Mitigating Employee Benefit Risks Through Contract Negotiations
Mitigating risks on infrastructure implementation in developing countries
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Transcript of Mitigating risks on infrastructure implementation in developing countries
Importance of infrastructures in development
Government all over the world need to grow their economies faster and Infrastructures are a key component to the development of a country.
Infrastructures:
Increase efficiencies
Help deliver primary services
Accelerate economic growth
Facilitate integration in the world economy
Help improve living standards
Etc.
The infrastructure paradox
There is an enormous demand in infrastructure investment yet not enough financing is
invested in infrastructure
The world could use an estimation of 6 trillion a year in infrastructure investment, yet
we only investing around 3 trillion a year in investment
On the 3 trillion, only 50 billion of capital market is invested in infrastructures
Main causes of risks in Infrastructures
investment
Unique operating environment and sectorial characteristics varying per infrastructures
Low governmental support
Little credit support
Lack of robust contract structure
Unreliable law enforcement procedures in developing countries
No exit strategy
Risk management
Definition:
Process of confronting risks, preparing for them and coping with their effects.
Risk management is increasingly a critical success factor for major infrastructure projects.
Objectives:
Produce resilience by mitigating losses and helping faster recovery
Achieve prosperity by improving benefits from pursuing opportunities
Steps to implementing risk management
strategies for infrastructure development
Risk management mainly consists of two components:
Preparation for the risk by creating platforms and control mechanisms that that will help understand the nature of the risk and implement safeguards to reduce the devastating effects of risks on infrastructures.
Effective preparation can broadly be subdivided into:
Acquiring knowledge
Obtaining protection and insurance
Coping after disaster has occurred. Despite a good preparation, the probability of a disaster occurring remains high. Developing strategies to cope after disaster has occurred is essential to build resilience and quick recovery
Knowledge/Information acquisition
Risk evaluation/ Identify where the risk lies
Acquisition of information, understanding of risk levels and risk mechanisms
Increased awareness to risk exposure
Follow trends and updates on the evolution of the situation, change of the status of the
environment
Acquisition of information about the local status and learning from successfully
implemented strategies, successful and unsuccessful experiences
Understanding the opportunity that lies behind the risk, evaluating the best course of
action
Protection
How can infrastructures be shielded the averse effects caused risks?
Protection measure? Which is the best option? Which option is available?
Insurance
Finding ways to acquire some sort of insurance to assist in recovery times
What is the best insurance to adopt based on the local environment and social
conditions?
Which type of insurance are available? Which is practically implementable?
Which insurance scheme best fit the risk and the environment?
Coping after disasters
Build capacity for resilience and quick response to disasters
Develop systems for recovery
Use of insurance
Gather information from the experience
Feedbacks from the experience to adjust future emergency measures
Strategies for preparing and coping with disaster
in an infrastructure development context Get the right information, updates and be constantly aware of the state of the
environment
Be realistic and adopt simplicity
Build foundation, without always trying to solve the problem at once
Evaluate behaviors that can increase the probability of risk
Educate every parties closely or remotely involved with the causes of the risk
Identify the right incentives to encourage parties to adopt the right attitude
Cost benefit analysis to quantitatively assess the financial aspect of risk management and foresee the future benefits
Optimal resources management in order to effectively take advantage of opportunities
Share the risk among different platform to be handled by the best parties capable of best handling the specific type of risk
Adopt coordination systems among different level of the system
Specific strategies that can be implemented
at each levels of the onion diagram
Onion diagram – World Development 2014 team
Households and communities
Community leaders should be more involved in planning of infrastructures projects. They better understand the community environment and based on their experience, can give valuable advices on how to proceed in order to avoid recurring risks
Inform he community about the opportunities that can lie in the infrastructure implementation in order to help them position themselves to benefit from those opportunities for opportunity or better understand the underlying risks and how they can affect them
Use of technology in the advantage of acquisition of information and collaboration
Build a strong social network in the community which can help increase awareness
Provide the right incentives for people to prepare for risk
Prepare for emergency plan that involve community leaders, community emergency actions; plan with the community beforehand
Develop insurance schemes that can support communities and encourage individuals to take advantage of opportunities that infrastructures development bring. Example: conditional cash transfer, provision of social insurance such as : unemployment insurance, injury insurance,
Private sector
Definition
Project finance consists of raising money in a special purpose vehicle (SPV) that has no recourse, or very limited recourse to the original sponsor of the project.
Use of project finance
When infrastructure projects go wrong, this can impede the company’s ability to : pay shareholder, pay creditors, enter into new ventures.
When there are risk in the project that the company is unaccustomed to dealing with, managing of mitigating
Companies can then use project finance to avoid exposing their balance sheet to the risk and to ensure that it does not encumber the company’s capacity to do further work.
A benefit of project finance is that a lot of debts can be put into the project, which otherwise wouldn’t be put on your balance sheet.
Project Finance
Public private partnerships programs
The private sector has to step up and do its role, but more than that the public sector has to bear hug and embrace the private sector in a way that enables the private sector to achieve risk adjusted return and many of its objectives.
Government and regulators may put their own money into projects to lower tariffs or customers charges. This help de-risk the project by combining private and public money for infrastructure development.
Vehicles through which governments can support the private sector
Capital subsidies: Government construction subsidies to reduce the private sector component
and make project financially viable once construction is complete.
Operating subsidies: Government subsidies used for the operation of the project once
construction is over.
Government guarantees: Government agrees to guarantee some of the demand on the assets
to the levels that they feel confident will be deliverable.
Public sector (State and Government)
Implement a risk board that can better work on assessing risk and implementing risk
management strategies
Each project needs to be part of a wider framework/Plan
A government unit needs to be responsible for implementation, monitoring and accountability
Need of cross-party long term political support
Need for rule of law in place
Financial sector
Need for a regulatory framework that can better support infrastructure investment and
give access to finance for bankable projects
Turn to capital markets, pension funds, insurance communities for financing
Capital markets can further help in infrastructures through project bonds, in the
environmental space through green bonds, catastrophic bonds or through innovative
thematic bonds (education, youth, employment)
Involve the diaspora to invest in local infrastructures that would make their community
live in better conditions, use incentives for foreign direct investments
Risk segmenting
Share the risk among different platforms
Segmenting risk and distributing across different platforms. Understand who is best able to manage
the individual risk, to mitigate them and allocate those risks to those parties that can best deal
with them
International community
Draw on expertise in risk management and mitigation. Gain experience from successful implemented strategies
Pooling of resources to prevent and reduce the risk for catastrophic disasters occurring
Global rules that can support risk management and facilitate global strategies at local level
Bring ODA (Official Development Assistance) into private sector funded structures as a means to leverage billions in order to bring in more investment for infrastructure development. This will supply small amount of risk capital that can catalyze multiples of capital and improve risk adjusted returns.
Conclusion
A collective action can help mitigate risks andshare the risk at each level, allowing a betterimplementation of infrastructure that willsupport development initiatives and byreflection reduce poverty, improve conditionof living and build capacity at each level tohandle different type of challenges with therisks that come with them