Insight: Who Controls Our Infrastructure? Editors: Peter Schram, Dane Wolfe, Laura Jablonski and Pranya Yamin

Infrastructure Reconsidering the Regulation in an asset recycling: A drive to depoliticize era of change: A Renaissance Man infrastructure roundtable with An interview with An interview with energy regulators Mike Baird Sir John Armitt Page 38 Page 18 Page 20 INSIGHT The global infrastructure magazine / Issue No. 7 / 2015 Who controls our infrastructure?

With a special feature on The global rail sector Clearly, private participation in infrastructure is a good – and entirely necessary – trend. And, given the existing infrastructure gap evident around the world, it also seems fairly clear that governments and public Foreword infrastructure authorities are going to need a lot more private participation in the future. But as the private sector takes on an increasing role in the delivery, funding and operation of our infrastructure, new and complex questions are starting to emerge. Who exactly controls our infrastructure? What role can and should government play in the delivery of assets and services? What will be the eventual impact of private participation on consumers and users? These are not easy questions to answer and much will depend on the speciﬁc social, economic and political realities of each market. What is clear, however, is that the shift of control towards the private sector is creating new challenges and complexities for infrastructure authorities, governments,

© 2015 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. regulators and investors around the world. fundamental rethink of the relationship Bank and a look at PPP structures in the For private participation to grow, answers between consumers, infrastructure and healthcare sector. will be needed. government. And that, in turn, will require On behalf of the contributing authors and That is why, for this edition of Insight another shift in the relationship between KPMG’s global network of Infrastructure Magazine, we asked our global network of the private and the public sectors. professionals, we would like to thank those infrastructure professionals to sit down with This edition of Insight Magazine also leaders who shared their experiences and the world’s operators, owners, investors includes our Special Report on Rail, a sector insights for this publication. We firmly believe and regulators to explore some of the big that is often at the epicenter of the debate that – through publications such as this – we challenges and trends influencing the debate around control. As governments increasingly can continue to work together as a sector around control. start to recognize the symbiotic relationship to solve some of the greatest challenges The insights and opinions that these between rail and economic growth, our facing the world today. leaders shared with us paint an optimistic Special Report examines the key trends We hope that this edition of Insight picture. Many seem to believe that concerns and challenges influencing the sector, from Magazine furthers the debate on the control related to control will quickly fall away as asset management and operational efficiency of infrastructure and helps governments, governments and infrastructure users gain through to alternative funding models and operators, owners and investors to rethink more experience with privately-delivered cyber-security. the way infrastructure is delivered, managed and operated infrastructure. Others suggest To round out our publication, we have and controlled. To explore these ideas that the issues can largely be solved through also included a number of timely and and concepts further, we welcome you regulation and deal structuring. topical viewpoints and interviews that to contact your local KPMG member firm At KPMG, we believe it will take more touch on key issues for the infrastructure or any of the authors who contributed to than creating new legal structures and sector including a review of our Emerging this publication. building consumer trust to put concerns Trends in Infrastructure for 2015, an update related to control to rest; it will require a on the Asia Infrastructure Investment

© 2015 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. © 2015 KPMGInternational Cooperative andisaSwiss withwhich (“KPMG International”). KPMG International provides entity noclientservices theindependent member firmsof theKPMGnetwork areaffiliated. CONTENTS p.10 Raising thebar Up front p.8 not control Ownership is Up front p.6 for theconsumer? Who willstandup Up front p.4 infrastructure Around theworld in p.12 Cline, Purdue University Meridiam, &Michael B. Plan, Teacher’s Pension Dale Burgess , Ontario discussion with A roundtable discussion roundtable Overview ofa investor motivation: Understanding p.20 Authority Delivery the London Olympic former Chairman of John ArmittSir , with An interview infrastructure drive to depoliticize Reconsidering the p.18 NSW, Australia Mike Baird, Premier of with An interview Renaissance Man recycling: A asset Infrastructure In thisissue: Who controls Tim Treharne, p.32 agencies international PPP heads ofmajor with KPMG’s former discussion A roundtable the future history, preparing for Learning from p.28 &Poor’sStandard Infrastructure Finance, Managing Directorof By infrastructure ripe to invest in The timeis p.24 KPMG in theUK By approach business-driven management: A Evolving asset Michael Wilkins, Mel Karam, p.42 Australia of UrbanGrowth NSW, David Pitchford , CEO with An interview success secret to Sydney’s renewal: The Urban p.38 KPMG in the UK Matt Firla-Cuchra, a responsefrom KPMG inSpainwith Hernandez Garcia , the UK,&Antonio Buchanan , KPMGin Commission, PublicState Service of theNew York former commissioner with article A roundtable energy regulators roundtable with era ofchange: A Regulation inan p.36 CEO oftheDelhi Airport I. Prabhakara Rao, with An interview India’s airports sector drives change in Private participation Robert Curry,

our infrastructure? Alistair Alistair p.50 KPMG intheUK By municipal Federal, regional and p.48 KPMG inCanada By view Start withastrategic megaproject success: The key to p.46 KPMG in Canada By investment of infrastructure The evolving world opportunities are: Going where the p.44 Xira Hospital CEO of Vila Franca de Vasco LuisdeMello, with An interview system cure thehealthcare private sector to Looking to the John Kjorstad, Gary Webster Craig Walter, , Spotlight: Global rail sector Insights

Increasing budgets and unblocking pipelines: India’s rail sector An interview with Emerging trends in Suresh Prabhu, infrastructure Railway Minister of A roundtable discussion with India, and a response Benchmarking the KPMG’s Global from Rajaji Meshram, tolling sector KPMG in India Infrastructure leaders South Africa: Big By Stephen Beatty, p.60 investments, big p.74 KPMG in Canada transformation p.84 Driving success An interview with The Asian with improved Piet Sebola, Group Infrastructure Project acceleration: The remarkable management Executive of Strategic Investment Bank: Saving the day from resurgence of rail information Asset Development at A step towards schedule delays By Daniel Loschacoff, By Richard Threlfall, PRASA closing Asia’s By Andrew Pollard KPMG in Portugal KPMG in the UK, p.68 infrastructure gap & Brian Relle, & Kurt Ramey, By Richard Dawson, KPMG in the US p.54 KPMG in the US KPMG in China Staying on track: p.86 The Doha Metro p.62 7 rail franchising p.78 project: Big vision insights from Control systems and strong action Enhancing urban Australia and the UK Bienvenue chez everywhere: bring a new system mobility in São Paulo By Stan Stavros, France Maximizing into development An interview KPMG in Australia By John Kjorstad, opportunities An interview with with Clodoaldo p.70 KPMG in the UK, through secure Abdulla Abdulaziz Pelissioni, Secretary Wilfrid Lauriano integration Al Subaie, Managing of Metropolitcan do Rego & By Cornelius Driving rail’s Director of Qatar Rail Transportation of the Charles Abbey, Namiluko & value proposition: State of São Paulo KPMG in France Roy McNamara, Facilitating freight p.56 KPMG in the UK p.64 A roundtable p.80 Roundtable Q&A: discussion with p.88 Securing the vision of Alternative funding Alex Yeros, Managing Tax, Sovereign High Speed Rail and ﬁnancing of rail Director of The Broe Wealth Funds and Bookshelf A discussion with projects Group, Kevin Shuba, Pension Funds: A Big ideas and Simon Kirby, CEO of By Ian Flanagan, CEO of OmniTRAX, & new approach for a valuable insights for HS2, & Jeff Morales, KPMG in the US, & Nathan Savage, SVP new environment Infrastructure leaders CEO of California High Philippe Raymond, & Group Leader at By David Neuenhaus, from KPMG’s network Speed Rail Authority KPMG in Canada Savage Services KPMG in the US p.58 p.66 p.72 p.82 p.90

ASPAC India banks. However, domestic gas worth US$899 million – was awarded constraints mean that sponsors will to a single consortium (PWKP) Building roads to build the need to develop a gas procurement who will also be responsible for economy strategy using liquefied natural gas maintenance of the bridges for India’s government has fast- (LNG) which may dampen interest 25 years following construction. tracked Prime Minister Modi’s in the project somewhat. The Java 1 According to PennDOT, the PPP ambitious Bharat Mala project. The project is part of Indonesia’s larger process should deliver each bridge US$10 billion plan envisions the plan to increase power generation at an average cost of around US$1.6 development of a road stretching capacity by 35 gigawatts within the million, versus the US$2 million right across India’s vast west-east next 5 years.5 average cost typical of traditional land border. Based on a recent bridge procurement models. The assessment of the existing road Australia project is widely viewed as a test of 7, 8 network, government officials Brookfield Infrastructure the state’s fledgling PPP program. estimate that the project will require approximately 5,300 kilometers expands portfolio with He shoots, he scores Asciano purchase of new roads and more than 100 The procurement process to select bridges. Modi’s government hopes Adding to their existing transport a private sector partner for the that the roads will have a strong portfolio of railroads, roads and new Gordie Howe International economic impact, particularly ports, Brookfield Infrastructure is Bridge (named after a legendary in poorer border states and will now creating one of the world’s Canadian hockey player who Hong Kong help promote trade. The project is leading rail, port and logistics played 25 years for Detroit) is on. expected to be completed within businesses with the proposed Hong Kong moves forward 3 In May, the Windsor-Detroit Bridge with new ‘Cultural District’ 5 years of breaking ground. acquisition of Australia’s Asciano. Authority announced the Request Valuing the company at US$8.8 for Qualifications, kicking off an Supported by a HKD21.6 billion Singapore billion, the purchase provides (US$2.8 billion) endowment from 18-month procurement process. Capacity expansions at Brookfield with a network of The estimated US$2.1 billion project the Hong Kong Government in 2008, assets including container terminal construction is now underway on Singapore’s Changi Airport will feature a total of six lanes, operations in a number of major associated border inspection plazas, the first phase of the West Kowloon The next phase of development is Australian cities; new port, terminal and direct connections to Highway Cultural District. The plan envisions progressing at Singapore’s Changi and supply chain services; and an 401 in Ontario and Interstate 75 creating one of the world’s largest Airport with soil improvement Australia-wide rail haulage operation in Michigan, a major trade route cultural quarters on a dramatic works underway at the planned consisting of more than 660 in North America. The Canadian harbor-front site in the heart of Terminal 5 ‘mega-terminal’ on the locomotives and 14,000 wagons government has already earmarked Hong Kong, in part through the 1,080-hectare site. The airport capable of hauling 180 million tons more than US$400 million to the development of 17 new arts venues plans to also expand capacity by of freight. Asciano shareholders are Bridge Authority to advance early spread across a 40-hectare site. implementing a three-runway expected to approve the proposal in work and land acquisition.9,10 The development will take place in system (using an existing military mid-November 2015.6 three stages with the first facility – runway) and by building almost 40 Canada the Xiqu Centre – expected to be kilometers of new taxiways. The NORTH AMERICA complete in 2017.1 project, which is progressing at the A new hydro powerhouse same time as the construction of Work is underway on a 824 MW New sports complex to start the new Terminal 4 building and the hydroelectric generating facility at ‘advance works’ expansion of the existing Terminal Muskrat Falls in Labrador, Canada. Hong Kong’s Home Affairs Bureau 1 building, will see annual handling The facility, which consists of two (HAB) has appointed an operations capacity increase from 66 to 135 dams and a powerhouse, will be consultant to help progress plans million passengers per annum by the the second-largest hydroelectric 4 for the Kai Tak Multi-purpose Sports mid-2020s. facility (behind the Churchill Complex (MPSC). First announced Falls facility) in the province of in 2007, the project was raised in Indonesia Newfoundland and Labrador and the Chief Executive’s 2015 Policy Bidders wanted for will boast the highest turbine Address as a key priority for the Indonesia IPP efficiency in North America. HAB. The facilities, which will include Under the terms of an agreement A Request for Qualification process a main stadium with at least 50,000 between Newfoundland and is underway for the 1,600 megawatt seats, an indoor sports arena and Labrador’s Nalcor Energy (a crown Java 1 gas-fired IPP in West Java. a public sports ground, will be corporation) and Halifax-based While the state-owned utility, US located in a park setting together Emera to develop Phase 1 of the Perusahaan Listrik Negara (PLN), is with commercial space, offices Building bridges with PPP Lower Churchill Project, Nalcor will tendering the Java 1 Independent and possibly hotel accommodation. Pennsylvania is moving forward with design and build the hydroelectric Power Producer (IPP) project Situated at the eastern end of a massive public-private partnership power station at Muskrat Falls and without government guarantees for Victoria Harbour, the current plan (PPP) program to replace 558 of a HVdc transmission line called the the Power Purchase Agreement, anticipates construction to be the state’s structurally deficient Labrador-Island Link from Muskrat the project looks set to attract completed in 2020/2021.2 bridges as part of their Rapid Bridge Falls to Soldiers Pond on the participation from several multilateral Replacement project. The contract – Avalon Peninsula. Emera will build

Source: 1 http://www.westkowloon.hk/en 4 http://www.news.gov.sg/public/sgpc/en/ 6 http://www.bloomberg.com/news/ 9 http://www.cbc.ca/news/canada/windsor/ 2 http://www.hab.gov.hk/en/policy_ media_releases/agencies/mot/press_ articles/2015-08-17/brookfield-infrastructure- gordie-howe-international-bridge-to-connect- responsibilities/Recreation_Sport_and_ release/P-20130830-2/AttachmentPar/0/file/ buys-asciano-in-8-8-bln-deal windsor-and-detroit-1.3074243 Entertainment_Licensing/mpsc.htm C2036%20Media%20Release%20(media). 7 http://planphilly.com/articles/2015/01/13/ 10 http://www.cbc.ca/news/canada/windsor/ 3 http://www.btvin.com/article/read/ pdf p3-project-to-replace-558-penndot-bridges- gordie-howe-international-bridge-request-for- news/2238/exclusive---pm-to-review- 5 http://www.rambuenergy.com/2015/05/pln- starting-this-summer qualifications-issued-1.3160249 highway-building--bharat-mala-on-aug-6 launches-prequalification-for-3-gas-and-coal- 8 http://parapidbridges.com/ 11 http://www.cbj.ca/muskrat_falls_hydro_ fired-power-plant-projects/ whatisthepennsylvaniarbrproject.html electric_power_project/

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© 2015 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. an electrical interconnection called suburbs of Markham. When construction sectors. A new for existing roads to be expanded, the Maritime Link between the completed, the line is expected infrastructure program, valued works that some analysts suggest islands of Newfoundland and Cape to have 22 new station stops and at approximately US$64 billion, will cost taxpayers around Breton, Nova Scotia, and invest in five interchanges with the existing does more than simply outline GBP5.7 billion. Heathrow is one of the Labrador-Island Link such that TTC rapid transit network. Part the basket of projects that Brazil the world’s busiest airports, handling Emera’s total investment in both of the funding for the program is needs (everything from roads and 73.4 million passengers in 2014, but the Maritime Link and Labrador- expected to be provided by the railways to ports and airports) it currently operates at 98 percent Island Link is less than 49% of province’s regional express rail also shows that the government capacity.20 the cost of the transmission plan, but the project will require an is committed to addressing some infrastructure included in Phase 1 additional CAD5.2 billion (US$3.9 of the past concerns voiced by AFRICA of the Lower Churchill Project. billion) in funding from the city and international players. Indeed, in Nalcor Energy will provide federal government to get off the comparison to the infrastructure approximately one terawatt-hour ground.14,15 plan outlined in 2012, this program of electricity to Emera each includes a raft of changes including year for 35 years in exchange Vancouver says no to tax- reduced subsidized credit levels, for transmission rights on the for-infrastructure proposal eased restrictions on profits and Maritime Link and ownership of more time for contractors to Citizens of Metro Vancouver voted the Maritime Link at the end of the prepare bids.18 against a proposal to implement a 35-year term.11 0.5 percent increase in sales tax in order to improve transportation EUROPE A new model emerges infrastructure and public transit In June 2015, the Québec National services in the metro Vancouver area. Assembly passed Bill 38, effectively With voters almost two-to-one against approving the creation of Caisse de the proposal, the scuttled plan has put Dépôt et Placement du Québec’s a number of much-needed projects (CDPQ) Infra unit. Under the new into question including new subways LAPSSET gets an model, CDPQ Infra will have an for Vancouver, new regional lines and international funding boost option to undertake several aspects rolling stock, a 25-percent increase The US has offered to invest of the lifecycle of projects submitted in bus service and more than 2,700 more than US$9 billion into the for evaluation by the Quebec kilometers of enhanced bikeways. The Lamu Port South Sudan Ethiopia government, including project vote, which was conducted via mail-in Transport corridor (or LAPSSET), a planning, financing, development ballot, saw participation rates of below transformative transportation corridor and operation. The first two projects 50 percent and was positioned as a Keeping up momentum project underway in East Africa. to come under the arrangement are non-binding plebiscite.16 on HS2 The initiative, which aims to build expected to be a set of greenfield and link new ports and airports in public transit systems valued at Mexico Recognizing that the delivery of Kenya to markets in South Sudan US$4 billion.12 the UK’s planned High Speed and Ethiopia, is made up of eight Mexico’s ambitious reforms Rail 2 (HS2) scheme may outstrip agenda projects – including a 32-berth port, an Go-ahead for underground contractor capabilities, HS2 has international airport, new resort cities, mine at Voisey’s Bay Mexico’s government certainly seems announced that it is moving ahead a dam project, crude oil pipelines, and determined to bring private investors with the tender process – at least Vale, the owner of the Voisey’s Bay railway and highway networks – worth into their infrastructure market. Last a year ahead of receiving Royal nickel-copper-cobalt mine in northern an estimated US$26 billion. The timing year’s announcement of the National Assent – to allow contractors and Labrador, has announced that it will of the US announcement (just months Infrastructure Program 2014-2018 partners to invest in recruitment, pursue underground mining once before a visit to the project by a high- brought almost 750 programs onto the training and education ahead of the open pit is exhausted in 2020. level Chinese delegation) suggests market, with an estimated total value the project start. Contracts for Initial work on the underground that the US wants to take a larger role of around US$590 billion. Some of an engineering delivery partner 21 program will start next year and, in the continent. the landmark projects include a 1,000 (worth up to GBP500 million) and once fully operational, is expected kilometer gas pipeline, Mexico City’s for enabling works (expected to to add more than 400 new full time Medupi power station new airport, high-speed and urban rail be worth approximately GBP900 jobs. The decision to go underground comes to life developments and nationwide fiber million) will be among the first at Voisey’s is likely influenced by optic cable networks. More recently, to be tendered. At least eight Medupi, the world’s largest dry- Vale’s desire to ensure a steady the government pushed ahead with consortiums are expected to cooled power station comprises 6 feed of nickel concentrate to their its initial oil and gas auction, allowing compete for the first phase of the units with a total output of 4800 new US$4.3-billion Long Harbour private and foreign investment into the project.19 megawatts. Construction began Processing Plant (LHPP) which, sector for the first time in more than in 2007 and in August 2015, the while more than 1,000 kilometers 80 years. While the auction failed to first of six units was completed away from the mine, is seen Heathrow wins latest fight meet expectations, it did demonstrate and officially handed over to the as a vital part of the integrated for airport expansion that Mexico is moving in the right utility provider Esksom bringing operation.13 With the Davies Commission’s direction.17 an additional 794 megawatts of final report now public, plans permanently available power to SmartTrack on track are being developed to build Brazil the system. South Africa suffers a Toronto’s plan to develop a a new 3,500 meter ‘third 2,000 megawatt energy shortfall Regional Express Rail surface Brazil looks to restore runway’ about 3 kilometers north during periods of peak demand, so service is slowly moving ahead. confidence of the existing airport. While the the addition of this extra capacity cost of the expansion – estimated The 7-year, CAD8 billion (US$6 After a shaky start to the year, will help considerably in reducing at GBP18.6 billion – will be raised billion) project is expected to Brazil’s government is actively the need for load shedding. privately, plans also call for part provide service from the airport in working to encourage greater Completion of all six units will of the M25 motorway to be put the west, through the downtown international participation in be progressive through to final into an underground tunnel and core, and out to the northeast the country’s infrastructure and completion in 2019.

Source: 12 http://www.infra-americas.com/ torys-smarttrack-a-little-further-down-the- 17 http://www.wsj.com/articles/mexico- out-to-tender-even-though-scheme-not-yet- print/1571791/how-cdpq-could-revolutionize- line.html awards-first-oil-block-in-historic- backed-by-mps/ greenfield-infrastructure-investment/ 15 http://www.johntory.ca/wp-content/ auction-1436978568 20 http://www.bbc.com/news/uk-19570653 13 http://www.northernminer.com/news/vale- uploads/2014/06/OneToronto_ Foresight 30 : Unleashing Latin America’s 21 http://www.iwgia.org/publicaciones/buscar- green-lights-underground-mine-at-voiseys- Backgrounder_Three_Smart_Track_Line.pdf potential publicaciones?publication_id=599 bay/1003700730/ 16 http://www.straight.com/news/482351/ 18 Foresight 32: Levelling the playing field http://lapsset.go.ke/new_site/index.php/ 14 http://www.thestar.com/news/gta/ transit-referendum-results-metro-vancouver- 19 http://www.expressandstar.com/ newscast/pages/1 transportation/2015/04/16/premier-moves- votes-no-tax-hike-public-transit-expansion news/2015/08/11/7bn-hs2-contracts-go-

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© 2015 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. Who will stand up for the consumer? When it comes to the private sector and infrastructure, the battle for the public’s hearts and minds is still raging. And nobody should expect it to be won anytime soon. Yet while much of the debate seems to center on consumer protection, this edition of Insight Magazine suggests that today’s consumers may actually be better protected and better represented than at any other time in history.

Talk to any anti-privatization campaigner to protect taxpayers and citizens and, as and you’ll quickly find yourself in a debate in any case where consumer protection about consumer and taxpayer protection. is required, regulation will be central to Many seem to believe that – in an all-out achieving that goal. Not surprisingly, we’ve rush for profits – private sector operators seen a flurry of new consumer protection and developers will run rampant over the regulation and legislation emerging over needs of consumers and users; costs will the past decade, largely from states and become unaffordable, assets will fall apart nations seeking to encourage greater and service quality will suffer. private participation in infrastructure Yet all signs indicate that nothing could delivery and operations. be further from the truth. In fact, as the That is not to say that government, burden of funding increasingly starts to regulators and private operators could not shift towards user fees and charges, our be doing more to protect the public good; experience suggests that consumers are more collaborative discussions between actually gaining a stronger voice in the way consumers, owners and operators will only infrastructure is developed and operated. The help turn the tide in the battle for public rising power of consumers as stakeholders hearts and minds. is a key theme in many of the articles in Government and regulators will also this publication. need to work hard to develop the right For their part, consumer advocates set of regulations to strike the appropriate have strengthened their voice – or, more balance between the needs of consumers accurately, amplified it – through the use of and the needs of investors (such as reliable social media. Whether privately or publicly returns, contract certainty and regulatory managed, all infrastructure owners and certainty). This is not easy; there are plenty operators are keenly aware of the impact of examples where regulation has leaned and influence that social media carries. too heavily on one side or the other and, as Even the most insulated utility providers a result, failed to protect either consumers and monopolistic state owned enterprises or investors. worry that they will become the target of However, as the shift towards greater the next big ‘viral’ consumer campaign. private participation in infrastructure But by far the strongest advocate for continues to pick up steam, we believe that consumer protection is – and should consumers will quickly start to recognize always be – the regulators. The bottom line that – rather than losing control over their is that government has a clear obligation infrastructure – they are, in fact, gaining it.

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Don’t confuse ownership with control; while closely related, they are often two very different matters. You may own a house, but that doesn’t mean you can burn it to the ground on a whim. You may own shares in a company, but that doesn’t give you the right to ﬁre their marketing people. And you may own a metro operation, but that doesn’t give you the right to overcharge users or reduce service levels.

Yes, the transfer of infrastructure assets to The challenge, however, is in understanding the private sector requires the ceding of some what level of control needs to be retained in level of control. Depending on the structure – order to achieve public expectations, while still ‘ownership’ can constitute anything from full providing enough flexibility to private sector privatization through to long-term concession owners to manage an efficient operation. agreements – the level of control ceded can The shift in ownership also means that public vary considerably. sector authorities will need to start thinking But regardless of who actually owns the differently about how they exert control in infrastructure, the fact remains that government various ownership scenarios and – importantly – will always retain the primary public service what capabilities and tools they will need in obligation and therefore, often by way of order to monitor, maintain and manage those regulation, will always maintain some level control mechanisms. of control. Our member firms’ experience suggests And rightfully so; it is, after all, government that those public sector authorities able that will be expected to respond when services to recognize and manage the difference are not delivered or when prices sky-rocket, it is between ownership and control should be government that will need to step in if agreements better placed to deliver on their infrastructure fail, and it is government that will be blamed obligations, regardless of who actually owns when public expectations are not being met. the underlying assets.

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Most informed industry observers and participants already know that private sector participation often leads to improved service quality, asset management and investment. And now many are starting to recognize that it is leading to improved public sector capabilities as well.

Let’s face it; the traditional public sector model where comparative information on private sector may not be the best service delivery mechanism results are widely available. In some cases, for today’s modern infrastructure requirements. In the comparators are plain to see and quick to part, it comes down to capabilities and incentives; draw scrutiny. Private roads being cleared of government entities are not famous for being hot- snow long before public roads or private schools beds of competition and innovation. But – more outperforming their public counterparts are the often – it’s because public sector models tend types of inconsistencies that are driving public to view infrastructure as long-term liabilities to sector players to step up their game. be managed and funded rather than as assets to At the same time, the public sector is also be harnessed for economic growth and budget beneﬁting from the best practices and innovation sustainability. of the private sector. New approaches, new Our experience suggests that the status quo is technologies and new tools are constantly being now changing. Indeed, spurred on by the improved developed and implemented by the private sector quality levels, increased sophistication and strategic and – as their beneﬁts emerge – are slowly picked outlook of their private sector competitors, many up by the public sector (think of Lean Six Sigma public sector organizations are now starting to or the use of Data and Analytics). take a more ‘professional’ view of the way they Clearly, the increased participation of the manage infrastructure. private sector is effectively raising the bar for all The shift is most clear in the more ‘contestable’ infrastructure owners, operators and managers. markets around the world – power generation, The big question is whether the public sector is telecoms and (increasingly) water, for example – ready to step up their game.

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© 2015 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. Understanding investor motivation: roundtableOverview of a discussion By James Stewart (@jaghstewart), Global Infrastructure Chairman

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© 2015 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. ne of the greatest benefits – and, conversely, one of the greatest challenges – of private sector Oinvestment is that it has created a vast range of different investment models and investor profiles. On the one hand, this gives public sector authorities unprecedented choice and flexibility when bringing new projects to market. But it also requires the public sector to start thinking more granularly about what motivates the various types of investors it hopes to attract. In the past, this was a fairly easy process. Investors typically belonged to one of three groups: the public sector (whose motivations were very clear); infrastructure funds (who were clearly financially-motivated); and subcontractors (whose motivations were dictated by contract). Today, however, there are literally dozens of different types of investors – everything from public pension funds and sovereign wealth funds through to concessionaires and global operators. And, as the following roundtable discussion illustrates, each has a slightly different motivation, investment strategy and expectation of control. In the article that follows, I sat down with executives from three very different ‘private sector’ investors to explore their unique and shared motivations. Tim Treharne, European COO of Meridiam represents the ‘new breed’ of infrastructure fund, focused on long-term strategic investments and portfolio shaping. The Pension Plan viewpoint – reflective of the wider ‘direct’ institutional investor sector – is represented by Dale Burgess, a Director in the infrastructure group at Ontario Teacher’s Pension Plan. And Michael B. Cline, VP of Physical Facilities at Purdue University represents a ‘hybrid’ public/private model where private investment is conducted through a ‘State Instrument’. What is interesting is that, underpinning their different investment models and strategies are also a number of By James Stewart (@jaghstewart), Global Infrastructure Chairman very common motivations and concerns. As the following roundtable discussion demonstrates, there is significant consensus on issues such as stakeholder management, asset management and government relations. And there is broad agreement that investment decisions need to be made on more than just financial returns – the desire to catalyze public good is a clear theme that emerges from each of the participants. With everyone agreeing that private sector participation and investment into infrastructure is only going to increase – both in scale and in investment numbers – our roundtable discussion also highlights the growing sophistication of both the investor community and the public sector authorities. Ultimately, the viewpoints shared in the following article clearly demonstrate that there is no ‘typical’ investor when it comes to infrastructure. Public sector authorities and regulators will want to spend some time considering the positions shared here and reflecting on how they might respond to each investment group as they strive to attract a broader range of private investors.

