Between the Poles

I-5 bridge classified as Functionally Obsolete in the National Bridge Inventory

Transportation for America has put the National Bridge Inventory of 604,474 bridges on line with Google Maps so you can zoom to any area in the U.S. and see which bridges are structurally deficient and the daily traffic on them.  In this example I've zoomed to the I-5 bridge near Mt Vernon that collapsed this morning.

It is interesting that Google Maps no longer shows the bridge.  The bridge is classified as Functionally Obsolete.  It was built in 1955 and handles 70,526 cars a day. 

Status

Deck 6 (Equal to present minimum criteria)
Superstructure 5 (Somewhat better than minimum adequacy to tolerate being left in place as is)
Substructure 6 (Equal to present minimum criteria)

It is supposed to be inspected every two years.  It was last inspected nearly 3 years ago.

"Functionally obsolete" means that the design of a bridge is not suitable for its current use, such as lack of safety shoulders or the inability to handle current traffic volume, speed, size, or weight.

I-5 bridge collapse: Is private capital the solution for the sad state of American infrastructure ?

In 2009 Blaine Leonard, of the Utah Department of Transportation and the then President-elect of the American Society of Civil Engineers (ASCE), gave the opening keynote at GITA 2009.  His talk focussed on the 2009 ASCE Scorecard on American infrastructure and what the stimulus means for addressing some of the infrastructure challenges that the ASCE has successfully attracted public attention to.

 Mr. Leonard presented a breakdown of the part of the ARRA spend that the ASCE believes is going to infrastructure, something over $70 billion, and then discussed the short fall for several of the items.

The key takeway I left with is that the stimulus is making a significant dent, but by itself it is insufficient to resolve the problem.  Of the $2.2 trillion the ASCE estimates is required to bring American infrastructure up to an acceptable level, meaning B- or C+, the money currently allocated by all levels of government is about 45% of what is necessary.

In 2010  a bipartisan report was released that calls for “a fundamental overhaul of America’s transportation policies and programs.  The report estimates a federal shortfall of up to $194 billion a year in infrastructure spending on roads, rail, and air transportation through 2035. Given the poor state of current US transportation infrastructure, as described in the ASCE's Infrastructure Report Card, it is estimated that an investment of $262 billion per year will be required to actually improve the US transportation network.  The report cites lack of  a vision and underinvestment as compromising US productivity and its ability to compete internationally.  The report says that it is time to "rethink existing systems for the 21st century and create an agenda for enacting change."

Deteriorating infrastructure and private capital

Last year President Obama in his State of the Union speech specifically called out infrastructure as requiring significant investment.  He said that "our infrastructure used to be the best", and mentioned countries such as Russia, China, South Korea, and several European countries that are ahead of the US in many sectors of infrastructure.  He also referred to the American Society of Civil Engineers' Intrastructure Scorecard that assigned a grade of "D" to American infrastructure.

He said that the Administration is proposiing to redouble the rebuilding efforts that were initiated over the past two years and identified attracting private funding as important for this effort.

UK National Infrastructure Plan based on private capital

Last year at the Global Infrastructure Leadership Forum, Geoffrey Spence, who heads up Infrastructure UK, the Treasury body that oversees the UK’s infrastructure plan, gave an overview of the National Infrastructure Plan of the UK.  The fact that Geofffrey Spence was a personal economic adviser to Chancellor Alistair Darling during the last banking crisis, gives some indication of how seiously the UK Government is treating infrastructure.

In 2011 the Government released its National Infrastructure Plan, which outlines a plan to invest about £250 billion in the next five yrs and £ 400 billion in the 10 yrs on infrastructure including high speed rail, energy (especially nuclear and wind), aviation, water and wastewater, roads and highways, and high speed broadband.  This is a considerably higher spend than in the past and signals a change in focus from social infrastructure such as hospitals and government facilities to economic infrastructure. 

The most revolutionary aspect of this plan is the intention that 70% of the funding will come from the private sector.

The Institution of Civil Engineers (ICE) has said that it supports the vision as expressed in the Plan and that it believes that it would enable the UK to compete in the global economy. It specifically recommended that HM Government assign a senior minister with responsibility for monitoring performance against Plan, create a simple set of performance measures for infrastructure that are independently assessed, and develop a two year pipeline of infrastructure projects to help the private sector to improve efficiency.  The ICE also suggested ways to asist the Government to attract private investment.

