Edge #4

Issue#4 winter_11/12

The Journal of LeighFisher

stepping back to focus in The challenging economic climate demands global perspective and analysis

issue#4 winter_11/12 The Journal of LeighFisher

We are in a time of change, which brings fresh challenges.

However, this also presents new opportunities to refresh our ideas and apply innovative solutions to the varied and complex issues we face.

While the LeighFisher aviation business is over 60 years old, as Edge went to press in winter 2011/12 we were celebrating the first 12 months of operations of our surface transport and local government businesses. This expansion has allowed us to broaden the scope of the strategic management and consultancy services that we can offer clients – just the start of planned expansion across a range of sectors.

We also continue to expand our geographical coverage, with growing LeighFisher teams in Europe, Asia, and the Americas and major new projects in Brazil and Ghana.

The current climate shows just how interconnected the global economy is and how boundaries between sectors, especially in infrastructure, are blurring.

LeighFisher, is a broad based consultancy, in terms of our global reach and the sectors in which we operate. We provide clients with robust advice, mixing our global perspective with the sharper focus of a genuinely expert team.

Europe / UK Chris Wilson Vice President Chris.wilson@leighfisher.com

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While the articles in this edition of Edge draw from this breadth of expertise, we are also open to fresh thinking from external sources. We invited Rohit Talwar of Fast Future Research as guest author. He shares his views on the implications of the current economic crisis on the developed economies and also considers how developing economies might respond to this situation.

Similarly, we consider the pros and cons of top-down and bottom-up approaches to forecasting, before a number of LeighFisher experts contribute views to this conversation. Given the range of skills and sectors represented by these individuals, it is not surprising that the responses demonstrate differing views and opinions on the subject.

In surface transport we examine India’s requirement for High Speed Rail and the challenges faced in delivering to a timeframe that will keep pace with the demands of this vast and expanding economy.

We also look at the gaps in the European road network and ask whether the system is as complete as is often portrayed.

Two of our experts also put forward their analysis of the current state of aviation, with a focus on India and the USA.

Americas / Asia Mark Lunsford Vice President Mark.lunsford@leighfisher.com

We also consider evolving transportation policy in the USA across all modes, and in particular the dominant issue – how will future schemes be funded?

Finally, we look at the £30 billion Second National Infrastructure Plan published by the UK government, and the implications for future infrastructure across all sectors. We look at two related issues affecting infrastructure and government in the UK. We initially consider recent developments in the provision of social infrastructure and what lessons can be learnt for the future, before looking at developments in procurement of infrastructure, and the search for “lean procurement”.

This fourth edition of Edge provides a platform for debate and analysis from our experts across many sectors and from around the globe: economists, planners, financial analysts and experts in other related fields. Edge enables them to share their expertise and thinking with a wider audience, and we hope that you will find their views stimulating. ■ Nick Davidson President www.leighfisher.com www.linkedin.com/companies/leighfisher www.facebook.com/LeighFisher.Global

contents 04 Future tense

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Rohit Talwar, CEO of Fast Future Research, forecasts challenges for the next 20-30 years

06 Reverse forecast Top-down or bottom-up – experts discuss which forecasting model works best Surface transport

08 Broken journey Europe’s road network is fast and flowing but cannot yet provide an uninterrupted journey

11 Fleeting vision One of the fastest growing global economies needs rapid rail travel – and it needs it soon

15 Public works, private funding?

Trust funds in the US can no longer fund major projects – can P3s step in?

Aviation

18 Look east The growth of aviation markets in Asian economies contains lessons for others

22 Changing skies With US airports already at capacity, what are the opportunities for growth in the market?

Government and infrastructure

27 Nerve stimulus

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A second government plan outlines major UK projects – but will the market buy into it?

30 Weather eye Despite public sector budget restraints, hospitals and schools are being developed

33 Root and branch UK government’s review of procurement – can it cut costs and deliver efficiency?

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Design: Smallfury Design Images: ©Jens Nieth / Corbis, Felix Pharand-Deschenes Globaia / Science Photo Library, Pascal Le Segretain / Getty Images, American Airlines / Oneworld, asterix0597 / iStockphoto, Mlenny / iStockphoto, © Bruno Levy / Corbis, © Pawel Libera / Corbis, photosindia / Getty Images, © Ocean / Corbis, Clayton Perry, Jorg Greuel / Getty Images, © Tim Griffith / Arcaid / Corbis, © Topic Photo Agency / Corbis, © Anindito Mukherjee / epa / Corbis, Xavier Marchant / 123RF, Sciepro / Science Photo Library, Jason Hawkes, © Jason Hosking / Corbis, Hypostyle Architects, European Investment Bank, Aeroservice / Science Photo Library, Andy Rain / European Press Photo Agency Published by: © 3Fox International Limited 2012. All material is s­ trictly copyright and all rights are reserved. Reproduction in whole or in part without the written p ­ ermission of 3Fox International Limited is strictly f­orbidden. The greatest care has been taken to ensure the accuracy of information in this magazine at time of going to press, but we accept no r­esponsibility for omissions or errors. The views expressed in this ­magazine are not n ­ ecessarily those of 3Fox International Limited or LeighFisher Inc.

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General

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Guest author n

Future tense What will be the impact of economic uncertainty and change on infrastructure development? LeighFisher invited a leading global futurist to share his thinking. By Rohit Talwar, CEO of Fast Future Research

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he core of the western world (the US and Europe) faces at least a decade of unavoidable turbulence, volatility and painful correction. A combination of a broken financial system, massive debt, income inequality, under-investment, unemployment, an ageing population and increasing social security and healthcare costs is creating challenges that would test even the most talented of governments.

While all this is happening, citizens are becoming more public and vociferous and corporations are increasingly shifting investment offshore.

This is compounded by slow government decision-making and a reluctance to solve problems in a fundamental way.

For most of the developed economies, a period of low economic growth with regular recessions seems much more likely than a sustained depression, though at times businesses and the public might not be able to tell the difference.

The US and Europe still hold immense comparative advantages in areas that will form the bedrock of tomorrow’s economy – education, biotechnology, nanotechnology, personalised medicine and green energy.

Training, planning, and a vision for tomorrow will be essential.

The emerging markets It has been estimated that $6 trillion needs to be spent by emerging market countries by 2014, simply to meet their basic infrastructure needs, and around

$12-33 trillion is required over the period to 2030. However, infrastructure investors will almost certainly have to reduce expectations for investment performance because poorer nations simply will not be able to offer the historic returns financiers have grown used to. A radical overhaul will also be required in infrastructure planning, design, construction and maintenance to shorten delivery timescales and bring down costs.

A key challenge is to develop decisionmaking capability and the long-range thinking skills of policy makers.

No developing economy has a golden ticket that will protect it whatever the economic outlook. Many will repeat the same mistakes as their counterparts in the developed world, in terms of slow decisionmaking, under-investment in infrastructure and failure to control the finance system.