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James Stewart (JS): Clearly, each of your possible value. So we have dozens of organizations has invested heavily in the projects that are intended to improve, infrastructure sector. What factors are maintain or manage our growth while driving your investment decisions today? managing costs and helping to redirect Dale Burgess (DB): The Ontario Teachers’ capital towards value-driving investments. Pension Plan has been investing in JS: How has ownership translated into infrastructure assets for 15 years now and operational control over the assets that we manage a pretty diverse portfolio of you own? assets, both by geography and by sector. TT: As a long-term investor, we ultimately When we started, we were growing our look to have a significant amount of control portfolio and had to be pretty opportunistic over the asset. Generally, we seek to secure about where we went. But now I see us as a majority of the project company in each more of a ‘top-down, bottom-up’ investor project we bid on and, in turn, we want in that we have a certain portfolio that we to manage the investments we have with want to create but at the same time we are senior and proportional representation on continuing to look for opportunistic deals the project company’s Boards. that have strong individual merits as well. Naturally it is the project company itself that Tim Treharne (TT): Dale is certainly right; is responsible for implementing the project. investors are becoming much more strategic We are there to make sure the project is in the way they make their decisions. At operating in an appropriate manner ensuring Meridiam, our funds are targeted at certain that we offer safe, value-for-money projects sectors and geographies and we’re clearly to the communities that we serve. looking to invest in particular types of projects. DB: I think that’s worth emphasizing. Teachers’ Much is influenced by the more technical views smart governance as being central to metrics such as the project profile, who economic ownership and so we have Board the potential counterparties are, the ESG representation on all the companies we (Environment, Social and Governance) invest in. But while we’re active at the Board assessments, and so on. level, we’re not involved in the operational But we are always influenced by the decisions. We focus on helping the company’s The bigger challenge is that we need to importance of the project itself and the management team deliver better results for constantly look for more innovative ways necessity and benefits it brings to the customers and for stakeholders. to create value within the rules of the community. We want to avoid what might MC: We recently engaged in a collaborative state laws we are beholden to. In some be considered ‘trophy’ projects; we want to process which resulted in the City of West situations, those in which we are not using focus on projects that fit with the community Lafayette annexing Purdue’s West Lafayette any government money at all, we still need and satisfy their needs. campus, and we are realizing mutually to find innovative procurement and project Michael B. Cline (MC): Our situation is beneficial results. Annexation is allowing us delivery models to get the best value from somewhat different in that Purdue University to deal with some relatively large projects – the market. is essentially a state instrument that – in the tens of millions of dollars – in a JS: Who do you see as your main since our founding in 1869 – has always way that was previously not possible. It stakeholders in infrastructure? owned much of our own infrastructure: has allowed us to join forces with the DB: You know, that’s often one of the buildings, power generation and distribution, City to create a stronger `town and gown’ challenges for private infrastructure investors; parking facilities and roadways for example. governance structure that prioritizes the there are so many important stakeholders Ultimately, our objective today is very much needs of our community and leverages that each play a critical role. as it has been for more than a century: best practices from the private sector to Infrastructure assets are generally high- deliver higher education at the highest help move projects forward. profile and tend to serve an important need

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© 2015 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. in a community so clearly you have an obligation to the customers that use that infrastructure; in some cases, they are represented by regulators – another very Teachers’ views smart governance as important stakeholder in our world. Then there are the project partners – both operating and being central to economic ownership financial – that are involved in the project. and so we have Board representation At the end of the day, our role is to invest on behalf of the elementary and secondary on all the companies we invest in. ” school teachers in Ontario so we also need Dale Bugess, Director, Ontario Teacher’s Pension Plan to make sure we’re always striving to get strong returns on the investments we are making. users and community around a project are such as governments and public authorities, TT: I think for the project companies absolutely critical and they are a barometer industrial contracting parties and so on. themselves, it is pretty clear that it’s of the project’s success. At the corporate Ultimately, though, we really believe their local communities that are their key level, there’s a different set of stakeholders in developing projects that represent stakeholders. Relationships with the local that also come into play – contracting parties the communities we serve and, in doing

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© 2015 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. so, we aim to create strong stakeholder each campus unit, we anticipate that our consensus and broad support – from users stakeholders’ energy consumption behavior and regulators – for making good investment will change, hopefully with a positive impact decisions. on our student affordability initiatives. MC: Our stakeholders are fairly evident JS: How has your relationship with and we spend significant time working government and regulators evolved over with them to understand and meet their the past few years? needs. The most obvious are the nearly TT: Obviously, relationships with government 40,000 students that invest their money authorities are very important. We have into the university and expect to receive multinational teams with great contacts at strong value for that money. But it’s also the local, national and regional levels across a faculty, researchers, staff, local government, range of geographies. And things like rule community members, alumni, prospective of law, contract certainty and transparency students and guests that use our facilities certainly play a major role when we make The bigger challenge is that and our infrastructure and – over time – this investment decisions. But I think we have we need to constantly look has created a few interesting situations. developed great relationships with all of for more innovative ways Consider, for example, that we supply the public sector counterparties that we’ve energy, water and heating and cooling worked with. to create value within the services directly to more than two-thirds We’re also always looking at new markets – rules of the state laws that of our campus but we have never charged those with longer-term potential – and seeing our campus stakeholders directly for their how we can work with their governments we are beholden to.” utility consumption. This creates no financial to explore new ways to help develop their Michael B. Cline, Vice President of incentive for energy conservation and, as infrastructure by doing workshops or Physical Facilities, Purdue University our energy management practices evolve, showcasing projects from other parts of and we measure energy consumption by the world. DB: It’s interesting; in some cases, it’s easier to have those conversations once you are seen to have some ‘skin in the game’ or investments in the country because you have more credibility with the local government. But in other cases, where we do not have an existing investment in a particular market, we’re acting as almost an impartial player because we don’t have a conflicted position on issues such as regulated rates of return. And while it’s often the project company that leads the relationships with the particular regulators or public authorities on a day-to-day basis, we recognize that regulators also want to hear directly from the investors themselves and so we spend quite a bit of time in conjunction with our management teams meeting with regulators and government entities. MC: Our relationship with government and regulators are positive. We’re very blessed to be led by the former Governor of Indiana, Mitch Daniels, who is now the President of Purdue University. Purdue has strong relationships with State and Federal levels of government. We also have a number of senior leaders who have held infrastructure authority positions with government in the past, which vastly helps as we strive to enhance those relationships and speed our ability to deliver infrastructure within the current context of statutes and regulatory requirements. Purdue has always had a very symbiotic relationship with government – particularly local government – who we work closely with to execute our plans.

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© 2015 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. The redevelopment of State Street JS: How do you expect infrastructure in West Lafayette is a great example of ownership to evolve over the coming these close relationships at work. The decade? road is the responsibility of the City TT: Clearly, there’s going to continue to be of West Lafayette and has significant an upsurge and enthusiasm for increased influence on the dynamic, safety and private participation in infrastructure. And efficiency of our city and campus. We I think that, as we see growing familiarity are working very closely with the City to with public-private partnership (PPP) type find innovative solutions that will allow arrangements, we should start to see a us to strategically, and many times jointly, greater number of deals flowing faster develop our community, while working through the pipeline. For governments, within the City’s jurisdictional authority. what will be key is having the right advice, JS: Who is responsible for capital capability and capacity to make sure that investment decisions within your the projects they are bringing to market We really believe in portfolio of assets? What is involved in are well prepared and properly structured developing projects the investment decision? ahead of time. that represent the DB: A lot of this is wrapped up in the DB: I think that the market is certainly going long-term business planning that is done to continue to grow, but I firmly believe communities we serve with management and approved by the that it will take some good precedence and, in doing so, we shareholders and it’s really management’s and strong examples of success to make job to do CapEx planning. Not surprisingly, customers, governments and investors aim to create strong it’s not all that different from the metrics happy. As a sector, I think we need to stakeholder consensus we use when evaluating a new project. And play a key role in this by ensuring that and broad support – from the metrics for a CapEx investment that we remain good stewards of the assets expands capacity – like a new runway, for we own and control rather than allowing users and regulators – for example – are different to the metrics that competition to drive us to increasingly making good investment we’d want to see if the CapEx was more aggressive assumptions. It only takes a few decisions.” focused on maintenance. high-profile examples of badly structured But when you talk about metrics, people deals or failures to stoke anti-privatization Tim Treharne, European COO, Meridiam tend to think of the financial ones that sentiments. are used to measure CapEx. This is too MC: I absolutely agree with Tim and Dale. one dimensional. Sometimes you just While the US has been a bit slow to take need to make the investment because up PPP approaches, I do believe that the TT: I think governments and investors of safety, quality or supply. And that’s not natural forces will continue to drive the are quickly starting to recognize that always easy to quantify but at the end of public market to be influenced and driven the best way to bridge the development the day it’s about being a good steward by private participation. I see that – as more gap between countries is by investing of your assets. organizations like Purdue strive to pioneer in developing countries’ infrastructure TT: Much like the experience at Teachers’, we new approaches to deliver infrastructure – and helping those economies to grow. I let the Boards and management do what’s we’ll see increasing appetites for the type think over the next few years we will see in the best interest of the company and the of risk ‘balance’ and private participation we continued focus on developing market asset when it comes to investment. That are encouraging here on our campus. I think opportunities and projects. approach is not only operationally sound, that the next decade will bring renewed I think we’re also going to see much more it also creates unique opportunities. Our first focus onto PPPs as more evidence emerges rigorous approaches being undertaken on project in Finland, for example, created a that they work. the management of environment, social community outreach program to develop new JS: What do you see driving infrastructure and governance issues, talking about local safety mechanisms that could be applied investment decisions over the next few community and stakeholder engagement around the project and the company went years? and growing focus on ensuring that projects on to make numerous investments into DB: I think that – for newcomers to the are accepted within the environment and these community-driven ideas. This concept sector – much will depend on their ability community that they support and deliver was so popular that is was later adopted by and capability. It’s not an asset class that on the shared benefits that they create. the government as part of the scope of the everyone can manage and, in our experience, MC: I think our investment decisions are subsequent project. if you are going to invest directly into fairly clear if we hope to support the growth MC: The interesting thing about Purdue’s infrastructure, you need to spend the time of our University. But, for us, the key is in situation is that President Daniels has been and resources to make sure you have the continuing to create and structure new ways very clear about his desire to ‘recycle’ capital appropriate level of expertise and team to to invest into and manage our infrastructure back into the campus and city. We’re not execute on your plans. I suspect that will so that we can continue to deliver higher just trying to reduce costs and shore up be the biggest challenge for many. The education at the highest possible value. our bottom line; we’re trying to ensure supply of capital into the sector is only Where that means breaking new ground or that our investments are being channeled going to increase; my concern is that the creating new approaches, we want to make towards the projects that will deliver the competition for strong projects will result in sure we are taking those opportunities and most value to our stakeholders on campus, some questionable structures and potential learning from the best in order to drive real in the community and in government. project failures. and lasting value.

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© 2015 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. The people of New South Wales (NSW), Australia, are in an infrastructure renaissance driven by an energized state government with a vision for fully functional economic infrastructure assets that actually deliver value. With US$14.6 billion in funding from asset sales and leasing earmarked to roll out the Rebuilding NSW infrastructure plan – which will deliver road, rail and social infrastructure across regional and metropolitan NSW – the state is about to undergo its most significant rebuilding phase in decades. To learn more about the Rebuilding NSW infrastructure plan and the asset recycling initiative, Paul Foxlee, National Head of Transport and Infrastructure for KPMG in Infrastructure asset recycling Australia, spoke with New South Wales Premier Mike Baird. Paul Foxlee (PF): What will the NSW Government achieve with the Rebuilding NSW infrastructure plan (which includes a significant investment in new infrastructure) and how do asset recycling and asset leases feature in the plan? Premier Mike Baird (MB): The Rebuilding A RENAISS ANCE MAN NSW plan was an overall strategy to bring together the infrastructure requirements of the state with the funding needed to achieve it – and present a strong message to the community about the future of infrastructure. The funding mechanism is important because we all know we need the infrastructure and we had plans in place for the M4, the M5, a number of hospitals and railways. But with debt levels right at the top end of our AAA rating and a relatively modest operating balance, we had nothing near the US$22 billion we needed to address are looking for defensive infrastructure-style to WestConnex along with the Western the infrastructure backlog we inherited. So assets at the moment, so there’s an almost Harbour Tunnel we had to take a new approach. We looked unprecedented market opportunity. An extra US$5 billion for Sydney Metro, to at the balance sheet and asked ourselves, The NSW ports and now the electricity fully fund a Second Harbour Rail Crossing can we turn our old assets into new assets? ‘poles and wires’ fit the bill. These are the US$1.5 billion for schools and hospitals The overall narrative for the Rebuilding NSW types of assets super funds around the world US$3 billion for regional transport plan is that if we do this on a large scale we are seeking, particularly in a low interest rate US$730 million for regional water security have the capacity to make a real dent in the environment. Right now we have an ideal US$219 million for regional tourism and infrastructure we all need. The US$14.6 billion situation where there is real interest in these the environment program is a once-in-a-generation opportunity assets, appropriate regulatory oversight More funds to sports and cultural to get ahead of the infrastructure curve. and protections in place to safeguard NSW infrastructure, up from US$365 million 1 The key is that this kind of asset recycling taxpayers. to US$875 million. creates a tangible benefit. The taxpayers PF: How do you intend to use the proceeds We need to make sure the investment understand this is not a standalone fiscal from asset sales and how will projects we are making is focused into economically measure; this is about the capacity to fund be prioritized? productive infrastructure. The prioritization the infrastructure that makes a difference MB: Of the US$14.6 billion proceeds from of the program is based on a plan created to their lives. the ‘poles and wires’ transactions, the by Infrastructure NSW, which was set up PF: How do you determine which public Rebuilding NSW plan will deliver US$4.4 to report on priorities to government. The assets are appropriate to be considered billion in infrastructure for regional NSW and first report was completed in 2012 and then for asset recycling? the balance for metropolitan areas. The focus updated once the additional US$14.6 billion MB: There are a number of parameters we use is on rail, with the Sydney Metro the biggest in infrastructure funding was made available. to identify the right assets. We look at assets ticket item. The key items we’re funding include: PF: How did you obtain a mandate from the that are attractive to the market and appropriate An additional US$800 million to invest public to enter into long-term leases for the in terms of regulatory oversight. Pension funds in the northern and southern extensions electricity transmission and distribution

1 http://www.nsw.gov.au/rebuilding

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© 2015 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. When you have Infrastructure asset recycling pressing needs of your constituents to meet, you have the capacity to do much more than you think if you look at all the resources of your state. Mike Baird, A RENAISS ANCE MAN Premier, New South Wales

flows. But there is a capacity – once there is some robustness around cash flows – to continue to participate with the private sector. We have structured WestConnex so that rather than just government providing a grant, we make an equity contribution and that provides the capacity to build the first part of the project. Then the cash flows are built up and from those cash flows we are able to raise non-recourse debt to the state government and use that to fund the assets and how important is that mandate service level standards around things like next element of the project. in pursuing the transactions? response during a crisis. Once we get to the end of the project MB: For 20 years this has been a very There are protections under the Foreign we will have a standalone entity where the contentious issue in state politics. We took Investment Review Board and the Australian NSW government has an equity position it the view that if we were going to do it we Competition and Consumer Commission, can recycle capital out of for additional use. needed to outline the arguments clearly and there is the Independent Pricing PF: What advice would you give to other Commissioner in place to sign off on the and we wouldn’t do it unless we received governments around the globe with regards lease to say this will not put upward pressure a mandate to do so. So we outlined the to asset recycling and asset leases? plan and strategy to the people of NSW on prices. MB: It’s not for me to give advice other and obviously they agreed. By winning PF: The large new road project than to say the process works. When you the election in March 2015 we secured (WestConnex) is a very innovative asset have pressing needs of your constituents the mandate we needed. The funding for recycling initiative. How is the project to meet, you have the capacity to do much infrastructure is now available and the plan being funded and how it is intended to more than you think if you look at all the we have has been endorsed. be ‘recycled’? resources of your state. If you don’t have PF: How will you ensure public interest MB: State governments have to be adept the operating budget you need you may is protected once public assets become to respond to market conditions. A number well have capital on the balance sheet that privately leased and managed? of public-private partnerships (PPPs) burned can address those needs. MB: There is a strong regulator in place but markets, so banks and institutional investors You need to be prepared to look holistically there are also a number of other protection in particular are very unlikely to take traffic risk. at the finances and use capital that is just measures, including obligations around Forecasts have proved very difficult to get right. sitting idly on the balance sheet. You need to reliability and capacity for us to step in if the As a result, there was a shift in appetite be upfront with the community, and clearly operator is in breach, or if we are unhappy from greenfield to brownfield investment – articulate the challenges involved and how with what is being delivered. There are also with established rather than projected cash you intend to deal with them.

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By JamesINFRASTRUCTURE Stewart, KPMG in the UK

By James Stewart (@jaghstewart), Global Infrastructure Chairman

Let’s face it: taking politics out of infrastructure is as easy as taking God out of religion; try as you might, the two simply cannot be separated.

Yet while many jurisdictions are clearly still striving to reduce the inﬂuence of politics on the infrastructure planning process, a new approach is now emerging that – rather than decoupling politics and infrastructure – focuses on strengthening the relationship between these two inextricably linked realities. And since the release of his ofﬁcial Review of the UK’s long-term infrastructure planning process in 2013, Sir John Armitt has been at the center of this growing movement.

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© 2015 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. UNDERSTANDING THE POLITICAL RISK make difficult (and potentially unpopular) end of the day, much of what we term Over the past decade or more, volumes of decisions. as infrastructure is focused on providing literature have been written on the need to Taken as cause and effect, one might fundamental services to citizens and – in one ‘depoliticize’ infrastructure planning. And quickly surmise that infrastructure planning way or another – it’s the taxpayers, users indeed, it is easy to point to a litany of worthy and delivery would be greatly improved if and voters that pay for those services, so projects that have stalled, been delayed or only infrastructure could be wrested away the cost of delivering infrastructure is always died on the pyre of political expediency. from meddling politicians. On face value, the going to be a very political issue.” In some cases, well-progressed projects are case for depoliticizing infrastructure would With this reality firmly in mind, Sir John killed at the ballot box as new governments seem obvious. believes that – rather than trying to force a take office and ‘clean house’ of any legacy divorce on politicians and their infrastructure – projects that may seem tainted by the EASIER SAID THAN DONE governments should instead be focused previous regime. In other cases, much- Many have tried to decouple politics from on building up the relationship. “Politics is needed infrastructure decisions have been infrastructure and failed. “The reality is that simply a reality of infrastructure and the only punted into the next political cycle, often there is no infrastructure without politics,” way to truly reduce the negative impacts to protect sitting politicians from having to Sir John Armitt argued recently. “At the of political influence is to introduce smart

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© 2015 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. political processes that bind politicians to a THE PATH TO CONSENSUS the recommendation for the formation of long-term plan,” Sir John argues. The Armitt Review, which was published in a new – and fully independent – National September 2013, made a number of core Infrastructure Commission responsible UNDERTAKING A REVIEW recommendations aimed at achieving cross- for assessing, planning and monitoring Sir John speaks from a position of authority. party political consensus, public support and the country’s long-term (25–30 years) Over his almost 50-year career in infrastructure, investor certainty. Central to the Review was infrastructure needs. Sir John has been intricately involved in many of the UK’s most notable projects. He was INSIDE THE ARMITT REVIEW the Chairman of the London Olympic Delivery Authority for the 2012 Games; he served as The Armitt Review makes a number of recommendations aimed at achieving cross- CEO of the UK’s Network Rail; he led the party political consensus, public support and investor certainty for long-term decisions company responsible for implementing the on the UK’s infrastructure needs. These include: Channel Tunnel rail link; and he helped build the A new independent National Infrastructure Commission to look 25–30 years ahead Sizewell B nuclear power station. His efforts at the evidence for the UK’s future needs across all significant national infrastructure to improve the UK’s rail network earned him and set clear priorities to support national objectives such as nationwide flood a CBE in 1997 and he was knighted in 2012 prevention or energy supply. for his work on the London Olympics. This National Infrastructure Assessment would be carried out every 10 years and Given his depth of experience and his include extensive research and consultations with the public, local government, extensive insight into the political challenges NGOs, regulators and other interested groups or individuals. facing the country’s infrastructure sector, it A parliamentary vote on the evidence-based infrastructure priorities would have was not surprising that the UK Labour Party to take place within 6 months of their publication, to avoid delays. selected Sir John to undertake an independent Within 18 months of this vote government departments would have to form review of the country’s long-term infrastructure detailed 10-year sector plans of how they will deliver and fund work towards planning in 2012. In particular, Sir John was these priorities. asked to place his focus on finding new ways to Parliament would then vote on these 10-year plans and the permanent National improve the country’s long-term infrastructure Infrastructure Commission would scrutinize the ability of these plans to meet the planning and new approaches for building 25–30 year national priorities and report to parliament annually on their delivery. political consensus around key decisions.

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© 2015 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. Politics is simply a reality of infrastructure and the only way to truly reduce the negative impacts of political influence is to introduce smart political processes that bind politicians to a long-term plan. Sir John Armitt Former Chairman, Olympic Delivery Authority & CEO of the UK’s Network Rail

What makes Sir John’s proposals different is tightly linked to engagement – the more term planning be supported by the right from other approaches is that his plan calls for you engage the public, the more support governance structure that includes precise politicians to take ownership over the long- the project will likely receive; ignore the responsibilities across the public and private term decision-making process by allowing public, however, and you are quickly going sector.” them to debate – and then vote on – the to find yourself on the back foot.” National Infrastructure Commission’s 10- Governments will also want to spend THE ROAD AHEAD year assessments and (at a later stage) more time thinking through the long-term Based on his initial Review, Sir John the individual Government Department’s needs of the country and understanding published two further documents for proposed actions and investment plans to what they want to achieve through their consultation; a Draft Bill that outlines the achieve the stated national objectives. investments. “The weakness in so many structure, framework and membership of “By asking parliament to debate and of these long-term strategic processes is the proposed commission and a summary vote on the national assessment and that few governments or project owners of the steps that will need to be taken departmental plans, we are essentially really stop to ask why they are doing what in order to deliver it. A set of revised binding the political parties to a long- they are doing,” noted Sir John. “The more proposals and a revised Draft Bill have been term consensus on what the national effort that government can put into debating completed, ready to be taken forward by infrastructure priorities should be for the the ‘why’ at the front end, the better the the new administration. next 10 years,” added Sir John. “Once you outcomes of their decisions will be.” “At the end of the day, the focus should have that cross-party political buy-in, you Sir John’s discussions with a broad range be on delivering the infrastructure we can start to create an environment where of industry players – both in the UK and need to serve us, our children and our there is a greater degree of certainty around overseas – also highlighted the need for grandchildren into the future and these are major projects and long-term investments.” creating the right governance structure questions that don’t often enjoy the level for long-term infrastructure planning of national debate and political support that MORE THAN JUST A PLAN and execution. “The reality is that most they should,” added Sir John. “This isn’t Sir John recognizes that his plan will governments suffer from fragmented about removing politics from infrastructure, require significant political will and effort ownership of the infrastructure decision- this is about building political consensus to implement. Public consultation and making process which means that there on the long-term needs of the country engagement will be key. “Politicians are are often too many cooks in the kitchen,“ and that is something that all politicians easily influenced by voter sentiment which added Sir John. “It is critical that long- can agree to work towards.”

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© 2015 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 owners, managers and investors have been talking about asset management for years. But over the past decade, a new view of asset management has emerged and quickly become an essential discipline for infrastructure organizations around the world. Evolving asset However, achieving real maturity in asset management will not only take patience, insight and a methodical approach, it will also require asset owners to take a more holistic view of the environment in which they operate. And our experience suggests that there are still management a number of challenges that asset owners will need to overcome if they hope to make asset management a key competitive advantage in the future.

By Mel Karam, Global Head of Asset Management

t is not surprising that the topic of Improved technology and innovation: asset management has rocketed up Recent developments in data and system Ithe infrastructure agenda. For asset- technologies have enabled infrastructure intensive corporates such as oil and gas owners and operators to achieve much producers, good asset management will more valuable insights about the health improve plant availability which drives and condition of their assets which, in turn, long-run efficiency and profitability; for allows better-informed base maintenance the public sector, it delivers the best long- and investment decisions. Remote and term value for the investment of public wireless condition monitoring of jet engines, funds in assets such as roads, hospitals for example, has allowed airline operators and schools. to extend the time between routine Simply put, asset management is about maintenance and increase flight hours. optimizing the management of physical New stakeholder interests: As assets – across their entire lifecycle – infrastructure assets become an asset to sustainably achieve an organization’s class in their own right, new institutional objectives. And in today’s economic investors are demanding more rigorous environment, the benefits of improved and structured approaches to investment value, profitability and efficiency from planning in order to better predict cash- assets simply can’t be ignored. flow and control costs. As pension funds, sovereign wealth funds, insurance PRESSURE TO CHANGE companies and other institutional investors It’s not just canny business sense that is increasingly invest in infrastructure, long- driving asset management up the agenda term (25–40 year) strategic asset plans as both an executive-level strategic business have become an essential and integral function and as a professional discipline. part of investment planning in privatized Infrastructure owners and managers are also utilities around the world. facing a number of other socio-economic Increased regulatory requirements: trends and pressures that, ultimately, can only Facing an increasing regulatory burden on be solved with better asset management. infrastructure businesses (often including These often include: economic, environmental, safety and Heightened customer expectations: For technical regulation), asset owners are publicly and privately-owned infrastructure now responsible for a more stringent set assets, customer service has rapidly of outputs which, in turn, demand better become a key competitive advantage. asset management tools. For example, the But there is a strong interdependency 2012 US Congress Act MAP-21 approved between asset reliability and availability an annual investment of US$40 billion on on one hand, and customer service on the national highways system, subject to the other. For example, airport operators each state developing a risk-based asset need reliable baggage handling equipment management plan to achieve federal to reduce wait times and improve airport performance targets. Elsewhere, large experience for passengers. catastrophic safety incidents (such as the

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© 2015 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. 2010 St Bruno gas pipeline explosion in 3. Embarking: Brazil, India, South America infrastructure businesses, all factors that are California which killed eight people and and Southeast Asia all show signs becoming more common in other countries. resulted in a US$1.6 billion fine for the of understanding the value of asset All UK infrastructure regulators – including owners) typically expose shortfalls in management but are only at the early energy, water, transport, and telecoms asset management practices and lead stages of development. regulators – have clearly recognized the value to increased regulatory interventions. of asset management and have developed Rising demand and funding challenges: CREATING THE RIGHT ENVIRONMENT incentives to help raise the discipline as a With demand for more capacity and While the concept of asset management was core business competency. improved reliability continuously first used in Australia in the late 1990s, today As a result, most owners and operators in increasing, owners are adopting asset it is the UK that is widely recognized as the the UK now practice the discipline internally management principles to extend the leader in the field. In part, this is because it and many have developed a very strong life of their assets through optimized was the UK’s Institute of Asset Management capability in supply chain (engineering operations, improved maintenance and (IAM) that developed the first formal set of and management consultancy) over the targeted investments. According to the standards under the British Standards Institute past 15 years. This is a trend that is also World Economic Forum, there is a global title of PAS55, which ultimately formed the growing within the developing category annual funding gap of US$1 trillion per year foundation for ISO5500. of countries. in transport, power, water and telecoms. The UK’s leadership is also largely related World infrastructure will continue to to the high level of infrastructure privatization, FIVE KEY CHALLENGES age, requiring better asset management high proportion of aging assets requiring While the UK may enjoy a number of practices. investment, and the existence of clear advantages over other markets, asset Improved market reputations: In many regulatory frameworks for public and private managers in the UK – and around the sectors, it has become customary to seek to adopt best practice tools and techniques in asset management in order to gain recognition as world-class operators and to minimize potential reputational risks that may stem from outages, service The bottom line is that asset management will interruptions or accidents. For example, good asset management plans give water soon become a key competitive advantage for and electricity customers and stakeholders infrastructure owners and operators. the confidence that their money is invested in the best possible way.

STANDARDS BRING IMPROVED MATURITY The introduction and adoption of international standards for asset management has also thrust the topic up the infrastructure agenda. Indeed, the publication of the International Asset Management Standard series ISO5500/1-3 in 2014 brought the discipline to the world stage and captured the attention of asset owners and operators that had not previously encountered it. However, while the standards are now generally well understood and publicized, our experience suggests that their application and, as result, the degree of maturity in asset management practices, varies widely across the world. Broadly speaking, countries tend to fall into one of three categories of asset management maturity. 1. Practicing: Countries that actively practice asset management include the UK, Australia and some Western European countries. 2. Developing: Markets that are active in asset management but are still developing their practices include North America, New Zealand and some of the Gulf States.

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© 2015 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. world – often struggle with five key promoting good discipline in this activity the requirements of regulation and challenges as they strive to improve their is often a challenge. standards into internal plans both today asset management capabilities and maturity. 3. Building a corporate-level integrated and in the future. 1. Improving asset data management asset management strategy: Many and data quality: Virtually every asset asset managers and owners are seeking TOMORROW’S COMPETITIVE management activity relies on good quality strategies and plans to promote corporate ADVANTAGE data supported by the right systems to level strategy development aimed at The bottom line is that asset management will properly acquire, store and analyze it. reducing on-going costs and optimizing soon become a key competitive advantage However, our experience suggests that asset performance. for infrastructure owners and operators. many organizations are struggling to 4. Improving risk assessment and Those able to continuously improve and secure or develop the internal capability management: While asset failure risks are adapt their approach to asset management to properly define the need and specify typically the largest items on infrastructure will ultimately reap the benefits of improved the outcome. corporate risk registers, today’s asset value, profitability and efficiency from their 2. Planning and prioritizing asset owners and managers need to better assets. Those that ignore the disciple do so investment: As executives of public and understand both their known and unknown at their own peril. private organizations start to recognize risks in order to develop a resilient and The good news is that – for those who the value of smart investment planning, robust asset management strategy. have yet to evolve their asset management many are rethinking their medium 5. Implementing new regulations and strategy – all is not lost. The reality is that and long-term investment plans in standards: Asset managers and every step along the pathway to maturity is a order to maximize corporate financial executives will need to focus on positive one and there are plenty of examples health. Identifying, understanding and improving their methods for translating of successful asset management programs to learn from. The key is to start taking steps today rather than waiting until tomorrow.

CRITICAL QUESTIONS TO CONSIDER

Do I accurately know what assets I have, what conditions they are in, how critical they are to my business objectives, and what contributions they make to the bottom line of the business? Do I know what performance measures I expect from my assets, and how are they likely to perform against those measures in the future? How do I invest in, operate, maintain and replace my assets at the lowest overall cost possible, given the outputs required to deliver, and the performance levels I expect from them now and in the future? Do I know the critical risks that my assets are exposed to, and the likely costs of those risks materializing? Does my organization base its investment decisions on a robust understanding of costs of owning and operating its assets throughout their lifecycle? How good are my internal processes, systems, and people competencies in relation to my assets?

For more information on how KPMG can help you address these critical questions, contact Mel Karam, KPMG’s Global Head of Asset Management, at infrastructure@ kpmg.com

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Lessons learned from 20 years of rating project debt could help underpin the potential impact of the ‘multiplier effect’ of infrastructure investment on the wider economy, making the timing of the European Commission’s ‘Juncker plan’ ideal, says Standard & Poor’s Ratings Services Michael Wilkins, Managing Director of Infrastructure Finance.

