Infrastructure

Seven Questions for Three-Time Power Broker Adrian Pellen

Various plans call for as much as $1 trillion in domestic infrastructure spending in coming years. While this presents massive business opportunities, risk, as we know, comes with it.
By: | May 16, 2017 • 6 min read

Adrian Pellen joined Marsh’s U.S. Construction Practice as U.S. Infrastructure Leader in November 2016. In this role, he is responsible for delivering risk advisory and strategic services to developers and contractors pursuing new infrastructure projects across North America. Adrian brings more than eight years of construction and infrastructure experience to the role, having worked on more than 30 public private partnership projects in Canada and the U.S. He was named a Risk & Insurance Power Broker® in 2013. 2014 and 2016. R&I sought Mr. Pellen’s take on the need for infrastructure improvements in the U.S., and the risks and opportunities involved.

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R&I: Should these plans come to pass, we can expect large amounts of foreign capital to flow into this country. What are some key risks to be aware of with that much capital coming in to fund domestic infrastructure projects?

AP: The single biggest risk in the U.S. infrastructure market is political uncertainty. Although both federal-level Democrats and Republicans have $1 trillion plans, infrastructure procurement is largely executed at the state and municipality level. There are a myriad of factors affecting infrastructure procurement including a state’s policy towards alternative delivery methods, enabling legislation, community opposition and environmental permitting etc. … These factors can contribute to significant delays, high pursuit expenses, and lost opportunity cost.

For domestic infrastructure firms, the risks may be even larger. Foreign capital inflows will be accompanied by disruptive technologies and new construction methodologies that could impact the competitiveness of local players. I also anticipate that the increased capital inflows — seeking consistent returns that infrastructure provides — will outpace the supply consistency for new projects and as such it will put downward pressure on margin, forcing infrastructure firms to take the same or greater levels of risk for lower returns.

R&I: The construction industry is already facing a labor shortage. How badly might this shortage intensify if these projects are greenlighted? What are some of the most worrisome impacts of an intensifying labor shortage?

AP: In the near to medium term, the shortage of qualified labor will make for challenging headwinds for construction companies. According to the AGC (Associated General Contractors of America), construction companies are  creating jobs at a faster rate than the general economy but they aren’t able to fill them quickly enough. This issue will only be further exacerbated by an increase in infrastructure spending. In the current protectionist environment, I do not anticipate a large inflow of foreign workers to reduce this burden either. These industry dynamics could result in project delays, reduction in competition, or worse, damage or liability resulting from construction defects or other errors resulting from the use of unqualified or over-burdened labor.

I am hopeful that it’s a matter of supply and demand in the long-run. The current hunt for talent will continue to drive greater emphasis on human capital management whether through training, career mapping, compensation or other innovative methods to attract and retain talent. Hopefully these efforts will enhance the pool for qualified talent.

R&I: What new products and risk transfer services do you see insurance carriers developing to help their insureds respond to the challenges of this level of increased construction activity?

AP: The insurance industry will need to broaden its risk-bearing appetite by expanding products to cover business risks that large infrastructure firms are absorbing, rather than focusing principally on providing hazard triggered — property damage and liability — insurance products. The insurers are responding with the emergence of non-physical damage triggered weather insurance and other parametric risk management products that continue to become viable means of transferring business risk associated with infrastructure projects. We’re also seeing the deployment of new products to cover the assessment and delay costs arising out of archaeological and paleontological discoveries.

R&I: Let’s talk about the different project delivery methods; design-build, integrated delivery, etc. What risks do these new delivery methods create for contractors? What products should they be thinking about now that they might not have had a need for previously?

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AP: With the increased utilization of private capital to fund infrastructure development through alternative construction delivery methods like public-private partnerships (P3s), rating agencies, like S&P and Moody’s, play an increasingly influential role for contractors. While procuring performance and payment bonds are nothing new for contractors under traditional infrastructure procurement method, the P3 delivery model often requires rating agencies to evaluate contractor default scenarios and performance security as a component of the debt rating process. This paradigm, coupled with constraints on qualified labor, generates an even greater emphasis on the use of surety and other performance security instruments to satisfy the needs of project owners and lenders. In this case, the continued evolution of increasing the liquidity of these instruments will be paramount in order to service debt payments and other financial obligations.

The insurance industry will need to broaden its risk-bearing appetite by expanding products to cover business risks that large infrastructure firms are absorbing rather than focusing principally on providing hazard triggered — property damage and liability — insurance products.

R&I: What’s best for the country as a whole, an infrastructure plan that leverages a solid percentage of private investment, or one that is predominantly government funded?

AP: There isn’t a one-size-fits-all approach. In the current environment, I anticipate that a significant percentage of the country’s infrastructure will be publically financed. It’s clear for countries facing significant infrastructure deficits like the United States that private investment has to play a major role in infrastructure revitalization and development.

There are clear benefits and efficiencies to be had from private sector financing, design, and construction through life-cycle management of infrastructure assets. The private sector brings ingenuity in delivering projects on time and on budget and for managing the most complex risks.

With that said, not all projects fit the profile required for private financing, such as smaller sized projects or those that require some form of user fees to support the underlying economics of a project. In addition, although private investors have access to tax exempt financing through Private Activity Bonds (PABs) and TIFIA or WIFIA loans, the public sector has a much greater capacity to access tax-exempt debt to be applied across a broader portfolio of projects.