Training, planning, and a vision for tomorrow will be essential However some should fare better than others. China has major debt challenges but has a reasonable chance of avoiding a hard landing that would be globally damaging.

India must reform planning systems, accelerate decision-making, bring down punitive interest rates and ensure delivery

of high-quality infrastructure solutions if it is to stand a chance of fulfilling its potential.

Some Indian sources see population primacy occurring by 2025. It is hard to argue with demographic data: short of war or a pandemic, India will eventually overtake China in terms of population. This could bring either a demographic dividend or a nightmare depending on investment in education, the rate of growth of its economy and the state of its environment.

For example, it has been suggested India will run out of fresh water by 2020, and even by 2015, 60% of India will still only have an average per head income of less than $2 per day. Educational advancement, infrastructure development and economic growth are essential. If these are achieved, India holds much potential in the coming decades.

For China the point of being passed is more important. China has one of the world’s worst demographic outlooks and is ageing rapidly. People over the age of 60 now account for 13.3% of the population, up nearly 3% since 2000. The figure could rise to 25-30% by 2030.

For China, the economic burdens of ageing could be significant, which in part explains the emphasis on economic growth – no poor country has aged in peacetime to the extent that China is doing. China is in a rush to become rich, as the cost of supporting such an ageing population means it simply has no choice. ■ For more information go to: www.fastfuture.com winter 11/12_05

Surface Transport

Reverse forecast In the analysis of data to predict the future, does top-down produce a better result than bottom-up forecastng? Or are they equally useful methods when deployed in complementary approaches? LeighFisher experts comment

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core activity undertaken by LeighFisher teams across the globe is predicting the future for our clients and, whether it is for the short or the long term, related to costs or revenues, operations or infrastructure, they all start by asking one simple question – top-down or bottom-up? Indeed, it is not just the forecasters at LeighFisher who face this issue; many in marketing, management and finance are asking the same question.

So what is top-down and bottom-up?

Simplistically, top-down involves analyzing the “big picture”, or to put it another way, it is essentially the breaking down of a system to gain insight into its compositional sub-systems. In a top-down approach an overview of the system is formulated, specifying but not detailing any first-level sub-systems. Those who don’t like top-down claim it is a process locked in “Ivory Towers”.

In contrast, bottom-up forecasting overlooks broad sector and economic conditions and focuses on the individual attributes of a system. It pieces together systems to give rise to grander systems, thus making the original systems sub-systems of the emergent system. Those who don’t like bottom-up argue that the process results in analysts who “cannot see the forest for the trees”.

Of course, the true benefit of top-down and bottom-up forecasts is that they look at the world from differing vantage points. Both have strengths and weaknesses. In addition, many argue top-down approaches are better suited to existing stable systems, while bottom-up is more appropriate for systems that either don’t exist or are likely to have undergone radical change.

For the forecasters at LeighFisher, there are two other dimensions to consider: how much data is available and how much time do we have? Top-down is arguably less data-hungry and quicker to develop, while bottom-up is often reliant on the development of complex data-hungry models and consequently, it can take a lot longer to develop.

We thought we would ask a number of people at LeighFisher, who are faced with this question every day, to share their views. ■

Ask the experts Graham Heald – Reading, UK “Top-down gives an approximately right answer while bottom-up gives a precisely wrong answer.” While not entirely agreeing, this offers guidance as to the best approach. If an approximate answer is all the end user requires, a top-down analysis is usually quick and cheap to produce. A bottom-up analysis is more complex but, if properly developed with allowance for uncertainty, provides multiple answers, permitting better understanding of the issues and risks surrounding a forecast. graham.heald@leighfisher.com David Ashmore – New Delhi, India It’s about getting the two forecasts to meet. Top-down thinking gives you an answer which, regardless of allegations of lack of rigour, will always pass the sense test. Sometimes with bottom-up you can end up with a ridiculous answer because of the propagation of errors through the chain. If the bottom-up doesn’t roughly come out around the same answer as the top-down, you’re probably on the wrong track. david.ashmore@leighfisher.com Paul McKnight – Ontario, Canada Both approaches are valid ways of ‘triangulating’ to a forecast.

The top-down approach carries more weight when forecasting bigger-picture entities (eg for a continent, region or country), particularly when the forecast horizon is relatively long. It provides a broad and general overall direction of the future. The bottom-up approach, on the other hand, provides a better forecast when forecasting smaller subsets (eg traffic for a specific facility or route), particularly when the forecast horizon is relatively short. It takes into account the local variables that may cause the forecast of the smaller subset to vary from the bigger-picture entity. paul.mcknight@leighfisher.com Linda Perry – San Francisco, USA With enough time and budget, the use of both bottom-up and top-down approaches is preferable. If the drivers of cost or demand are not sufficiently understood, underlying changes that could materially affect future activity may be missed. Preparation of detailed plans or schedules has become increasingly essential for planning studies which use them for simulation and other computer modeling. The expectation is not that predicted detail will occur with 100% certainty, but that the detail is consistent with the overall top-down results, facilitating planning of future facilities. linda.perry@leighfisher.com Charles Williams – London, UK Using both approaches enables sense checks on results at regular intervals. Top-down can lead to incrementalism, where the underlying assumption is no change in the status quo apart from one or two economic assumptions. If looking forward 20 years, test by looking back 20 years – how much change has there been in this time? – providing a bottom-up sense check on the robustness of top-down assumptions. charles.williams@leighfisher.com

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Surface Transport

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Surface transport ■

Broken journey

Europe’s road network is widespread and substantial. But there are still plenty of gaps left to fill. By Riccardo Mattei and Philip Bates

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rguably one of the most influential reports on transport in the UK in recent years was the Eddington Transport Study. Published in 2006, one of its most important findings was as follows: Historically, new connections have played a pivotal role in periods of rapid economic growth in many economies, but in mature economies with well-developed transport networks, it is transport constraints that are most likely to impact upon a nation’s productivity and competitiveness.

In other words, don’t stop building new connections but also focus on solving problems in the existing system.

Although the report was about the UK, many of the symptoms that led to this diagnosis (large but ageing infrastructure coupled with large but ageing population) apply equally to other western European countries. As a consequence, Europe is now seeing a programme of transport

infrastructure renewal and upgrade, such as the A Modell in Germany, the new Forth Crossing in Scotland, or more commonly, high-speed rail projects such as Madrid to Barcelona in Spain, or the HS2 in the UK. While this leaves one with an image of western Europe being a region with a complete highway network, this is far from the truth. So where are Europe’s road gaps and what is being done to fill them?

In France, sections are still being added to the strategic motorway network. The most high profile of these is arguably the A355 Strasbourg Bypass, a 25km-long two-by-two-lane greenfield motorway with an estimated cost of around €400 million.

However, there are plenty of others, including the A150 Rouen to Le Havre in northern France, the A45 Lyon to Saint Etienne, the A63 Salles to Saint Geours de Maremne and bypasses in Marseille, Tarbes and Vichy.

