Assessing the True Value of Infrastructure Investment

Assessing the true value of infrastructure investment

Global Infrastructure

KPMG International

kpmg.com/infrastructure Foreword

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. By now, it should be clear to everyone that investment into infrastructure can stimulate economic growth. The reality is that infrastructure systems and economies are intricately intertwined; infrastructure can increase connectivity, facilitate productivity, create jobs and stimulate trade — all key enablers of economic growth. On the other hand, economic growth can be a key enabler of increased investment and funding for infrastructure; those economies with stronger growth prospects tend to attract more investment for infrastructure than those with poor or no growth prospects.

Go beyond financial viability economy rather than the influences of And, recognizing that the letter of Our experience suggests that this the political cycle. Yet achieving this is policy and its application are often causal relationship between economic not as simple as drawing up a list of two different things, we have also prosperity and investment into high-profile projects; identifying and included a case study for each market infrastructure is poorly understood. prioritizing the projects that will deliver to illustrate how approaches are being Traditional cost/benefit appraisal the greatest return will require new practically applied. mechanisms to assess value, more methodologies are far too narrowly To learn more about how these policies robust business case and appraisal focused on an asset’s financial are being practically applied in these methodologies and clear insight into viability and almost always view markets, this report also includes a the longer-term needs of society. projects in isolation. summary of a roundtable discussion between industry experts in the UK, The challenge has been accentuated Why we did the study by fiscal constraints. Demand for South Africa and Brazil. To round out While the need for new appraisal infrastructure — and other government the report, we have also included our and prioritization methodologies is services — is rising and many countries point of view, articulated by two of critical, relatively limited research are now faced with the challenge of KPMG’s top infrastructure leaders. seems to have been conducted in delivering increased investment in an Together, these articles provide useful this area. Approaches vary — both in era of reduced fiscal capacity. insight and key takeaways for those maturity and practical application — seeking to improve the way they This, in turn, is forcing governments to around the world and across different prioritize and deliver infrastructure. focus on prioritizing their infrastructure infrastructure segments. Few sources investments in favor of projects exist for those looking for leading Make the most of your investments that can deliver increased economic practices and insights into developing In today’s world of high demand for growth, social benefit and resilience. their own assessment methodology. infrastructure, slow economic growth This, too, will require new and To close this gap and to help and constrained fiscal budgets, improved prioritization methodologies governments and project owners we believe that governments, that provide a link to all the drivers of get more from their investments, infrastructure investors and project infrastructure investment. we set out to research and assess owners and sponsors must start to With far too many projects stuck current approaches to prioritization rethink the value they receive from in pipelines around the world, and assessment in a variety of their infrastructure investments. governments are also looking for markets around the world. In this We hope that this report catalyzes new and improved ways to appraise report, we shine the spotlight onto governments to reevaluate their individual projects to allow faster the emerging markets — South Africa, current approaches to project appraisal and better decision and approval Brazil and India — as well as the UK and prioritization and provides valuable mechanisms. which, arguably, boasts the most insights to help project owners and mature frameworks for assessing and The reality is that — now, more than sponsors demonstrate the true prioritizing infrastructure investment. ever — governments and societies value of their projects to investors, need a long-term plan for infrastructure In each case, we have included keen governments and users. that focuses on responding to the insights and analysis from ‘in country’ needs of society and growing the leaders within KPMG’s global network.

Getting practical: Market A roundtable overviews discussion and case studies

KPMG viewpoint: Time for a new approach South Africa 10

Brazil 14

India 18

Infrastructure prioritization and and capacity to properly plan and start moving people from the poorer planning is rising up the agenda assess projects. We’ve had a long satellite residential communities into for governments, developers and period of very unstable investment employment areas and demonstrate investors around the world. In this into infrastructure in Brazil and that the economic impact that will have. roundtable discussion, we brought often means that we don’t have a You can’t overstate the importance of together industry experts from the stable enough pipeline to maintain and socio-economic criteria. UK, Brazil and South Africa to share improve those capabilities. Bridget: I think in the UK we are their experiences and advice for Bridget Rosewell: The UK has a fairly beginning to recognize that it’s about improving the way infrastructure is mature assessment process. What is even more than just economic benefit. planned and prioritized. not being well addressed, however, It’s about rationally selecting and Tomas Bruginski de Paula is a is the role that infrastructure plays in then balancing a set of criteria that Director with the Company for a changing economy. People seem to achieve the vision that you are trying Partnerships at the state of São Paulo, understand that infrastructure matters to attain. The criteria needs to be not Brazil; William Dachs is the COO of and that it contributes to growth in the only useful and measurable, but also the Gautrain Management Agency in economy. What we haven’t yet pinned something that our politicians can South Africa; and Bridget Rosewell down is how we rationalize decisions understand as being realistic. is a highly-regarded UK infrastructure differently as a result. advisor and Commissioner for the To what extent should cross-sector independent National Infrastructure What role should economic impacts influence the infrastructure Commission. benefit play in the business investment decision process? case development process? Bridget: That’s is exactly why we’ve In your opinion, what can be done Tomas: Particularly in the transport been setting up infrastructure to improve the way infrastructure sector, economic benefit plays a commissions and conducting national investments are currently massive role. When we go to the infrastructure planning in the UK. But assessed and prioritized? international stage for funding, the National Infrastructure Plan is still William Dachs: It may be a broad international investors and institutions essentially a list of sectoral projects. statement, but I think the big challenges are very demanding when it comes to Where the cross-sectoral work is actually often arise when governments try to economic benefit. Economic benefit is being done is more at the city level by translate policy into practical action. We also key to our own decision making; groups such as the London Infrastructure get lots of wonderful policy papers — we always want to ensure that our Commission. The more recently set up well thought out arguments on why investments are going to the projects National Infrastructure Commission is public transport should get preference that deliver the best benefit in the also aimed at addressing this issue at a over private or road-based transport — long run. national level. but very little of that actually rolls down into real projects. William: I’d absolutely agree. It’s William: I think you absolutely need to not good enough to just say that think about the cross-sector impacts. Tomas Bruginski de Paula: I think you are going to improve mobility Developing a new mass transit system in Brazil — certainly in São Paulo and accessibility. That’s not going to in an urban area isn’t just about laying state — one of the biggest challenges make the priority list. It’s got to have down track and signaling. It’s also comes down to government capability a massive social impact; it’s got to about how the asset impacts housing,

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© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. spatial planning, city master planning Bridget: I think it’s about building and that’s a political decision. The and so on. Cross-sectoral planning is at consensus around what we need to problem comes when politics starts the bedrock of what we need to do. do and how we are going to do it. to interfere with the details. You need It’s about discussing it differently and to focus on finding the best technical Tomas: It’s certainly all interconnected. really thinking about what linkages approach to the project — maybe Part of our thought process is about your projects have with the economy. make minor adjustments based on making the best use of our assets. There’s certainly been a huge shift in relevant political issues — but the Rather than extending out our regional the debate about infrastructure, but core decisions — including scope and rail line — which connects the city I’m not certain we’re making those financing — must be technical ones. to urban areas some 50 kilometers linkages yet. away — maybe the better question is What advice would you give to how we move more people closer to What role should politics play in those involved in infrastructure the existing network. And what does the infrastructure planning and planning and prioritization today? this mean in terms of the supply of prioritization process? houses and employment opportunities. Tomas: I think it’s about understanding Bridget: I actually believe we need what you can sustainably achieve. In your experience, what can to find a model where political I think planners are afraid to reduce the governments do to improve their engagement is more incorporated scope of the project in fear of missing current infrastructure planning and than it is today. I think where we are a big target. But if you can deliver a prioritization capability? going to see the most activity in that project — on time and on budget — arena is at the city level. That’s where that provides 80 percent of your goal, William: To me, it’s about getting the these trade-offs can happen in a more that’s much better than failing to deliver right people in the right places — the integrated fashion; in a more ‘small a project because you set an ambitious training, the up-skilling of people, the p’ political rather than ‘big p’ political but unrealistic target. deployment of the private sector — fashion. these are all going to be critical to Bridget: I think that’s absolutely right. improving our capabilities. I think we William: You can’t take away the And I’d say we need to start thinking also need to start looking at things in politics even if you wanted to. Any more in terms of the risk scenarios. more detail, starting in the planning manager operating in the infrastructure Maybe not trying to get the perfect process but also on the procurement space must have political support. But outcome or right answer, but rather side and I think sometimes that requires what needs to stop are the sudden balancing the risks and developing the outside and independent viewpoints. changes that often come from a change scenarios that help define what you of party or policy. Once the planning has need more of. Tomas: I’d agree with William on both led to an investment decision, these counts. You need the right people and William: And I think that echoes for decisions must be honored in the same skills, and you need a strong plan. the broader prioritization process. A way as a contractual agreement and I think sometimes we could move lot of countries get overambitious and that’s not always the case when politics faster, deliver better results and be try to solve all of their problems in is involved. much more efficient in our delivery of one 10-year plan and the reality is that infrastructure if we just spent more Tomas: I absolutely agree. Prioritizing they just don’t have the resources, time planning and creating a better investments requires a view of what the investors or — frankly — the risk starting point than we often do. you want to offer the next generation appetite to get it done.

