Infrastructure summit 2012 summary paper

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The Infrastructure Summit is the leading event that takes a strategic view of infrastructure opportunities in Europe and the UK. This years event took place on November 6th 2012 at Kings Place in ...

The Infrastructure Summit is the leading event that takes a strategic view of infrastructure opportunities in Europe and the UK. This years event took place on November 6th 2012 at Kings Place in London.

The event brought together over 150 senior business leaders, top policy-makers and experts from transport, energy and digital communications to explore new approaches to infrastructure and the opportunities these present.

Issues discussed included:
• Why infrastructure development will give Europe the necessary economic stimulus.
• Where the necessary public policy reforms have already been made or will be made, in short: where to invest.
• We will explore how policies must change to give the right impetus to technological innovation and private investment.
• The new, cutting-edge technologies, how to integrate them, how this will help move ahead of the competition, increase efficiencies of infrastructure systems and cut costs.
• The new approaches and strategies that are already here or will generate smart, sustainable growth across the continent. This includes, how to take an integrated approach amongst public and private sector stakeholders across EU, national and regional levels.
• How to finance infrastructure development whilst government budgets are stretched.
As Europe's economy stagnates, infrastructure development offers one of the critical devices to generate growth. Yet we need new ideas. Traditional approaches are simply not working. We need to rethink our policies, embrace new opportunities offered by technology and rethink how we finance these.

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  • 1. S P O N S O R E D B Y:
  • 2. THE INFRASTRUCTURE SUMMIT 2012 SUMMARY REPORT THE infrastructure SUMMIT New Policy, Technology and Finance INTRODUCTIONThe scale of infrastructure needs in the UK and across the EU is colossal. But what, where, howand when proposed projects for transport, energy, utilities and technology are implemented issubject to continual and protracted debate. Speakers and delegates at Economist Conferences’Infrastructure Summit, held on November 6th 2012, discussed a range of practical andphilosophical issues such as the EU’s vision, the role of the state, what makes a city worth livingin, and how to finance projects.The following themes were among the many concerns of investors, policymakers and citizens:•  U infrastructure plans and political and budgetary constraints E•  here the role of the state begins and ends, and who bears the costs? W•  ow to balance local and national interests of major projects, and measure their impact on H society?•  ow cities develop and connect with other cities, suburbs, regions and the wider world H•  he importance of innovation, education and data in creating tomorrow’s infrastructure T•  he creative ways to finance huge, long-term projects TSummit chair:Patrick Lane fromThe Economist
  • 3. THE INFRASTRUCTURE SUMMIT 2012 SUMMARY REPORT The EU and its infrastructure strategyThere can be no doubt about the scale of infrastructure needs in the Janusz LewandowskiEU over the next two to four decades, so getting it right is crucial.The EU’s hopes and plans were laid out by Janusz Lewandowski, theEU Commissioner for Financial Programming and Budget who notedthe huge gap between the EU’s infrastructure needs and what wererealistic options given the current financial pressures. Europe wouldhave to invest trillions of euros to achieve the transport, energy andICT infrastructure it needs, he said. Such networks and cross-borderconnections are preconditions not only of an integrated singlemarket but also the region’s security. But the current economicclimate coupled with opposition to budget increases specificallyfrom the UK, mean that this may not be realised. The EU needs tolaunch pilot projects to gauge the most cost-efficient financingapproaches. This might involve improving long-term finance ratings,loans and guarantees, generating a strong multiplier effect in thewider economy, and mobilising public-private partnerships (PPPs).He re-iterated the pivotal role that the EU plays in developing Central Eastern Europe’s infrastructure: 90% of investment inHungary, 76% in Slovakia, and 52% in Poland is co-financed by the EU. The EU is targeting 12 priority corridors for investment, andhigh-speed secondary lines to connect hinterlands to the main EU ports. It wants to integrate “energy islands” in the EU, such asthe Baltic states so they are not dependent on Russian gas giant Gazprom. Proposed projects also include linking the power systemsof the UK and France, and strengthening high-voltage connections to Northern Ireland, Norway and Belgium. In gas, improving UK-Ireland connections are also important.His view was that the market needed “more of Europe” to solve these problems, but recognised that the EU lacks popular credibilityand legitimacy, and so expanding its role is politically not feasible.He felt that the EU’s work was under-appreciated, with the media distorting the true extent of its financial claims on member states.The EU budget, he stated, accounted for only 1% of EU member states budgets. The much maligned administrative costs accountedfor some 6% of the EU budget.He asserted that it was important for member states, especially the UK, “to shape policies, not just belong”. This is especially truewhen it comes to creating a predictable budget to 2020. He noted some benefits that accrue to euro-sceptic nations such as theUK, with the latter, for example, being the second biggest recipient of grants for research infrastructure in EU, which involves UKuniversities, such as Oxford and London’s Imperial College leading large research consortia on biological and genetic research.Later, Matthias Ruete, Director-General of the Directorate-General of Mobility and Transport, European Commission elaboratedon the themes and practicalities of the EU’s plans. He noted that in transport and logistics six EU member states are ranked in thetop 10 globally, and half of the top 30 are EU countries. Europe is still producing top-quality trains and cars. But the continentstands to lose this important competitive advantage in coming years. Given that 13% of EU household costs and 16% of businesscosts go on transport and logistics, and most of the EU’s oil is imported, it’s vital to ensure that the vision and activity aroundtransport policy is right.