In Spain, we’re seeing major new greenfield roads opening even at the very winter 11/12_09

■ Surface transport

height of the recession, such as the new Malaga ring road and Guadalmedina toll road north of Malaga. Meanwhile in Portugal, another country buffeted by the recession, major new highway schemes are being built to link the country with Spain (Transmontana and Marão Tunnel).

In the UK, it could be argued that strategic highway network construction ended 20 years ago with the M40, an alternative route between London and Birmingham via Oxford. However, small gaps are actually still very common – ask anyone who drives on the A303 past Stonehenge.

But large gaps also appear if one looks closely, including a Lower Dartford Crossing and access to mid Wales. While road construction activity in recent years has been low, the Second National Infrastructure Plan, published in the autumn of 2011, suggests we may be facing a new dawn of investment in the UK road network.

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It is arguably Italy where we see the most activity, with the jewel in the crown being the chain of new, largely greenfield toll roads north of Milan and Venice. The four schemes – Pedemontana Piemontese, Pedemontana Lombarda, Pedemontana Veneta and Pedemontana Friulana, which represent around 260km of new highway – are all at very different stages of development.

These schemes aim to relieve the highly congested strategic network, including the A4 – one of the most congested in Italy – to which they run parallel. As well as serving the many cities in northern Italy (Turin, Milan, Bergamo, Verona, Venice and Trieste), the

Pedemontana schemes will also provide a strategic east-west link across Italy (European Corridor V), a local link between small- to medium-sized cities north of the A4 (such as Verese, Como and Trento) that have undergone dramatic growth over the last decade. Finally, the new Pedemontana system will provide an alternative motorway arc closer to the Alps, improving access to recreational facilities, both in the mountains and on the lakes that fringe them.

While the Pedemontana schemes are impressive, these are not the only greenfield motorways under consideration.

Other schemes under evaluation include two around Milan, Bre.Be.Mi and TEEM – Tangenziale Est Esterna di Milano. The delivery of both projects is being accelerated so they will be available in time for Expo 2015, which will be held north-west of Milan.

Another scheme is the 400km-long Nuova Romea toll road between Orte and Mestre. This motorway will cross five regions – Lazio, Umbria, Toscana, Emilia Romagna and Veneto – and provide a brand new north-south link to relieve traffic on the highly congested A1 + A13 Rome-to-Padua toll road. Tenders are expected in late 2012.

In addition, the proposed Cispadana and Ferrara-Porto Garibaldi toll roads will create a new east-west link parallel to the A1 toll road in Emilia-Romagna, while the Nogara-Mare and Cremona-Mantova highways would provide an east-west link parallel to the A4 toll road in the Veneto region.

If most of these projects are ultimately built on the currently proposed timescales, the upcoming decade could arguably see the biggest expansion of the road network in Italy since the Second World War. So, while it is true that the highway network of Europe is widespread and substantial, it would be wrong to think we have everything in place – we still have many gaps left to fill. ■

elieving congestion – R major highway developments are under way in France, Portugal, Spain, and in particular, Italy

n xxxxxxxxxxxxx

Fleeting vision The apparition of a high speed train enters a Kerala station – no ghost train this, but India’s vision for the High Speed Rail network that its fast-growing economy demands. By David Ashmore continued overleaf ➔

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olitical shenanigans, indignant lobby groups, howls of protest from those who see their rural idylls potentially being decimated, arguments, counter arguments, endless debates. Welcome to the world of large scale transport infrastructure projects.

High Speed Rail (HSR – loosely defined as a passenger rail system which operates above 200 km/h) has never been more topical, or contentious. Early successes with the Shinkansen system in Japan, followed by high profile European schemes such as Eurostar and the TGV in France, have made politicians sit up and take note of this seemingly advantageous mode of

transport. This is unsurprising: HSR has many characteristics which endear it to politicians – it’s visible, grandiose and futuristic – in other words highly sellable from a political perspective. The snag is it is extremely expensive and, like with all things, if one politician goes out on a limb to support it, his or her opponent will be equally dogged in refuting it.

‘It’s wonderful’, cry the advocates. ‘It rejuvenates local economies, redistributes wealth and gets people out of cars and planes. It’s good for the environment!’

‘Nonsense,’ the sceptics retort. ‘HSR is expensive to build and run, and shifts wealth from one epicentre to another. There

are simply better uses of our money. Like upgrading what we have.’

Who is right? Well neither. And both.

As with all complex arguments relativity is the key. It’s not about what you are deploying as a solution, but how you are deploying it, and where. But the electorate understandably becomes bored with such nuanced discussions, so the battle around HSR in the developed world has largely fallen back on to ideological and political fault lines, not to mention survival battles from those most strongly affected. And what a battle: it’s brought governors head to head with presidents, middle class residents of English Shires side to side with environmental

HSR has many characteristics which endear it to politicians – it’s visible, grandiose and futuristic ...

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Proposed High Speed Rail routes within India As Indian markets expand, so does the urgent need for vast development of the country’s rail infrastructure.

Miles Km

100 100

200

200 300

300 400

Proposed stations for High Speed Rail Other cities Population

Data according to Census of India 2011

SRI LANKA

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One of the incredible things about India ... is the voracious desire for infrastructure activists, and had airlines and construction companies fighting their corners with politicians so as to influence what gets built, if anything, and where – at least in the developed world.

be the largest employer in the world, serving all corners of the subcontinent, so, incredible in their own way, but with poor reliability and ailing infrastructure, modern they aren’t. If you are travelling into an urban area for an important meeting, there’s every chance you will be several hours late. This is no longer tolerated in the new economy.

The gap was first filled by low cost airlines such as Kingfisher and Jet, whose services are comprehensive, affordable and, more importantly, punctual. Domestic air travel in India, always sizeable, is now huge, with many middle class families jumping on and off budget airlines as a matter of course.

HSR in India: on track • Indian government is not predicted to deliberate over cost benefits • Upgrading is not an option, with no fast rail system in place • India has a positive, ‘can do’ attitude – plus 8% growth per year

Queuing up for contracts Build more and build it quickly In the developing world the attitude to infrastructure is completely different. There is no fast rail system to upgrade and if there was one, upgrading it certainly would not cope with the pace of growth being seen in India and China, whose urban amenities and economies have been catapulted into the twenty first century in an unprecedented time frame. No stagflation here – 8% growth per annum is the current norm in India.

For decades such countries were massively regulated by the government but deregulation of key industries, combined with innovations in technology, has allowed highly skilled yet lower cost labour markets to be utilised by western companies, leading to boom times with which governments simply cannot keep pace.

The attitude therefore is ‘build more and build it quickly’, and given that governments cannot move at the speed needed, the void has been filled by the private sector, which is being granted concessions to build motorways, railways, airports and ports – anything which will ensure the huge need to travel and that freight movements can be catered for.