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Market overview National Infrastructure Plan each year With very limited funds of their own, and outlined the Top 40 priority projects most local projects are funded through Planning and prioritization of for the UK. business case submissions to central government bodies, which places them infrastructure IUK was guided by the IUK Advisory within the broader national prioritization As far as planning of infrastructure Council which comprised of public sector process for each department. Local is concerned, it is all changing in the managers (representing the government infrastructure projects are often UK. In November 2015 the Chancellor, departments responsible for delivering funded through a mix of council taxes George Osborne, announced the economic infrastructure projects) on residential properties, a share of establishment of the National and private sector representatives business rates and grant funding from Infrastructure Commission (NIC). The (contributing experience in key functional various other levels of government. As NIC will assume the responsibilities of areas such as construction, operations, a result, prioritization of local projects Infrastructure UK (IUK) for developing regulation, finance and technology).1 a long-term vision and plan for UK tends to be based on whether or not infrastructure. Shortly afterwards it Those projects that fall below the funding can be found. Top 40 are planned and prioritized was announced that IUK would merge While this dynamic has recently by the relevant central government with the Major Projects Authority to changed somewhat with the department and then approved and create the Infrastructure and Projects introduction of ‘City Deal’ growth fund funded (based on a mix of business Authority (IPA). The objective of allocations from central government case rationale and political direction) by the NIC is to bring independence to local authorities, the funding HMT. The devolved powers of Scotland, and greater transparency to the represents only a small part of the Wales and Northern Ireland tend to infrastructure planning process and government’s overall infrastructure have more control over cross-sector it will be established through new capital budget. Just GPB2 billion prioritization within their jurisdictions. legislation. It is not yet clear how has been allocated for the 39 local exactly the NIC and IPA will operate Essentially, government funding for enterprise partnerships in England and so this UK Market Overview focusses infrastructure projects outside of the much of this funding represents money on the historical picture. Top 40 is decided through a 5-year that had already been committed Established in 2009 to advise the comprehensive spending review where before the deals were struck. government departments submit government on the country’s long-term Projects can also receive support project and program proposals that are infrastructure needs, Infrastructure through the government’s National then allocated funds from the relevant UK (IUK) worked under Her Majesty’s Infrastructure Planning body, delivered budget. Interestingly, much of the Treasury (HMT) to determine the UK’s by the Planning Inspectorate, who is pipeline is based on submissions from long-term priorities and to help secure responsible for examining planning local government who play a complex private investment for infrastructure applications for nationally significant projects. IUK developed the country’s role in project prioritization.

1 https://www.gov.uk/government/organisations/infrastructure-uk/about/our-governance

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© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. infrastructure projects. The Planning factors such as its strategic importance, —T— he economic case — does the Act of 2008 was introduced, in capital value, regional importance or its preferred option demonstrate the large part, to streamline the decision- ability to improve national infrastructure greatest value for money? making process for projects deemed capabilities and expertise. —— The commercial case — is the ‘nationally significant’, with the intention Outside of these Top 40 projects, the project commercially viable? of making the planning process responsibility for the prioritization of fairer and faster for developers and —T— he financial case — is the project infrastructure projects largely rests stakeholders. financially affordable? with the relevant central government —T— he management case — can the department, with each using their Long-term planning project be successfully delivered? own technical methods to carry out The UK’s largest and most impactful prioritization within their relevant sector. The business case is generally projects are covered under the developed over a long period of As previously mentioned, the devolved National Infrastructure Plan which time and is often viewed as a powers of Scotland, Wales and Northern has been developed as a partnership living document while the proposal Ireland tend to have more control over between IUK — who was responsible develops. for recommending which projects to cross-sector prioritization but — to fund — and HMT, who has the funding date — have no formal framework Economic appraisals capacity. The National Infrastructure for evaluating projects across sectors While HMT provides guidance on Plan contains the list of Top 40 priority and prioritizing based on anticipated economic appraisals through the investments across a variety of sectors economic impacts. Instead, projects Green Book (a ‘best practice’ guide to (projects in the 2013 plan represented are often prioritized based on political appraisals for all central departments), a 10-year investment pipeline worth direction and input from government each department develops its own GBP375 billion (US$55 billion), for the departments (who are effectively technical methodology for carrying most part focused on the energy and competing for investment budgets). out appraisals. Many local authorities transport sectors). It must be noted that — while local have also developed their own Scotland, Wales and Northern Ireland government tends to have little power methodologies consistent with the also develop long-term infrastructure to prioritize projects — some regional principles contained in the Green Book plans, largely based on input from authorities (most notably The City of and departmental technical guidance the relevant government department London) have greater financial power requirements, albeit while providing (such as Transport Scotland) and and are able to generate significant supplementary guidance on their own political direction from the devolved private funding to pay for infrastructure specific areas. governments. In Scotland, for example, without central funding. However, Economic appraisals are developed the Scottish government published projects still must follow the usual as part of the business case process, its Infrastructure Investment Plan in central government infrastructure requiring planners to have considered December 2011 to outline its intended approval processes. a range of project delivery options project pipeline for investment up to based on ‘value for money’. Associated 2030. Since its publication, the Scottish Business case development costs, benefits, and risks across the government has produced annual All infrastructure projects and entire life-cycle of the project must progress reports and updated project schemes require the development be considered and calculated annually pipelines. Similar plans were developed of a full business case. The business with the results compared on a Net in Wales and Northern Ireland. case summarizes all the research and Present Value basis. analysis needed to support transparent Prioritization methodology and decision making and, in its final Cross-sector integration approach form, summarizes project objectives, As part of its mandate, IUK was To select and prioritize the Top 40 outlines the preferred option for expected to observe infrastructure projects outlined in the National meeting those objectives, discusses planning from a holistic view when Infrastructure Plan, IUK used three key features of implementation developing its National Infrastructure main criteria: management and details arrangements for post-implementation evaluation.2 Plan. However, outside of the Top 40, —T— he project’s potential contribution projects are planned and executed to economic growth To help guide all levels of government in isolation by the relevant government in their development of business departments. —T— he project’s potential to deliver cases, HMT has developed the ‘Five enhanced quality, sustainability or Case’ model that describes five At the local level, a small number of city capacity different yet interconnected aspects of authorities have started to take a more —T— he project’s potential to unlock business case development: holistic view on cross-sector prioritization private investment (see our case study on Glasgow), but —T— he strategic case — does these efforts have often been aimed at However, IUK’s selection and the project justify government securing specific government grants or prioritization of projects could also intervention? funding allocations. be influenced by a number of other