R&I: What risks does the Internet of Things present to builders of large infrastructure projects? What hazards in this area must they guard against?

AP: As society continues to make use of new technologies that increase the connectedness in which we build, operate, and maintain infrastructure, it is crucial to understand the potential risks that come along with the Internet of Things. One risk in particular is that cyber criminals are focused on securing or sabotaging confidential data. Unfortunately, we also must guard our critical infrastructure including bridges, public transit systems, dams, and other assets from cyberattacks. The Internet of Things provides greater ways for cyber criminals to hack our infrastructure to cause physical damage to the assets themselves along with bodily injury and property damage to third parties.

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R&I: When we think about Public-Private-Partnerships — already in play in more than 30 states — what risk transfer mechanisms have you seen that work best? That you have the most faith in?

Robust contractual risk transfer remains the most important factor in P3s. What’s critical is that there is a fair and equitable risk allocation between project owners, developers financing infrastructure, contractors building infrastructure, and engineering firms designing projects.

There are no hard and fast rules to risk allocation; however, over time, there tends to be acceptance of what risks are commercially bearable to the private sector, others which are retained by the project owner, and those so severe they allow for dissolution of the contract. Adhering to P3 risk allocation guidelines put out by agencies like the Federal Highway Administration encourage commercial standardization of risk allocation, which promotes competiveness and reduces frictional costs. Insurance brokers and other risk advisors promote this process by working in tandem with P3 stakeholders to develop risk registers or matrices that map out risks allocated amongst contract parties and the various risk transfer mechanisms available to mitigate those risks.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Management

The Profession

Pinnacle Entertainment’s VP of enterprise risk management says he’s inspired by Disney’s approach to risk management.
By: | November 1, 2017 • 4 min read

R&I: What was your first job?

Bus boy at a fine dining restaurant.

R&I: How did you come to work in this industry?

I sent a résumé to Harrah’s Entertainment on a whim. It took over 30 hours of interviewing to get that job, but it was well worth it.

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

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The Chinese citizen (never positively identified) who stood in front of a column of tanks in Tiananmen Square on June 5, 1989. That kind of courage is undeniable, and that image is unforgettable. I hope we can all be that passionate about something at least once in our lives.

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

Cyber risk, but more narrowly, cyber-extortion. I think state sponsored bad actors are getting more and more sophisticated, and the risk is that they find a way to control entire systems.

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

Training and breaking horses. When I was in high school, I worked on a lot of farms. I did everything from building fences to putting up hay. It was during this time that I found I had a knack for horses. They would tolerate me getting real close, so it was natural I started working more and more with them.

Eventually, I was putting a saddle on a few and before I knew it I was in that saddle riding a horse that had never been ridden before.

I admit I had some nervous moments, but I was never thrown off. It taught me that developing genuine trust early is very important and is needed by all involved. Nothing of any real value happens without it.

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

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Setting very aggressive goals and then meeting and exceeding those goals with a team. Sharing team victories is the ultimate reward.

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

Disney World. The sheer size of the place is awe inspiring. And everything works like a finely tuned clock.

There is a reason that hospitality companies send their people there to be trained on guest service. Disney World does it better than anyone else.

As a hospitality executive, I always learn something new whenever I am there.

James Cunningham, vice president, enterprise risk management, Pinnacle Entertainment, Inc.

The risks that Disney World faces are very similar to mine — on a much larger scale. They are complex and across the board. From liability for the millions of people they host as their guests each year, to the physical location of the park, to their vendor partnerships; their approach to risk management has been and continues to be innovative and a model that I learn from and I think there are lessons there for everybody.

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

We are doing a much better job of getting involved in a meaningful way in our daily operations and demonstrating genuine value to our organizations.

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

Educating and promoting the career with young people.

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

Being able to tell the Pinnacle story. It’s a great one and it wasn’t being told. I believe that the insurance markets now understand who we are and what we stand for.

R&I: Who is your mentor and why?

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John Matthews, who is now retired, formerly with Aon and Caesar’s Palace. John is an exceptional leader who demonstrated the value of putting a top-shelf team together and then letting them do their best work. I model my management style after him.

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

I read mostly biographies and autobiographies. I like to read how successful people became successful by overcoming their own obstacles. Jay Leno, Jack Welch, Bill Harrah, etc. I also enjoyed the book and movie “Money Ball.”

R&I: What is your favorite drink?

Ice water when it’s hot, coffee when it’s cold, and an adult beverage when it’s called for.

R&I: What does your family think you do?

In my family, I’m the “Safety Geek.”

R&I:  What’s your favorite restaurant?

Vegas is a world-class restaurant town. No matter what you are hungry for, you can find it here. I have a few favorites that are my “go-to’s,” depending on the mood and who I am with.

If you’re in town, you should try to have at least one meal off the strip. For that, I would suggest you get reservations (you’ll need them) at Herbs and Rye. It’s a great little restaurant that is always lively. The food is tremendous, and the service is always on point. They make hand-crafted cocktails that are amazing.

My favorite Mexican restaurant is Lindo Michoacan. There are three in town, and I prefer the one in Henderson as it has the best view of the valley. For seafood, you can never go wrong with Joe’s in Caesar’s Palace.




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