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infrastructure

New Approach to Risk and Infrastructure?

Globally, the World Economic Forum estimates that the planet is under-investing in infrastructure by as much as $1 trillion a year. Since 1990, for example, the global road network has expanded by 88%, but demand has increased by 218%.

With the global population continuing to grow – and urban populations, in particular – the pressure on existing infrastructure is only set to worsen. And in the developed world, that infrastructure is creaking: In the U.K., 11 coal-fired power stations are nearing 50 years old, the end of their operational lives, and replacements have yet to be built; in the U.S., the average age of the country’s 84,000 dams is 52 years old; in Germany, a third of all rail bridges are more than 100 years old; parts of London’s Underground rail system, still in daily use by hundreds of thousands of commuters, run through tunnels that are more than 150 years old.

According to the Report Card on America’s Infrastructure by the American Society of Civil Engineers (ASCE), the U.S. alone will need $3.6 trillion of infrastructure investment by 2020.  The report assigned near-failing grades to inland waterways and levees, and poor marks for the state of drinking water, dams, schools, road and hazardous waste infrastructure.

Europe’s infrastructure is in worse shape. The Royal Institute of International Affairs has suggested that the continent needs $16 trillion of infrastructure investment by 2030, more than any other region in a world.

Taxing Issues, Tragic Consequences

While taxes once covered the cost of building and maintaining public infrastructure, entitlement programs such as Social Security and healthcare have started to claim a larger share of these funds as a percentage of government tax revenue, particularly as the number of people in retirement has expanded.

In addition, as the cost of social programs grew, governments came under pressure to cut taxes, leaving even less money available to maintain existing infrastructure, let alone invest in the requirements of growing populations. “Too often infrastructure is seen only through the lens of cost, expenditure and not as core to society’s prosperity”, says Geoffrey Heekin, executive vice president and managing director, global construction and infrastructure, Aon Risk Solutions.

“Since the 1950s, investment in infrastructure in developed countries has been declining,” he says. “In the U.S., for example, investment as a percentage of GDP has fallen from around 5% to 6% in the 1950s to around 2% today.”

Tragically, train derailments, road closures, water main breaks and even bridge collapses have become commonplace. “Until situations like the water crisis in Flint or a bridge collapse happens, infrastructure does not hold proper weighting in the psyche of leaders in government,” Heekin says.

This lack of attention to infrastructure is costing developed economies billions of dollars in lost productivity, jobs and competitiveness. Without addressing the infrastructure investment gap, the U.S. economy alone could lose $3.1 trillion in GDP by 2020, according to the ASCE, while one estimate attributes 14,000 U.S. highway deaths a year to poorly maintained road infrastructure.

A Private Sector Solution to Public Sector Under-Investment?

To begin reversing the infrastructure gap, it is likely that governments will need to find ways to encourage private sector investment toward replacing, renewing and upgrading physical infrastructure.

Governments of all political stripes are increasingly supportive of private investment in infrastructure. One model that is now gaining attention is the Public Private Partnership (P3) model.

P3s in one form or another have been used successfully in developed countries for several decades. They are being used to procure everything from public healthcare facilities, schools and courthouses to highways, port facilities and energy infrastructure. While the volume and type of P3 deal can vary widely by country, there continues to be an upward trend for the model’s use by the public sector.

In 2015, for example, Canada procured 36% of its infrastructure with the P3 model. Aon Infrastructure Solutions anticipates that 21 P3 projects will close in Canada in 2016, with a total capital value of US$12.8 billion – the highest value of P3 projects in Canadian history. In the U.S., where adoption of the P3 model is less widespread, 11 projects are expected to close in 2016, with a capital value of US$8.7 billion.

Like traditional design-bid-build procurement, P3 projects involve public authorities’ putting public projects or programs up for competitive tender and selecting a preferred bidder from multiple consortia.

The key difference is that the contractual structure in P3 allows the public authority to transfer a different set of risks to the private party – including (but not always) the financing for the project. The arrangement can allow the private partner that designs, builds and finances construction of the asset to operate and maintain it in return for either a share of the revenue generated by the use of the asset, or a stream of constant payments from the public authority (also called availability payments).

