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Managing the Dutch Waterworks Using Long-Term Maintenance Contracts

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Managing the Dutch Waterworks Using Long-Term Maintenance Contracts Managing the Dutch Waterworks using long-term Maintenance Contracts Functional Risk Allocation between Public and Private Parties Master thesis by O.D. Brommet 1368915 Master Construction Management and Engineering Delft University of Technology 27 August 2015 Graduation committee: Prof. dr. ir. M.J.C.M. Hertogh |TU Delft, Civil Engineering and Geosciences dr. R. Schoenmaker |TU Delft, Civil Engineering and Geosciences ir. Y. Chen |TU Delft, Architecture ir. G. R. Kleijn van Willigen |Rijkswaterstaat PREFACE In front of you is my graduation thesis, which is part of my graduation project for the master Construction Management and Engineering at the Delft University of Technology. This thesis is the result of my research into the responsibility allocation between public and Private parties in a long-term maintenance contract of waterworks. I could not have done this research without the internship within Rijkswaterstaat and the excellent supervision of my graduation committee and I would like to thank all of them. I would like to thank Rob Schoenmaker for giving me inspiration and excellent feedback on my research. Yawei Chen, thank you for your enthusiastic feedback which motivated me to deliver an understandable and structured report. And Marcel Hertogh, thank you for supervising this research and your valuable feedback. Gwen Kleijn van Willigen and Peter Blanker, thank you for your enthusiasm, the many interesting discussions, keeping me sharp by critical feedback, and the time which both of you used to improve my research. In addition, I would like to thank everybody who took time to help me during this research. Without the interviewees this research would not have been possible. The interviews provided necessary information about the risk allocation, but also gained insight and different perspectives in the world of asset management and waterworks. The site visits on the Haringvliet barrier, Oosterschelde barrier and Nuclear Power Plant Borsele showed the applications of LPAM, and the tour on the Volkerakcomplex showed the practical application of the operation of such a large complex, which definitely made my research more interesting. Further I would like to thank Nikki and Philine, for all the coffee moments at CME, my parents, especially my father for reviewing my English, and other family and friends for the fun times in between. Last but not least I would like to thank Mark for his support and patience during my graduation, by being there for me and making lovely dinners while I was working on my graduation project. Olga Brommet Delft, August 2015 v vi SUMMARY INTRODUCTION On the 22th of January 2015 the first DBFM contract for waterworks reached its financial close. In the next 30 years, 50 of the 83 locks in the Netherlands need to be renovated (Willems, 2015). The Dutch Government prefers the use of Design, Build, Finance and Maintenance contracting as agreement. In this contract model the public party enters a long-term contractual agreement with the Private sector in which the Private sector is responsible for the design, construction and maintenance of public sector infrastructure facilities. This type of outsourcing of waterworks to the Private party is rather new, compared to road- and rail infrastructure. This gives reason for concern, because of the differences in functional requirements: next to facilitating shipping (Availability), the lock prevents the hinterland against flooding (Reliability). To verify these RA- requirements, and thus the performance, Living Probabilistic Asset Management (LPAM) is used. This methodology requires translation of the Water act into requirements expressed in failure rates of the asset in order to verify the performance of the asset. The methodology indicates respective risks of the lock divided in hardware, software, human failure and external risks. A performance requirement is the set of criteria regarding the condition of the main functions of the lock that must be met all times during its lifecycle. A proper risk allocation between parties is vital for the project performance (Ward, Chapman, & Curtis, 1991). In this research a risk is an event, which may lead to the functional failure of a system: non-performance of the requirements. Research on how to distribute the risks, whereby the level of outsourcing to the Private party is in line with the desired degree of control of the pubic party during the maintenance and operation phase, is missing. The objective of this research is to find a proper risk allocation method, with respect to the performance and the costs so the Dutch Government manages infrastructure adequately. The main question of this research is: ‘What can be the allocation of risks of functional failure of a lock between public and Private parties in a DBFM contract, with respect to the optimisation between performance and costs, so the public party still manages the infrastructure adequately during the Operation and Maintenance phase?’ First, in order to establish a suitable risk allocation between the public and Private party, a ‘to be’ situation based on theory is developed. The ‘to be’ situation is a theoretical risk allocation method, consisting of a risk allocation matrix and conditions, based on the theories of DBFM, LCC, uncertainty of failure probabilities and suitable management structures according to the Transaction Costs Economics. Second, the application of risk allocation is analysed by practical case studies. In this way, the ‘as is’ situation can be described and the risk allocation method can be validated and improved. Three cases from the LPAM portfolio of the Dutch Government are selected: the Volkerak complex (lift locks), Safety Lock Heumen and Safety Lock Limmel. The Volkerak complex and Safety Lock Heumen are both in the Operation and Maintenance phase. Safety Lock Limmel is currently in the design phase. The observations of the first two cases are used in the last case for finding the current culture of risk allocation. Data and observations of each case are conducted from contracts, reports and through interviews with critical stakeholders. In this research critical stakeholders have a significant contribution to the performance of the lock: they are the operator, the contracting team of the Dutch Government and the contractor. RESULTS The risk allocation method derived from literature consists of a risk allocation matrix and conditions. The risk allocation matrix, see Figure 1, provides a management structure for long-term contracting based on the degree of two uncertain variables. The first non-consistent variable is the failure rate, which is translated into the expected frequency of failure of a critical element during the contract period. The second variable is the vii repair time. Repair time can have negative influence on the Reliability and Availability of the lock, therefor high repair time will be priced into the costs as risk premium. The degree of uncertainty of the variables influences the involved risk premium costs. Postponing the decision of allocation provides control by the Public party on the maintenance strategy, and thus the consideration of costs versus performance. The risk allocation matrix gives for each element a management structure for the public party to keep control on the asset and the related performance and costs. Figure 1 Risk allocation matrix The risk allocation conditions are related to the assessment and effective management of risks. They ensure a reasonable and fair allocation. The desired risk assessment of the critical stakeholders is risk averse for the operator and contractor in order to maximise the performance of the lock. On the other hand, the desired risk assessment of the Dutch Government is risk averse combined with risk neutral to keep in control of the optimisation of performance and costs. The compliance to the nine risk allocation criteria by the critical stakeholders, as in table 1, indicates the effective manageability of the risk. Table 1 Risk allocation criteria Risk allocation criteria Operator Rijkswaterstaat Contractor 1 Whether the party is able to foresee the risk / Has been made fully aware of the risks they are taking 2 Whether the party is able to assess the possible magnitude of consequences of the risk 3 Whether the party is able to control the risk chance of occurring 4 Whether the party is able to sustain the consequences if the risk occurs 5 Whether the party will benefit from bearing the risk 6 Whether the premium charged by the risk receiving party is considered reasonable and acceptable for the owner 7 The party is able to manage the associated uncertainty, and thereby mitigate risks 8 The party has the necessary risk appetite to want to take the risk 9 Whether the party is able to make use of the prescribed LPAM methodology. viii CONCLUSIONS All three case studies validated that the risk allocation matrix is suitable to allocate the hardware and software related risks. In case 1, the hardware and software risks are outsourced in line with the risk allocation matrix, project problems which came up were related to the organisation and contractual requirements. Case 2 involved a short-term maintenance period for a fixed price, whereby the management suggestion for hardware and software risks of the risk allocation matrix is applicable. In the last case, every hardware and software risk is outsourced under several functional contractual requirements in DBFM. This disagrees with the risk allocation matrix which suggest outsourcing the risks which will possible, likely or often occur in order to control the performance versus costs of the object. Stated can be that the risk allocation matrix provides, a suitable management structure for long term contracting to keep in control of the performance versus the costs. In practice, the application of the matrix showed that the political acceptance of risk premium costs with respect to the performance and the degree of control by the public party have various considerations. The risk allocation conditions must be considered first for risks related to human failure and external factors.
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