  • 4. THE INFRASTRUCTURE SUMMIT 2012 SUMMARY REPORT Key benchmarks are set for 2030 and 2050, including the Matthias Ruete reduction of carbon emissions by 60%. There are 40 concrete interrelated initiatives that involve the internal market, infrastructure, innovation and international relations. Of the 10 goals, two are specifically related to the transport network, including high speed rail, road to rail and water freight. The vision is for a core transport network, equivalent of interstate corridor system, and an energy and digital infrastructure. This would be realised by 2030, though some would be complete by 2020. Under a motto “connect to compete”, the commission’s strategy is built around “four Is” integrated, interlinked (i.e. crossborder), interoperable (i.e. having common standards), and intelligent network (i.e. not just roads rail, but intelligent systems, using existing capacity, air traffic management systems). Northern European transport routes might dominate European connections to Asia, but current plans were unlikely to be affected by the potential impact of the melting ice cap.In the past, Mr Ruete admitted that the Commission got it “horribly wrong” after it attempted to determine future transportnetworks by simply asking people in Europe what they wanted. After heads of states objected to the lack of priorities, Mr Rueterecalled that “we had a dinner” and fixed priority projects “like spaghetti on a map of Europe”. There was insufficient regardpaid to an effective methodology. This time around, he noted, there was more consideration to hubs and ports, and the commission“refrained from showing any map” in the first instance, but just talked about vision and concept regarding ten core multimodalcorridors.Despite a funding squeeze of some 10-20% cuts, there are enough funds to undertake some of the plan, with money managedcentrally using innovative financial instruments. The role of governmentMr Lewandowski’s practical thoughts on the need for member states to help shape policy was picked up in a broader sense byPhilippe Aghion, Professor of Economics, Harvard University, about what the role of the state should be in shaping tomorrow’sinfrastructure. Professor Aghion re-affirmed that that infrastructure was an important precondition for economic growth, and,explained China’s superior economic performance compared with that of India. Along with education, good infrastructure spurstrade and competition, and enables reallocation of resources across geographies or sectors. It helps to create knowledge hubs andthe connections to them.He referred to Schumpeter’s concept of creative destruction as a way to achieve innovation-driven growth, and as part of this sawa new role for the state. It had a dual responsibility: to promote growth enhancing policies while also reducing the budget deficit.The post-war era was largely about “catch-up” growth, based on imitation, so the importance of competition was limited. However,there is a residual distrust of anything that seems like industrial policy, or smacks of “picking winners”, which creates lobbies andvested interests. A common reaction to an overbearing state of the past was to minimise its activities, by focussing just on law andorder, defence etc., and to leave the rest to the private sector. “We are not a welfare state; we are not neoconservative; we are a smart state.” Philippe Aghion, Professor of Economics, Harvard University