2 HM Treasury. “Assessing Business Cases ‘A Short Plain English Guide’”

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Putting cities at the forefront However, it is worth noting that, for the approximately GBP2.2 billion) annually for most part, programs included in these the regional economy. With an increasing recognition that deals have been rather small. Just four growth “does not take place at Conducting the economic of the deals or funds that were created an abstract national level”, the UK prioritization topped GBP1 billion (Greater Manchester, government created the City Deals West Yorkshire, Glasgow and the Clyde To secure the City Deal funding and program in 2011 in an effort to give Valley, and Greater Cambridge). to ensure that it was doing everything UK cities more control to create it could to boost economic growth economic growth. Glasgow and Clyde Valley through investment, the Glasgow and The main goals of the City Deals Announced in 2014, the Glasgow and Clyde Valley authorities knew they program are to fund major infrastructure Clyde Valley City Deal brings together needed to take a different approach to projects, drive innovation and growth, eight local authorities representing their infrastructure prioritization. and address the challenges of local labor the largest city-region in Scotland and Working with KPMG in the UK, the markets.3 Broadly speaking, the program one of the largest in the UK. As such, Glasgow and Clyde Valley authorities is essentially a decentralization of urban the region is seen as a “key engine of designed a Single Assessment policy to the local level.4 economic growth for both the Scottish Framework model capable of measuring 6 To support the goals of the City Deal and the UK economies.” the economic impact of potential program, the UK government also investments across different sectors, created the Cities Policy Unit (bringing namely transport, housing and together experts from public and regeneration. private spheres) and created the new The Glasgow and Clyde While key metrics include the Gross position of Minister of Cities with the Valley City Deal has Value Added (GVA) and job impacts responsibility for improving lines of the potential to deliver that each investment would provide to communication between local and Glasgow and the seven participating central government. The position holds significant economic and local authorities, the key feature of the significant weight in government, jobs growth across the model is that it offers way to measure particularly after the first Minister (Greg Glasgow metropolitan the impacts of interventions across Clark) was promoted to Secretary these sectors on a level playing field. of State for Communities and Local region. The model has Government following the 2015 a proven track record An initial list of 80 projects valued elections, largely due to his success in England, boosting at more than GBP4 billion was with the City Deal program. the economies of many culled down to 40 using preliminary assessments and these projects were High level prioritization competitor cities. then tested and prioritized based on Initially, the program was not available their potential impact on the region’s to all urban areas but rather was rolled The Glasgow and Clyde Valley City GVA (as a proportion of whole life out in waves in order to focus on the Deal consists of a GBP1.13 billion costs). Ultimately, this resulted in areas of greatest need and return. The infrastructure fund made up of grant an infrastructure prioritization list of first wave focused on the eight largest funding (both the UK government and 20 projects, covering a range of sectors cities outside of London (also known as the Scottish government will allocate such as housing and regeneration, the Core Cities) and the second wave GBP500 million in grant funding) with flood management, and transport. expanded the scope to include the the remainder expected to be funded Many prioritization initiatives suffer ‘next 14’ largest cities and the six cities by the local authorities themselves. from two main challenges: projects with the highest population growth Ultimately, the Glasgow and Clyde are often assessed in isolation and between 2001 and 2010.5 Valley City Deal expects to create the benefits are often centralized. Cities interested in a City Deal must 15,000 construction jobs and 29,000 We believe that Glasgow’s Single develop a proposal to demonstrate permanent jobs and should allow the Assessment Framework model how it plans to use that investment to city to leverage an estimated GBP3.3 addresses both of these challenges stimulate and support economic growth billion of investment from the private successfully and therefore provides and how it will leverage public-private sector. The fund is expected to deliver a a strong model for other markets partnerships to amplify the investments. sustainable uplift of around 4 percent (or to emulate and adapt.

3 Ibid. 4 Unlocking Growth in Cities, 2011 5 https://www.gov.uk/government/policies/giving-more-power-back-to-cities-through-city-deals 6 Glasgow and Clyde Valley City Deal, 2014

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While the UK has taken great Realistically, no country will ever As the Glasgow and Clyde Valley strides towards improving national fully achieve a true separation case study (see previous page) infrastructure prioritization and of politics and infrastructure illustrates, significant progress planning, it is clear that politics and planning and prioritization. The is being made through the City transparency have continued to UK’s framework is certainly Deal program. But even with all create challenges for the smooth better than most and, with the of the safeguards, processes and prioritization and planning of introduction of the NIC, is about appraisals, the UK framework infrastructure. to take a bold step forward in could go further to improve terms of independence and transparency on infrastructure The reality is that many of the greater transparency of analysis prioritization. No formal framework UK’s most controversial projects and decision making. The NIC exists for evaluating projects (those with large costs or will add to the existing positive across sectors or prioritizing significant environmental impacts, aspects of the framework: the them based on their anticipated for example) are often delayed rigorous appraisal process and the economic impacts. Instead, to suit the political calendar; the business case requirements that projects have historically tended decision on whether to grant an provide considerable confidence to be prioritized based on political expansion to Heathrow or Gatwick, that projects will be progressed direction and fierce competition for example, has been delayed based on their merit. Confidence is between departments, making for decades, and for a further further reinforced by the fact that it much more difficult for central 6 months just recently, and — the Queen ceremonially approves government authorities to take an at many times — the reason for all schemes, which makes them objective approach to prioritizing the delay has been to suit the difficult to cancel based on purely projects. Here is the challenge for political calendar. politics alone. the newly formed NIC. Clearly, there is no point Appraisal reform has become IUK’s National Infrastructure Plan progressing a proposal that is an important topic — politically has been a case in point: the three unlikely to be deliverable — either and financially — for the UK main criteria for selecting and from a physical, financial or government. Many are recognizing prioritizing projects (contribution to political perspective. Often, the that cities and regions are starting economic growth, ability to enhance inability to deliver is inter-related; to take the lead in driving the quality, and ability to unlock private the current decision on London’s reform agenda (particularly in investment) are all rather subjective airport expansions may be transport) and government is now which means that decisions on difficult to deliver politically given working hard to understand the which projects and sectors to the promises made in previous implications of that trend. prioritize are not always transparent. elections.

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Market overview Plan (NIP) which prioritized 18 In addition to the NIP, SOEs and Strategic Integrated Projects. government departments also develop Planning and prioritization of Formalized by the Infrastructure 20 to 25-year master plans for their infrastructure Development Bill in 2013, the PICC’s respective infrastructure project needs. Until recently, all of South Africa’s mandate is to ensure the systematic For the most part, these plans are infrastructure planning and prioritization selection, planning and monitoring largely focused on capacity planning, was conducted individually by the of large infrastructure projects, with but socio-economic impacts are often relevant government entity. However, the ultimate goal of achieving the considered in scoping and selection. country’s growth, development and with more than 1,100 ‘organs of The Department of Energy, for employment targets. state’ across the country (including example, developed a strategic 45 national departments, 108 provincial Those projects that fall outside of plan (the Integrated Resource Plan departments, 278 municipalities and the NIP’s mandate are typically for Electricity) and vision for 2025 715 state-owned entities), each with prioritized at a departmental level to ensure secure and sustainable their own mandates, strategies, and at a State-Owned Enterprise provision of energy for socio-economic growth and long-term expenditure (SOE) level. Each national department development. The Department of plans, there has been little consistency (such as the Department of Water’s plan covers a 5-year span in project planning and prioritization Energy, the Department of Water and is focused on ensuring equitable across the country. and the Department of Transport) access to water as well as its Recognizing the need for greater develops and maintains their own sustainable, efficient and effective consistency, the Presidential strategic plans. use towards achieving the social and Infrastructure Coordinating Committee economic goals of the country. Long-term planning (PICC) was established in 2011 with Infrastructure is also planned and responsibility for planning and prioritizing Guided by the priorities and developed at the provincial and major public infrastructure projects. requirements set out in the country’s municipal/local level. At the provincial The PICC is a multi-level government National Development Plan (which level, infrastructure projects are required body that sits within the Economic articulates the long-term vision for to align to four key planning documents: Development Department and includes the country), the PICC developed representation from the President the country’s first NIP in 2012. The 1. The Provincial Growth and and Deputy President of South Africa, NIP outlines 18 Strategic Integrated Development Strategies (PGDS): national Ministers with responsibility for Projects (SIPs) which include more a strategic tool based on the infrastructure, provincial Premiers and than 150 individual infrastructure province’s long-term view of metropolitan Mayors. projects (selected from a list of almost development, intended to guide 650 potential ‘in scope’ projects) and coordinate the allocation In 2012, the PICC published the covering a wide range of social and of national, provincial and local country’s first National Infrastructure economic infrastructure sectors. resources and private sector.