Michael Wilkins, Managing Director of Infrastructure Finance, Standard & Poor’s

he timing for governments, banks original value to the wider economy through before doing so. Over the past 20 years, and private investors to invest in increased employment and productivity. S&P has rated 513 projects covering more Tinfrastructure couldn’t be better. Today, And this conclusion is leading to a political than 573 separate debt issues. And of infrastructure projects stand as one of the response – the European Commission’s these 573 issuances, 39 have defaulted. most robust and stable investment assets, (EC) ‘Juncker Plan’ being a case in point. A study of these defaults concluded that according to a review of over 20 years of As such, S&P believes that over the next projects can fail for reasons ranging from project finance ratings by Standard & Poor’s 3 years all eyes will be on Europe – and the simple and easily identifiable to the Ratings Services (S&P). if the plan is successful, it could provide varied and complex. Meanwhile, recent studies suggest a template for other governments and S&P has recently redesigned its criteria that investment in infrastructure can public bodies to follow suit. for assessing global project finance reflecting have a significant positive effect on Gross the lessons learned from the past. The Domestic Product (GDP). Indeed, the LEARNING FROM LESSONS PAST causes of defaults can be divided into seven ‘multiplier effect’ enjoyed by infrastructure Of course, they will need a good grasp of broad groupings: technology or design, investment can make it worth double the the risk presented by infrastructure assets operational, hedging/commodity exposure,

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© 2015 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. market exposure, structural weakness of the essential for the success of future project market exposure risk (the biggest cause of parent, counterparty failure and regulation financings. Doing so will highlight potential default) and strengthening project structure (see table below). weaknesses and ultimately provide better to provide the necessary resilience to While the study shows that some failed project appraisal and selection, leading to withstand external threats. Alongside this, projects experienced problems in more comprehensive cost-benefit analyses. work has been done to improve transaction than one of these areas, S&P believes that Indeed, the sector has absorbed lessons structures, mitigate construction risk and clearly differentiating the risk factors is from the past, specifically by minimizing reduce counterparty exposure.

Breakdown of project ﬁnance issue defaults No. of debt % of defaults Aggregates % of defaults issues Technology and Technology or design (during constuction/ramp-up) 7 20.59 29.41 operations Operational (underperformance, higher capital expended, etc.) 3 8.82 Market for input or Hedging/commodity exposure 2 5.88 32.35 output Market exposure (price or volume) 9 26.47 Structural weakness at the parent 6 17.65 Structure/counter-parties 35.30 Counterparty failure 6 17.65 Regulation 1 2.94 Regulation 2.94 Total 34 100.00 100.00

Source: S&P, 2015 Who controls our infrastructure? | INSIGHT | 29

2.5

2 Brazil UK China

1.5 US Argentina India Italy

1 Japan

0.5 Canada France Mexico South Korea Germany Indonesia Australia Eurozone 0

Source: Data from OECD; S&P calculation

THE ‘MULTIPLIER EFFECT’ BRINGS a massive expansion – instantly facilitated strongest impact when the economy is at its SIGNIFICANT RETURNS international maritime trade. Similarly, the weakest. At the same time, the supply-driven Given the floundering economic recovery Channel Tunnel connecting France and the effects depend on the scale of investment. in many regions around the world – UK, which opened in 1994, now ushers Therefore, the magnitude of the ‘multiplier especially Europe – such improvements in an estimated 20 million passengers (and effect’ can vary considerably. assessing project finance creditworthiness almost that many tons of freight) each year Chart 1.1 displays estimates of the are timely. Indeed, recent studies have between the two countries. multiplier effect to a range of economies shown that investment in robust and well- As such, infrastructure spending boosts over a 3 year period (2015–2017) following a managed infrastructure projects can help to output through demand in the short term and hypothetical infrastructure spending increase strengthen the wider economy as a whole. supply in the long term. But some economies of 1 percent of real GDP in the first year. By generating much more than the initial benefit more than others. This is because Generally speaking, S&P found the spend in terms of total economic output, the magnitude of the demand-driven effect multiplier effect to be greater in developing investment in infrastructure benefits from depends on where an economy stands in economies than for more developed countries. a ‘multiplier effect’. its economic cycle – it tends to have the China, India and Brazil, for example, would all This is because there are considerable short- and long-term benefits to be won. Initially, infrastructure spending tends to boost job creation in the construction industry, which requires materials, goods, and services from other areas. This demand consequently has a positive ‘knock-on’ effect on employment in these related sectors – the demand for engineer and surveyor services increases, for example. As the total wage bill rises, people spend their additional income on consumer goods and services, again creating more jobs and benefitting the economy as a whole. S&P estimates suggest that for each 1,000 jobs directly created by infrastructure construction, overall employment rises by approximately 3,000 jobs. But the benefits don’t stop there. Over the longer term, improving infrastructure through increased spending can enhance productivity – improving roads and railways can reduce transport costs and time spent traveling, for example. Certainly, there’s no shortage of examples in which a large infrastructure project has had a transformative effect. The 80 kilometer-long Panama Canal – now in the final stages of

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© 2015 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. 1.2 GDP per hour worked in G7 countries (2013) S&P believes that insufficient investment in infrastructure has been one of the key factors explaining weak productivity 150 performance in the UK and with an accumulated infrastructure investment 140 deficit of more than GBP60 billion (US$95

US billion), a clear opportunity exists. Indeed, investment in the UK’s 130 infrastructure has been shown to beneﬁt the economy far beyond the initial sum invested. For instance, simulations show that France 120 each additional GBP1 spent on infrastructure Germany would increase real GDP by GBP1.9 over the following 3 year period. We also predict that 110 additional spending of 1 percent of GDP in the UK would add more than 200,000 jobs in the same timeframe. 100 Even though the potential returns are Italy

Canada better for some than others, S&P believes UK it is vitally important for all countries to 90 improve the quality of their infrastructure investments in addition to increasing spending – regardless of where economies Japan 80 stand in their development.

Source: Data from OECD; S&P calculation ALL EYES ON EUROPE Measures are already being taken to exploit enjoy a boost to GDP of at least double the the countries examined at 2.5. This is partly the ‘multiplier effect’ in order to promote original investment, while the multiplier effect because the UK is lagging behind the rest healthy economies in the future. One such for countries such as Australia, Germany, and of the major G7 industrialized economies in initiative – being watched closely around Canada would be much smaller. terms of productivity of labor. For instance, the world – is the EC’s ‘Juncker Plan’. The The UK, however, provides a notable in 2013 one hour of work in the US was over plan, formally adopted in January 2015, has exception. According to S&P, the UK has one 40 percent more productive than one hour identiﬁed a pipeline of 2,000 projects which of the highest potential multiplier effects of of work in the UK (see chart 1.2). it expects to be ﬁnanced primarily through the capital markets over the next 3 years (2015–2017). To kick-start the plan, the European Fund for Strategic Investment (EFSI) will make an initial investment of EUR21 billion – made up of EUR16 billion from the EU and EUR5 billion from the European Investment Bank (EIB). The hope is that this initial EUR21 billion – alongside a combination of credit enhancements and incentives – will attract up to 15 times more investment through the ‘crowding-in’ of private investment. Over the next 3 years, the plan aims to inject EUR315 billion into the European economy. Certainly, this is an ambitious target. Some obstacles – such as the short-time frame of only 3 years – could limit its success. And some argue that the ‘grandiose’ plan is nothing more than an over-ambitious ‘wish list’. S&P believes that its success will rely on convincing investors that the plan is achievable and realistic by providing attractive and viable investment opportunities. With strategic planning and careful management, the ‘Juncker Plan’ could offer a template for other struggling economies to adopt in the future.

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The debate over who controls and delivers infrastructure is not new. But it is constantly evolving. To better understand where the debate is going, we sat down with three prior leaders of major infrastructure units – James Stewart (@jaghstewart), former CEO of Infrastructure UK, Larry Blain, former CEO of Partnerships BC in Canada, and John Fitzgerald, former interim CEO of Infrastructure Australia – to look at the experience of these three countries over the past few decades and to draw some conclusions about how the debate will evolve over the coming decades.

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Editor (ED): Looking back over the past competition in the private sector would lead active investors and, ultimately, the effective three decades, how has the control of to improved customer service. controllers of the businesses. infrastructure shifted in your market? Initially, effective control over those Then in the 1990s, we went through another James Stewart (JS): I think the UK has newly-privatized assets rested with the shift, this time aimed at speeding up the seen the most change over the past 35 executive management and the boards as delivery of the infrastructure investment years. In the 1980s, we had the ﬁrst wave the shareholders were widely dispersed pipeline through private participation which of privatization which was largely driven by amongst retail and institutional investors. essentially was the start of private ﬁnance a general dissatisfaction with the quality However, this changed as – over time – the initiatives (PFIs) and public-private partnerships of service provided by public monopolies, retail investors sold to institutions who, in (PPPs) in the UK. And so, once again, there coupled with the expectation that increased turn, sold to infrastructure funds who became was a change where the management and

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© 2015 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. control of the asset was defined under a government didn’t get the risk transfer right, the private sector can’t always be trusted to partnership contract, with the government whereas there is now a much more realistic be there, or where the risks are simply too having significantly more influence and understanding of which risks can be allocated great for the private sector to absorb. The UK ultimate ownership via the contract. to the private sector and which must remain Guarantee Facility, for example, was essentially Larry Blain (LB): The experience in North with the public sector. created in 2012 as ballast against constrained America has been somewhat different The experience in Australia has also helped infrastructure private finance markets. And to the UK in that we have seen very few the government shift its objectives for private it is clear from the ongoing airport debate infrastructure assets fully privatized. In fact, participation away from simply transferring that government will need to continue to be in the true sense of the word, control over risk and towards longer-term objectives involved in the decision-making and cannot just infrastructure in Canada and the US has such as improving value for money and leave it to the private sector airport operators. always remained firmly in the public sphere. operating efficiency which, in turn, has led to This has led to a rather complicated What we have seen over the past few more transparent and collaborative dialogue environment where the government is often decades, however, is an increasing recognition between the public and the private sectors. struggling to define its role and develop a that the public sector may not be the best This dialogue has essentially become less reliable solution that allows them to avoid delivery agent for infrastructure. And, as a about ownership and control, and more about being the ‘lender of last resort’ and all of result, we’ve seen greater participation by the quality of infrastructure services. the moral hazards that often come with private players – investors, contractors and LB: Canada’s historic focus on PPPs rather government intervention. operators – in the Canadian market. While than privatization has led to a bit of a different the US market has been somewhat slower to debate. Indeed, since all infrastructure is ED: What role has the public played in move towards PPPs, most states have now owned by the public sector, the conversation the debate? either drafted or passed PPP legislation over in Canada often leans more towards questions JS: I think the public debate has shifted the past few years. about funding and the impact on taxpayers over the past few decades. At a high-level, John Fitzgerald (JF): Australia’s experience and users rather than concerns about who I think the UK public generally understands has been a bit of a hybrid between the UK ultimately owns the infrastructure. the role that the private sector plays in and Canada. In some sectors – healthcare and The Canadian experience has also put UK infrastructure delivery; particularly in education, for example – the private sector more focus onto optimizing the funding mix relation to the privatized utilities where I has always played some role in infrastructure between public and private sector sources believe the public is fairly confident that the delivery. But, for the most part, infrastructure in a way that enables a transfer of risk to right regulation is in place to protect their was largely the remit of the public sector. the private sector while minimizing the use interests as taxpayers and as consumers. Over the past 20 years or so, however, the of relatively expensive private capital. I think PPPs, however, are often a different story private sector has become much more involved it’s a more nuanced debate about the role and remain a political hot potato. in infrastructure investment and delivery, both of each of the funding parties rather than a But I also firmly believe that the public – through PPPs and – increasingly – through the debate about ultimate control. and more particularly the consumer – will privatization of assets. The changes in Australia, JS: All evidence in the UK suggests that start to play a greater role in the debate as in many ways, have mirrored those in the UK, we’ve hit another significant change point more of the funding burden shifts towards but with a lag of about 5 years or so. in our evolution. Privatization and private user fees and direct taxation. London’s participation are fairly well-understood models CrossRail project, for example, was partly ED: What impact have these in the UK and the government continues funded through supplemental business rates experiences had on today’s debate to make heavy use of PPPs and select and Crossrail 2 may have to go down a similar over the control of infrastructure? privatizations to improve the delivery of route. And as this happens, businesses and JF: I’d like to believe that each government has infrastructure. consumers will demand a greater say in the learned quite a bit from their early experiences. However, there is also an increasing decision-making process. In the Australian context, some of the early recognition that some level of government LB: If you look at ‘control’ somewhat loosely, private financing models failed because the intervention may be required in sectors where you can make the argument that the public

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© 2015 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. has always been in control of infrastructure, first as taxpayers, and now increasingly as consumers. In addition we are now seeing greater participation in the PPP financing markets by pension funds (particularly public pension funds) as investors. This essentially shifts an element of control over infrastructure priorities back to broad-based public ownership, albeit managed through proxy by investment managers (who, frankly, are judged based on returns to pensioners rather than the social impact of their investments). JF: Yet we mustn’t underestimate the public and their ability to understand the shifts in control or delivery of infrastructure services that are currently underway. Twenty years ago, very few people in the general population truly understood the financial markets, but today everyone from your dentist through to your children’s teacher seems to have their own stock portfolio. I believe that – in 10 years’ time – the public will have a much more mature understanding of the role the private sector should play in infrastructure delivery and how that delivers better outcomes for the public and consumers. LB: I suspect that – in Canada and around planning and policy if they hope to attract private ED: Looking ahead 25 years, how do the world – over the next 25 years we will investment. And I think this will catalyze other you expect the debate over control of see countries start to really perfect the markets to start thinking more strategically infrastructure to evolve? current PPP models to achieve the right about effective delivery. JF: As Larry noted earlier, we’ve started balance between financing, risk transfer JF: As consumers gain more clout, we’ll to see greater participation from pension and consumer protection. Each market’s continue to see a greater level of transparency funds – SuperAnnuation funds as they are balance will be different and therefore the and public communication regarding called in Australia – in the infrastructure space. ultimate ‘control’ of infrastructure will likely infrastructure decision-making. Of course, these funds manage the pension vary, influenced by culture, history and social The public will enjoy greater access and savings of the vast majority of citizens or the expectations. insight into why certain business cases, public who are consumers of infrastructure Canadian culture, history and social contractual agreements and controls were services. expectations, for example, suggest that the developed or why certain models were As these funds increase their investment model of private investment into publicly- selected. Private participants will also start to and shift towards more ‘direct’ investment owned infrastructure will continue into become more actively engaged in the wider structures, we’ll also see institutional investors public policy debate around infrastructure start to play a greater role going forward. the future, albeit executed in different decision-making. And, as a result, I believe Combined with the rise of the infrastructure ways depending on the funding sources we’ll see a significant shift in public perception funds, I suspect we’ll start to see control and and sector. about the role that private participants can delivery become more consolidated from play in the delivery of infrastructure. an ownership perspective, ultimately by the ED: What are the longer-term JS: I absolutely agree with Larry and John. public, as Larry suggested. implications for public and private In most markets, the consumer has largely JS: I’d agree with John; institutional investors infrastructure participants going will certainly start to play a greater role in forward? been left out of the conversation about the infrastructure delivery process. And I LB: The reality is that competition for private infrastructure delivery and funding and – suspect that might ultimately lead to a greater investment into infrastructure is going to as we start to see more ‘user pay’ models polarization of control between institutional increasingly tighten as more and more and the further removal of subsidies in investors on one side and consumers who, markets shift towards private partnership some markets – governments and private as users and ultimate funders, will start to models. participants will need to pay much closer flex their muscles. What role the regulator I think what we’ll see is significant attention to the consumer. plays in this will also continue to evolve. improvement in policy frameworks for At the same time, however, the consumer I suspect that the UK will also start to the delivery of PPP models and a greater is becoming much more sophisticated in their zero in on achieving a sustainable balance understanding of what that means in terms understanding of infrastructure and much between private sector participation and of effective delivery in the public interest. more accepting of private investment which, government intervention which, in turn, will Recent reports by the US Treasury and a in turn, should lead to a more sophisticated clarify government’s role and level of control Congressional Committee have both suggested debate about who ultimately controls our over the infrastructure. that the US needs to increase investment into infrastructure.

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© 2015 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. Private participation drives change in India’s airports sector By Amber Dubey (@amberdubey123), KPMG in India

Almost 10 years since the Government alongside a new runway (one of the world’s success for not only the airport’s owners of India placed the country’s two busiest longest), improved passenger facilities and passengers, but also for the government airports into private hands, many see and expanded retail, food and beverage and the national economy. “The Government the sector as irrefutable evidence of the operations. Last year, the airport was of India and the Airports Authority of India benefits of private participation in funding, recognized as the “World’s Best Airport” have received over US$1.3 billion in revenue- developing and operating the country’s in the 25-40 million passengers per sharing payments over the past 7 years infrastructure. annum category by the Airports Council alone from this privatization agreement,” International. adds Mr. Rao. “More importantly, the According to I. Prabhakara Rao, Chief “I believe that a key reason behind our airport development has also boosted Executive Officer of the Delhi Airport, success is that we are a privately-owned employment, improved the tourism industry privatization has already delivered wide- airport, which means that we can often be and contributed almost 0.5 percent of the ranging benefits to travelers, citizens, more nimble-footed than our counterparts country’s Gross Domestic Product (GDP).” governments and the national economy. in the public sector,” notes Mr. Rao. Public perception and political positions And many more benefits are just waiting “Quicker decision-making allows us to be on privatized infrastructure in India is also to be unlocked. more responsive to demand – whether it changing. “I firmly believe that the success pertains to investing in new technologies, of the Delhi Airport has strengthened the t is easy to imagine why foreign visitors proactively engaging with customers to case for future privatization, as both state landing in Delhi, India pre-2006 often identify improvement areas, or introducing and central governments realize that there Idescribed their arrival as chaotic. Running new services and products to enhance the is significant value to be unlocked through at almost double capacity and operating out overall passenger experience.” further airport privatization,” added Mr. Rao. of 40-year-old terminal buildings, the Indira Since 2006, at least four new ‘greenfield’ Gandhi International Airport was widely derided SUCCESS BREEDS SUCCESS airports have been developed through Joint as one of the 10 worst airports in the world. While there were sceptics, that initially Ventures or private consortiums. In some Today, much has changed. Two new doubted the benefits of airport privatization, cases – such as the newly announced Mopa terminal buildings have been added, the program has proven to be a massive Airport in the State of Goa – the government

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© 2015 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. This is an exciting time for India; with the right policies and focus on quality, cost and passenger interest, India should be well-placed to achieve its vision of becoming the third largest aviation market by 2020.” I. Prabhakara Rao, CEO of the Delhi Airport

has allowed private consortiums to hold a already collaborates with private operators aviation industry needs to engage and 100 percent stake in the Special Purpose to share learnings and best practices, collaborate with policy makers to come up Vehicle created to operate the airport. particularly around customer service, with efﬁcient and rational decisions that will cargo development and non-core revenue shape the future of the Indian Civil Aviation WORKING WITH THE PUBLIC SECTOR creation,” he adds. “But much more can still industry,” he noted. “This is an exciting time Mr. Rao recognizes that India’s bureaucracy be done through more effective stakeholder for India; with the right policies and focus is working hard to speed up the development management – both with key stakeholders on quality, cost and passenger interest, of public-private partnership (PPP) models and the local communities – and in the India should be well-placed to achieve its vision of becoming the third largest aviation for the sector. “Our experience suggests area of employee engagement and skills market by 2020.” that government departments are always development.” Ultimately, Mr. Rao credits his team and the willing to work in the interest of the project,” willingness of key stakeholders to collaborate MORE TO COME he noted. “While there may sometimes be for the project’s success. “One cannot over- a delay in the implementation of certain With the Asian aviation market booming, state the importance of having a strong initiatives, operators and investors also driven largely by a growing middle class and team and creating valuable synergies with need to be patient and continue engaging their desire to travel, India is experiencing our stakeholders,” he added. “We believe in with the departments, recognizing that an era of massive expansion in the sector. the idea of fostering an airport community the government has to play the unenviable New airports, aggressive low-cost carriers, where mutual inter-dependencies bring role of balancing expectations of multiple cutting-edge technology introductions and out the best of enterprises which, in turn, stakeholders – not all of whom are supportive increased foreign investment are all catalyzing further enhances the overall development of the PPP process.” a transformation in India’s aviation sector. of our airport and drives renewed value back to the passengers, airlines, government However, Mr. Rao does not suggest But much more must still be done. stakeholders and investors.” that public sector-operated airports cannot “We believe that private and PPP airport achieve similar improvements in customer models will be the way forward for India, service. “The Airports Authority of India but to make them sustainable, the whole

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© 2015 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. Regulation has – and always will – play a key role in defining who controls infrastructure. But as the pace of technological, economic and social change picks up speed, today’s regulatory regimes are under increasing pressure to shift their focus away from traditional cost- reduction objectives and towards a broader set of objectives that protect consumers while still delivering investor certainty and clarity.

For this edition of Insight Magazine, we sat down with three former energy sector regulators – Alistair Buchanan, the former CEO of the UK’s energy regulator Ofgem; Robert Curry, former commissioner of the New York State Public Service Commission; and Antonio Hernandez Garcia, former Director General for Energy Policy and Mines with Spain’s Ministry of Industry, Tourism and Trade – to try to unravel the regulatory perspective on the changes now pressuring electricity markets around the world.

Editor (ED): Many jurisdictions around as California – regulatory change was largely the world are currently considering – led by the legislature and then implemented or implementing – energy market by the regulator. In other states (such as reforms and, in doing so, are shifting New York) the regulatory agency took more the regulatory stance. What impact has of a leadership role and changed the rules this had over the past few years? without any real legislative authority. Alistair Buchanan (AB): In the UK, we The reality is that it is tremendously recognized some time ago that our current difficult for the US Federal Government regulatory regime wasn’t providing the right to create and implement any long-term incentives to drive the type of investment goals for the energy sector, in part because the country required. At the same time, we ‘ownership’ of the issue in Congress is split were painfully aware that consumers didn’t between almost 20 different committees, really understand how the market operated each with their own agendas and objectives. and how that translated into their contracts And ultimately, that makes it difficult for and bills. government to cede power of oversight So in 2012, Ofgem announced a new, to regulators. more sophisticated approach – one we called Antonio Hernandez Garcia (AHG): I think RIIO – that tied revenue (the R in RIIO) to Spain is living a different moment than incentives and innovation (the two Is) and the US and the UK. In fact, following an output – essentially telling the customer aggressive privatization program in the late what we are doing. So while we wanted to 1990s and early 2000s, and the unforeseen make sure that investors would receive a and significant demand reduction entailed reasonable rate of return, we also wanted to by the economic crisis experienced since inspire participants to deliver outputs more 2008, Spain now has a marked overcapacity in efficiently while still investing in technical many infrastructure sectors including energy. and commercial innovation and promoting Therefore, regulators are not mainly focused greater transparency for consumers. on encouraging new foreign investment but Robert Curry (RC): The path in the US hasn’t on ensuring that infrastructure continues to been as clear as that of the UK. We’ve seen operate efficiently and sustainably. a variety of different approaches to energy In fact, a combination of sustained market reform depending on the state and investment in the energy sector over the the level of involvement from the particular past decade with a significant demand drop legislature. What we saw with the last round explain the overcapacity. This situation has of regulatory reform in the energy sector in been very harmful for the electricity sector the late 1990s was that in some states – such in particular, since a relevant tariff deficit has

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© 2015 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. appeared, amounting close to EUR27billion. focused on ensuring that we provided put, it is a large part of the state regulators’ By 2010, estimates suggested that the deficit surety to participants about key aspects job to ensure that the operating utilities have from this energy imbalance was adding of the regulatory regime that would not the capital necessary to fulfil their plans and about EUR2.3 billion to the government debt change – protecting cost drivers from keep the lights on. every year and that, in turn, was shaking inflation, for example, or the rewarding I think today, however, regulators really investors’ confidence. of payments at the beginning of the cost need to take a step back and ask themselves ED: Regulatory change can either control period. what their objectives should be in order inspire investment or dampen it. How In doing so, we were able to provide to respond to all the new demands in the does this reality influence the way enough clarity to the investors to give them market. Is it to drive efficiency? To catalyze regulators implement change? the confidence to give us the time and innovation? To secure investor returns? Or AB: When we were planning the move from leeway we needed to rework completely is it to protect the consumer from price and availability shocks? I think the answer the traditional cost-focused approach and the regulatory process for the UK. depends on the jurisdiction. towards the ideas of RIIO, we understood RC: I think both the US and the UK have that – without clear guidance for the future – traditionally appealed to investors that were AHG: I’d argue that there are a number of investors would likely delay any investment focused on having a high degree of certainty ways to use regulation to deliver investor decisions until we delivered and explained on the return on their investment dividends or confidence. As most people know, Spain the new model. As such, we were very the payment of the coupon on debt. Simply recently underwent a change in regulatory stance within the energy sector and – while the change itself may have created some immediate uncertainty – the long-term benefit has been the elimination of the harmful tariff deficit which has long been a big concern for investors. We’ve recently seen a significant uptick in investor interest in Spain’s energy sector and many investors are coming back to Spain; not just infrastructure funds, but also sovereign wealth funds and others that take a longer-term view of the markets. ED: If you were just starting your regulatory job today, what would you want to do differently given the changing environment? AHG: I think the three key drivers for me would be stakeholder engagement (listening to the opinion of all involved agents), the need to balance investor returns against consumer protection, and regulatory certainty and clarity. Stakeholder engagement can often uncover some really smart opinions that may need to be considered when drafting or reforming regulation. Regulators should also always remember that – at the end of the day – it is the consumer that is funding the investment, either through tariffs or through public debt and so their needs must be balanced against those of the private sector and investors. Finally, I do believe that regulators should always try to be very clear and very predictable because a lack of clarity can have a direct impact on longer-term risk premiums which, ultimately, just drives up cost overall. AB: This would be a very interesting time to be a regulator. If you look at the trend, we’ve moved from a cost-control stance to more of an incentive-based stance and – looking forward – it’s clear that we’re looking

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© 2015 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. at an entirely new environment brought on by not just an evolution in energy but possibly a revolution in the way energy is distributed at a very local level as battery technology matures and people start to think about connecting directly to their local wind farm. I think the key for regulators going forward is going to be their ability to carry their various constituencies along with them in whatever change is required. Spending years on public consultations just to find that you lack the support of a key stakeholder only wastes time and weakens investor confidence. Even if it means ending up with a solution that achieves only 90 percent of your goal, that’s a pretty significant win given these complex macro governmental change scenarios. RC: I’d agree with everything that Antonio and Alistair have said. I’d add that one of my first orders of business would be to ensure that I had the legislative support and clarity that would be required to enact the necessary changes. The problem with energy is that it’s a very politically-charged topic in the US and nobody wants to be left holding the blame for market failures. But the reality is that – without legislative support and leadership – any market reforms are doomed to fail; it’s a self-fulfilling prophecy.

GETTING REGULATION RIGHT Dr. Matt Firla-Cuchra (@mattcuchra_kpmg), KPMG in the UK

Regulation is necessary because of market The energy sector is particularly this assumes that they know what ‘good’ failures (hold that thought); as tempting challenging to regulate because of its looks like. Typically, they don’t and what as it might be, it’s not the right tool to complexity, multiple constituent markets, is optimal for the market as a whole is address other issues like social policy or and multiplicity of market failures. The latter not really obvious – besides, a regulator subsidies. And while it aims to improve include everything from the monopoly is not a central planner. Regulators need welfare, regulation often brings risks – it position of networks infrastructure (could to implement government policies, not can create wrong incentives, amplify market lead to higher prices, reduced supply/quality attempt to invent them. But this distinction distortions and impose significant additional or underinvestment), through distortions is sometimes hard to make – for example, costs. In fact, much regulation is created in the underlying commodity markets balancing affordability and security of to address distortions and imperfections (sending inefficient short–term price signals supply is fundamentally a policy question, created by the existing regimes. for long-term investments), to investors’ yet in practice it is often determined by A regulator should always consider first unwillingness to take on long-term risks in regulatory decisions. which exact market failures he/she is trying building new energy infrastructure at any So where it can, the regulator should to address and be very clear about it. This price (due to the risk of asset stranding create mechanisms for market participants is to ensure that regulation is targeted or wrong price signals). It’s difficult to get to correct their behavior rather than choose and proportional, and applied only where it all right and still preserve commercial the optimal market outcomes for them. it can actually help. But that’s not an easy interactions in a private industry. Smart regulators recognize that making question in complex markets like energy. One ‘solution’ is to regulate to determine regulated companies listen to their Where targeted regulatory intervention is the exact outcomes deemed desirable. customers and create their own plans difficult, it’s often tempting to broaden it to Regulators complain that they have to is likely a better idea than making them ‘sort it all out’ for the ‘general public good’. compromise with other stakeholders, but listen to the regulator himself.