Geoffrey Spense said that the Government wants full transparency for the infrastructure effort, so that business will know where they should focus its efforts over the next ten years.  It intends to maintain an open pipeline of projects for the next several years so that, for example, companies specializing in tunneling will be able to see for all tunneling projects in one place, whether they are for rail, sewers, or nuclear power plants.  He said that there is a multi-ministry subcommittee that meets regularly to identify where blockages are occurring between ministries and to work colaboratively to streamline infrastructure projects where multiple ministries are involved.

The challenge of construction productivity

McKinsey says that construction productivity has stagnated or declined in many countries and gave historical construction productivity data for the European Union, Korea, Japan, and the U.S.

McKinsey suggested that governments and infrastructure investors could reduce risks and increase returns by focussing on three areas,

• Improving priductivity of existing and new assets

For example, by tuning the regulatory and market structure to improve efficiency and expand capacity.

• Making the economic model more attractive to investors

By being smarter about matching capacity expansions to demand and  finding additional sources of revenue.

• Reducing cost and risk by improving project delivery

By allowing more competition, pushing more risk on to contractors, and encouraging engineering, procurement and construction (EPC) companies to increase their build capabilities.

Several speakers reiterated that one of the major problem in the infrastructure sector is the lack of data for comparing efficiency of construction and operation across projects.

McKinsey suggested that more private sector involvement in infrastructure projects could result in an estimated 30% improvement in construction productivity over 5-10 years, resulting from the combination of 5-15% reduction in the cost of design and planning, 5-10% in engineeering, 5-10% in materials purchase and sub-contracting, 3-5% in construction, and  3-5% from organizational enablers.  They estimate that this would translate into a 20% reduction in overall infrastructure spend.

Can alternative business models for water distribution help resolve the water crisis ?

There are several business models for water distribution including investor owned, coops, regional associations, private-public partnerships and municipal.  In the UK there are a small number of regulated regional investor owned water utilities like Thames Water, Northwest Water and Southern Water each of which serves millions of customers.  But in many parts of the world water and waste water are a municipal responsibility.  In France water and waste water are the responsibility of municipalities, but 75% of water and 50% of waste water services are contacted out to private sector companies like Veolia and Suez.  In the Unites States there are about 54,000 community public water systems, which are either publicly owned, cooperatives or privately owned.  But about 50,000 of these systems provide water in localities with less than 10,000 inhabitants.

Water and waste water funding gap

Only a portion of water infrastructure maintenance and operations costs are covered by rates in the United States, the rest comes from grants from several levels of government.  Both the American Society of Civil Engineers (ASCE) has estimated that the water infrastructure funding gap is on the order of $20 billion per year.   As a result most municipalities across North America under-invested in water infrastructure for years and many are now faced with the reality of aging infrastructure with increasing leakage and breakage, competition for more limited (quality and quantity) sources of water, and the increasingly costly impact of regulation from state and Federal regulators.  Assuming every pipe would need to be replaced, the cost over the coming decades could reach more than $1 trillion, according to the American Water Works Association (AWWA).  Capital investment needs for U.S. waste water and storm water systems are estimated to total $298 billion over the next 20 years according to the ASCE.

Municipal water systems are typically departments of the city government and are controlled by the mayor and the city council.  And like public water companies around the world, it has been very difficult to persuade elected officials to raise water rates to cover the funding gap.  From Margaret Catley-Carlson's perspective, the crossover between elected officials and water and water pricing is one of the universals around the world.  She told a story of how even in the great drought of Spain two summers ago Spain was still charging less for water than any of the other European countries.  She talked to people in Spain and they understood that paying more for water was part of the solution, but it was not possible to get elected officials to make the decision to increase water rates.

Utilities that have surmounted the funding gap

At the Canadian Water Network conference we heard about two examples of municipally water companies, both of which are unique  in their own ways, but both have been able to get the needed funding to fill the gap in infrastructure spending.  These companies which may be pointing the way to the future of water delivery. 

The first,  EPCOR Utilities based in Edmonton, Alberta, is run like a private corporation, but is wholly owned by a municipality for which it is a source of revenue, estimated at about $1.5 billion since it was formed.

The second, Greater Victoria Water Services, is structured like a municipal public water company, but because it is a regional water utility it has a board that has an arms length relationship to its constituency.