  • 5. THE INFRASTRUCTURE SUMMIT 2012 SUMMARY REPORTHe felt that today’s modern economy needs something new –a “smart state” that is aware of knowledge externalities and creditconstraints. A smart state targets investments that are horizontal, (i.e. education, skills inputs etc.) vertical (i.e. sectoralindustrial policy such as in bio tech, green innovation) and geographical (i.e. creating fast trains to knowledge hubs). Governanceis also important to make the best of these investments, so the state has a role in incentivising good governance when allocatingfunding, to universities or health institutions. It’s not just the amount of investment but the quality. Economic growth is positivelycorrelated with high scores in international education rankings, rather than linked just to the amount of money spent. Similarly,health can be cheaper and more effective, as can be seen in France or Sweden. Co-financing can also be a good check on unprofitableprojects. Neil Rimer Mariana MazzucatoThus, he suggested that EU structural funds’ country allocations are made conditional on being “transformative”, while loans couldbe geared towards high-tech investments, focussed on the preservation of competition and with selection being “evidence based”.In short, he noted: “We are not a welfare state; we are not neoconservative; we are a smart state.”Mariana Mazzucato, Professor of Economics, Sussex University, asked why innovation was coming from the US rather than Europe.Silicon Valley had a mission, vision and a plan, she agreed. But it also had plenty of official government support. Many firms went tostate-backed SBIR for their initial funding. She argued that we have over-hyped the role of investors in developing Silicon Valley.The much-heralded features of the iPhone, for example, were government funded. The NIH had spent $31bn on biotech research, andventure capital rides on that. There has been huge amount of free riding on the ecosystem.Neil Rimer, a Partner at Index Ventures, argued that it was true that government should fund basic research, but the vital role ofventure capital is to take something from proof of principle and concept to a sustainable business model. But Ms Mazzucato addedthat the state was not just providing basic research. Indeed, 80% of radical new drugs were state supported, with VCs mainly doingthe product adaptions. Therefore, it is wrong to believe that the state’s role is essentially there to provide a structure or businessoperating environment, within which so-called entrepreneurial revolutionaries launch their business. Rather, the state has beeninstrumental in very direct commercial ways. The view that the state should only intervene to counter market failures was wrong;this “bandage” approach is not viable. Silicon Valley was not just bottom up; it was top down, with 15 government institutionsinvolved in funding. Returns to the state therefore should not just occur through the tax system. Google algorithms were fundedfrom the NFS, but the state got nothing from the billions of dollars subsequently made, and is bankrupt. The problem is that “we aretoo fearful of picking winners.” She concluded that government should make things happen that wouldn’t have happened anyway,for example in trying to redirect the economy, stimulate private investment, and create cross-sectoral investment where there is noventure capital.Perhaps the most important role that government can play is in setting out a long term industrial strategy. Peter Cochrane,Chairman and CEO, Cochrane Associates felt that insufficient thinking was happening about the UK’s long-term industrial needs.“The UK is engaged in a random walk into the future”. Rapidly growing Asian economies do have a long-term vision, but in Europeonly Germany has “a vision, a mission and a plan”. This, he asserted, should be a major concern of policymakers and citizens as “thefuture will be wildly different”. For example, there will be huge manufacturing capability that is unimaginable today. We are alreadywitnessing extraordinary manufacturing capacity today, with over 1bn mobiles being made and distributed annually. Apple had soldthree million iPads in a single weekend. But this astonishing capability will increase exponentially.