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Few cities have taken on the task of urban partnerships with the private sector are vital What is driving Sydney’s passion for urban regeneration and renewal as actively or as to delivery. To learn more about Sydney’s renewal today? purposefully as Sydney, Australia. From the success, Graham Brooke (@gbrooke737) David Pitchford (DP): Just like many other redevelopment of disused docklands at with KPMG in Australia sat down with David cities, Sydney wants to enjoy all of the Barangaroo through to the creation of new Pitchford, CEO of UrbanGrowth NSW, the advantages that come from being a truly global inner-city parklands through its Central Park and organization tasked with delivering the urban city, meaning we need to constantly strive to Green Square projects, Sydney continues to transformation program, to explore some of remain internationally competitive and globally attract international recognition for its success the challenges, objectives and strategies relevant. And the competition is ﬁerce; we’re in renewing urban areas. driving this city’s vision. not just competing with traditional leaders The Master Plan for any city is the Graham Brooke (GB): Sydney is already like New York, London or Hong Kong. Today responsibility of the public sector but widely-regarded as a world-class city. there are countries right across Asia Paciﬁc

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© 2015 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. and around the world that are all looking for UrbanGrowth NSW: City Transformation Life Cycle™ ways to modernize their platform and compete on the world stage. 1 Thinking Yes, Sydney has always been seen as a world- cities class city, but much of that focus has come from tourism and our abundant attractions. The challenge today is that we need to think A new global beyond tourism and beautification to really 4 Living methodology Evolvingfor the 2 Funding understand what it means to also compete cities urban transformation cities economically. of cities GB: Clearly, there are different infrastructure levers that can be pulled depending on whether you want to focus on economic 3 Building growth versus beautification. How is cities that shift impacting the city’s investment prioritization decision process? DP: I believe economic infrastructure is critically important to becoming a global city, particularly The second phase , ‘Funding cities‘, considers all But all levels of government have been investment into those assets that enable of the innovative ways to finance the aspirations hugely supportive. In fact, I think our various the development of industry, the creation of outlined in the first phase. ‘Building cities‘, the governments are showing great courage in knowledge-based jobs, the advancement of third phase, is actually where most projects in working together to push back the political innovation and – crucially – the attraction other cities tend to start – design, shape, land and public juggernaut in a way that provides of talent. use and transport planning. We also see a fourth us some room to actually take the time But the reality is that there is always so phase, the ‘Living cities’ phases, where we then that is needed to do effective planning and much that could be done and many of the focus on creating great places and great spaces assess our options. projects on the list are massive undertakings. that make the city more resilient, happy and Likely the greatest catalyst from government, So we really need to be disciplined about prosperous. And it’s all quite dynamic because however, has been the introduction of establishing an achievable and workable we always need to be changing. clear governance structures and dedicated platform and then we need to stick to it. GB: What role has government played authorities. We had a history of talking about What’s massively apparent from similar in supporting Sydney’s urban renewal action but never getting past the talking projects around the world is that those who goals? phase; clear leadership and lines of authority take on too much tend to fail while those that DP: UrbanGrowth NSW is actually a State- allows everyone to start acting. are focused tend to achieve their objectives. Owned Corporation, so clearly there is buy-in GB: What do you credit with Sydney’s GB: Has Sydney struck upon a ‘winning’ from State government on the need for urban urban transformation success? formula for delivering infrastructure? renewal and transformation. DP: I think there are three things that we DP: Quite the opposite, actually. What we’ve have done in Sydney that have helped us found is that there is no ‘one-size-fits-all’ move towards achieving our goals for the city. approach to delivering projects and much First is that we weren’t afraid to do things depends on the complexity of the individual differently and to start from a different point. project, the outcomes you want to achieve We think about what we want to achieve and the private sector organizations you are and how we might finance it long before partnering with. we sit down to start drawing up designs, What that means is that we need to be and that’s a very different approach than really flexible in the way that we approach most cities take. delivery and we need to be willing to do things differently so that we’re always making sure The second thing is collaboration. We’ve been that both parties get what they need out of very careful to collaborate with all stakeholders the transactions and the city gets the optimal to achieve our goals. We even have somewhat result for its investments. formal collaboration agreements with the government secretaries and the CEOs of GB: What is guiding the long-term What’s massively various state agencies that are involved in plan for Sydney? Does the city have a apparent from similar our projects. vision for where it wants to be in the next projects around the 20 years? world is that those who I think our third real advantage has been DP: We’ve been very focused on what we ambition. And it’s not just that we have want Sydney to represent in the future. We take on too much tend to an ambition to change, but we also have have actually developed our own methodology fail while those that are the ability to articulate that ambition and which we call the City Transformation Life Cycle. focused tend to achieve then structure and drive its adoption so that Essentially, there are four dynamic elements to everyone is working together to achieve that the cycle. First is what we call ‘Thinking cities’ their objectives. goal and purpose. and this is where we bring together all of the David Pitchford, GB: Thank you, David. I think we all look ideas, ambitions, aspirations and needs that CEO of UrbanGrowth New South Wales forward to seeing how Sydney transforms define what we want Sydney to be. over the coming years and decades. Who controls our infrastructure? | INSIGHT | 43

As healthcare costs continue to rise and governments – particularly in Europe and parts of Asia – start to grapple with growing demand for health services from an aging population, many are now looking to the private sector to help bridge the gap.

As Vasco Luis de Mello, CEO of Vila Franca de Xira Hospital in Portugal, can attest, the introduction of private sector players has been key to increasing capacity and driving improved value for money for Portugal’s healthcare system. But building and operating a hospital also comes with its own unique challenges and complexities.

ENCOURAGING PRIVATE PARTICIPATION In 2005, with the objective of building four as CEO of Vila Franca de Xira Hospital – this Private hospitals are not a new concept in new hospitals – three to replace existing approach would deliver important long-term Portugal. Indeed, the private sector has been facilities and one as a fully ‘new’ service – beneﬁts. “Making the construction company involved in the delivery of health services since Portugal’s government announced a new PPP responsible for a 30-year lifespan of the facility 1995 when Hospital Fernando Fonseca was program that would require bidders on each meant that everyone was focused on delivering handed over to José de Mello Saúde – a private project to bring together both the infrastructure very high-quality solutions that would achieve healthcare services provider – as the ﬁrst and the operations under one consortium. the best total lifecycle costs for the investment; healthcare public-private partnership (PPP). Winning consortiums would sign two separate it really added a very different set of incentives But the privatization process has been slow contracts – one for the building of the asset for the developers and designers.” and overall healthcare costs have continued to and maintenance for 30 years and another as The approach also added new complexity. climb. In response, Portugal’s government has a 10-year clinical operations contract. Given the need to ensure a high level of state become increasingly focused on encouraging oversight and quality requirements, the bidding greater private participation in the building, GETTING IT RIGHT FROM THE process for the tenders was particularly detailed maintenance and operation of health facilities BID PHASE and resource-intensive. “On the clinical side, as a way to increase capacity and drive value According to Vasco Luis de Mello – who serves the bid requirements included more than for money for government investments.1 as both a Director at José de Mello Saúde and 80 different categories, each of which got

1 http://www.euro.who.int/__data/assets/pdf_ﬁle/0019/150463/e95712.pdf

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© 2015 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. We knew that if we could deliver the right incentives, the right motivation and the right tools, we could really improve the way that the existing facility ran.” Vasco Luis de Mello, CEO of Vila Franca de Xira Hospital

to a very granular level. For example, as part to people and processes. “These people of the bid process, we had to identify every had been working at that facility for years, piece of equipment that would go into every while embracing a specific culture, and we room, what software we would use and what knew that we couldn’t just arrive one day and personnel would be required to operate the change everything – we would never get their facility,” noted Mr. de Mello. full involvement if we took that approach. For us, it was all about building respect and BALANCING CONTROL WITH AGILITY trust by listening and involving the clinical and While the government may have required operational staff in the process.” substantial detail and transparency, they also At the same time, with cost savings, provided bidding organizations with significant operational efficiency and performance at freedom to control key elements of the planning the top of the agenda, Mr. de Mello’s team and design. “Allowing the bidders to propose wanted to prove that they could also drive their own designs and functional layouts during improvements at the old facility while the the bid process meant that the government could new development was being constructed. profit from the private sector’s considerable “We knew that if we could deliver the right incentives, the right motivation and the right experience in clinical operation design while, tools, we could really improve the way that at the same time, giving the eventual operators the existing facility ran,” he noted. more control into how the facility will run on a Subtle changes in the operating room, for day-to-day basis,” he added. example, raised the OR output by almost However, hospitals are highly-technical 50 percent in one month while improved facilities and hospital technology is constantly management tools and systems provided changing which can create challenges as management with a way to track and measure designs and assets are developed. According the impact of their changes. “People are to Mr. de Mello “It really requires an architect not inclined to believe without evidence, so with insight into how hospitals work – how The new Vila Franca de Xira Hospital boasts more we needed to make sure we could show 2 traffic flows within the halls, what areas than 8 floors totaling almost 40,000m of clinical area, that our activities were creating real value 9 operating rooms, 280 beds, a heliport, shops and need to be restricted or how patients move and benefits for the clinical staff and for the 844 parking spaces through the care pathway should all heavily patients,” added Mr. de Mello. influence the design. We also embedded an engineer into the construction team so that any A MODEL FOR THE FUTURE unanticipated issues could be solved quickly tension within the project so that people set While these initiatives were important in during the construction process.” ambitious goals and then celebrate their helping drive down costs and improve service, accomplishments,” he added. they also helped the existing employees grow IMPROVING THE OLD TO PREPARE FOR Not surprisingly, Mr. de Mello is proud of THE NEW accustomed to change and prepare for their what he and his team have accomplished. All Likely the biggest challenge, however, was roles in the new facility which – at three times of the key indicators show that the hospital is that the Vila Franca de Xira Hospital project the size of the current structure – would take operating at a far higher level than originally was to replace an existing facility. As such, some adjustment. “Everything ran wonderfully anticipated in terms of volume and quality. And the winning consortium would be expected the first day but – as with any living project like he clearly believes that the approach taken to take over operations in the existing facility this – we still needed to spend the next year by Portugal’s government will be borrowed in while the replacement hospital was being or so making adjustments and adapting our other markets across Europe and the world. built, manage the transfer of services to the sequences and processes in order to optimize “I see a clear opportunity to expand this model new hospital once it became operational and them according to the physical infrastructure.” across other geographies and other places in then manage and operate the new facility For Mr. de Mello, the team’s motivation the world - we have delivered clear benefits for for the remainder of the 10-year term. and enthusiasm were key factors in the the patient, clear benefits for the professionals While the challenge of shifting an operating project’s success. “For this type of project, and clear benefits for the healthcare system hospital from one facility to another in 7 days you really need people that are enthusiastic, and the state. Besides that, nowadays, helping was certainly daunting, Mr. de Mello suggests optimistic, hardworking and comfortable finance healthcare is very important to the that the more challenging issues often relate with change. It’s really about having positive future success of our country.”

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By Craig Walter, KPMG in Canada

The infrastructure investment nfrastructure as an ‘asset class’ hit its environment continues to evolve. stride 15 or so years ago when Australian and Canadian institutional investors began New long-term capital from a I investing long-term capital into infrastructure We are now in a new ‘third growing and global group of in a meaningful way. These investors were phase’ in the evolution of institutional investors is driving attracted to infrastructure for both its portfolio institutional investment, up competition and pressuring diversification benefits and the way its long- returns in ‘core’ developed term, lower-risk and inflation-protected cash characterized by an flows matched the long-term liabilities of infrastructure markets. aggressive focus on non- pension funds and insurance companies. In this ‘first phase’ of infrastructure investment, traditional and emerging A growing number of the more most strategies were focused on less risky markets and a growing sophisticated investors are now ‘core’ infrastructure (regulated utilities, mature appetite for higher-risk starting to explore how they can toll roads, and contracted power) in core investments.” best leverage their experience and markets – Australia, Canada, the UK and capabilities in order to uncover and the US for some, the OECD for others. Not surprisingly, attractive returns earned secure new and more attractive by early movers resulted in both a wave of investment opportunities. This capital targeting infrastructure and more is leading to a dramatic shift aggressive investment strategies to win in investment patterns, with deals, including excessive leverage and more capital focusing on riskier aggressive growth assumptions in areas like traffic and revenue, for instance. Some geographies and business models of these strategies were exposed in the in search of superior risk-return aftermath of the Global Financial Crisis tradeoffs versus what is now (GFC) and many investors were forced to available in core markets. restructure, write-down or realize losses. In

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© 2015 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. the years following the GFC, the ‘second sectors where risks are better understood innovative partnerships and structures to phase’ of infrastructure investment, some and returns more reliable. Regulated asset more effectively deploy capital. of the more sophisticated investors adapted sales in places like the UK, Canada, Australia Last year, for example, the Canadian Pension by beginning to change the composition of and Western Europe, for example, have been Plan’s Investment Board (CPPIB) invested their investment teams (building diverse fiercely contested. into a wide range of emerging market assets skill sets, including operational capability), Rather predictably, the high level of including a pipeline business in Peru and a toll their approach to transaction evaluation competition and significant increase in road portfolio in India. In April, Quebec’s Caisse (much more thorough), and their level of capital has led to reduced returns for core de Depot et Placement (CDPQ) invested in a involvement as an owner in their investments infrastructure in core markets. portfolio of toll roads in Mexico and, in May, the (much more proactive). Ontario Teachers’ Pension Plan Board (OTPP) As was the case near the end of the THE SEARCH FOR BETTER RETURNS and PSP Investments announced a partnership first phase of infrastructure investment, Unwilling to settle for depressed IRRs, and with Banco Santander to acquire and develop we are now seeing another wave of new armed with the valuable lessons of the GFC various renewable energy and water projects in capital targeting infrastructure. At first, and now-significant experience assessing, markets like Brazil, Mexico, Uruguay and Spain. funds started to flow from investors in core pricing and managing risk, a growing number infrastructure markets such as the UK, US of the more sophisticated funds are now A SHIFT IN RISK APPETITE and Europe. But it has quickly been followed starting to branch out beyond core sectors Ultimately, we see these trends resulting by new sources of long-term capital from the and markets in search of better returns. in a meaningful shift towards riskier areas emerging markets, particularly the Middle As a result, we are now in a new ‘third of investment. For some, this will mean East and Asia. phase’ in the evolution of institutional investing into assets and companies in the While new investment flows towards investment, characterized by an aggressive emerging markets. For others, it may mean infrastructure is certainly a welcome focus on non-traditional and emerging markets taking on projects with more development development, the reality is that to date, (such as Mexico, Peru, Brazil, India, Turkey, risk or investing into companies with greater rather than increasing the number of projects parts of South East Asia and Africa) and a revenue and/or operating risks. The more being funded, much of the new capital growing appetite for higher-risk investments. aggressive will do all three. And this may has been earmarked for just a handful of And we are starting to see investors think prove to provide better risk-adjusted returns ‘mature’ infrastructure markets and “core” more creatively about how they can create than investing in core in any event...

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© 2015 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. The key to megaproject success Start with a strategic view By Gary Webster, Global Head of Capital Projects Leadership

Megaprojects are certainly awe-inspiring. But they can also be extremely risky for governments and project owners. Recent history suggests that the majority of megaprojects currently on planning tables will either stall, go over budget or face signiﬁcant delays. But with millions – sometimes billions – of dollars on the line, national reputations at risk and economic growth in the balance, some project owners are now starting to take a more strategic approach. And in doing so, many are ﬁnding that they can greatly enhance the potential for project success.

MORE MEGAPROJECTS, MORE RISK But our experience suggests that most AVOIDING THE INEVITABLE In the world of infrastructure, megaprojects are unlikely to achieve The unfortunate reality is that the vast there are few things as grand or as their original planned targets. Indeed, majority of project delays and over-runs impactful as megaprojects. Massive in a recent KPMG survey of project could be avoided if only the right information, structures, eye-popping budgets, intense owners, just 30 percent said that their perspective and experience were to be complexity and the potential for huge beneﬁts projects had been completed within applied at the outset, with the right project all come together to capture the imagination budget over the last 3 years and only teams overseeing and executing against of citizens, governments and investors. a quarter said they had managed to the plan. The challenge is that few project Not surprisingly given the massive complete their projects within 10 percent owners have the right skills or capabilities demand for infrastructure around the world, of their original timeline.2 In most cases, to achieve this. most governments are particularly keen on cost overruns and delays brought the Private sector owners tend to bring megaprojects. As the most recent edition of value of the entire project into question unmatched industry experience to project KPMG’s Infrastructure 100: World Markets and, with it, the reputation of the planning, but often lack insight into the Report demonstrates, there are literally owners and investors resulting in regulatory, social, political and environmental thousands of megaprojects now underway serious consequences to executive issues that are so important to a project’s around the world.1 sponsors. success. Public sector owners, on the other

1 Infrastructure 100: World Markets Report, KPMG International, 2014 2 Global Construction Survey 2015: Climbing the curve, KPMG International, 2015

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© 2015 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. working together to achieve common goals. stakeholders (I’m often amazed at how Yet while history shows that failure can be few projects actually do this). lethal to the careers of both politicians and Selecting the right project leaders will executives, few projects focus on finding also require careful attention from the the middle ground. board. The ideal candidate would bring In part, this gap in strategic viewpoint is together a strong commercially-based due to high demand and scarce resources. approach with an executive mind-set and In Canada alone – arguably not one of the deep project implementation skills. They larger infrastructure markets – we have must be able to think strategically and around 400 projects or programs worth broadly about the environment in which more than a half-billion dollars in the pipeline, they are operating and be able to lead yet only a handful of people with the right and delegate efficiently. And they must experience and perspective to properly plan be able to navigate the complex social and manage them. To make things worse, and political stakeholder environment in many of those with the right skills are now which the project will be delivered. But close to retirement, creating the specter of those with this combination of skills and even greater skills gaps in the near future. experience are few and far between.

STARTING WITH THE RIGHT SKILLS GETTING THE RIGHT ADVICE As a result of this gap, most infrastructure With little suitable capability in-house, most megaprojects around the world are being project owners – both public entity and planned, designed and managed by privately-led – will likely need to focus on ‘technocrats’ who often lack the necessary identifying, recruiting and retaining external breadth and depth of experience. In some advisors with the right skill sets and experience cases, these are bureaucrats with experience to help plan projects of this size and intensity. in smaller projects who hope to be able to Then the trick will be pairing them up with scale-up their experience to megaproject talented internal managers to ensure that status. In other cases, projects may be skills and experience are properly transferred With so much at risk, initially designed by engineers or project in order to support the ‘next phase’ of promoters who are focused on the more megaproject delivery. governments, project technical aspects of the project rather than But project owners be warned: a theoretical owners and investors the wider strategic aspects. approach to project management is no match Unfortunately, our experience suggests for a practical approach. Many advisors – both in megaprojects their projects tend to fail more often than small and large – will tell you they know what should see producing not. The reality is that it takes a very special it takes to manage a megaproject strategically a holistic practical skill set to fully understand, oversee and but few have put their skills to the test. In an manage megaproject delivery – one that environment where every mistake can cost plan as a top priority not only encompasses the technical and many millions of dollars, this lack of practical and then constantly socio-economic aspects, but also the wider experience can mean the difference between political program management and strategic ultimate success and public failure. ensure that the project leadership requirements. is being implemented For their part, boards and executives THE MOST IMPORTANT STEP to this plan. need to understand the complexity of the With so much at risk, governments, project megaproject environment, and be prepared owners and investors in megaprojects should to provide consistent active stewardship see producing a holistic practical plan as a and oversight of both the business case top priority and then constantly ensure that planning and – likely more importantly – the project is being implemented to this hand, tend to have deep experience (and the implementation. plan. This sounds simple but unfortunately some influence) over the social, political This, in turn, will require executives and doesn’t happen as much as it should. The and environmental aspects but struggle to boards to receive regular (and full) briefings; bottom line is that issues found in the apply the more ‘commercial’ perspective to understand and ask the right questions planning phase that cost a dollar to fix will required to help industry stakeholders to achieve all of the project objectives (not cost 10 times as much in the design phase; achieve success. just cost and schedule); and to be much but those found in the implementation phase The key, therefore, is in ensuring that more aware of the consequences of their could cost hundreds and thousands times the public sector and developers work decisions on the project teams. Simply put, more than they would have, had they been together to achieve a common goal while they need to ask the right questions of the caught in planning. simultaneously protecting their core right people at the right time. As a result of this, and given the extreme values – regardless of who will ultimately Beyond supporting the development of a pressure on government budgets, investor own the infrastructure. This will require robust holistic plan, boards and executives demands and public scrutiny that comes both governments and developers to must also ensure that all ‘people’ systems with megaproject delivery, securing the understand each other’s challenges, issues and reports are focused on implementing right people with the right skills who can and objectives in order to become more the plan in a way that reduces the potential acomplish this will likely be the most critical informed and collaborative counterparties for surprises to key shareholders and step project owners can take.

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© 2015 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. As the political pendulum across major infrastructure markets swings towards local authorities, those in central government are keen to remind people that infrastructure is often a national priority with a collective national benefit.

Infrastructure is not something that sits neatly within one layer of government. And while, traditionally, the balance of power in infrastructure development sits with the layer of government that funds it, many are now starting to ask who should ultimately be responsible: federal, regional or municipal?

By John Kjorstad (@JohnKjorstad), KPMG in the UK

ingapore’s founding father Lee Kuan in the United States via his HBO series Last Yew died in March, evoking reflection Week Tonight.1 He highlighted municipal Sfor many of the city-state’s 5 million issues such as burst water mains and residents. The 91-year-old helped transform “deadly” potholes as well as state and a small colonial port city in Southeast Asia federal problems maintaining aging bridges into an independent and successful nation and hydroelectric dams. Oliver illustrated the that has become one of the world’s premier challenge facing the country’s infrastructure: financial centers. Singapore’s success is Everyone wants to see something done built on its strategic geography and the about it, but no one agrees how to pay for it. government’s uncanny ability to deliver world Gone are the huge federal funding programs class infrastructure that enables it to attract that supported the development of America’s and manage economic growth. interstate highways and rural electrification. Singapore is unique among countries What remains is both inadequate and politically trying to develop essential infrastructure. It difficult. For example, the federal gasoline represents one governance extreme where tax was once the primary central funding there is virtually no difference between national mechanism for transportation infrastructure in and local interests. In contrast, much larger the US. However, it has remained unchanged geographies like the United States, Canada, for more than 20 years – its purchasing power Australia, Brazil and India lean more towards diminished by inflation and more fuel-efficient local entities with states, provinces and cities vehicles. Meanwhile, traffic volumes continue leading the development, prioritization and to rise causing greater wear and tear on funding of local infrastructure. Other countries America’s roads and bridges. are more balanced – orchestrating from central The declining state of America’s government and executing locally. infrastructure – and the federal government’s Traditionally, the balance of power in inability to act on it – has sparked a renewed infrastructure development sits with the national debate about funding. Increasingly, layer of government that funds it. Central state and municipal planners are having to governments control broad budgets and be creative and rethink how they will pay for have access to larger pools of capital. Local new schemes as well as the refurbishment governments better understand constituent and maintenance of existing structures. The needs and the user’s ability to pay. Pennsylvania Rapid Bridge Replacement Which model is correct? Who should pay Project is one such public-private partnership for our infrastructure? Who is responsible (PPP). It is part of the state’s comprehensive for our infrastructure? transportation funding plan and majority financed by more than US$700 million of LESS MONEY FROM THE TOP, MORE Private Activity Bonds, debt instruments NEED FOR LOCAL FUNDING issued by state or local governments whose Earlier this year, comedian John Oliver proceeds are used to construct projects with presented a robust satire on infrastructure significant private involvement.2

1 http://www.citylab.com/commute/2015/03/john-olivers-solution-to-americas-infrastructure-crisis/386549/ 2 https://ijglobal.com/articles/95616/plenary-and-walsh-close-on-penn-bridges-ppp

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© 2015 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. As local governments begin to take more may seek greater devolution from central control over the planning and funding of governments in order to manage their own their infrastructure, the role of a central finances and fund local infrastructure. Devolved government shifts from financier to facilitator. powers already exist and are expanding in Last year, Infrastructure UK’s (IUK) government Wales, Northern Ireland and Scotland leaving guarantee scheme was deployed in the much of England feeling powerless outside of United Kingdom to support the financing Westminster and the UK’s southeast capital of the Mersey Gateway Project – a US$896 region. However, five northern cities led by million (GBP600 million) road bridge spanning Manchester have strategically formed “One the River Mersey in north west England.3 North” creating a regional US$22 billion The project was led by a small local authority (GBP15 billion), 15-year transport plan that instead of the Department for Transport. IUK they’ve presented to central government.4,5 wrapped the senior debt, but the local council How taxes are collected and distributed has is shouldering most of the financial risk and a huge impact on infrastructure investment will make regular availability payments to the strategies. Centralized taxation and distribution concessionaire funded through toll revenue. give enormous power to the top layer of government and a national agenda, while MORE LOCAL FUNDING, MORE regional and municipal taxation empowers the DEVOLUTION bottom favoring local plans. If local governments As a result of the first trend, states and take more control of their infrastructure, they municipalities – particularly those in Europe – need more control over financial resources.

3 https://ijglobal.com/articles/91288/mersey-gateway-bridge-ppp-uk 4 http://www.manchester.gov.uk/downloads/download/5969/one_north 5 http://www.bbc.co.uk/news/uk-28654134

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© 2015 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. significant even if locally unpopular. In these cases, national governments and high-ranking judiciaries may need to intervene.

ENABLING LOCAL INFRASTRUCTURE THROUGH NATIONAL OR REGIONAL PPP PROGRAMS Perhaps the greatest non-financial contribution a national government can make to support local infrastructure is enabling private investment. Public-private partnerships require legislation enacted nationally or at an empowered regional level. Once that government entity has established the ground rules for engagement and set a clear precedent, the model easily trickles down to lower levels of government. When Brazil was initially developing their model in the mid-2000s, the country established a PPP department in the Federal Planning Ministry to manage the process. The ministry then set out to demonstrate the model and use the first project in each sector as a benchmark for that sector.7 Brazil now has a vibrant PPP market successfully closing US$12.4 billion across 41 separate PPP transactions according to data from IJGlobal. Recently, the US$1 billion Água São Lourenço water supply system PPP, by the state government of São Paulo. Few municipalities have successfully launched their own PPP programs independent of broader government guidance. Chicago, Illinois in the US is one rare exception.8 The city was the first American local government to pursue and successfully close PPPs on its own. Three separate deals involving a toll road and two parking systems have net nearly US$3.6 billion for the city’s residents and taxpayers. Other American cities have worked with their state governments to NATIONAL BENEFITS FROM over the local. Privatization can shift revenue replicate Chicago’s success – slowly building INFRASTRUCTURE INVESTMENT from a locally-owned public utility or asset a competitive American infrastructure market As the political pendulum across major into federal income taxes paid by the new and attracting a wide range of domestic and infrastructure markets swings towards local private owner. Whereas before, that money international investors. authorities, those in central government are would have been recycled locally, it becomes This competition to attract private capital keen to remind people that infrastructure more generic as tax paid into a national investment is healthy, and can also be credited is often a national priority with a collective treasury after privatization. in Singapore’s unlikely success. Speaking national benefit. It was announced in March in New Delhi, India at the 37th Jawaharlal that publicly-funded infrastructure projects LAND PLANNING, AND Nehru Memorial Lecture in 2005, Lee Kuan in the UK will be branded with a Union JURISDICTIONAL CHALLENGES Yew said: “When most of the Third World was Jack plaque to recognize taxpayers’ key Infrastructure is not something that sits neatly deeply suspicious of exploitation by western contribution in funding vital projects.6 within one layer of government. It must be (multinational corporations), Singapore invited Infrastructure may be local, but the economic coordinated to comply with regulations and them in. They helped us grow, brought in benefit from building roads, railways, and national standards. Some projects cross technology and know-how, and raised power grids – even hospitals and schools – borders and require multiple approvals. Others productivity levels faster than any alternative can equally be felt nationally. These projects need effective conflict resolution. A suburban strategy could.”9 help countries compete by supporting railway may cause jurisdictional disputes Lee’s vision directly impacted Singapore’s health and well-being, skills development, between competing municipal, regional economic success. He didn’t have to cut and international trade. and national interests. Other projects such through layers of government to realize There is also a scenario where privatized as nuclear waste disposal or a cross-border this vision, but that doesn’t mean it was infrastructure benefits national government pipeline project might be deemed nationally any easier.

6 https://www.gov.uk/government/news/new-union-jack-infrastructure-plaques-announced 7 http://www.bnamericas.com/news/infrastructure/Ofﬁcial:_Fed_hwy_BR-116_BR-324_PPP_to_serve_as_model_ for_future_projects 8 http://www.cityofchicago.org/city/en/depts/ﬁn/supp_info/public_private_partnerships.html 9 http://scroll.in/article/715572/Singapore’s-Lee-Kuan-Yew-on-why-he-departed-from-Nehruvian-welfarism Who controls our infrastructure? | INSIGHT | 53

By Daniel Loschacoff (@GlobalRailKPMG), Global Head of Rail, [email protected]

Once derided as old-fashioned and boring, today’s rail sector is positively sizzling. Old lines are being rehabilitated; new – often high speed – lines and metros are being developed; and new sources of investment are ﬂowing into the sector. Welcome to the remarkable resurgence of rail.

here is nothing boring about today’s rail service in that country – while, in other EVERYONE WANTS MORE RAIL rail sector. Flush with new investment places, new systems and lines are rapidly In part, this resurgence of rail is related to Tand driven by growing public demand, being developed; the articles on the Doha a number of macro forces at work around the rail sector has – rather suddenly – surged metro (page 56) and the Sao Paulo metro the world. Shifting demographics in the back into the hearts and minds of politicians, expansion (page 64) examine two such developed world and massive urbanization investors and average citizens. examples currently underway. in the developing world has reset public It’s not just conventional rail that is enjoying expectations about urban planning, A WORLD OF ACTIVITY the resurgence – so, too, is the High Speed connectivity and public transit. At the same As this Spotlight on Rail clearly illustrates, Rail sector. Plans for new High Speed Rail time, growing environmental awareness the rail sector is enjoying massive growth lines are in development in places like and the introduction of carbon targets in in almost every geography and market. In Saudi Arabia and Africa; calls for new High many jurisdictions has changed rail’s value many places, conventional rail lines are being Speed Rail services are growing in Europe proposition in the minds of users and tax upgraded and revitalized – South Africa’s and Asia; and long-awaited new High Speed payers. rolling stock procurement program (see Rail projects are currently under development People are also increasingly starting to page 68) is expected to utterly transform in the UK and the US. recognize that more roads do not necessarily

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NEW SOURCES OF FUNDING EMERGE With the reevaluation of rail’s value has come a transformation of its funding. As the article on page 66 clearly demonstrates, government leaders and rail authorities are now exploring new and alternative approaches to funding and financing transit, often by monetizing the development opportunities that so often surround rail development. In much the same way, the roundtable article on High Speed Rail (page 58) shows that – while government will often still need to take on some of the risk of development – many are starting to think more creatively about how major projects are funded and financed. Flush with new investment and driven by THE STORY BEHIND THE STORIES growing public demand, the rail sector has – Ultimately, this Special Report on Rail rather suddenly – surged back into the hearts highlights a number of key lessons for and minds of politicians, investors and average governments, rail operators and developers around the world. Likely the most important citizens. theme is that of connectivity. Those that take the time to fully understand how their assets ‘fit’ into the wider economy should be better placed to reap the broader benefits. The need for improved stakeholder lead to more growth or better quality of life. technological advances. Simply put, management also emerges from these In fact, many governments are now starting politicians, investors and voters understand articles. Organizations that collaborate and to eschew the ‘car culture’ that has built up that improved rail service does more than consult with stakeholders – from development in most urban areas and, in response, are just move people or goods from point A to partners through to community advocates – placing growing investment and support point B; it creates value. Value for users, will face fewer challenges and achieve greater behind mass transit in general and rail in value for investors, value for businesses results from their investments. particular. and value for governments (and their tax A more subtle – but equally important – The resurgence of rail is also driving a collectors). theme is that of operational efficiency. renewal of innovation across the sector. As a result, we are starting to see rail Building new lines is great, but getting more New control systems, greater data analytics projects evaluated on more than just financial from your existing assets is better. Given capabilities and improved use of technology and environmental feasibility. South Africa’s the significant advances in technology, are all creating new opportunities for improved rail modernization program, for example, is control systems and operational capabilities, productivity and efficiency while, at the same designed to not only raise the quality and organizations should be continuously striving time, innovative operating models are being productivity of the country’s rail network, but to improve the efficiency and productivity developed, supported by a burgeoning also to drive local development, create jobs of their assets. international rail operator segment. and – ultimately – establish a ‘made-in-Africa’ All of this leads to one over-arching rolling stock manufacturing sector. São conclusion: those that take a more holistic MORE THAN THE SUM OF THEIR Paulo’s rail investments are largely focused view of their rail projects and investments PARTS on improving access to employment for a will likely achieve more value, better returns While these macro trends are certainly broader cross-section of society. Proponents and deliver better quality services from this important, the reality is that rail’s resurgence of the UK’s HS2 project are adamant that resurgence of rail than those that view their has more to do with the perception and the project will be ‘transformational’ for projects from a purely technical or financial understanding of rail than with any specific the UK economy. perspective.

