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

2017 Risk All Stars

Immeasurable Value

The 2017 Risk All Stars strengthened their organizations by taking ownership of improved risk management processes and not quitting until they were in place.
By: | September 12, 2017 • 3 min read

Being the only person to hold a particular opinion or point of view within an organization cannot be easy. Do the following sound like familiar stories? Can you picture yourself or one of your risk management colleagues as the hero or heroine? Or better yet, as a Risk & Insurance® Risk All Star?

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One risk manager took a job with a company that was being spun off, and the risk management program, which was built for a much larger company, was not a good fit for the spun-off company.
Rather than sink into inertia, this risk manager took the bull by the horns and began an aggressive company intranet campaign to instill better safety and other risk management practices throughout the organization.

The risk manager, 2017 Risk All Star Michelle Bennett of Cable One, also changed some long-standing brokerage relationships that weren’t a good fit for the risk management and insurance program. In her first year on the job she produced premium savings and in her second year is in the process of introducing ERM company-wide.

Or perhaps this one rings a bell. The news is trickling out that a company is poised to dramatically expand, increasing the workforce three- or four-fold. Having this knowledge with certainty would be a great benefit to a risk manager, who could begin girding safety, workers’ comp and related programs accordingly. But things sometimes don’t work that way, do they? Sometimes the risk manager is one of the last people to know.

The Risk All Star Award recognizes at its core, creativity, perseverance and passion. The 13 winners of this year’s award all displayed those traits in abundance.

In the case of 2017 Risk All Star winner Steve Richards of the Coca-Cola Bottling Company, the news of an expansion spurred him to action. He completely overhauled the company’s workers’ compensation program and streamlined its claim management system. The results, even with a much higher headcount, were reduced legal costs, better return-to-work experiences for injured workers and a host of other improvements and savings.

The Risk All Star Award recognizes at its core, creativity, perseverance and passion. The 13 winners of this year’s award all displayed those traits in abundance. Sometimes it took years for a particular risk solution, as promoted by a risk manager, to find acceptance.

In other cases a risk manager got so excited about a solution, they never even considered getting turned down. They just kept pushing until they carried the day.

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Butler University’s Zach Finn became obsessive about what he felt was a lackluster effort on the part of the insurance industry to bring in new talent. The former risk manager for the J.M. Smucker Co. settled on the creation of a student-run captive to give his risk management students the experience they would need to get hired right out of college.

The result was a better risk management program for the university’s College of Liberal Arts and Sciences, and immediate traction in the job market for Finn’s students.

A few of our Risk All Stars told us that the results they are achieving were decades in the making. Only by year-in, year-out dedication to gaining transparency about her co-op’s risks and learning more and more about her various insurance carriers, did Growmark Inc.’s Faith Cring create a stalwart risk management and insurance program that is the envy of the agricultural sector. Now she’s been with some of her insurance carriers more than 20 years — some more than 30 years.

Having the right idea and not having a home for it can be a lonely, frustrating experience. Having the creativity, the passion and perhaps, most importantly, the perseverance to see it through and get great results makes you a Risk All Star. &

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Risk All Stars stand out from their peers by overcoming challenges through exceptional problem solving, creativity, perseverance and passion.

See the complete list of 2017 Risk All Stars.

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