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 [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Management

The Profession

After 20 years in the business, Navy Pier’s Director of Risk Management values her relationships in the industry more than ever.
By: | June 1, 2017 • 4 min read

R&I: What was your first job?

Working at Dominick’s Finer Foods bagging groceries. Shortly after I was hired, I was promoted to [cashier] and then to a management position. It taught me great responsibility and it helped me develop the leadership skills I still carry today.

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

While working for Hyatt Regency McCormick Place Hotel, one of my responsibilities was to oversee the administration of claims. This led to a business relationship with the director of risk management of the organization who actually owned the property. Ultimately, a position became available in her department and the rest is history.

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

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The risk management community is doing a phenomenal job in professional development and creating great opportunities for risk managers to network. The development of relationships in this industry is vitally important and by providing opportunities for risk managers to come together and speak about their experiences and challenges is what enables many of us to be able to do our jobs even more effectively.

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

Attracting, educating and retaining young talent. There is this preconceived notion that the insurance industry and risk management are boring and there could be nothing further from the truth.

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

In my 20 years in the industry, the biggest change in risk management and the insurance industry are the various types of risk we look to insure against. Many risks that exist today were not even on our radar 20 years ago.

Gina Kirchner, director of risk management, Navy Pier Inc.

R&I: What insurance carrier do you have the highest opinion of?

FM Global. They have been our property carrier for a great number of years and in my opinion are the best in the business.

R&I: Are you optimistic about the US economy or pessimistic and why?

I am optimistic that policies will be put in place with the new administration that will be good for the economy and business.

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

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The commercial risks that are of most concern to me are cyber risks, business interruption, and any form of a health epidemic on a global scale. We are dealing with new exposures and new risks that we are truly not ready for.

R&I: Who is your mentor and why?

My mother has played a significant role in shaping my ideals and values. She truly instilled a very strong work ethic in me. However, there are many men and women in business who have mentored me and have had a significant impact on me and my career as well.

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

I am most proud of making the decision a couple of years ago to return to school and obtain my [MBA]. It took a lot of prayer, dedication and determination to accomplish this while still working a full time job, being involved in my church, studying abroad and maintaining a household.

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

“Heaven Is For Real” by Todd Burpo and Lynn Vincent. I loved the book and the movie.

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

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A French restaurant in Paris, France named Les Noces de Jeannette Restaurant à Paris. It was the most amazing food and brings back such great memories.

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

Israel. My husband and I just returned a few days ago and spent time in Jerusalem, Nazareth, Jericho and Jordan. It was an absolutely amazing experience. We did everything from riding camels to taking boat rides on the Sea of Galilee to attending concerts sitting on the Temple steps. The trip was absolutely life changing.

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

Many, many years ago … I went parasailing in the Caribbean. I had a great experience and didn’t think about the risk at the time because I was young, single and free. Looking back, I don’t know that I would make the same decision today.

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

I would have to say the relationships and partnerships I have developed with insurance carriers, brokers and other professionals in the industry. To have wonderful working relationships with such a vast array of talented individuals who are so knowledgeable and to have some of those relationships develop into true friendships is very rewarding.

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

My friends and family have a general idea that my position involves claims and insurance. However, I don’t think they fully understand the magnitude of my responsibilities and the direct impact it has on my organization, which experiences more than 9 million visitors a year.




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