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By James Stewart (@jaghstewart), Global Infrastructure Chairman

ew nations have enjoyed the growth focused on catalyzing greater diversity some estimates suggest that congestion seen by Qatar over the past 50 years. within the economy. One of the key ways costs our economy between 1 to 2 percent FIn 1970, Qatar was a nation of just they hope to facilitate this shift is through of GDP each year.” The need for improved over 100,000 people with a Gross Domestic improved urban transport. transit will become even more acute as Product (GDP) (on a purchasing power parity Qatar gears up to host the 2022 FIFA basis) of only US$300 million.1 Today, the A CLEAR VISION World Cup. nation boasts more than 1.8 million people As the Managing Director of Qatar Rail, Guided by the Qatar National Vision and a GDP of almost US$300 billion.2 And Mr. Abdulla Abdulaziz Al Subaie, points 2030 – a clearly articulated strategy for according to the IMF, Qataris enjoy the out, “Transport and mobility are important driving economic and social progress for highest GDP per capita in the world – almost for any city, but it becomes even more the nation – the government’s transportation 50 percent higher than that of Luxembourg.3 critical for rapidly growing cities where plans include massive development over the While oil revenues clearly played a demand is increasing exponentially each next few years through three interconnected signiﬁcant role in Qatar’s spectacular growth year. Today, everyone relies on private cars projects – the Doha Metro, the Lusail Light trajectory, the government is increasingly and congestion is becoming unsustainable; Rail Transit project and the Long Distance

1 http://www.tradingeconomics.com/qatar/gdp 2 “Report for Selected Country Groups and Subjects (PPP valuation of country GDP)” IMF, 2015 3 World Economic Outlook Database, April 2015 56 | INSIGHT | Who controls our infrastructure?

© 2015 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. SPOTLIGHT Transport and mobility are important for any city, but it becomes even more critical for rapidly growing cities where demand is increasing exponentially each year. Mr. Abdulla Abdulaziz Al Subaie, Managing Director, Qatar Rail rail project. “Our National Vision is a very networks they lacked knowledge of local laws strategic program that aims to transform and regulations and that could pose a risk Qatar into a better place to live and work to the project. To overcome this, we asked and we believe that superior transportation international contractors to bid through Joint infrastructure is key to unlocking that vision,” Ventures with local companies who could help added Mr. Abdulla. them navigate local market issues, laws and regulations,” added Mr. Abdulla. THINKING BIG AND ACTING BIG Much like its endeavors in other areas, Qatar’s ACHIEVING THE VISION plans for the development of the massive Enhancing the social and economic value of Doha metro system are both grand and the project has also been a key priority for ambitious. The first phase will see more than the project planners and owners. Stations, 100 kilometers of track laid and more than for example, are planned to be part of ‘mixed 37 new stations built over the next 4 years use’ communities where commercial centers (by 2019). A second phase will add 72 more are developed over top of the urban stations. stations, extending the network by an additional “We believe that our stations should add 150 kilometers. “This will be one of the most to the appeal of an area and – in doing so – advanced metro systems both in the region increase the population density around the and in the world,” noted Mr. Abdulla. station which, in turn, will drive increased use And, much like its achievements in of the network,” stated Mr. Abdulla. other areas, Qatar seems to be on track to Sustainability is also a key theme for the meet its aggressive goals. The last of the project. “Economic, social and environmental 11 construction packages was awarded in sustainability are central to achieving our February 2015 and, as of April 2015, more objectives for social and economic progress. than 7 million cubic meters of soil had already This project, once completed, will cut more been moved and more than 52 million man than 250,000 tons of CO2 from the environment hours had already been invested in the project. each year, will improve overall road safety and The government’s commitment to meet will allow our younger generations to enjoy their deadlines is perhaps best illustrated by more freedom of movement and opportunity,” the fact that Qatar has acquired 21 tunnel noted Mr. Abdulla. boring machines which are now all engaged simultaneously on the project. PROACTIVELY MOVING INTO THE FUTURE Qatar Rail knows that there will be challenges THE RIGHT PARTNERSHIPS, EXPERIENCE along the way. Mr. Abdulla notes the need AND CAPABILITIES TO SUCCEED to be ready for the unexpected and to know Qatar’s government also recognized, however, how to deal with issues creatively through that it takes more than funding to successfully collaborative relationships and partnerships. deliver a project of this size and complexity. Ultimately, Mr. Abdulla points to the need for “Qatar Rail adheres to very high governance both effective engagement with government and transparency practices which delivers authorities and key stakeholders and an ability greater accountability in terms of project to be proactive as keys to success. “We have management and delivery. We know that our been very proactive in finding all of the skills success will ultimately depend on our ability and deploying all of the expertise required to manage the complexity, so we focus on to deliver this size of project on time and on integrating multiple perspectives to help us budget,” added Mr. Abdulla. predict and mitigate risk,” noted Mr. Abdulla. “Creating a metro system from scratch is With no existing rail infrastructure or unlike any other project – it’s not a one-time developers active in the market prior to this deal nor is it ever developed in isolation – so project, the Doha Metro project required it’s critical that we continue to be proactive significant international participation. “The as our nation grows and changes. We want challenge was that – while the international this metro system to serve the city well for contractors were excellent at building rail 100 years or more.”

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High Speed Rail projects are capturing the we build it and how we maximize the potential imagination and the attention of governments benefits from an economic, a social and an and populations across the globe. Today, employment perspective. dozens of networks are being developed Jeff Morales (JM): That’s right. In fact, around the world, from the Middle East and I would suggest that it’s not about the Asia through to the US and the UK. train at all. High Speed Rail is really about things like creating a positive impact on To find out more about the opportunities, communities, investing in sustainable benefits and challenges of developing a High development, reducing greenhouse gasses, Speed Rail network, Insight Magazine sat and encouraging a mode-shift away from down with Simon Kirby, Chief Executive roads and onto trains. It’s about economic Officer of the UK’s High Speed Two (HS2) development and the benefits of tying Limited and Jeff Morales, Chief Executive together regional economies in a way that The bigger challenge is Officer of the California High-Speed Rail hasn’t been done before. The train is really making sure that what Authority. just a means to an end. you build fits into the Editor (ED): What is it about High Speed ED: What are some of the challenges cities, communities and Rail that makes it so attractive today? organizations face when developing a the infrastructure of Simon Kirby (SK): I think, in a word, it’s new High Speed Rail network? the future, and that is transformational. It’s a complete step-change JM: For us, I think one of the greatest in the capability and capacity of rail. But it’s challenges we face is that High Speed Rail is all about working with more than just building a new world-class new to the US. We’re the first. The problem communities, stakeholders railway; in the UK we see it as an opportunity is that few people in the US – from the to stimulate economic growth. Our current average citizen through to elected officials and government partners to rail network capacity is already maxed out – have any first-hand experience with High ensure that everyone has and we believe that High Speed Rail will Speed Rail and so they have a hard time an integrated masterplan. allow us to not only improve access across really grasping the concept. They understand the country, but also lighten the load on our roads and highways; they understand airports Simon Kirby, CEO, UK’s High Speed current rail and road networks. and transit systems; but they don’t really Two Limited Ultimately, I believe it isn’t just about what understand the value and benefits that High we build and what we deliver. It’s about how Speed Rail has to offer.

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© 2015 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. SPOTLIGHT Thinking practically, I believe that High Speed Rail will become an ever-more important part of the transportation mix for many countries. It’s not a pet project or a whim; for us in California, it’s a necessity. Jeff Morales, CEO, California High-Speed Rail Authority

That being said, I suspect that – as we is efficiently and effectively integrated into interests to enable a blend of public and progress in California – more High Speed their master plans and transit strategies. private funding that focuses on stimulating Rail projects will be proposed and developed I think there were initial doubts that the economic growth. For example, we see across the country. project would get going but, now that it great opportunities to stimulate significant SK: The greatest challenge facing the UK is has, we have seen increasing engagement private funding for developments around similar in nature to that facing the US: from local communities and stakeholders. major stations. The ultimate objective is experience with High Speed Rail. In the UK, to drive private funding off the back of it’s less of a public perception challenge – ED: What role does politics play in the publicly-funded station in a way that High Speed Rail has a lengthy history driving High Speed Rail projects creates a huge scale of development and across Europe – and more of a challenge through the pipeline? economic benefit. in securing the right skills and capabilities JM: I think politics can be divisive but political JM: We’re also deeply focused on exploring to manage and operate the project. leadership is key, and that is true of any big how we can generate new sources of funding High Speed Rail is very different to venture. Projects that are this big and this from the project. Nearly a third of the revenues traditional rail. The technology is different, transformational really need a vocal champion of JR East – one of Japan’s leading High Speed the solutions are different and the skills that can articulate and maintain a vision of what Rail owners and operators – now comes required are different. That’s why HS2 the project means and that is what Governor from things other than ticket receipts and Limited is now building two new colleges Jerry Brown has done here in California. that suggests that significant private funding in the UK to focus solely on developing the At the Federal level, politics is playing a more can be secured for these types of projects. skills required for High Speed Rail. divisive role that has led to a period of decline In California, our project was identified as a in infrastructure investment. It can take years critical part of the State’s program to address ED: High Speed Rail projects often take just to have a simple highway bill reauthorized climate change back in 2008 and, recently, the decades to develop and deliver and – at the Federal level so we need to show a legislature under Governor Brown agreed to if all goes well – should last another much more positive direction and make big, commit 25 percent of the annual proceeds of 75 to 100 years or more. How are you bold investments at the State level instead. the State’s Cap and Trade program towards ensuring that investments today will SK: It is absolutely about political leadership the High Speed Rail program and that has meet the needs of future generations? and support. And in the UK, we’ve been lucky been a game-changer. It not only provides SK: It is certainly difficult. Ultimately we are to enjoy broad support for HS2 from both of us with both cash and financing options, building a significant piece of infrastructure, the main political parties. In fact, both parties but also means we’ll be able to deliver the so the challenge is how to get innovation voiced their support for HS2 as part of their project faster, more efficiently and with into our design and innovation into our recent election platforms and – at the second greater environmental benefits. thinking. How can we really forecast what reading of the bill in the House of Commons will constitute an outstanding experience for last year – Members of Parliment voted to ED: Do you see a strong future for High a passenger in 2026? It’s almost like asking support the project by a majority of 411. Speed Rail going forward? what the iPhone18 will look like in 20 years. But like any large, transformative and JM: I think that High Speed Rail fills a But the bigger challenge is making sure potentially sensitive project, we need to specific niche in the overall transportation that what you build fits into the cities, continuously build and maintain that political system very efficiently in terms of communities and the infrastructure of the support by delivering on our promises and environmental impact, land use, capacity future, and that is all about working with doing it to a high standard. and speed. And it does all of that in a way communities, stakeholders and government that highways, airplanes and traditional rail partners to ensure that everyone has an ED: Securing sufficient funding and simply can’t. So thinking practically, I believe integrated master plan. financing has been an ongoing that High Speed Rail will become an ever- JM: I’d agree that it’s difficult to forecast challenge for High Speed Rail projects more important part of the transportation what customers will want in the future and around the world. What role can the mix for many countries. It’s not a pet so we rely heavily on the manufacturers and private sector play in helping fund project or a whim; for us in California, it’s rolling stock providers to drive innovation. these projects? a necessity. Our legislation sets certain guidelines like SK: Current government policy is that the first SK: I absolutely agree. And that’s what minimum speeds and safety standards, but phase of HS2’s infrastructure will be funded by makes it such an exciting time to be involved then we really look to the private sector to the government treasury so ultimately it will fall in the sector. The opportunities in terms of help us take advantage of – and, later, adapt on the public balance sheet. To be honest, I think job creation, skill developments, economic to – new technologies. it’s getting harder and harder for government to growth and innovation are unprecedented – a Much like the UK, we’re also very focused on pass on these types of major projects. once in a lifetime opportunity – so it’s a hugely working with the local communities and But I think the broader issue is how you positive place to be, not just today but for governments to ensure that our network work with local stakeholders and private the next two to three decades at least.

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sectorBy Arvind Mahajan (@arvindmahajan), KPMG in India

With the tabling of India’s 2015 Rail Budget India and recognize that our railways are an become one unified market. However one in February, Railway Minister Suresh Prabhu important enabler of that vision. In part, it’s unified market needs physical connectivity clearly signaled India’s intention to unblock about improving our growth, productivity and and railways will play a critical role in this. the infrastructure project pipeline. The capital attractiveness as an investment destination. outlay for 2015-16 is around INR 1 trillion But there’s also an ideological link that AM: In your recent budget, you articulated (US$15.6 billion), which is around 55 percent reflects the important role railways play in a vision for India’s railways. What are the higher than last year’s outlay. creating opportunities for the common man. key priorities for your Ministry? The 2015 Rail Budget represents a A nationally linked rail network also brings MP: One of our top priorities is making significant increase in allocation towards together and bonds all of the States across India sure we embed good global customer rail infrastructure for India. Almost half will which is important to driving more consistent service standards into our rail network and come from the public budget and Minister growth across the country. The government is operations. At the same time, we need to focus on safety and are already working Prabhu hopes to secure the remaining funds going to bring in a major reform in the form of with the Ministry of Transportation to raise from private investors including pension Goods and Service Tax (GST) implementation and when this happens the entire country will safety standards. funds, multinational banks, infrastructure funds, and by borrowing from the market. Proposed investment plan (2015-2019) According to Minister Prabhu, private Amount sector investment and tapping alternative Item (Rs in crore) mechanisms of financing will be two key Network Decongestion (including DFC, electrification, doubling 199,320 factors in achieving his Ministry’s goals (electrification and traffic facilities)) under this latest budget. Network Expansion (including electrification) 193,000 We sat down with Minister Prabhu shortly National Projects (North Eastern & Kashmir connectivity projects) after he announced the 2015 budget to find out 39,000 more about how his new investment strategy Safety (track renewal, bridge works, ROB, RUB, signalling & telecom) 127,000 will drive value for private investors, the Indian Information Technology/Research 5,000 economy and the wider national population. Rolling Stock (locomotives, coaches, wagons – production & maintenance) 102,000 Passenger Amenities 12,500 Arvind Mahajan (AM): What is driving the High Speed Rail & Elevated Corridor 65,000 renewed investment into India’s rail sector? Minister Suresh Prabhu (MP): The Prime Station Redevelopment & Logistic Parks 100,000 Minister and his government are very Total 856,020 focused on creating a more prosperous Source: Indian Railways, 2015

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© 2015 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. SPOTLIGHT Since railways are a monopoly, we will need the right regulatory framework to ensure that we are striking the right balance between the needs of private investors and the interests of the public and the economy. Suresh Prabhu, Railway Minister of India

We carry 1 billion tonnes now and our target projects in which Indian Railways wants to Four transformative is to achieve 1.5 billion tonnes in 5 years. We invite private sector participation has been goals are well on our away to exceeding this target. posted to the Railways website. According to India’s Rail Ministry, My top priorities are capacity augmentation, the government hopes to achieve modernization, accounting reforms and making AM: What role do you see foreign four transformative goals over the the railways bigger and better. development banks, multinational banks next 5 years: and foreign governments playing in the AM: What are some of the challenges you funding of India’s railways? 1. To deliver a sustained and see in attracting private investment? MP: We already have agreements with measurable improvement in MP: Since railways are a monopoly, we will about nine critical country partners and are customer experience. need the right regulatory framework to ensure actively pursuing others. Foreign investors 2. To make rail a safer means of travel. that we are striking the right balance between can participate in a number of ways – often the needs of private investors and the interests through either investment or technological 3. To substantially expand Bhartiya of the public and the economy. A model partnerships. Japanese entities are keen to Rail’s capacity and modernize concession agreement has been prepared and participate in the Mumbai Ahmedabad High infrastructure: increase daily put up on the website of the Indian Railways. Speed Rail project. Chinese investors are passenger carrying capacity from We are also revamping the public-private looking into the Delhi-Chennai high speed 21 million to 30 million; increase partnership (PPP) cell at the Railway Board. corridor. Investors from France, Germany, Italy, track length by 20 percent (from Korea and a host of other countries are also 114,000 to 138,000 kilometers); AM: What opportunities are there for private interested in participating in India’s rail sector. grow annual freight carrying investors in India’s rail sector? capacity (from 1 to 1.5 billion MP: I see private sector participation as a AM: The budget contains a number of tonnes). win-win for everyone. The private sector topics and projects that have been raised 4. To make Bhartiya Rail financially can look at various opportunities available before but never materialized. Are you self-sustainable and generate large in the areas of last mile connectivity to confident in your Ministry’s ability to surpluses from operations, not ports, tourism, etc. There are opportunities deliver on these targets? only to service the debt needed to in station redevelopment and also in various MP: I’m happy to report that within a week fund capacity expansion but also railway line projects that Indian Railways of releasing the budget, we were already to fund the ongoing replacement plans to do on Annuity/BOT basis. Other implementing a large number of the projects of depreciating assets. PPP policies such as the Special Freight outlined in it. We’ve also made great strides Operators Policy and Liberalized Wagon in ensuring our public sector managers have Source: indianrailways.gov.in, Highlights of the Investment Scheme are under review and the right policies in place to support faster Railway Budget 2015-2016 once ready will also present an investment decision-making. I’m very confident that we opportunity for the private sector. A list of will meet our budget targets.

ADDRESSING THE RIGHT PROBLEM By Rajaji Meshram (@RajajiMeshram), KPMG in India The statistics linked to the railways in India are reason for this has been under investment in the road, port and airport sectors in the impressive, by any standards – 65,808 route in railway infrastructure. Railways, in India, past decade have led to significant addition kilometers, 7,112 stations, 1 billion tonnes is a sector where there is negligible private in capacity and the Minister wishes to of freight traffic and 8.4 billion originating sector investment (around 6 percent) as replicate this in the railways sector. In our passengers (all figures are for the year compared to roads (20 percent) or ports view, the Minister is taking appropriate 2013-14). Another interesting statistic, as (81 percent) sectors. Key railway lines in India steps to address the right problem of under per a report of the Planning Commission of which carry a major proportion of passenger investment in railways sector. Once the India, is that the modal share of railways in and freight traffic are choked and there is funding for the railway sector is ramped up, passenger traffic is around 10 percent and in an urgent need for investment to augment the next challenge for the Ministry would be freight traffic is around 35 percent. The modal the line capacity. By focusing on the aspect to create an execution organization that has share of railways, in the beginning of the of routing additional funds to the railways the capability to spend the funds allocated 21st century was 15 percent and 40 percent sector, the Minister is trying to address one and deliver projects on time. respectively. The share of railways has thus of the root causes impeding growth in the been steadily declining. One important railways sector. Private sector investments

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By Richard Threlfall (@RThrelfall_KPMG), KPMG in the UK, & Kurt Ramey, KPMG in the US

The pressure on public and private railway owners and operators is tremendous: public scrutiny is mounting; demand for service is rising; and the available time for maintenance is becoming increasingly scarce. At the same time, rail owners and operators each face a unique combination of (sometimes conﬂicting) local stakeholder pressures and demands. In this increasingly complicated environment, robust governance structures underpinned by good management information are essential to long-term success. Yet historically rail owners have struggled to obtain good information on their assets, and rail operators are routinely overwhelmed with conﬂicting information when things go wrong. Both challenges are now being solved, through the adoption of technology in the industry and through transformational improvements in data analytics.

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With complexity rising on all sides, many railway operators and owners are now exploring how they might alleviate some of these pressures by improving their governance structures and management information.

RISING PRESSURE, MOUNTING risk. Clear and coordinated governance personal data privacy, rail operators can COMPLEXITY structures are critical to ensuring that all start to track end-to-end journeys, and then Few users of rail services truly understand parties understand their responsibilities and run predictive data analytics to forecast, the astounding complexity that goes into that there are clear reporting processes, for example, how volumes may be affected making sure that projects are delivered which become particularly critical at times of on a particular route by wet weather or a and that trains run on time. Yet there is an network disruption or when external events major event. That in turn allows mitigating expectation, amongst rail customers, and the impact project delivery. actions to be taken, for example increased general public, that a rail system should run A strong governance structure is also staffing or additional services to be run, like clockwork, and when there are safety central to managing public perception if overcrowding is expected. And rapid or operational problems and delays railway and responding to stakeholder and policy data diagnostics allow better decisions owners and operators quickly find themselves questions. Indeed, by clearly articulating a to be taken when services are disrupted, subject to intense and often public criticism. plan and communicating with stakeholders, quickly computing what pattern or diversion That rising public scrutiny in turn drives railway owners and operators can help or replacement services will minimize increased political scrutiny. It is not unusual build up public consensus around their customer inconvenience. to see the CEO of a metro service dragged objectives and the necessary actions to For the railway owner, technology is in front of a legislative commission to answer achieve them. And in doing so, they can making the asset management revolution for service interruptions or safety failures. also quickly respond to issues and policy possible. Building Information Modelling And there are countless examples of rail questions. holds out the promise of asset information projects that have died or stalled as a result for life. Mapping technology means of policy or administration changes. TECHNOLOGY TO THE RESCUE increasingly we know where our assets At the same time, demand for service Whilst the need for good governance are, both for a particular network and relative is rising while funding remains limited has always been understood, it has been to other networks. Embedded technology and assets are coming under increasing difficult to attain in practice in the railway in assets means a constant stream of data pressure as owners and operators seek sector. The operating environment is on asset health. Data analytics creates the to squeeze more value and efficiency from inherently complex, and railway owners capacity to take all of that data, model future their existing investments. For operational typically lack good information on assets scenarios, and for decisions on interventions railways, this means less ‘down time’ for which may have been created decades to be based not just on judgement but on maintenance and upgrades. For those previously. This severely limits the ability an understanding of long-run financial and under development or in design, this means to closely manage asset performance. operational outcomes. For asset intensive renewed focus on reducing (or delaying) Fortunately, technological developments, rail businesses it is the route to maximizing costs and eliminating over-runs or delays both in physical assets and in data analytics, long-term profitability and performance. all while building in needed operational and now provide a basis for a step change in For public sector railways it is the key to safety requirements. information quality. unlocking value. It should mean greater From a railway operator perspective, transparency and accountability for both THE NEED FOR ROBUST GOVERNANCE implementation of performance shareholders and taxpayers. With complexity rising on all sides, many railway management structures supported by operators and owners are now exploring how technology offers both improvements in CONCLUSION they might alleviate some of these pressures customer experience, improved information The technical challenges of running a railway by improving their governance structures and can extend to safety and asset life. have not changed materially in decades, and management information. And rightfully For example, the paper ticket is rapidly but the intensity of use of many railways so: robust governance and management becoming obsolete in favour of smart has multiplied the difficulty of meeting that information are key to long-term operational cards or contactless payment. That is challenge. Railway owners and operators success and financial stability. easier for customers but it also provides need to invest now in the structures and In part, this is because robust governance a wealth of information for operators on technologies that both improve the customer structures allow operators and owners to journey choices. Combined with mobile experience and provide a basis for more properly delineate responsibility and allocate data, suitably anonymised to deal with effective decision making.

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By Mauricio Endo, KPMG in Brazil

Boasting the largest population in Latin Metropolitan Transportation for the State population itself has grown by just 2 percent. America – arguably the largest in the of São Paulo notes that the region’s future According to Mr. Pelissioni, increasing Western Hemisphere – urban mobility is a economic, social and development goals automobile usage has started to strain the critical issue for the São Paulo Metropolitan largely rely on improving connectivity and city’s roads and economic productivity. “The Region. The ‘megacity’ already enjoys one mass transit in the region. high number of trips made by automobiles has of Latin America’s largest rail systems created heavy trafﬁc jams during ‘peak hours’ which, as part of the wider integrated mass BIG CITY, BIG CONGESTION which, besides being of great environmental transit system in the region, carries more With more than 20 million people spread and economic concern, also means increasing than 7 million people around the city each across more than 8,000 square kilometers, time spent travelling between home and work day across both the Metro and the regional urban transit is a key topic for those living and for the region’s population,” he noted. commuter rail company CPTM. working in the São Paulo Metropolitan Region RMSP already boasts a world-class transit Yet while the rate of population (RMSP). Roads have become congested; system. The city’s metro was named Best growth in the megacity may be slowing, over the past 8 years, automobile usage has Metro Americas in 20101 and the São Paulo Clodoaldo Pelissioni, Secretary of increased 18 percent in the city, while the Metropolitan Train Company (the region’s

1 http://www.abn.com.br/editorias1.php?id=58485

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© 2015 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. SPOTLIGHT Many of our plans focus on the growing need to provide service to areas where the projection of socio-economic variables point to a higher incidence of low-income population. Clodoaldo Pelissioni, Secretary of Metropolitan Transportation for the State of São Paulo

commuter rail service) is one of the busiest The first PPP ever conducted in Brazil was dialogue established between the main actors rail networks in the world. The network also for the São Paulo Metro (Line 4) in 2005, signed involved in the operation and management includes a massive bus system (more than just a few short months after the passing of of the metropolitan transportation systems, 16,000 buses) and an extensive network of new federal PPP legislation in December including the municipal systems of the RMSP, rapid bus transit lanes. 2004. In the last 2 years alone, two new remains strong and ongoing,” he noted. PPP arrangements have been signed – one Ultimately, solving São Paulo’s urban IMPROVING CONNECTIVITY AND for the Metro’s new Line 6 and one for the congestion challenges will require all levels ADDRESSING SOCIAL IMBALANCES Monorail Line 18. of government to work towards a solution. “A big challenge in the past was the historic The ability to finance these works has been “The problem of transportation will not be lack of connectivity between modes of supported by Brazil’s National Development settled solely by one sectorial policy created transport which impacted accessibility to Bank (BNDES) who have not only financed in a vacuum; it can only be achieved if there urban centers of jobs and services,” added the State payments during the works through is appropriate interaction of various urban Mr. Pelissioni. “The big challenge we are subsidized interest rates, but also the private functions, governed by the corresponding public facing is to update the metropolitan network Special Purpose Company. “One big benefit of policies and invigorated by market forces.” of high- and medium-capacity transport working with the BNDES is that it essentially in RMSP.” meant that the grantor did not need to offer Another key challenge now facing the city real guarantees to private PPP partners for the is the perceived imbalance between the public obligations which, in turn, has allowed distribution of low-income housing and the the State to contract several other PPP projects employment centers. “The São Paulo State in the following years,” Mr. Pelissioni added. Secretariat for Metropolitan Transports (STM) has tried to link our solutions to the objectives MORE WORK TO BE DONE of other key public policies, particularly While progress is certainly being made, around land use and development,” added Mr. Pelissioni suggests that the country could Mr. Pelissioni. “Many of our plans focus on be doing more to attract private investment the growing need to provide service to areas to urban mobility projects. “One area of focus where the projection of socio-economic should be on establishing the legal conditions variables point to a higher incidence of low- and instruments for the expansion of public income population.” guarantees to private partners which will reduce credit risk and consequently reduce the cost PRIVATE SECTOR INVOLV EMENT of long-term loans,” he added. “It will also be HELPS EXPAND THE NETWORK essential to improve regulations and reduce A set of long-term investment plans for bureaucracy, as well as to establish the right the city’s urban network envisions massive macroeconomic conditions and mechanisms expansion over the next 15 years. The length for the expansion of private resources for long- of the network will triple from the current term financing, complementing or replacing 500 kilometers of high- and medium-capacity those offered by BNDES.” to more than 1,500 kilometers by 2030; the However, he also notes that greater inclusion number of stations serving the lines will also of the private sector in infrastructure delivery nearly triple to more than 420. The metro does not absolve the public sector from their system will see the greatest level of expansion, strategic planning duties and responsibilities. alongside some 200 kilometers of proposed “There really needs to be someone focused on monorail. understanding the studies within the broader Such a large and diverse number of projects context of planning which includes issues in development and planning is creating such as demand management measures, significant challenges for the SMT. “It’s a pricing policies, the identification of new and massive undertaking, requiring a high level complementary sources of financing, and of financial resources, strong management the consolidation of an integrated planning capability and extensive capacity in terms of management and monitoring process,” works, equipment and services,” noted Mr. Mr. Pelissioni added. Pelissioni. “Recognizing this, the government To achieve this, however, Mr. Pelissioni is now encouraging the participation of the calls for greater collaboration and cooperation private sector through public-private partnership between the public and private sectors. “For us (PPP), particularly in the rail sector.” to continue our advances, it is essential that the Who controls our infrastructure? | INSIGHT | 65

© 2015 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. railAlternative projects funding and financing of By Ian Flanagan, KPMG in the US, & Philippe Raymond, KPMG in Canada These days, it seems everyone wants more rail projects. But few know how to pay for it. Budget constrained and feeling pressure from mounting unfunded needs, many jurisdictions are now starting to consider alternative ways to fund and finance their much-needed rail projects.