  • 6. THE INFRASTRUCTURE SUMMIT 2012 SUMMARY REPORTWestern economies will not be able to grow by constantly looking for efficiency savings, but rather through new, sustainable waysof doing things, said Mr Cochrane. He asserted that long-term infrastructure and technology strategy failed to join the dots, andwas too random. It doesn’t have to be perfect at the outset, as one always adjusts a mission midway, like any business. But theUK needed to decide what it wants to focus on, and then resource its strategy as necessary. A national plan needs to be built onknowhow, on finding an area that is currently less competitive, and excelling there. Singapore, for example, invests some $2.5bn inindustrial R&D, far larger than similar UK investments. “We can’t sit in a room with a wet towel around our heads and think we cancome up with the solution, is not going to happen”. “We can’t sit in a room with a wet towel around our heads and think we can come up with the solution; it is not going to happen… The future lies in the intersection of nanotechnology, biotechnology, ICT and Artificial Intelligence” Peter Cochrane, Chairman and CEO, Cochrane AssociatesAn economic model based only on money will destroy the world. “The future lies in the intersection of nanotechnology,biotechnology, ICT and Artificial Intelligence”. 3D-printers is one such development that could fundamentally transform oureconomies. One can already print a gear box. Boeing is able to print 300 parts for its dream liner. The world’s first bicycle and car canbe printed, he noted.Doctors can be overruled by computer algorithms that are more accurate than the judgement of professionals. Technology willhit every profession, through social networks and local modifications said Mr Cochrane, adding that we will “move from shippingproducts to shipping designs”, the system is “going from open software to open hardware, and we are going global.”It was a perspective that informed some of the thinking of venture capitalist Mr Rimer, a Partner at Index Ventures which seekspassionate entrepreneurs whose products could either replace an incumbent, or even create a new market from scratch. He sees thesituation in terms of winning a war, and this cannot be won by private enterprise alone. But industries that are subsidised (such asgreen energy) can deter investors who are fearful of subsidies later being removed. We need to price in the externalities of thoseinitiatives that we subsidise.Yet attempts to replicate Silicon Valley’s success have failed, as Mr Cochrane pointed out. He said that this was because it adopted a“bottom up” approach, and had been developing for decades longer than the period that European policy makers have been tryingto copy it, so it was important to “forget these complexes [about no European Google or Apple] which is a very European thing”.Mr Cochrane further pointed out that the next version of Silicon Valley would involve key people distributed across many differentlocations rather than being clustered in the same place.
  • 7. THE INFRASTRUCTURE SUMMIT 2012 SUMMARY REPORT Political considerations, competing interests and dilemmas Having a strategy and agreement about the overall role of the state is one thing. But getting strategy implemented is quite another. This requires an understanding of the highly-charged dilemmas of everyday political discourse and competing interests. This cannot be avoided, given the scale of investment and the social impact that such projects are likely to have. In particular, there is a need for political consensus so that projects can be maintained over several electoral cycles, and because it involves the need to balance multiple interests in society. James Smith, Chairman, Carbon Trust, noted that we take infrastructure for granted, and don’t want to pay for it, which is why the state must get involved. In the case of adapting to climate change, the problem lies in its incremental nature which makes it hard to identify where, when and for whom the costs to society arises. Yet some £200bn out of £500bn earmarked for infrastructure over the next decade is for energy, and this means getting realistic about what technologies we need, regarding wind power, offshore generation, carbon capture, nuclear and energy efficiency. Any serious infrastructure strategy is likely to upset someone, said Mr Smith; if it doesn’t James Smith then the strategy is probably not going to be effective.A typical problem here is “planning nimbyism (Not In My Back Yard)”. Shell ran into such problems when it tried to install a carboncapture facility near a village close to Amsterdam. Sometimes opposition isn’t rational, yet decisions have to accommodate publicopposition, and in such a case, it may means taking facilities offshore.It is important not to dismiss local and regional input into plans, and have too many decisions made in Brussels, if there is to bewider support for projects. There are many lessons to be learned about winning local success for initiatives. For example, main roadsmay be gritted in winter, but if minor roads are left out, key workers, such as teachers cannot get to work, and schools have to close.The details of big projects matter for both technical and political reasons.At the same time, local investments have to consider the wider strategic vision of which they are a part. Unfortunately, local organisationsdo not have sufficient control over national decisions, especially in energy. An example was given of how the Orkney Islands had investedheavily in energy generation for export, but now faces inadequate connections to the grid. This was a lesson, applicable across Europe,about not considering complementary investments that may be required. It was said that such small islands often make the mistake ofpresenting a begging bowl rather than a commercial pitch for funding. Roy Perry, of the Assembly of European Regions, suggested thatlocal interest groups adopt a positive attitude of: “this is what we can give, rather than here is what we want”.José Viegas, Secretary General, International Transport Forum, OECD emphasised the need to ask what these big projects areactually intended to achieve. Some governments build too much infrastructure without knowing what it was for, says Mr Viegas. “Ifeveryone is running after the same ball then you don’t have a good team”. Who is doing the other things that are needed to make aplan work?, he asked. We need more strategy at a European level. But one also needs to capture differences and specialisation inregions -- localisation but also promoting centres of excellence.A major issue involving resolving competiting interest is the question of who foots the bill. The problem is that societies are notready to pay for externalities, even though some benefit enormously. One approach is a “user pays” principle. But will road userspay for potholes to be filled, say in the form of a “pothole tax”? (it was suggested that the only tax people willingly pay is for thelottery.) It is in fact possible to identify accurately very specific beneficiaries in some cases. For example, the building of a metrostation pushes up the rental or sale value of surrounding properties. This is a source of revenue that the state seldom sees, andeven more rarely taps. Yet it would be possible to include the cost of the project in the form of a transaction tax when selling theappreciating property, and this can be calculated precisely based on property values.
