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P3: 3 Benefits + 3 Risks

Public-private partnerships carry both benefits and risks.
By: | January 9, 2017 • 5 min read

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The American Society of Civil Engineers issues a report every year tracking the status of the nation’s infrastructure across 15 categories, including airports, pipelines, roads, bridges and solid waste facilities. In 2013, the United States earned a D+, a mark that has been steadily declining since it received a C in the ASCE’s first report card released in 1988.

To combat its ailing infrastructure, federal and state governments will increasingly rely on partnerships with private investors to help get these big-ticket projects off the ground.

The U.S. Department of Transportation defines public-private partnerships, or P3s, as “contractual agreements formed between a public agency and a private sector entity that allow for greater private sector participation in the delivery and financing of transportation projects.”

In its whitepaper “The United States: The World’s Largest Emerging P3 Market,” global insurer AIG outlines the promise offered by these partnerships in fixing the nation’s crumbling infrastructure, but notes that they come with their own set of challenges. Below are three major benefits and three key risks to the P3 model.

As we enter into new political landscape in the U.S. with President-elect Donald Trump, the role of P3 may become increasingly important.

The Benefits

1. Filling Investment Gaps

In a time when public dollars are limited but infrastructure needs are infinite, P3s help to fill in the investment gap to make desperately needed upgrades to American infrastructure.

According to the ASCE, an estimated $1.723 trillion is needed for surface transportation, $100 billion for rail and $134 billion for aviation infrastructure. The expense is far outpacing the level of investment from the public sector.

According to a McGraw Hill Construction Dodge report, public works construction dropped 14 percent from 2011 to 2012, and was projected to drop another 6 percent from 2012 to 2013. If the shortfall in public investment isn’t made up in some way, continually aging infrastructure may lead to disasters that cost lives and compromise economic activity in the towns they service — and state governments will be liable for the damages.

Especially in challenging economic climates, P3s can ease the burden on government budgets and help critical projects come to life.

2. Increasing Efficiency

On top of filling a pressing public need, P3 projects also save time and money. Compared to public projects, they have a better track record when it comes to staying on budget and finishing on time.

According to a study conducted by Infrastructure Partnerships Australia from 2000-2007, 18 percent of traditionally procured projects ran past deadline, while only 10 percent of P3 projects were past due. When traditional projects ran late, they were delivered 26 percent later than originally expected. Overdue P3 projects, on the other hand, were completed only 13 percent later.

Forty-five percent of traditionally procured projects incurred additional expenses, compared to just 14 percent of P3 projects. When traditional projects ran over budget, they incurred 35 percent extra expenses, while over-budget P3s went over by only 12 percent.

3. Spurring Economic Growth

P3s also help to spur economic development. They offer a lucrative business opportunity for investors in a time when returns are typically low. And infrastructure projects – particularly transportation networks – enable economic growth in the communities they connect.

Take for example E-470, the 47-mile highway constructed outside Denver, Colo., to service traffic to and from the soon-to-be-opened Denver International Airport. Eight counties and cities pooled their funds in 1989 to build the road, with no federal funding whatsoever. The highway was completed four years ahead of the airport and was the first large tollway to use electronic tolling.

The road paved the way for economic development in a previously sparsely-populated area. The population along E-470’s corridor was expected to double in the years following the project’s completion. In fact, the population of Denver — and the whole state of Colorado —has risen so much that the toll road is undergoing expansion.

The ASCE’s 2013 Report Card stated, “We know that investing in infrastructure is essential to support healthy, vibrant communities. Infrastructure is also critical for long-term economic growth, increasing GDP, employment, household income and exports. The reverse is also true – without prioritizing our nation’s infrastructure needs, deteriorating conditions can become a drag on the economy.”

The Risks

1. Uneven Liability

The chief complaint of private entities that want to further P3s as viable delivery mechanisms is that the government allots an unrealistic portion of the risk to private partners. To make matters worse, most of that risk is not transferrable though traditional insurance methods.

Nailing down contractual language that is acceptable to both parties and spreads liability fairly is the primary obstacle in P3 deals.

According to AIG’s whitepaper, Administrator Victor Mendez, head of the Federal Highway Administration, has argued for more precise valuation of risk in P3 projects, so that public and private parties can place a dollar value on the amount of risk they are willing to assume and strike a fairer balance.

Insurers, for their part, will have to continually analyze the changing construction landscape and develop new products to meet the needs of the evolving P3 model. AIG, for example, recently developed a product to address contractual liability issues in P3 deals.

2. Long-Term Commitment

P3s require a long term commitment on the part of the private entity — as much as 20 to 30 years. Private investors have to be prepared not just for the construction, but also the ongoing management of the project, whether that means ensuring regular maintenance or operating tolling systems. On top of that, covering and projecting insurance costs for the operational and maintenance risk over that course of time provides another layer of complexity. Properly transitioning insurance coverage between course of construction and operational and maintenance can be challenging for some carriers.

Because it’s difficult to predict how the economic environment will change over the next several decades, private partners take on a big risk in assuming management responsibilities for that length of time. Proper due diligence, conducted by both parties, is necessary to ensure the private investor can go the distance.

3. Project Ownership

The general public has also shown concern that major pieces of infrastructure will be owned by a private company rather than the public, and therefore subject to that company’s financial viability over the long term, or to the needs of their bottom line. In other words, citizens don’t want their vital transportation networks and other facilities to be commoditized.

