Future proofing infrastructure assets

FUTURE-PROOFING INFRASTRUCTURE ASSETS
Building capital-efficient infrastructure in the
age of austerity
A report by The Economist Intelligence Unit
Commissioned by

Building capital-efficient infrastructure in the age of austerity
© The Economist Intelligence Unit Limited 2014 1
Contents
Introduction 2
Chapter 1: Focus on reducing costs 3
Chapter 2: The perils of cost cutting 6
Conclusion 9

Introduction
2 © The Economist Intelligence Unit Limited 2014
There was a time when roads, railways, power
plants and other forms of infrastructure were paid
for straight from the public purse. However, in
recent decades, the corporate sector has played
an increasingly important role in financing,
building and operating these assets—whether
through full privatisation or public-private
partnerships (PPPs). And since the global
financial crisis and the recession that followed in
its wake, the role of private capital has expanded
further.
In an era of austerity, governments
and companies have sought to increase
infrastructure’s capital efficiency—that is, the
ratio of its output to the capital expenditure
needed to operate it. The challenge is to maximise
the productivity of assets and minimise the
costs associated with building, operating and
maintaining infrastructure. This can be done in a
variety of ways, including:
l Streamlining infrastructure portfolios with the
help of cost-benefit analyses and by looking more
broadly at project objectives;
l Building in flexibility of use and dynamic
pricing;
l Considering the possibility of multiple-purpose
assets;
l Using technology to improve design, planning
and performance.
However, while these measures can cut costs and
increase capital efficiency, focusing too intensely
on cost cutting has its perils. Often, short-term
savings can lead to additional costs over the
lifetime of assets that may need to be in place for
decades.
For this reason, it is critical both to make
lifecycle assessments of the cost of operating and
maintaining assets and to “future-proof” those
assets by anticipating changes in patterns of use
or growth in demand, thereby creating flexibility
and the potential to add capacity.
This report will examine the tools and techniques
that can help drive capital efficiency in
infrastructure, as well as the business models and
procurement arrangements that create incentives
to rein in costs, while maximising performance
and operational efficiency.

1 Focus on reducing costs
In the US alone, the scale of investment required
is daunting. More than 200m trips a day are
taken across deficient bridges, according to the
American Society of Civil Engineers, while 42% of
major urban main roads are congested (costing
an estimated US$101bn a year in wasted time and
fuel) and much power infrastructure dates back to
the 1880s.1 Around the world, as infrastructure-spending
needs mount and government budgets
and credit remain tight, attention is turning to
capital efficiency.
An important part of this is assessing the
returns on infrastructure assets. In financial
terms, the returns on some assets—such as
revenue-generating transport networks or
power plants—are easier to measure than others,
such as bridges or public roads. However, as
well as financial returns, infrastructure assets
need to deliver returns to society. Increasing
the long-term performance and productivity of
infrastructure is, therefore, another important
goal of asset owners.
Public-private partnerships
For governments, however, the first question is
where to find the money to make the necessary
investments. Public-private partnerships (PPPs)
are one route to funding. These have been
widely used in the UK. Between 1990 and 2006,
for example, the country secured US$50bn for
transportation infrastructure through this “best-of-
both-worlds” funding model.2
PPPs have sometimes been accused of being far
from equal partnerships, with private companies
enjoying substantial financial benefits while
taxpayers shoulder the burden of cost over-runs,
or projects’ net returns failing to offer taxpayers
good value for money.
Nevertheless, in an era of tight public finances
and government austerity, the role of the private
sector in providing infrastructure is widely
accepted. “Throughout the West, there are
going to be severe constraints on public funding
for infrastructure needs,” says Wilson Magee,
director of global real estate and infrastructure
securities at Franklin Real Asset Advisors. “So,
capital efficiency, almost by necessity, involves
use of private-sector capital to provide these
essential services in an environment where
governments are unlikely to be able to.”
Institutional investors, such as pension funds,
also play a part in advancing the capital efficiency
of infrastructure by selecting the most efficient
projects. “They have an influence by what they
choose to invest in,” says Richard Robinson, head
of civil infrastructure for Europe, the Middle East
and Africa at Aecom, which provides technical-and
management-support services to sectors
ranging from energy to construction. “They are
looking for cash flow, rather than rapid equity-value
appreciation, so they are certainly a force
for long-term thinking.”
Joining the dots
Regardless of the source of funding, companies
and governments need to ensure that the design,
construction and maintenance of infrastructure
assets make the most efficient use of limited
resources.
1 American Society of Civil
Engineers, 2013 Report Card
for America’s Infrastructure.
2 Engel, E., Fischer,
R. and Galetovic,
A., “Public-Private
Partnerships to Revamp
U.S. Infrastructure”,
Discussion paper 2011-02,
The Hamilton Project/
Brookings, February 2011.

