Understanding Infrastructure Disputes: Stakeholders
Peter Bird
A guide to the fundamentals of infrastructure projects covering project economics, risk, structure and financing and the main sources of disputes.
The complexities of infrastructure and construction disputes certainly extend to their economic and financial nuances.
In this series of guides, BRG’s infrastructure, construction and damages experts set out the elements of infrastructure projects which are key to understanding the disputes they frequently become involved in; and the context and insights which economists and forensic accountants will apply in their analysis and assessment of these cases.
In this first guide, we look at the definition of an infrastructure project and an overview of the stakeholders involved.
Infrastructure Projects
Infrastructure projects by nature involve many parties from multiple jurisdictions. They are usually of economic and strategic importance at an industry, national and often international level. They typically involve high costs, are technically complex and span long timeframes.
Disputes resulting from infrastructure projects can mainly be categorised as stemming from issues of delay, cost, defects, professional negligence, insolvency or failure.
What constitutes an infrastructure project?
Infrastructure has many definitions, and there is no universal understanding of what the term covers. However, typical features of infrastructure projects are:
Projects are long-lived—often up to ten years or more.
Projects serve many people—the general public (or a subset)—not private individuals.
The projects themselves involve many financial stakeholders, as this guide seeks to illustrate.
Projects are expensive: typically, but not exclusively, $10 million plus and potentially up to tens of billions of dollars.
In many cases, projects are non-rival: below full capacity, use by one person does not diminish use by another. Projects may also be non-excludable; i.e. non-payers cannot be kept out.
Historically, most are provided in the public sector, not often provided privately or in public–private partnerships (PPPs).
Note that:
“Hard” infrastructure projects (e.g. railways, power plants or airports) typically share all or most of these characteristics.
“Quasi” infrastructure projects (e.g. car parks, hotels, football stadiums or shopping malls) share some but not all of these characteristics.
Infrastructure Project Stakeholders – An Overview
Infrastructure projects typically involve a wide range of stakeholders; this variety is often a feature of the project and complicates the issues involved. Below, we give some non-illustrative examples.
Public Sector
In infrastructure projects the most important stakeholder is typically the relevant government ministry.
Example: The UK’s government-driven high-speed railway “HS2” project – other UK rail projects may be led by Network Rail, the owner and infrastructure manager of most of the railway network in Great Britain and an “arm’s length” public body of the Department for Transport, with no shareholders.
Primary concern: Avoiding political reputational risk relating to project time and cost.
Project Sponsor
Known as the “lead developer”, this is usually the primary equity investor. In emerging markets in particular, the sponsor may bring in other investors, often a local partner. The international partner may bring its technical and developmental expertise, alongside its financial capacity; the local partner brings local knowledge and experience of dealing with local governmental agencies.
Development is the process of taking a project from conceptual stage to “financial close”; i.e. the execution of the project contracts and drawdown of the financing, allowing work to start in earnest. The developer’s role is akin to that of a producer of a stage play or film: the person or organisation “who gets the show on the road”. Development is a high-risk business, and if it fails there is nothing to show for the effort. Developers typically get rewarded with a success fee. After financial close, they may be keen to sell down a stake and move on, although lenders will want the developer to stay involved for some period so that they have “skin in the game” to ensure the project’s success.
Primary concern: Tying up loose ends and getting the project to financial close as soon as possible.
Lender
Can (less frequently) be an individual lender, or often, a group of lenders, which may syndicate the loan further. In emerging markets, lending will frequently involve a syndicate of banks, including national banks or the World Bank, as a party.
Lenders normally mandate a “lead arranger” who diligences the project and coordinates the lending group. An alternative, or a supplement, to bank borrowing is to finance the project via a bond issue. This may require a rating from a rating agency; in such cases the diligence on the project by the agency will be of a similar nature to that of a lead arranger.
Primary concern: That the loan or bond gets repaid, project cash flows are managed and risk is limited. Whilst individual bankers are incentivised on the size of their lending book, they need to tell a compelling story to satisfy the bank’s credit committee.
Contractor
On large projects delivered on a turnkey basis, the preference is for a single EPC (engineering, procurement and construction) contractor to be in place. This is the best option from a risk management perspective, as there is only one entity responsible for project delivery. With multiple contractors, there is a risk of attempts to pin blame for delays on others, and complex mechanisms need to be devised.
Primary concern: Profit margin and performing to minimum guarantees on time and performance (enforced to manage).
Project Company
This is normally a company formed as a special purpose vehicle (SPV) purely for the execution of the project. Legally, the SPV is different from the public or private sponsor.
Primary concern: Its concerns are automatically the sum of all previously outlined
stakeholders’ concerns.
Operators
The operator is the entity responsible for day-to-day operation of the project, employing the staff and managers and focussed on project performance. There are two typical models for operators:
Operating is contracted out to a specialist third-party operator, who is incentivised to optimise performance. This is appropriate if the sponsors themselves do not have operating experience. Or the operator could be a subsidiary of one of the sponsors.
The project company SPV carries out its own operations and manages itself. This may be aided by a long-term service agreement where the original equipment supplier provides a maintenance package, relieving the operator of some of the need for technical expertise.
Primary concern: Not operating beyond its competencies.
Insurers
Banks expect tailored insurance packages from top-level brokers.
Primary concern: Understanding risk and exposure and providing comprehensive cover.
In this series, Peter Bird and Calvin Qiu set out the elements of infrastructure projects which are key to understanding the disputes they frequently become involved in; and the context and insights which economists and forensic accountants will apply in their analysis and assessment of these cases. Read part two, “Financing Strategies and Rates of Return.”