Differentiation of political and regulatory risks is a prerequisite for risk mitigation. Complex infrastructure projects require continuous monitoring of project risks, reporting and evaluation of the project progress, and the service cost assessment as part of management duties. Techniques to mitigate risk are largely dependent on the type of risk that you want to reduce. Assessment Mitigation in Infrastructure Projects By Marielle Rowan, Principal Social Scientist, Social Sustainability Team, Mott MacDonald marielle.rowan@mottmac.com for IAIA 2013 Conference, May 2013. In case of default, the lender may not seize any assets of the borrower beyond the collateral. One possibility is to enable insurance to become a large-scale asset class by creating a system-wide risk insurance platform. Multilateral Development Banks’ Risk Mitigation Instruments for Infrastructure Investment Pablo Pereira dos Santos Matthew Kearney February, 2018. The key is to know what risks are inherent to a project and what degree of freedom you have to shape the risk profile before you commit the bulk of your funds; you must also have skills in place to prevent the remaining risks … Resilience is about managing existing and future risks—preparing for the risks and consequences, understanding where the risks lay, identifying critical and vulnerable points, and taking the steps to integrate resiliency into the planning process. As noted, for the government or corporate sponsor involved, the main objective is to move a project’s construction, operating, and financial risks off the balance sheet whilst maintaining control and capturing the economic upside — financial and, in the case of government, economic and social. Infrastructure Projects. Start adding content to your list by clicking on the star icon included in each card. Organisations can take the following five actions to mitigate negative results: Our experience helping companies, governments, regulators, NGOs and international organisations around the world respond to high-profile health crises has made it clear that the response window for a crisis such as COVID-19 is measured in months, while recovery is measured in years. Public sector entities may also use project finance to keep project debt and liabilities off-balance-sheet, using lower levels of fiscal space.[6]. Political and regulatory risk is one of the major constraints on infrastructure investment decisions. The demand for infrastructure will not let up; the Asian Development Bank estimates that Asia requires an investment of US$1.7 trillion every year until 2030. Each risk category was given a code, consequently, risk factors were coded based on these categories. Project finance is a form of secured lending, and typically has carefully considered risk allocation arrangements. Costing project risks doesn’t have to be complicated, … You will not receive KPMG subscription messages until you agree to the new policy. Main commercial risks in Southeast Asia. However, adequate capital can be sourced: investors prove exceedingly keen to finance the rare infrastructure deals that they consider “bankable”, and that have optimum risk-return profiles. [5], A debtor with a non-recourse loan cannot be imposed upon for additional payment beyond the seizure of the asset. Risk identification, calibration, and mitigation are central to project and infrastructure finance. General Project Finance Risks Risks that can be assessed and mitigated using the Financial Model Risks that can (but do not have to be) hedged in order to mitigate them Inputs are sourced and processed, and the outputs are products that are sold and off-taken. Non-recourse debt often has high capital expenditures, long loan periods and uncertain revenue streams. General risks for all projects 15 4. Usually debt finance makes up the majority share of investment needs in projects, and can include commercial loans, bridge finance, bonds and other debt instruments (for borrowing from the capital market), and subordinate loans. Cost-push inflation occurs when supply costs rise or supply levels decrease, driving up prices if demand is a constant. In conclusion, focusing on the above three parameters is critical for successfully attracting private capital. It is usually secured by collateral. [5] https://www.investopedia.com/terms/n/non-recoursefinance.asp#:~:text=Non%2Drecourse%20finance%20is%20a,are%20generally%20secured%20by%20collateral. The Fundamentals. It’s important to have visibility over the project’s third-party supply chain … on infrastructure projects in China. https://www.investopedia.com/terms/n/non-recoursefinance.asp#:~:text=Non%2Drecourse%20finance%20is%20a,are%20generally%20secured%20by%20collateral. Regulation may take one of two forms: US cost-push inflation, and price-cap regulation. related risks, adaptation and mitigation considerations, and disaster resilience have been taken into account; and what measures have been adopted to ensure resilience to current climate variability and future climate change within the project. Political and regulatory risk is one of the major constraints on infrastructure investment decisions. For instance, the power sector can broadly be split into generation, transmission and distribution. DECISIONS … … Please note that your account has not been verified - unverified account will be deleted 48 hours after initial registration. A data breach is just one example of a risk event, since it compromises your network’s data and prevents your IT infrastructure from keeping your end users safe, which could be one of your project’s goals. Typical Risk in Infrastructure Projects Economic Risks: Inflation, Economic Policy stability Soc.