Business Models for Value In Complex Infrastructure

3th February 2017

Professor Peter Sharratt

Presented at Consortium for the 4th Revolution | Executive Briefing Day (#C4IR) Cambridge, UK 2-3 February 2017 | www.cir-strategy.com/events

Todaytheworld’slargest600ci4esgenerate:

Top23Mega-ci4eswithjust1/20thworld’spopula1ongenerate14%globalGDP.Metro-regionsare2%oftheworld’ssurfaceandgenerate80%oftheworld’swealth.20%ofglobalGDPcomingfrom190ci4esinNorthAmerica&Canada.

In15years’1me....

2 billion (1/4 world’s population)

$64 trillion Will Generate 60% global GDP

1.5 billion (about 1/5th of the world’s population)

Generate $30 trillion Over half of global GDP

CITY REGIONS AS DRIVERS OF THE GLOBAL ECONOMY

Source:McKinseyGlobalIns1tuteCityscope

World’s top 10 cities in the next 15 years: Rank By GDP By Growth By

Population

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

New York Tokyo Shanghai London Beijing Los Angeles Paris Chicago Rhein-Ruhr Shenzhen Tianjin Dallas Washington Houston Sao Paolo

Shanghai Beijing New York Tianjin Chongqing Shenzhen Guangzhou Nanjing Hangzhou Chengdu Wuhan London Los Angeles Foshan Taipei

Tokyo Mumbai Shanghai Beijing Delhi Kolkata Mexico City Dao Paulo Mexico City New York Chongqing Karachi Kinshasa London Lagos

Impacts50%60%33%12%40%10%

GlobalGHGemissionsWorld’senergyuseGlobalresourceconsump4onGlobalfreshwateruseGlobalsolidwasteproduc4onGlobalworkforceemployed

Global Urbanisation

NEW URBAN MODELS

$23bn – of which 1/3 was infrastructure

Re-inventing Growth: Critical National Infrastructure

RenewableenergypumpingsystemsonthecanalSource:Foster+Partners

Red

2Dead

Cities and City Regions are the power house of the global economy and will continue to grow in importance. The projected infrastructure spend to support urban economic growth and development is estimated to be over

$40 trillion. Today’s Cities Urban growth challenges are increasingly about global security, energy and resource constraints, re-alignment of the global economy, social equity and demographic issues and the impacts of disruptive change.

CITY REGIONS AS DRIVERS OF THE GLOBAL ECONOMY

Lineenablesupto200,000newhomesandhasaHousingLand

ValueupliSof£15bn Note–Na1onalRailAbstrac1on=13%(lossoffareboxrevenueonotherlines) Theindirectcontribu1onisprojectedtobesomewhere

between160-212%ofthecosts. Developmentphase5-6years|10-12yeardeliveryphase|duetobeopera1onal2032.

Capital Funding Sources Crossrail 2 Opera1ngSurplusBusinessRatesSupplementMayoralCILRe-saleLand/PropertyCouncilTaxLondonContribu4on

11.6% 20.3% 16.9% 6.3% 1.4%56%

THE CHALLENGE OF PAYING FOR ECONOMIC INFRASTRUCTURE

Tax Increment Financing (TIF)

Incremental Business Rate Income

Community Infrastructure Levy Borough (CIL)

Mayoral CIL

Stamp Duty Land Tax (SDLT)

STATION CENTRIC DEVELOPMENT

WSP TFL BRIEFING: THEROLEOFTRANSPORTINMEETINGTHEMAYORSSTRATEGICOBJECTIVESFORLONDON

HeathrowGateway ClaphamJunc1onEarlsCourt

OpportunityAreas AreasforIntensifica4on12345678910111213141516171819

BexleyRiversideBromleyCanadaWaterCharltonRiversideCityFringe/TechCityColindale/BurntOakCricklewood/BrentCrossCroydonDephordCreek/GreenwichEarlsCourt&WestKensingtonElephant&CastleEustonGreenwichPeninsularHarrow&WealdstoneHeathrowIlfordIsleofDogsKensalCanalSideKingsCrossStPancras

20212223242526272829303132333435363738

Lewisham,Cahord&NewCrossLondonBridge,Borough,Banks.LondonRiversideLowerLeeValleyOldKentRoadPaddingtonParkRoyalOldOakCommonRoyalDocksBecktonWaterfrontSouthallThamesmead&AbbeyWoodTokenhamCourtRoadUpperLeeValleyVauxhall,NineElms,Ba`erseaVictoriaWaterlooWembleyWhiteCityWoolwich

39404142434445

Farringdon/SmithfieldHarringayHeartlandsHolbornKidbrookeMillHillEastSouthWimbledon/ColliersWoodWestHampsteadInterchange

Red=projectswearecurrentlyengagedon

REALIZABLE VALUE CAPTURE

Sta4onPipeLine

ClaphamJunc1onWimbledonChelseaStadiumGunnersburyRossmoreRoadKingsRoadRoyalMintGardens

STATION OVERBUILD + LAND BRIDGING DEVELOPMENT

‘ the scale of the cuts means we need

to completely re-think the role and

structure of the city council and how we

achieve the outcomes we seek …..