One important thing that both of them have in common is that they were both able to successfully structure solutions to problems facing their water utility as a result of a major crisis, a financial crisis in the case of EPCOR and a major water main break in the case of Greater Victoria Water Services.

EPCOR Utilities

Don Lowry, past President and CEO of EPCOR Utilities, is a strong believer that the only way to have a functioning water distribution system is that everyone must pay for water.  In his view water is not an entitlement,   it's a hard earned right.  You have to be diligent and work 24x7 on continuously earning that right to have access to water and a sustained, continuous supply of water. 

EPCOR was formed in a crisis.  The city was faced with a significant financial crises during the Canada's National Energy Program.  Facing massive layoffs and job losses, the water system had no choice.  It had to carry its own weight, recover its own costs and start to be a growth engine for the city as opposed to a burden for the city.  As a result EPCOR Utilities is 100% owned by the City of Edmonton, but it is operated completely as aa commercial enterprise.  EPCOR has become the water and waste water provider for a large footprint  of water and waste water utilities in Western Canada. They are also the largest private water supplier in the states of Arizona and New Mexico in the U.S. 

The way that EPCOR is setup is that it is 100% owned by the City but has an independent board of directors under a universal shareholders' agreement that puts it on a standalone basis.   It must finance its operation completely from earnings of the business or what it raises on the capital markets.  It has a BBB+ credit rating.  EPCOR pays its shareholder a dividend.  Since 1998 the dividend was $67 million annually, today it is $144 million.  The company has returned back to the shareholder over $1.5 billion in cash, taxes, fees and dividends and this is growing.  EPCOR pays tax in every jurisdiction in which it does business and it competes in the capital markets.  Most importantly EPCOR fully costs its water, there are no subsidies.  They are able to compete and EPCOR's water utilities are thriving and growing..

The three key challenges EPCOR sees facing water today is the scarcity of it, the deterioration of the infrastructure and and most importantly the fragmented approach that we in North America take to its operation, regulation and financing.
 
Scarcity

The increasing scarcity of water is an absolute growing concern.  In southern Alberta it has been fully allocated.   There can be no further development unless there is trading of water rights or the diversion of water from one use to another.  EPCOR is working to make better utilization of the water that they use.  For example, they are capturing the water that we would have previously diverted back into the river after processing it through their waste water treatment plant and are piping 15 million liters per day to a Suncor refienry ro make petrochemical products.  But in the long run the scarcity of water is going to lead to longer pipes, bigger pumps, more chemicals,  more competition for water, higher costs and Don believes that the current service delivery model is not going to make it.

Aging infrastructure

North American infrastructure is getting older.  Most of the infrastructure that was put in Canada and most in the US was put in major chunks.  A lot of it in the 60s and 70s and it is old and deteriorated and needs to be replaced.   On top of that you need to layer the growth requirements and the replacement requirements.  In Canada alone it is estimated to amount to about $80 billion for replacement and to plan for the growth of infrastructure, pumps, pipes, valves, plants, and meters necessary to deliver that essential service.  In the US it's estimated to be over a trillion dollars.  In Edmonton EPCOR has a major program underway to replace the cast iron pipe that was put in shortly after the Second World War, that  has deteriorated dreadfully, causing leaks and water main breaks.  As a result they are starting to see results, fewer leaks and less breakage.  This is an example of a program EPCOR expects that that other municipalities are gong to have start to aggressively implement to replace ageing infrastructure.  \

Fragmentation

North America is backward in terms of how we approach the treatment, the delivery, and the recycling of water across Canada and US in terms of the shear number of companies.  There are over 54 000 water companies in the US, ranging from the local water company in a town of 10 people up to millions of people in New York,  However, 8% of those companies serve 81 % of the entire population.  The other 92% serve 19% of the population.  The story is not much different in Alberta.  Of the over 530 water companies in Alberta, the top 10 water utilities serve 76 % of the population, the other 520 or so  serve 24% of the population.  Don's point is that with such a fragmented structure we can't get the economies of scale that we see in other industries in our society, such as airlines, telephony, wireless, natural gas, and electricity.  The present fragmented state of the industry it brings its own stream of inefficiencies and concerns such as how do you adequately train people in very small water utilities and how do you fund all these water utilities.  Even more critically how do you ensure that what happened in Walkerton and North Battleford (well publicized outbreaks of water borne disease outbreaks in small communities) don't get repeated.