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© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. 2. The Provincial Sector Plans: a and addressing service delivery in the the costs and revenues over the life of framework that sets out strategic poorest provinces. the project. objectives for each sector at a In addition to the results of the spatial Beyond demonstrating financial provincial level along with defined mapping exercise, the PICC further feasibility, the study also requires wider strategies and implementation prioritized the projects to be included economic analysis on the project’s plans; supporting activities and into the SIPs based on its terms of potential impact on key growth monitoring are also outlined in the reference which include the following indicators such as job creation, Gross Provincial Sector Plans. objectives: Domestic Product (GDP) growth, 3. The Provincial Sectoral Master tax revenues and environmental —A— chieve development objectives Plans: prepared for a 25-year impact, and considers factors such as through improvements in skills, period, these master plans include deliverability, governance and asset industrialization, empowerment and key policy directions and economic management. development scenarios, set out research and development land use and spatial plans, as well —— Expand maintenance on new and However, different government as development principles for each existing infrastructure departments tend to apply different sector. lenses to their appraisal of projects. —— Improve infrastructure links, The Department of Energy, for 4. The Provincial Integrated particularly in rural areas and the example, includes the concept of ‘Cost Development Plans (IDP): poorest provinces of Underserved Energy’ (essentially the an IDP based on the socio- —A— ddress capacity constraints cost of interruption of supply) in their economic profile of the province and improve coordination and appraisal framework. The Department that identifies the Growth and integration of Transportation evaluates projects Development Strategy (GDS) based on macro-economic impacts, —— Support African development and principles, objectives and physical environment impacts and the integration mechanisms. potential for improving social equity. At the municipal level, strategy and Outside of the projects included in project planning is set out in local the NIP, national departments tend Cross-sector integration to prioritize projects based on their documents including municipal The SIPs provide a strong motivation long-term plans. Projects within Integrated Development Plans, local for cross-sector integration. Each of the Department of Energy, for sector plans and project pre-feasibility the SIPs focus on a goal rather than a example, are prioritized to achieve the studies and business plans. specific project or sector and therefore department’s vision of a transformed require government to integrate and sustainable energy sector that Prioritization methodology and activity and investment across various includes 30 percent ‘clean’ energy approach sectors to achieve their goals. by 2025. The Department of Water’s In developing the NIP, the PICC prioritization tends to align to the Projects outside of the NIP, however, undertook a ‘spatial mapping’ exercise department’s Second National Water tend to be planned, prioritized and aimed at projecting potential growth Resources Strategy, which outlines the executed by the relevant government (in population, urbanization and the future priorities for the water sector in department or SOE and, for the most economy) and identifying the specific South Africa. part, little cross-sector integration is infrastructure that would be required to achieved. facilitate that growth. In particular, the While, at the provincial level, the exercise focused on identifying: comparison and prioritization of However, outside of developing the projects remains quite limited, it NIP, the PICC is also expected to play —— Current and future demand is at the local level where sectoral a more holistic role in infrastructure —T— he state of existing infrastructure planning and provision often takes planning by developing the necessary assets and services place, including prioritization, the frameworks to ensure that national, —T— he long-term infrastructure identification of appropriate resources provincial and local structures are requirements to fill the gap and the selection of the service coordinated. provider. —T— he potential for unlocking Integrated development planning also economic opportunity 7 takes place at the municipal level, Economic appraisals bringing together all of the sectoral The exercise resulted in the All infrastructure projects funded from plans into a more programmatic identification of more than 645 the National Treasury require a full approach. However, progress is often infrastructure projects across the feasibility study before funding can hampered by a lack of sufficient country, of which more than 150 were be approved. Economic appraisals are program and project management prioritized and ‘clustered’ together to conducted as part of the feasibility capacity at the municipal level. form the 18 SIPs, largely focused on process, often by outside transaction supporting economic development advisors who analyze and estimate

7 A Summary of the South African National Infrastructure Plan. Presidential Infrastructure Coordinating Commission, 2012.

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Achieving socio-economic goals Coal Base-Load Independent Power be payable by Eskom (as the buyer) through power procurement Producer (IPP) Procurement program) pursuant to the Power Purchase Since 2007, South Africans have had and around 11.4 GW of renewable Agreement (PPA), with the price to grow accustomed to the dark. energy sources (to be developed not to exceed a set price cap for Electricity supply has lagged behind by 2030 under the Renewable each technology for each phase. demand and, as a result, the country Energy Independent Power Producer Bidders are also required to submit has experienced widespread blackouts. Procurement (REIPPP) program). the terms of material contracts, including financing agreements and But a secure electricity supply is The Coal Base-Load IPP Procurement construction and operation contracts not South Africa’s only challenge: program unemployment is also rife, peaking at and an Operating and Maintenance over 25 percent in 2010, while GDP The goal of the Coal Base-Load IPP (O&M) contract. is to procure 2,500 MW of power per capita remains stubbornly low The first round, launched in August generation capacity and energy from (US$5,694). 2011, selected 28 preferred bidders independent power producers to with a total proposed generating Over the past few years, South be connected to the South African capacity of 1,416 MW. A second round Africa’s government has been electricity grid over the next 10 years. working aggressively to improve the initiated in November 2011 selected socio-economic growth of the country To achieve this, South Africa’s 19 bidders (out of 79 proposals) and by embedding socio-economic goals Department of Energy has issued a third round in May 2013 selected into their wider basket of investments a Request for Proposal for the a further 17 preferred bidders for an and programs. procurement of 1,000 MW of additional 1,456 MW of renewable capacity. Single projects can be energy generation capacity. First tabled in May 2011 and then no larger than 600 MW, but IPPs updated in 2013, South Africa’s can register and submit proposals Concluding the economic Department of Energy published for more than one project. The prioritization its Integrated Resource Plan for RFP includes a Power Purchase Interestingly, both the Coal Base- Electricity 2010–2030 (IRP 2010). The Agreement (which may not be Load IPP Procurement program and plan essentially outlines the power marked-up) and the government has the REIPPP program are designed generation requirements for the proposed an incentive payment for to not only help alleviate the current country and sets the guidelines under those projects that can be delivered constraints on electricity, but also which NERSA (South Africa’s energy before June 2020. Both initiatives to help the country achieve key regulator) can license new capacity. should further aid in executing the socio-economic goals. The IRP 2010 calls for the addition projects in a timely manner. Clearly, the overall goal of this program of 41,346 MW of new electricity is to secure new energy supplies and generating capacity (above and beyond The REIPPP program diversify the country’s energy mix. that needed for the replacement While South Africa’s first renewable But the government has also made it of decommissioned plants) with ‘feed-in’ energy policy in 2009 was clear that participation in the program the overall objective of diversifying ultimately cancelled due to issues will require projects to show how they the coal-driven power mix. The plan surrounding the legality of the can contribute to socio-economic and seeks to increase generation through program and the pricing of tariffs, sustainable growth as well. domestic and regional IPPs and the government’s new REIPPP incorporates multiple energy sources program has already demonstrated Indeed, minimum thresholds for IPPs such as renewables, nuclear as well significant success. to qualify for the programs include as thermal. metrics related to job creation, The REIPPP is being rolled out in five economic development requirements, The IRP 2010 also calls for the addition rounds of competitive bidding with local content and ownership, preferred of new base-load generation capacity selection based on both price and procurement and supplier and of 7,761 MW (a third of which is non-price criteria. In each round, enterprise development. envisioned to be procured through a bidders bid the price (tariff) that will

The overall goal of this program is to secure new energy supplies and diversify the country's energy mix. But the government has also made it clear that participation in the program will require projects to show how they can contribute to socio-economic and sustainable growth.

