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.

More from Risk & Insurance

More from Risk & Insurance

4 Companies That Rocked It by Treating Injured Workers as Equals; Not Adversaries

The 2018 Teddy Award winners built their programs around people, not claims, and offer proof that a worker-centric approach is a smarter way to operate.
By: | October 30, 2018 • 3 min read

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.

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That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.

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Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

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