  • 8. THE INFRASTRUCTURE SUMMIT 2012 SUMMARY REPORTA good illustration of some the political issues arising from a major long-term project is the UK’s proposed High Speed rail program(known as HS2) to connect London and the north. According to Alison Munro, CEO of HS2, there is a widespread view that the UK hasfallen behind France, Japan and other industrial nations in terms of transport infrastructure, so a key objective of the planned HS2rail link is to connect the UK’s south west and the rest.The first phase will not open before 2026. The political problem often boils down to the fact that the beneficiaries are widelydispersed but the losers are concentrated - as with a new airport - and therefore better organised and more coherent. The issue thenbecomes how to compensate the losers. How smarter cities connect and developThese political considerations are closely related to how government and citizens envisage the future of their cities. The HS2debate is also about the vision of a city as a social and economic entity and its relationship with other cities and regions. Ms Munronoted that HS2 is not only about bringing people to London, but connecting regional cities, and to create a more cohesive north ascounterbalance to the south east. HS2 calculates productivity gains of around £48bn net at present value over 60 years, excludingindirect spin-offs for the economy.The “intra versus inter” city theme about transport infrastructure was developed by Alexandra Jones, CEO Centre for Citieswho believed that the issue centres on a city or region’s access to skills and ideas. Both types of connectivity are important. Butinfrastructure investment must also be seen in the broader context of how a city connects with its outskirts, its centre, withsurrounding commuter regions, other cities in the country and foreign cities. Understanding the context applies not only totransport investment but utilities as well. In the case of London, commuters commonly cross administrative boundaries to get towork, 100 miles or more away, from the midlands and the south coast, and it acts as an important gateway to other internationalhubs in the Europe, the US and worldwide. Such interconnectivity is not always apparent in other cities. While London may havea strong impact generating jobs in say Manchester or Leeds, these regional hubs in turn, do not necessarily support their ownneighbouring city economies. In the case of high-skill jobs, these may concentrate in the inner-cities, so it may be necessary to linkdifferent city centres, rather than just cities to their respective outskirts.Connectivity is one vital aspect of good city planning. But Elspeth Finch, Director, Atkins identified three other criteria:acknowledging the uniqueness of each city; identifying the objective of a city; and knowing what smart technologies are availableand necessary to help achieve this. In a similar vein, Jannis Van Zanten, Strategy Adviser, City of Amsterdam, judged a city’ssuccess according to: “why people come to our city; can they afford it and do they want to stay.” Different cities need to focus on what they are good at. Not all Elspeth Finch cities can, or want to, do the same thing. Coastal cities have different concerns to inland, or mountain cities, (e.g flooding, climate change etc.). New cities can be built afresh with smart technologies; older cities may need to be retrofitted, though older cities may be young in population and attitudes. Such differences have planning implications. London is expanding, and will need to absorb over a million more citizens in the next two decades. Birmingham has focussed attention on reducing carbon emissions. Singapore has invested in broadband technology. It was also noted that one cannot be too prescriptive as developments can have unexpected consequences. The liberalisation of London’s financial sector in the 1980s led to the development of the Canary Wharf financial district a generation later. But when Amsterdam sought to develop its commercial standing by increasing the supply of office space, much of this now lies empty. Smart cities should be viewed as “loose fit”, where the basics facilities are made available, and then needs