A DESPERATE NEED FOR FUNDING rethink the ‘value’ that rail and transit projects Joint Development: In a Joint Development, When we talk with government leaders about provide to stakeholders. public and private sectors work together infrastructure, rail and transit projects almost In the past, most governments tended to develop rail assets through a prudent always top the list of priorities. Whether it to focus on the value rail projects offered to quid-pro-quo. In some cases, for example, is new metro lines in Mumbai, High Speed direct stakeholders, such as transit users and the public owner will lease or sell lands Rail in the UK or regional lines in East Africa, advertisers. Often left out of the equation was adjacent to the project in return for governments are increasingly recognizing that the more long-term value that rail projects were improved connectivity can help drive growth known to deliver to their surrounding areas. and environmental benefits, promote economic So while government would pay for new rail inclusion and enhance productivity. lines and stations, it was often the property But there is a big difference between wanting developers, businesses and homeowners that better rail projects and being able to afford captured the long-term value from government’s better rail projects. And few governments today capital expenditure. are in a position to lavish out on new major capital projects. In most markets, government ALTERNATIVE MODELS EMERGE budgets are as tight as they have ever been. Today, governments and project owners are Difficult funding choices are being made and increasingly starting to think about how they credit agencies are watching every penny that might tap into that long-term value lift to create is added to the balance sheet. alternative – and often more sustainable – Over the past decade, many governments funding options for rail projects. A number sought some reprieve to their funding woes by of different models have emerged or have making use of more efficient project delivery generated renewed interest, such as: mechanisms that can generate cost savings, Tax Increment Financing (TIF): This approach such as entering into public-private partnership essentially uses expected property tax (PPP) agreements or through concessions. gains that will be derived from the capital In addition, governments today are keenly expenditure to help fund the necessary searching for alternative options for creating rail development, often by allowing new, long-term, sustainable funding for their government to borrow or issue bonds rail projects. Some are already achieving against the anticipated incremental tax significant success. revenues. TIF approaches have been used successfully, mainly in the US. However, A NEW VIEW OF VALUE while TIF approaches tend to be useful A review of the current alternative funding in unlocking new funding flows, it must models around the world suggests that the be noted that governments will often still key to uncovering new funding options is to need to take on much of the revenue risk.

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A review of the current alternative funding models around the world suggests that the key to uncovering new funding options is to rethink the ‘value’ that rail and transit projects provide to stakeholders.

contributions to its development (as so, the State has essentially developed a enhanced urban development and greater was the case for some Metrorail stations new source of ongoing funding that helps social cohesion. The wider ‘benefit’ should in Washington D.C.). Alternatively, the it better achieve its environmental goals by be an issue that all stakeholders can agree developer may be expected to contribute funding a High Speed Rail project aimed on and coalesce around. a portion of their annual revenues or rents at taking cars off the road and reducing 2. What are the long-term objectives for the towards the ongoing funding of the project. carbon emissions throughout the State. project? Managers and public owners will Local Improvement Districts: While Local need to consider whether the objective Improvement Districts operate more as a DEVELOPING YOUR MODEL of the project is to recoup as much special property tax levied on those within The challenge facing those considering capital as possible over the project’s the district boundary, the idea is to capture alternative funding models, however, is that lifespan, or possibly more focused on some of the property gains that will be each situation is unique which means that – social objectives such as environmental delivered through rail improvements and while some best practices and lessons can protection. The long-term objectives will capital investments (within a defined distance certainly be shared from other jurisdictions – partially dictate how the funding model from rail stations). Governments may issue each project sponsor will need to develop their will be structured. a bond against the future tax revenues or own alternative funding models to suit their 3. What control do you have over taxes, use the annual payments to maintain and own unique circumstances and objectives. regulation and borrowing? Clearly, a massive upgrade assets on an ongoing basis. Our experience suggests that public owners and complex funding scheme, like Cap- and-Trade, may not be appropriate for local Cap and Trade: While there are a number of and government leaders should consider five and municipal governments. Similarly, few ‘Cap and Trade’ programs underway around key questions as they develop their approach: federal or central governments control the world, the State of California stands 1. What is the wider ‘benefit’ that rail delivers? property tax revenues or collection. Creating out for specifically earmarking a portion Yes, rail and transit projects move people from the right alternative funding mechanism of the revenues gained from their program point A to point B, but they can also deliver often requires supportive regulation which (aimed at reducing carbon emissions overall) a wider range of benefits such as improved usually requires the cooperation of various towards helping fund a low emission form environmental stewardship, increased land levels of government. of transportation – High Speed Rail. In doing values, improved business connectivity, 4. How will you sustain the asset over the long-term? All too often, existing funding mechanisms focus on the upfront capital required to deliver the project but ignore the longer-term funding requirements of maintenance, upkeep and improvements. Understanding the longer-term funding requirements across the project life-cycle will be critical in developing a sustainable alternative funding approach. 5. What is your appetite or capacity for risk? Different types of alternative models place varying levels of risk – both revenue and funding – onto the public owner. Governments must take some time to understand the current appetite and future capacity for managing and offsetting that risk.

BRIDGE THE GAP Clearly, demand for new and improved rail and transit connectivity is not going away any time soon. Nor is there much evidence of a resurgence in government budgets and funding capacity. For many, an additional option for ﬁlling the gap is to tap into alternative funding sources. Finding the right source and the right model will take time, careful consideration and some new thinking about how rail and transit projects deliver value.

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By all accounts, South Africa’s plan to procure more than 7,200 new rolling stock sets a record as the largest public metro rail procurement program in history. And with a total 20-year projected budget of around US$10 billion, it is likely the largest rail project of any kind underway in the world today. Yet while the headline numbers may be impressive, more impressive still will be the transformational impact the program will have on the national economy and economic growth and development.

By DeBuys Scott (@Debuys_Scott), KPMG in South Africa

A GROWTH IMPERATIVE products sit unproductively for long hours on businesses closer to the nodes which, in turn, For the country of South Africa and its people, the roads is simply not good for the economy drives significant development and creates the rolling stock procurement program and won’t help South Africa grow and develop.” massive opportunities for the population.” represents more than just another major project; it represents opportunity. More than EVALUATING THE BENEFITS OVERCOMING THE CHALLENGES 2.2 million people rely on the country’s aging Recognizing the wider benefits that improved PRASA faced a number of challenges in rail network to get to work every day but – with rail infrastructure could provide, PRASA strives developing such a large and transformational much of the existing rolling stock now almost to make investment decisions based on procurement program. In part, this was because 60 years old – reliability, speed and capacity much more than simple financial cost/benefit South Africa had not made a major procurement have become significant problems, both for analysis. Environmental impact, reduction of rolling stock in more than 30 years and users and for the economy. in travel times, improved safety, long-term therefore lacked much of the experience and “Helping people and products get to operating costs, potential for job creation and capacity to develop an achievable plan. their destinations quickly, reliably and on economic development are also factored into Data and market information were a particular time is key to growing a middle-class and the decision-making process. problem. For example, PRASA needed to creating an attractive and successful business “Ultimately, it’s about development and ensure that the national market contained environment,” pointed out Piet Sebola, Group improved rail infrastructure that catalyzes enough capacity and resources to meet the Executive of Strategic Asset Development development in ways that roads just can’t,” threshold of at least 65 percent local content of Passenger Rail Agency of South Africa added Mr. Sebola. “Once you start laying out that had been set by the Department of (PRASA) and the person responsible for this the rail lines and improving the service, people Trade and Industry. “The data we needed on Procurement Program. “Having people and tend to respond by moving their families and the market, its capability and capacity either

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didn’t exist or wasn’t readily available so we needed to spend some time collecting and analyzing the data to ensure that we could – with authority – say that we could meet or Helping people and products get to exceed that requirement,” added Mr. Sebola. their destinations quickly, reliably and Time was another ongoing challenge. Indeed, on time is key to growing a middle- with about half of all existing rolling stock already out of service and many at the end of class and creating an attractive and their lifespans, PRASA knew it needed to move successful business environment. quickly to avoid serious service disruptions. Piet Sebola, Group Executive of Strategic Asset Development, BUILDING LOCAL CAPACITY AND Passenger Rail Agency of South Africa (PRASA) REGIONAL MARKETS To help encourage the necessary ecosystem and to re-establish South Africa as a rolling financial close and the first coaches are already of experienced professionals who could help stock exporter (some trains still operating in in production. And with the environmental us from a technical, commercial and financing Malaysia and Taiwan, for example, were built assessments now approved, work is ready perspective,” added Mr. Sebola. “We couldn’t in South Africa during the 1980’s), PRASA to begin on the new manufacturing site. waste time or resources taking a project to the included specific requirements for local content It is estimated that the project will create market that wasn’t attractive to the industry and local manufacturing. A new development approximately 33,000 direct and indirect jobs and so we needed to make sure we got it of almost 300 hectares is envisioned, housing in the first 10 years alone. right the first time.” manufacturing facilities, supplier parks and a “We’ve made significant progress so far, rail training center. both in planning and in preparation for the A TRANSFORMATION STARTED “Once the site is complete, we will be in new system – the infrastructure which we While PRASA and Mr. Sebola are proud to a position to use the site and the skills that are currently implementing include signaling, be working on such a large and high-profile have been developed to export new systems perway, station and depots modernization, project, they are much more motivated by the and rolling stock across Africa which, we amongst others – we must intensify our efforts transformational impact their work will have on firmly believe, is a strong growth market for so that when the first trains arrive and are their country and their fellow South Africans. those who understand the environment,” ready to be provisioned, we are ready with “We are building a rail system that will meet added Mr. Sebola. our own infrastructure,” added Mr. Sebola. the needs of everyone – young or old, poor or Mr. Sebola credits much of this success rich, white or black – rail does not discriminate ACHIEVING THE TARGETS to a strong and experienced team. “As an against anyone,” noted Mr. Sebola. “At PRASA In April 2014, the first phase of the procurement organization, we were facing challenges that we’re going to continue to work long and hard project (a 10-year, US$5 billion contract won we had never experienced before and quickly to make sure that vision becomes a reality for by a conglomerate led by Alstom) reached recognized that we needed to build a solid team millions of South Africans.”

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With two decades of rail franchising s governments around the world Our review of the two programs provides experience in the UK and almost as much search for better service for seven key lessons that – we believe – should in Australia, there is now a signiﬁcant body Aconstituents and better value from be considered ahead of any public transport of knowledge and experience to help public assets, rail franchising is once again rising reform agenda. and private sector participants make key up the agenda as a mechanism to deliver on decisions around key issues such as the government value and service objectives. 1. Context and leadership can help franchise structure, the procurement process Given that it has been almost 20 years drive implementation and the management of contracts. since the ﬁrst generation of rail franchising in What precedes the process is just as the UK and 15 years since its introduction in And while no two systems are the same, our important as the process itself. Rail Australia, we believe that these two markets experience suggests that – while there are franchising in Victoria, Australia, for have seen enough trains pass over enough still some major challenges and opportunities example, occurred in a very specific tracks to provide a robust body of insights to overcome – the journey can be well worth context characterized by a strong into the process. the trouble. government cross-industry reform agenda.

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© 2015 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. SPOTLIGHT Rail franchising efforts in the UK and Australia provide a rich repository of experience for public and private sector participants to draw on as they jointly consider the best public transport solutions for the future.

sector can never fully remove itself from partnership approach to both governance responsibility, including retaining ownership and the application of the contract. It’s of the rail network assets, setting fares, also important that the team managing setting broader transport policy and planning the arrangement can match it with the and delivering (sometimes in partnership franchisee on a day to day basis with the franchisee) large capital projects. 6. Use contract extensions to drive 3. Structuring of the franchise and the performance franchisee is critical Arrangements that have adopted an ‘earned Experience in the UK and Australia both right’ to renegotiate an extension have been demonstrate how important it is to effective in motivating good performance implement the right franchise and franchisee by the franchisee and providing flexibility structure. Overall, the lesson learned is for the government in the context of that the fewer interfaces the better; where procurement requirements. In the latest possible, the number of franchises should franchises in Victoria, for example, flexible be contained. The internal structure of the KPIs were added to fixed KPIs as part of franchisee is equally important, with key this earned extension right and have worked sub contracting arrangements in Victoria’s well. Flexible KPIs can be changed from early model being replaced by genuine skin year to year to ensure focus on the most in the game at the ownership level. relevant needs of the day.

4. A shift in the risk paradigm 7. Think about the end before you start Of all the lessons learned about rail End of franchise agreements need to franchising over the last 20 years, the shift in be appropriately covered as part of the the general philosophy around risk transfer contractual arrangements to ensure has been the most profound. In the 1990s continuity of services and ability to contracts pushed almost all risk into the competitively tender out the services private sector – there was no real concept in the future. This includes, for example, of risk being taken by the party best able ensuring ring-fenced special purpose to manage it. More recent contracts still vehicle structures, appropriate access to transfer revenue risk (as it provides a strong assets, employees and information, and incentive to drive good behaviors rather the ability to ‘novate’ key contracts. than just relying on contract provisions) but now they include a sharing of this risk with STRIKING YOUR OWN PATH a level of upside and downside protection. Clearly, the experience gained from the There is also significantly more focus on the Australian and UK rail franchising programs sustainability of bids and ensuring there are provide a significant body of knowledge and As such, the agenda was supported by appropriate arrangements in place around experience to help inform public and private both political will and clear leadership the stewardship of assets that have a life decision-making. But it is also clear that each based on a real vision for what reform well in excess of any franchise term. system and reform agenda is different and, in the sector could achieve. therefore, government and private participants 5. Contract management requires a will need to be careful before they apply models 2. Franchising is not an asset sale pragmatic approach from other jurisdictions without appropriate Franchising is different to other types of Experience from Australia and the UK consideration of unique characteristics of their reform and public divestment. Franchising also suggests that managing ‘by the own system and objectives. is a process of seeking the best global contract’ may not be the most effective operator to operate a network in partnership approach. In fact, history suggests that Our experience suggests that while – even with government – to bring a better those who run things by the letter of the in the UK and Australia – there are still major customer experience at a lower ongoing contract often end up with an unworkable benefits to unlock and major challenges to cost to government. But as the purchaser relationship. As such, governments and overcome, the rail franchising journey can be of public transport services, the public operators will want to create a pragmatic well worth the ride.

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Warren Buffet isn’t the only savvy investor to recognize the long-term asset value and stability of freight rail. Over the past decade, strategic investors have been eagerly snapping up available freight rail assets in the US and around the world. At the same time, thousands of miles of new freight rail networks are being developed, both in developed markets and – increasingly – in emerging markets as well. Now the focus is starting to shift towards Our focus is on ﬁnding driving value from those assets – for owners, for operators investments that are not and for customers. only long-term, sustainable By Piyush Mishra & Travis Hemphill, KPMG in the US and defensible; they also hose active in the rail sector know Yet far too often, equity investors tend to need to demonstrate that the value of rail far exceeds the view their rail assets as passive investments Tsum total of its assets. As Alex Yeros, which, left alone, can deliver a steady rate of an ability to create Managing Director of The Broe Group notes, return over a relatively long time span. And incremental value above “Investors sometimes overlook the fact that while this is somewhat true, the reality is and beyond the inherent these aren’t just assets to own; they are also that – with active management and targeted operating businesses that are intertwined investment – rail operators and owners value of the ﬁxed assets. into local economies and, as such, carry could be creating incremental value for their Alex Yeros, broader risks and opportunities that need shareholders, communities and customers. Managing Director, The Broe Group to be carefully managed if value is to be And, in doing so, can greatly enhance the truly created.” overall value of their investments.

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© 2015 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. SPOTLIGHT The best way to improve the value of rail assets is through organic growth and so we spend a lot of time understanding our customer base and what other commodity flows they represent. Kevin Shuba, CEO, OmniTRAX

A STRONG VALUE PROPOSITION are allocated effectively and that investment Mr. Savage. “We are always asking ourselves Through their OmniTRAX subsidiary, The Broe is going to the right places to maximize value how we can increase velocity, efficiency and Group has invested heavily into rail assets for their customers, whether that be through safety in a way that both reduces costs and in North America. “Our focus is on finding faster switching, loading and unloading or helps our customers do better.” investments that are not only long-term, through improved maintenance to reduce For rail operators and owners, these types sustainable and defensible; they also need to down-time or service interruptions. of supply chain management and logistics demonstrate an ability to create incremental “We want to maximize the maintenance companies can help deliver renewed value value above and beyond the inherent value of dollars we spend and one of the ways we’ve across the asset. “The railroad is often quite the fixed assets,” added Mr. Yeros. The key, done that is by going mile post to mile post on effective when it’s about the long-haul, but he adds, is in creating the right operating our existing infrastructure to truly understand – it’s what you do at the first mile and the last company with the right mix of assets to drive in a granular way – what traffic is running mile that really makes the difference – the new and diverse growth. over each mile of rail and what it will take industrial switching, the movement of the Alongside rail assets, The Broe Group also to really harden those railroads to get the locomotives, the safety and efficiency of the owns a sizable commercial real estate portfolio, highest efficiency out of it,” added Mr. Shuba. loading and unloading – it’s all about getting various oil and gas assets, as well as ports, Adding value for customers also requires those trains back out on the line as quickly terminals and industrial complexes. “We’ve the organization to invest in improving the and safely as possible which, ultimately, is focused on creating entities that enable us to efficiency of operations and processes a win-win for everyone involved.” develop a much more stable and diversified at the terminals and ports which, in the At the end of the day, Savage, Yeros and business base around our rail assets and case of assets managed by OmniTRAX is Shuba all seem to agree that – while the then we use our experience and expertise to often handled by their own internal division, rail sector environment is often becoming create synergies across the business units in OmniTRAX Logistics Solutions. more complicated, there is more value to be a way that drives value for our customers and harnessed from freight rail assets. “You can’t communities.” GETTING THIRD PARTY SUPPORT shy away from complicated situations because, In other cases – particularly where industrial oftentimes, those are where the greatest value DRIVING ORGANIC GROWTH rail users and customers want to own their are to be had,” added Mr. Shuba. As the operator and developer of the Group’s own assets, terminals and ports – rail value is rail and industrial park assets, OmniTRAX being increased through the support of supply focuses on understanding and responding chain management solutions providers who are to the shifting demands of their nearly 400 increasingly starting to invest in infrastructure industrial customers. “The best way to to support their customer’s needs. improve the value of rail assets is through “In order to deliver the right value proposition organic growth and so we spend a lot of time to our customers, we often own the assets understanding our customer base and what that we use to help our clients move their other commodity flows they represent,” noted products efficiently from point A to B,” noted Kevin Shuba, CEO of OmniTRAX. “It’s really Nathan Savage, Sr. Vice President and Group about creating a broader business base, a Leader at Savage Services, a US-based global more diverse customer base and – in doing logistics and material handling organization. so – creating a more solid franchise to serve “In some cases, we own the terminals but our customers.” in others, we’ve entered into joint ventures Key to the OmniTRAX strategy is a focus with our customers to ensure that we’re on building a network of assets including operating as part of their team and delivering We are always asking ports, terminals and loading assets that – a seamless solution.” when combined – creates valuable solutions ourselves how we for customers. “For us, it’s about providing a DRIVING EFFICIENCY TO ENHANCE can increase velocity, total logistics supply chain that seamlessly VALUE efficiency and safety in manages everything from the first mile to the One area that Savage often sees customers last; it’s about partnering with our customers struggle with is non-core processes and a way that both reduces to help them manage their flow of goods logistics requirements that are either managed costs and helps our more efficiently, more reliably and more cost inefficiently or that could be improved to effectively.” drive incremental value for the organization. customers do better. “It’s much more than just managing a supply Nathan Savage, Sr. Vice President and MAXIMIZING INVESTMENT chain – it’s about finding the efficiencies that Group Leader, Savage Services In part, this requires OmniTRAX to run an can, in turn, increase the yield of the asset efficient rail operation, ensuring that resources thereby driving incremental value,” added

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© 2015 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 Infrastructure is a story of evolution. It drives social and economic development. It enables us to renew our public services and physical surroundings. It allows societies, economies, companies and individuals to live to their full potential. The way we approach infrastructure itself is also evolving. Some of the shifts are sudden and disruptive. Others evolve slowly, ebbing and flowing in and out of political consciousness based on changing circumstances. At KPMG, we continuously track and report on the tides and trends driving the world’s infrastructure markets. Based on our experience, here are what we believe to be the top 10 Emerging Trends in infrastructure for 2015.

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© 2015 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. Trend 1 GOVERNMENTS TAKE ACTION TO UNCLOG THE PIPELINE Infrastructure has never been higher profile. The G20 Summit in Brisbane in November 2014 put the topic of infrastructure squarely on the global agenda as governments recommitted themselves to helping bridge the infrastructure gap. The G20 Summit also saw the formation of a Global Infrastructure Hub which – if armed with the right staff, scope and priorities – could help unlock trillions of dollars in private infrastructure spending. At the national and local level, we have also seen a growing number of governments starting to take a more interventionist approach, often driven less by a desire to fill the capacity gap, and more by a lack of trust in private sector financing markets and a deep desire to accelerate delivery. Taken on balance, the move towards greater government intervention – at the multilateral and the national level – indicates that public discourse has started to shift away from merely admiring the problem of infrastructure delivery to taking action to solve it.

SOME OLD AND SOME NEW IN 2015 A number of the trends that we identified last year remain key issues today. Many have themselves evolved. In 2014, we argued that projects were stuck in pipelines; this year we have noted significant moves by governments, multilaterals and development banks to ‘unclog’ the pipeline. Cities were also a big topic in 2014 and continue to be so in 2015, but with a larger emphasis on urban mobility. Asset sales and improved asset management played a significant role in our Top 10 last year and again this year. Other trends from last year continue to simmer. Affordability of infrastructure remains a key challenge, as does the need for greater transparency and control against corruption. More worrisome is that technical skills continue to be underdeveloped but international demand for infrastructure professionals and capabilities only continues to grow. This year’s list includes a number of new trends that have risen up the agenda as societies struggle to balance necessity against opportunity in prioritizing infrastructure spend. Political uncertainty and regulatory reform are becoming key risk factors. Water scarcity, security of supply and the silent battle to control resources are already starting to impact infrastructure decision-making. Development banks and multilaterals are recalibrating their targets to focus on leveraging private finance. As always, the world continues to change. We only hope that this year’s insights provide a worthwhile perspective on key trends and opportunities facing the sector. Trend 2 MARKET REFORMS – STATUS QUO IS NOT FIT FOR PURPOSE As governments move to reform the market structure across a number of infrastructure sectors, many infrastructure and regulatory leaders are starting to recognize that traditional price-cap regulation – while popular with consumers – may be insufficient to enable utilities and other regulated sectors to meet the growing demand for additional capacity or to adapt to new technologies. In reforming the markets, regulators and politicians need to balance two key responsibilities. The first is to provide certainty to investors that the regulatory regime will remain stable, consistent and supportive of ongoing investment. The second is to create mechanisms that balance the need to protect consumers with the need to ensure that investors receive sufficient returns allowing them to continue to invest in assets. Once again, governments and regulators will need to take a long-term view of their infrastructure needs, growth projections and demographic forecasts to make sure they are creating a sustainable and encouraging environment for infrastructure investment.

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© 2015 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. Trend 3 Trend 5 POLITICAL AND REGULATORY RISKS RISE UP THE THE SHIFTING ROLE OF MULTILATERALS AND AGENDA DEVELOPMENT BANKS Potential risks associated with political and regulatory uncertainty With renewed focus on enhancing the flow of long-term capital for are not just a problem affecting developing countries; they apply infrastructure development – particularly into developing markets – equally to the developed world. Looking at the long list of much- we have seen a significant shift in the operating models and needed infrastructure projects that have recently stalled as a performance targets of many multilateral and development banks. result of election results, it becomes clear why investors are Rather than measuring themselves purely on their quantum of concerned that their projects may die at the ballot box. lending, a number of today’s development banks and multilateral Uncertainty surrounding regulation also creates significant institutions are increasingly moving towards targets related to challenges. In many markets, we have seen a significant shift in the amount of private sector capital they are able to leverage. mindset that seems to favor consumer protection over investor This is a welcome development. We believe that development protection. But while this may appeal to the electorate, it can also banks and multilaterals have a vital role to play in shaping the deflate investor confidence and undermine contract certainty. development of infrastructure markets. However, concerns Many are already taking valiant steps towards depoliticizing have also been raised that ‘subsidized’ development loans the infrastructure agenda by developing national infrastructure can distort local infrastructure debt markets by crowding out plans and robust processes for evaluating needs and prioritizing bank financing and other private debt solutions. projects, but more must be done to create the right political We believe that governments who offer subsidized lending and regulatory environment to ensure a steady flow of capital should consider directing their subsidies through other channels to finance worthy projects. and thereby concentrate on acting as catalysts for private sector investment.

MAJOR INTERDEPENDENCIES: POLITICS MAJOR INTERDEPENDENCIES: LONG-TERM CAPITAL Infrastructure is – and always will be – a fundamentally political While some markets (particularly in Asia, Africa and South field of endeavor. Yet over the past few years, we have seen America) continue to struggle with a lack of long-term capital a significant increase in the influence of politics over the hard for infrastructure development, there is now a growing pool of realities of infrastructure development. debt and equity available for investment into infrastructure. The This year’s trends contain a number of issues that – in large much-anticipated entry into the market of Asian institutional part – are driven by political issues. Market reforms, political investors promises to add even more capital to the mix. risk, government intervention in financing markets, investment The challenge is in matching capital to worthy projects. prioritization, public sector asset sales and urban mobility are all Access to long-term capital is a necessity for infrastructure the stuff of political platforms and electioneering. The challenge investment and renewal. More must be done to ensure capital is separating political rhetoric from the needs of society. can flow to the regions and projects with the ability to deliver the greatest returns.

Trend 4 Trend 6 CITIES SHARPEN THEIR FOCUS ON URBAN MOBILITY BIG COMPLEXITIES START TO IMPEDE BIG PROJECTS While urban areas continue to serve as a crucible of economic The world is full of large ambitious projects aimed at solving growth and development in most countries, the agenda of the major infrastructure challenges. However, over the past year we city infrastructure debate seems to have focused more clearly have seen a number of much-needed mega and cross-border on the issue of urban mobility over the past year. projects delayed (some indefinitely) as project managers, Not only does urban mobility allow for a freer flow of goods, investors, developers and owners grapple with the complexities capital and people within cities, it also provides a means for of moving larger projects from the drawing board to the field the world’s urban poor to access jobs, social services and and across the finish line. education opportunities. Raising the urban poor out of poverty Many of the challenges are fairly easy to identify. Some projects ultimately leads to larger tax revenues and more productive are unaffordable and struggle to secure appropriate financing cities. Urban mobility projects often deliver long-tail social (much of which is currently provided through development and economic benefits far beyond those identified in most and export credit banks). Others are frequently tied up in red cost/benefit analyses. The challenge is to adopt an appraisal tape and approvals. methodology that can capture all these benefits. The more persistent and pernicious issue, however, relates Over the coming year, expect to see more urban mobility to skills (a challenge certainly not limited to megaprojects). projects announced in almost every market (but particularly Given that many of the more experienced project managers in those going into an election cycle). The opportunities for are now on the verge of retirement, we expect the competition providers, investors and operators should be significant. for skilled talent to continue as a trend for many years to come.

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© 2015 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. Trend 7 Trend 9 STRIKING THE RIGHT BALANCE BETWEEN NECESSITY RESOURCE SCARCITY DRIVES INVESTMENT AND OPPORTUNITY All governments want to improve their energy, water and While a growing number of jurisdictions have started to develop resource security. Many recognize that scarcity of these key and implement national infrastructure plans aimed at ‘depoliticizing’ elements will hobble growth and – very possibly – lead to infrastructure decision-making, the challenge is that many of significant political conflict in the future. Water efficiency has these plans place a disproportionate value on economic versus also become a key objective for infrastructure assets, particularly social infrastructure. given the majority of the world’s water is used for industrial and Ultimately, this is a question of long-term versus short-term agricultural purposes. priorities. Economic infrastructure (when developed properly) The development of new and more efficient infrastructure can deliver a much-needed shot in the arm to national and local will be key to reducing the impact of resource scarcity, but it is economies. But over the long-term, social infrastructure is also only one component. More valuable still would be the removal needed to encourage the economic inclusion of people moving of existing subsidies on water and energy (a practice prevalent out of poverty and support an aging demographic. in both developing and mature markets) which will effectively Striking the right balance will take a national consensus that drive conservation and better align costs and revenues to the brings together economic and social imperatives as well as asset life-cycle. more effective methodologies for evaluating those benefits. However, some progress is being made. China, for example, But planners will also need to remember that it’s not a choice is trialing the trading of water rights between municipalities, with of one over the other, but rather a well-planned and executed water-rich areas entitled to charge a truer, unsubsidized price. combination that overlays long-term objectives on top of the realities of immediate need.