The debates which characterize the passage of HSR schemes in the developing world are thus almost completely absent here in India. HSR is seen as innovative, modern, and a sign that India is moving forward – everything that India’s colossal existing rail system isn’t. Indian Railways may

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So this market is seemingly ripe for HSR. In Europe it’s been shown that if stations are located in the central business district, and airports remote from city centres, provided fares are competitive, for journeys under five hours HSR can make significant inroads into air travel’s market share. Getting to airports can be painful and expensive and check-in times can be long relative to flight times.

So the Government of India last year announced an HSR programme. As there are no indigenous manufacturers of complete systems, much of the technology will need to be imported and much of the financing will come through international development banks. So it’s been decided that for all the benefits of technological uniformity, it would be in India’s interest to spread the trade opportunity around.

Understandably, the Japanese, the French, the Germans – all the countries with ‘off the peg solutions’ and development banking institutions – are queuing up.

This is reflected in the award of contracts following feasibility studies. Aside from Hyderabad to Chennai, Chennai to Ernakulum, and Delhi to Amritsar, all the projects are progressing with different foreign sponsors.

Pune to Ahmedabad is being developed by the French, Delhi to Patna by the British, and Haldia to Kolkata by the Spanish.

Questions yet to be answered Is the future bright for HSR in India? It depends. The location of stations is key. As

existing Indian Railways’ track serves the city centre markets, HSR stations will often be located remotely from city centres, negating any advantages over airline travel, especially given India’s notorious traffic congestion.

The question of fare is also critical – to pay back the capital costs of the systems, fares may need to be set at market prices, which again will offer little advantage over airlines; setting fares at lower levels will necessitate a subsidy, which may be justifiable, but will need to be built into the concession documents, depending upon who bears revenue risk; and it’s unclear if usage will cover operating costs.

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inally the spectre of Indian railways looms in the background – their role is as yet murky: if they are not responsible for the operations, then they could be custodians of the track, yet separating the wheel and the rail may bring problems at key operational interfaces.

But one of the incredible things about India at the moment is the voracious desire for infrastructure, combined with a ‘can do’ outlook. The Indian government is unlikely to pontificate endlessly over cost benefit considerations. It’s likely these schemes will be built and people will have to wait and see what happens.

Anathema to the western mind. But, after all, this isn’t the west. ■

Surface transport ■

Public works, private funding?

With trust fund dollars declining for air and rail projects, public private partnerships offer a proven alternative.

By Stephen Van Beek

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n the US, slow growth, high unemployment and low interest rates used to mean ideal conditions to invest in infrastructure, with cheap labour, materials and debt, and the economy needing an injection of stimulus to kick-start demand and growth. But the recession – coupled with changes in driving habits and airline travel – has reduced government income and thus the resources available for infrastructure investment. With new fuel and excise taxes unlikely, now could be the time for federal and state governments to embrace public-private partnerships (PPPs).

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A growing number of successful PPP deals, including several in Canada, are becoming more widely known

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The end of the trust fund era During the past three decades, highway, transit and airport infrastructure have been partially funded from fuel and excise taxes that flowed into the surface transportation’s highway trust fund (HTF) and mass transit account (MTA), and aviation’s airport and airway trust fund (AATF). The trust funds were designed to provide states, transit agencies and airports with steady and predictable flows of capital, enabling long-term investments in infrastructure.

Future flows were so certain, in fact, that authorities often used the debt markets to generate upfront capital that was paid back when the grants were subsequently received. Public policy reinforced the use of debt markets by making interest paid to bondholders for many projects tax-exempt, reducing the cost of capital.

Over the past decade, the economy and transport sector have gone through several severe shocks, causing fuel prices

to increase and fluctuate wildly and leading to a drop in travel demand. As a result, collections into the trust funds have fallen well below forecasts, making them unable to support the spending Congress had previously authorized. Short-term infusions of taxpayer funds, totalling well over $30 billion to shore up the trust funds, have run their course. The resultant gap between infrastructure needs and available revenues means that US transport policy has reached a stalemate.

One solution is the use of public private partnerships, whose ability to leverage scarce public and private dollars could help finance large capital projects in the transport and social infrastructure sectors, and provide demonstrable public and private benefits.

Until now, despite the global growth in investor funds used by other nations to fund infrastructure projects, US state and local authorities have not extensively used PPPs. But this is changing as realization of

the financial realities facing federal and state finances sinks in, and as a growing number of successful PPP deals, including several in Canada, are becoming more widely known.

The most compelling argument in their favour, however, are new PPP structures that are responsive to market realities, better align the roles of the public and private sectors, and effectively manage risk in the development and delivery of infrastructure.

• The role of trust funds is declining in funding infrastructure • Public private partnerships attract alternative investment

Availability payments A common element of many of these newer generation PPPs is the use of availability payment contracts – fees paid by a government to its private sector partner when certain milestones are met during the project delivery process and once the asset is in service. Under this model, the government retains ownership of the asset and collects any revenues. The innovative part is that the government gives the private sector the responsibility for much of the rest of the process, including potentially designing, building, financing, operating, and maintaining (DBFOM) the asset.

When the public sector puts the PPP out to bid under a DBFOM structure, rather than setting out a highly specified procurement process it takes advantage of competitive market forces by enabling a private entity to find the lowest-cost and best way of delivering the infrastructure. The public agency is free to include socially important goals in the bid, of course, understanding that inclusion of them is likely to affect the pricing of the deal.

One benefit of this structure is that with a typical period of the concession being 30 years or longer, the private company is given an incentive to look at the full life-cycle costs of the project, recognizing that up-front investments in higher quality and resilient materials will lower the costs of maintaining the project as it ages. This is reinforced by post-delivery contract terms that provide payments over the life of the concession to maintain service levels associated with the asset’s infrastructure. For example, the company running Vancouver’s Canada Line receives operating and maintenance payments based on inflation, as well as

on future decisions made by federal, state, and local policymakers.

The private party also assumes a variety of traditional construction and schedule risks, some of which may not be under its control (such as labour and materials prices), as well as such risks as lawsuits, protests and political change. Some of these can be accounted for in the contract; others may be harder to quantify.

Promise meets reality • New generation PPPs feature fees paid on achievement of milestones

such measures as punctuality, cleanliness of stations, and reliability of escalators and elevators. This alignment of a public sector value such as service, with the private sector value of profitability, is a key virtue of a PPP structure that uses availability payments.

The two sides of risk In a PPP using availability payments, the public agency agrees to accept much of the market risk, retaining both user-generated revenues and appropriated revenues and/or capital grants and credit enhancements from federal, state and local programs.

A key part of the deal is that the proposed partner will carefully assess the potential ‘appropriations’ risks that depend

In the US, a few deals are in negotiation or completed. These include transport: California’s Presidio Parkway; Florida’s Port of Miami Tunnel; Denver Colorado’s Eagle Transit Project; and social infrastructure projects such as California’s Long Beach Courthouse. More proposed projects and bids are expected and offer promise in highways, transit and rail. The number of US PPP deals is still small, outstripped by just one province of Canada – British Columbia.