  • 9. THE INFRASTRUCTURE SUMMIT 2012 SUMMARY REPORT grow organically. Cities don’t always need too much investment to get innovation flowing, and it may be that planners are just making things too complicated. People can create their own applications, using the city as a platform, rather than just waiting for the municipality to provide it for them. Technology or data-driven products should be made simple and intuitive, such as London’s Oyster card used to pay for train and bus travel on London transport. Too often, we say: “here’s a problem and Tom Hoehn here is the technology to solve it”. Keep it simple.According to Tom Hoehn, Visiting Professor at Imperial College Business School, our ability to collect huge amount of data andcombine, aggregate and analyse it allows us to create new services, such as mobile phone apps for bus timetables or car sharingclubs. Data, in some respects, an additional factor of production, can be obtained for free, despite the constraints of privacy andcommercial sensitivity which has made some organisations unwilling to share information about themselves or clients. Policymakersmay consider creating incentives to share for the common good. That said, there’s plenty of scope to make better use of data that wealready have, and, most crucially to let citizens know what they can do with their data. TfL (Transport for London) made a consciousdecision to make its data public. People are then empowered to make their own smart decisions with this data. This includes historicdata and real time data used, for example, to monitor traffic jams, underground delays, or the availability of free city bikes. Rio deJaneiro, for example, has a data control centre in which various city authorities sit together to facilitate better sharing.Speakers identified other technology and policy trends for the next few years that would impact infrastructure planning.Developments included greater use of “the cloud” and cloud-based apps, to empower the individual as much as the multinational;online social problem solving (for example, local snow clearance initiatives); digital fabrication, 3-D printing; and new materials,such as low carbon cement reinforced with fibre, not steel used to eliminate corrosion and reduce transport costs.Harry Verhaar, Head of Government Affairs at Philips Lighting, reminded delegates that large companies also play an importantrole in providing cities with technology. Half a city’s energy bill is for lighting, he noted, so anything that can make lightingsmarter, cheaper and safer, is important. Energy savings can be equivalent to hundreds of power plants. And he pointed out thatPhilips doesn’t need to wait for government support to do this.Sean Griffiths, Founding Director of Fashion Architecture Taste, and Reader in Architecture at University of Westminster,reminded delegates of the ultimate purpose of technology, and cities generally, and not to discard design and beauty in the questfor efficiency. He noted that most of the value of an iPhone lay in its design which was produced in California, not the productioncost achieved in China. He suggested we need more poets and artists to debate climate change – not simply the scientists. Hewarned that it was too easy to overlook the emotional and cultural values that are essential to our happiness (noting also thatinternet dating sites and the “blackberry divorce” are important dimensions of our technological age). Education and skillsThe less definable, but essential “softer” aspects of infrastructure development might also include the quality of education andskills. A major industry complaint was that firms had to get staff up to the basic education standards that the school system shouldhave delivered. Business associations, representing over 100,000 companies, identified serious resentments about having to doremedial work on literacy, numeracy, and basic safety and teamwork skills. Of course, business was prepared to spend money on thespecialist skills that keep staff in employment and that spread through the supply chain. But government had to provide acceptablestandards of health and education. Even in the US there was deemed to be more cross-party collaboration on educational goals thanwas apparent in the UK.There was a long and wide ranging list of problems relating to some of the practical skills too. Some felt that the UK had deskilled inrecent years, for example in nuclear energy, and that skills such as those in the renewable sector, were being exported rather thanbeing kept in the country. Others felt that while the UK indeed has the skills, it lacks effective integration of these skills; or thatthings have gone wrong because of an “infatuation with the process; where we seem to get lost in ticking boxes”. Thus, we may bevery good at analysing a problem but not at getting things done. We also disagree on outcomes such as what the desirable benefitsare, the realistic lifespan of a project, how fast our economy will we be growing in five years’ time, or what is affordable, even if it’snot the most cost effective.
