20
infrastructure
investor
may
2014
When it comes to investment, there
is no such thing as a ‘good’ or ‘bad’
country, just a good or bad risk. Inves-
tors have significant influence over the
risk profile of their investment and the
development and implementation of an
effective risk management strategy will
raise the potential for success.
The particular challenge in devising
a risk management strategy for infra-
structure projects arises from the long
tenors and multi-billion-dollar invest-
ment in high-value fixed assets. Such
projects are highly visible and generally
not extractable from a territory, there-
fore leaving them exposed to numerous
political cycles and the uncertainties
that these bring.
Managed effectively, infrastructure
investments promote productivity and
efficiency in both the public and private
sectors and are an essential catalyst for
economic growth. The economic life of
much of this infrastructure is in the order
of several decades and, for the investor,
has the potential to generate a fairly
stable, often inflation-linked, return.
RISK MANAGEMENT STRATEGY
Identification
Risk analysis must be about identifying
challenges and understanding how risk
may be anticipated and managed effec-
tively to preserve the opportunity and
returns offered by investment in an
infrastructure project. The long-term
nature of infrastructure investments
requires a risk management strategy
that reflects the uncertainty and range
of risks that impact these projects over
their life cycles. This strategy must
incorporate the often competing inter-
ests of different stakeholders entering
the project at different stages in the life
cycle with different roles, responsibili-
ties, risk-management capabilities and
risk-bearing capacities.
Infrastructure projects change the
environment in which they are situated
and risk management strategies must
evolve over time to accommodate the
changing characteristics of the invest-
ment landscape they have created. Risks
that manifest themselves in the latter
stages of a project’s lifecycle are often
caused in earlier stages and require a
holistic approach to risk management
that continuously evolves throughout
the life of the project.
Plan
No amount of political risk insurance
can ‘fix’ a bad contract, so the risk man-
agement process to mitigate political
and payment risk begins early – at the
structuring of contracts. It is imperative
to identify key stakeholders and their
respective interests. This does not just
include financiers, but also the host gov-
ernment, sub-sovereign entities, local
tribes or communities, project sponsors
and NGOs. Active engagement will help
establish a stable operating environ-
ment. Ensuring equitable reward shar-
ing between the participants is essen-
tial as a major risk factor arises when
participants perceive inequitable terms.
Elizabeth Stephens
of JLT Specialty explains how varying strategic approaches to
risk are required at different stages of a project’s life cycle
Planning for the long term
s t r a t e g y
Cochabamba Water War
: victory for protestors
RISK