A market will not develop simply because the public sector is underfunding infrastructure and would like private capital to help fill the void. A successful PPP market is based on more than investor demand and innovative financing techniques. To become a reality, a vibrant PPP market requires changes to state and local laws, investor confidence and a volume of deals sufficient enough to make the US market worthwhile.

The potential is huge. ■

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■ Aviation

Look east With the economic outlook – and aviation market – looking bleak for Western economies, the world should turn to the growing Asian market for answers. By Satyaki Raghunath continued overleaf ➔

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s major western economies struggle, aviation is one of the sectors most badly affected.

Major airlines are struggling mightily, the market is consistently weak, major network and legacy carriers are disappearing or merging and there seems to be little on the horizon to offer hope. As a result, governments across the world are seeking to involve private investors in the development of airport infrastructure.

There are, however, pockets of optimism, with some of the emerging markets across Asia and Latin America bucking the trend.

China, India, Brazil and the Middle East are all showing signs of growth and resilience and it is in these markets that significant capacity and growth are going to be seen.

In recent months, aviation news has been all about Asia. Beijing is now the second busiest airport in the world with over 70 million passengers in 2010; new terminals are in different stages of planning and development at Incheon and Hong Kong; airports in the Middle East are being developed through public 020_

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private partnerships; and finally, in India the long-awaited regulatory ruling on aeronautical charges has been announced, while IndiGo placed the largest aircraft order in the history of commercial aviation.

Beijing’s growth as a major international airport was never doubted – the only surprise has been how quickly it reached the 70 million mark. As the Chinese economy has grown rapidly, so has international and domestic air traffic, increasing, respectively, by over 30% and over 15% on last year. This has been accompanied by an unprecedented investment in the development of new aviation infrastructure.

Beijing is well on its way to becoming the busiest airport in the world over the next few years, especially as growth at American and European airports remains stagnant, thanks to lowered demand or constrained capacity.

The Chinese government has already announced plans for the development of a third airport for the Beijing metropolitan area to cater for long-term demand.

Elsewhere in Asia, Hong Kong and Incheon international airports are developing

new terminals. The former is breaking ground on a new midfield terminal concourse that will add 20-odd gates, while the latter is in the early stages of concept design for a new terminal that will add approximately 30 million people in annual capacity. If the existing facilities are anything to go by, we can expect to see new benchmarks set for the quality of infrastructure and level of service at both of these airports.

In the Middle East, airports are showing signs of going down the public private partnership route, a trend reflected in the ongoing Madinah Airport build-operatetransfer contract. Calling for investment in the long-term development of the airport, the bid process has been robust and well received so far. It remains to be seen whether other airports in the region will follow this route.

The Brazilian government plans to privatize three major airports: São Paulo Guarulhos, Brasilia and Campinas Viracopos.

Given impressive growth rates and upcoming events such as the FIFA World Cup and 2016 Olympics, this is welcome news. There have also been interesting developments in

IndiGo – one of India’s fastest-growing low-fare airlines – placed an order for 180 Airbus A320 family aircraft valued at approximately $16 billion in early 2011 India. Firstly, IndiGo – one of India’s fastestgrowing low-fare airlines – placed an order for 180 Airbus A320-family aircraft valued at approximately $16 billion in early 2011.

Along with another order of 30 turboprop aircraft placed by Spicejet – another low-fare carrier – it was a staggering affirmation of faith in the long-term growth of Indian aviation, especially in the low-fare segment, which is where most of the recent growth has been. Conversely, and surprisingly, Kingfisher announced its exit from the low-fare segment, thereby also bringing the Air Deccan story to a sad end.

Secondly, the Airport Economic Regulatory Authority (AERA), put forth its final regulatory determination for airports across India in 2011. The general ruling was, as expected, to move towards a

single-till approach to aeronautical charges with a view to maximizing welfare and keeping tariffs for the general public as low as possible. In addition, the Directorate General of Civil Aviation (DGCA) has begun to step in to regulate airfares in India, based on complaints that some airlines were overcharging passengers, including charging them for seat selection. This decision seems surprising and even counter-productive – in a competitive market that is very fare-sensitive, there is little need for a regulator to step in to control fares.

Such measures might keep consumer groups and the traveling public happy, but it does not encourage private sector participation in delivering urgently needed aviation infrastructure. This will be crucial in light of projected double-digit GDP

growth over the next decade. Without reasonable rewards to private companies, India runs a risk of developing sub-standard infrastructure, a major stumbling block for a nation that is likely to have the third largest GDP in the world by 2030.

Despite structural and regulatory challenges, China, India, the Middle East and Brazil are likely to thrive, presenting airport operators with huge opportunities for innovation and improved performance.

Airport operators across the world face similar challenges – access to capital, regulatory uncertainty, investment in facilities and implementation of capital programs, pricing pressures.

In these uncertain times, airports around the world could learn from these problems and their solutions. ■

Aviation in the developing world • Beijing – world’s second largest airport since 2010 • Incheon & Hong Kong – major expansion of airports • Madinah – build-operate-transfer contract • In Brazil, three major aiports are being privatized

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Aviation

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Aviation â–

Changing skies Aviation in the developed world, particularly in the US, is driven by cost and revenue initiatives rather than exponential traffic growth. By Linda Perry

A

viation in the developed world is characterized by mature domestic and international airline networks, a population with above average incomes and a high propensity to travel, and airport facilities at or approaching capacity. As a result, traffic growth is limited and airlines and airport operators must identify opportunities to improve financial and operating performance.

Shifts in global aviation The rapid growth of developing economies such as Brazil, China, and India has resulted in a shift in global aviation from Europe and North America to the Asia-Pacific region. Although advanced economies accounted for the largest share of world capacity (in terms of scheduled departing seats) in 2011, total capacity has remained relatively unchanged since 2000. The lack of capacity growth in advanced economies reflects, in part, airline efforts to reduce costs by flying fewer aircraft and increasing average load factors (the percent of seats occupied) and to increase revenue by limiting capacity, thereby improving their ability to charge higher air fares. Airlines in advanced economies have increasingly relied on the development of international service to fuel

traffic and revenue growth. The liberalization of international aviation-related treaties, including the creation of more than 100 US Open Skies agreements, is expected to facilitate future growth in international service, although this growth will be shared by airlines in developing economies with the financial resources to build their fleets. In 2010, airlines in the Asia-Pacific region accounted for approximately 33% of world orders for new aircraft through 2029, according to the global market forecasts prepared by Airbus and the Boeing Corporation. By 2029, airlines in the Asia-Pacific region are expected to account for 34% of the world aircraft fleet, compared with a 22% share in 2010.