3 McKinsey Global
Institute, “Infrastructure
productivity: How to
save $1 trillion a year”,
January 2013, p. 5; www.
mckinsey.com/insights/
engineering_construction/
infrastructure_productivity.
Part of this involves seeing assets as part of
a portfolio and prioritising where to invest.
Rather than constructing additional main roads,
for example, investments in public-transport
systems could reduce demand for roads.
A recent study by the McKinsey Global Institute
estimated that, of the US$1trn in potential
savings to be made in infrastructure globally,
US$200bn would come from improved asset
selection and streamlining infrastructure
portfolios through cost-benefit analyses and by
looking more broadly at project objectives.3
“We need to look at infrastructure in its entirety,”
says Terry Bennett, a senior infrastructure
strategist at Autodesk, which provides software
to engineering, construction and other sectors.
“One of the best things we could do is to have a
single infrastructure vision that doesn’t separate
roads and highways from other infrastructure
things like water and sewers—because it all has
to work together.”
Once infrastructure-asset owners take this
joined-up approach, they can adopt another
strategy that is critical to increasing cost savings
and improving the productivity of their assets—
building in flexibility.
For energy infrastructure, this might mean the
capacity of a power plant to use several energy
sources, whether moving from gas to coal when
appropriate or feeding renewable sources, such
as solar and wind, into the mix.
Road infrastructure can also incorporate
flexibility. Multiple lanes, of different speeds, can
be used to manage traffic flows. Dynamic tolling
and other forms of flexible road pricing minimise
congestion, while also generating revenue. “That
makes it much more efficient for consumers and
more productive for companies,” says Mr Magee.
In some instances, infrastructure can even be
used for multiple purposes: fibre-optic cables
can be laid along railway lines, for instance. And
because cement plants, with their extremely
high temperatures, can be used as incinerators,
municipalities looking for more efficient waste
management might consider locating facilities
near to cement kilns.
In San Francisco, an investment in energy-efficient
street lighting to cut costs has led
to a pilot project whereby wirelessly enabled
lampposts are creating a communications
network that could monitor everything from
parking spaces to traffic lights. One futuristic
venture, Solar Roadways, is even proposing to
cover roads with modular solar panels.4
Technology drives efficiency
In managing these increasingly complex, multi-purpose
infrastructure projects, technology is
playing an increasingly important role. First,
private investors, such as pension funds, are
now able to gain a clearer picture of proposed
projects, since 3D-modelling software, such
as building information modelling (BIM), can
produce a visualised business plan as part of the
initial proposal. Technology can then enhance
efficiency of assets once they are operational.
“Investing in infrastructure has almost been a
blind trust—you throw the money over the wall
and hope someone manages it correctly and
your project comes in on time and on budget,
which often isn’t the case. BIM with associated
visualisation, simulation and analysis can
reduce that dramatically,” explains Autodesk’s
Mr Bennett, a land surveyor and civil designer
by training. “Now, with big projects, people
can understand what the end result will be—so
visualisation has been key.”
For those constructing and managing
infrastructure assets, technology can be an
effective cost-cutting tool and can improve
performance and productivity. For example,
according to the McKinsey Global Institute study,
intelligent transportation systems for roads,
railways, airports and ports can double or triple
the use of those assets.5
4 Solar Roadways, www.
solarroadways.com.
5 McKinsey, “Infrastructure
productivity”, p. 50.