MAJOR INTERDEPENDENCIES: THE SKILLS AND MAJOR INTERDEPENDENCIES: TECHNOLOGY CAPABILITY GAP One would be hard-pressed to deny the transformative power One of the greatest barriers holding back today’s infrastructure of technology. Yet the infrastructure sector has – to date – pipelines is not lack of capital or resources, but rather a dearth seemed unable to embrace technology to deliver fundamental of appropriately-skilled project managers and engineers. improvements in order to keep up with the pace of change Training programs such as those in Europe and Asia will help fill in the world around it. some of the gap, but the reality is that today’s complex projects This is a lost opportunity. Technology may very well hold require real experience and on-the-job insight, neither of which the answer to many of the biggest problems facing the can be taught but must be learned. Infrastructure providers, infrastructure sector today: efficiency, productivity, safety, developers and owners will want to think about how they might longevity and costs. Given the critical role infrastructure be able to retain their more experienced professionals while plays in society, we should be the leaders of innovation ensuring they are taking the time to share their insights with not the laggards. newly-trained peers. Trend 8 Trend 10 STRIVING FOR BETTER ASSET PERFORMANCE INFRASTRUCTURE PLAYERS GO GLOBAL As governments aim to improve public services, many are While most infrastructure is decidedly local by nature, it is also starting to benchmark the performance of public utilities quickly becoming a global game. Investors have long taken a against best practice and explore alternative delivery and more global view of infrastructure. And over the last decade, ownership structures. Many have considered introducing we have also seen the emergence of ‘global developers’ such private operators and leveraging commercial models in order as the Japanese trading houses, fast arriving Chinese firms to improve efficiency, cost and customer experience. or Spanish contractors forced to seek new opportunities Governments are also keen on asset privatization for financial outside their domestic market. reasons: it means that future investment can be moved off But it is the rise of the global operations organizations or of the public books, and returns from asset sales ploughed ‘concessionaires’ that have been most visible with specialist back into developing new infrastructure (which, in turn can be airport, railway, water, port and road operators as well as privatized in a virtuous cycle of investment recycling). energy generators and distributors vying to compete for It is clear, however, that deal flow will always be restricted in tenders in both mature and emerging markets. situations where privatization or restructuring of government While this is certainly a positive development, providers assets remains a politically-charged topic. Success will require must ensure that in the rush to capture new assets and politicians, regulators and the private sector to work together tenders, they take the time to seriously consider the risks to ensure deals and regulations are structured appropriately and opportunities in the markets in which they hope to to balance the needs of consumers and investors, while still operate. gaining the support of voters.

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© 2015 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. With more than US$100 billion in available capital and the strong backing of Asia’s (and most of the world’s) major economies, expectations for the Asian Infrastructure Investment Bank (AIIB) are high. And – given the size of Asia’s current infrastructure financing gap – the need is certainly clear. While many of the bank’s foundational issues are still to be clarified and formalized, we believe the AIIB will be a welcome next step in Asia’s development story.

By Richard Dawson (@richardrsdawson), KPMG in China

A NEW INFRASTRUCTURE BANK IS the massive financing gap currently haunting of directors? How will the bank ensure BORN the Asian region. According to the ADB’s transparency in all its activities? When China’s President Xi Jinping announced own reckoning, Asia needed US$8 trillion While these are all important questions, the formation of an Asian-focused infrastructure of investment into infrastructure between we believe that – over the remainder of year – investment bank in 2013, most observers sat 2010 and 2020 to meet growing demand.2 China and its partners will make significant up and took notice – China’s government is not A vast number of bankable projects are on headway providing answers, clarity and known for making promises it does not keep. offer across the region, many ranging up transparency to stakeholders and observers. Just 2 years later, any lingering doubts to the billions of dollars in value. The AIIB’s Now that China’s executive has made the about the viability of the Asian Infrastructure US$100 billion appears, on the face of it, to AIIB a top priority, history suggests nothing Investment Bank (AIIB) are now gone. As be a drop in the bucket when compared to will come in the way of the promise being of early 2015, 57 countries had signed this massive need; however, with leverage delivered. up to be perspective founding members. and mobilization of third party capital it Not surprisingly, virtually all of Asia’s major may begin to make decent in-roads into A BOOST FOR THE INFRASTRUCTURE economies – including India and Indonesia – the funding gap. SECTOR have signed up. So, too, have most of the The future of the AIIB should be of particular world’s leading economies including the UK, interest to international and Asia-based Germany, Italy, France and Brazil. infrastructure participants. But it’s not just the local Asian contracting community that TWO PATHS TO THE SAME The greatest measure will benefit from this institution. So, too, DESTINATION of success for the AIIB will many of the international strategic While many had originally worried that sponsors and contractors with the skills, the AIIB might effectively ‘compete’ with won’t only be how many capabilities and experience to deliver in existing development banks – such as the Asia members it has, nor how this region. Development Bank (ADB) and the World Bank’s many projects it funds but We anticipate significant opportunities will International Finance Corporation (IFC) – the also start to emerge for other players – airport reality is that the bank’s objectives are likely rather how much third operators, specialist equipment providers, more complimentary than they are competitive. party capital it is able to power distributors and the like – as these The ADB, the IFC and other national projects start to develop. And, in short time, development funds are principally focused mobilize. some of the more derivative opportunities on alleviating poverty. The AIIB, on the other are also likely to enter the market as new hand, is fully dedicated to unlocking financing The greatest measure of success for the airports unlock unknown tourist destinations for infrastructure projects which, in turn, can AIIB won’t only be how many members and new transit options open up more land drive economic growth and help pull people it has, nor how many projects it funds for development. out of poverty. but rather how much third party capital Recognizing this potential, many of the major it is able to mobilize, whether that be A WELCOME PLAYER AT THE TABLE global finance institutions have announced from governments, strategic sponsors, Unless something unexpected occurs to that they would cooperate with the AIIB. As infrastructure funds, commercial banks or derail the bank’s formation, we expect one International Monetary Fund (IMF) official other multilateral organizations. the AIIB to represent a welcome step recently noted, they are comfortable with the towards closing Asia’s infrastructure gap. idea of a bank that puts together finance for SOME QUESTIONS REMAIN And a welcome source of new projects infrastructure, because of the huge need for Progress continues to be made. In June, and investment opportunities for public and 1 infrastructure in emerging markets countries. the 57 Prospective Founding Members private organizations. ADB President, Takehiko Nakao, has said that gathered for a Signing Ceremony in Beijing Those foreign players seeking to gain a the ADB would also be happy to cooperate and by the fall, a President will be elected foothold in Asia may want to start working with the AIIB, including co-financing. (by Super Majority vote at the Board of with their respective governments to see Governors). However, there are still a number how they can best align their interests to A DROP IN THE BUCKET LEADS TO of big issues that need to be answered those of the AIIB. Those already in Asia, RIPPLES THAT SPREAD before the AIIB takes its place on the world however, may prefer to just focus on building Likely the greatest reason to dismiss stage. Will financing be provided through up their capabilities in the region… and concerns about competition, however, is debt or equity? Who will sit on the board quickly.

1 http://www.cnbc.com/id/102526769 2 http://www.adb.org/news/public-private-partnerships-key-meeting-asias-8-trillion-infrastructure-needs-study

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John Kjorstad (@JohnKjorstad), KPMG in the UK, Wilfrid Lauriano Do Rego & Charles Abbey, KPMG in France

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© 2015 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. John Kjorstad, KPMG in the UK, and Wilfrid mature in the coming years and become State intervention and threat of increased Lauriano Do Rego & Charles Abbey, KPMG attractive brownfield opportunities. This regulation are two major risks concerning in France, highlight investor trends for trend is likely to produce more churn in the investors in French infrastructure. These French inbound and outbound infrastructure merger and acquisition market. risks are acutely being felt in other politically- investment. In the meantime, there are currently a charged European infrastructure markets as number of regional airports in France that well. However, given public budget constraints rance is steeped in global infrastructure are attracting interest from all over the and ongoing financial difficulties, it’s likely investment. Its project finance banks world. In February, the French government that the French government will continue are “résilients” and consistently at or introduced a new law that allows for the to seek private investment in infrastructure F 1 near the top of global rankings; its equity privatization of airports in Nice and Lyon. ahead of the next major election in May 2017. funds and institutional debt providers are It is expected that these assets will be “sophistiqué” – finding innovative solutions launched into the market once the law FRENCH OUTBOUND INVESTMENT to unlock the true potential of capital markets passes in the senate. France is also well known for internationally- in infrastructure; and its industrial sponsors France also remains a buoyant and mature minded outbound investors like Meridiam, are “stratégique” – successfully winning market for renewable energy investments – Antin Infrastructure Partners, OFI InfraVia and work and delivering major projects all over particularly onshore wind and photovoltaic Ardian, four Paris-based equity infrastructure the world. solar. These assets are supported by long- funds investing capital beyond French However, a quality brand and a wealth of term feed-in-tariffs that provide good visibility borders. The country also has large pension market experience does not automatically on returns. The greenfield market continues funds like EDF Invest becoming more active translate into ongoing success. Like many to have political support as the government in the European market. of their international competitors, French seeks to increase its renewables target to Europe’s secondary market for investors are all facing the same issue – 32 percent by 2030, while reducing the infrastructure continues to draw strong finding the right asset and risk profile to share of nuclear power on the grid from interest from investors who expect to see invest in at home or abroad. 75 to 50 percent.2 significant portfolio rotation in the coming years. The earliest pure infrastructure equity LACK OF MATURE ASSETS funds were first raised in the mid-to-late The first characteristic defining French 2000s and many of them are nearing the infrastructure investment is a lack of end of their first fund investment cycles. available brownfield assets. It has been Like many of their Given the fixed duration of some funds, it difficult to educate the general public on international competitors, is likely that some assets will be flipped, the critical differences between greenfield adding growth to the existing secondary infrastructure and secondary market French investors are all market deal flow. investments. Institutional investors prefer facing the same issue – French infrastructure funds have mature assets over the riskier greenfield generally been conservative, limiting equity primary investment opportunities favored finding the right asset and investments to Western Europe and the by large construction companies, utilities risk profile to invest in at secondary market. Earlier this spring Ardian and major equipment suppliers. A lot of home or abroad. acquired a 65 percent stake in Spanish toll- these large corporates operate an integrated road operator Tunels and took joint control approach and are not divesting the plethora of Italian airport operator F2i Aeroporti. of assets currently sitting on their balance Toll road concessions have also been Last year, OFI InfraVia invested in a natural sheets. By not releasing these assets into a popular and contentious area of private gas transportation system in the North a secondary market, the owners are not investment. France’s Socialist government has Sea connecting offshore gas fields of The efficiently recycling their capital – transferring been engaged in a long running showdown Netherlands and United Kingdom sectors to mature assets to institutional investors and with private operators to freeze tolls and the Dutch Gas Transport Services network. applying the capital gain to new primary revise long-term contracts that it regards These are staple investments for European greenfield opportunities. as too generous.3,4 In 2014, the European infrastructure funds, and outbound French Commission approved a EUR3.2 billion plan investment remains healthy. FRENCH INBOUND INVESTMENT where operators agreed to bear the cost of Meridiam, meanwhile, has been a The good news for French infrastructure is upgrading French motorways in exchange notable exception in this field investing that there is a lot of upside to come, and for an average 3-year extension of their primarily in greenfield projects in and beyond international firms remain active in pursing concessions. After months of polemics, a Europe. The fund is well established in these investments. There are a number of resolution was announced in April ending North America and has even expanded into greenfield projects originally structured as the standstill and allowing the capex plan Turkey, closing the Adana Integrated Health public-private partnerships (PPPs) that will to move ahead.5 Campus6 in December 2014

1 https://ijglobal.com/articles/95251/french-airport-privatisations-likely-next-month 2 http://www.rechargenews.com/wind/1387589/2015-OUTLOOK-Next-steps-for-renewables-in-Europe 3 http://www.reuters.com/article/2015/01/27/motorway-freeze-idUSL6N0V62L220150127 4 http://in.reuters.com/article/2015/04/01/motorways-france-idINL6N0WY3K520150401 5 http://www.reuters.com/article/2015/04/08/france-motorways-idUSP6N0VE01K20150408 6 https://ijglobal.com/articles/94615/ﬁnancial-close-for-turkeys-adana-hospital

Who controls our infrastructure? | INSIGHT | 81

As infrastructure begins to come into its own as an asset class, the topics of tax and transparency have quickly rocketed up the investment agenda. For institutional investors – Sovereign Wealth Funds (SWFs) and pension funds in particular – the risks associated with tax have become acute.

By David M. Neuenhaus, KPMG in the US

ver the past decade, infrastructure As the European Union noted in 2008, are widely endorsed by SWFs around the world has become the darling of SWFs “SWFs raise concerns, in particular with regard (particularly by members of the International Oand pension funds. By the end of to the opacity of the way in which some of Federation of Sovereign Wealth Funds who 2013, infrastructure had already become them function and the non-commercial use must endorse the Principles as a condition of the third most active asset class for SWFs that could be made of them. These SWFs membership) and are more broadly seen as a (behind ﬁxed income and public equities) sometimes trigger protectionist reactions. ‘leading practice’ for state-owned investment with 57 percent of SWFs saying they were Some are concerned that their investments are vehicles of all types. active in the sector.1 aimed at taking strategic control of technology Another key response by the sector has Many of the larger and more established or expertise, or even that they may be used by been the growing adoption of the Global pension funds have also been voracious in certain governments as a means of pressure.”3 Investment Performance Standards (or GIPS), their appetite for infrastructure investments. a common set of ethical standards designed Allocations towards infrastructure more than SELF-REGULATING THE SECTOR to improve the way investment performance doubled between 2007 and 2010.2 And as of Over the past decade, however, new is reported. Compliance with GIPS not only April 2014, seven of the top ten institutional regulations and standards have been developed provides pension funds with more legitimacy investors into infrastructure were pension funds. which – if properly applied and adhered to – by virtue of complying with a global investment should bring increased transparency and ease standard, it can also reduce complexity by UNDER THE MICROSCOPE deal-making for SWFs and pension funds. providing a common approach to performance However, despite the critical role that these In 2008, a number of SWFs came together calculation when investing in overseas assets. funds played in keeping the markets open with the IMF to develop the Santiago Alongside the Santiago Principles and GIPS, during the credit crisis of the past decade, the Principles, a voluntary framework of principles a third set of standards aimed at improving reality is that most outside observers – the and practices aimed at improving governance investment transparency and reducing tax public, the media and even politicians – often and accountability arrangements at SWFs avoidance is now starting to emerge under the still view infrastructure investments by foreign and encouraging sound, prudent conduct of auspice of the OECD and the G20. Known as the SWFs and pension funds with some suspicion. investment practices.4 The Santiago Principles BEPS Project, the initiative will impact certain

1 https://www.preqin.com/docs/newsletters/inf/Preqin_INFSL_Nov_13_Sovereign_Wealth_Funds.pdf 2 Source: Public Investment Association of Canada (via http://www.taylor-dejongh.com/wp-content/uploads/2012/02/Pension-Fund-Direct-Investments-in-Infrastructure.pdf) 3 http://europa.eu/legislation_summaries/internal_market/single_market_capital/mi0003_en.htm 4 http://www.ifswf.org/pr/pr21.pdf

82 | INSIGHT | Who controls our infrastructure?

© 2015 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. 1.1 SWFprincipals/standards or administration(seechart 1.2). and risksrelatedtoachange code inthetax farther risks intooperationalrisks,reputational authorities);butratherextendand tax much result ofdiffering views betweentaxpayers to the technical risks (those that emerge as a Many have realized ‘risk’ is not confined that tax for atransformation intheirapproach totax. at SWFsandpensionfundsrecognize theneed infrastructure-related investments. plan forexposure andmanagetheirtax on business models,butalsointheway they not onlyintheirinvestment, reportingand compliance withoutsignificantchange – many fundinvestors may struggle toachieve improving transparency, isthat thereality principles would clearly go a long way towards and While complyingwith these standards TAX ON THE debateonSWFsandpensionfunds. morality key tomitigatingtheimpactofpublictax rules,specific BEPStax however, will be managers. Demonstratingcompliancewith increase the reporting burden for investment aspectsofinfrastructuretax investors andlikely processes are critical to ensuring that all data processes arecriticaltoensuring thatalldata investment decisions. Clear and streamlined to helpingmanagersmake and smarttax the rightskillstosupportbusinessiskey Having therightpeopleinplacewith key areas:people,processandtechnology. team toachieve itsvision. right supportsandprocessestoenablethe investment managersandthencreatingthe value totheorganization and the individual the way function supports and adds the tax faster. It’s rethinking aboutfundamentally is notaboutdoingmoreofthesame,only recognizing thattransformingfunction thetax Thankfully, agrowing number of executives This willrequireconcertedfocus onthree At the same time, they are also increasingly Standard/Principle (Potential) Impact Developed by © 2015 KPMGInternational Cooperative andisaSwiss withwhich (“KPMG International”). KPMG International provides entity noclientservices theindependent member firmsof theKPMGnetwork areaffiliated. acks general enforcement body • Ensures best practices and • Intended to facilitate transparency • Targets SFs • Santiago Principles

fairness in market AG EN DA

IFSF investment programs.However, we believe riskprofilesand their individualpolicies,tax need tofollow theirown pathdependingon Clearly, each SWFandpensionfundwill APPRO A NEWENVIRONMENT complex markets and dynamic economies. processes and controls across standardizing intricate, technology willalsobecentralto and investment structures becomemore sector becomesmorecomplex, anddeals quickly andefficiently identified. And asthe and reporting risks is aligned are and that tax 1.2 SWF/Tax Risk Change Reputation Operational Technical ACH of law risk risk risk risk acks general enforcement body • Ensures best practices and • Intended to facilitate transparency • Applicable to pension funds • fairness in market Risk of loss due to actual or proposed changes in la This is an • Risk of loss may arise hen a proposed ta position is contrary to • Risk of loss due to inaction of people or inadeuate processes There •

Risk of differing vies beteen tapayers and ta authorities The • Chartered Financial Inuence actions investment partners must undertake to achieve – irect control actions that the organizations on employees must – from the investment foreseeable and have a measurable impact on the afterta returns changes in ta la or administrative practice that are reasonably inherent risk of investing To manage this risk an entity must focus on policy makers rather than local ta collecting authorities The threshold to test is generally the opinion of the governament idely understood ta policy objectives of a particular governement are to types degree of risk is typically highly sensitive to facts and assumptions Analyst Institute the intended ta outcomes undertake to achieve the intended ta outcomes GIPS ; A NEW Who controls ourinfrastructure? |INSIGHT |83 Risk a commercialmarket differentiator andusethis well positionedtoleverage theirtransparencyas successfully adopttheseprinciplesshouldbe compliance – thoseorganizations that investments. foreign when enteringintoandmaintaining and deliver signiﬁcant competitive advantages greatly improve theirpositioninthemarket a moreholisticview towards compliancewill that those organizations that are able to take of their target infrastructureof theirtarget investments. not onlytheirown stakeholders,butalsothose position toimprove theircommunicationswith The bottom lineisthat–beyond demonstrating orking ith G countries to • Ensures best practices and fairness • Intended to facilitate transparency • Applicable to all investors • ensure enforcement in market and reduce ta avoidance OECG BEPS Benchmarking the tolling sector

By Stephen Beatty (@stephencbeatty), Americas and India Head of Global Infrastructure

84 | INSIGHT | Who controls our infrastructure?

© 2015 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. Improved operating efficiency can lead not only to direct cost savings but also to increased usage, extended asset life, and enhanced customer satisfaction. More importantly, perhaps, improved asset efficiency can also lead to improved revenues for asset owners.”

Some are government owned and operated. Technology is being upgraded. More Others have been transferred to the private than half (53 percent) said that they had sector under public-private partnership upgraded their tolling system within the (PPP) arrangements. last five years and a further 18 percent At the same time, technology has enabled a said they are constantly upgrading their gradual – but profound and sustainable – shift equipment and systems. in the way that toll roads are operated. And There are significant variations in what as a result, every element of the value chain operators include in their cost to collect has been affected, from the users’ driving calculations. However, the data indicates experience to the core operations of the back that some tolling operators’ cost to collect office. Open road tolling (ORT), electronic toll can be as low as 13 percent of revenues, collection (ETC), Global Positioning System whereas others may be as high as (GPS) and new back office systems and 60 percent or more. technologies are revolutionizing the industry On average, the industry spends and streamlining operational efficiency. US$0.43 per transaction. The most cost efficient toll operations tend to report LOOKING FOR THE ‘NEXT LEVEL’ OF costs of less than US$0.26 per transaction EFFICIENCY while the more inefficient operators While many public and private asset owners report costs of more than US$0.59 per have made great strides in ‘sweating’ their transaction. road assets, most are now looking for new opportunities to wring further efficiencies A BENCHMARK FORMS out of their operations. Asset management As the first of its kind, the process of has become a hot topic in the road sector creating this comparative review has been and owners want to learn about leading challenging. Data sources and metrics are practices and understand how they compare often inconsistent; wide variations exist in to their peers around the world. the way operators report their costs; and Recognizing a significant lack of reliable there is little consistency in the terminology global comparative data for the toll road and definitions applied across the sector. he benefits of improved asset sector, KPMG collected data from more than Clearly, more work will need to be done management in infrastructure can 40 tolling companies and agencies world- across the sector to drive more consistent Tbe significant. Improved operating wide to – at least start – building a better metrics and reporting. efficiency can lead not only to direct cost understanding of what ‘good’ performance However, we believe this report provides savings but also to increased usage, looks like and, eventually, a global benchmark important data for the sector. And, when extended asset life, and enhanced customer to help compare key metrics such as cost combined with the practical insights and satisfaction. More importantly, perhaps, to collect or operational efficiency. context offered by KPMG member firms’ improved asset efficiency can also lead to top roads and tolling professionals, starts to improved revenues for asset owners. And WHAT WE FOUND: KEY STATISTICS offer governments and private organizations for governments, this means more money to KPMG International’s Toll Benchmarking the information and advice they need to invest into existing and new infrastructure. Study 2015 provided some compelling become more efficient and drive improved results and interesting data points. For results from existing assets. The efficiency of toll roads is important. ROADS IN THE CROSSHAIRS example, the research found that: Not just for tolling operators, but also for Our experience suggests that one of the Toll operators are implementing a wide governments, investors and the driving first places governments tend to look array of toll collection approaches. public. We hope that, as the first in a series for improved efficiency is in their roads. Ninety-one percent of all respondents of ongoing surveys, we are adding to the said that they now offer some form of Recognizing that the public is often willing body of knowledge driving decision-making ETC. Forty-three percent say their agency to pay more for improved service, we have in the toll road sector. seen a dramatic increase in the number uses ORT and 23 percent said they use of toll roads1 operating around the world. some form of video billing mechanism. To read more, visit kpmg.com/tolling.

1 According to the International Bridge, Tunnel and Turnpike Association (IBTTA), the US has added more than 500 miles of new toll roads since 2011.

Who controls our infrastructure? | INSIGHT | 85

© 2015 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. The reality is that project acceleration often involves high stakes, large dollar commitments and immense pressure to minimize potential losses.

Project acceleration: Saving the day from schedule delays By Andrew Pollard & Brian Relle, KPMG in the US

86 | INSIGHT | Who controls our infrastructure?

© 2015 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. When it comes to infrastructure planning and budgets must be adjusted for declining attentive to avoiding the pitfalls inherent in execution, schedule delays are inevitable. Large labor productivity and rework. accelerating the work, many risks can be capital projects are complex undertakings with avoided or mitigated. the potential for failure, even under the best CHOOSING FROM YOUR OPTIONS Our experience suggests that acceleration management practices. The key to meeting Since every major capital project is unique, efforts tend to suffer from a number of project milestones is in making sure that there is no ‘silver bullet’ for solving project common challenges during the acceleration when delays occur, the project team knows delays. Rather, it requires project teams to period including: what options are available to accelerate the balance their options for project acceleration Unexpected costs: Even though higher project and how to evaluate the cost tradeoffs against the expected cost of their action and labor costs should be expected during for those options. its potential impact on delivery. periods of accelerated performance, Project teams have a number of project project costs can quickly snowball during t some point, most infrastructure acceleration options to choose from. protracted periods of acceleration. projects will experience delays to the Oftentimes, project teams will use more Weekend work, overtime, and extra crews Adevelopment schedule, which can than one option to achieve their acceleration all come at a steep premium. threaten the project’s expected completion objectives. Some of the more popular Reduced workplace safety: When date. This is especially true for multi-year approaches include: additional crews are used to accelerate or highly-complex projects where owners Going into overtime: Overtime is one of project performance, there are more may face multiple delaying events over the the most common forms of acceleration opportunities for ‘stacking of trades’ course of planning and execution. These and can be accomplished with existing causing unsafe working conditions. delays can be caused by any number of labor resources who are familiar with Diminished quality: Quality work results unexpected issues – engineering shortfalls, the job. Limited overtime can be used from a combination of trade skills, regulatory delays, differing site conditions, for time-critical work, while extended appropriate materials, and adequate time. poor subcontractor performance, material overtime is often used to correct for With project acceleration’s increased time shortages, weather events, or political major project delays or to complete a pressures, project teams must manage instability. project early. work quality with greater care to mitigate Adding manpower: Adding extra manpower the risk of added rework. IT’LL COST YOU to the job can help achieve acceleration Low productivity: Doubling crews and The problem is that when construction goals while reducing the issues of fatigue stacking trades on top of each other projects fall behind schedule, it often takes and the premium costs associated with can result in declining labor productivity. a significant effort by the project team and overtime work. But increasing the number Workers may find themselves standing senior management to recover the lost time of workers does not come without its idle for periods of time waiting for others caused by schedule delays. As evidenced by own set of problems; without proper to complete necessary work. high-profile projects that have fallen under supervision, overcrowding can threaten Resource burnout: Asking contractors financial scrutiny, the added effort to get productivity if not dealt with carefully. to work overtime and on weekends projects back on schedule often comes at Prioritizing the critical path: Isolating consecutively for several weeks may a cost premium. and identifying critical and ‘near critical’ help recover lost time due to schedule Of course, the simplest way to adjust activities in the recovery schedule delays, but if these efforts are extended for project delays is to extend the contract allows project managers to ensure that continuously over the course of months, performance period. But depending on the acceleration costs are incurred for the project teams will suffer from burnout, nature of the project, delaying the expected most important elements of project which will further exacerbate productivity completion date may not be a viable option success, and in turn, inefficient costs and safety issues. (consider, for example, the impact that project are kept to a minimum. delays could have on a major sporting event Streamlining the process: In cases where UNDERSTANDING THE IMPACTS like the Olympics). In these cases, the only the owner’s policies and procedures are Today, infrastructure projects move at a record real option is project acceleration. unnecessarily elaborate, project teams can pace and the potential for cost growth due Project acceleration – essentially any help accelerate the process by identifying to schedule delays are innumerable. The action taken to increase the speed of approval bottlenecks and restructuring effects of delays can be devastating if handled construction to recoup lost time – can either internal controls. improperly. However, so too are the effects be ‘self-initiated’ by the contractor (often of a poorly executed acceleration strategy. to avoid liquidated damages) or ‘directed’ WATCHING FOR ‘IN FLIGHT’ RISKS The bottom line is that accelerating a by the project owner. Generally speaking, While many available options for project project to meet schedule constraints is a ‘self-initiated’ project accelerations tend acceleration seem straightforward from risky maneuver with no clear-cut path to to cost the contractor, whereas ‘directed’ a theoretical perspective, the reality is success. That is why our member firms accelerations are often covered by the that project acceleration often involves advise both contractors and owners to weigh owner. In either case, the fact remains that high stakes, large dollar commitments and all of the options carefully prior to engaging it takes money and resources to accelerate immense pressure to minimize potential in project acceleration, while fully exploring a project. Costs increase for temporary losses. Even after an appropriate acceleration the hazards associated with each. When materials – like scaffolding – and additional option is implemented, risks can arise. used strategically, project acceleration can construction equipment is often brought to Indeed, an agreement between the owner mean the difference between delivering an the site, labor costs rise due to overtime and contractor to accelerate the construction infrastructure project on time and missing and shift work, the costs of construction schedule does not mean that either party is the completion date by months or even support and supervision increase, and entirely in the clear. But if both parties remain years.

Who controls our infrastructure? | INSIGHT | 87

By Cornelius Namiluko (@ni6x), & Roy McNamara (@RoyMcNamara), KPMG in the UK

Control systems are present in almost With the emergence of open systems, Power generation – control systems every infrastructure and industrial computing devices started to be integrated monitor and control the state of power sector and are critical to the world as into production and automation environments. plants and safety controls we know it. Yet as businesses become As a result, processes that were once ‘fixed’ Building management – new control increasingly integrated , control systems could be more easily updated, repurposed systems are being used in construction designed to operate in isolation are now or redesigned which, in turn, led to higher and to monitor the structural state being connected into the virtual world, scalability, reduced cost and improved Rail traffic management – control systems with production data flowing from efficiency. are central to monitoring railway tracks, inside and outside of the organization. controlling traffic flow and train speed As a result, the cyber risks – and CONTROLLING THE WORLD’S Road traffic management – the controlling opportunities – for infrastructure owners INFRASTRUCTURE of traffic lights, toll bridges and billboards and operators are growing. Control systems are found in any environment are increasingly managed by control that requires the automation, control or systems. WHAT ARE CONTROL SYSTEMS? monitoring of interactions with physical LINKING UP THE CONTROL SYSTEMS Much like their name suggests, control processes. As such, they form a critical part systems are used – primarily in infrastructure of the infrastructure management toolkit in While control systems were originally and industrial settings – to control, monitor areas such as designed to work in isolated environments and/or supervise physical processes that Vessel automation – control systems and to be accessible only by well-qualified extract, make or move the resources or provide remote supervisory control and staff, the past few years have seen many products of the modern world. ship monitoring systems of these systems start to be integrated into Early control systems were mechanical or Water treatment – operators use control networks, the internet, or even the cloud analogue which meant that they operated systems to manage flow control and to in order to improve operational efficiency. on fixed instructions wired into circuitry. monitor water levels and pump operations Indeed, in a recent survey of IT/Engineering

88 | INSIGHT | Who controls our infrastructure?