12 | Assessing the true value of infrastructure investment

Clearly, South Africa boasts one often do more to complicate and industrialization and economic of the most transparent and lengthen the process of bringing benefits need to be more carefully efficient infrastructure planning a major project to market than to balanced to ensure fiscal efficiency and prioritization processes on shorten them. Governments must and sustainability. the continent. The use of more therefore strive to ensure that such Clearly, South Africa’s government structured feasibility studies for processes are developed to be as is moving in the right direction, projects and the articulation of a efficient as possible, supported by albeit somewhat necessitated national vision and plan have done sufficient capacity in the planning by financial constraints within much to help the country start and prioritization departments to the tax system and challenges to overcome many of their most move projects forward. accessing financing. At the same critical infrastructure challenges. At the same time, we have seen time, municipalities and provincial However, the country continues vested interests influence and authorities are starting to apply to face a number of challenges in delay projects either directly or more critical criteria in project implementing large infrastructure through procurement challenges. selection and seem open to the projects. Project planning and The escalating cost of construction need for project prioritization. execution capacity continues to lag and monopoly pricing are also While some of these changes are behind demand at the institutional creating major challenges to the happening on a more informal level and slow approval processes delivery of large projects across basis, most expect more formal keep many projects stuck in the sectors. changes to follow soon. pipeline for extended periods Going forward, South Africa’s The greatest challenge facing the of time. Lengthy and onerous government will need to focus government, however, will be government tender processes do on creating a more transparent creating more alignment between not help. and consistent process for policy objectives and budgets. These implementation challenges project prioritization. Economic Without significant change, are a reminder that — unless benefits need to be more policies and priorities will become great care is taken — the comprehensively assessed and increasingly unachievable, and implementation of more robust and compared; project financial viability affordable only on a limited or transparent planning, prioritization and asset sustainability need to piecemeal basis. and business case processes can be more candidly assessed; and

Assessing the true value of infrastructure investment | 13

Market overview The PAC plan is overseen by the sector in order to achieve its Planning Minister (one of the most mandate of improving the country’s Planning and prioritization of important ministers in Brazil’s transportation network. infrastructure government) who delegates Infrastructure prioritization in Brazil responsibility for the planning Long-term planning is managed by the federal, state or and procurement of certain Based on the success of the first local government depending on the infrastructure projects to specific PAC (which was widely credited sector or project location. However, for ministries (the Ministry of Cities, for with increasing job creation and major infrastructure developments, the example, is charged with subways, encouraging private investment), federal government takes a bigger role regional trains, and sanitation Brazil’s government announced a as the main provider of funds. and water projects, among other second phase (PAC-2) in 2011 with responsibilities). Within Cabinet, the a 3-year target of US$526 billion in The country’s Growth Acceleration Ministry of Planning sets out the public and private investments in Program (PAC), which was created budget for the whole country. infrastructure. in 2007 to promote the recovery of major infrastructure projects and A handful of other government bodies PAC-2, similar to PAC-1, focuses its drive sustainable development, is a also contribute to the prioritization of investments in the areas of logistics, massive development and investment projects within certain sectors. The energy and social development. It is program that is funded by the federal organization created to oversee the focused on six major initiatives: recently-announced ‘second edition’ government but includes federal, state —B— etter Cities (urban infrastructure) and local projects. Programs such as of the country’s Logistics Investment the PAC largely guide infrastructure Program (PIL), for example, is expected —— Bringing Citizenship to the prioritization in Brazil. to play a role in the prioritization of Community (safety and social projects within the transportation inclusion)

14 | Assessing the true value of infrastructure investment

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. However, while the EPL clearly the need to prioritize accessibility recognizes the need for a long- through investments in transportation term plan (with a prioritized project infrastructure. pipeline based on a set criteria), the organization is relatively new and is Business case development therefore more focused on integration In some cases, state governments rather than planning and prioritization. and government departments can It is widely believed that the EPL will submit a business case to the federal focus on developing a project appraisal government to secure additional and prioritization framework in the funding but — even in these near future. cases — there is no set business case framework for infrastructure Prioritization methodology and projects in Brazil. approach Those business cases that are Brazil’s approach to prioritizing developed tend to focus more on infrastructure projects is not entirely financial feasibility and some risk consistent or transparent, with many mitigation rather than the wider investment decisions seemingly based aspects of infrastructure project solely on what the federal government planning such as project delivery and thinks is best for their citizens. governance. For the most part, the government follows a top-down approach Economic appraisals to planning and implementing With no set appraisal framework for infrastructure projects with the federal infrastructure projects, most appraisals government identifying the priorities tend to focus narrowly on financial and gaps. However, the federal feasibility (how much it will cost, how it government stops short of identifying will be funded and/or financed). specific projects, preferring instead to identify actions (such as ‘we For the most part, it is not clear how need to increase our stock of public rigorous appraisals are and whether all housing’). Based on these actions, the associated costs and benefits are being Planning Minister provides funds and considered. —— My House, My Life (housing) delegates responsibility to states and government departments to execute Cross-sector integration —W— ater and Light for All (sanitation projects. Projects are generally viewed in and access to electricity) isolation with little to no cross-sector The government’s main concern is the —— Energy (renewable energy, oil analysis of costs and benefits. employment and financial welfare of and gas) Brazilians. PAC-1 was introduced in a Within sectors, however, there is some —T— ransportation (highways, railways, time of severe global financial crisis evidence of increasing integration. airports) and provided many Brazilians with The EPL, for example, is currently Long-term planning is also conducted both secure employment and a steady focused on increasing integration in the transportation sector through income; these two objectives remain across the multiple agencies involved the PIL which was initially created in at the core of new PAC mandates in transportation and logistics 2012 to promote investment in roads and are believed to influence project planning and all federal ministers have and rails and to encourage greater prioritization and selection. been asked to help EPL develop an integrated plan. integration. A second version of the However, outside of this mandate, PIL — with the same objectives — prioritization of projects under Integration is also a challenge at the was launched in mid-2015. To execute PAC-2 remains somewhat opaque regional level, with few links currently this mandate, the government with allocations to each of the six existing between the planning created the Company of Planning and initiatives largely determined by the functions of federal, state and local Logistics (EPL) to help implement the perceived level of pressing priority and government. While programs such as more than US$50 billion in anticipated necessity. In the run-up to the 2014 PAC have provided mechanisms to public-private partnership projects FIFA World Cup and 2016 Summer improve integration (largely via federal within the sector. Olympic Games, for example, the funding of projects), most projects are government of Brazil recognized managed in isolation.

