Infrastructure is on the up. Post-financial crisis, investors who at first sought to diversify their portfolios now see infrastructure as an increasingly stable and mature asset class by itself. In spite of this confidence boost, investors’ approach to managing risk has not always kept pace. Broadly speaking, legal and contractual risks are well accounted for, leaving some potential investors with opportunities that look financially sound on paper but mask difficulties further down the line.
Social risk, while less covered, has significant potential to influence the success of an infrastructure project, sometimes leading to disruption or even failure. Far from being restricted to emerging markets alone, social risk can also affect projects in developed economies.
Taking examples from across the globe, we will analyse how social risk has adversely affected projects, and provide advice on how you can manage it.
Social risk is a considerable challenge for infrastructure projects throughout Latin America, but particularly in Colombia. While manifestations of social risk are manifold, several points have gradually crystallised as critical to investors there. These include: that posed by constitutional requirements for prior consultations with certain ethnic minority groups, challenges related to community resettlement and the general threat posed by operating in remote areas, where most road and energy infrastructure projects take place.
Unsatisfied basic needs and, especially, a historical absence of state presence add to the risk in remote locations in Colombia. This is evident in the context of peace negotiations between the government and leftist guerrilla groups, where we expect an rise in social activism and unrest to be accompanied or even driven by an expanding leftist political agenda at national and local levels. At the same time, communities will look to organisations involved in infrastructure projects to fill the development gap left by the state in a post-conflict setting, potentially leading to unrealistic expectations which companies cannot and should not meet.
In a recent case, Control Risks worked with a client whose energy infrastructure project was located in one of the areas most affected by Colombia’s armed conflict. The project suffered considerable internal and external pressures as the client attempted to conduct an environmental impact assessment safely. Managing the expectations and concerns of local minority groups at the same time only exacerbated the situation, especially with regard to social investment and the use of the armed forces for physical protection of personnel, assets and operations.
Investment to expand and upgrade Africa’s inadequate transport and power infrastructure has grown dramatically over the past 10 years, spurred in no small part by new resource finds requiring a reliable means to move products to market. In Africa, as in Latin America, social risk often stems from companies’ interactions with local communities in regions with historically weak state presence.
Railway projects associated with expanded mining activities in Guinea, Liberia and Mozambique have all struggled to manage very high expectations of direct benefit to local communities in terms of jobs as well as basic services the state is unable to provide such as power, education and health facilities. With increasing levels of sophistication in civil society and the internet age providing an unprecedented ability to connect local issues with a wider audience, there is also increased risk that any mis-step at a local level is scrutinised by national or regional actors and has a ripple effect on a company’s reputation internationally. Understanding the existing social dynamics locally, how these play into the bigger political picture in a given country, and how projects will affect and be affected by them is a crucial first step to success.
It is not only in developing countries that social risk can pose a substantial threat to infrastructure projects. The development of high-speed rail in Europe has been a major destination for public and private investment in the past two decades, and seems set to remain so for some time to come. In some cases, the new links have been transformative, immeasurably improving mobility to previously underserved parts of the country concerned – Spain’s original AVE link from Madrid to Andalucía, for example. Others have been less effective, providing only marginal benefits over existing infrastructure or failing to break-even in the running. However, a number of high-speed rail projects have been delayed, substantially redesigned, or even obstructed during the construction phase owing to social risk concerns.
The highest-profile project thus affected is in Italy. Though the country has a long history of high-speed infrastructure, the plan to build a link from Turin to the French city of Lyon has met significant opposition from both residents in the Alpine valley through which the route passes (adjoining the existing railway and road route) as well as anti-capitalists and environmentalists from further afield. The ‘NO TAV’ movement has so far delayed work on the section by 10 years, with completion still not in sight.
It is a similar story in northern Spain, where the Y-shaped section connecting the Basque cities of Bilbao, San Sebastián and Vitoria to the main northerly route has met opposition from a number of fronts, including Basque separatists. The technical challenges in constructing this section – with an unusually high percentage carried by either bridge or tunnel across hilly terrain – exacerbate the security concerns arising from this opposition. Even in the UK, the plans for a second high-speed route connecting London to the Midlands and the North have been delayed in the planning stage. The key feature here is the presence of multiple causes. An alliance of different groups with different objections such as local residents and a national environmentalist lobby can be a more potent source of social risk than one such interest group alone, even if the latter is much larger.
HOW TO MITIGATE SOCIAL RISK?
Despite its influence on obtaining an operating license and its impact on the reputation and funding of project participants, social risk can be effectively managed. The type and applicability of mitigation measures will vary according to the location, scale and type of the project components as well as the life cycle stage. There are some recommendations, however, which project participants can build into their planning to help mitigate the risk:
Consult early and regularly, with a wide range of stakeholders.
This is the best way to engage stakeholders. Form partnerships and develop trust and respect with the populations that may be affected. Each stage of an infrastructure project will bring different interactions and challenges, meaning that relationships need to be broad and mutually reinforcing.
Understanding the complexities of the issues on the ground will be impossible without collaboration with a wider group of stakeholders. NGOs, local community groups, local employers’ organisations and other infrastructure organisations will all have valuable insights supporting better understanding. A collaborative effort will have a much greater impact than individual company efforts.
Embed social risk into wider processes
Social risk needs to be seen as an integral part of any country and project risk assessment and should be embedded into existing risk management structures. Political, regulatory and security risks will all have an impact on social risk and therefore need to be assessed and addressed collectively. A unified approach will also ensure that engagement is not relationship-specific, which can sometimes be a challenge in complex environments and long project lifecycles.
Roll out your programme to contractors
Contractors have an important role to play as they are often close to matters such as local employment, providing housing, food, healthcare and local supply chains. Ensuring that they are involved in your assessment of social risk and your actions for mitigation and positive engagement will be integral to the success of the project and, as a consequence, the integrity of your reputation.