-political risks: Social stability, regional stability, corruption, social non-acceptance Regulatory & Legal Risks: Stability of regulatory framework, enforceability of contracts, independent regulations Market Risks: Tariffs, demand, competition. Project design and deliverable definition is incomplete. four main tiers: correct unbundling of infrastructure consideration of regulations and public policy appropriate financing at On a global scale, it appears that the main issue is not that there is not sufficient capital available for infrastructure. Figure 1. You will not continue to receive KPMG subscriptions until you accept the changes. Conclusion 37 dentons.com 3. Identify critical suppliers. The only type of breach of covenant which would lead to lenders indeed having recourse to at least part of the shareholders’ assets, would have to be a deliberate breach on the part of the shareholders. The SPV has no other purpose but to own and borrow the funds to construct the project and has no pre-existing business record. Studies have shown that the world needs to invest an average of USD 3.7 trillion annually through 2035 (USD 69.4 trillion from 2016 to 2035) in infrastructure finance to support currently expected rates of growth. Risk response preference has been investigated how to assess the risk of PPP airport infrastructures development project in Indonesia. Printed in the United Arab Emirates. Equity is provided by project sponsors, governments, third-party private investors, and internally generated cash. It is said that 16.6% of projects always face cost overrun, 37% often suffer from cost increase, and 98% of … It explains the various types of agreements which are commonly used in order to reduce the inherent riskiness and stabilize project … This report is a first-time overarching assessment of availability and suitability of IFI Risk Mitigation instruments and has … Regulators can remain locked in a continuous battle, trying to reduce the estimated cost of capital, while the accuracy of the calculated return may be hotly debated by the operators’ lawyers and accountants. Background 5 2. Ravi Suri, KPMG Global Head of Infrastructure Finance and Regional Head of Infrastructure Advisory. The … An example of successful mitigation of foreign exchange risk is the Nam Theun 2 hydropower project in Laos [2]. (identification, assessment, allocation, mitigation of risks) is needed for only those events that negatively affect the PPP project (for example, those that can lead to financial losses and additional costs for participants of the PPP project, lost revenue, as well as delays in the PPP project) which impede the achievement of the desired general results. The horizontal method is a topographical separation: all functions within a particular area are controlled by a single entity, with another entity controlling all functions in a different geographical location. 10 PPP in Taiwan – Application Government-Planned Projects. There are two main methods: vertical and horizontal. Risk Matrix 35 5. It is safer for the power sector, especially for the generation component. Infrastructure Project Risk Management & Mitigation: role of the ground engineering professional Asim Gaba Director, Arup Doha, 04 December 2013 . Japan and Argentina opted for this when they overhauled their railway systems with structural reforms. Successful risk mitigation is what enables us to finance long term debt in infrastructure projects. Project risk: Project risk combines all potential risk events with the inherent risks in your project’s structure, scope, and design. Investment in water and waste water infrastructure is also required to further improve the resiliency of key infrastructure. Any slowdown across infrastructure investments due to, for example, uncertainty of demand or access to financing could have an impact on project start dates or stall construction progress, with potential longer-term economic repercussions for host countries. It is important for businesses to ensure a comprehensive risk assessment is undertaken which then informs a risk-based mitigation action plan. In this example, the transmission sector necessitates the most regulation as it is monopolistic in nature and capital intensive. All rights reserved. With a project cost of USD 1.58 billion, it is the largest ever privately financed hydropower scheme, and involved the sale of 995MW of generating capacity and electrical energy to the Electricity Generating Authority of Thailand (EGAT). Transmission, however, can be vertical, as power lines run continuously across large swathes of land and an excess of interface transfer costs could cause administrative complications. The nature of each component must subsequently be analyzed to determine the extent of regulation it requires. For instance, research by Tummala and Burchett (1999) proposed the use of a risk management process (RMP), structured in a similar fashion … formal Risk Mitigation instruments, finally allowing available capital to flow towards deserving infrastructure projects in emerging