In reality, private investors merely help to finance and manage the project, while it remains the property of the public. Unless that message is communicated clearly, though, aversion to private sector involvement in public works projects could stall some P3 efforts.

In spite of the headwinds and slowly emerging P3 sector in the U.S., AIG stands ready to partner with stakeholder to manage the inherent risks, deliver solutions and value to our clients.

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This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with AIG. The editorial staff of Risk & Insurance had no role in its preparation.




AIG is a leading international insurance organization serving customers in more than 100 countries.

More from Risk & Insurance

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2017 RIMS

Resilience in Face of Cyber

New cyber model platforms will help insurers better manage aggregation risk within their books of business.
By: | April 26, 2017 • 3 min read

As insurers become increasingly concerned about the aggregation of cyber risk exposures in their portfolios, new tools are being developed to help them better assess and manage those exposures.

One of those tools, a comprehensive cyber risk modeling application for the insurance and reinsurance markets, was announced on April 24 by AIR Worldwide.

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Last year at RIMS, AIR announced the release of the industry’s first open source deterministic cyber risk scenario, subsequently releasing a series of scenarios throughout the year, and offering the service to insurers on a consulting basis.

Its latest release, ARC– Analytics of Risk from Cyber — continues that work by offering the modeling platform for license to insurance clients for internal use rather than on a consulting basis. ARC is separate from AIR’s Touchstone platform, allowing for more flexibility in the rapidly changing cyber environment.

ARC allows insurers to get a better picture of their exposures across an entire book of business, with the help of a comprehensive industry exposure database that combines data from multiple public and commercial sources.

Scott Stransky, assistant vice president and principal scientist, AIR Worldwide

The recent attacks on Dyn and Amazon Web Services (AWS) provide perfect examples of how the ARC platform can be used to enhance the industry’s resilience, said Scott Stransky, assistant vice president and principal scientist for AIR Worldwide.

Stransky noted that insurers don’t necessarily have visibility into which of their insureds use Dyn, Amazon Web Services, Rackspace, or other common internet services providers.

In the Dyn and AWS events, there was little insured loss because the downtime fell largely just under policy waiting periods.

But,” said Stransky, “it got our clients thinking, well it happened for a few hours – could it happen for longer? And what does that do to us if it does? … This is really where our model can be very helpful.”

The purpose of having this model is to make the world more resilient … that’s really the goal.” Scott Stransky, assistant vice president and principal scientist, AIR Worldwide

AIR has run the Dyn incident through its model, with the parameters of a single day of downtime impacting the Fortune 1000. Then it did the same with the AWS event.

When we run Fortune 1000 for Dyn for one day, we get a half a billion dollars of loss,” said Stransky. “Taking it one step further – we’ve run the same exercise for AWS for one day, through the Fortune 1000 only, and the losses are about $3 billion.”

So once you expand it out to millions of businesses, the losses would be much higher,” he added.

The ARC platform allows insurers to assess cyber exposures including “silent cyber,” across the spectrum of business, be it D&O, E&O, general liability or property. There are 18 scenarios that can be modeled, with the capability to adjust variables broadly for a better handle on events of varying severity and scope.

Looking ahead, AIR is taking a closer look at what Stransky calls “silent silent cyber,” the complex indirect and difficult to assess or insure potential impacts of any given cyber event.

Stransky cites the 2014 hack of the National Weather Service website as an example. For several days after the hack, no satellite weather imagery was available to be fed into weather models.

Imagine there was a hurricane happening during the time there was no weather service imagery,” he said. “[So] the models wouldn’t have been as accurate; people wouldn’t have had as much advance warning; they wouldn’t have evacuated as quickly or boarded up their homes.”

It’s possible that the losses would be significantly higher in such a scenario, but there would be no way to quantify how much of it could be attributed to the cyber attack and how much was strictly the result of the hurricane itself.

It’s very, very indirect,” said Stransky, citing the recent hack of the Dallas tornado sirens as another example. Not only did the situation jam up the 911 system, potentially exacerbating any number of crisis events, but such a false alarm could lead to increased losses in the future.

The next time if there’s a real tornado, people make think, ‘Oh, its just some hack,’ ” he said. “So if there’s a real tornado, who knows what’s going to happen.”

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Modeling for “silent silent cyber” remains elusive. But platforms like ARC are a step in the right direction for ensuring the continued health and strength of the insurance industry in the face of the ever-changing specter of cyber exposure.

Because we have this model, insurers are now able to manage the risks better, to be more resilient against cyber attacks, to really understand their portfolios,” said Stransky. “So when it does happen, they’ll be able to respond, they’ll be able to pay out the claims properly, they’ll be prepared.

The purpose of having this model is to make the world more resilient … that’s really the goal.”

Additional stories from RIMS 2017:

Blockchain Pros and Cons

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Embrace the Internet of Things

Risk managers can use IoT for data analytics and other risk mitigation needs, but connected devices also offer a multitude of exposures.

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Damage to brand and reputation ranked as the top risk concern of risk managers throughout the world.

Reviewing Medical Marijuana Claims

Liberty Mutual appears to be the first carrier to create a workflow process for evaluating medical marijuana expense reimbursement requests.

Cyber Threat Will Get More Difficult

Companies should focus on response, resiliency and recovery when it comes to cyber risks.

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Carriers continue their vital role of helping insureds mitigate risks and promote safety.

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]