Finding new ways to deliver large infrastructure projects to increase the benefit to society
Infrastructure investment needs are on the rise worldwide – surely a challenge for countries with budget constraints, but a good possibility for change. Now is the perfect time for financially stable countries like Finland to think through how they will maximize the value of planned large-scale infrastructure investments. Infrastructure projects where many partners and technologies must work together to produce a functioning and sustainable outcome are challenging. Furthermore, history shows that the current ways of operating often lead to failures. Infrastructure projects tend to substantially exceed their budgeted costs, outrun construction schedules and once ready, fail to perform as expected.
How to secure the best value out of the money spent is highly relevant right now in Finland. Finland is planning for up to three major high-speed train projects with a total investment budget calculated in billions of euros. Due to their size, these projects put pressure on the state’s investment budget. According to the recently published Liikenne 12, Finland’s 12-year traffic infrastructure plan for 2021–2032 (ref. https://valtioneuvosto.fi/hanke?tunnus=LVM018:00/2019), infrastructure projects will also be publicly financed in the future. Even assuming that most of the financing will come from the state budget, we should stop and think whether alternative delivery and financing models could be of any use in maximizing the value of the investments for society. Some questions to consider are: What would be the best and most cost-effective way to secure Finland’s traffic infrastructure in the future? How can we get the most societal and environmental ‘value for the money’? How can we improve the way infrastructure projects are planned, procured and executed?
The discussion easily gets distorted when talk about private financing of infrastructure takes the stage. The focus easily shifts towards ‘how the cake should be divided’, even though everyone knows that a bigger and better-tasting cake benefits all. To get the ingredients right, it pays to benchmark what more experienced ‘bakers’ are doing. Australia, Canada and the UK have been forerunners in actively rethinking infrastructure procurement, and there are things to learn from their experiences. We soon realize that the most crucial thing may not be about the privatization of public infrastructure. Instead, the questions deserving new thinking appear to about how to create good incentive mechanisms for all the partners involved and how to distribute risks in the best possible way.
In other words, it is about maximizing productivity and societal benefit. This was also highlighted in a recently published report, co-authored by PBI, on new ways to finance and deliver traffic infrastructure projects (Liikennehankkeiden vaikutusten hyödyntäminen osana hankkeiden rahoitusta).
Full report: https://julkaisut.valtioneuvosto.fi/handle/10024/162932
The report presents several valuable conclusions. For example, there needs to be true political will to find new ways to deliver infrastructure projects, new competence needs to be built up on both the public and private side, a steady stream of projects that can be delivered with alternative models needs to be secured, and a proper (both ex-ante and ex-post) evaluation methodology needs to be taken into use nationally for all large infrastructure projects. The methodology will require the structured collection and analysis of planned versus actual costs, schedules and societal impact for large infrastructure projects.
Successful delivery of infrastructure projects is thus not only about financing or even who in the end owns the infrastructure asset. It should be kept in mind that many long-term institutional investors are currently searching for projects, which means that private funding may currently come with attractive terms. According to the alternative investment data provider Preqin (2021), worldwide capital flows into unlisted infrastructure funds were down only 14% in 2020 (from 2019), despite COVID-19. Preqin estimates that assets under management of private infrastructure funds will grow to USD 795 billion by 2025—up from USD 655 billion in June 2020.
Equally important is the project delivery model. Proper risk-sharing mechanisms coupled with financial incentives for involved actors is key to maximizing productivity, thereby also benefiting society. We believe that Finland will need new models for delivering large infrastructure projects. Continuing as before may not be the best way forward, especially if we are to secure the best possible value from the planned, highly complex high-speed train links, which may come with a wide range of systemic opportunities. We need to be open to new ideas and alternatives and most importantly, ready to pilot new models in practice. Is Finland ready for this? What would it require in terms of capabilities and competences?
In our next blog, we will open the way forward, based on our own research and experience from other countries. Stay tuned.
Professor Kim Wikström, Senior Partner, PBI
Anders Jungar, Manager, Strategic Consulting, PBI
Dr. Jonas Spohr, collaborating researcher at PBI and lecturer at the Laboratory of Industrial Management, Åbo Akademi University