Management report > Risks

Contribution to value creation

Ferrovial is exposed to a variety of risks inherent to the activity and the countries where it operates. The company identifies and assesses these risks and implements timely control measures to mitigate their probability of occurrence and/or potential impact, in acordance with the strategic objectives set. In addition, thanks to an effective and efficient management of certain risks, it is possible to identify new business opportunities.


Main Risks

The main risks to the success of Ferrovial's strategy, and therefore its ability to create value, are related to some of the inherent risks in the markets where it operates. These include:

1. Increased competition in the markets in which Ferrovial operates that may affect the profitability and value creation in activities focused on long-term projects with significant execution risks.

The financial crisis in emerging economies, triggered by slowing growth and a progressive decline in commodity prices, has undermined demand for infrastructure. This has entailed greater risk of concentration of competitors in the rest of the international market, with subsequent pressure on prices and margins.

The company conducts a study of the competitive climate in target regions, it has a procedure in place to approve investments and divestments, while establishing limits on the acceptable risk by activities and project types. Once an investment decision has been made, risks are monitored for the lifetime of each project in order to identify any new risks well in advance.

2. Economic stagnation and tax consolidation: the impact that these conditions may have on the ability of public investment.

The potential macroeconomic deterioration in countries where Ferrovial operates and fiscal consolidation policies in the same, lead to a decline in investment capacity at public sector bodies and lower confidence among private investors. This may drive down both demand and margins, as well as lead to increased conflicts with clients.

This risk is mitigated by a strategy of selective internationalization in those geographies with high legal certainty and in which socio-economic stability and tax regulation is expected, specifically focused on five countries: Spain, United States, United Kingdom, Canada and Poland.

Additionally, the company conducts continued analysis of business opportunities by activity and geographical area, helping to predict changes and/or declines in demand.

Throughout 2015 certain cases have been revealed that demonstrate the 65 importance of this type of risk for Ferrovial's activity.

Consequently, the number of litigations increased in some markets in which the company operates as a result of budgetary restrictions and some of our clients needing to curb costs. In the note in the financial statements on litigations the main outstanding cases are detailed. These include the dispute with Birmingham City Council in the United Kingdom, in which Ferrovial has taken the necessary legal defense measures to enforce its contractual rights and the administrative litigation undertaken by the "Autopista Terrassa Manresa" concession for the restoration of the economic and financial balance, damaged as a result of the change in the concession scheme approved by the Generalitat of Catalonia in July 2015.

3. Some of the activities carried out by Ferrovial may be affected by changes that alter the legal and regulatory framework under which the company operates, and that affect the firm's ability to manage and monetize its business.

The company continuously monitors the regulatory and legislative procedures that affect the company's activity, with a view to predicting possible changes, appropriately managing the same and capitalizing on any opportunities.

It is noteworthy that Ferrovial evaluates and monitors any emerging risks that might negatively affect its ability to meet strategic targets, in order to adapt its strategy sufficiently in advance. Among others include natural disasters or those caused by human action, terrorism in all its forms, humanitarian crises, anti-globalization and protectionist political movements to reduce international investment and jeopardize free competition, occurrence of technological obsolescence, etc.

It is finally noteworthy that as well as the aforementioned risks, the context of economic, social and political uncertainty that currently exists globally can increase the relevance of some risks that are currently considered unlikely or irrelevant.

Financial risks

Section 5.4. of the Consolidated Financial Statements describes Ferrovial’s level of exposition and management in relation to the most relevant financial risk events: interest rates, exchange rates, share price, liquidity and credit. Said analysis is performed distinguishing those policies applied to companies developing infrastructure projects and the rest of companies, in those cases where the difference is relevant.

Effective Risk Management: Ferrovial Risk Management (FRM)

Ferrovial has a risk identification and assessment process in place, called Ferrovial Risk Management (FRM), supervised by the Board of Directors and the Management Committee (M.C.), and which is implemented in all of the group's business areas.

This process allows us to identify, in good time, and to assess the risk events based on their probability of occurrence and their potential impact on strategic business objectives, including the potential impact on corporate reputation, in order to take management measures and more suitable assurance based on the nature and location of the risk.

Based on common metrics, two assessments of the identified risk events are carried out: One inherent assessment, which takes place before implementing the specific control measures for mitigating risks, regardless of their impact or probability of occurrence. The other assessment, residual, is carried out after taking the specific control measures. In addition to determining the relative importance of each risk event in the risk matrix, this serves to evaluate the efficiency of the implemented control measures for risk management.

For more information, see the E section of the Annual Corporate Governance Report.

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