Across the continent and including South Africa, the majority of large-scale construction projects for infrastructure and renewable energy plants are undertaken through public-private partnership (PPP) agreements between governments and business investors.
It takes these projects into a space where politics, regulation and corporate governance play distinct roles in how agreements are formulated and implemented for mega construction projects, according to Tirelo Tsheoga,Head of Distribution in Sub-Saharan Africa for Chubb South Africa.
“South Africa’s construction and engineering sector is hungry for projects of this magnitude following a period of significant inertia and policy indecision with regard to renewable energy projects.
“At the same time, as a relatively new but rapidly growing sector, renewable energy projects come with significant and complex risks that involve many interlinked role players, massive price tags and onerous contractual liabilities due to the debt financing models in place.
“These projects must be underpinned by innovative and purpose-built insurance programmes that take into consideration the unique demands of each individual project,” explains Tsheoga.
Chubb is seeing increased demand and interest from ‘waste to energy’ producers, biomass derived power generators, wind energy, solar power and biofuel manufacturers. Addressing the many and varied risks encompassed by these sectors, Chubb lists the covers that are typically required during the physical construction of a project:
- Construction All Risks (Builders Risk) – Ideally suited to contractors, property developers and principals, builders risk cover is available as either a single risk project solution or an annual policy. It primarily covers the construction project itself and also provides cover that addresses risks associated with contractors’ plant and equipment, delay in start-up, non-negligent liabilities as well as public liability.
- Construction All Risks – Civil Engineering – typically forcontractors involved in hydro projects, motorways, railways, pipelines and similar ventures with annual cover or single risk project cover. It is tailored to protect organisations against risks and liabilities associated with consequences of design, extended maintenance, natural catastrophes, property damage and primary third-party liability. It can, however, be extended to include delay in start-up and full design.
- Erection All Risks (EAR) – includes the erection and installation of electrical or mechanical plant and machinery. It’s ideal for mechanical and electrical contractors looking for delay in Start-up, casualty, single project professional indemnity, annual contract cover or developers, manufacturers, power and energy companies involved in large and complex installations.
While these covers form the basis of an insurance solution, there are additional risks associated with mega construction projects that need specialty covers, such as marine insurance for project-related equipment, professional indemnity, cyber risk, directors and officers liability, single project PI, in addition to political risk and terrorism covers.
“An in-depth insurance discussion and analysis takes place around all the required insurance solutions once the Engineering, Procurement and Construction (EPC) contractor has been appointed for the project and the value of the project is determined and finalised.
“This would include aspects such as pricing on materials and equipment, labour, design and so on, in addition to required geotechnical studies such as soil samples and environmental impact assessments,” explains Tsheoga.
“Based on this, underwriters can then assess the risks involved, taking into consideration the timeframe required, expertise of contractors involved in the project, the quality and nature of materials utilised and risk management tools employed.
“Costs can then be attributed to the insurance component of the project from where the broking and underwriting teams will determine what percentage can be covered by local insurers with the risk appetite and financial ability to do so, and if and how much of the risk needs to be placed in global reinsurance markets,” says Tsheoga.
The final selection of insurance needs to reflect local insurance legislation, adhere to multinational policy as well as offer a tax-optimised solution. “It is an onerous task that requires experienced insurance management and a thorough understanding of all the potential and interlinked risks, which role players are affected and bear or share the risk, in addition to mature risk management practices on the part of the insured.
Finding a solution that meets such a diversity of construction risks, especially across geographies, is an enormous task that needs strong and early collaboration between client, broker and insurer to develop the optimum risk management and insurance solution.
“The reality is that renewable energy projects are relatively new and the local available expertise needs to draw on global capacity. There are few standard projects in this sector so it’s essential to have a global insurer and broking partner with global capabilities along with local experience of country specific conditions,” concludes Tsheoga.