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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 Report: Manufacturing

More Robots Enter Into Manufacturing Industry

With more jobs utilizing technology advancements, manufacturing turns to cobots to help ease talent gaps.
By: | May 1, 2018 • 6 min read

The U.S. manufacturing industry is at a crossroads.

Faced with a shortfall of as many as two million workers between now and 2025, the sector needs to either reinvent itself by making it a more attractive career choice for college and high school graduates or face extinction. It also needs to shed its image as a dull, unfashionable place to work, where employees are stuck in dead-end repetitive jobs.

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Added to that are the multiple risks caused by the increasing use of automation, sensors and collaborative robots (cobots) in the manufacturing process, including product defects and worker injuries. That’s not to mention the increased exposure to cyber attacks as manufacturers and their facilities become more globally interconnected through the use of smart technology.

If the industry wishes to continue to move forward at its current rapid pace, then manufacturers need to work with schools, governments and the community to provide educational outreach and apprenticeship programs. They must change the perception of the industry and attract new talent. They also need to understand and to mitigate the risks presented by the increased use of technology in the manufacturing process.

“Loss of knowledge due to movement of experienced workers, negative perception of the manufacturing industry and shortages of STEM (science, technology, engineering and math) and skilled production workers are driving the talent gap,” said Ben Dollar, principal, Deloitte Consulting.

“The risks associated with this are broad and span the entire value chain — [including]  limitations to innovation, product development, meeting production goals, developing suppliers, meeting customer demand and quality.”

The Talent Gap

Manufacturing companies are rapidly expanding. With too few skilled workers coming in to fill newly created positions, the talent gap is widening. That has been exacerbated by the gradual drain of knowledge and expertise as baby boomers retire and a decline in technical education programs in public high schools.

Ben Dollar, principal, Deloitte Consulting

“Most of the millennials want to work for an Amazon, Google or Yahoo, because they seem like fun places to work and there’s a real sense of community involvement,” said Dan Holden, manager of corporate risk and insurance, Daimler Trucks North America. “In contrast, the manufacturing industry represents the ‘old school’ where your father and grandfather used to work.

“But nothing could be further from the truth: We offer almost limitless opportunities in engineering and IT, working in fields such as electric cars and autonomous driving.”

To dispel this myth, Holden said Daimler’s Educational Outreach Program assists qualified organizations that support public high school educational programs in STEM, CTE (career technical education) and skilled trades’ career development.

It also runs weeklong technology schools in its manufacturing facilities to encourage students to consider manufacturing as a vocation, he said.

“It’s all essentially a way of introducing ourselves to the younger generation and to present them with an alternative and rewarding career choice,” he said. “It also gives us the opportunity to get across the message that just because we make heavy duty equipment doesn’t mean we can’t be a fun and educational place to work.”

Rise of the Cobot

Automation undoubtedly helps manufacturers increase output and improve efficiency by streamlining production lines. But it’s fraught with its own set of risks, including technical failure, a compromised manufacturing process or worse — shutting down entire assembly lines.

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More technologically advanced machines also require more skilled workers to operate and maintain them. Their absence can in turn hinder the development of new manufacturing products and processes.

Christina Villena, vice president of risk solutions, The Hanover Insurance Group, said the main risk of using cobots is bodily injury to their human coworkers. These cobots are robots that share a physical workspace and interact with humans. To overcome the problem of potential injury, Villena said, cobots are placed in safety cages or use force-limited technology to prevent hazardous contact.

“With advancements in technology, such as the Cloud, there are going to be a host of cyber and other risks associated with them.” — David Carlson, U.S. manufacturing and automobile practice leader, Marsh

“Technology must be in place to prevent cobots from exerting excessive force against a human or exposing them to hazardous tools or chemicals,” she said. “Traditional robots operate within a safety cage to prevent dangerous contact. Failure or absence of these guards has led to injuries and even fatalities.”

The increasing use of interconnected devices and the Cloud to control and collect data from industrial control systems can also leave manufacturers exposed to hacking, said David Carlson, Marsh’s U.S. manufacturing and automobile practice leader. Given the relatively new nature of cyber as a risk, however, he said coverage is still a gray area that must be assessed further.

“With advancements in technology, such as the Cloud, there are going to be a host of cyber and other risks associated with them,” he said. “Therefore, companies need to think beyond the traditional risks, such as workers’ compensation and product liability.”

Another threat, said Bill Spiers, vice president, risk control consulting practice leader, Lockton Companies, is any malfunction of the software used to operate cobots. Then there is the machine not being able to cope with the increased workload when production is ramped up, he said.

“If your software goes wrong, it can stop the machine working or indeed the whole manufacturing process,” he said. “[Or] you might have a worker who is paid by how much they can produce in an hour who decides to turn up the dial, causing the machine to go into overdrive and malfunction.”

Potential Solutions

Spiers said risk managers need to produce a heatmap of their potential exposures in the workplace attached to the use of cobots in the manufacturing process, including safety and business interruption. This can also extend to cyber liability, he said.

“You need to understand the risk, if it’s controllable and, indeed, if it’s insurable,” he said. “By carrying out a full risk assessment, you can determine all of the relevant issues and prioritize them accordingly.”

By using collective learning to understand these issues, Joseph Mayo, president, JW Mayo Consulting, said companies can improve their safety and manufacturing processes.

“Companies need to work collaboratively as an industry to understand this new technology and the problems associated with it.” — Joseph Mayo, president, JW Mayo Consulting

“Companies need to work collaboratively as an industry to understand this new technology and the problems associated with it,” Mayo said. “They can also use detective controls to anticipate these issues and react accordingly by ensuring they have the appropriate controls and coverage in place to deal with them.”

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Manufacturing risks today extend beyond traditional coverage, like workers’ compensation, property, equipment breakdown, automobile, general liability and business interruption, to new risks, such as cyber liability.

It’s key to use a specialized broker and carrier with extensive knowledge and experience of the industry’s unique risks.

Stacie Graham, senior vice president and general manager, Liberty Mutual’s national insurance central division, said there are five key steps companies need to take to protect themselves and their employees against these risks. They include teaching them how to use the equipment properly, maintaining the same high quality of product and having a back-up location, as well as having the right contractual insurance policy language in place and plugging any potential coverage gaps.

“Risk managers need to work closely with their broker and carrier to make sure that they have the right contractual controls in place,” she said. “Secondly, they need to carry out on-site visits to make sure that they have the right safety practices and to identify the potential claims that they need to mitigate against.” &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]