Assessing the true value of infrastructure investment | 15

A PIL for transportation woes A pipeline of transportation —— Airports: Includes concessions Brazil’s government knows it needs investments of four international airports to reinvigorate investment into As previously mentioned, in August (estimated at US$2.4 billion) and infrastructure. In part, this is because 2012, President Rousseff introduced improvements at regional airports, the country’s infrastructure has been the PIL, a new plan to promote mainly in the state of São Paulo under the spotlight as the host of investment in roads and railways. Removing bottlenecks both the 2014 FIFA World Cup and And, based on its successes, the the 2016 Summer Olympic Games. government launched PIL-2 in The introduction of the new updated Games infrastructure has certainly mid-2015. The PIL-2 envisions a variety PIL program (and the earlier come under scrutiny, but so too of transportation projects requiring establishment of the Company of has the country’s transportation investments of around US$56 billion, Planning and Logistics (EPL) suggests infrastructure as floods of new with around US$20 billion to be that Brazil’s government is focused on visitors overwhelm airports and invested between 2015 and 2018. three main priorities: further congest already-overcapacity For the most part, these projects —— Improving transportation networks roadways and railways. are expected to be delivered via to resolve transport bottlenecks, public-private partnership models. At the same time, Brazil recognizes which currently hurt the that it is losing some of its global The PIL includes investments into: competitiveness of major industries competiveness. Indeed, prior to 2012, such as mining and agribusiness —— Highways: Includes 11 new Brazil was ranked the sixth largest lots of highway and toll roads —— Improving access to major centers economy in the world but ranked (approximately 4,400 kilometers as the country emerges onto global 104th in terms of infrastructure total) estimated at US$9 billion, stage as the host of the FIFA 2014 quality, investing just 1 percent of plus additional investments in World Cup and the 2016 Summer Gross Domestic Product (GDP) existing concessions Olympic Games into infrastructure (most estimates —— Supporting renewed GDP growth suggest 3 percent is required in order —— Railways: Plans to construct or and facilitating the emergence of a for Brazil to just maintain its existing upgrade five major railway projects, middle class. infrastructure). plus additional investments in existing concessions at a total However, in the structuring of the Ultimately, the growth of GDP, investment of US$25 billion PIL, it is clear that the most dominant impacted by the increase in foreign —— Ports: More than US$4 billion motivation for the EPL and PIL is to direct investments, has driven reduce the increasing transportation an increased demand for greater for widening and modernizing Brazil’s ports costs within the country; particularly investment into Brazil’s infrastructure. those due to congestion on roadways.

The most dominant motivation for the EPL and PIL is to reduce the increasing transportation costs within the country; particularly those due to congestion on roadways.

16 | Assessing the true value of infrastructure investment

Brazil’s recent hosting of — and management led to pushbacks are not being resourced expertly preparations for — the 2014 FIFA on major deadlines. The most enough to benefit the country’s World Cup put the spotlight on the conservative estimates put total own people. limitations of Brazil’s government investment by the government on Corruption is another issue that in implementing large-scale the World Cup at US$3.5 billion. is frequently noted by those infrastructure projects. Controversy surrounded many of operating in Brazil’s infrastructure In part, this was due to rapidly the projects such as the Arena sector. Current scandals at shifting economic realities. In Amazonia — a stadium built in the Petrobras, for example, have 2007, when Brazil first lobbied middle of a rainforest — which has shaken investor confidence and to host the event, the country led many domestic and foreign significantly undermined the was experiencing an economic observers to wonder whether the country’s infrastructure market. boom. But when it came time country has the proper planning For Brazil, the hope is that to implement the infrastructure, skills to effectively utilize its mandates such as PAC-1, the economy had changed and financial resources for funding PAC- 2 and PIL will improve the country was struggling with infrastructure in the long term. these limitations. By effectively construction capabilities. Poor planning and investment prioritizing infrastructure With the world watching, controls on infrastructure spend investments towards the needs preparations became delayed. Poor related to both the 2014 FIFA World of Brazilians, the government safety standards at construction Cup and the 2016 Summer Olympic will be able to slowly increase sites led to many workers being Games has also raised concerns stability within the country in the injured or killed on the job while from many of Brazil’s citizens who long term. limitations on infrastructure are critical that the investments

Assessing the true value of infrastructure investment | 17

Market overview of Economic Affairs (CCEA) which monitoring important government operated under a wider mandate that programs and projects, called Planning and prioritization of included reviewing economic trends PRAGATI (Pro-Active Governance and infrastructure on a continuous basis and evaluating Timely Implementation). Many large Generally, the planning and matters of economic policy, funding, infrastructure projects across a variety prioritization of infrastructure projects financing and implementation across of sectors — including airports, roads, in India falls under state jurisdiction but sectors in order to drive investment railways, ports and energy sectors — all projects require central government and growth. For obvious reasons, the are within PRAGATI’s purview and approval. The exact approval standards CCEA places a high focus on reviewing progress is reviewed on a monthly vary depending on the central and approving infrastructure project basis by the Prime Minister. department involved. proposals on a regular basis. Long-term planning In the past, India’s investment decisions In January 2015, Prime Minister Narendra Modi scrapped the PC in In the past, economic growth goals had been guided by the Planning for the country had been articulated Commission (PC) who — since 1951 — favor of a new planning ‘think tank’ called the National Institution for through the PC’s Five Year Plan had developed successive Five Year which covered a variety of growth Plans aimed at improving resource Transforming India (NITI). The group will include leaders from each of stimulants such as health, industry, exploitation, living standards, production poverty reduction and infrastructure levels and employment. India’s states and union territories and will answer directly to the Prime investment. In 2009, the Committee on Infrastructure Minister. Modi’s plan for the body is Infrastructure received significant (CoI), which was responsible for planning to create an approach that is based attention in the Eleventh Five Year and prioritizing major public infrastructure on a “pro-people, pro-active and Plan (covering years 2007 to 2012) projects, was replaced by the Cabinet participative development agenda”. 8 and a strong emphasis was placed Committee on Infrastructure (CCI). The NITI also maintains separate focus on promoting sustainable economic The CCI, which is chaired by the Prime groups on infrastructure and public- growth through infrastructure Minister, is responsible for reviewing private partnership projects, which are investment. Working in partnership and approving infrastructure projects and responsible for undertaking periodic with CCI and other government advising on financial, institutional and reviews of project proposals and Steering Committees within the legal interventions that may be required progress in implementation. infrastructure sector, the Eleventh to support project implementation. It is worth noting that in March Five Year Plan outlined an estimated In 2013, the government merged 2015, the Prime Minister also set US$514 billion in investment the CoI with the Cabinet Committee up a multi-purpose platform for requirements over the plan period.

8 http://in.reuters.com/article/2015/01/01/india-planningcommission-modi-idINKBN0KA1NA20150101

