Need of the hour: A Global Infrastructure Bank

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NEED OF THE HOUR

A GLOBAL INFRASTRUCTURE BANK

By Ayswarya Murthy 68 > qatar today > october 2013

the Director of the Institute of Infrastructure Studies, Anthony Holmes, has an exciting new challenge for Qatar. they are 12% overbudget and are expected to take 29% longer to complete. Barely a month before it was due to go operational, snags found in the control systems forced the Berlin Brandenburg Airport to push back opening by two years, incurring an additional cost of QR7 billion ($2 billion).

Closer to home, Jeddah and Oman have suffered delays with their airports,” says Anthony Holmes, Co-founder and Director of the Institute of Infrastructure Studies.

“All over the world, large complex infrastructure projects are increasingly facing roadblocks. There are several common features between them that induce delays and overspending, but since they are being built and handled in isolation, nobody has tried to understand them or learn any lessons.”

This is the purpose of the British Consulting-funded non-profit thinktank that began operations in April this year. With its staff currently based in London, Holmes says they will be opening a branch here in December because Doha is a fertile research ground.

“Transformative economy is a new science, and Qatar is the perfect study subject,” he says.

traditional asset risk profile

risk

practical completion

emerging asset risk profile

risk

construction completion

Construction Phase

Operate Phase

Time

Construction Phase

aggregate risk

asset operation

Integration Phase

Time

Operate Phase

Source: Institute of Infrastructure Studies

T

he opening of Hamad International Airport, already embarrassingly late, has been postponed further to early 2014. Recently all work at Lusail was stopped temporarily when a bridge collapsed, injuring 15 workers. The prestigious Doha-Bahrain Expressway remains a non-starter and a distant dream. After its celebrated launch, the Al Waab City project, said to be the largest residential project in the country, seems to be going at a snail’s pace, with no new announcements of project relaunch for close to a year. For a country whose infrastructure overhaul is only just heating up, with a string of megaprojects yet to be realised (MEED predicts that 2014 will be a record year for Qatar, with QR182 billion ($50 billion) worth of projects scheduled to be awarded), within strict deadlines too, these aren’t good signs. But if misery loves company, Qatar would be glad to know that it isn’t alone.

“Heathrow Terminal 5 in London was a struggle to deliver on time and under budget. We are monitoring 16 big projects in progress in the UK, and between them

qatar today > october 2013 > 69

development > tag this

“All over the world, large complex infrastructure projects are increasingly facing roadblocks. There are several common features between them that induce delays and overspending, but since they are being built and handled in isolation, nobody has tried to understand them or learn any lessons.”

Anthony Holmes Director of the Institute of Infrastructure Studies

70 > qatar today > october 2013

A new solution “Qatar is expected to sink close to QR437 billion ($120 billion), or 9% of GDP, in mega infrastructure projects in the next five years, and if oil prices stay put, the government can afford this without having to borrow,” Holmes says. This gives them the advantage of flexibility and more control compared with public-private partnership projects.

Elsewhere in the world, unfortunately, private financing is struggling to cope with the challenges that these complex projects are throwing up.

In fact, Holmes goes so far as to say that traditional private funding is on its way out.

Infrastructure can’t be treated like a regular investment, he feels, and this is why: “The importance of infrastructure can’t be overstated. It’s the framework around which our society exists. It stimulates economic development. So financing these assets isn’t optional, it’s obligatory.”

But the risks associated with these projects make them unviable for private players.

He puts forward the example of the London-Birmingham high-speed rail link. “It hasn’t even begun, and already the government has revised the costs from £32billion to £50 billion. It is likely that costs might touch £70billion before it is finally delivered.”

Complex infrastructure like ports, airports and railways that have large components of IT can go overbudget by as much as 80%. How can any private entity prepare itself for this? “Although the project is extremely important, with big social returns, there is no direct economic return for the extra money that has to be invested.”

He says $70 trillion needs to be invested in infrastructure globally in the next 17 years, much of which will be required within the next 5-6 years. “There is no historic precedent for this kind of spending. Banks, as we know them today, can’t handle this.

Neither do investment firms have the capacity.” The Basel III regulations will only put more pressure on the banks, with their focus on liquidity and intolerance to uncertainty. “It is very likely that more than half of these projects won’t be able to find financing,” he predicts.

“There is a need for a better, specialised entity that understands how these projects work and treats them as a separate asset class. An institution that has the financial and technical ability to deal with fairly big projects ($8 billion and above). One that doesn’t just lend money and sit back but is actively involved in the unfolding of these projects, stepping in and rectifying

problems when required. There is a dire need for an institution that has collected and analysed data from such projects worldwide and knows about the hidden “dark risks” that are not seen at the outset.

Challenge accepted?

“This country is unique in the way it’s spending a lot of money on its infrastructure projects over a short period of time. The action, unrivalled in the rest of the world, is concentrated and funded and supervised by a single entity (the government). The data generated here on how the implementation of these different projects works and interacts together will be invaluable in guiding the next generation of project managers.”

Holmes has an enticing and thought-provoking idea: “Qatar has the ideal combination of relevant economic activity and financial resources to collect and analyse the data and use this information and expertise to create an international infrastructure investment bank (there is no such institution in the world currently, though the World Bank has for long been recommending one), placing the country’s banking sector in a dominant position in this major asset class,” he says. Pause for effect.

Currently, the data from the country’s mammoth $200 billion is being wasted, being burnt away despite its immense economic value. “We estimate that $15 million would be needed to collect and study the data over the next few years. That’s 0.01% of the total programme cost,” he points out.

Qatar easily can, and should, consider doing this, even if it isn’t yet hatching plans to float an ambitious global banking entity.

“Inflation over the next two years can increase the programme cost by as much as 15-20%. If this information can help to reduce that even by 1%, the exercise would have paid for itself enormously. It’s a very sensible thing to do,” Holmes says. But things have to be put in motion as soon as possible, he says. “It’s already too late for the airport. This sort of data evaporates quickly and it isn’t possible to go back and collect the information. And the earlier you start, the richer your data is. And that’ll dictate whether your data will be used to rectify a problem or predict it before it even happens and avoid it all together.”

Holmes has a compelling argument to support the need for such an initiative. “I always tell people, don’t think of overspending in terms of money, think of it in terms of infrastructure. That $1 billion of over-budget could mean a few more schools and a few more hospitals.”