According to Don, the Government of Alberta has taken a first step in this direction and has embarked on a conversation with the regions within the province to look at the watersheds and consider the creation of utilities similar to EPCOR that could achieve an economy of scale for all of the water needs for each region.  This could be a first step toward shrinking the over 530 existing water companies down to perhaps 10 or 12 to begin to achieve some efficiencies of scale.

Water Services, Capital Region District, Greater Victoria, British Columbia

Jack Hull, General Manager of Water Services of the Capital Region District in Victoria, British Columbia, gave an overview of some of the successes Greater Victoria Water Services have had in implementing some of the measures that have been implemented by EPCOR. 

First of all he said categorically that there is no infrastructure deficit in the Greater Victoria water supply system.  It was eliminated over a 15 year period.  Like a lot of municipalities the Greater Victoria Water started off in the early 90s with underinvestment.  “If it breaks, we'll fix it,  but we won't be proactive.”  Greater Victoria Water put a strategic plan in place to address water supply, water quality, and infrastructure and pricing issues.  They moved to a utility model for pricing, which is based on the asset base.   Over the next 15 years with over $200 million in investment Greater Victoria Water eliminated its infrastructure deficit and addressed its water quality and quantity issues. 

All the decision making was ultimately done by a group of politicians who recognized that if they didn't invest,  there was going to be a major negative impact on the quality of life within the capital region.

Greater Victoria Water also runs the distribution systems that serves about 60 000 people in five neighbouring  municipalities.  Similarly to EPCOR's cast iron pipes problem in Edmonton, it was necessary to replace asbestos cement pipes.  Greater Victoria Water recommended a 10 year program to address this issue, but the politicians came back and said no we want to do it in five years and they put the money behind it to do it in five years.

Greater Victoria Water has been able to successfully promote water conservation.  A utility model obviously is able to generate revenue.  According to Jack every cent of that revenue goes back into improving the infrastructure and eliminating the deficit.  During the same period, particularly in the last 10 years, Greater Victoria experienced 14 % growth in population, but water demand dropped by 8% during that same period.  In 2001 Greater Victoria Water had a ban on outdoor water use for 9 months of the year.  Last year normal water use was down to that level without anything extraordinary in terms of water restrictions.  

From Jack's perspective, given the right group of politicians and the right group of managers you can achieve much of what EPCOR has done without going to the fully corporatized model.

Jack said that he fully supports what EPCOR has done with small systems because that is where the real issue is.  Small systems do not have the resources to deal with some of these issues and that is where an organization like EPCOR can  provide significant assistance, which a regional government  can't do because of the legislation that controls regional government.
 
With respect to governance the Greater Victoria Water board is one step away from the electorate because they are members of local councils who are appointed to the regional board.  They are elected officials at the local level, but appointed to the regional board and appointed to the water commission so they are one step away from being directly elected to the board.

The other thing that contributed to this achievement was a crisis.  On New Year's Eve in 1992 Victoria had a major water main break.  A 36" water main burst and caused a lot of damage.  So when Greater Victoria Water reviewed its budget that year they had lots of photos of all the damage caused by the water main break.  The fact that it took 18 hours to shut the water off because the valves hadn't been serviced probably since 1915 when they were installed.  There were photos of air release valves that couldn't be recognized as valves, because they were just  clumps of rust.  As a result when at the budget review Water Services asked for some money to do a study on infrastructure, Jack related that this was one of two times in the last 20 years when politicians asked him if he was sure he had enough money in his budget, didn't he need some more ?

Conclusions

The most important conclusion I take from this is that water needs to be fully costed from the water source to treatment and reinjection if we are going to have sustainable water systems that work.  The second is that there are several ways to skin the cat but setting up a governance structure that allows the water utility to be run an arm's length from the elected politicians seems to be key. Thirdly, small water systems are facing a crisis, because it is going to be increasingly difficult and expensive for them to access the resources they need and it may be regional companies based on the EPCOR model that can resolve this problem.  And the moral of the story is don't waste a good crisis.

A Lean approach to streamlining utility business processes

I have blogged on many occasions about pathological business processes for designing, building and operating and maintaining infrastructure that plague many utilities. Some of these processes don't seem to have changed since Edison and Tesla's time and result in redundant data, wasted effort, backlogs, and poor data quality.

