Risk management lessons from desalination disasters
Published October 25th, 2012
I am in Sacramento today to give a paper on the Top 10 Desalination Disasters of all time. Although the title is somewhat incendiary, it raises a serious question: what is the best way of managing risk for big-ticket infrastructure projects?
For the record, my top 10 disasters are:
1) Wonthaggi, Australia – $1 billion additional EPC costs
2) Hong Kong MSF – big stand-alone MSF which never ran
3) Carboneras, Spain – farmers failed to pay for the water
4) Tampa Bay, Florida – foul-up on EPC contract
5) Carlsbad, California – nearly a decade in permitting
6) Ad Dur RO, Bahrain – pretreatment failure for CTA membranes
7) Point Lisas, Trinidad – EPC costs spiral and parties dispute
8) Santa Barbara, California – rained off
9) Jeddah 1 MSF, Saudi Arabia – acid attack
10) Palm Jumeirah, UAE – demand miscalculation left one of two plants redundant
I also have a whole list of older thermal desalination plants from the early days which failed spectacularly, mostly because the technology did not perform according to plan, but the amounts of money involved were smaller, so they don’t make the top 10.
Before I get deluged by complaints from those involved in building these plants, I should point out that Wonthaggi, Carboneras, Point Lisas, and Palm Jumierah are all great desalination plants and deserve the accolades that they have received from us and from others. Carlsbad has every opportunity of becoming a great plant as well (but the cost over-run on permitting should not be ignored). Ad Dur and Tampa Bay are now great plants, but they did have their difficulties.
The point I am trying to make is that the biggest risk in the desal business is not technology or operations – it is on the demand side. Hong Kong, Carboneras, Santa Barbara and Palm Jumeirah have all entailed significant wastage of money because the demand for water never came in as expected, and as a result tens of millions of dollars were wasted.
There are contractual arrangements – such as the BOT (build-operate-transfer) model – which manage risk effectively on the supply side. You can have EPC (engineering, procurement and construction) cost blow-outs and you can have operating problems, but these can be managed to protect the client. For example, the cost over-runs at Point Lisas did not have a significant impact on the Water and Sewerage Authority of Trinidad and Tobago’s profit and loss account. The developers, GE Ionics and Hafeez Karamath Engineering, picked up the tab.
Nothing could have protected WASA if there had been no demand in the Point Lisas industrial estate for the water. If a water agency contracts a desalination plant which it does not use, it ends up wasting a whole lot of money, no matter what happens. Whoever finds a way of effectively managing that risk will become a rich man.