Role of airline mergers Since the merger of Air France and KLM Royal Dutch Airlines in 2004, most of the recent mergers have been between US airlines. In contrast to the Air France/KLM merger, in which each airline continues to operate separately, mergers of US airlines have resulted in single-branded entities with consolidated operations and facilities. The result is a combined airline that serves a greater number of destinations within the United States and throughout the world than the individual airlines before the merger. winter 11/12_023

â– Aviation For example, as a result of the Delta Air Lines merger with Northwest Airlines in 2008, the combined airline (including regional affiliates) now serves 28 US destinations and 15 world destinations in addition to those which Delta alone served before the merger.

Similarly, as a result of United Airlines’ merger with Continental Airlines in 2010, the combined airline (including regional affiliates) now serves 50 US destinations and 79 world destinations in addition to those which United alone served before the merger. The objective from the perspective of US airlines is to strengthen the competitive position of their alliances by expanding their US networks.

Redefining the competitive landscape Airline alliances emerged from a need to create seamless international air travel.

Globalized industries increasingly require access to local markets beyond a country’s primary international gateway. In response to this requirement, large, strategic, branded airline alliances were formed, together with code-sharing and other marketing arrangements, to mitigate the effects of restrictive bilateral agreements, ownership restrictions, and licensing and control regulations. Airlines based in different countries formed alliances to facilitate access to specific markets and to leverage their local knowledge, relationships with

Merger of giants: Delta and Northwest Air France and KLM Royal Dutch United and Continental

Pursuit of passenger market shares shifted from competition among airlines to a contest between airline alliances

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suppliers, and specialized marketing and distribution channels.

With the development of airline alliances, the pursuit of passenger market shares shifted from competition among airlines to a contest between airline alliances.

In 2010, the three global airline alliances – Star Alliance, SkyTeam, and oneworld – accounted for two-thirds (66%) of scheduled departing seats at US airports, up from 43% in 2000. During the same period, the low-cost carriers doubled their share of US airport departing seats. The participation of US legacy airlines in global alliances has allowed them to remain competitive with the low-cost carriers by expanding their global networks, making their network service more attractive to business travelers, and accessing markets that are not yet subject to low-cost carrier competition.

Of the three, the Star Alliance accounted for the largest share of capacity at US airports in 2010, except at medium-hub airports. The large low-cost carrier share at medium-hub airports reflects, in part, the strategy of these carriers, such as Southwest Airlines, to provide service to secondary airports, particularly in multi-airport regions.

At this time, the three global alliances do not include any US low-cost carriers, largely because the complexity and integration costs of alliances are inconsistent with the business model of these carriers. There are, however, examples of simplified and less costly forms of alliance cooperation among US low-cost carriers, such as JetBlue Airways’ arrangements with Aer Lingus, American Airlines, El Al Israel Airlines, Emirates, Icelandair, LAN Airlines, Lufthansa German Airlines, and South African Airways and Southwest’s code-share arrangement with Volaris.

Co-operation takes many forms Airline alliance co-operation can take many forms and is changing in response to new challenges, including increased competition from low-cost carriers, the high cost associated with developing service to new international destinations, and the volatility of fuel prices. The figure on the following page illustrates the range of airline alliance co-operation as it exists today. The range

Total scheduled departing seats by world region Source: OAG, accessed September 2011.

2000

Percent of the world

2011

Africa 2.2%

3.1%

3.5%

5.3%

2.5%

2.0%

1.0%

0.8%

2.1%

1.7%

23.9%

24.9%

18.6%

26.1%

3.0%

5.6%

5.1%

6.1%

38.0%

24.3%

Australasia & Oceania

Canada

Caribbean

Central America

Europe

Far East

Middle East

South America

USA

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■ Aviation extends from the least alliance co-operation – where there is limited co-operation on specific routes (such as interlining, frequent flyer program credits, and airline lounge access) – to the most alliance co-operation, where there is a merger-like integration.

The most integrated airline alliances include anititrust immunity (ATI) agreements; revenue, cost, and benefit sharing; and “metal neutral” joint venture arrangements.

Least alliance co-operation

Global considerations

Most alliance co-operation

The maturity of aviation in the developed world combined with rapid economic and aviation growth in developing economies will require airlines and airport operators to evaluate the global aviation market. As airlines increasingly rely on global alliances, airline service at airports is likely to be evaluated in terms of its contribution to

Limited co-operation on specific routes Interlining Frequent flyer programs

Expanded co-operation to develop joint network Code-sharing Direct co-ordination on prices, routes, scheduling, and facilities

Merger-like integration Antitrust immunity Revenue, cost, agreements and benefit sharing joint venture

an alliance’s market share and overall profitability. Future decisions about service at a specific airport may be influenced by the intensity of fare competition and the contribution of each additional passenger

Creating seamless international air travel

* Member elect airline that has stated its intention to join the alliance and is currently completing the steps required for integration. ** In August 2010 suspended operations indefinitely.

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“Metal neutral” joint ventures

to the bottom line. The challenge for airport operators making financial and planning decisions is to consider the changing role of their airports in accommodating global airline alliances. ■

Airline alliances

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Airline lounge access

Nerve stimulus

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The UK is at risk of falling behind in its infrastructure investment, but a new national plan is designed to reverse this situation and provide a massive stimulus to renewal.

With ÂŁ30 billion of investment, the initiative raises expectations.

By Chris Wilson continued overleaf âž”

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■ Government and infrastructure

T

he coalition government published the UK’s second National Infrastructure Plan in November 2011 and many professional bodies, including the Institution of Civil Engineers, believe it is an opportunity not to be missed. The plan is intended to stimulate £200 billion worth of investment over the next five years. This could prove vitally important to the task of renewing the UK’s economic infrastructure. High expectations, however, are balanced by concerns that the plan’s specific commitments need to be both credible and fundable.

What needs to be done Infrastructure is a rapidly changing game within a highly competitive global market.

Funders, sponsors, contractors and consultants inevitably seek out the best opportunities in global infrastructure markets and countries such as Brazil, Australia, India, China and Canada are leading the way in innovation and opportunities. The UK must reassert its leadership position on innovation and deal-flow. The government has estimated national demand for economic infrastructure investment at £40-50 billion every year to 2030 and to meet this, the UK needs to be seen as a leader in the global market. Funders and sponsors have to be attracted to provide a stream of projects and assets, funding opportunities, workforce and skills capacity, intellectual capital, research and development, cost-effective procurement procedures and opportunities for innovation.

Present and previous governments have stated their commitment to infrastructure but the UK lags well behind its major competitors in the World Economic Forum’s most recent Infrastructure Index. Similarly, while the first National Infrastructure Plan in 2010 was met with real excitement, many believed it was long overdue. There has also been disappointment about the pace and leadership needed to tackle deep-seated issues of policy and capacity as well as attitudes and behaviours.

