AsianInvesterAsianInvester
Advertisement

Infrastructure risks may be greater than realised

A survey of project risk in Australia finds infrastructure projects can end up costing more than investors expect.
Infrastructure risks may be greater than realised

As more Asia-based investors look to add or increase infrastructure exposure to their portfolios, their main concern about risk may be with regard to leverage and other financial aspects that got many infrastructure funds into trouble in 2008.

However, a report into one of the most sophisticated markets for infrastructure in the world – Australia – shows that risks throughout the project are often underestimated. This ultimately leads to delays that will affect returns on investment or the economics around how tariffs are set.

Blake Dawson, an Australian law firm, says the need for basic infrastructure – from developing the resources sector to rebuilding flood-devastated Queensland – are placing demands on public and private sources of funding. This is true in other countries as well.

The good news, at least in Australia, is that participants – corporations, construction and engineering firms, contractors and financiers – have a better sense of project risk, and improved processes to manage it.

The findings make a decent due-diligence list for anyone looking at a direct infrastructure investment.

One of the biggest potential problems comes when principals shift risk onto contractors. They think they are protecting themselves but, in many cases, contractors accept risks they cannot mitigate or manage in order to win business. Investors should look at whether contractors are being appropriately compensated and what pledges they have made.

Another area where projects experience problems is when the risk-management policies have all been spelled out – but not implemented. Such failures are often because policies aren’t backed up with adequate resources. This often leads to delayed completion of projects, cost overruns, reduced quality and disputes.

That said, risk-management policies are not a black box that need only be addressed when writing contracts. Each project needs a specific approach about how to identify what could go wrong and develop plans – and a budget – to head off problems.

Investors should make sure they have an understanding of infrastructure projects’ nuts and bolts – or at least make sure the principals they are backing are clued in.

For example, investors need to understand the sequencing and timing of work, ensure information is properly shared, ensure stakeholder agreements are sound, agree limits on the enforcement of obligations, provide for protection from liability, use mutually agreed key-performance indicators, and provide for a price adjustment should a particular risk occur.

¬ Haymarket Media Limited. All rights reserved.
Advertisement