  • 10. THE INFRASTRUCTURE SUMMIT 2012 SUMMARY REPORTOther shortcomings identified included a tendency to over-specify a project, thereby stifling innovation. There was also seen to betoo much “command and control” in an era when command and control management should be on the way out.Some solutions were proposed. Apprenticeships should be provided as a valid alternative to our obsession with universities,especially as there are so many other ways to achieve global specialisation. No institutions seemed to be feeding the huge demandfor technical skills. Related to this is an obsession with qualifications, with “outputs rather than outcomes” too often the mark ofsuccess. Thus more should be invested in technical colleges, and on connecting the worlds of business and education. Rising collegefees will force students to reconsider if they really want to do a course, and if it is really right for them. There was also said to be aneed for better teacher training and motivation, which includes keeping teachers up to date, rather suffering from the “half-lifeof knowledge”. However, the successful Olympic park and massive crossrail project was given as an example of excellent projectmanagement and technical skills in the UK. Raising long-term financeThe idea that infrastructure was always the responsibility of government is misplaced; private involvement has always been thereover the centuries, simply because government doesn’t have enough money. But it was argued that if you want to mobilise privatecapital, you have to give institutional investors a framework that allows them a long-term return. If the regulatory framework isinadequate governments will have a major problem attracting investors.Mathias Burghardt, Head of Infrastructure, AXA Private Equity, noted that there had been a massive drop in project finance sincethe financial crisis. Over the longer term, Basel 2 and Basel 3 rules would be a disincentive for banks to lend for infrastructureprojects. He noted that we are in a protracted period of deleveraging. But there was still an appetite, not least from Asian investors,for this asset class.This new pool of money may not be sufficient to compensate for the shortfall, but there was arguably already too much liquiditybefore the crisis hit. Money is there, as European pension funds are slowly increasing their allocations, but investors are morecautious than before.What investors want is long-term, inflation-linked cash flows, and infrastructure projects should be a good match, providingpension funds with stable and predictable returns. And yet the match often seems hard to make. One reason may be that projects arehighly leveraged, and it is hard to ensure stable cash flows when borrowing levels are above 50%.Another problem is alignment of interests. Typically, private equity investors, with their high annual charges, often have a “buy,hold, flip” mentality. But pension funds also have misaligned timescales and fees. Often they prefer brownfield assets, and arescared off by greenfield funds. There are plenty of institutions that will lend but deals must be carefully structured to satisfy banks,end investor and constructors. It is often necessary to take construction risk and sell it on.Gerassimos Thomas, Director at the DG for Economic and Financial Affairs at the European Commission felt that it was not forgovernment to pick up the bill, but it had responsibility to attract equity and debt investors. The problem, however, according toGershon Cohen, CEO of Infrastructure Funds, Lloyds Bank, was that governments often don’t know what sources of capital evenexist. Pension funds, for example, may not be the best source of infrastructure financing. More imaginative thinking is needed.Could the retail end of the market provide a better return? There is more than enough capital, with new pools of capital opening upall over the world, but governments have to decide what is most appropriate for each project. Before the financial crisis there hadbeen too much “dumb” capital, mispricing of risk, leverage, and a tendency to go for the lowest cost of capital, under private financeinitiatives (PFI), which today is not necessarily the best choice. However, Mr Burghardt warned against being too innovative, toallow risk to be easily transferred. The demand for deals is often overestimated and fees are set too high. “ e are reaching a tipping point where decisions have to happen on W airports, roads, railways. We don’t have the luxury to continue the debate.” Gershon Cohen, CEO Infrastructure Funds, Lloyds Bank
  • 11. THE INFRASTRUCTURE SUMMIT 2012 SUMMARY REPORTPension and insurance funds in the Netherlands, which are more consolidated than in the UK, still want predictable cash flows, andsufficient cross-party political support so projects are not delayed or disrupted. Mr Cohen noted that the right decisions are notalways taken because one must take account of different popular views. Life is not a mathematical exercise; there are trade-offsto be made, he noted. But that didn’t mean we could delay indefinitely. “We are reaching a tipping point where decisions have tohappen on airports, roads, railways. We don’t have the luxury to continue the debate.” Bravery and vision is needed now, even if itmeans politicians become unpopular. “ nergy and infrastructure is the life blood of modern E society. If we don’t get infrastructure right we won’t get anything right.” Volker Beckers, Group CEO, RWE npowerVolker Beckers, Group CEO, RWE npower, re-iterated this urgency. He said that the EU needed some €400bn of infrastructureinvestment, half of which was needed in the energy sector. Energy legislation must reflect a mix of sources and promote competitionbetween technologies. Though these huge, long-term decisions can seem far removed from our everyday lives, the recent storms inthe US, and power cuts in India remind us of the importance of infrastructure, as will coming hikes in energy costs which will hit usin our household bills or through taxes. “Energy and infrastructure is the life blood of modern society. If we don’t get infrastructureright we won’t get anything right.”
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