The group’s policy of penetrating new markets, particularly those with the highest rates of development, expose it to risks such as: political, social and economic instability, not accurately evaluating local legislation (as applies to companies, the sector and tax), the challenge of protecting intellectual property, exchange rate fluctuations, as well as the creditworthiness of counterparties, which can negatively impact the group’s financial position and results of operations. Country risk is assessed when the group decides which offers and bids to make.
Any mitigating actions are also contemplated at the time the bids are prepared and contracts managed.
Reference should be made to the paragraph of this report covering the halt of the contracts in Libya due to the instability and unrest in that country and the delays and extra costs accumulated on the Turkish and Greek contracts.
Reliance on public customers and long-term contracts
Group operations are highly dependent on public customers and, particularly in the turnkey systems business, on complex long-term contracts of a significant amount.
Delays, amendments, revisions or cancellations of one or more significant contracts acquired could negatively impact the group’s operations and its financial position and results of operations.
Assessing long-term contracts using the percentage of completion method requires the estimates of costs to complete the activities, project risks (technical, legal, tax and commercial) and contract progress. These estimates are based on assumptions related to the impact of future events which, by their very nature and given the complexity of the projects underway, may not occur as envisaged, thus negatively impacting the project’s financial and economic performance.
Indeed, there is often an element of uncertainty related to third-party performance of civil works for transportation infrastructure and the group cannot always cover the related impacts on programs with contractual clauses.
The following factors mitigate such risks:
- market diversification and monitoring of country and compliance risk;
- structured project review processes involving senior management;
- the regular review and adjustment of contract and programme estimates;
- the adoption of risk management processes both at the time the bid is made and throughout project implementation, as well as lifecycle management processes involving the regular comparison of physical and accounting progress.
Budgeting and risk management project planning
Ineffective project planning and control processes and weak project technical management could mean the project team cannot implement the project within the set budget and timeframes, especially complex projects. Likewise, risk management may not be effective if based on incomplete or inaccurate information, or if it is not adequately defined and monitored. These risks could cause delays in identifying issues during project roll-out and related remedial actions as well as inaccurate reporting and planning, with a consequent negative impact on the group’s financial position and results of operations.
To mitigate this risk, there are formalised and monitored processes to check physical and accounting progress and risk management, clear allocation of responsibilities within the project team, managerial review of project performance, review of the estimates at the time the bid is made and an independent review carried out by the risk management department.
Third parties (subcontractors, subsuppliers and partners)
Ansaldo STS group makes considerable use of subcontractors to supply subsystems or assembly and installation services and of subsuppliers for goods or services in its business. The group’s ability to fulfil its obligations to customers therefore relies on both subcontractors and subsuppliers properly fulfilling their contractual obligations. A breach thereby could in turn cause a breach by Ansaldo STS group, negatively impacting its reputation and, unless it is possible to obtain compensation from the subcontractors and subsuppliers, the group’s financial position and results of operations.
Moreover, particularly in the turnkey projects business, Ansaldo STS group also carries out contracts in conjunction with other operators. In these cases, each operator generally has joint and several responsibility vis-à-vis the customer for the completion of the entire contract. In the event of a breach or damage caused to the customer by an operator, the group could be called on to replace the operator causing the breach or damage, and to compensate the damage caused to the customer in full, without prejudice to the group’s right of recourse vis-àvis the defaulting operator. If the right of recourse against the operator responsible for the breach or damage is ineffective or protracted, this could negatively impact the Ansaldo STS group’s operations as well as its financial position and results of operations.
The preliminary assessment and consequent qualification of partners, suppliers, subcontractors and subsuppliers, particularly in new markets, may be inadequate, with negative impacts on the competitive nature of the technical solutions offered, project performance and on the effectiveness of partnership governance (for instance, differences of opinion between the partners, misalignment of risks and costs/benefits for the individual partners).
To mitigate these risks, the group has processes in place to select and evaluate suppliers, subcontractors and subsuppliers, it works with known and reliable partners, it defines, agrees and manages appropriate contractual and joint venture clauses, it has risk management processes and it requests specific guarantees, where applicable.
