Draft PF2 Proposals ‘Pose Insurance Risks for UK Infrastructure Sector’

Proposed changes to the structure of public-private partnerships (PPPs) announced by the UK government will create new insurance risks for the country’s infrastructure sector, according to Marsh.

The insurance broking and risk advisory group said that new insurance risks created by Private Finance 2 (PF2) include changes to premium risk sharing, having government as equity co-investors, shorter procurement periods and, contractors having to place greater reliance on ground condition reports commissioned by the authorities.

There are a number of significant differences between PF2 and its predecessor, Standardisation of PFI Contracts version 4 (SoPCv4), in respect of risk management. A key element of PF2 is that government is likely become a shareholder in projects and share in on-going investor returns. This means it is also likely to be more involved in a project’s risk management arrangements.

“Proposed changes to the premium risk sharing mechanism mean that public entities can take a greater share of the risk associated with fluctuating insurance costs,” said Edwin Charnaud, chairman of Marsh’s global infrastructure practice. “This could reduce the risk sharing threshold from 30% to as low as 5% of the base cost. While this lower premium risk-sharing trigger level is welcome, it could increase the frequency of sharing arrangements during the life of the project, adding to contractors’ administrative burdens.

“As it is envisaged that public sector investors will appoint directors to the boards of project companies, it is also likely these directors may seek the protection of directors’ and officers’ [D&O] liability insurance, adding to the costs of the project.

“Additionally, now that government has the option to act as a minority equity co-investor in projects, it may seek a greater say over a project’s insurance arrangements.”

Charnaud added: “PF2 only applies to new UK infrastructure projects, so it will be a number of years before the full impact of the changes are realised. In the meantime, private sector providers should be rigorously reviewing their current risk procedures to ensure they can retain their competitive edge when bidding for the UK’s next generation of infrastructure development.”

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