Keeping Focused on the Big Picture

“The public sector benefits from P3 delivery when the model is applied to a project that meets a community need and is procured through a transparent, accountable process,” says Gordon Paul – senior vice president, Aon Risk Solutions and member of Aon Canada’s Construction Services Group executive committee and Aon’s  global PPP Centre of Excellence.

“Public authorities seek ‘value for money’ in a P3 project by looking to the long-term value,” Paul says. This means identifying whether the private sector party is able to design, build, finance, operate and maintain an infrastructure project for a price lower than if the public authority did it on its own over the same period. It’s about the full lifecycle of the project – not just the building costs.

Taking a big picture view is equally important for the private sector party, says Alister Burley, head of construction for Aon Risk Services Australia. He points to the importance of taking a holistic view to P3 projects and investments to enable efficiencies to be built that will carry forward.

If done right, P3 arrangements can be a significant benefit to both the public and private sectors. Public bodies gain a much-needed boost to their infrastructure, often with long-term maintenance included in the deal, reducing the potential negative economic and health consequences of infrastructure failure. And private investors can secure a stable, long-term return through a stake in some of the underlying essentials of our economies.

Whatever route governments take to secure the integrity of our underlying infrastructure, one thing is clear – without a significant increase in infrastructure investment over the coming years, the world’s economy and health could well be put at further risk.

Connected Humans, Version 3.0

Whether you commute to work on public transport to work or fly between busy airports to serve your clients, wherever you go you will see people glued to their phones, tablets or e-readers. More than likely, all these devices are connected to the Internet in real time over a mobile network or capable of connecting via Wi-Fi.

There is so much written on the connected car and the connected (“smart”) home, but we also need to open a discussion about connected humans.

Let me clarify: I have no interest in talking about social networking. I’m more interested in connections from the perspective of tracking health and biometric data to be used by the healthcare and insurance industries for pricing.

A decade ago, we were limited by the technology and the computing power of hand-held devices. Wearables and ingestible devices were nowhere in the ecosystem. It made perfect sense to use historical data to price and sell products based on stale census information.

Technology drivers

Fast forward to the current time. Computing power has scaled exponentially over the last decade. We have devices that can track, store and filter essential lifestyle and health data, and we have predictive analytic capabilities that would make historic rating methods look like the Stone Age.

Market demographics

The growth rate of Millennials earning paychecks is not keeping pace with the growth in the aging population living off savings. If that was not bad enough , buying behaviors of Millennials indicate that insurance is not one of their top priorities. There are numerous surveys you can find online that point to this problem.

We have heard of “gamification” and customer engagement in the context of banking and financial services, to attract Millennials, but insurance and healthcare companies have barely touched the tip of the iceberg on this. The amount of biometric data that can be harvested and used for predictive analytics could include a host of items, including blood pressure, heart rate, vitamin count, sleep patterns, activity metrics and blood sugar, just to name a few. All this information, harvested and analyzed to price and sell a host of new products to new market segments with lifestyle diseases like diabetes or obesity, opens the route to gamification of healthcare apps and much better life insurance pricing. Providers today stop at just providing discounts on the fringes as I see it, not truly revisiting pricing.

With technology evolving at the pace it is and with our ability to get more out of the data through predictive analysis, the healthcare and insurance segment could look very different 10 years from now.

There is a school of thought that says privacy issues will limit the use of biometric data, but, if there is a business model that works for weight watchers and diabetic forums, there is a business case and a market segment to change the way insurance and healthcare products are priced and sold.

Hertz has begun to pitch itself as a used-car sales channel, allowing the consumer to test drive a car for an extended renting period and then buy or not buy the car. In the insurance or healthcare context, if pricing were driven by behavioral patterns and biometric statistics, you could offer an extended free look or evaluation period allowing a skeptical diabetic or obese customer to try devices, see the effects on their health and the corresponding premium discounts and then make a decision on locking into the product.

Insurance and healthcare have not truly embraced the technology and buying behavioral shift of customers. What remains to be seen is who leads the charge. Will it be insurance and healthcare companies? Will it be technology giants like Google, which are already tracking a lot of what people do? Or will it be a company like Tesla and Uber, which have disrupted traditional industry segments where they were never the incumbent.