We need to deliver on the promise of a more consistent, joined-up approach to

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The government has estimated national demand for economic infrastructure investment at £40-50bn to 2030

the Penfold Review of non-planning consents and also policy developments around the new Planning Framework. It is time to signal leadership and delivery across the whole infrastructure landscape. There is progress with transformational projects such as super-fast broadband, Crossrail and (prospectively) HS2. But many believe that, with growth of around 0.2% and a prevailing sovereign debt crisis, there is urgent need for action to stimulate infrastructure expansion as a pull-through for economic growth.

Pulling the strands together infrastructure planning for long-term gains.

Infrastructure development needs to become apolitical. Stop/start planning policy creates uncertainty for funders, sponsors and contractors. The planning approvals process is a major obstacle to progress and is at the heart of an overly complex and centralized bureaucracy that needs simplifying and rationalizing. Legislation on planning must be fast-tracked and clear decisions rapidly reached on major projects like HS2 and a new London airport to drive and support economic growth. The focus must also be national, not just in the south-east, in order to give real stimulus to regional industries.

Some delay has been inevitable with the government in review and policy development mode, but there have been valuable outputs from the review of private finance initiative (PFI) contracts (although the current PFI review has less support),

Recently, the government set out strands of its high-level infrastructure policy: a focus on smart management, particularly in energy and transport (eg managed motorways); the targeting of network pinch-points and stress points for investment in flood defence, railways and road transport; the development of large-scale projects; and the low-carbon agenda.

There is increasing recognition that infrastructure networks, up to now managed separately, are more and more interdependent. Recognition of this can form the start of a major integrated program to provide huge growth and efficiency opportunities across both public and private sectors.

The proposed National Policy Statements on areas such as ports, waste, and aviation are a step forward. Equally the publication of lists of public and private sector projects will

UK National Infrastructure Plan 2011 • £20 billion investment from pension funds • Local government able to borrow to support major projects and raise funds eg from toll roads • £1 billion investment to tackle road congestion • £1.4 billion investment in railway infrastructure • £100 million investment in superfast broadband • Cabinet committee to push 40 priority projects

certainly increase transparency on deal-flow.

The Green Bank is another major step forward, even if its funding is inadequate to the task. While a more proactive approach to funding is clearly needed, it may be that the government will not support the idea of a National Infrastructure Bank.

Against this background, a significant development was the government’s acknowledgement that PFI has a better track record on time and budget than other public sector infrastructure procurement methods, and also, that it successfully transfers appropriate risks to the private sector.

On the back of the Romford pilot to test the deliverability of savings on PFI projects, the government’s target of £1.5 billion looks realistic.

Aviation policy is one of the biggest challenges. Whilst the South East Airports Taskforce is seeking short term alleviation and improvement measures to sweat the current asset base, the policy delays risk causing a further slowing of economic growth and a loss of traffic to other major European airport hubs.

The priority is economic The previous government preferred investment in social infrastructure such as schools and hospitals, but the shift now is to economic infrastructure (energy, road and rail transport). Investors now need to see a credible flow of new projects and assets coming to market, rather than a focus on secondary assets via sales and

The previous government preferred investment in schools and hospitals but the shift is now to energy, road and rail

the consolidation and rationalisation of existing portfolios.

Recognising the interdependence of infrastructure sectors, we believe that government needs to establish a centre of excellence for program management and cross-departmental implementation.

This would cut through red tape and tackle the issues of project implementation across government and the private sector.

In summary, the second National Infrastructure Plan marks a significant further step forward in showing: firstly, that the government will take the lead; secondly, that private sector investors will be attracted back to the UK market; thirdly, that there will be a real focus for infrastructure and capacity growth alongside the flagship projects; and fourthly, that the planning system will be reformed.

If the plan delivers on these, it will go a long way to providing the step-change that the UK needs to boost its infrastructure and economic growth. ■

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Government and Infrastructure

Weather eye This is a turbulent economic climate, particularly in Europe.

So how has investment in social infrastructure: schools, hospitals and social housing, survived relatively unscathed?

Along with a well-defined program of potential investment, a synopsis of the market points to flexibility and innovation of funding and finance. By Andrew Clearie 030_

The Journal of LeighFisher

Government and infrastructure ■

O

ver the past two years, there has been a surprisingly high level of global investment in schools, hospitals, social housing and other social infrastructure, with about 400 greenfield public private partnership (PPP) projects started around the world, of which 135 had reached financial close, as Edge went to press. This includes 25 schools, six hospitals and two social housing projects in the UK alone. In Canada, there is the US$1001 million Humber River Regional Hospital in North West Ontario; and in Germany, the Braunschweig Schools PPP in Lower Saxony cost €280 million. And it is not just PPP; conventionally funded projects have also got off the ground, notably South Glasgow Hospitals in the UK, with investment of £842 million.

But funding social infrastructure has not been achieved without difficulty, particularly in the European market. Many governments have been forced to cut public spending and refocus investment programs. In 2010 the UK coalition government canceled 12 major projects and suspended 12 others in various sectors. The North Tees and Hartlepool hospital project, with a lifetime cost of £450 million, and the Leeds Holt Park wellbeing centre, with a lifetime cost of £50 million, were among those canceled.

The government also cut back the Building Schools for the Future (BSF) program, canceling 719 school projects that were under procurement and reviewing 14 other projects to find savings. A further 123 academy schemes, another policy of the previous government, were also reviewed.

The story is similar elsewhere.

Funding is difficult. Budgetary cutbacks have left many public sector bodies tight for cash and this has been exacerbated by a fall in capital receipts and developer contributions from a sluggish property market. Finance is also difficult. Bank debt is hard to obtain. Terms are shorter than they previously were and margins are higher, reflecting a more cautious appetite for risk.

Equity is looking for safer investments in the secondary market. Bonds offer most promise, but wrapped products are difficult to obtain since the downgrading of many of

France is investing 3.4 billion, Germany 200 million, and Italy, Ireland, Spain and Portugal some 5.5 billion the monolines (insurers of credit risk). The sovereign debt crisis and difficulties with the euro have made Europe less attractive than emerging economies such as Brazil or India.

Why then is there an apparent high level of project activity? Social infrastructure projects are ideal for infrastructure investment plans, as they usually take less time to plan and deliver than transport infrastructure. The benefits are therefore realized sooner; a point not lost on politicians looking for quick wins to kick-start growth. From an investor’s point of view, a well-defined program of potential investment is always attractive.

As regards investment in Europe, the main attractions are familiarity with the regulatory regime and the local market, a local presence and local partners (although some might say that the nature of the asset is more important than its location).

Some of the current activity is down to legacy projects from previous programmes that have survived the cuts – the majority of the PPP schools projects in the UK completed since 2010 were BSF projects – but much of it is new. In the UK, Scotland has its £1.25 billion Schools for the Future

program, its hub program, which is valued at more than £1 billion over the next 10 years, and the previously mentioned Southern General Hospital. The UK government has announced a budget of between £1 billion and £3 billion for its new Priority School Building Programme and is seeking a private sector partner, as well as continuing investment through other initiatives.

