All risks lead to disruption

If there is one frontrunner for infrastructure theme of the year already, that frontrunner is disruption – especially in the technologically-induced, paradigm-changing sense of the word.

At our Berlin Summit 2016, technological change was omnipresent in many of the panel discussions and sideline conversations. So much so, in fact, that we half-jokingly wrote after that the ghost of Airbnb seemed to be haunting the halls of the Berlin Hilton. Whether it was toll roads receipts affected by automated electric vehicles, or car parks that could potentially be vulnerable to apps that, say, allow people to rent out their allotted street-level parking slots, disruption was everywhere.

In a way, that is not surprising. A lot is changing in the infrastructure industry and, more importantly, a lot is changing thick and fast. Just look at the energy sector and how it continues to be revolutionised by renewable energy. Power prices have been severely disrupted in Europe thanks to the introduction of large-scale, subsidy-backed renewable generation. In parts of the US, distributed solar is steering a growing number of people towards partial grid independence. And once renewables are able to be viably paired with energy storage on a large scale, expect the landscape to change even further.

But dramatic, paradigm-changing transformation is, in many ways, a headline risk. Investors are right to be looking over their shoulders for the next Uber or Airbnb and how it might affect their investments, but on a more quotidian basis, there are a lot of other risks that threaten to disrupt infrastructure investments. In a way, preventing disruption is the essence of risk management.

Over the following pages, we take a look at five key risks that pose a threat to the health of many of today’s infrastructure investments. Some are sector-specific risks, like the intermittency risk inherent to renewable energy generation which is now starting to be tackled by the insurance industry, allowing investors to smooth out their cashflows (p. 27).

Others are overarching risks, affecting all sectors, but not as visible as one would expect given their importance. Cybersecurity (p. 26) is a case in point. Can you imagine how damaging a high-profile cyber-attack on a privately owned infrastructure asset could be for the industry as a whole? And yet the average delay between a breach and discovery is a staggering nine months, a renowned expert pointed out at our recent Investors’ Council event in Versailles, held under Chatham House rules.

What is more, if a company in the EU suffers a serious breach and fails to report that breach within 72 hours, then it is potentially liable for a fine equal to 4 percent of its global turnover. In the UK alone, 81 percent of companies have experienced a breach; and the chief executive of a US utility confessed to suffering three million attempted attacks every month. You would expect most managers and company boards to be putting stringent plans in place in the face of such egregious figures, especially since 80 percent of all cybersecurity breaches could be curtailed with basic hygiene. But when a show of hands was asked for in Versailles over how many managers incentivised cybersecurity plans through chief executive KPIs, not a single hand went up.

Of course, no feature on risk would be complete without political risk (p. 25), which we tackle mostly from the perspective of an emerging markets investor. Not that developed market investors worry less about it: in a recent Deloitte survey taking in 25 European fund managers and direct lenders, 38 percent of respondents cited political risk as their biggest concern, followed closely behind by regulatory risk at 35 percent. 

We also take a look at currency risk (p. 28), again from an emerging markets perspective, and how investors are tackling it these days. And finally, consultancy Control Risks (p. 30) analyses how social risk has been disrupting projects across the globe, from the usual emerging market suspects to the less usual European ones.