© 2015 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. managers, a third said that their control systems were already connected to their organization’s networks, while 45 percent said they are now considering moving more of their control systems onto the network.1 Not surprisingly, many And now, with the introduction of Big infrastructure owners Data techniques, organizations are starting and operators are now to look to their control systems to enable new business opportunities and insights. looking for improved ways of integrating their control CYBER SECURITY CHALLENGES systems while minimizing Control systems often pose unique security challenges. In some cases, they may be their cyber risk. utilizing technology older than the internet itself. The reality is that, historically, most control systems were initially designed as INTEGRATING CONTROL SYSTEMS specialized, isolated systems and were not AND MINIMIZING RISK built with cyber security in mind. In some Not surprisingly, many infrastructure owners infrastructure sectors, compromises could and operators are now looking for improved result in the loss of integrity and availability ways of integrating their control systems of the physical process; breaching statute while minimizing their cyber risk. Some have in some sectors and reputational damage. tried performing unfocused security testing The new interconnectivity paradigm, and patching for identified vulnerabilities, but however, means that attacks are already most often find that this leads to unacceptable a reality. In 2014, ICS-Cert (a branch of the service disruptions. And few have the budget US Department of Homeland Security or the available capacity to fully replace their focused on cyber threats) reported a existing legacy systems. total of 245 incidents involving control Our experience suggests that the most robust solutions tend to follow an ongoing systems, out of which 55 percent involved risk-driven approach. This allows operators advanced persistent threats (APT) – and managers to balance disruption with sophisticated attacks typically directed at the cyber risk while, at the same time, high value business and political targets; providing assurance that interconnectivity 42 percent of these targeted Communication, will not compromise core operational 2 Water and Transport infrastructure. processes. A key to success is to place appropriate focus on both the strategic and the tactical elements: the tactical elements are important DRIVING VALUE FROM CONTROL SYSTEMS as they often deliver cost saving and quick value-add; but the strategic elements are Control systems are not just the passive police officers controlling static operational usually even more important as they help processes. They are also valuable tools to help infrastructure managers and owners ensure that the benefits are sustained and improve their operational efficiency. return on investment justified. By integrating control systems with data analytics, asset owners and operators are finding that they can extract and analyze a massive amount of ‘Big Data’ from OVERCOMING RISKS TO ACHIEVE their systems to drive key insights to support: OPPORTUNITIES The operationalization of business processes (including the anticipation of potential Control systems are everywhere. And their systems failures or the adoption of new operational trends); integration – coupled with improved data The identification of new business opportunities (such as the opportunity to analytics capabilities – opens up numerous repurpose underutilized resources); and opportunities for infrastructure owners and The achievement of operational cost savings through shared infrastructure and operators to improve efficiency, enhance services. productivity and achieve substantial revenue In the UK, for example, significant resources are spent on monitoring the state, usage generation and cost savings. and maintenance of what is arguably the world’s oldest and most heavily relied-upon But with opportunity comes risk. In some rail networks. To improve their efficiency, Network Rail has formulated a ‘Digital sectors, a single control system failure or Railway’ strategy that relies heavily on control systems. As well as capturing valuable hack could cost lives. Infrastructure owners real-time data on traffic and track conditions, Network Rail also plans to process and operators would be well advised to their data to generate additional business insights and further improve efficiency.3 think seriously about how they manage cyber security as they look to unlock new opportunities. 1 KPMG Survey on IT & OT Convergence, 2015 2 https://ics-cert.us-cert.gov/monitors/ICS-MM201502 3 http://www.railtechnologymagazine.com/Rail-News/network-rail-to-accelerate-digital-enablement-of-britains-railway Who controls our infrastructure? | INSIGHT | 89

© 2015 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. To access the publication listed here, visit: www.kpmg.com/infrastructure or email us at: Bookshelf [email protected]

INSIGHT: THE GLOBAL INFRASTRUCTURE MAGAZINE Insight is a semi-annual magazine that provides a broad scope of local, regional and global perspectives on many of the key issues facing today’s infrastructure industry.

Issue No. 6 – Population Issue No. 5 – Resilience This edition of Insight takes a This edition of Insight explores closer look at the link between some of the world’s most unprecedented population changes impactful stories of resilience. It and demographic shifts currently also includes an exciting Spotlight underway and the infrastructure Special Report on the important needed to meet these challenges. changes and opportunities within It also includes a Special Report on Latin America’s infrastructure Asia Paciﬁc’s infrastructure market. market.

INSIGHT Issue No. 4 – Megaprojects Issue No. 3 – Infrastructure The global infrastructure magazine / Issue No. 4 / 2013 Megaprojects This edition of Insight magazine Investment: Bridging the Gap explores some of the key This edition explores the complex

With a special feature on Africa’s infrastructure challenges and opportunities world of infrastructure ﬁnance and market impacting megaproject delivery, funding, including critical topics and includes a Spotlight Special ranging from direct investment, Report on Africa’s infrastructure to innovative ﬁnancing and market, a key growth area. funding models, and the evolving infrastructure fund market.

KPMG GLOBAL INFRASTRUCTURE PUBLICATIONS AND REPORTS KPMG member ﬁrms are priviledged to be involved in many of the exciting changes that are happening in every corner of the world, across many sectors and at various stages of the lifecycle of infrastructure. We continuously seek to share the insights we are gaining in the process.

Infrastructure 100: World KPMG Toll Benchmarking Study 2015: Markets Report An evolution in tolling In the third Infrastructure 100, This study helps toll road owners, operators KPMG highlights key trends and governments compare key metrics such driving infrastructure investment as cost to collect and operational efﬁciency. around the world and a global Based on in-depth survey data collected from panel of independent industry more than 40 tolling agencies world-wide, it experts identify 100 of the world’s provides organizations with an unprecedented most innovative, impactful view into the challenges, risks, costs and infrastructure projects. opportunities facing the tolling sector today.

ISO 55001: A new era for asset Tax, Sovereign Wealth Funds and management Tax, Sovereign Pension Funds: A new approach for a Wealth Funds and Pension Funds: new environment This paper discusses the beneﬁts A new approach for a new environment

KPMG INTERNATIONAL of an integrated holistic approach kpmg.com/infrastructure This report provides insights into how to asset management, looks at sovereign wealth funds and pension funds are the requirements of ISO 55001 approaching important market developments. and explains how companies It focuses on several critical topics including comply with the standard and the shifting infrastructure investment market improve asset performance. and evolving investment approaches. 90 | INSIGHT | Who controls our infrastructure?

© 2015 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. GLOBAL CONSTRUCTION SURVEYS SERIES KPMG conducts the Global Construction Survey to monitor Engineering & Construction issues and provide timely summaries and insights to help professionals make more informed business decisions in today’s rapidly changing environment.

2015 Global Construction Survey: 2013 Global Construction Survey:

GLOBAL CONSTRUCTION SURVEY 2015 Climbing the curve Climbing The 2013 report catches the the curve In the ninth edition, we focus on the industry in a more upbeat mood 2015 Global Construction Project Owner’s Survey kpmg.com/building challenges facing owners as they after gauging the views of 165 KPMG INTERNATIONAL strive for a balance between power, senior executives of leading responsibility and control. This report Engineering & Construction ﬁrms gauges the views of over 100 senior from around the world to determine executives of leading private and public industry trends and opportunities organizations from around the world. for growth.

2012 KPMG Global Construction 2010 KPMG Global Construction Survey: The great global Survey: Adapting to an uncertain infrastructure opportunity environment The 2012 survey focuses on the The 2010 survey highlights the insatiable demand for energy and cautiously optimistic outlook of many infrastructure in all forms, and the E&C companies about their immediate resulting fundamental shifts in focus prospectus and discusses key industry for nearly all E&C ﬁrms. issues and the measures adopted to seize the new opportunities identiﬁed.

FORESIGHT: A GLOBAL INFRASTRUCTURE PERSPECTIVE In the complex world of infrastructure, hot topics of conversation and industry ‘buzz’ are constantly changing. Foresight: A Global Infrastructure Perspective is a series of articles that feature our take on some of the hot topics, trends and issues facing our ﬁrms’ clients.

FORESIGHT FORESIGHT Special Edition - January 2015 SPECIAL EDITION: Emerging Trends 32nd Edition – July 2015 Levelling the playing ﬁeld Levelling the playing ﬁeld 10 Emerging Trends for 2015 in 2015 By Mauricio Endo, KPMG in Brazil Trends that will change the world of Mauricio Endo reviews the infrastructure over the next 5 years FORESIGHT Four of KPMG’s Global Infrastructure A global infrastructure perspective implications and opportunities for FORESIGHT A Global Infrastructure Perspective leaders look back on predictions from local and international investors

In a bid to encourage greater international less knowledge of the Brazilian market, so this extension should competition for projects, Brazil’s new US$64 increase their chances of preparing a competitive bid. In addition, the judging criteria will now acknowledge contractors’ overall 2015 billion infrastructure program reduces subsidized international track record, and not just their experience 2014 and share their views on new credit, eases restrictions on profits, and gives within Brazil. contractors more time to prepare bids. around Brazil’s new US$64 billion The financing environment has changed considerably. Whereas The announcement of a new set of infrastructure concessions previous programs imposed a maximum internal return on has raised hopes that Brazil can finally start to attract a significant investment, the latest concessions have no fixed ceiling, and amount of foreign investment into the sector. The latest package, will instead be assessed on a case-by-case basis, to ensure that worth 64 billion US dollars (US$), covers roads, railways, ports, contractors can achieve margins in line with the sector average. and airports, and is designed to open up a market traditionally An abundance of cheap debt from the Brazilian Development trends that will change the world of thought to favor domestic contractors. Bank (BNDES) has meant that taxpayers have effectively Infrastructure is a story of evolution. It drives social and economic development. It A previous set of concessions in 2012 enjoyed mixed fortunes. subsidized contractors, which has tilted the odds towards infrastructure program. enables us to renew our public services and physical surroundings. It allows societies, Although contracts for two-thirds of road projects and both domestic players with local contacts. To address this imbalance, economies, companies and individuals the opportunity to live to their full potential. airport projects were completed, none of the port or rail debt-to-equity ratios have been adjusted for each of the four tenders managed to close. This time around, the government is sectors of roads, railways, ports, and airports. The maximum At the same time, the way we approach infrastructure itself is also evolving. Some of determined to create the right conditions to avoid a repeat, with a proportion of a project that can be financed by the BNDES, at number of important changes to its approach. subsidized rates of interest, has been reduced to 45 percent for the shifts in the sector are sudden and disruptive. Others evolve slowly, ebbing and 1 infrastructure in 2015. In recognition of the complexity of infrastructure projects, roads, 35 percent for ports and airports, and 70 percent for rail . In flowing in and out of political consciousness as governments and businesses react to the deadlines have been substantially lengthened, to give a bid to make financing more internationally competitive, BNDES changing circumstances. potential bidders sufficient time to carry out detailed studies into will offer more subsidized funding to companies that raise debt construction, demand and capital expenditure, to more accurately on capital markets via infrastructure debentures – which also For the past 3 years, KPMG’s Global Infrastructure practice has tracked the annual size the costs and risks. Foreign investors have, understandably, carry tax incentives until 2020. tides and trends driving the world’s infrastructure markets. And each year, we have published our perspective of the top 10 trends that will likely impact the infrastructure In a bid to make financing more internationally competitive, BNDES will offer market over the coming year. Welcome to our short report on Emerging Trends in 2015. more subsidized funding to companies that raise debt on capital markets via infrastructure debentures – which also carry tax incentives until 2020

1. http://www.bnamericas.com/news/infrastructure/brazils-bndes-cuts-infra-project-financing-limit-in-half

1 Foresight / January 2015 1 Foresight / July 2015

© 2015 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved. © 2015 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.

FORESIGHT FORESIGHT 31st Edition – June 2015 Landmark PPP to reduce congestion 30th Edition – June 2015 Unleashing Latin America’s Landmark PPP to reduce congestion Unleashing Latin America’s potential in North Carolina, US in North Carolina, US By Victor Esquivel, KPMG in Mexico potential By Matthew Gill, KPMG in the US FORESIGHT FORESIGHT Matthew Gill discusses the innovative A Global Infrastructure Perspective Victor Esquivel reviews some of A Global Infrastructure Perspective US$650 million initiative that enabled the topics discussed at the World

Free trade, robust regulation and transparency In a continent with a mixed record of transparency, there is a pressing need to re-establish trust in the rule of law and governing Economic Forum in Mexico and can open the doors to private finance to power This innovative 650 million US dollar (US$) to be ready in less than four years; with state funding alone the the region’s infrastructure, according to a recent institutions. Competitive bidding processes, timely payments for the state transportation authority to completed work and protection of intellectual property can help initiative enables the state transportation timing would be more like 20 years. After initial interest from four WEF discussion. With its strong Reforms agenda consortia, the final contract was awarded to Spanish engineering to reassure investors that they will be treated fairly. authority to carry out much-needed and growing pipeline of projects, Mexico is and construction giant Cintra. enhancements to a major commuter route. At a becoming increasingly attractive to investors. Mexico’s ambitious Reforms agenda Although PPPs are growing in popularity in the US, a number of time in the market of limited appetite for revenue Infrastructure will play a huge role in advancing Latin America’s As Latin America’s second largest economy, Mexico is high profile deals have hit problems due to toll revenue failing to economies and improving social inclusion. With this in mind, taking strides to speed up its growth. A 2015 report from the addresses potential opportunities risk, the transaction strikes an excellent deal for meet forecasts, leaving developers unable to keep up with debt a recent session of the World Economic Forum (WEF), held in Organization for Economic Co-operation and Development North Carolina’s taxpayers and balances the risk repayments and in some cases leading to bankruptcy. This has Riviera Maya, Mexico in May 2015, looked at ways to accelerate (OECD) praised Mexico for embarking: “…on a bold package for developers and lenders. made lenders, developers, public authorities and citizens nervous carry out much-needed enhancements of structural Reforms to break free from three decades of slow the region’s infrastructure development, by creating an attractive of such partnerships. growth, low productivity, pervasive labor market informality and In the state’s first ever infrastructure public-private partnership environment for private finance. What sets the I-77 transaction apart from previous PPPs is the high income inequality.”1 These reforms cover areas such as (PPP), North Carolina is to add new lanes to a notoriously Delegates urged a shift to more market-oriented economies, innovative financial structuring, designed to minimize the cost to competition, the financial sector, labor, infrastructure, energy, crowded section of highway. where traditionally publicly-owned assets could be opened up the NCDOT while mitigating risk to lenders. telecommunications and tax. related to the countries ambitious Traffic congestion on the I-77 corridor has made daily commuting to private capital, including energy, telecommunications and The Government is certainly thinking big; it’s National a misery for thousands of workers around the city of Charlotte. In order to hedge against revenue shortfalls, revenue-risk PPPs transport, as well as ‘social’ infrastructure such as schools and Infrastructure Program 2014–2018 pledges to invest US$590 Continued population increases will only worsen the situation. have historically included a ramp-up reserve, funded prior to hospitals. Mexico, Chile, Colombia and Peru, in particular, were commencement of operations. Should early revenues come in on to a major commuter route. commended for their efforts to sign trade agreements. billion in 743 programs covering energy, land development, In response, the North Carolina Department of Transportation target, however, the ramp-up reserve – initially funded by a mix of transport and communications, healthcare and tourism. Some (NCDOT) has chosen a long-term solution to widen a 26-mile Legal, regulatory and structural challenges remain. Countries like debt, equity, and public subsidy – can typically be released to the of the landmark projects include a 1,000 kilometer (km) gas (42-kilometer (km)) stretch of road, adding dynamically-priced Chile have a well-tested set of regulations and procedures refined developer, which is not always an ideal arrangement for lenders pipeline, Mexico City’s new airport, high-speed and urban rail express lanes in each direction. Drivers that pay tolls to switch to through two decades of privately-funded projects. Some other and public authorities. developments and nationwide fiber optic cable networks.2 reforms agenda. the express lanes will enjoy shorter journey times, which should nations are lower down the learning curve in preparing a pipeline also reduce traffic on the existing general-purpose lanes. Public For the I-77 project, NCDOT decided to take a different of appealing projects and managing the tender process. Investors Given that historically a number of Latin America infrastructure buses and vehicles with three or more occupants can use the approach. Rather than increase the upfront public contribution may be deterred by slow, cumbersome customs approvals and projects have failed to pass over the discussion phase, there is a express lanes for free. to fund a ramp-up reserve, NCDOT established an innovative prohibitive tariffs, while a dearth of local engineering and project strong argument for Mexico to curb its ambition somewhat and narrow down its priorities. A private developer was sought to manage the project design, contingent, credit enhancement facility. If toll revenue is management talent is a further impediment. construction, finance, operation and maintenance, and take insufficient to fully fund operations and maintenance costs and scheduled debt service, the developer may request additional revenue risk over a 50-year concession. The road is expected 1. OECD Economic Surveys: Mexico, January 2015. 2. Mexico Update: Infrastructure Plans Unveiled, Americas Society/Council of the Americas, 9 October 2014.

1 Foresight / June 2015

© 2015 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. © 2015 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.

Who controls our infrastructure? | INSIGHT | 91

© 2015 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. FORESIGHT FORESIGHT th India’s 2015-2016 Budget: A kick-start th Vibrant Gujarat puts India back on 29 Edition – March 2015 27 Edition – January 2015 India’s 2015-2016 Budget: for infrastructure Vibrant Gujarat puts India back on the world stage the world stage A kick-start for infrastructure A regional ‘Davos’ emerges By Hitesh Sachdeva, Arvind Mahajan, Manish Aggarwal, Biswanath Bhattacharya By Arvind Mahajan, Head of Infrastructure & Government Services, KPMG in India and Rajaji Meshram, KPMG in India KPMG in India’s infrastructure leaders FORESIGHT FORESIGHT Arvind Mahajan reviews the A Global Infrastructure Perspective A Global Infrastructure Perspective review the country’s budget and opportunities and outcomes of the discuss its impact on investment and Last week’s Vibrant Gujarat Summit removed any lingering doubts regarding India’s position on Vibrant Gujarat Summit, India’s ‘Davos While India’s recently-announced Budget Focus on infrastructure the world stage. Cheered on by an audience of world leaders, global business executives and policy Plan may not have been a ‘big bang’ as some Mr. Jaitley’s budget demonstrates that the Modi government is makers, the event clearly demonstrated that Gujarat – and, by extension, India – is taking a leading role investors expected, many believe it will have a keen to unblock the infrastructure pipeline. In part, he will use in defining the emerging world agenda. very big impact on the country’s infrastructure public money to do this: recognizing that many projects have sector. Indeed, with this announcement, India’s been stalled by a lack of private funding, the Budget included If you didn’t attend this year’s Vibrant Gujarat Summit, you may have more than 21,000 investment ‘intentions’ were struck during the Government is clearly taking significant steps to US$11 billion in increased commitments through Private Sector development in the infrastructure missed a massive opportunity. Far from the regional investment fair course of the event). demonstrate that it is willing to make big changes Enterprises for infrastructure investment. that characterized the first Summit in 2003, the event has quickly Those who were seeking to rub shoulders with India’s political and become the definitive venue for the discussion and development of of the East’. in order to deliver on its old promises. More importantly perhaps, the Budget also included a new fiscal business decision-makers were not disappointed. Virtually the entire industrial and investment policy in the East. In fact, many now view framework for the division of taxes between the central and Federal cabinet was in attendance, led by Prime Minister Modi As Arun Jailey, India’s Finance Minister, stood up to deliver the the event as ‘Asia’s Davos’. state governments, increasing the allocation towards states by (who, as Chief Minister of Gujarat from 2001 to 2014, was widely Modi government’s first full-year budget this past weekend, he about 10 percentage points. It is expected that states will now viewed as the architect of that State’s impressive economic growth) had good reason to be pleased. Over the past few months, India’s Davos of the East be more empowered to spend on infrastructure capacity creation and many key Indian portfolios (such as finance, home affairs, growth has continued to pick up and the macroeconomic trends (albeit at the expense of some ‘fiscal headroom’ at the Central The comparison to WEF Davos is not unwarranted. The event defense, power, coal and renewables, and health) were also actively had become increasingly positive. drew a wide global audience; more than 25,000 people attended, Government level). sector. represented by ministerial delegations. What the country needed was not a ‘big bang’ but rather a representing more than 110 different countries. Many sent their What was particularly notable in the approach taken by Mr. Jaitley highest ranking officials – John Kerry led the US delegation, pragmatic approach to catalyzing growth while continuing to A leadership platform is that it reinforces the ‘One Team’ model for infrastructure that Secretary General Ban Ki Moon led the UN delegation, while the maintain fiscal prudence: a long-term plan that would combine What makes the Vibrant Gujarat Summit unique, however, is recognizes the importance of both the Central Government and the delegations from countries such as Bhutan and Macedonia were that it has risen above simply focusing on investment. This year’s investment, policy reform and improved regulation to deliver the led by their respective Prime Ministers – clearly reflecting the State Governments who, arguably, are closer to those that need Summit brought attention to a range of issues of vital importance right environment for growth over the coming years and decades. importance of India on the international agenda. and use the infrastructure. Continuing partnership between the to the State, the country and the region. Key social issues such And that is exactly what the Finance Minister delivered in this year’s various levels of government in India is an encouraging sign. Equally impressive was the list of global CEOs, Board Members as healthcare and Corporate Social Responsibility were front and budget. In fact, we believe that Mr. Jaitley’s “Growth Oriented” and executives who came to not only make deals, but also to center. “It was great to see business and policy leaders from approach – which envisions GDP growth of 8 percent in financial Meeting the social agenda learn more about Gujarat, India and the wider sub-continent. around the world come together in this forum to start to solve year 2016 and double-digit growth by 2020 – includes a number of This year’s budget also recognizes the need to take immediate Many used the event to launch country-wide tours or make some of the region’s bigger social and economic challenges,” much-needed measures that should encourage increased activity action to achieve some of the government’s larger social platforms significant investment announcements (organizers estimate noted Richard Rekhy, CEO of KPMG in India and a panelist for the and investment in India’s infrastructure sector and, in doing so, help such as ‘Power for all’ and ‘Health for all’. For example, the that more than 1,200 strategic partnerships were signed and CSR session. to spread the benefits of growth across the economy. budget includes provisions to help electrify the last remaining

1 Foresight / March 2015 1 Foresight / January 2015

FORESIGHT Maintaining infrastructure FORESIGHT 25th Edition – September 2014 23rd Edition – May 2014 Prioritizing transportation projects in Maintaining infrastructure investment in an era of tax morality Prioritizing transportation projects investment in an era of tax morality in an age of funding constraints an age of funding constraints By David Neuenhaus, KPMG in the US Dave Neuenhaus addresses the political By Stephen Andrews and Clay Gilge, KPMG in the US FORESIGHT FORESIGHT Clay Gilge and Stephen Andrews discuss A Global Infrastructure Perspective concerns and tax implications of A Global Infrastructure Perspective how governments should evaluate and infrastructure investment. A dynamic tension is developing between investors and governments seeking to collect a “fair If governments are to meet their 21st century transport needs, they should meticulously evaluate and select the right capital projects using share of tax”. Moving forward, pension and sovereign wealth investors must be prepared to inform select the right capital projects, using highly objective, data-driven procedures. governments about their unique role in the infrastructure ecosystem and they must also anticipate the need to explain their tax positions to tax authorities and the media. For their part, governments must Transportation infrastructures around the world have suffered With a minimum 20-year horizon, plans should be consistent with better understand and address the special needs of these investors if they wish to attract the foreign from years of neglect and under-investment, with population the agency’s overall mission, which calls for close coordination with increases and urbanization putting ever-greater pressure on roads, transportation planning at other levels of government. investment capital they require for major infrastructure development. highways and bridges. Alternative financing – such as public-private Among the key components are clearly defined goals, partnerships – cannot fully compensate for shrinking budgets, so demographic and environmental trends impacting transport, and a Tax morality has become a political hot topic over the past corporations, many of the measures being proposed may impact governments must find ways to make their money go further. objective, data-driven procedures. three years. Media and politicians are challenging legitimate significantly cross-border investment in infrastructure. In particular, full inventory showing any deficiencies in existing assets. And by tax optimization planning techniques, in part because countries the BEPS Action Plan calls for measures to: (i) eliminate the tax Many transportation agencies lack robust protocols for identifying, including a breakdown of potential projects, major investments are struggling with deficits and funding requirements while advantages of hybrid mismatch arrangements (e.g., instruments that evaluating and selecting those capital projects that can deliver the and any budget constraints, planners have the fullest possible multi-national corporations seem to be paying relatively little give rise to a deduction to the payor and no taxable income to the greatest value. Although they have much of the data they need, information, enabling them to prioritize effectively. what is often missing is a standardized framework, with clearly direct income tax in the countries where they have operations. recipient); (ii) limit the deductibility of interest payments; (iii) deny tax Asset management Historically, there has been a general acceptance of a taxpayers’ treaty benefits in cases of perceived abuse; and (iv) require greater defined criteria and weightings. The decision-making process right to plan their affairs to optimize their tax position. That reporting of the global activities and tax arrangements of groups of is frequently subjective, with insufficient understanding of the A capital plan must present a clear picture of the current asset fundamental principle is now being challenged by media affiliated companies. existing estate, and too much emphasis upon short-term goals. portfolio, enabling ongoing tracking and optimal use of these and politicians highlighting apparently profitable companies Existing controls are routinely ignored or circumvented, while assets throughout their lifecycles. Strong asset management gives Pension, sovereign wealth and investment funds could be operating in their countries without making contributions to planners also fail to consider limitations in human resources and agencies a real-time view of assets, so that the project screening subject to certain unintended and adverse consequences of tax revenues at a level they deem appropriate. commodities. and selection is geared towards those parts of the infrastructure these efforts. And investments in the infrastructure sector are In establishing a consistent approach to project prioritization, that deliver the greatest benefit to the transport system and the In a bid to address these political concerns about perceived tax by no means immune. In fact, a number of infrastructure related project owners need to consider their longer-term strategies, asset wider economy. abuse and to obtain increased transparency regarding tax payments characteristics could serve to intensify the dynamic. management and planning frameworks. globally, the OECD (Organisation for Economic Co-operation and Agencies can call upon a number of recognized asset management For instance, infrastructure investments often attract public Development), as mandated by the G20, has developed an Action frameworks (most notably ISO 55000), while a centralized asset attention. Many such investments require substantial initial Long range planning Plan on Base Erosion and Profit Shifting (BEPS). Very generally, the management database ensures that data is accurate, up-to-date capital, sometimes with no positive aggregate return anticipated BEPS initiative seeks to revise the international tax standards to This complex process requires input from all levels of the agency and easily accessible. Assets should be evaluated using objective for years. This is because investments in infrastructure generally address certain perceived abuses. While the origin of the project and including senior executives, planners and administrators, as well criteria, and planners need to manage the various stages of do not have a liquid market, and investors generally must take the interim recommendations are largely oriented to multi-national as external stakeholders such as national and local government, the asset lifecycle: planning, development, use, monitoring, communities, and other public and private transportation groups. maintenance and decommissioning.

1 Foresight / September 2014

OTHER THOUGHT LEADERSHIP KPMG’s Infrastructure and Major Projects Advisory professionals conduct research and develop thought leadership for a variety of clients and industry leaders. This information focuses on current issues facing infrastructure owners and contractors in a rapidly changing construction environment, provides key insights and tangibily contributes to their decision making procesess.

Preventing black swans: Avoiding How to successfully manage your major project failure mega-project This paper highlights characteristics Effective management of mega-projects of major capital projects that can lead relies on three key concepts: early to catastrophic failure for owners and planning and organizing, stakeholder contractors, alternative approaches communication and project controls for screening projects, and red ﬂags integration, and continuous improvement. and triggers for early identiﬁcation of This three part series covers best practice troubled projects. for managing mega-projects.

Integrated project delivery: Next wave: Continuous monitoring Managing risk and making it work and compliance for all parties This report reviews the framework This paper provides an overview of for developing a continuous project the current practices and challenges monitoring and compliance program that involving IPD and its evolving risk integrates the positive features of project proﬁle. It also offers guidance on how to performance monitoring, project risk and prepare an IPD strategy and describes controls monitoring, and computer aided the tools and methodologies currently auditing. used to facilitate successful IPD.

MPA Project Leadership Series

KPMG’s Major Projects Advisory (MPA) Project Leadership Series is targeted toward infrastructure owners with major construction programs, but its content is applicable to all entities or stakeholders involved with construction projects. This series describes a framework for managing and controlling large capital projects based on the experience of professionals from KPMG’s MPA practice. Member ﬁrms provide services to hundreds of leading construction owners, and engineering, procurement and construction contractors.

• From Concept to Project – Critical Considerations for • Governance and Project Controls Project Development • Budgeting, Estimating and Contingency Management • Stakeholder Management and Communication • Monitoring Capital Projects and Addressing Signs of Trouble • Project Organization & Establishing a Program • Project Risk Management (future) Management Ofﬁce • Investing in Tools & Infrastructure (future)

92 | INSIGHT | Who controls our infrastructure?

INTEGRATED SERVICES IMPARTIAL ADVICE INDUSTRY EXPERIENCE

When it comes to infrastructure, KPMG member firms know what it takes to drive value. With extensive experience in most sectors and countries around the world, our Global Infrastructure professionals can provide insight and actionable advisory, tax, audit, accounting and compliance-related services to government organizations, infrastructure contractors, operators and investors. We help clients to ask the right questions that reflect the challenges they are facing at any stage of the lifecycle of infrastructure assets or programs – from planning, strategy and construction through to operations and hand-back. At each stage, KPMG’s Global Infrastructure professionals focus on cutting through the complexity of program development to help member firm clients realize the maximum value from their projects or programs. Infrastructure will almost certainly be one of the most significant challenges facing the world over the coming decades. That is why KPMG’s Global Infrastructure practice has built a team of highly-experienced professionals (many of whom have held senior infrastructure roles in government and the private sector) who work closely with member firm clients to share industry best practices and develop effective local strategies. By combining valuable global insight with hands-on local experience, KPMG’s Global Infrastructure practice understands the unique challenges facing different clients in different regions. And by bringing together numerous disciplines such as economics, engineering, project finance, project management, strategic consulting and tax and accounting, KPMG’s Global Infrastructure professionals work to consistently provide integrated advice and effective results to help member firms’ clients succeed. For further information, please visit us online at kpmg.com/infrastructure or contact:

James Stewart Stephen Beatty Julian Vella Global Infrastructure Americas and India Head of Asia Paciﬁc Head of Global Chairman Global Infrastructure Infrastructure Partner, KPMG in the UK Partner, KPMG in Canada Partner, KPMG in China E: [email protected] E: [email protected] E: [email protected] kpmg.com/infrastructure

© 2015 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. The views and opinions expressed herein are those of the interviewees and authors and do not necessarily represent the views and opinions of KPMG International or any KPMG member firm. Designed by Evalueserve. Publication name: Insight: Who controls our infrastructure? Editors: Peter Schram, Dane Wolfe, Laura Jablonski and Pranya Yamin. Publication number: 132687-D. Publication date: September 2015. Take thinking to new heights

Infrastructure is one of the biggest and most complex challenges of the 21st century. An estimated US$57 trillion of investment will be needed by 2030 to sustain global growth. KPMG’s Global Infrastructure practitioners, on site in 155 countries, advise governments, developers and investors across the lifecycle of projects – from strategy and financing to delivery and hand-back.

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