1. 1 AUSTRALIA Winning Strategies in Major project implementation Jeremy Harris BFA Conference, Port of Spain June 2008 Energy and Natural Resources

2. 2 Covering today 1. Context 2. Global Survey 3. Sector Challenges 4. Trends 5. Conclusions

3. 3 Context Boom in the global projects market is unprecedented in world history China and India Russia and Brazil New technologies Years of under-investment in infrastructure

4. 4 Focus of presentation Changing Environment “The Project” Industry Outlook KPMG Survey Why are Project Outcomes Poor?

5. 5 Embracing Change? Global Construction Survey 2008

6. 6 KPMG annual survey KPMG’s Global Construction Survey 2005 KPMG’s Global Construction Survey 2007 KPMG’s Global Construction Survey 2008

7. 7 KPMG survey themes In KPMG’s 2005 Global Construction Survey, contractors expressed particular concern about managing risks in contracts, finding ways to price at a profit and recruiting and retaining the best talent. In KPMG’s 2007 Global Construction Survey, we sought the views of buyers and owners of construction services, who saw the shortage of qualified contractors and the steep rise in costs as real barriers to completing future projects. In KPMG’s 2008 Global Construction Survey, we focused the views of leading construction contractors around the world on four key areas impacting the industry: Resource shortages Risk management Escalating costs Sustainability

8. 8 Construction Survey Findings – priorities Owner Perspective 1. Availability of Qualified Contractors 2. Shortage of Internal Resources 3. Managing Risk 4. Rising Cost of Construction Source: KPMG’s 2007 Global Construction Survey 5. Environmental Matters 6. Availability of Qualified Vendors 7. Delivery on Time and Budget 8. Regulatory Matters 9. Technology 10. Transferring Risk 11. Entering New Markets 1. Shortage of Qualified Resources 2. Managing Risk 3. Transferring Risk 4. Securing Forward Workload 5. Entering New Markets 6. Gaining Competitive Edge 7. Succession Planning 8. Bonding Capacity 9. Reducing Overhead 10. Industrial Relations Priority Contractor Perspective

9. 9 Overcoming resource shortages 84 percent of respondents say the construction industry is not doing enough to tackle skills shortages Over half of those responding, 55 percent, see the shortage of good people as critical right now The biggest single fear, 49 percent, is that a lack of good people will restrict the growth plans of contractors

10. 10 What will be the impact of this scarcity How will resource issues negatively affect your business? Source: Embracing Change? Global Construction Survey 2008, KPMG International

11. 11 Managing risks in an uncertain environment 81 percent claim to effectively Identify and assess risk Over 70 percent feel risk assessment is effective throughout the project life cycle Only a third of CEOs carry direct responsibility for risk management strategy

12. 12 Managing risks in an uncertain environment What are the three most common causes of cost overruns? Source: Embracing Change? Global Construction Survey 2008, KPMG International Respondents could answer more than one option

13. 13 How well is risk integrated into the project management process? Who is responsible for your risk management strategy? Source: Embracing Change? Global Construction Survey 2008, KPMG International

14. 14 Coping with escalating costs Where are you most susceptible to cost escalation Source: Embracing Change? Global Construction Survey 2008, KPMG International Respondents could answer more than one option

15. 15 Passing on benefits – and costs When preparing your initial budget, how detailed is your cost escalation estimate? Source: Embracing Change? Global Construction Survey 2008, KPMG International

16. 16 Why is sustainability so important to contractors? Which of the following stakeholders have most influence on your view of sustainability? Source: Embracing Change? Global Construction Survey 2008, KPMG International Respondents could answer more than one option

17. 17 Energy sector challenges

18. 18 Key sector challenges Typically projects are large (>$500m, commonly $multi-billion) Assets are frequently indivisible Facilities are often developed in adverse physical environments, socio- political instability adding to risk and complexity Transferring the asset to another location is generally technically unfeasible and/or commercially unviable Asset design/development and implementation times are long, typically 2-4 years and 3-6 years, respectively Material and labour costs escalation during the construction period Adverse regulation where authorities are transitional or unstable Lack of available technical staff

19. 19 Why poor performance?

20. 20 Why Has Project Performance not Improved? “Forecasts of cost, demand, and other impacts of planned projects have remained constantly and remarkably inaccurate for decades” “For the 70 year period for which cost data are available, accuracy in cost forecasts has not improved” Type of ProjectAverage Inaccuracy Rail44.7% Bridges and Tunnels33.8% Road20.4%

21. 21 Inaccuracy Explained Statistically inaccuracy is not due to; Unreliable or outdated data Inappropriate forecasting models Inappropriate systems or tools Inexperience Accuracy of estimates has not improved in 70 years in spite of: Improved data and methods after decades of study Modern systems Specialized training Professional knowledge standards Accumulated experience Flyvbjerg Improvement over time

22. 22 Inaccuracy Explained The analysis can be explained in psychological terms Inaccuracy due to optimism bias Inaccuracy due to strategic misrepresentation These explanations complement each other leading to a consistent inaccuracy in forecasting

23. 23 Inaccuracy Explained Deception Delusion The two drivers of bias offset each other

24. 24 Inaccuracy Addressed Motivation for External Testing Errors of judgment are not random are systematic and predictable shared by experts and lay people alike People do not readily correct the error even when fully aware of the detail Reference class forecasting (benchmarking) forces people to review their “illusion” Reference class forecasting is a method of unbiasing forecasts Would take place throughout project life cycle Constantly brings outside view to the project

25. 25 Changing Environment Oversight of contractors activities will increase Transparency will become the norm New contracting models are appearing Owners independent oversight will extend to contractors Contractors will need to lift their own reporting quality to level of client

26. 26 Conclusions Raise sector profile Create risk-aware culture Manage reality of costs Sustainability

27. 27 Jeremy Harris Practice Leader Major Projects Advisory KPMG LLP (UK) +44 (0)20 7311 8337 jeremy.harris@kpmg.co.uk The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2008 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.