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By Roger Boothe, Director, Infrastructure Advisory | June 10, 2020

​Infrastructure projects are akin to icebergs – in that there is typically a lot more going on beneath the surface, which you don’t see.  Recent world events have created a new environment in which project and commercial risk must be newly understood, priced, and allocated through proper management and contracts.

The new environment – what we don’t know

With infrastructure projects, there are always a multitude of unknown risks and activities that occur during the conceptual development of the project and surround the project feasibility/planning and procurement phases.  The new reality presents a challenge to the way we manage risk, and the ways we think and deal with risk, under our framework of tried and tested principles of risk management.

Insurance and project security packages – In most cases project proponents are realizing their insurance coverage specifically exempts or does not address pandemics.   For projects in procurement, owners may look to require such coverage, but the question remains can insurance products be found, and at what cost?  With respect to contractual and project security such as bonding, limits of liability, PCG’sletters of credit and any funded reserves, it is conceivable that there will be pressure to increase these to achieve any required or targeted financial ratings.

Contractual  and risk pricing – In the U.S.  several major projects such as the Purple Line transit project in Maryland have applied for Force Majeure relief related to COVID-19, but it will likely be months before legal wrangling renders an outcome.   Meanwhile, project proponents and owners with projects in procurement are including more specific language regarding pandemics in their contracts, and those with projects that have already reached financial close are typically lamenting the lack of specificity in their contract language.  Clear risk allocation and responsibility is a necessity for obtaining fixed pricing and being able to manage projects going forward.

Duration of impact – We don’t know when this pandemic will dissipate, and if it will be a regular occurrence going forward.    Related to this,  we don’t know if and when global economies will recover, to what extent governments will utilize infrastructure spending as a stimulant, and what this means for private investment.   Other potential impacts including the growing international tensions, and growing civil unrest within the United States, add additional layers of uncertainty around project planning and procurement.

Commercial models in procurement (Revenue and Availability models) – With respect to transportation, the key unknown is how quickly demand will rebound across modes, and to what level it will rebound.   It is conceivable that long-term structural changes to work, commuting patterns and travel may result and impact revenue streams.

The business environment – What is probable?

Project planning timelines – The feasibility, planning and permitting phase for infrastructure projects can take many years and is often longer than the project delivery phase itself.   Upon completion of feasibility/planning,  the procurement phase can move as quickly as 12 months (more or less) depending upon the form of procurement.  We have no reason to expect this will change.  Owners may seek to accelerate the planning process and various approvals to get projects moving sooner.  Likewise, in the U.S. there is a push to urge the Federal and state governments to streamline the onerous approval process, particularly with respect to environmental approvals.

Contract clarity and flexibility in delivery – It is certain that project planning and feasibility will now include a detailed appreciation of the risks related to the business environment issues noted above. The impact of the added measures required at site and the inefficiency this causes, the extent of which will depend upon the asset type (i.e. vertical buildings, highways or transit), will undoubtedly lead to increased costs and extended delivery schedules. Because of the unknown future impacts, there needs to be flexibility in the contract in addressing these matters, but also clarity on responsibility for time and dollar impacts.

Changes in project priorities for infrastructure is still important.  Most economists expect a recovery beginning in the fourth quarter of 2020, which will gain steam with broad and robust growth in 2021.     However, Canadian and U.S. governments are already talking about using infrastructure investment as a tool to support and re-stimulate a softer economic environment.  The public/private mix of that investment comes into question, and we expect the majority of projects that have been delayed by current events to move forward, with particular emphasis on healthcare, broadband and public works.

Summary of the key project risks for rethinking

Diagram showing key risks for projects during the feasibility stage

Several areas of risk allocation must be considered as we plan and procure infrastructure projects in the new environment, including:

Demand and user risk – What are the economics of particular asset types on user pay/revenue models and what are the new pricing and lender demands in terms of additional security, or the commercial terms? This may encourage greater use of availability based models.

Design and technical – A number of questions come to mind:

    • Will long-term changes to commuting patterns influence the Purpose and Need, project alignment, and typical section of a project?
    • To what extent will connected autonomous vehicles be accommodated?
    • Will emergency response requirements impact design? Example – For transit will there be a need for more space in underground stations, more vertical transportation, more air changes and longer platforms to facilitate social distancing?

Construction – In construction safety protocols, means and methods, inspection and reporting procedures, schedules and costs will all be impacted by the new environment  The question is for how long and will the new long-term requirements impact productivity? The obvious answer is yes depending upon the type of asset, i.e. a highway versus an enclosed vertical structure.

Operations & Maintenance (O&M) and lifecycle – Will changes in usage mean longer O&M standard intervals, and changes in maintenance practices, standards and materials? Will this impact cost concession lengths, payment mechanisms and performance requirements? The answer has to be potentially yes to all of these things.

Contracts and pricing – Pricing incorporates risk, and the unknowns of the new business environment means more risk to price. Project security packages without clear risk allocation in contracts and compensation regimes, make it difficult to see how contractors can currently commit to fixed-price, date-certain contracts on large infrastructure projects. These same challenges apply equally to the O&M piece.

Private financing – Will there still be the same appetite from lenders for the infrastructure space and if so, on what terms? It is conceivable that there will be a tightening of terms as lenders take a different look at the risk transfer.

Changing project needs and asset use – Looking at the recent cancellation of Halton courthouse by the Ministry of Attorney General; this project had run all the way to bid and developer selection before it was cancelled. The reason given was that the ministry wished to reallocate the funds from this project to invest in the use of virtual hearings, a situation informed by most recent events.

In future articles we will look at these and other risks impacting the remaining phases of the project life cycle.

In summary, there is always a temptation we feel to perhaps overestimate the impacts in the short term and though we feel it is inevitable that the pandemic will change design and behaviors we also feel that it is equally still likely that people will still see the benefits of city living, the efficiencies of office working and that public transit ridership will return.

 

For more information on infrastructure project risks – read Infrastructure projects:  Managing project delivery risk in the new environment

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