Elsewhere in Europe, France is investing some €3.4 billion, Germany €200 million, and Italy, Ireland, Spain and Portugal, some €5.5 billion collectively in social infrastructure through PPP alone.

Innovative approaches are being developed to address the problems in obtaining finance. A number of project bonds using sub-debt loans or guarantees are being prepared, such as the European 2020 project bond. If it receives final approval it will see the European Investment Bank (EIB) providing sub-debt loans or guarantees worth up to 20% of a project bond’s total debt, which the EIB hopes will enhance the credit of senior tranches of issued bonds to at least A-rating. Current thinking on senior debt is that shorter terms of typically six

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■ Government and infrastructure

The public sector is adopting a mixed economy for funding, using capital where available or private finance where it isn’t to seven years could be addressed by a regulated refinancing within the contract.

The public sector is adopting a mixed economy for funding, using capital where available or private finance where it isn’t. It makes use of grants or funding sources such as JESSICA, and looks at partnering with other authorities, with private sector partners or the third sector.

JESSICA allows EU member states to use the European Regional Development Fund for loans and equity investment and guarantees, alongside complementary resources from the EIB and other funders, support for projects forming part of an integrated plan for sustainable urban 032_

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development. The investments generate a financial return, which is recycled to keep the fund going. Funds are delivered to projects via urban development funds (UDFs), which can be established at national, regional or local level. They can be a separate legal entity or a separate block of finance within an existing financial institution. So far, the EIB has undertaken the procurement of UK UDF investment partners, typically a consortium of companies, investors and the public sector.

Scotland’s hub program features partnering, setting up five joint venture companies to deliver primary and social care premises and schools (three are already established). It aims to improve effectiveness of the existing community planning process through streamlined facilities procurement,

based around collaboration between different public bodies. The initiative aims to reduce procurement and design costs, streamline construction, operation and maintenance of the facilities and realize savings through joint working. The Scottish government addresses its non-profit distributing policy through the structure and funding of the joint venture company (hubco) rather than directly through the project contracts. Projects are funded either through capital or revenue (private finance).

Despite difficult times, a well defined program of potential investment is always attractive. Flexibility and innovation in the approach to funding and finance are key to continued investment in social infrastructure. ■

Funding mechanisms and sources: Public private partnership Joint venture company JESSICA European Investment Bank via urban development funds

Root and branch

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With cuts in expenditure being applied across UK public services, the government is conducting an extensive review of procurement – rooting out wasteful practices and cumbersome processes to streamline the system. But will the Lean Review process succeed in cutting costs? By Tracey Lee continued overleaf ➔

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■ Government and infrastructure

A

t the end of 2010, the minister for the UK’s cabinet office, Francis Maude, announced a Lean Review designed to uncover any wasteful practices and unnecessary complexity in central government procurement processes – and to suggest actions to rectify them. The objective was to examine how the procurement process can be accelerated within UK central government, to make doing business with government faster and cheaper, both for buyer and supplier.

The study investigated procurements using competitive dialogue in central departments. It found that there were significant savings to be made in time and cost by working in a more efficient and

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effective way. It was concluded that there was potential to reduce turnaround time by 70% on competitive dialogue procurements, reduce supplier bid costs by £3.5 million per competitive dialogue, and reduce government resource and processing costs by £400,000 per competitive dialogue.

Five key themes emerged from the study.

There was misuse and poor selection of procurement route. Excessive waste was built into the existing procurement process from inception through to award. There was a lack of sufficient capable senior procurement resources and commercial in-house legal advice. There was insufficient preparation and planning for tenders via the Official Journal of the European Union (OJEU) process. Endemic bureaucracy was

leading to excessive levels of approvals and governance.

The key output of the lean review is a proposed new way of managing competitive dialogue procurements, based on lean principles, within the existing legal

This is not simply “standarization” but instead, a change in the way government thinks about procurement

Key themes from the study: • misuse and poor selection of procurement route • excessive waste throughout the existing procurement process

framework, which eliminates waste and unnecessary sequential activity. From this starting point, the Cabinet Office has developed a “standard solution” – a suite of tools aimed at procurement practitioners for the sourcing stages of competitive dialogue, restricted and open procurement routes.

This standard solution is yet to be made available to the public. At its centre, is the understanding that there will be a future map of materials and information required. This value stream map will cover the stages of procurement, from policy through business need identification and baselining, market analysis and sourcing strategy, supplier identification, finalising contract and handing off to contract management.

Whilst the standard solution has not been made available to the public, we can expect the overview to include suggestions such as publication of a prior information notice (PIN).

This is designed to warm up the market and advertize the industry engagement event, the elimination of lengthy proposal documents, the use of an outline solution template for bidders to complete, and a draft contract to be used as the vehicle for the dialogue so the detailed solution emerges in the form of contract schedules.

We have already seen standardized contracts being used effectively across the public private partnerships (PPP) initiative in the UK to understand common risks, to allow consistency of approach and pricing

• insufficient senior procurement resources and commercial in-house legal advice • insufficient preparation and planning pre-OJEU • endemic bureaucracy leading to excessive levels of approvals and governance

across similar projects, and to reduce time and costs of negotiation.

The Cabinet Office is currently working with other central government departments on live procurement projects as pathfinders to test and refine the process driven by the standard solution.

A pilot training program is under way to explain how the lean principles are incorporated into the new standard solution and is being evaluated prior to roll out. We can expect a lean sourcing manual to be launched by the Cabinet Office minister in the new year. This is likely to be available online to government procurement teams, practitioners and the public.

One thing for sure is that it is possible to run a timely and cost-efficient procurement process using the competitive dialogue procedure. Many projects have done it, but unfortunately more projects fail to deliver on time and on budget procurements.

An issue that does not appear to have been addressed by Cabinet Office in its Lean Review to date is how it plans to address the resource and knowledge gap that is clearly evident in government procurement teams. Interested parties may question whether this issue should be the first step taken, before more standardised documents, templates and guidance land on the desk of procurement officers?

The Cabinet Office has indicated that this is not simply “standardization”, but

instead, a change in the way government thinks about procurement.

Whilst the focus has been on central government, we can expect the standard documents and tools will also be easily applied at a local level. The cynics in the market might feel that there have been plenty of similar reviews and initiatives like this in the past and, without any kind of mandation and control, more standardization will fall by the wayside.

Standardizations of PFI Contracts (SoPC4) have been in place in the UK since 1999 (mandated since 2004) and have been used as a base to standardize the PPP model across the world. But some might say that it has taken us until now – almost a decade – to understand and accept sector standardized contracts. So how long then will it take for us to understand the Cabinet Office’s latest new and improved standard solution to government procurement?

Certainly, the benefits of successful implementation of lean procurements are considerable, particularly in times of fiscal restraint where there remains a need to embrace growth, control expenditure and find savings, all at the same time.

If Cabinet Office’s standard solution for government procurement provides the time and cost savings indicated, it will go a long way towards providing more efficient and effective government procurements, at a time when they are desperately needed. ■

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General