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].

Advertisement




“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 [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Management

The Profession

Verizon’s risk manager David Cammarata loves when his team can make a real impact on the bottom line.
By: | May 2, 2017 • 4 min read

R&I: What was your first job?

I was a financial analyst with the N.J. Casino Control Commission.

R&I: How did you come to work in risk management?

I was told at a Christmas luncheon in 2003 that I was being promoted into a new job.

R&I: What is the risk management community doing right?

Advertisement




I think the risk management community is getting a lot better at utilizing big data and analytics to manage risk. Significant improvements have been made, but there is still much more room for improvement.

R&I: What could the risk management community be doing a better job of?

I think that the insurance and brokerage communities need to really start thinking about what this industry is going to look like in 10 years. They need to start addressing how they are going to remain relevant. I think that major disruptions to existing business models will occur and that these disruptions combined with innovation and technological advances may catch many of today’s industry leaders by surprise.

David Cammarata, assistant treasurer, risk management and insurance, Verizon Communications Inc.

R&I: What was the best location and year for the RIMS conference and why?

San Diego, any year.

R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?

I think the advent of cyber risk and cyber insurance. For several years it has been, and it continues to be, the main topic of discussion at industry meetings.

R&I: What emerging commercial risk most concerns you?

Advertisement




Advertisement




I think the most scary scenarios include a nuclear, biological, chemical or radiological event, a widespread global health epidemic and/or a widespread state sponsored cyber shutdown.

R&I: How much business do you do direct versus going through a broker?

We do almost all of our business through a broker.

R&I: Is the contingent commission controversy overblown?

No. It’s a conflict.

R&I: Are you optimistic about the U.S. economy or pessimistic and why?

Optimistic because hopefully President Trump’s policies (lower taxes and less regulation) will be pro-business and good for the economy.

R&I: Who is your mentor and why?

My dad, who passed away many years ago. He was very influential during the formative years of my career. He taught me how important integrity and reputation were to your brand and he had a very strong work ethic.

R&I: What have you accomplished that you are proudest of?

I would have to say raising two awesome kids. My daughter is graduating from James Madison University this year as co-valedictorian. My son is finishing his sophomore year at Rutgers and has near perfect grades. But more importantly, both of my kids have turned out to be really good people.

R&I: How many emails do you get in a day?

A lot.

“I love it when the risk management organization is able to contribute in a way that makes a real impact to the corporation’s overall objectives. On several occasions we have been able to make real contributions to the bottom line.”

R&I: What is your favorite book or movie?

“My Cousin Vinny.” That movie makes me laugh no matter how many times I watch it.

R&I: What’s the best restaurant you’ve ever eaten at?

Advertisement




Advertisement




My dad used to take me to a place called Chick & Nello’s. It was an Italian place that did not have a menu. They came to your table and told you the two or three items they were making that day. The food was out of this world.

R&I: What is your favorite drink?

Iced tea. The non-alcoholic kind.

R&I: What is the most unusual/interesting place you have ever visited?

I can think of several places but for me it would be a tie between India and Italy. India just has such a different culture and way of life and Rome has breathtaking historical sites.

R&I: What is the riskiest activity you ever engaged in?

Well, one of the best thrill rides I’ve been on was Kingda Ka at Great Adventure. It feels risky but probably isn’t all that risky. I flew in a prop plane with my brother-in-law one time … that felt kind of risky. I have also parasailed, does that count? I think it definitely has to be driving on the N.J. Turnpike day in and day out.

R&I: If the world has a modern hero, who is it and why?

Advertisement




What about the Fukushima 50? I don’t think I could have done what they did.

R&I: What about this work do you find the most fulfilling or rewarding?

I love it when the risk management organization is able to contribute in a way that makes a real impact to the corporation’s overall objectives. On several occasions we have been able to make real contributions to the bottom line.

R&I: What do your friends and family think you do?

I don’t think they really know. My children see me as dad; others just see me as an executive with Verizon.




Katie Siegel is a staff writer at Risk & Insurance®. She can be reached at [email protected]