Infrastructure

Intelligently Shared Risk in Infrastructure Spending

Public-private partnerships offer a way forward for infrastructure investment. To replicate Canadian successes, the U.S. must address risk management issues.
By: | May 15, 2017 • 3 min read

One of the few national issues on which there is near-universal agreement is the state of roads, bridges, dams, airports, and railroads in the U.S. – invariably described as “crumbling.”

There is also broad bipartisan consensus on the need and indeed value of capital spending. The devil is in the details, as liberals tend to favor big-ticket government-led projects while conservatives advocate varieties of tax credits and other private-sector inducements.

Public-Private Partnerships (P3s) seem like a proven way to bridge the gap and actually get things done. The approach has been highly successful in Canada, and also to a modest degree in the U.S. A program across Pennsylvania to rebuild rural bridges is a notable example.

For all their many attractive features, P3s raise several important risk and insurance questions. At the tactical level, builders risk and surety bonding have to be reassessed project by project.

More strategically, the success of P3s has been built around the essential element of tying operational and maintenance costs and revenues into the capital expensive of design and construction.

Those risk management questions were addressed at a seminar May 10 in New York held by law firms, the U.S.-based Haynes & Boone and Gowling WLG, based in Canada.

“The models tend to look at P3s in just two ways,” said Gilbert D. Porter, partner with Haynes & Boone in New York.

“Either the availability/capacity concept, where payments are made regardless of use, [such as if private investors fund part of a hospital or school] or the performance-based or concession model where there is right to operate but revenues come from use [such as for a toll road or light-rail system].

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“The problem with the second is that it often confuses elements of appropriate market risk and government responsibility. What needs to be explored is some sort of sharing of risk, versus just allocating.”

Porter explained that the appeal of the concession model is because it is often non-recourse to the government unless the government takes actions that could be considered competitive or otherwise detrimental to the concession. That is where disputes and litigation arise.

“But there are ways of sharing risk that do not lump it all one way or the other. One example is a collar, where a minimum return is guaranteed by the government (if availability standards are met) and there is a sharing of upside return between the project sponsor and the government.

“That is just one idea, but if in the U.S. we are going to continue favoring the concession model (as opposed to the availability model that is prevalent in Canada) then all parties — government, investors, and contractors — have to start thinking about ways of sharing risk in ways that balance the strengths of the private sponsors with governmental responsibility.

“Otherwise you just end up trying to push risk onto the private sector. And private sector is going to find ways to push back.”

According to data compiled by Gowling, the majority of P3 projects in Canada over the past 15 years have been in health care, with the next most in transportation.

Darryl J. Brown, partner with Gowling, noted that before the P3 approach became common in Canada, roughly half of government infrastructure projects were completed over budget and a year late. Of the P3 projects identified, about 97 percent were completed on time and on budget.

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at riskletters@lrp.com.

More from Risk & Insurance

More from Risk & Insurance

2017 Risk All Stars

Immeasurable Value

The 2017 Risk All Stars strengthened their organizations by taking ownership of improved risk management processes and not quitting until they were in place.
By: | September 12, 2017 • 3 min read

Being the only person to hold a particular opinion or point of view within an organization cannot be easy. Do the following sound like familiar stories? Can you picture yourself or one of your risk management colleagues as the hero or heroine? Or better yet, as a Risk & Insurance® Risk All Star?

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One risk manager took a job with a company that was being spun off, and the risk management program, which was built for a much larger company, was not a good fit for the spun-off company.
Rather than sink into inertia, this risk manager took the bull by the horns and began an aggressive company intranet campaign to instill better safety and other risk management practices throughout the organization.

The risk manager, 2017 Risk All Star Michelle Bennett of Cable One, also changed some long-standing brokerage relationships that weren’t a good fit for the risk management and insurance program. In her first year on the job she produced premium savings and in her second year is in the process of introducing ERM company-wide.

Or perhaps this one rings a bell. The news is trickling out that a company is poised to dramatically expand, increasing the workforce three- or four-fold. Having this knowledge with certainty would be a great benefit to a risk manager, who could begin girding safety, workers’ comp and related programs accordingly. But things sometimes don’t work that way, do they? Sometimes the risk manager is one of the last people to know.

The Risk All Star Award recognizes at its core, creativity, perseverance and passion. The 13 winners of this year’s award all displayed those traits in abundance.

In the case of 2017 Risk All Star winner Steve Richards of the Coca-Cola Bottling Company, the news of an expansion spurred him to action. He completely overhauled the company’s workers’ compensation program and streamlined its claim management system. The results, even with a much higher headcount, were reduced legal costs, better return-to-work experiences for injured workers and a host of other improvements and savings.

The Risk All Star Award recognizes at its core, creativity, perseverance and passion. The 13 winners of this year’s award all displayed those traits in abundance. Sometimes it took years for a particular risk solution, as promoted by a risk manager, to find acceptance.

In other cases a risk manager got so excited about a solution, they never even considered getting turned down. They just kept pushing until they carried the day.

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Butler University’s Zach Finn became obsessive about what he felt was a lackluster effort on the part of the insurance industry to bring in new talent. The former risk manager for the J.M. Smucker Co. settled on the creation of a student-run captive to give his risk management students the experience they would need to get hired right out of college.

The result was a better risk management program for the university’s College of Liberal Arts and Sciences, and immediate traction in the job market for Finn’s students.

A few of our Risk All Stars told us that the results they are achieving were decades in the making. Only by year-in, year-out dedication to gaining transparency about her co-op’s risks and learning more and more about her various insurance carriers, did Growmark Inc.’s Faith Cring create a stalwart risk management and insurance program that is the envy of the agricultural sector. Now she’s been with some of her insurance carriers more than 20 years — some more than 30 years.

Having the right idea and not having a home for it can be a lonely, frustrating experience. Having the creativity, the passion and perhaps, most importantly, the perseverance to see it through and get great results makes you a Risk All Star. &

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Risk All Stars stand out from their peers by overcoming challenges through exceptional problem solving, creativity, perseverance and passion.

See the complete list of 2017 Risk All Stars.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at dreynolds@lrp.com.