Public, private sectors partner on riskPosted On: Jun. 4, 2018 12:00 AM CST
The most important word in “publicprivate partnership” is “partnership.” But risk management is a core part of the equation even if insurance solutions for projects undertaken via these partnerships are limited, experts say.
While noting that a single definition of a P3 is difficult, “key characteristics of P3s, delineating them from typical arrangements between the public and private sectors, include the transfer of risk from the public sector to the private sector, the marrying of multiple steps of the procurement life cycle and the shifting of some public sector responsibilities to the private sector,” according to the National Conference of State Legislatures 2017 report P3 Infrastructure Delivery: Principles for State Legislatures.
“Successful P3 projects rely on the proper alignment of the public sector’s and private sector’s interests,” the report said.
“Creating incentives to allow the private sector to pursue profits while also enhancing the public interest is paramount.” Risk management is key to the success of P3s, said Marilyn Rivers, director of risk and safety for the City of Saratoga Springs, New York. The municipality has entered into three P3 arrangements — two for parking garages and one for a visitor center. Among other things, Ms. Rivers said, risk management helps the partners understand the allocation of risk according to each partner’s tolerance of risk; outlines how the P3 will be managed; helps establish clear incentives, contingencies, performance requirements and milestones for each partner in the P3; and measures the potential community and political pressures that may occur.
And making sure the government entity has the right partners is key, said Ms. Rivers.
“I think people underestimate a P3,” said Ms. Rivers. “You really have to know what you’re doing, you need to know who you’re contracting with. You have to make sure that they are who they are — not like ‘The Music Man,’” referring to the con man in the long-running musical of the same name.
“We see a lot of partnerships taking place,” said Jim Smith, president of the Park Ridge, Illinois-based American Society of Safety Professionals, formerly known as the American Society of Safety Engineers, and regional leader for the national risk control group of Arthur J. Gallagher & Co. in West Palm Beach, Florida.
The synergy between the parties is getting better and better, he said. “We’re all on the safety page; nobody wants anybody to get hurt on the job,” Mr. Smith said.
The P3 approach has been touted as a means to encourage resilient building in the aftermath of natural catastrophes. Yet federal requirements may slow resilient building (see related story). And although public-private partnerships for infrastructure improvements have been frequently employed in Canada and elsewhere, the approach isn’t as widespread in the United States as some insurers had hoped.
“It’s starting to get more traction, but it’s an incredibly slow process,” said Gary Kaplan, Chicago-based president of North America construction for XL Group Ltd., which does business as XL Catlin. “It’s not as big a part of my business as I thought it would be. We had higher expectations that it would be a bigger deal in the U.S.”
“There are so many obstacles and hurdles,” he said. “The most disappointing thing for the insurance companies is it’s such a long-drawn-out and expensive process.”
Large infrastructure projects take years to complete, said Mr. Kaplan.
“Most of what we do in insurance is annual,” he said. “It’s unusual for underwriters to be betting that far in the future.”
One reason for such uncertainty is that the public-private partnership approach is inherently political.
“Whenever you have an election year, our experience is it gets worse,” said Tariq Taherbhai, chief operating officer of Aon P.L.C.’s infrastructure solutions unit in Chicago. “If you look at some recent high-profile projects that have been delayed or canceled, it’s around the politics of the project.”
And unlike infrastructure projects undertaken by U.S. firms in some emerging markets, political risk insurance isn’t an option, he said: “There isn’t really a domestic political risk product. Here, a lot of the risk is in the process before the project begins.”
“One of the unique insurance issues in P3s is the issue of having to place insurance on an asset after the construction phase that’s being used for a public purpose but not having the public owners being the operator,” said Mr. Taherbhai.
Sovereign entities may benefit from certain caps on legal liability that private entities do not, he added.
“The role of insurance can be to help de-risk some aspects of the problems,” said Samantha Medlock, Willis Towers Watson P.L.C.’s head of North America capital, science and policy in Washington.
Insurance can respond to unforeseen disruptions to the time line or to the supply chain, she said. Insurance comes into play if hazardous substances are uncovered during construction, and parametric insurance can speed payout if unforeseen weather hits a project.
But “the insurance piece is a small part of the risk equation,” said Saratoga Springs’ Ms. Rivers. “It’s really measuring out the risk tolerance that each of the partners is willing to absorb.”