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

Verizon’s risk manager David Cammarata loves when his team can make a real impact on the bottom line.
By: | May 2, 2017 • 4 min read

R&I: What was your first job?

I was a financial analyst with the N.J. Casino Control Commission.

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

I was told at a Christmas luncheon in 2003 that I was being promoted into a new job.

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

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I think the risk management community is getting a lot better at utilizing big data and analytics to manage risk. Significant improvements have been made, but there is still much more room for improvement.

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

I think that the insurance and brokerage communities need to really start thinking about what this industry is going to look like in 10 years. They need to start addressing how they are going to remain relevant. I think that major disruptions to existing business models will occur and that these disruptions combined with innovation and technological advances may catch many of today’s industry leaders by surprise.

David Cammarata, assistant treasurer, risk management and insurance, Verizon Communications Inc.

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

San Diego, any year.

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

I think the advent of cyber risk and cyber insurance. For several years it has been, and it continues to be, the main topic of discussion at industry meetings.

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

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I think the most scary scenarios include a nuclear, biological, chemical or radiological event, a widespread global health epidemic and/or a widespread state sponsored cyber shutdown.

R&I: How much business do you do direct versus going through a broker?

We do almost all of our business through a broker.

R&I: Is the contingent commission controversy overblown?

No. It’s a conflict.

R&I: Are you optimistic about the U.S. economy or pessimistic and why?

Optimistic because hopefully President Trump’s policies (lower taxes and less regulation) will be pro-business and good for the economy.

R&I: Who is your mentor and why?

My dad, who passed away many years ago. He was very influential during the formative years of my career. He taught me how important integrity and reputation were to your brand and he had a very strong work ethic.

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

I would have to say raising two awesome kids. My daughter is graduating from James Madison University this year as co-valedictorian. My son is finishing his sophomore year at Rutgers and has near perfect grades. But more importantly, both of my kids have turned out to be really good people.

R&I: How many emails do you get in a day?

A lot.

“I love it when the risk management organization is able to contribute in a way that makes a real impact to the corporation’s overall objectives. On several occasions we have been able to make real contributions to the bottom line.”

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

“My Cousin Vinny.” That movie makes me laugh no matter how many times I watch it.

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

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My dad used to take me to a place called Chick & Nello’s. It was an Italian place that did not have a menu. They came to your table and told you the two or three items they were making that day. The food was out of this world.

R&I: What is your favorite drink?

Iced tea. The non-alcoholic kind.

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

I can think of several places but for me it would be a tie between India and Italy. India just has such a different culture and way of life and Rome has breathtaking historical sites.

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

Well, one of the best thrill rides I’ve been on was Kingda Ka at Great Adventure. It feels risky but probably isn’t all that risky. I flew in a prop plane with my brother-in-law one time … that felt kind of risky. I have also parasailed, does that count? I think it definitely has to be driving on the N.J. Turnpike day in and day out.

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

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What about the Fukushima 50? I don’t think I could have done what they did.

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

I love it when the risk management organization is able to contribute in a way that makes a real impact to the corporation’s overall objectives. On several occasions we have been able to make real contributions to the bottom line.

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

I don’t think they really know. My children see me as dad; others just see me as an executive with Verizon.




Katie Siegel is a staff writer at Risk & Insurance®. She can be reached at [email protected]