Third-Party Risks in an Infrastructure Project

In the previous few articles, we have come across the various types of risk which are present in an infrastructure project. We have discussed the risk of cost overruns as well as the risks of revenue delays and everything in between. However, all the risks we discussed were directly applicable to the infrastructure company or to the government i.e., the first and the second party.

In many cases, projects involve several third parties. These third parties are not directly involved with the project. However, still, their actions or inaction can cause grave damage to the project. In this article, we will have a closer look at all the third party risks. We will list down the important third party risks and explain them in greater detail.

Utilities Required for the Project

In many infrastructure projects, the timely completion of the project is dependent upon certain actions to be taken by third party utility companies. This could mean something as basic as providing electricity or a water connection. Other times, it may be something a little more complex, like obtaining an approval license from a public works body.

However, in all these cases, the third-party has no real stake in the project. As a result, the third party does not really have any incentive to adhere to a schedule. However, the services they provide may be absolutely crucial. For instance, the operation of a toll road can be brought to a standstill in the absence of an electricity connection.

There is very little an infrastructure company can do to manage these situations. The only solution is to assume the worst while planning. Infrastructure companies are better off if they leave long lead times as buffer for such tasks during the planning phase. The infrastructure company should maintain close co-ordination with these third-party service providers in order to ensure that the delay caused is not excessive.

Removal of Utilities

Just like the addition of utilities, the removal of utilities from a project site can also be difficult and time-consuming. For instance, if a new road is being built, it could pass over some electricity grids, gas pipelines or water pipelines. Therefore, for the road to be built, these utilities will have to be relocated to a different location or will at least have to be moved underground. Infrastructure companies are required to keep utility companies in the loop during the execution of such projects.

However, once again, the problem remains exactly the same. The infrastructure company is running on a tight schedule and has the incentive to do so. On the other hand, the utility company does not need to adhere to any schedule. As a result, they may react slowly and may end up delaying the entire project. At times this is done wilfully. However, during other times, this is just the result of inaction, which is common in many utility firms.

Interdependence between Projects

Many times infrastructure projects are interdependent upon one another. In some cases, there is operational dependence, which means that the operations of the dependent project cannot commence until the first project is completed. For instance, a coal-based power plant may not be able to commence operations till the coal mining project is able to reach a certain level of output, which will enable it to supply to the power plant.

In many other cases, the operations may not be dependent upon one another. However, the finances of the project may be dependent upon the finances of another project. In such cases, it may be possible to remove the dependency from the other project if both the projects are financed separately. However, that may prove to be more expensive since the amount of debt which will have to be raised will be higher and will have less collateral backing it. Combining the projects in order to finance them may also not be a viable solution since both projects may be executed by different infrastructure companies.

Political Disturbances

Many times, the execution of a project may be severely impacted by political disturbances. These disturbances may be beyond the control of the infrastructure company. However, the infrastructure company needs to ensure that the possibilities related to such delays are managed correctly in the project contract.

It is best to provide the responsibility for such risks to the government. This is because the government has the tools required to contain the protests. The government can negotiate with the protestors and provide them better compensation so that they end the protests. Also, the government is capable of providing police protection to the contractor so that they are able to continue their work unabated. If, despite all these measures, the government is not able to quell the protests and provide a conducive working environment, then it should take responsibility for the process. This means that the government should consider the delays caused because of these reasons as force majeure events and should not penalize the infrastructure company for the same.

The bottom line is that infrastructure projects face a lot of risks from third parties as well. Recognizing and mitigating these risks before they threaten the success of the project is very important.