18 | Assessing the true value of infrastructure investment

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. A retroactive analysis of the Eleventh on economic returns. Indeed, at both And for the High Speed Rail project Five Year plan shows that — while the state and the federal level, India’s linking Mumbai to Ahmedabad, the overall investment target was government is increasingly focusing on planners prepared a very detailed met — some funds were shifted projects that alleviate poverty. business case. Furthermore, projects towards more commercial ventures funded by multilateral institutions However, the fact remains that (such as telecoms and oil and gas) such as the World Bank or the ADB prioritization is currently a very informal at the expense of segments such invariably also require business cases process that varies from state to state as ports, water and wastewater and to be prepared. and from department to department. transportation. And political priorities continue to play While business cases are becoming The PC’s Twelfth Five Year Plan was an influential role in the prioritization more robust and frequent, their use announced in December 2012 and process; investments that support the (particularly at the state level) is often sets aggressive targets for increasing Prime Minister’s priority projects — inconsistent and the data analyzed infrastructure investment. Indeed, the such as the Make In India campaign within the business cases can plan envisions a doubling of investment (aimed at growing the manufacturing sometimes be influenced by political overall (to more than US$1 trillion), sector), the Sagar Mala project (aimed preferences. Indeed, in some cases, lifting infrastructure investment to at modernizing the country’s ports) political preferences are often allowed 10 percent of Gross Domestic Product or the Smart Cities program (aimed to overrule commercial or economic (GDP) by 2017. It is widely expected at improving the efficiency of city rationale. that the NITI will continue to strive operations) — tend to receive special towards these targets through the attention from India’s government Economic appraisals completion of the current Five Year departments. India also lacks a formal economic Plan period (2012 to 2017). appraisal framework for any level of Business case development However, in a recent NITI review, government. As a result, projects authorities suggested that investments While governments and government are generally appraised based only under the Twelfth Five Year Plan had departments can submit a business on financial feasibility (cost, potential started to lag. The report suggests case to the federal government revenues and anticipated returns for that there will likely be a shortfall for funding, there is currently no investors). formal governmental business case of 20 percent of public investment Few — if any — projects assess their framework for infrastructure projects and more than 40 percent in private wider economic impacts (such as how 9 in India. Projects that are large or investment. the proposed infrastructure project nationally significant often require will affect employment, economic collaboration between the states and Prioritization methodology and growth or the environment) and it the central government to develop approach is therefore difficult to assess the business cases, but often the federal Infrastructure prioritization in India rigor of the appraisal and whether all government is responsible for is often an informal process. With associated costs and benefits were developing the business case for no standard prioritization process or considered. major projects. approach at either the state or the central government level, priorities That being said, some business case Cross-sector integration are often based on the individual development is conducted within Outside of the high-level targets of state’s objectives and their ability to national departments. The National the Five Year Plans, little focus is produce an infrastructure pipeline. Highway Authority of India prepares placed on cross-sector integration The State of Kerala, for example, has a financial model for every new road for infrastructure planning and seen a dramatic rise in tourism and project; Indian Railways requires both prioritization. has therefore successfully prioritized a business model and a certain Internal tourism-related infrastructure projects. Rate of Return (IRR) before investing; However, some cross-sector integration and the Airports Authority of India is now being seen on major national At the federal level, India has seen a requires a business case analysis for all projects such as the Sagar Mala project significant transition in the way projects greenfield and brownfield projects to which may lead to closer integration are prioritized. Whereas, just a few years help determine IRRs. across broader project portfolios in the ago, priorities were most often driven future. Some state governments are by political motivations (focusing on Other central departments and also working to create a ‘single window those investments that would return authorities are quickly following process’ for infrastructure planning and the greatest number of votes come suit. For the Sagar Mala project, the approval which, ultimately, will create election time), the country is undergoing Ministry of Shipping is expected to greater integration, at least at the a shift towards prioritizing projects based require an IRR of at least 8 percent. bureaucratic level.

9 NITI AAYOG Brief #5

Assessing the true value of infrastructure investment | 19

Land acquisition remains one of competitive bidding process for These factors created significant the biggest challenges in project selection of the private sector partner delays. For example, while the implementation and an agreement is expected to be Ministry of Civil Aviation issued an in- The Navi Mumbai International Airport signed by June 2016. principle approval for the NMIA project (NMIA) is the largest greenfield in 2007, it still took another 3 years public-private partnership (PPP) airport A history of delays to get the zoning approved by the in India. The project was first conceived The government created the initial Ministry of Environment and Forests by the Government of India in 1997 roadmap for the implementation of due to the presence of mangroves to address the long-term air traffic a second airport in Mumbai almost on the proposed site. The specially- demand for the Mumbai metropolitan two decades ago which — given the formulated land compensation policies region. Mumbai is the country’s significance of the project — provided for the land owners also needed to business and financial capital and, some certainty and momentum to be reviewed and ratified by the state with more than 20 million people, is the project. However, the project government. also India’s most populous city. With has suffered a number of lengthy While the CIDCO appointed technical the old city increasingly challenged for delays, in part due to government consultants and project advisors in large-scale horizontal development, the uncertainty; while airports are a 2008 to help prepare the airport master region of Navi (which means ‘new’) central responsibility in India, state plan, business plan and transaction Mumbai is being planned as the city’s governments have often taken up documents, the global tendering new core. Together, the twin cities are initiatives for both greenfield and process was ultimately held back for expected to serve a population of more brownfield airport projects with the almost 2 years while much of the land than 25 million in the next 20 years, support of private developers and acquisition process was underway. with estimated air traffic of 100 million operators. passengers per annum (mppa). That being said, most observers now For NMIA, many of the greatest believe that the project is essentially The new airport is clearly needed, in challenges came down to land issues. back in flight. The second stage of part because the existing Chhatrapati Many sites were evaluated to assess the bidding process for NMIA got Shivaji International Airport is likely to technical feasibility and, in 2000, the site underway in November 2015 with the breach its estimated operating capacity was moved from Mandwa-Rewas to issue of the request for proposal (RFP) of 45 mppa in the next 2 to 3 years Navi Mumbai in order to accommodate and project agreements. The project and, in part, to serve the growing a second runway. However, the specific is also now being directly monitored urban and suburban areas to the north site (at Panvel) presented a number of by the Prime Minister’s office under and east of the city. The availability of challenges: the terrain was undulating the PRAGATI (Pro-Active Governance world-class aviation infrastructure is and difficult to develop; the site and Timely Implementation) initiative considered necessary to maintaining contained an environmentally-sensitive with the first phase of the airport Mumbai’s stature as the financial hub area of mangroves that needed to be now scheduled to be opened for and in advancing the state’s leadership properly managed; and it was populated commercial operations by 2019. in attracting foreign direct investment. by a number of scattered landowners and settlers who had to be resettled, The airport is designed to be developed Better planning required rehabilitated and paid reasonable in four stages with passenger traffic What is clear from this project is financial compensation. expected to reach 10 million annually that — even with the right political in its first year of operation (2019), While the site location was decided in will and demand — projects can rising to 60 million passengers annually 2000, the process for the acquisition often become stalled by government by 2030.10 Responsibility for planning of approximately 670 hectares of approvals and popular opinion. and overseeing the implementation private land from people affected by In some cases, a lack of coordination of NMIA belongs to the City and the project began only in 2011. First, between different agencies can lead Industrial Development Corporation NMIA needed to acquire an additional to standoffs on critical approvals, of Maharashtra Ltd. (CIDCO), a public 1,150 hectares of land (separate to the which could seriously affect the agency, and the project is being 1,160 hectares needed for the airport’s execution of projects. For NMIA, this implemented as a PPP. footprint) to compensate land givers lack of coordination led to significant through a unique land-for-land model, A Special Purpose Vehicle (SPV) will complexity dealing with multiple and to provide for other airport related be formed for the development and levels of interactions between state infrastructure requirements. A majority operation of the airport under a long- and central government stakeholders of the land owners consented to the term concession agreement, with on the project scope, structure and land-for-land deal but there were a few CIDCO and its nominees holding documentation (including related dissenters seeking better terms, which 26 percent of the shares in the SPV. regulatory compliance requirements). delayed the process further. CIDCO is running an international

