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Public-Private Partnerships: Paving the Way for Infrastructure Revitalization

Many factors for infrastructure projects that are seemingly coming together could signal the dawn of a P3 Golden Age.
By: | March 1, 2017 • 5 min read

Public-private partnerships (P3s) are an effective way to get complex and expensive transportation infrastructure projects done at a time when political will to invest public funds fall short.

While the approach has been successfully utilized for many different projects, overall adoption remains limited. Out of the United States’ total annual infrastructure spend of $1.2 trillion, roughly $20-25 billion goes toward P3 projects, or about 2 percent.

Part of what has kept P3 to this niche is a dependence on toll-based revenue structures. But new revenue approaches such as Availability Payments could make the model work for a much broader scope of projects, including social infrastructure like hospitals and public schools.

“The insurance community, construction community, and finance community all have an interest here. These three industries could get aligned and work together to help promote P3s as a potential alternative solution for what needs to get built and rebuilt and improved in the next five to 10 years,” said Thomas Grandmaison, executive vice president, Energy and Construction Industry Leader, AIG.

P3s come with a set of both benefits and risks, but new financing approaches combined with an evolving political climate that seems to favor infrastructure investments could be the dawn of a P3 Golden Age.

New Revenue Structures

Developments in finance structures and insurance coverage make P3s more attractive for both public and private partners.

Roads built under a P3 model have typically generated revenue from tolls. The financing of these projects is therefore based on traffic forecasts that estimate the number of cars using the road every day, over a period of 30 to 50 years.

And when those forecasts are inaccurate, the entire project is put in jeopardy. In 2016, SH 130 Concession Co., the private entity that financed, constructed and maintained State Highway 130 — a 41-mile toll road connecting Austin and Seguin in Texas— filed for bankruptcy. The project cost $1.3 billion. SH 130 tried to attract drivers with a high speed limit of 85 mph and an alternative route around other gridlocked highways, but motorists ultimately opted for longer commutes that required no toll payment.

In California, the 10-mile South Bay Expressway suffered the same fate, declaring bankruptcy in 2011. Same for the privately operated Indiana Toll Road, which went bankrupt in 2014.

That’s why availability payments have become increasingly popular.

With availability payments, the public entity issues a periodic payment of a predetermined amount to the private partner as long as the project is available for its intended use at the expected performance level. In this arrangement, the public partner collects any tolls and retains the risk that revenue may not meet expected levels. These arrangements help to attract private partners who don’t want to take on traffic risk, but also allows public sponsors to retain some ownership and control over the road going forward. Availability payments can also enable non-transportation P3 projects, including water treatment plants, ports and public facilities like hospitals and schools.

“There is no shortage of interest in private financing,” Grandmaison said. “There’s plenty of capital out there, and now potential financiers can feel more secure in their investment. The availability payment option often provides the difference between investment grade, and non-investment grade debt, dramatically reducing the cost of debt and increasing the number of potential investors.”

Evolving Risk Management

Insurance coverage plays a part in that security as well, and carriers have been pushed to build creative and flexible solutions to accommodate the size and complexity of P3s. Current trends and P3 project structures need sureties providing alternative solutions that incorporate liquidity elements that can address both concessionaire and rating agency concerns.

“As P3s become more prevalent, builder concessionaire teams and brokers will be asking the insurance market to think more holistically about how separate coverages can be brought together in a coordinated and aligned fashion to make the buying process more streamlined,” Grandmaison said.

There may be multiple large contractors working on a P3 project, and none wants to take the entire program onto their balance sheet. Same goes for the mix of private investors involved. And then there’s the public entity that wants full insurance protection even though they take a back seat in terms of project management and execution.

“You’re creating a six-headed monster as the owner or sponsor of the insurance program,” Grandmaison said. “It’s a more complex risk assumption than the traditional setup where the public entity is responsible for insuring construction, but takes on operation of the project through a separate program.”

Complete and coordinated coverage for all of the risks involved in complex projects alleviates fears — held by both public and private parties — that one entity will be more exposed than their partners, or that risk will be allocated unfairly. For P3s to be executed smoothly, it’s critical to have insurers involved that have the full breadth of experience and capabilities to fill this need. In addition, not all insurers are comfortable with project terms that are often longer than 5 years (sometimes 8-10 years), and providing operational coverage during course of construction or post construction.

AIG is one of few insurers that can provide all of the coverages traditionally needed for construction projects like workers’ compensation, general liability, builder’s risk, inland marine, environmental, professional liability, surety and even some ancillary coverage like cyber and kidnap and ransom.

