Between the Poles

Estimating the unsubsidized cost of clean water production

At the Canadian Water Network conference we heard that it is estimated that 800 million people don't have access to clean drinking water and 41 percent of the world’s population, 2.3 billion people, live in water-stressed areas.  Cash-stressed governments are increasingly being forced to turn to the private sector to fund the construction and maintenance of water networks.  But estimating the cost of producing freah water is difficult because of such things as entitlement typically involving givernment subsidies.

At the conference Geoff Riggs from IBM mentioned a joint Waterfund LLC and IBM project that was signed in January of this year to develop a Water Cost Index (WCI).  This will use IBM's big data analytics technology to analyze data from sensors and smart meters as well as large and diverse unstructured data sets to estimate unsubsidized cost of freshwater production in different regions around the world.  Index values will reflect estimated water production costs measured in US dollars per cubic metre for a variety of major global water infrastructure projects ranging from retail water utilities and wholesale water utilities to major transmission projects.  

It is estimated that the backlog of investment in water systems around the world is about $1 trillion, and this does not include the 800 milllion people that currently don't have access to clean water.  The idea is that the WCI will provide a financial tool will make it easier for private investors to estimate costs and returns of water infrastructure investment.

Brazil plans stimulus to attract private investment in transportation infrastructure

A massive spend on infrastructure, globally about $50 trillion, is expected over the next two decades. It is anticipated that 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.  This set the stage for greater private investment.  But there are significant impediments preventing private capital from playing a greater role in funding infrastructure.  Complex regulations and politics which slow infrastructure development and poor construction productivity are important factors in eroding returns on infrastructure and making infrastructure less attractive for private investment.

Brazil's government has announced a stimulus package designed to attract up to R$133 billion (US$66 billion) from the private sector for road and rail projects.  The government plans to take the lead on the project. A new state-run company will be created to manage infrastructure planning and the BNDES development bank will provide subsidized loans for the projects.  The government hopes to attract investments for major highway projects as well as to add 10,000 kilometers to Brazil's rail network.

As in the case of the UK's National Infrastructure Plan, the government will have to find ways to make infrastructure projects attractive to private investors through concessions such as loan guarantees and low cost loans.

Transportation infrastructure in Brazil detracts from economic growth (as anyone who has tried to get between Congonhas and Guarulhos airports in Sao Paulo on a Friday afternoon will know).  Reportedly goods take at least twice as long to move the same distance as they do in China and other more efficient markets.

Greater Victoria wastewater treatment to meet new federal standards

I blogged recently about the first national sewage treatment standard in Canada.  Every year about 150 billion litres of untreated sewage are dumped into Canadian surface waters.  The Environment Minister and Minister of Transport, Infrastructure and Communities have announced that the Wastewater Systems Effluent Regulations are now in force. The Regulations are established under the Fisheries Act and include mandatory minimum effluent quality standards that can be achieved through secondary wastewater treatment.  The regulations are intended to prevent untreated and under-treated sewage from being dumped into surface waters.

Victoria's untreated sewage outfall

Greater Victoria, British Columbia, produces about129 million litres of raw sewage each year.  Currently the Capital Regional District (CRD) of Greater Victoria, which is reponsible for the local water and sewage system, screens and dumps the waste without treatment into the Strait of Juan de Fuca through underwater outfall pipes.

Victoria's Core Area Wastewater Treatment Program

The governments of Canada and British Columbia and the Capital Regional District (Greater Victoria. comprised of 13 municipalities) recently announced $800 million in joint funding for the construction of a new wastewater treatment system for the CRD to improve treatment of wastewater discharged into the Strait of Juan de Fuca. Called the Core Area Wastewater Treatment Program (CAWTP), it will be funded by $253.4 million from the federal government, up to a maximum of $248 million from the Province, and about $281.3 million from the CRD. The program includes three projects, a wastewater treatment plant and marine outfall, a Biosolids Energy Centre and conveyance system upgrades. The new facilities will be designed to satify the new federal Wastewater Systems Effluent Regulations.

Public-private partnership (P3)

The Biosolids Energy Centre will be delivered through a public-private partnership, via the P3 Canada Fund.  The facility will consist of

• A sludge dewatering and stabilization facility
• A biosolids storage and truck loading facility
• Pumping stations
• 18km of pipes to carry the sludge from the wastewater treatment plant to the Biosolids Energy Centre.

The P3 Canada fund will provide $83.40 Million in funding.  The private sector partner will be responsible for designing, building, financing, operating and maintaining the facility for a total concession period of 25 years. The CRD of Victoria will own the facility and will be accountable for the project to ensure performance objectives are met and taxpayer investment is protected.

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.

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.

Financing new nuclear power generation in the U.S.

As I mentioned in a previous post, the US Nuclear Regulatory Commission has approved the first new combined Construction and Operation Licenses (COL) in the U.S. since 1978.  The licenses are being issued to Southern Nuclear Company to build two new nuclear reactors at Alabama Power's Vogtle Electric Generating Plant south of Augusta, Georgia.