10 http://www.cidco.maharashtra.gov.in/NMIA_AbouttheProjects.aspx

20 | Assessing the true value of infrastructure investment

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. However, the key challenge for implementing large public service KPMG insight projects in India often comes down to the issue of land. In general, the diversity of land owners and holdings, asymmetric information, improper land records, disputed land titles, inadequate social awareness, weak community participation and — last but not least — the existence of a variety of state and central land-related legislations and property laws can make the process of land acquisition a laborious, litigious and exasperating exercise. Oftentimes, stalemates result from huge differences Clearly, infrastructure prioritization in disputes and litigation in rural between the value offered for land (as and planning in India would areas, while urban population per government records) and the actual benefit greatly from a more formal density growth has made market value, which leads to disputes approach to project planning, acquiring land in cities increasingly and litigation. business case development and difficult. Growing environmental Many projects have been stalled or economic assessments. sensitivities are also creating land been delayed due to land acquisition disputes along the coastline. Governments at both the state issues. The reality is that the statutory and the federal level generally The Modi government’s proposed process for notification and acquisition have a good idea of what projects raft of reforms may do much of lands from private owners for any will provide the largest economic to unblock the infrastructure public purpose project is quite lengthy benefit. But most suffer from pipeline. Included in the and — particularly where voluntary challenges related to deliverability, program are new land purchase consent is not forthcoming — can governance and project planning. rules, important labor reforms, require multiple rounds of negotiation. As a result, projects tend to a reduction in government As in any democratic environment, become delayed, experience subsidies and a long pipeline of political influencers can also play high cost overruns or get stuck asset sales. a big part in delaying or expediting in the project pipeline. A more project closure, especially where land In the most recent federal formal approach to planning and valuations and stakes are high. budget tabled in March 2015, the business case development would government announced a new In this case, however, progress was force projects to create more fiscal framework for the division supported by the active role that robust governance structures and of taxes between the central and CIDCO played in negotiating what is address deliverability challenges state governments, increasing widely viewed as one of the better prior to securing funding. the allocation towards states by compensation and rehabilitation One of the biggest issues about 10 percent. This, in turn, packages for displaced land owners stemming from the lack of a formal should provide state governments in India’s history. Clear support from business case process is that with more control over the the government for speedy closure on governments have been forced prioritization, planning and funding the deal has also catalyzed progress to focus more on the short term of infrastructure projects. somewhat. (spending time dealing with project However, to truly achieve Modi’s While it may be an obvious lesson, planning and execution) rather than objectives for the country, we the NMIA project shows that proper on the long term by taking a more believe that India’s governments project planning and coordination is strategic and sustainable view of need to start focusing on creating critical to successful infrastructure infrastructure priorities. an ecosystem that prioritizes delivery. All too often, government Another ongoing limitation on long-term and sustainable leaders and project owners are in India’s ability to implement large growth. To achieve this, however, a rush to award projects and make infrastructure projects comes India will need to improve the announcements, but this often forces down to land ownership and way it plans, prioritizes and authorities to side-step crucial aspects acquisition. Resistance from local executes infrastructure projects of the project planning like land communities has long resulted at all levels of government. acquisition.

Assessing the true value of infrastructure investment | 21

By Lewis Atter and Said Hirsh, KPMG in the UK and Australia

If everyone agrees that investment many governments recognize the process often focus narrowly on into infrastructure drives economic sense in prioritizing those investments calculating what expected revenues growth, then why are decisions that seem likely to drive economic can be generated from users and the being made without a view on the growth. Most seem to understand welfare benefits to these users (i.e. true economic value that those that improved economic growth is their untapped willingness to pay) for investments deliver? And, without ultimately about productivity, and that an improvement, usually against the these considerations, how is improved productivity will increase tax background of an assumption that anyone effectively prioritizing their revenues without the need to raise the “real economy” is fixed. In some investments to ensure they are putting tax rates. sectors, such as transport, appraisals the right money in the right places to now incorporate an estimation of the Yet our experience suggests that very achieve their economic objectives? wider economic benefits that a fixed few governments are able to properly economy, welfare based appraisal We believe that current infrastructure assess the actual economic value that might miss. While that is a step in the appraisal and prioritization their investments deliver. In part, this is right direction, this “missing piece” methodologies are frequently because current infrastructure appraisal approach is too narrow, and fails to nowhere near sophisticated enough and prioritization methodologies tend provide a complete picture of the to allow governments to make truly to take a very narrow view of value. As impact a project may have on the real informed decisions about their this report illustrates, in some markets, economy, since inevitably there are investments. It’s time to rethink appraisals are simply based on a mix overlaps between the welfare and real the way we appraise and prioritize of feasibility studies and (occasionally) economy views of the world. A better infrastructure, and forge better links economic cost/benefit analysis. In question would be how a project will between decision making, growth and many cases the appraisal is a way impact the real economy (growth and thus the revenues that ultimately pay for individuals to get what they want jobs), land values and tax revenues, for what is built. rather than helping decision-makers and what this means for overall understand which combination of The unavoidable fact is that demand for project affordability for the taxpayer. projects merit investment. infrastructure is growing exponentially For instance, a conventional appraisal while — in most markets — the Those — like the UK — that do include of a rail project will forecast revenue ability of government to fund these more sophisticated business case and cost projections 60 years into the investments is dwindling. In response, requirements into their investment future, but ignore the impact of the

22 | Assessing the true value of infrastructure investment

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. more influence in the government prioritize investment accordingly. investment decision-making process. The latest developments in the UK Indeed, quite often, we find that suggest this may not mean one all- project appraisals are used as a means encompassing appraisal metric based towards an end, rather than as a way on an opaque set of shadow prices, to assess various options. but parallel appraisals addressing key objectives, and in the case of the real Politicians, for example, may decide economy, long-term affordability. that a new airport is needed and appraisals will be conducted to find Just as importantly, governments need the best way to deliver that airport, or to start thinking about their infrastructure to clear a particular approvals hurdle. as a portfolio or program rather than as a Very rarely does anyone question set of discreet projects. This should allow whether an airport truly delivers decision-makers to better understand the best economic outcomes when the relative value — and the necessary compared against, say, high-speed trade-offs — of each option which, in rail or improved urban mobility turn, should drive improved prioritization. projects, or a fundamentally different The program approach can also help economic strategy based on a set of deliver balance between objectives and interventions in other sectors. help deliver minimum outcomes, which is impossible at the project level. We believe that it is time for governments to start focusing on To take another UK example, this evolving their infrastructure appraisal approach is being used by cities at the and prioritization processes to reflect forefront of the UK City Devolution the real economic value and thus long- agenda to design programs that seek term affordability of infrastructure, and to maximize growth, but do so subject focus on programs rather than projects. to minimum environmental and social outcomes for the program as a whole. To start, governments must find a way In practice this means parallel program to explore and measure the broader level appraisals of real economy, basket of benefits that their investments environmental and social outcomes, with can deliver. The calculation for economic the mix of projects in the program being benefit should include not only adjusted until the desired balance is traditional metrics such as ‘time saved’ achieved. Politicians define what balance project on productivity and thus tax or revenues generated, but also aspects really means (ideally in advance); and receipts tomorrow. such as impact on tax revenues and the bureaucrats and their advisers run land value changes. As is being found In the UK this is resulting in what the numbers until they have found the in the UK, this may mean running real amounts to twin track appraisals, with program that delivers it. economy and program based appraisals the real economy and conventional in parallel to more conventional, scheme We believe that governments and welfare approaches running in parallel. specific approaches. Authorities are policy makers need to embrace Another major challenge is that most taking steps to help ensure that these change and encourage more innovative governments today tend to manage real economy approaches are as approaches to infrastructure appraisal their infrastructure investments in rigorous as the conventional variety. and prioritization. departmental silos or (in the case of In many cases, governments may Creating and implementing a new strategically important projects and have other specific policy objectives approach to infrastructure appraisal megaprojects) on a project-by-project that they hope to achieve (reducing and prioritization will not be easy. In basis. And, as such, there is often little the carbon footprint, for example, or some cases, the right data may not be awareness of the relative value that each improving job prospects for the poorest available. In other cases, governments project delivers to the government’s 25 percent of the population). These may face opposition from stakeholders overall economic objectives which, must also be understood, measured with a vested interest in maintaining in turn, makes it very difficult for and assessed. the status quo. governments to properly balance their investments to get the best returns. The With this information in hand, However, we firmly believe that — project-by-project view of life also risks governments should be in a position to to achieve the best returns on their ignoring important interactions between start making more informed decisions investments, to achieve their policy projects, which can only be addressed about how they invest their budgets objectives, and to achieve better by looking at whole programs and across to optimize their policy objectives. The affordability for infrastructure — silos. In the real world, no program is role of politicians, therefore, would governments must start to evolve ever exactly the sum of its parts. be to set the right policy objectives their approaches and methodologies. and decide the right balance between And, given the current ‘funding gap’ In the absence of data, methodologies them which, in turn, will enable the for infrastructure, most would be well and a program view, our experience bureaucrats to properly evaluate and advised to start right now. suggests that politics gains much

Assessing the true value of infrastructure investment | 23

Said Hirsh Director KPMG in Australia E: [email protected]

Lewis Atter Associate Partner KPMG in the UK E: [email protected]

James Stewart Global Infrastructure Chairman KPMG in the UK E: [email protected]

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