This is the end of Local Government as

we know it. ‘

Sir Albert Bore, Leader of Birmingham City Council, 2014

‘Snap-Shot ‘ City Profile

•  Birmingham is the largest municipal authority in Europe and is underperforming

•  Birmingham’s GVA is lowest of the core cities at £19,523 •  UK’s second largest city ONS predict a population growth of 85,000

between 2011 – 2021 to •  1,160,100 – an increase of 8%. •  Overcrowding rose 3.6% in 2001 to 12.4% in 2011 •  Ethnicity is more diverse that the UK average 47% BME. •  22% current population born outside the UK •  44% primary and 38% secondary school children have English as second

language. •  Youngest population of any European City: 46% population under 30

years •  11% growth in pensioners 2011 to 2021 •  Population 85yrs + expected to grow 30% between 2011 – 2021.

Revenue Challenge

•  90% from central Government ( ring fenced for public service delivery) •  10% from Council Tax. •  By 2018, cumulative Revenue Support Grant will reduce by 50% Key Growth Challenges

•  Maintaining public service commitment with a reducing funding from central government.

•  Housing shortage •  High localised deprivation •  Securing private sector Inward investment •  Having a clear vision of a City Government Reform for 2020

2015 2016 2017 2018 2019 2020

Core Grant £403m £353m £293m £256m £260m £264m

% Change -14% -21.3% -12.4% -16.9% -12.9% +1.6%

% Cumulative Change -14% -32.3% -40.7% -50.6% -57% -56.3%

CityCouncilBusinessPlan

CITY CITY STRATEGIC CHALLENGES

HS2

StrategiesforLVC:Extend high density central core areas to city fringe Population Dispersal to South East Region New Settlements: Eco-towns (Land Release: Brownfield + Green-Belt) Suburban Intensification

Access Charges

New Infrastructure

Land Value Capture

New Finance Models

MODELS FOR TRANSPORT ENABLED DEVELOPMENT

Focus on Supply Side: How projects are brought to market.

Less on ‘Demand Side’ – how projects are delivered + financed

Use tax incentives to boost affordability for Public Sector

Develop models to release Capital from existing surplus Or underutilised Public assets To invest capital in new projects.

Public Sector Social Value Funds

SWF / Govt Bonds

‘One Belt, One Road’ – China’s Silk Road Initiative will create A connected global economic infrastructure.

Projects Completed or Planned 2015 Source: Merics – Mercator Institute

NEW INVESTORS

Collaboration between Govt, industry and 9 research organisations.

CIVIL SOCIETY

NON- ALIGNED

ORGANISATIONS

OPINION FORMERS

PRIVATE ORGANISATI

ONS

PUBLIC SECTOR

ENTERPRISE

PUBLIC DEBATE

GOVERNMENT

SUPRA-NAT8IONAL

ENTITIES

PUBLIC PRIVATE PARTNERSHIPS

CITY

Regions

UNDERSTANDING COMPLEXITY AND HOW THINGS HAPPEN ….

GeographicInforma1onSystem(GIS)applica1onscanenableorganisa1onstovisuallyassesstheLikelihood(Vulnerability,ThreatandTargetAkrac1veness)oftargeted,environmentalandsitua1onalbusinessrisksonasingle,integratedplahorm.Thisempowersriskstakeholderstotakekeydecisionsbasedonenhancedsitua1onalawarenessandvisualisa1onofsimultaneousdatasets.Ourteamworkwithorganisa1onstoiden1fyspecificdata‘layers’fromacomprehensiveàlacarteselec1onfallingintothefivecategories(listedleS)recognisingthroughoutthisprocessthateachbusiness’individualcharacteris1csoSendetermineriskexposureandthatinternalriskappe1tedefinescontrols.Together,theselayersprovideadetailedRiskOpera1ngPicture(ROP).sHORASoutputsaretailoredtoclientrequirements.ROPscanbeincludedinwrikenGRAreportsordeliveredasstand-aloneKMZ/KMLfiles,augmentedbydashboardrepor1ng(seebelow),forinclusionwithininvestmentriskappraisalsoraspartofop1onstes1ngforna1onal,regional,districtorsitelevelappraisals.

Geopolitical & Macroeconomic

Socio-economic

Physical Security

Energy Security & CNI

Environmental

Sustainability Risk and Value Management Tools VisualisingLoca4onIntelligenceforInfrastructureeco-systems

Theme Anti-Bribery & Corruption Compliance

Overseas Investment Risk Global

Environmental Threats Regional

Location Intelligence District

Total UK Carbon 1.215 million t Case Study: GenericTotalCosttoServemodelforDataCentres

DATA CENTRE ‘COST TO SERVE’ MODELS INPUTS Engineering – Tier rating, IT load per hall, number of halls, PUE Technology – Applications, server complexity, rack size, IT load projected growth Real Estate – Years to plan for, location, site cost, inflation

OUTPUTS Engineering – area required for plant, energy and carbon tax costs Technology – IT Load per rack & hall, number of servers and racks required, costs (IT hardware, operating, migration) Real Estate – site size required, construction costs, maintenance and running costs Facility parameters defined together with cumulative total cost of ownership and spend profile for the life of the data centre.

