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Sustainable infrastructure projects

Trends and needs

Global construction spending is estimated to exceed $4 trillion annually, but the growth in public and private large-scale infrastructure development comes with complex risks that span enterprises, industries, markets, and national borders.

History offers many examples of infrastructure projects that have been fraught with delays and budget blowouts. In Germany, the Berlin Brandenburg Airport was delayed nine years and finally opened in 2020 just when air travel traffic was at a historic low. The Big Dig tunnel project in Boston took 15 years to complete and came in five times over budget costing $22 billion in total.

As governments and the private sector specifically embark on climate transition infrastructure spending, some of the major challenges include i) operational risk (cost overruns/schedule delays/technical issues), ii) raising capital, and iii) managing credit and political risk.

Five successful capital strategies

  1. Securing quality EPC contractors to enhance project bankability: Having credit solutions in place can make it more appealing for Engineering, Procurement, and Construction (EPC) contractors to take on projects in challenging geographies.
  2. Enhancing valuations for investors and sponsors: Political risk solutions can protect against the negative impacts of government intervention in the equity investment value of a project.
  3. Protecting project cash flows: Offtake or power purchase agreements are the key source of cash flows for infrastructure projects. These revenues can be protected through breach of contract or non-payment solutions.
  4. Supporting supply chain resilience: Most project companies enter into long-term take-or-pay contracts to secure the supply of raw materials at an agreed volume and price. Insurance solutions can mitigate performance risks in the supply chain.
  5. Increasing infrastructure lending capacity: Lenders can insure the borrower non-payment risk and/or distribute their bank guarantee exposures to surety providers on a risk participation basis. Accessing insurance capital can enable banks to increase credit lines and improve their return on capital.

Infrastructure projects stakeholders map

Selection of Credit Solutions

Credit Solutions to unlock value

Background

Insurers have covered political risks on infrastructure projects for decades. In the last few years, insurers have also advanced their coverage solutions for comprehensive non-payment risk on non-recourse project financing.

Insurer appetite for renewable assets has been amplified in their move to diversify away from historical concentrations in the oil and gas sector. Renewable energy projects make up a large share of new transaction volumes, with insurers providing both non-payment and political risk cover for project financing. There is now considerable market depth and capability available to meet the requirements tenor (15+ years) for this asset class. For project finance lenders, taking up credit insurance allows them to manage internal credit limits, increase lending ticket sizes and obtain capital relief in some jurisdictions.

Climate transition will remain a key priority for financial institutions – from understanding and reporting on links between climate risk and credit risk to capturing opportunities from growing client demand for sustainability-linked lending and green loans.

Capacity appetite

There are also other tangible signs of significant growth in the credit insurance capital being allocated to renewable transactions. Recently, two insurers provided capital to launch an independently-run underwriting platform, focused solely on green project finance transactions. This new market entrant has an underwriting capacity of up to $50 million per transaction for up to 20 years and illustrates the growth in new credit insurance capital available in this space. Another trend we are seeing is the rise of “green cycle” solutions where premiums earned from insuring green asset financing are reinvested into the green economy via certified green bonds.

"Credit insurers have made a significant investment in supporting financial institutions to help fund the green economy and we expect this partnership and growth to continue."

Aon's 2023 market capacity review

Aon continuously monitors insurance capacity through our various tools and platforms. Despite a hard reinsurance renewal, Credit and Political Risk capacity in the market is still increasing albeit at a slower pace compared to the pre-COVID period.

Source: Aon's Market Capacity Review 2023