Efficiency and risk: auditors and infrastructure projects
24 February 2021: Bill Meredith, Audit Partner at KPMG, specialises in infrastructure, building and real estate businesses. He says climate and social risk impacts are all much better understood and reportable than previously.
Infrastructure is at the forefront of enabling environmental change, whether through energy transition to renewables or extending broadband to reduce travel and transport emissions.
The issues may be shifting as we enter the net-zero landscape and stakeholders work to drive carbon out of what has been a carbon-intensive sector, however, infrastructure businesses will also need to continue to focus on risk management and project execution. An auditor’s top priority is to understand the project risks, assess the controls infrastructure companies have put in place when taking on complex infrastructure projects and make sure that project performance is appropriately reflected in the accounts. “We look for the risk areas and dig deeper if anything sets off alarm bells,” says Meredith.
“At the start of large infrastructure projects, you don’t have complete information. You don’t know what the ground conditions are going to be. You don't know how easy it is to plan what you're going to do. You don't know what you're going to be faced with until you actually do it. You have to make some quite big estimates. There's that estimation risk that you have to get right at the start of the project.”
Managing risk is intrinsic to these types of projects and it does not stop with managing the unknown at the beginning of a project. “There is always a complex supply chain that these types of companies will have to make sure to deliver for them. There is a lot of risk in managing all the interfaces in the supply chain and making sure each element of the supply chain knows its responsibilities,” says Meredith. “And then it's really about monitoring everything so that if things go wrong, the problem can be identified really quickly, and the project team can drill down and manage any problems.”
He points out that projects that start to become problematic tend to keep on getting worse until there is intervention, identification of the problem and correction. It is all about getting projects back on track – and quickly given the size of these investments.
And, of course, the construction sector is subject to that bit more scrutiny in the prevailing environment. “I think there's always inherent risk in big projects,” says Meredith. “I don't think you can eliminate that.”
He continues: “But what you can do is to try and control and monitor those risks more carefully. Those in the supply chain are also being a bit more careful about the types of arrangements that they enter into.”
Caution is also being exercised that little bit more at the bidding stage of projects, he points out. Have those companies really got the capability to deliver those big projects before they enter into them? More questions are being asked.
And some risks have always been there but are rightly becoming the subject of greater scrutiny, measurement and reporting. Climate risk, social risk and impacts are all much better understood and reportable than previously.
“Wastage and sustainability issues are becoming key aspects of all projects,” says Meredith. “This is not only a concern for the construction company, but also for the client. So, if you're developing a project – and retaining a construction company – you're going to have your own environmental, social and governance requirements to make sure that you are driving down all those inefficiencies and waste effectively and contributing to your communities.”
The client and delivery organisation aside, investors are also in the mix. “Investors are very keen on seeing what companies are actually doing about climate change, and we're at the stage now where a lot of companies will be making targets or commitments to achieving net zero,” says Meredith.
“Companies will be asking themselves what meeting environmental and social goals means for them. It will mean that they will have to drill right down into every project and every supply chain and ask more challenging questions. Companies will have to behave in a much more sustainable way.”
He points out that the next step will be probably global standards on environmental reporting, in the same way as we have accounting standards. Investors are already keen to see these metrics and they are only going to become increasingly important in the shift to net zero.
“I think most companies are collecting more data, but it would be fair to say that not everybody's got all the data they need at the moment,” says Meredith. “It is going to be a bit of a journey for businesses, and they are starting that journey, working out what the key data is, and then they'll start building it up. That’s already happening in terms of carbon emissions but there are other data requirements that large companies need to meet and to do so in a standardised way under the TCFD framework, and probably assured by external parties as well.”
How does an auditor bring auditor-thinking to how infrastructure businesses address climate change?
“We ask our clients what these targets they’re setting in terms of net zero mean for them as a business. There may be increased costs, there may be future hurdles to accommodate, resilience issues, and ultimately there may be questions about expected returns,” says Meredith. “It comes down to looking at the whole business model, and the strategic risks that are going to affect that business model and how the companies are going to manage the risks as well as report them in the future.”
The auditor brings discipline to that process of demonstrating accountability, points out Meredith, including but not only financial discipline. “It is also important not to lose sight of the fact that there has to be a financial return on a project,” he says, “and, in the end, that will also drive efficiency and rigour.”