of the risks that initially face the construction of the airport will be resolved, some risks still exist. However, with putting up contingency plans we feel that these risks can be minimized. This report has identified the a few ways of assessing risk management even though there are many other way of assess risk. All in all when assessing risk cost is one of the major factors to look at in any project. Risk management is useful techniques that can help an organization make good decisions on introducing a product or service. This is because by having a risk assessment the organization is able to know what to expect, what they will require and what to avoid. BIBLIOGRAPHIES LIST AIRMIC,ALARM, IRM. 2002, A Risk Management Standard. London: British Standard Institute. Dempsey, P. S. 2000, Airport Planning & Developement Handbook: A global survey . USA: McGraw Hill. Donaldson, G. 2007, Risk Management Report. Vancouver BC: Finning Associate. Heldman, K. 2005, Project Manager's Sportlight on Risk Managment. USA: Neil Edde. Merna, T., Merna, A., Chu, Y., & Al-Thani, F. F. 2010, Project Finance in Construction. USA: Wiles-Blackwell. Read More