At the EDIST 2013 Conference in Toronto, Ottawa Hydro described how they used a Lean Process to address this problem specifically in the capital execution (design and build) process.

Ottawa Hydro spends $90 million every year on capital projects and this is forecasted to increase, because of aging infrastructure and the transformation to the new smart grid.  But in this time of aging and shrinking workforces at utiities, they have found that while capital expenditures are going up, they have less staff to manage the process.  The result has been frustrated staff and delays in construction because designs are not getting completed in time, increasing spend on overtime, and most importantly a significant carryover of capital, and worst of all and unhappy regulator (the Ontario Energy Board).

The Lean Process involved convening a team of 10 grass roots people  from all divisions of the company who spent 5 days identifying the the current state and the issues associated with it.  66 issues were identified.   They took a break for 2 weeks and then got together for 5 days of brainstorming resulting in a set of recommendations to upper management.  They prioritized the recommendations based on their projected impact and size.  They moved first with simple processes involving one department with immediate payback.  After successfully completing a few of these, they moved on to more complex processes involving multiple departments.

The results speak for themselves.  Even though the capital budget has increased they are getting the work done and have reduced overtime by 35%.

The water infrastructure crisis and the evolution of asset management at a small water utility

Last week at the GIS in the Rockies annual conference in Denver Elthron Anderson of Southgate Water and Saniation Districts gave a very insightful presentation on the evolution of asset management at a small water and wastewater utility.  To set the stage and convey the urgency of what he was gong to present,  the first question that Elthron asked the audience is how many of you are aware that there is a crisis with our water/wastewater infrastructure.  If you are not aware that there is a crisis, a good place to start to get a feel for it is the ASCE's Report Card on American Infrastructure, which assigns a grade of D- to America's drinking water and wastewater infrastructure.

Southgate has followed a fairly typical path for a small utility in the evolution of its ability to manage its assets.  Prior to 2007, asset records were in the form of AutoCAD drawings.  In 2007-2008 Southgate implemented a GIS to manage asset records and had to deal with CAD/GIS integration issues.  In 2009 they implemented a Computer Maintenance Management System (CMMS) and a CCTV pipeline inspection system.  In 2010 they installed a flow monitoring system.  By 2011 they had many operational systems that were generating a lot of data about their assets.

Prioritizing capital spending

At this point the public utilities board posed a fundamental question, how can we use this information to prioritize spending on infrastructure.  It was at this point that Southgate began the development process that resulted in what they refer to as their Infrastructure Optimization (IO) tool, which is designed to help engineers and operators prioritize short and long term captial investment in their infrastucture.  It is GIS-based and provides a onfigurable framework for asset risk assessment and management.  A key financial foundation is baseline replacement costs, which provides an estimated value (replacement cost) for all of their assets.  With this tool Southgate is able to perform scenario based planning  for both renewal (replacement) and maintenance.

Business risk exposure

Risk or Business Risk Exposure (BRE) is computed from three factors, probability of failure (POF), consequence of failure (COF), and redundancy. 

The probabliliy of failure can be estimated from factors such age, condition, operational / maintenance history (breakage, leakage, defects), physical Location (associated soil characteristics, climatic conditions, proximity to construction activity), and asset reliability and performance information.

The consequence of failure is estimated from factors such as accessibility to repair, environmental Impacts, critical facilities served such as hospitals, proximity to structures (roads/buildings/lakes/creeks), cost, health and safety concerns, and regulatory Impacts.

Redundancy refers to whether the asset is whether thet asset is a critical asset or whether there are other assets that are able to provide the same service.  For example, a large diameter pipe responsible for gathering and conducting all the sewage for an entire city to the water treatment plant is a critical asset because there is no alternative.

Business Risk Exposure provides a measure for all their asets of business crticality that allows Southgate to prioritize all of their assets for renewal and maintenance.

Since they know the replacement value of their assets and the costs of maintenance, with their annual budget forecast they can schedule maintenance and replacement of all their assets into the future.  Southgate has done this for 50 years into the future.  This allows them to estimate the impact of gaps in current maintenance and capital replacement budgets on future spending.

