New Civil Engineer has teamed up with Autodesk to try and capture a common vision for what the future of financing for major projects should look like, exploring how the industry might get there, and what data will be needed to support the industry.
An initial gathering of experts was convened last summer to thrash out the issue and two critical themes were identified.
The debate begins
The first theme articulated by the group was that the positions of the three major parties in the infrastructure equation – government, financiers and engineers were too far apart. How can these three constituents be brought closer together, and what benefits would that deliver?
Risk was a second theme that ran throughout the debate – the risks associated with the construction phase of major infrastructure, and the ability to match investor risk appetite with the risk profiles of projects. What should the future of risk management look like to solve these problems, and what benefits would that deliver?
A second gathering of experts was convened in the late Autumn to attempt to address those themes, and it emerged that, first of all, there had to be a recognition of where the knowledge gaps were within the key players – government as policy driver; the civil engineer as deliverer; the financier as supplier of the private capital; and, critically, the public as ultimate provider of public capital and heavy influencer of government policy.
For government it was viewed that the current gap is a real understanding of the value of taking a long term view on the whole life of infrastructure assets as a system – as opposed to taking a short term view on a series of individual assets.
That then feeds through to the public which needs educating about why it is necessary to make and sustain long term investment in infrastructure.
The challenge for the government, it could be surmised, is to uphold a long-term strategy for the provision of infrastructure systems against a backdrop of short-term expectations from the public.
At the delivery end, for contractors – and the broader supply chain – the need is to improve project delivery against a backdrop of work pipeline uncertainty that acts as a barrier to investment in new processes and technology. Is it possible for the supply chain to collectively work to transform client engagement from costs and assets focus to value and outcomes focus?
And for the financier there is a real need to better match investor appetite for risk with genuine project risk profiles.
So the question remains: what barriers are currently preventing these key parties from communicating effectively and closing these gaps?
Closing the gap between government and public
All funding ultimately comes from the public. Whether it is in taxes to pay the government which then funds infrastructure or in road tolls, water bills or airline landing charges paid to the private sector which, in turn, funds infrastructure.
So government closing the gap to the public is key.
The solution presented
Fundamentally, it was felt, the public needs educating about why we need to make the investments we do, especially long-term investments such as maintenance or improved rail signalling. “The not sexy stuff,” as one of the panel said.
“Ministers need to buy into and sell to the public whole life asset management as sexy,” it was said. “They have to see the value of the whole life of assets over cutting ribbons,” was another comment “Software is just as important as hardware,” was another.
Closing the gap between engineer and government
Getting ministers to shed the need to cut ribbons is tall order. And the clear view was also that we, as engineers, need to make ministers – who speak and make decisions on behalf of the public – more understanding of the importance of maximising the whole life value of an asset – not just opening something new.
Closing the gap between financiers and government
Financiers have a key role to play too. They have to help governments understand how to monetise wider economic benefits of infrastructure. It was pointed out that the fare box or unit price of electricity will never fully fund a project. Hong Kong’s rail operator MTR was cited as the outstanding example, where oversite developments are enabling major rail upgrades to proceed. The same happens in Japan, and many other urban centres around the world.
Once there is clarity about the whole life cost/benefit of an infrastructure project, investors get much more interested. As one of our panel said: “if they can see a long term income stream then they will get more interested in supporting an increased capital outlay for a better long-term solution”.
The digital railway – Network Rail’s big idea to release an up to 60% increase in capacity from the existing network through digital signalling – arguably needs public funding to be supplemented by private funding. So is there a long-term income stream that could be offered to a private investor based on line availability and or available capacity?
Clarity is key
But the question remains would the government – wary of public backlash – accept one supplier taking a long term return? It’s a good example, as it also reinforces the need to close that gap between public and government around the need for long-term investment.
And it is also a great example as the reality is such a programme would need a long term return for the financier as the risk would be perceived as high.
Closing the gap between engineers and financiers
The engineering fraternity can help here. As another panellist commented: “anything with technology scares investors”. Engineers need to better realise the significance of the risks that lie in commissioning and operations and start projects from that viewpoint. Major projects do not fail because of construction delays; they fail because of commissioning and operations issues: Terminal 5 was the great example of that.
Closing the gap between engineers and government
Bringing it all together, it is clear that engineers can assist more with the planning stage. For example, engineers can use technology to communicate and collaborate with the public to sell a long term vision. Technology must also be used to better deliver projects with less disruption; this reassures the public, government and financiers in equal measure.
The government, in return, must continue offering a reliable, trustable, long term view on the infrastructure pipeline to give engineers confidence to invest in technology and resources to aid the long term selling of schemes to the public.
Using technology to rethink risk
The overarching need around risk is for everyone to understand the need to innovate in what is, by its nature, a risky environment. There is a clear view that this means having flexibility in specification, a culture around value engineering with effective incentives to innovate, and commercial and investment models that support innovation and allow engagement with the supply chain in a timely manner.
And fundamentally, an understanding that the functional requirement – the output - needs to improve.
At the delivery stage, it was observed that the information gap between design and construction is too large; concerns were also raised that expertise from clients and contractors has been sold to consultants over last 20 years; and it was noted that some procurement models still in use today are not viable – particularly those that still place a heavy emphasis on price over quality.
Technology plays a key role here: the industrialisation of the construction process will demand building information modelling and total information exchange. Technology will also drive down the transaction cost.
Investment risk will be addressed by changing to a different model that focuses on the effect of infrastructure; the added value it makes to a local area. Such a shift in thinking requires local government to collaborate with the marketplace as they are often the landowner, and again technology will play a major role in helping visualise what is possible and also to quantify the value proposition.
So where do we go from here? Are these the right gaps that need closing? Through 2016 New Civil Engineer plans to work through these issues, providing best practice examples of where they have been addressed and offering thoughts on how others can follow.
Alan Couzens, head of infrastructure performance and reporting, Infrastructure UK
Jaap Flikweert, director water governance and strategy, Royal Haskoning
Andrew McNaughton, technical director, HS2 Ltd
Darryl Murphy partner, global infrastructure, KPMG
Julian Ware senior principal, finance, Transport for London
Duncan Wilkinson, director, Arup
Mark Hansford, editor New Civil Engineer
Paul Flemming, Autodesk
Nigel Curry, chief executive Rhead Group
Vardy Jones, director, Rendell
John-Pierre Margolin, BD manager, Bouygues
Murray Rowden, MD infrastructure, Turner & Townsend
Adrian Savory, operations director, Bam Nuttall
Neil Thompson, UK head of digital research and innovation, Balfour Beatty
Alexandra Wynne, deputy editor, New Civil Engineer
Dominic Thasarathar, Autodesk