Over the past decade, some of the world’s largest countries have invested billions of dollars in infrastructure projects. Between 2004 and 2008, China spent more in real terms on infrastructure than in the entire twentieth century, laying as many miles of high-speed rail as all of Europe in the previous two decades.
Increased globalization and the need for project cargo
At the end of 2008, the Chinese announced an economic stimulus package of US$586 billion for infrastructure projects, while India earmarked US$475 billion. In 2009, the US announced a US$787 billion stimulus package aimed at infrastructure improvement. Half of the estimated US$22 trillion projected to be spent globally on infrastructure improvement over the next decade is in emerging economies.
While such investments present tremendous opportunities for engineering and construction firms, they involve potentially crippling risks. Large projects can overrun completion dates, go appreciably over budget, and alter plans significantly as the project unfolds. Also, the project site may be so remote that machinery and equipment cannot be transported there until roads, harbors, and airstrips are built, increasing the hazard of shipping delays. In real terms, difficult transport logistics, tight timeframes, and high cargo value can turn a US$10 million equipment loss into a US$150 million delay in start-up (DSU) loss.
Delays can be crippling – insurance is critical
Assessing exposures and underwriting project cargo risks is difficult. Few insurers possess the expertise to provide proper lead coverage and offer the substantial limits required.
“The scale of such projects and the critical nature of the equipment means that any loss or shipping delay can impact project timelines and completion dates,” says Kevin Wolfe, Global Head of Project Cargo at Allianz Global Corporate & Specialty. “Contractors may expose themselves to liabilities caused by not getting equipment to the sites on time. If the project is budgeted at billions of dollars, a month’s equipment loss delay can cost tens of millions of dollars.”
Wolfe emphasizes that project cargo insurance including Marine DSU coverage is critical to projects. Not only does the policy cover the physical loss or damage to the equipment during transport, but usually is extended to provide coverage for loss of income (DSU) or advance loss of profits (ALOP).
“Marine DSU is another form of business interruption insurance,” says Wolfe. “Many projects involve oversized, heavy components, insured for substantial amounts. These are critical pieces and their safe arrival at the site is vital to ensure an on-time start-up. Should one item be lost or damage during the transit move (project cargo) it could take from six months to over two years to manufacture, test, and deliver another one to the site, which could delay the start date. Clients would incur expenses for a delayed project, with no generated revenue.”
Project cargo insurance protects this loss of income and/or debt service and/or continuing fixed expenses during the delay period as a result of a covered loss. Without demonstrating DSU coverage, owners and/or contractors could not fund the project adequately, since lenders insist on it as part of the financing agreement.
Huge growth in large-scale projects
Wolfe says global project activity has increased fivefold during the past 18 months, compared to the period of the credit crunch from 2008–2009.
“A project cargo policy is written for a specific project over a stated period of time, normally expiring on the estimated project completion/start-up date. It covers equipment, machinery, and materials shipped to the site and destined to become a part of that facility,” says Wolfe. “Policy periods can range from several months to five or more years.”
The strongest demand is in the energy sector, with construction projects of liquefied natural gas (LNG) plants, power generation facilities, and nuclear power plants, and retro-fit projects of existing plants with more efficient equipment to reduce carbon emissions. Alternative and renewable energy projects such as solar, geothermal, hydroelectric, and wind power, also are increasing.
Substantial global activity continues in upgrading/replacing infrastructure like bridges, tunnels, and railways, while mining, manufacturing, and oil and gas refinery projects are also growing. “Large-scale infrastructure projects such as power grid expansions and water filtration facilities cannot be held back in regions like South America, Asia, and Africa,” says Wolfe.
“Population growth, housing and building developments, and more power demand from businesses mean projects must continue even if local/national economies face a downturn. Existing power grids cannot cope and projects cannot be further delayed.”
Project cargo and energy projects
Experts believe investment in energy projects in developing countries will continue to increase. The Pike Research group estimates smart grid improvements in Asia-Pacific will increase by 2017 from US$11.9 billion to US$28.8 billion. The cleantech market intelligence firm forecasts cumulative smart grid investment in Asia-Pacific to reach US$171.3 billion by 2017.
The commissioning of such intensive projects has seen changes in how they are carried out. Previously, contractors imported machinery parts and equipment and “stick-build” onsite.
Tim Donney, Global Head of Marine Risk Engineering at Allianz Risk Consulting, sees a trend in large-scale infrastructure projects towards “modularization,” which involves sourcing the construction of as much plant, machinery, and equipment in a country with lower labor costs and moving it in large, completed modules to the project site – potentially on the other side of the world.Donney says this trend carries substantial risks. “Shipping custom-built machinery thousands of miles to the other side of the world is difficult enough,” he notes, “but some modules can weigh up to 2,000 tons or more, presenting logistical challenges.”
One problem is finding a ship capable of loading, transporting, and discharging such modules. “As modules get heavier and bulkier, fewer vessels are available to transport them,” says Donney. “Advance planning becomes essential, as the current demand for heavy-lift ships and submersible vessels is more than the market can bear. It can be months before a similar vessel can be booked to transport the goods.”
“All projects contain risk,” explains Wolfe, “and insurance is the best tool available to manage exposures.“ Unfortunately, most Marine DSU market knowledge rests with a few expert underwriters and brokers. Some owners/contractors risk not getting the level of protection required for the transportation segment of their project.”