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Global Infrastructure Practice
INFRASTRUCTURE RISK SURVEY
FROM THE MARSH & McLENNAN COMPANIES 2012 NORTH AMERICAN INFRASTRUCTURE RISK CONFERENCE
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Marsh & McLennan Companies recently held its 2012 North American Infrastructure Risk Conference: “Balancing Public Interest and Private Investment Risk.” This event brought together 20 thought leaders in the infrastructure sector, who joined Marsh & McLennan Companies CEO Brian Duperreault and US Representative John Mica in addressing over 100 senior industry practitioners, representing private investors, lenders, concessionaires, operators, legal firms, and the public sector.
The conference focused on interactively exploring the complex risk dynamics inherent in infrastructure issues for public and private investors in today’s economic climate. One feature of the conference was live polling of attendees during the day’s five panels, which shaped each panel’s discussion around a particular facet of infrastructure risk. Herein we present highlights of the survey, which provide a snapshot of current industry perspectives on the nature and breadth of infrastructure project risks, from public policy and financing to revenue generation and sustainability.
POLITICAL AND PUBLIC POLICY RISK More than half of survey participants see political risk as impacting infrastructure investment decisions in North America. To win private capital, participants overwhelmingly agree the public sector must deliver projects that can withstand rigorous due diligence (creditable and creditworthy).
Most also believe that the returns required to attract private investment in public infrastructure can be supported politically. The one caveat is that investment may need to be “home-grown,” as more than 80 percent see some bias against foreign-owned firms investing in or operating North American infrastructure.
BANKABILITY RISK While three-quarters of participants agree that good projects are becoming increasingly difficult to finance and that non-traditional capital providers (e.g., pension funds, public/private trusts) will be needed to fill the financing gap for infrastructure, the same number see little or no agreement between the public and private sectors on what a “good, financeable” project actually looks like.
Overwhelmingly, however, those polled agree that public/private risk sharing must evolve. The question is whether project stakeholders currently have the right tools to identify, quantify, and mitigate perceived project risks – 85 percent do not appear convinced that this is true in all cases.
Q. From a global investor’s point of view, is political risk in North America a significant issue in making infrastructure investment decisions?
Q. Must risk sharing between the public and private sectors evolve to enable projects to proceed?
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REVENUE AND OPERATING COST RISK Nearly all of those polled believe revenue risk has become much more important since the economic downturn, while 70 percent see revenue risk mitigation as essential to the creation of a bankable project. Ninety percent say that operating cost structure is also an increasing source of risk.
Where respondents split is on the question of where revenue risk allocation must shift in the future to ensure projects are funded and implemented. Almost half believe project sponsors will have to take on greater responsibility for project risk, while a third think it is likely that the burden of mitigation will fall to investors.
REFINANCING RISK Nearly two-thirds of participants don’t see regulatory requirements like Basel III and Dodd-Frank de-risking the credit environment. And 60 percent believe that “bad deals” will still be able to get over the refinancing wall.
Nevertheless, as is the case with revenue risk, refinancing risk sharing must evolve – nearly two-thirds of respondents believe more of this risk will be allocated to public sponsors in the future.
As noted, the demand for new players/new capacity to finance future projects will increase. Yet participants are split on whether one potentially major source of funding – US pension funds – is likely to take the lead on investing in future projects.
SUSTAINABILITY RISK A majority of respondents appear to be excited about the business opportunities that a greater focus on sustainability and enhanced resource productivity could provide. But more than three-quarters do not believe they truly have a good understanding of sustainability, nor do they have the tools and skills in place to determine the financial implications of sustainability goals for infrastructure projects.
About 60 percent of respondents believe there is sufficient cash to invest into sustainable infrastructure. What appears to be a more critical issue is a lack of good, transparent models to guide sustainable infrastructure financing and development.
Q. Do project stakeholders have the right tools for identifying, quantifying, and mitigating project risks?
Q. In the future, the allocation of revenue risk will shift toward:
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Q. Will US pension funds ever be leading direct investors in infrastructure?
Q. Do you see sustainability as a risk or an opportunity for your business?
Q. Is there a shortage of cash to invest into sustainable infrastructure (e.g., renewable energy) or a shortage of good, transparent models?
ABOUT THE GLOBAL INFRASTRUCTURE PRACTICE Marsh & McLennan Companies’ Global Infrastructure Practice offers an experienced team that is dedicated to advising the infrastructure community throughout the life-cycle of a project or asset. We have advised governments at all levels and the private sector, including infrastructure funds, private equity investors, commercial and investment banks and design, engineering and construction-related clients. Our expertise includes identifying opportunities and associated risks, mitigating risks, facilitating project completion, managing through the operational phase and exit strategies.
The Practice works globally across all sectors of infrastructure development, operation and maintenance in leveraged infrastructure acquisitions, PPP/PFI competitive bids and non-PPP project-financed developments, advising clients on the complex risk issues associated with the financing, development and operation of greenfield projects, brownfield improvements, acquisition, leasing and operation of secondary assets and privatization of essential public services.
The information contained herein is based on sources we believe reliable and should be understood to be general risk management and insurance information only. The information is not intended to be taken as advice with respect to any individual situation and cannot be relied upon as such.
Copyright © 2012 Marsh & McLennan Companies. All rights reserved.
RISk ADvISORY AND INSURANCE TRANSACTIONAL SERvICES
EDWIN CHARNAUDManaging Director, Marsh+44 20 7357 3157 [email protected]
GEOFFREY CLARkManaging Director, Marsh+1 213 346 5025 [email protected]
MARTIN BENNETTSenior vice President, Marsh+44 20 7357 [email protected]
COMMERCIAL/MARkET, OPERATIONS, CAPITAL PLANNING ORGANIzATION AND STRATEGIC RISk MANAGEMENT
ALLAN kAULBACHPartner, Oliver Wyman+1 617 424 [email protected]
MANNY HONTORIAPartner, Oliver Wyman+1 617 501 8719 [email protected]
BORIS GALONSkEPartner, Oliver Wyman+41 44 553 [email protected]
DR. kRISTINA GERTEISER Associate Partner, Oliver Wyman +49 89 939 49 432 [email protected]
ECONOMICS AND REGULATION
GRAHAM SHUTTLEWORTHDirector, NERA Economic Consulting +44 20 7659 [email protected]
HUMAN CAPITAL INvESTMENTS
BOB BRADDICkSenior Partner, Mercer+1 212 345 [email protected]
GILES ARCHIBALDSenior Partner, Mercer+44 20 7178 [email protected]
MARk HOBLEPartner, Mercer+44 20 7178 5725 [email protected]
INvESTMENT ADvISORY SERvICES
kAREN CHESTERPartner, Mercer+612 8864 [email protected]
FINANCIAL MODEL AUDIT
SHIkHA BAJPAIPrincipal, Mercer+1 212 345 [email protected]
CONTACTS
Note: Numbers in pie charts may not add due to rounding