Financing

The total cost of the project is estimated at $14 billion.  Of this about $6 billion is coming from Southern Company.  The remaining $8.3 billion is coming in the form of loans guaranteed by the Department of Energy's (DOE) Loan Programs Office (LPO).  The LPO enables DOE to work with private companies and lenders to reduce the financing risks associated with building commercial-scale clean energy projects.  LPO supports nearly 40 projects include the world’s largest wind farm, several of the world’s largest solar generation facilities, one of the country’s first commercial-scale cellulosic ethanol plants, and the new Vogtle nuclear units.

The Energy Policy Act of 2005 was passed by the United States Congress in July, 2005, and signed into law by President George W. Bush in August of the same year. The act changed US energy policy by providing tax incentives and loan guarantees for energy production of various types and has far reaching consequences for nuclear power.  Specifically it authorized loan guarantees of up to 80% of project cost to be repaid within 30 years or 90% of the project's life.  (The Energy Policy Act of 2005 also changed daylight savings time and enabled the shale-gas drilling boom in the U.S. by exempting shale-gas exploitation from Federal environmental oversight.)

In December 2005, the Southern Company sent a proposal to DOE to include Southern Nuclear in new nuclear plant licensing projects co-funded by DOE.  In February 2010 President Obama and DOE Secretary Steven Chu announced the award of conditional loan guarantees for Vogtle Units 3 and 4, and in June of the same year Southern Company and DOE announce the final agreement regarding loan guarantees for the new Vogtle units.

Traditionally cost recovery for electric power projects, in other words, passing the cost onto consumers, begins after commissioning.  But some jurisdictions, for example, Ontario, are now permitting cost recovery to begin earlier, during construction.  In April, 2009 Georgia Gov. Sonny Perdue signed into law a bill which allows Georgia Power to recover financing costs during the construction of the new nuclear units.

Vogtle Units 3 and 4 are planned to be operational by 2016 and 2017, respectively.

Obama says infrastructure needs investment

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 some sector 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.  He specifically mentioned two initiatives.

High speed rail

Within 25 years the goal is to enable 80% of Americans to have access to high speed rail.  He mentioned routes in California and the Midwest that are already underway.

High speed wireless

Within 5 years the goal is to make it possible for businesses to provide 98% of Americans with access to the next generation of high speed wireless coverage.

£30 billion public private infrastructure fund proposed in the UK

According to the National Infrastructure Plan 2011 HM Government plans to provide £5 billion by 2014-15 while it is hoping to planning to attract £20 billion from private investors.  The Treasury hopes two-thirds of the of the funding will come from the National Association of Pension Funds and the Pension Protection Fund. It is also separately looking for more investment in infrastructure from insurance companies and from China.

The National Infrastructure Plan sets out a new strategy for meeting the infrastructure needs of the UK economy. It is based on a comprehensive cross-sectoral analysis of the UK’s infrastructure networks and identifies over 500 priority infrastructure projects.

Funding

The Government will facilitate the private investment that will finance the majority of the UK’s infrastructure. This includes bringing in new investors into UK infrastructure; introducing new sources of revenue such as tolling; allowing local authorities more flexibility in the way they use local receipts to fund major infrastructure in specific circumstances; and being willing to consider guarantees against specific risks that the market cannot bear.

Cross-sectoral analysis

The cross sectoral analysis shows the UK’s infrastructure performance is beginning to improve in some areas, such as broadband speeds and coverage, and road safety, but that the age of some networks and the dense pattern of urban development in the UK combine to pose challenges. Many power stations are ageing, road congestion is a growing concern, train punctuality in the UK is worse than on the continent and there is a growing airport capacity challenge in the South East of England.

Based on this analysis, the Government has identified a set of goals for improving infrastructure performance,

• improving the performance and environmental impacts of the UK’s transport networks including maintaining the UK as an international aviation hub
• achieving a secure, diverse and reliable energy supply for the UK while reducing the carbon intensity of electricity generation
• increasing broadband speed and coverage, and ensuring adequate spectrum availability for the wireless communications industry
• maintaining the water and sewerage system while reducing its environmental impacts
• mitigating the impacts of flooding and coastal erosion
• moving towards a zero-waste economy through recycling and other measures

Priority projects

Improvements to the national road network,

• two new managed motorway schemes to allow use of the hard shoulder at congested times on the M3 and M6
• improvements to M1/M6 Junction 19, the A14 Kettering Bypass, widening of the A453 and the A45/46 Tollbar End improvement scheme
• smaller projects which will deliver significant improvements on the road network

Improvments in railway infrastructure and commuter links, including

• electrification of the Transpennine railway route from Manchester to Leeds and a rail link between Oxford and Bedford
• enhancement and renewal works to improve stations and rail infrastructure
• improvements to the quality of travel for rail users, including smart ticketing, new carriages, and limiting fare increases

The Government is committing to extra funding for more local transport projects including new low carbon emission buses.

The Government is announcing funding to create up to ten ‘super-connected cities’ across the UK, with 80-100 megabits per second broadband and city-wide high speed mobile connectivity. 

There will be a particular focus on small and medium sized businesses and strategic employment zones to support economic growth. Edinburgh, Belfast, Cardiff and London will receive support from this fund and a UK-wide competition will identify up to six additional cities to receive funding.