Political Considerations

Despite their big benefits, P3s also come with significant hurdles. Even with a shifting government agenda that prioritizes infrastructure, local political will can still be difficult to muster.

If a P3 project doesn’t pan out, taxpayers end up paying the balance. Local governments sometimes struggle to justify such costly projects that potentially place their constituents’ wallets at risk. To overcome that hesitance, political leaders want to be assured that their private partner has the capacity to stay with a project over its long lifespan.

“One of the challenges we’ve seen here in the States is that Departments of Transportation want to ensure that the companies that are contracted to keep the project running for up to 30 years actually remain in place,” he said. “There is hesitance to transfer that ownership over to a party that may want to cash out as soon the market shifts.”

Of course, having comprehensive insurance coverage alleviates fears for public sponsors as well.

“AIG is really a full service carrier that can provide everything a customer might need on a project-specific basis,” Grandmaison said. “AIG has been in the market of flexibility and creativity for years and will continue to be so.”

The future certainly looks promising for P3, and the insurance industry looks poised to face any new challenges it brings.

To learn more about insurance solutions for P3 projects, visit http://www.aig.com/business/insurance.

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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.




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The Profession: Curt Gross

This director of risk management sees cyber, IP and reputation risks as evolving threats, but more formal education may make emerging risk professionals better prepared.
By: | June 1, 2018 • 4 min read

R&I: What was your first job?

My first non-professional job was working at Burger King in high school. I learned some valuable life lessons there.

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

After taking some accounting classes in high school, I originally thought I wanted to be an accountant. After working on a few Widgets Inc. projects in college, I figured out that wasn’t what I really wanted to do. Risk management found me. The rest is history. Looking back, I am pleased with how things worked out.

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

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I think we do a nice job on post graduate education. I think the ARM and CPCU designations give credibility to the profession. Plus, formal college risk management degrees are becoming more popular these days. I know The University of Akron just launched a new risk management bachelor’s program in the fall of 2017 within the business school.

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

I think we could do a better job with streamlining certificates of insurance or, better yet, evaluating if they are even necessary. It just seems to me that there is a significant amount of time and expense around generating certificates. There has to be a more efficient way.

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

Selfishly, I prefer a destination with a direct flight when possible. RIMS does a nice job of selecting various locations throughout the country. It is a big job to successfully pull off a conference of that size.

Curt Gross, Director of Risk Management, Parker Hannifin Corp.

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

Definitely the change in nontraditional property & casualty exposures such as intellectual property and reputational risk. Those exposures existed way back when but in different ways. As computer networks become more and more connected and news travels at a more rapid pace, it just amplifies these types of exposures. Sometimes we have to think like the perpetrator, which can be difficult to do.

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

I hate to sound cliché — it’s quite the buzz these days — but I would have to say cyber. It’s such a complex risk involving nontraditional players and motives. Definitely a challenging exposure to get your arms around. Unfortunately, I don’t think we’ll really know the true exposure until there is more claim development.

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

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Our captive insurance company. I’ve been fortunate to work for several companies with a captive, each one with a different operating objective. I view a captive as an essential tool for a successful risk management program.

R&I: Who is your mentor and why?

I can’t point to just one. I have and continue to be lucky to work for really good managers throughout my career. Each one has taken the time and interest to develop me as a professional. I certainly haven’t arrived yet and welcome feedback to continue to try to be the best I can be every day.

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

I would like to think I have and continue to bring meaningful value to my company. However, I would have to say my family is my proudest accomplishment.

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

Favorite movie is definitely “Good Will Hunting.”

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

Tough question to narrow down. If my wife ran a restaurant, it would be hers. We try to have dinner as a family as much as possible. If I had to pick one restaurant though, I would say Fire Food & Drink in Cleveland, Ohio. Chef Katz is a culinary genius.

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

The Grand Canyon. It is just so vast. A close second is Stonehenge.

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

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A few, actually. Up until a few years ago, I owned a sport bike (motorcycle). Of course, I wore the proper gear, took a safety course and read a motorcycle safety book. Also, I have taken a few laps in a NASCAR [race car] around Daytona International Speedway at 180 mph. Most recently, trying to ride my daughter’s skateboard.

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

The Dalai Lama. A world full of compassion, tolerance and patience and free of discrimination, racism and violence, while perhaps idealistic, sounds like a wonderful place to me.

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

I really enjoy the company I work for and my role, because I get the opportunity to work with various functions. For example, while mostly finance, I get to interact with legal, human resources, employee health and safety, to name a few.

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

I asked my son. He said, “Risk management and insurance.” (He’s had the benefit of bring-your-kid-to-work day.)

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]