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Why you should take a ‘risk-first’ approach to infrastructure

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By Joanne Foley | September 13, 2019

A “risk-first” approach will provide a more holistic and strategic perspective and satisfy the demands of stakeholders involved in these complex projects

Wherever you are in the world, it’s hard not to notice the need for improving (or developing) local infrastructure whether that be roads and highways, airports or utilities. When it comes to major infrastructure projects, you should take a “risk-first” approach, because it will provide a more holistic and strategic perspective and satisfy the demands of stakeholders involved in these complex projects.

Additionally, evaluating an infrastructure project from a risk-first perspective is a good response to the threat of a hardening insurance market, which certainly does demand a greater emphasis on presentation and differentiation of risk.

Why take this approach?

A risk-first approach will certainly support your objectives of the most cost-effective insurance premium. However, we believe it is also at the core of development of infrastructure in response to global demand.

Insurance is a valuable risk transfer tool and one which project financiers will use to achieve project “bankability.” However, your insurance strategy and program should be built on the fundamental principles of effective identification, quantification and allocation of the risks that exist at the heart of your infrastructure project.

There is widespread awareness of the vast numbers predicted to be required in order to meet the global requirement for infrastructure investment both in terms of addressing ageing infrastructure and meeting new infrastructure needs.

While demand is clear, there are still challenges to increasing infrastructure investment in line with these demands:

  1. These can include factors such as the constraints on the public sector’s ability to meet long-term investment requirements, which means that private sector engagement is also key.
  2. Private-sector capital is certainly available however, non-traditional private investor appetite may be restricted due to lack of sector knowledge.
  3. Lack of information and data particularly with respect to development and construction risks can act as a deterrent to investment. Pre-completion may be generally perceived as the highest risk stage to project returns.
  4. To attract investment and fund projects, the public sector may look to alternative procurement methodologies and while seeking to attract investment, these must be designed to reflect an allocation of project risks and returns which remains attractive to all parties. As we see in certain territories procurement methods (such as public–private partnership) can in themselves lead to project controversy and negative public perceptions around issues such as value for money, which can ultimately jeopardize projects.
  5. Large infrastructure projects may have complex and lengthy development stages. The development stage is typically characterized by multiple global consortia tendering, each requiring independent advisors (technical, legal, financial, insurance etc.) and protracted contractual negotiations which can take multiple years, which has resulted in some projects failing to be realized due to among other things political short termism.

By their nature, lengthy development and procurement phases propagate inefficiencies, delays and increased or duplicated development costs, which may ultimately be borne by the end users. With these challenges in mind, an approach that creates a focused discipline of understanding risks while maintaining a sustainable financial view is needed for these complex projects.

How should we go about this?

We believe that early risk advisor engagement and adherence to fundamental principles can help to drive successful project development.

Development and construction risks are wide ranging and their sources include:

  • Permitting
  • Planning
  • Design
  • Financing
  • Completion delays
  • Cost over-runs
  • Performance
  • Loss or damage during construction
  • Third-party risks

Fundamental principles say that contractually, risk should be allocated to the party best able to manage them at the lowest costs.

Unfortunately, infrastructure projects have a lot of variables that parties may not agree on who is responsible for specific risks. Furthermore, the various parties involved may have no common understanding of the financial impact of these risks and how they might be mitigated.

To avoid this situation, it is critical to engage risk advisors early in the process to work with infrastructure project teams to:

  1. Identify and understand the risks – includes Probable Maximum Loss (PML) studies, risk matrices, risk register review, analytics, benchmarking, etc.
  2. Analyze and quantify the risk – includes available insurance transfer options to meet project specific needs
  3. Propose optimal allocation of the risks – can only be delivered with an in-depth understanding of project risks and risk transfer solutions
  4. Design strategies for mitigation, transfer or retention of the risks – to achieve sustainable insurance program requirements

An early project risk strategy will deliver an understanding of the development and construction risks, efficient and optimal allocation of risk which can facilitate an optimal procurement and delivery strategy and help to drive a more efficient development stage.

Contact

Joanne Foley
Director, Global Infrastructure

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