In power infrastructure, smart meters allow
utilities to manage energy consumption patterns,
cutting back on the use of more expensive
“peaker plants”, saving large amounts of money.
Lowering the pressure on the network through
IT-enabled demand response also increases
reliability.
In the US, for example, OG&E’s smart-grid
programme—covering a service area of 30,000
sq miles in western Arkansas and Oklahoma—
uses dynamic pricing and other tools that allow
customers to manage their energy use. This
reduces peak demand, deferring the need to
build extra fossil-fuel power plants, avoiding
associated operating costs of US$250m–
US$300m net present value.6
Technology builds greater efficiency by making
infrastructure assets more flexible. In the
renewable-energy subsector, for example, a wind
turbine will be more productive if its blades adjust
themselves to changes in wind direction and
speed, while solar panels generate more power
if their angle shifts in line with the movement
of the sun. “Those kind of things are innovative
and really important developments, in which
the private sector is typically a leader,” says Mr
Magee.
Of course, the challenge—particularly in sectors
such as power generation—is that, given the
age of existing infrastructure, data often
exist in siloes in different business units and
reside in systems that are not interoperable. In
many cases, much work remains to be done in
streamlining these data sets, so that information
can flow more easily across the enterprise,
particularly as power infrastructure needs
to accommodate increasingly diverse energy
sources, from wind and power to the energy
generated by electric vehicles.
New projects face fewer of the challenges posed
by integrating technology into legacy systems.
From the start of a new project, technology can
be used to improve planning and design. BIM
technology provides information on which to
base decisions, from construction through to
operation and maintenance.
Using Autodesk’s software, for example, clients,
contractors, administrators and others working
on the expansion of the Panama Canal—designed
to double its shipping-traffic capacity—can
see the design in three dimensions, assess a
range of options and make any changes before
construction starts. Through 3D visualisation,
companies and governments can cut costs and
time spent at various stages of a project. First,
with more accurate visual plans being submitted,
planning approvals can be secured more quickly.
Moreover, when more efficient and accurate site
designs can be created, a greater proportion of a
project can be prefabricated. This saves time and
generates less waste than building everything
onsite.
Meanwhile, data analytics is increasingly being
used for everything from highlighting complex
risks before construction to helping identify
potential weaknesses in aging infrastructure.
At Carnegie Mellon University, the Advanced
Infrastructure Systems group is researching
ways in which computers, networks and sensors
can be used to develop information modelling,
advanced analytics and visualisation to improve
the performance and reduce the lifecycle costs of
traditional physical infrastructure.7
Computer modelling more accurately predicts
schedules and costs, taking out much of the
uncertainty that can deter investors.
Once assets are in place, technology is
increasingly being used to track their
performance in real time, delivering a picture of
components that would otherwise be expensive,
time-consuming or impossible to monitor. One
example is water-delivery infrastructure. Using
web-enabled sensors, companies can track the
quality of water—including pH levels, turbidity
and temperature—and detect leaks before they
become severe, saving money on the repair of
pipes and other network infrastructure.
6 VaasaETT for Ventyx
and ABB, “Smart Grid:
2013 Global Impact
Report”, 2013, https://
www.smartgrid.gov/
sites/default/files/
doc/files/global%20
smart%20grid%20impact_
report_2013.pdf.
7 Carnegie Mellon University,
Advanced Infrastructure
Systems, www.cmu.
edu/cee/research/ais-research.
html [accessed on
September 1st 2014].

2 The perils of cost cutting
For investors looking for assets that have
attractive annual and long-term returns and
relatively low volatility, short-term gains are of
less interest than knowing their investments are
being managed efficiently for the long term—
from planning and construction stages through
to operation and maintenance. Hence, despite
the benefits of cost cutting highlighted in the
previous chapter, an over-reliance on cost cutting
to raise efficiency, at the expense of long-term
planning, can be counterproductive.
Given the cost of maintaining assets with
extremely long lives, Mr Robinson of Aecom
stresses the need to consider the full lifecycle of
infrastructure at the outset and to make up-front
investments that save money later on. He
cites the example of road maintenance, where
investing in accessible lighting systems makes
sense, given the cost of closing off a section of
a motorway and installing temporary road signs
simply to change a few bulbs. “Those costs are
very significant,” he says. “In fact, the costs of
the traffic management are probably equal to the
costs of the work that’s being done.”
Certainly, cost cuts may look attractive in the
short term, particularly if they are part of what
is often referred to as “value engineering”—a
systematic approach to providing the required
functions of a project at the lowest cost. “In
a project that’s not done well, cost cutting is
sometimes hidden under value engineering,”
says Mr Robinson. However, he explains, this
approach can also create extra expenses in the
long term.
Take power plants, which have to be regularly
dismantled and reassembled for routine and
corrective maintenance. A company or utility
might decide to save money on construction
by minimising the size of the plot of land
designated for the plant. Yet this could make the
maintenance more expensive. “There are safety
implications when a plant is hard to take apart;
it takes longer to do it and you have to use more
expensive equipment,” explains Mr Robinson.
“So, you have successfully cut a few percent
out of the capital cost by minimising the size of
the plot, but you’ve built in a huge amount of
downstream problems.” Avoiding this scenario
means gaining a complete understanding of
immediate investments, as well as future capital
and operational costs.
The importance of future-proofing
If investors in long-lived assets are seeking
reliable returns over a period of many years, it is
essential that infrastructure projects can remain
efficient and productive over the long term. This
means that those assets must be future-proofed
by predicting likely increases in demand and or
changes in use patterns. “This is extraordinarily
important,” says Mr Magee of Franklin Real
Asset Advisors. “If you think about utilities
alone, in the US, where you still have significant
population growth, these utilities are having to
build plants that require many years to construct.
They need to anticipate demand trends that are
well into the future—and these are huge capital
investments, so this is a very delicate decision-making
process.”
Of course, predicting the future with certainty
and in detail is never possible. For this reason,

