A centralized and integrated approach to risk management and compliance by the infrastructure projects owner, and the regular re-assessment thereof over the lifetime of the project, is increasingly necessary to ensure some form of measurement of sustainability of infrastructure projects.
International efforts to create bankable standards for new projects have brought various project phases and main role players closer together but have also highlighted different needs of debt and equity participants. Overall project risk management and compliance should be the domain of the project owners as their interest in the project goes beyond construction and/or debt repayment. A comprehensive compliance track record improves future prospects.
Only a fraction of infrastructure projects envisaged in developing countries get beyond the initial concept and design phase for lack of funding . Increasingly, Governments and SOEs as project owners turn to the private sector for funding of infrastructure projects. Funding only really materializes once a project has reached the so-called bankable stage. Although traditionally only a small percentage of the total project cost, this early-phase development cost is on the increase due to an ever-widening scope and carries high risk.
Traditionally, project owners themselves have had to fund the early stage development to get a project to bankability. In other cases, larger construction firms have undertaken this burden as part of their risk-based investment to get the work. In consequence of this fragmented approach to early-stage development, there is little consensus on what constitutes bankability. This lack of uniformity is a major obstacle to funding new projects and internationally efforts are underway to standardize an approach to bankability. This is done to facilitate funding for the early-stage development which is also becoming unaffordable for many poorer countries.
Sustainability is the single most important criterium for bankability. One international initiative is SuRe® (The Standard for Sustainable and Resilient Infrastructure) by the Global Infrastructure Basel Foundation. SuRe® contains 76 criteria against which a new project should be measured over the spectrum of governance, society and the environment. Many more could be added to this but the example suffices.
The effect of renewed attention paid to early stage project development is the following:
– A clear distinction is drawn (from a funding perspective) between the early phase i.e. concept and design (1-5% of project cost), the construction phase (95% of project cost) and operation and transfer phase.
– The three most important themes to measure sustainability are a project’s social and environmental impact and the governance regime applicable.
– The increasing importance of the environmental and social impact of projects places them clearly in the early-stage development phase as they determine a project’s initial “go” or “no-go” status.
– The importance attached to compliance as part of the governance criteria is increasing, to the extent that failure to develop an adequate compliance plan which includes controls, monitoring and reporting, will cause a project to be red-flagged. This means that a project will not become bankable without meeting this requirement, and that it will lose its bankable status if there is a subsequent failure to maintain the regime. The same applies to selected aspects of environmental and social impact such as a failure to implement a proper complaint and dispute resolution mechanism.
– It is expected that senior funding agreements, if they don’t already make provision therefor, will be adjusted to compensate the funder for failures to maintain governance regimes submitted in evidence of bankability. This aspect further pre-supposes continuous reassessment of every project from beginning to end.
– The development of risk management and compliance protocols for a project in the concept and design phase is no longer something on a project’s “to do” list, but must have been be completed and monitoring begun with in order to attain bankability. On-going monitoring and reporting across the entire spectrum of project endeavours will become the norm – at least until the senior debt has been repaid.
Regardless of who actually puts up the funds for early stage project development, the requirements of the senior debt funder must already be met in the design phase and continued to be met for at least as long as any part of the debt remains outstanding. This makes the senior debt funder the most influential role player in determining governance criteria and characteristics, including risk management and compliance. In short, the requirements of the senior debt funder will create the foundation for the project, its governance framework and the manner in which it is managed. Risk management and compliance as so-called “red flag” areas are here to stay. Banks are the main senior debt funders in infrastructure projects. Internationally, banks are also leaders in compliance standards due to very stringent regulatory requirements applicable to them, and it stands to reason that their standards and demands will be set accordingly high for project governance.
Moreover, the prospect of reassessment of projects as it transitions from one phase to the other is a real one as confirmation of the project objectives and milestones not only continuously satisfies the senior funder, but also increases the creditworthiness of the project for purposes of ancillary financing or in the event that an equity participant may wish to exit. It is imperative therefore that a regime is developed which covers all risk and compliance bases and which provides, in its design, continuity between the various phases. A breakdown in risk management and compliance could prove very costly indeed, in more ways than one.
Project owners and debt funders have different objectives. The debt funder wishes to see a return of capital at a risk-based interest rate. Owners wish to create wealth and/or improve the living standards of the project beneficiaries. Owners are in for a longer haul than funders and are ultimately the greatest beneficiaries of a project. Project owners also stand to lose most should the project fail or not live up to its expectations. It stands to reason therefore that the project owner should accept responsibility for the development of the risk management and compliance regime. With so much at stake and without detracting from the capacity of individual contractors, independent oversight at a macro level in this extremely important aspect seems to be called for. The efficacy of the compliance regime will be determined by its reporting and mitigation capability in at least the following areas:
Legal/political, Environmental, Social, Operational, Contract compliance and Professional standards compliance. (Financial compliance is undoubtedly part of the structure, but not dealt with here as it ought to form part of the internal audit function.)
Not only will a risk and compliance management plan developed according to senior financier standards and requirements and integrated across the spectrum of participants serve to provide access to capital, but it will assist in keeping the project on track and provide peace of mind to those with most to lose – the project owners.
Chris van der Walt
Eas e Comply (Pty) Ltd
Eas e Comply (Pty) Ltd is a risk management and compliance consulting firm. We have developed an extensive early-stage project development capacity designed to ensure bankability of new projects. For more information please contact writer or Surprise Nkosi at [email protected]