Competing for Resources
The OECD estimates USD $53 trillion in investment or the equivalent of an annual 2.5% of global GDP by the year 2030, to meet demand for infrastructure investment by 2030. 1 According to ACEC, a $3.6 trillion investment is needed by the year 2020 in the U.S. alone, 2 and the Conference Board of Canada recently stated that, “Canada needs to invest at least $293.8 billion in electricity infrastructure between 2010 and 2030 3. Those numbers are so large and intimidating that most people are tempted to ignore them with hopes they will go away. Public sector budget shortfalls and a lack of willingness to address funding through legislative measures will make the situation worse with failures looming on the horizon.
One potential solution exists within the impact investing community which controls more than $29 trillion worldwide 4. Roughly 56 percent or $16.24 trillion of that capital is from the U.S 5, alone. Impact Investors have a growing interest in making long-term commitments to infrastructure and public building projects. Yet impact capital has not made significant progress in finding its way into these projects. One of the primary reasons is the lack of transparent, objective, comparable, and affordable investment information. That information is needed to decide whether to invest. Determining project value (including environmental, social and economic impacts) and risk is essential to the due diligence process.
The information gap is also a barrier to success in winning public sector, merit-based funding. Project sponsors are used to formulate grant programs and are just now coming up to speed in articulating business cases needed to demonstrate and compare the value of merit with disparate competing projects.
The good news is that things are changing rapidly, and soon, project sponsors will be making their cases for merit funds and private impact capital. They will be basing their case on the comprehensive value of cash as well as internal/external costs and benefits that are adjusted for risk to determine overall value for money. 6 That value can be assigned across a range of stakeholder beneficiaries to address the interests of most of the entities that can make or break a project.
During times of scarce resources, there is intense competition. Value and risk information is needed to answer stakeholder questions. Credible input data is essential to building support and moving up the prioritization list. Capturing that data will require the use of existing, standardized tools that can be affordably harnessed and then applied early and often throughout a project’s life to provide relevant decision support information.
Universally recognized Cost Benefit Analysis (CBA) is the best starting point. CBA is a standard approach to economic valuation used frequently in custom assessments associated with infrastructure projects. Custom studies are often commissioned via consulting economists who reinvent the wheel as they assess specific projects. Custom studies are expensive, and inherent “tweaking” make them difficult to compare. As a result, they are done early in the project development process to sell a project during concept stage. Once the project is sold, they are generally placed on a shelf and ignored as decisions are made that actually define and deliver final projects.
CBA has been a proven tool in the quest for merit funding. Work has been done to create sector specific metrics (i.e., energy, transportation, water, social infrastructure including healthcare, military and educational facilities) that run in conjunction with an analytic engine that is “powered” by CBA and probabilistic analysis. AutoCASETM (automated business case) is a software plug-in solution that runs in conjunction with Autodesk project simulation and visualization tools used by millions of planning and design professionals around the world. Together, the metrics and engine run to translate tangible and intangible costs and benefits to risk adjusted monetary units that assign value by specific groups of stakeholder beneficiaries. For example, the Trinity River Visioning Authority recently completed a project working with consulting firm VERDUNITY, the Institute for Sustainable Infrastructure’s EnvisionTM. Sustainable Infrastructure Rating System, and the Business Case Evaluator economic companion tool and AutoCASETM. Using these tools, they were able to compare a range of low impact development scenarios with traditional “grey” infrastructure to craft comprehensive business cases for each alternative. In Pima County and the City of Tucson, Arizona, stormwater managers and transportation planners are using AutoCASETM with Autodesk’s Civil 3D infrastructure design software to inform new planning guidelines that will subject infrastructure alternatives to comprehensive business case analysis.
Reducing the Due Diligence Burden
Professionals charged with overseeing investments of impact capital have been discouraged by the effort required to complete the due diligence process. They have struggled with quantifying the value and risk associated with specific projects. In addition, they have found the average project size well under the dollar amount needed to efficiently finance in the marketplace. By using standard CBA and probabilistic analysis tools, sector specific metrics, and recognized building information modeling (BIM) software, project sponsors can reveal impact value while supplying information that reduces the due diligence burden. At the same time, they can increase project comparability that can aid in bundling disparate projects. These three benefits will go a long way to making infrastructure projects attractive investments for impact capital.
Further, by answering the “What’s in it” questions, they can reduce the risk of project delay through deal balancing and the allocation of financial and sustainable returns on investment.
Making the Case
Transparent, objective, credible and comparable value and risk assessments are key to making the case impact capital. Assessments should begin as early in the project development process as possible and continue through each stage of planning, design, construction, and operations in order to benefit from increasing levels of detail as decisions are made and implemented. Baseline data and the resulting decision support information from the business case will provide a foundation for performance measurement, monitoring and reporting throughout the entire life cycle. Those project sponsors who understand and articulate the full value and risk associated with their projects will realize an advantage in the competition for impact capital. Overtime, as comprehensive business cases become more common, users will realize additional benefits as projects are bundled and systems are managed on a basis of value for money as compared to other investment options.
John Williams is the Chairman & CEO of Impact Infrastructure LLC.