DENMARK RAIL PROJECT DEMONSTRATES NEED FOR RISK MANAGEMENT

PARIS-Problems that have befallen the building of a road and rail link in Denmark highlight the need for a risk management unit in large construction projects, its insurance manager said.

During the project, contractors were allowed to manage themselves, resulting in the loss of two excavation machines, a nine-month delay and insured losses of 320 million Danish kroner ($48.5 million), said Peter Topsoe-Jensen, insurance manager of the state-financed Storebaelt project. He spoke late last month at a conference in Paris, organized by SCOR Reassurance.

A Lloyd's of London engineer who saw risk reports estimating possible delays and cost overruns recommended creating a risk management unit for the project. But the technical manager on the project rejected that idea, said Mr. Topsoe-Jensen said. Project management came from the Danish government and civil service.

The project, a tunnel and bridge link of a total of 10 miles across the Store Baelt strait, between the Danish islands of Fyn and Sjaeland, went ahead in 1988 after the Danish government agreed to fund the project for 12 billion kroner ($1.82 million). But the amount was intentionally underestimated in order to get government funding, according to Mr. Topsoe-Jensen.

By 1997, the project had cost 25 billion kroner ($3.79 billion) for construction and 18 billion kroner ($2.73 billion) for financing and interest, for a total cost of 43 billion kroner ($6.52 billion).

A wrap-up policy with a 5 billion kroner ($758 million) limit was purchased for the project, along with professional liability coverage with limits of 1 billion kroner ($151.6 million). A total of 425 million kroner ($64.4 million) in premiums was paid for the coverage for the project, which has generated 320 million kroner in claims.

The first train is scheduled to run through the link this month. The government will eventually recoup its costs through toll charges on vehicles using the link. The payback period originally was calculated to be 12 to 13 years with tolls equal to those on the existing ferry between the islands. However, the government bowed to public demand and lowered the toll so that it would be cheaper to use the new link rather than the ferry. As a result, the payback period for the project has been lengthened to 35 years.

When asked by a delegate why the project's managers did not buy advanced loss of revenues insurance, Mr. Topsoe-Jensen replied, "Because management told us not to buy it." He summed up the Storebaelt venture with a touch of sarcasm, it was "double the costs, double the time, we are very proud of our project."

Most claims were below 5 million kroner, but there were two major losses.

In one case, two tunnel excavation machines were lost after flooding in the tunnel. The loss caused a nine-month delay to construction and cost 74 million kroner ($11.2 million) from the contractors all risks coverage. That loss might have been avoided if the project's contractor had not removed some special flood sensors from the excavating machines, Mr. Topsoe-Jensen said.

The contractor thought the machines' Scottish supplier had fitted them with too many such sensors, which were signaling and causing frequent delays, and so removed most of them.

As a result, the machines were unable to detect the onset of a flood. "Could this have been avoided?" asked Mr. Topsoe-Jensen. "Yes, if the contractors had taken some notice of the supplier's instruction manual."

A further nine-month delay was caused by a tunnel fire in November 1994, costing 230 million kroner ($34.9 million). About 100 feet of concrete lining was burnt through, and the tunnel diameter had to be reduced by about 18 inches.

After the fire, the government halted all access to the tunnel. This in turn stopped insurers from inspecting the fire and determining its causes, as well as creating much tension between the project managers and insurers. The cause was determined to have been a leak of oil from a hydraulic pipe. "Who is checking the contractor if there is only a few more meters of work left?" asked Mr. Topsoe-Jensen. "The contractor is checking the contractor."

The project serves as a lesson in oversight for other government projects, he said. As a state-funded project, where the state also is the employer, its management came from government and civil service, rather than from engineering companies. The CEO was a permanent secretary at the ministry of the environment. "If you think I am being skeptical about the management," noted Mr. Topsoe-Jensen, "I am."

Other decisions were made to save money that in the long run will cost more. For instance, the tunnel linings were not waterproofed, as this was deemed too expensive, and as a result, water is seeping through regularly. Finnish oil rig construction companies complained that the height of the bridges was too low for their rigs to pass easily en route from Baltic Sea to the North Sea.

Mr. Topsoe-Jensen said the Finns claimed that they would incur additional costs in making their rigs of more flexible height. As a result, Storebaelt paid the Finns 90 million kroner ($13.6 million) in compensation.

The lessons learned are that such a project must have a risk management unit, that it is a mistake for the employer to leave all of the decisions to the contractor, that it was a mistake to employ loss adjusters without a written contract thus making it impossible to fire them, Mr. Topsoe-Jensen said.

The tunnel was designed for a lifetime of 100 years, but modifications during the project have meant repairs will be needed in the tunnel every 30 years. Mr. Topsoe-Jensen said Storebaelt could go bankrupt but likely would be bailed out by Danish taxpayers.