 

And this is the crisis that Elthron referred to at the begiining of his talk.  As the ASCE and the EPA have shown, there is a large gap, estimated by the ASCE at $108.6 billion over 5 years, between what we are currently spending on water and wastewater infrastructure and what we should be spending to maintain this critical infrastructure at an acceptable level.   Sooner or later we are going to have to pay the piper.  It will be more expensive later.

UK National Infrastructure Plan includes public loan guarantees for private investment

I have blogged previously about the UK National Infrastructure Plan which plans to invest about £250 billion in the next five yrs and £ 400 billion in the 10 yrs on infrastructure including high speed rail, energy (especially nuclear and wind), aviation, water and wastewater, roads and highways, and high speed broadband.  This is a considerably higher spend than in the past and focuses on economic infrastructure. The most revolutionary aspect of this plan is that 70% of the funding is intended to come from the private sector.

The government has found it diffcult to attract the level of private investment that is required, at least partially due to the adverse credit situation in Europe.  To make infrastructure investment more attractive to private investors, such as pension funds, the UK goverment has announced a £50bn loan guarantee program for private investment in infrastructure and exports.

It is estimated that up to £40 billion worth of projects could quality.  The criteria the government intends to use to assess projects are

• Nationally significant
• Ready to start construction within 12 months (similar to the U.S. ARRA's shovel-ready criterion)
• Financially credible
• Would not proceed without a loan guarantee
• Good value to the taxpayer

The loan gurantees program also includes a temporary lending programme to enable 30 public private partnership (PPP) infrastructure projects worth an estimated £6 billion to go ahead.

ASCE projects annual funding gap of $11 billion by 2020 for electric power in US

The American Society of Civil Engineers (ASCE) in its latest Failure to Act Report on electric power in the US is projecting that current trends will lead to funding gaps in electric generation, transmission, and distribution that will reach $11 billion per year and a toal accumulated gap of $107 billion by 2020.  In 2020, 88% of the investment gap will be in distribution and transmission infrastructure while about 11% of the gap will be in generation infrastructure.

The result of the investment gap wil be more frequent electricity outages including blackouts and brownouts. The ost of the investment gap is projected to cost US households $6 billion in 2012 and reach $71 billion per year by 2020. The cost to business is setimated at $10 billion in 2012 and reach $126 billion by 2020.  The total cost ot the economy is projected to average $20 billion through 2020.

Chicago Infrastructure Trust intended to attract private funds for infrastructure

At a recent conference in London, the National Infrastructure Plan for the UK was outlined.  This is a plan to invest £ 400 billion over 10 yrs in UK infrastructure including high speed rail, energy (especially nuclear and wind), aviation, water and wastewater, roads and highways, and high speed broadband.  Perhaps the most interesting aspect of this plan is the intention that 70% of the funding will come from the private sector.

The Mayor of Chicago has just outlined a $7 billion infrastructure development plan for Chicago.  An important participant in this plan is the Chicago Infrastructure Trust, an initiative announced by Mayor Emanuel and former President Bill Clinton.  The fund is a nonprofit corporation that collects private investment which is then applied to infrastructure development.

The Mayor specifically mentioned several major projects including

• $1 billion for the Chicago Transit Authority to renovate more than 100 stations and eliminate “slow zones”
• $1.4 billion for O’Hare International Airport for two new runways by 2015 and other expansion.
• $290 million for new parkland, playgrounds, basketball courts, sports fields, nature trails and bike and running paths.
• $1.4 billion to fix Chicago's water system (3,800 leaks last year), including the replacement of 900 miles of century-old water pipe, the repair of 750 miles of sewer line, and the reconstruction of 160,000 catch-basins.
• A $660 million investment in Chicago Public Schools, and a $479 million investment in the City Colleges of Chicago
• “Retrofit Chicago,” a $225 million dollar effort to retrofit City buildings, reducing their energy consumption by 25 percent - the first project funded by the Chicago Infrastructure Trust.

Presumably this is in addition to the consent decree that Chicago agreed to in December of last year to address the issue of combined sewer overflows that it is estimated will cost the city about $3 billion.

Funding the UK National Infrastructure Plan

At the Global Infrastructure Leadership Forum, Geoffrey Spence, who heads up Infrastructure UK, the Treasury body that oversees the UK’s infrastructure plan, gave an overview of the National Infrastructure Plan of the UK.  The fact that Geofffrey Spence was a personal economic adviser to Chancellor Alistair Darling during the last banking crisis, gives some indication of how seiously the UK Government is treating infrastructure.

