Public infrastructure projects play a crucial role in South Africa’s development, providing essential services such as roads, power stations, water supply, hospitals, and ports. However, these projects present unique risks to insurers due to their scale, complexity, and government involvement.
Understanding these risks is essential for insurers to mitigate exposure and tailor coverage effectively.
The total value of new projects announced by both the South African government and private sector in 2024 amounted to R445bn, with 78% of this investment coming from government and state-owned enterprises. Public infrastructure projects are pivotal for economic development but are fraught with risks that can impact their success and financial stability. Insurers must be alive to these risks to provide effective coverage and mitigate potential losses. Below is an overview of unique risks to insurers associated with such projects:
Political and Regulatory Risks
- Policy Uncertainty: Frequent changes to government policies can jeopardize project viability, increasing the demand for political risk insurance to safeguard investments.
- Expropriation Risks: Seizure of land and political interference can result in financial losses for contractors and investors, leading to a higher incidence of claims.
- Regulatory Delays: Prolonged approval processes for environmental and construction permits can postpone project timelines, thereby elevating exposure under delay-in-start-up (DSU) coverage.
Financial and Funding Risks
- Budget Shortfalls: Incomplete projects and contractor defaults, often stemming from budget shortfalls, can lead to increased performance bond claims.
- Public-Private Partnerships (PPPs): While PPPs are instrumental in mobilising private sector expertise and funding, they introduce credit risks through revenue-sharing models. Ensuring that insurance coverage aligns with PPP agreements is crucial for risk mitigation.
- Complex Contracts: Projects involving multiple contractors can result in liability disputes, highlighting the need for comprehensive contractual risk assessments to pre-empt and manage potential conflicts.
Design and Construction Risks
- Defects: Design errors and structural failures on mega-infrastructure projects can lead to significant professional indemnity claims and policy disputes.
- Labour Unrest and Supply Chain Disruptions: Commonplace in regions like Southern Africa, these disruptions cause delays which in turn increase DSU and business interruption claims.
- Extreme Weather: Extreme weather can lead to damaged infrastructure, project delays and cost overruns resulting in increased claims under business interruption and property damage coverage. Focus should be given to climate risk modelling to be integrated into underwriting and parametric insurance solutions should be explored.
- Social Risks: Public opposition to projects can result in project suspension, theft and vandalisation, triggering property damage and liability claims. Insurers are well-advised to promote proactive community engagement strategies and offer cover for civil disturbance damages.
To effectively manage the unique risks outlined above, insurers can implement the following risk
mitigation strategies:
- Enhanced Due Diligence: Conducting comprehensive vetting of procurement processes and thorough financial feasibility assessments can significantly reduce the risk of defaults and project failures.
- Clear and Tailored Policy Wording: Ensuring that policies include well-defined exclusions, customised coverage, and that its wording aligns with contract specific terms and provisions
(such as FIDIC and NEC). This will help to prevent coverage disputes and ensures clarity for all parties involved. - Collaboration with Stakeholders: Establishing joint risk committees and adopting standardised risk management frameworks can strengthen project oversight and improve communication between all stakeholders, leading to more effective risk control.
- Leveraging Technology: Incorporating advanced technologies such as Artificial Intelligence and predictive analytics can greatly enhance the monitoring of risks, improve real-time decision-making, and streamline claims processing.
From a “real world” point of view, the Gautrain, Kusile, and Medupi projects serve as key examples that underscore the critical importance of latent defects insurance, performance bonds, and clear policy terms. These projects highlight the necessity for insurers to adapt to the evolving political, financial, and environmental challenges to safeguard their portfolios.
It is further important for insurers to consider all the project contract documents before issuing coverage because the omission to do so could result in the client being overinsured, or even more distressing, critical risks being uninsured.
By having a clear understanding of the unique risks associated with public infrastructure projects and implementing effective risk mitigation strategies, insurers can better manage their exposure and support the development of critical infrastructure in South Africa.
For expert assistance in the field of project insurance, contact our offices today to arrange a consultation with our specialist attorneys.