Difficult economic environment requires good project risk management

Author: Sabrina Baker-Boshuizen, Marsh Public Sector Europe
Source: RISK Management & Governance, Edition 6, Summer 2010

The financial and European Sovereign debt crises have had a huge impact on infrastructure investments. Infrastructure projects require extensive capital investment and downgrades of government debt have made funding of infrastructure projects more expensive. Whereas at the beginning of the financial crisis, countries and local authorities were pushing investments in infrastructure to stimulate the economy. They are now forced to cut their spending.

Private Investment through the PPP (Public-Private-Partnership) model seems like a good solution; however the private sector has their own liquidity problems and is struggling to raise funds. This doesn’t mean though that the PPP market has completely collapsed. Banks have become more selective when it comes to investing in infrastructure projects and it may take longer for a project to get to financial close but projects are still being closed.

In order to attract lenders and investors, an infrastructure project needs to be bankable. The local authority needs to be able to show that it has reduced the volatility and uncertainty in the project to an acceptable and financeable level. Until the public entity is able to gain comfort that all risks have been identified and evaluated across the different phases of a project and that a structure is put in place to effectively manage each risk’s potential impact to delivery of the project, they will be unable to dispense their fiduciary duties.

Understanding risks specific to a project and options to achieve their successful mitigation is a key requirement to successful project management. In the most ideal situation each risk should be allocated to the party who is best able to manage the risk. the different stakeholders in an infrastructure project all share the same goal; delivery of the project on time and within specification. However tolerance, appetite and perception of risks vary between the different stakeholders. In order to successfully manage the risks in a project this should all be taken into account. For a local authority, providing clear economic justification and an investment rationale for a project, while demonstrating public responsibility and accountability to protect both the short term and the long term interests of tax payers and voters remains the main focus. However, the notion of value at risk, next to the value for money, seems more and more accurate as public entities are increasingly pressured to avoid cost and delay overrun.

Quantifying project risks, measuring their impact and value of mitigation strategies will help the public sector in: providing an arbitrage on the total cost of risks, enable risk transfer to be optimized through understanding what insurances a contractor / operator should be required to effect and maintain for the project, how the public entity’s financial interests should be protected within the contractor / operator’s insurance including availability of controls over litigation arising from the project – to avoid potentially adverse publicity to the public entity in event of a contentious claim. Public sector in the past has too often overpaid risk cost by transferring all major risks to the private sector whereas some of these risks were not controlled by the infrastructure private operators.

Marsh Infrastructure’s global team of over 600 professionals has over 25 years experience providing world class risk advisory and transactional insurance services to the entire infrastructure sector. Our team understands the divergent risk tolerance of the public sector, equity investors, lenders and the construction sector, assisting clients to manage, reduce and mitigate risk in their projects and investments through preservation of asset value, reduced volatility of revenue streams, redeployment of capital and confidence to achieve desired outcomes.