markets. From the survey, the following critical risks, in descending order of criticality, have been identified: Chinese Parties’ reliability and creditworthiness, change in law, force majeure, and delay in approval, expropriation, and corruption. [2]  Research shows that by scaling up best practice in selecting and delivering new infrastructure projects, and getting more use out of existing infrastructure, governments could obtain the same amount of infrastructure for 40% less. This will give the description to the Government of Indonesia that risk mitigation is significant issue for developing the airport infrastructures in Indonesia. As the CPI takes into consideration a wide range of organizations within the economy, it is a valid comparative measure, and the preferred method of regulation in most jurisdictions. Whilst project finance loans from banks will continue to play an important part, liquidity will be available from infrastructure funds, export credit agencies and project boards. Project 85: Strengthening Laboratory Capacities in Africa against CoVID-19 and other epidemics: from set up in Senegal to scale up in Africa (LABPLUS AFRICA) Project 82: Capacity Building for Medical Preparedness and Response to CBRN Incidents in the GCC. Refer to Pellegrino et al. Emerging economies need investment to meet infrastructure requirements, whether because of sub-optimal use of existing facilities or difficulty in meeting current and future demand. Risk mitigation is the practice of reducing identified risks. Risk Mitigation Instruments.Risk Mitigation Instruments. We want to ensure that you are kept up to date with any changes and as such would ask that you take a moment to review the changes. They typically carry higher interest rates than recourse loans. Instruments that provide political risk cover from institutions like MIGA and EIB can be used to elongate tenor of project finance loans/bonds. Our privacy policy has been updated since the last time you logged in. [6] https://ppp.worldbank.org/public-private-partnership/financing/project-finance-concepts, [7] https://www.investopedia.com/terms/p/projectfinance.asp. Contents 1. The demand is amplified by strong economic growth, a growing population and rapid urbanisation. KPMG Global defines it as “a tool to understand how the value a business creates and reduces for society is likely to affect the value it creates for shareholders.”[4]. Risk management in these projects is especially demanding, so it is important which risk management techniques are employed. A data breach is just one example of a risk event, since it compromises your network’s data and prevents your IT infrastructure from keeping your end users safe, which could be one of your project’s goals. On Risk Mitigation, the infrastructue experts agreed that the support given to Project Owners at the early stage of project preparation will aid greatly in making the projects “appealing” to potential investors. Governments must perform value-for-money calculations to assess whether privatization would be financially viable and advantageous, and analyze efficiencies, including the cost of capital, to determine whether monetary value is created for the government. In this the criticality of the political and force majeure risks has been discussed. 9 PPP in Taiwan – PPIP Law Underlying principles General Application Maximization of private participation Maximum government prudence Models of Private Participation BOT, BTO, BOO, ROT, OT Procedures of Application Government planned projects Unsolicited Proposal. spending on infrastructure. All rights reserved. We want to make sure you're kept up to date. Risk mitigation addresses investors’ concerns over potential losses that are often significant in infrastructure projects. Mitigation: To prevent this risk factor, a project manager must take the initiative to brief out the importance of the project to the other managers. 9 PPP in Taiwan – PPIP Law Underlying principles General Application Maximization of private participation Maximum government prudence Models of Private Participation BOT, BTO, BOO, ROT, OT Procedures of Application Government planned projects Unsolicited Proposal. While the current situation is evolving, organisations should put processes in place in the first instance and then look to monitor and adjust on a regular basis into the future. The United Kingdom, for example, implemented vertical unbundling when it privatized its rail sector, allocating train tracks across the entire network to one operator, signaling to another, and rolling stock to yet another (or multiple along geographical lines). https://www.investopedia.com/terms/p/projectfinance.asp, consideration of regulations and public policy, mitigating technology risk (this will be discussed in our next insight). For example, the high visibility of large projects means they have important political implications. Strategic Infrastructure: Mitigation of Political & Regulatory Risk in Infrastructure Projects, a new World Economic Forum report developed in collaboration with The Boston Consulting Group, is part of the Strategic Infrastructure Knowledge Series, which addresses key challenges to bridging the global infrastructure gap. This is a healthy transition as it is likely to better serve the world's infrastructure needs. 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