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Critical Infrastructure: the value of long-term thinking

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AUG SEPT 2011 624Friday 21 March 2014 – Well-built infrastructure underpins resilient economies, but the quality of construction practices vary across the globe. As an increasing number of emerging markets embark on ambitious infrastructure plans, insurers have a key role to play in safeguarding standards. (source: Lloyd’s of London)

Infrastructure is one of the key facilitators of economic growth, with billions of dollars being invested globally in transport links, power stations and other facilities needed to sustain rapid economic and demographic expansion.
But poorly built infrastructure can be a threat to both human life and the resilience of the economies it was designed to support. Whether it is a collapsed bridge or a malfunctioning power plant, if key infrastructure fails it can have far-reaching economic costs, from property damage to public liability and business interruption.

Meanwhile, inadequate defences against natural catastrophes can leave cities vulnerable to devastating damage and cripplingly expensive rebuilding. Japan, for example, was not adequately prepared for the tsunami that hit the Tohoku region in 2011 causing an estimated $170bn in damage, and is now embarking on a state-of-the-art rebuild.

Emerging markets

“Quality infrastructure plays a vital role in the development of emerging economies. Whether it is sanitation systems, roads or flood defences, if they are not built to the proper standard they will soon fail and this has a knock on effect on everything else in the economy” says Colin Rose, Head of Construction and Engineering at Lloyd’s Construction Consortium syndicate Beazley.

“If you lose a key piece of infrastructure, you face not only the cost of replacing it but also potentially loss of business that cannot be conducted because the infrastructure is missing, which in some situations could run into millions of dollars per day, ” adds Steve Cross, Senior Construction and Engineering Underwriter at fellow consortium member Hardy.

According to Richard Abadie, Global Capital Projects and Infrastructure Leader at PricewaterhouseCoopers, developing markets with poor transparency, corruption and limited resources may adopt a shorter-term mentality when it comes to building infrastructure; as a consequence corners are cut and assets are more likely to fail.
“Construction practices in some low income countries can be very poor – not only because of a lack of risk oversight but a lack of codified construction practices and supervision, ” he says.

Government decision-makers in particular, he says, may be under pressure to make decisions based solely on cost, and may opt to build with cheap contractors and materials rather than investing in a more expensive asset that would require less on-going maintenance. They also often opt to self-insure from their state balance sheet, he adds.
However, Abadie, Cross and Rose all agree that global standards are gradually rising, particularly due to the increase in public-private partnerships and the exacting standards imposed by multilateral agencies like the World Trade Organisation, which provide essential financing for many developing world projects.
Abadie adds that developed world governments have been particularly astute at “learning from the practices of the private sector when it comes to risk identification, mitigation, management and insurance”.

Information exchange

Insurers are key private sector stakeholders in many of the world’s largest infrastructure projects, providing vital insurance coverage. But they also play an important proactive role by working with developers and contractors to ensure better risk management and construction standards are in place, which can help reduce the risk of future failures.

“We [insurers] are a database of losses, ” says Cross. “We are here to pay claims. But we also learn from them. By sharing our experiences with developers we can reduce the risk of things going wrong.”
According to Rose, insurers usually employ independent engineering experts to consult on loss control and risk management, conduct audits, assess quality assurance documentation and advise on contingency planning to mitigate future losses. “If the client identifies a risk that could lead to business interruption we can advise them on how to limit business downtime, ” he says.

However, the contractor must prove that their construction and risk management procedures are up to acceptable standards or the insurer will not want to take on their risk. The insurer will also want to know about the contractor’s loss history, and if they have learned from bad experiences they may have had in the past.

“When we meet a contractor for first time we look at their management systems, quality assurance procedures, their attitude to risk and how they manage it, ” Cross explains. “One of the worst things a risk manager can say is that insurance is their risk management – insurance should be the very last part of the risk management process.”
Cross adds that face-to-face contact with contractors is vital in establishing their attitude to risk and the quality of their work. “If we are not being actively welcomed by the insured to come and kick the tyres and run our fingers through the dirt then that is a warning sign, ” he says.

But for those contactors willing to make the investment of time and resources into serious risk management practices and building standards, they will find in the insurance market a valuable ally.

 

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