Mr Robinson again points to the importance of
building flexibility into infrastructure assets—in
this case, the flexibility to adapt them to shifts in
demand or changed patterns of use.
An example is the construction of expansion
options on a railway line to allow for any new
lines that might need to run off the main line in
the future. This means that, instead of having
to shut the whole line down when modifying
it—causing extensive disruption—operators
can simply connect the new line to that spur.
“That usually entails a bit of extra capital cost
and, during the value engineering phase, those
things can fall victim to the cost-cutting knife,”
Mr Robinson says. “But that can be short-sighted
because it can make it very expensive to modify
that infrastructure in the future.”
Setting the right incentives
While using technology and making the right
investments are critical to future-proofing
infrastructure assets, so is developing
procurement and ownership models that create
incentives for companies to engage in long-term
planning and investment. “Owner-operators,
such as power companies, are more clearly
incentivised to understand the balance of
operating and maintenance costs versus capital
costs, whereas a contractor might be asked to
build a bridge at the lowest cost possible and
then it’s handed over to a separate company to
operate and maintain,” explains Mr Robinson.
One way of aligning incentives is through a
public-private partnership (PPP) contract
known as the design, build, finance and operate
(DBFO) model. Here, the focus is on providing
an operating service, rather than building an
asset. In the UK, DBFO arrangements have
been used extensively by the government’s
Highways Agency. Contracts typically run for 30
years, with private-sector enterprises assuming
responsibility for operating and maintaining a
length of existing road and for building specified
improvement schemes over the contract’s life.8
Another model—design, build and operate (DBO)
—creates procurement arrangements, whereby
a single enterprise designs, constructs and
operates a facility (or makes improvements to an
existing asset), while its ownership remains with
a municipal water utility, for example.
Mr Robinson argues that these kinds of contracts
create incentives to focus on efficiency and
productivity. “It’s a push to bring those areas
together and get companies to think about
lifetime costs,” he says.
Environmental sustainability
In recent years, the environmental-sustainability
agenda has also started to drive capital efficiency
in infrastructure. With increasing stress on global
water systems and pressure to reduce carbon
emissions and waste, the owners and operators
of everything from power stations to water-treatment
plants are starting to look at efficiency
through an environmental lens.
In the energy sector, government pressure to
reduce use of fossil fuels and introduce more
renewable energy into the power mix has led to
the creation of regulatory carrots and sticks that
influence the construction of power-generation
infrastructure.
Meanwhile, pension funds and other institutional
investors are becoming more keenly focused on
the sustainability credentials of the companies
and assets in which they invest. For example,
more than 760 institutional investors, with more
than US$92trn in assets now work with CDP, an
investor-engagement non-profit organisation
that measures companies’ environmental
performance.9
While some might argue that the sustainability
agenda adds a new layer of cost to the
construction and maintenance of infrastructure,
this is not necessarily the case. Companies
participating in the CDP’s Carbon Action initiative
found that carbon-reduction and energy-efficiency
measures were generating an average
8 Highways Agency, UK
Department of Transport,
www.highways.gov.
uk/our-road-network/
managing-our-roads/
operating-our-network/
how-we-manage-our-roads/
private-finance-initiatives-
design-build-finance-
and-operate-dbfo/
about-design-build-finance-
and-operate-dbfo-contracts/
[accessed on
9 CDP investor initiatives,
https://www.cdp.net/
en-us/whatwedo/pages/
investors.aspx [accessed on

internal rate of return of 33%, or payback within
three years.10
For Mr Robinson, resource and energy efficiency
are simply part of effective infrastructure
management. “Optimisation and efficiency
improvement is always something good
engineers have done,” he says. “But, if the focus
on the green agenda brings more opportunity
for industry to do better, that’s got to be a good
thing.”
10 CDP, Carbon Action,
www.cdp.net/en-us/
programmes/pages/
initiatives-cdp-carbon-action.
aspx [accessed on

Conclusion
Taking the long view
With governments and companies under pressure
to make the best use of their limited resources,
the temptation is to prioritise cost reduction.
Certainly, optimising the capital efficiency of
infrastructure assets—whether through use
of technology or of integrated procurement
models—will remain critical in an era of
continued austerity and poor access to credit.
However, cost cutting has its perils if it creates
increased expenditure down the line. And, while
future-proofing infrastructure may require larger
investments up front, a combination of pressures
means this makes good business sense for both
policymakers and companies.
First, demand for everything from energy
to public transport is rising as the global
population expands. Second, investors want
greater certainty over their returns, as well as
viability and environmental sustainability of their
investments in the long term.
When put together, these pressures should
focus attention on the right way to increase the
capital efficiency of infrastructure—by taking
into account costs over the lifecycle of an asset
and making up-front investments that build in
flexibility and future-proof that asset for growth.

While every effort has been taken to verify the accuracy
of this information, The Economist Intelligence
Unit Ltd. and HSBC Bank Plc cannot accept any
responsibility or liability for reliance by any person
on this report or any of the information, opinions or
conclusions set out in this report.

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