Cities & Infrastructure: Pulse Survey Howstronglydoyouagree/disagreewiththefollowingstatements? Agree Neutral Disagree

TheGovernmentshouldcon1nuetoinvestinmajorinfrastructureprojects

99% 1% -

TheGovernmentshoulddelayinvestmentdecisionsun1lthereisgreatercertaintyonBritain'srela1onshipwiththerestofEurope

2% 4% 94%

Ci1esshouldhavegreaterfiscal/revenuecontrolanddecisiontakingpowersoninvestmentpriori1es

73% 18% 9%

Thepublicdon'tunderstandtheroleofinfrastructureinenablinggrowth

80% 7% 13%

Theindustryshoulddomoretoengagekeydecisiontakersontheimportanceofinfrastructureanddevelopment

94% 5% 1%

Britain'sleavingtheEUwillsignificantlyweakentheUKGovernment'sEnvironmentalcommitmentsandcarbonreduc1ontargets

42% 27% 31%

Thequalityofourci1esandthepublicrealmwillbeofincreasingimportanceinincreasingourna1onalcompe11venessshouldweleavetheEU

79% 15% 6%

A(14%)

B(14%)

D(14%)

I([PERCENTAGE])E

([PERCENTAGE])L

([PERCENTAGE])

E(8%)

K([PERCENTAGE])

J([PERCENTAGE])

E([PERCENTAGE])

E([PERCENTAGE])

C([PERCENTAGE])

TOP5investmentpriori4estohelpensureourlongtermcompe44venessImprovedtransportlinksbetweenci1ese.g.HS2,HS3NorthernPowerhouseImprovedtransportlinkageswithinci1esandcityregionse.g.CrossRail2IncreasedairportcapacityintheSouthEast

Conven1onalPowerGenera1on,Transmission,Distribu1onIncreaseRenewableEnergy

SystemsImprovemente.g.electrifica1on

ImprovingUK'smainTrunkRoadsandMotorwaysImprovingLocalRoadTransport

FloodDefense/ClimateResilience

Ranking Priority

1st AB

ImprovedTransportbetweenci1esImprovedtransportwithinci1es

3rd C Digital&ITInfrastructure

4th D AirportExpansioninSE

5thEFGH

TrunkRoad&MotorwayImprovementIncreasedRenewableEnergyUrbanHousingSocialInfrastructure

9th10th11th12th

IJKL

Conven1onalPowerFloodDefence/ClimateresilienceLocalRoadTransportSystemsImprovements,Electrifica1on

Cities & Infrastructure: Pulse Survey

SinglemostimportantareasforGovernmentandpolicymakerstoensuregrowthandcompe44veness

Na4onalInfrastructure 28%23%20%

Beker,integratedinter-urbantransportsystemsLongtermna1onalinfrastructureplanwithcrosspartysupportNa1onalcleanpowerstrategy+supportsystems

City&CityRegions 22%20%17%

BekerpublictransportsystemsBeker,integratedmul1-modaltransportsystemsDevolu1on

Rural 52%10%7%

Broad-BandCommunityInvestmentPlanningpoliciesthatsupporteconomicdevelopment

KeyThemes

Cities & Infrastructure: Pulse Survey

Housingwassurprisinglynotamajorissueeventhoughthepublicandpoli<ciansseehousingastheirmostimportantinfrastructurerelatedissue(ignoreimmigra<on).Ifinfrastructurewantstobevocalitshouldtalkinthelanguageofhousing(development)thatthepublicunderstands.

Compe44veness Wehavebeencallingforgreaterinfrastructureinvestmentforyears,wewereonthisjourneyanyway.Brexitdoesn’timpactthedesireorlongtermneedforupgradingourtransportnetworksthatneedittocopewithagrowingpopula1onandeconomy.

Confidence Is Brexit Infrastructure’s opportunity to find it’s voice? Notonlydoesitprovideenormousbenefitstotheeconomy,weasanindustryaresignificantemployersofhighendtechnicalskillsinourownright.

Advocacy&Awareness

Howdowedoabekerjobincommunica1ngthecomplexi1esandbenefitsofinfrastructureandconnecteddevelopment?Dowethinkthatbypersuadingthepubliccanwepersuadegovernment?Howcanweakractyoungbrightpeopletotheindustry?

Engagement&Influence

Howcantheindustrydomoretoengageandinfluencedecisiontakersandpoli1cians?Whatdoweneedtodobeker?

1 2 3 4

‘Thereisanexis<ngskillsgapinthiscountry.Wewantyoungpeopletoseegreatcareersaheadofthemwiththepromiseofworldclassiconicprojectstoworkon,otherwisetheymaychooseotherindustries.MajorprojectscanhelptheUKtoinspirethenextgenera<onofBrunel’s.’

Professor Peter Sharratt MA, DipArch, MSt. IDBE, FRSA

Director Strategic Consulting, WSP Parson Brinckerhoff

Professor of Industry & Professional Practice, University of Westminster

Peter.Sharratt@wspgroup.com

07713 - 985 833 m