In 2011 the Government released its National Infrastructure Plan, which outlines a plan to invest about £250 billion in the next five yrs and £ 400 billion in the 10 yrs on infrastructure including high speed rail, energy (especially nuclear and wind), aviation, water and wastewater, roads and highways, and high speed broadband.  This is a considerably higher spend than in the past and signals a change in focus from social infrastructure such as hospitals and government facilities to economic infrastructure.  Perhaps the most revolutionary aspect of this plan is the intention that 70% of the funding will come from the private sector.

The Institution of Civil Engineers (ICE) has said that it supports the vision as expressed in the Plan and that it believes that it would enable the UK to compete in the global economy. It specifically recommended that HM Government assign a senior minister with responsibility for monitoring performance against Plan, create a simple set of performance measures for infrastructure that are independently assessed, and develop a two year pipeline of infrastructure projects to help the private sector to improve efficiency.  The ICE also suggested ways to asist the Government to attract private investment.

Geoffrey Spense said that the Government wants full transparency for the infrastructure effort, so that business will know where they should focus its efforts over the next ten years.  It intends to maintain an open pipeline of projects for the next several years so that, for example, companies specializing in tunneling will be able to see for all tunneling projects in one place, whether they are for rail, sewers, or nuclear power plants.  He said that there is a multi-ministry subcommittee that meets regularly to identify where blockages are occurring between ministries and to work colaboratively to streamline infrastructure projects where multiple ministries are involved.

The critical challenge in realizing the Plan is reducing the financial burden on government. The UK Government recognizes that traditional funding mechanisms such as bonds, traditional public-private partnerships (PPP), and long term loans from banks are not longer viable. As a first step the Government is planning to reform PPP policy, and has just completed a public consultation on this.

The second problem is that banks are charging unprecedented rates, 3-4% over Treasury rates, and it is hard to find long term loans longer than seven years.  The Government is looking at how best attract the banks and at ways of encouraging banks to take on some of the risk in the early stages of projects. The Government is also looking at different models for low cost, long term financing.  For example, in Canada pension funds have been a source of long term infrastructure funding. Another option is off-shore investors such as China.

Reducing cost of infrastructure by improving construction productivity

At the Global Infrastructure Leadership Forum, a very interesting presentation was given by two consultants from McKinsey on the major trends in global infrastructure development and some suggestions of ways to address some of the challenges they have identified.

First of all they are anticipating a massive spend on infrastructure, something on the order of $7 trillion annually.  The infrastructure spend in the developing countries market is just as large as in the developed countries market. But infrastructure spending growth is significantly higher in the developing countries market.  In many countries there is a shortage of infrastructure funding from governments, which sets the stage for greater private investment.  Complex regulations and politics together are slowing infrastructure development.  For example, in the US it can take 12-20 years to build a new transmission line.  There are significant impediments preventing private capital from playing a greater role in funding infrastructure. For example, several speakers expressed doubts about the future of private-public partnerships (PPP), suggesting that a new paradigm for private investment is required. McKinsey singled out poor construction productivity as an important factor in eroding returns on infrastructure and making infrastructure less attractive for private investment.

McKinsey says that construction productivity has stagnated or declined in many countries and gave historical construction productivity data for the European Union, Korea, Japan, and the U.S.

McKinsey suggested that governments and infrastructure investors could reduce risks and increase returns by focussing on three areas,

• Improving priductivity of existing and new assets

For example, by tuning the regulatory and market structure to improve efficiency and expand capacity.

• Making the economic model more attractive to investors

By being smarter about matching capacity expansions to demand and  finding additional sources of revenue.

• Reducing cost and risk by improving project delivery

By allowing more competition, pushing more risk on to contractors, and encouraging engineering, procurement and construction (EPC) companies to increase their build capabilities.

Several speakers reiterated that one of the major problem in the infrastructure sector is the lack of data for comparing efficiency of construction and operation across projects.

McKinsey suggested that more private sector involvement in infrastructure projects could result in an estimated 30% improvement in construction productivity over 5-10 years, resulting from the combination of 5-15% reduction in the cost of design and planning, 5-10% in engineeering, 5-10% in materials purchase and sub-contracting, 3-5% in construction, and  3-5% from organizational enablers.  They estimate that this would translate into a 20% reduction in overall infrastructure spend.