Efficient technical operations and relevant technical references
Development and engineering activities carried out without a clear understanding and identification of the requirements, specifications or effective configuration management could negatively affect the project budget, compliance with deadlines, performance and customer satisfaction. To mitigate this risk, the group has requirement and configuration management processes in place to ensure quality, compliance with deadlines and efficiency in projects and development management. It has rolled out special projects to monitor the proper implementation of these processes during projects.
Furthermore, if Ansaldo STS group does not have adequate market and operating references for products, this could lead to lost sales and non-compliant project implementation, negatively impacting the group’s competitiveness and its financial position and results of operations.
Such risk is carefully assessed when the bid is being prepared.
It is managed through processes designed to ensure adequate interaction between the engineering unit, which communicates the customers’ requirements, the portfolio unit, which assesses the market’s technical requirements and possible technical solutions, and the development unit, as well as via the development and monitoring of the product development roadmap.
Liability to customers or third parties for product defects or delivery delays
Technological complexity and tight delivery times for group products and systems could leave it liable for delays in or failure to supply contractually-agreed products or services, for their non-compliance with customer requirements (for instance, due to design or construction faults) and for breaches of and/or delays in roll-out, the provision of post-sales services and product maintenance and servicing. Moreover, many products and systems supplied by the group are subject to certifications and approval, including by third-party bodies.
Such liability could be directly attributable to Ansaldo STS group or to third-party operators such as subsuppliers or subcontractors.
These risks could negatively impact the group’s operations, its financial position and results of operations and its reputation, and could also result in the group incurring costs to repair faulty products or their withdrawal from the market in extreme cases.
Even if adequate insurance is in place, the sum insured could be exceeded or the premiums could be raised following a claim, negatively impacting the group’s financial position and results of operations.
To mitigate these risks, the group agrees specific insurance coverage, carefully supervises its engineering, validation and returns monitoring processes and identifies mitigating actions and provides for contingencies in the bid in conjunction with the risk management process.
The complexity of dealings with third parties (customers, subcontractors/ subsuppliers and partners), especially for international projects and the content of systems and products developed, as well as specific business risks expose the group to a significant risk of legal disputes. Legal disputes could also relate to the awarding of bids.
The settlement of disputes could be complex and take a long time, leading to delays in completing projects and negative impacts on the group’s operations and its financial position and results of operations.
To mitigate this risk, there are risk management processes in place during both the bid and management stages, disputes are monitored closely, contractual clauses are examined carefully with the legal department, and a prudent approach is adopted in recognising specific items under contract costs and provisions for risks.
Human resource management
Ansaldo STS group supplies products and systems featuring cutting-edge technology on a global scale and to do so, it requires human resources with specific expertise, which can be difficult to procure on the labour market.
The success of the business development plans, especially in new markets, also depends on the group’s ability to attract, retain and develop the skills of its human resources, particularly in order to operate in a global group and market context and on complex projects.
To mitigate this risk, human resource management policies reflect the business needs.
Ansaldo STS group also has an integrated human resource management and development system under which regular checks of expertise and performance are carried out and relevant training initiatives identified, as well as enabling the best possible allocation of resources. Processes and initiatives are also in place to identify the most talented resources, with regard to both managerial and technical profiles, and plot career paths for them.
Reference should be made to the section on human resources for a description of the latter.
Health, safety and environmental compliance
Ansaldo STS group has to comply with health, safety and environmental legislation in the various countries in which it operates. Failure to comply with such legislation as a result of operating processes which are not adequately monitored or - especially in new markets in countries where standards are below-par or that are exposed to specific risks (e.g., high crime rates, terrorist attacks or epidemic risks) - due to an inadequate evaluation of such requirements and necessary measures, could expose the group to risks having significant impacts on its operations, its financial position and results of operations and its reputation.
To mitigate this risk, Ansaldo STS group adopts health, safety and environmental management systems ensuring rigorous compliance with legislation in accordance with best practices, subject to internal and external monitoring and integrated with the security processes monitored by an independent internal unit.
These management systems are certified (to OHSAS 18001 standard for workplace safety and ISO14001 for the environment) in the group’s key companies.
Requirements in new markets are evaluated at the time the bid is prepared and the assistance of external consultants is also sought. Policies and procedures have also been set to ensure a consistent approach throughout the group’s various companies while still allowing for specific local legislation.