Wednesday, 28 March 2012

Macro Level Trends - UK Investment - New Perspectives on the Well Worn Topic of Road Tolls

It has become a given fact that recession and depression periods are revitalised via the initiation of socio-economically positive infrastructure projects.

History Foretells -

Through the ages spanning 16th, 17th, 18th, 19th & 20th centuries, concentration on the private and public development of roadways, canals, railways, radio & tv air-waves, airports and of course the physical & ethereal route-ways of the internet's 'information superhighway', have when instigated singularly and combined have created new economic platform(s) from which commercial, industrial, service and leisure activities have benefited.

Such engrained and 'default-position' policy practice, offering short-term build and re-build fiscal opportunity, combined with the long-term economic facilitation, have consistently delivered new eras for national, continental and worldwide enhancement. From Britain's 17th century ward and county toll-roads, the UK and colonial India's steam-powered railways, the inter-state road networks of pre & post-WW2 America & Europe, the revolutionary 'bullet trains' of 1980s Japan. With most prominently the explosion of scale-enabled Chinese socio-economic growth, thanks to the snowball inter-connectivity effect of various aforementioned solutions within 21st century China.

[NB China simply re-playing the American 19th & 20th century 'play-book' of marrying foreign innovation with domestic scale. (The US having used German, French & British sourced technologies to make is economic leap)].

Such historical precedence is etched into the consciousness of economic advisors, politicians and international financing agencies such as the IMF, EBRD et al.

The UK's Present Paradox -

However, the great majority of such infrastructure projects undertaken in Britain over the last 100 years or so have either been state initiated, state generated or exploitation of previously state-owned infrastructure. This ranging from amalgamation of the once separate London omnibus & underground companies, the creation of a standardised national electrical grid, the first official motorway (the M1 & later tributary motorways) to private interest leverage of the old GPO telephone network under BT stewardship to roll-out the world-wide-web.

But today the state that is now being retitled 'Great Britain' is caught in similar fiscal straits to those of the 18th and early 19th century'. Then having 'over-stretched' in the financing of international expansion, paving the way for privateers such as the East India Company. Today the akin situation arguably even worse. This the result of parallel military over-stretch (especially over the last 2 decades) but additionally weighted down by the 'economic baggage' of being the wrong-side of an ever-widening 'global competition gap' across intermediate value manufacturing and services plus the hefty and seemingly growing cost of the nation's social security bill, itself the consequence of a ageing population and a near 'lost' young generation. Themselves sat midway between the debt-fear of higher education and its 'real-world' merits, versus similarly or even better educated foreign students who have gained either free or low cost education.

These innate headwinds centred around a record national debt, empty government coffers, squeezed notional middle-class, sense of the 'broken-promise' handed to the Facebook generation, and to add further pain, a sense of real caution by western corporations and institutional investors about investing in a much deflated Britain.

[NB Please see Post Script for investment-auto-motive's more optimistic viewpoint of the much criticised 100 year gilt offering].

The current headwinds leave the UK in a truly paradoxical situation.

Never has such a major revitalisation effort been as badly needed as today, yet equally never has there been such an enormous state funding vacuum. Whilst the UK's sovereign debt standing still enjoys an investment grade AAA standing thanks to unavoidable 'austerity measures' – itself put on 'negative outlook' by the Ratings Agencies – which compared to EU country grades is strong, the fact remains that the required 'deep-pocket' UK infrastructure spending is seen with unease by many traditional institutional investors; especially so western pension funds (corporate and private) which must address reducing their immediate and mid-term exposure to greying population bases.

Looking Abroad -

There appears little option than for the UK to court 'deep pocket' foreign funds, with no doubt leanings to the SWF monies that have been accrued by China by way of its foreign reserve holdings, the Middle East's petro-dollars, Singapore's trading income and perhaps even to the newer SWF operators from Latin America and even perhaps Africa.

The ongoing central investment philosophy typical of most – albeit as part of a broader risk-return portfolio - is to provide liquidity for multi-decade, low risk, 'utility' type programmes. Programmes which also typically provide value-chain synergies with their own country's economic platform and ambitions.

A typical (though simplified) scenario would be that the SWF country offering the funding is itself able to provide the 'up-stream' raw materials for the project in question, whilst also able to gain valuable 'downstream' learning about the implemented programme for later domestic adoption

[NB Hence the interests of Australia's Macquarie Group directed interests in a CO2 sensitive and cost conscious Europe, for latter stage implementation across the states of New South Wales and Victoria, this future programme offering such a benchmark example afterward to progressive SE Asian countries].

The Foreign Precedents -

Of course, as with the ownership issue raised by Congress in the USA regards Chinese acquisition approaches of its Port Authorities, there is the political and nationalistic dimension to foreign funding, involvement and ultimately ownership.

However, whilst the US may e viewed as jingoistic the rebuffel of China obviously came at a time when foreign policy sensitivity was at an all time high, in the midst of Iraq & Afghanistan. Perhaps then justifiable because of the very scale of US Port traffic, its life-line to the US economy, aswell as of course the potential for increased terrorist threat in addition to usual contraband and illegal shipment concerns.

However, a more laissez faire UK and Europe should have less concern over projects which are physically internal – as opposed coastal – and pose no or little potential for national defence or social threat.

And indeed, that very viewpoint has enabled foreign owners to take an interest in UK infrastructure; providing it does not oppose what seems an expected graduated risk aversion policy..

Spain's Ferrovial Group acquired 56% of BAA plc and reverted the company back to Limited company status, sharing ownership with Canada's 'Caisse-Quebec' and Singapore's GIC soveriegn wealth fund. Whilst more recently, China's own SWF, the China Investment Corporation (CIC) bought nearly 9% of Thames Water, itself a sub-divisional holding of Australian Macquarie Group's 'European Infrastructure' Fund.

[NB investment-auto-motives has previously commented on the possible exploratory potential of adapting 'air-side' traffic management systems (which orchestrates road vehicles and planes) to use on public and private highways].

A Progressive, Not Copy-Book, UK Programme -

Infrastructure planning - especially so of roads - has rarely ever been a 'blank sheet' 'blue-sky' exercise. Whilst the olde-worlde 'advanced' countries learnt from each other, understandably more recently economically emerged nations have typically deployed a 'copy-book exercise' reflective of endemic American influence and style. Such acutely referential planning schemes and signage graphics intended to promote the country's perception of 'advanced' and '1st world' image. This aspirational conveyance engrained as similar other projects such as national skyscrapers and city shopping malls. Moreover, it may indeed be 'dis-functional' not to do so, since many past EM countries have emerged as a consequence of direct US influence and as such sought to utilise proven practice and demonstrate cultural kinship as part of its own economic growth path.

But an olde-worlde economy obviously does not have the luxury of planning from a 'clean sheet'. It must heavily adapt as opposed to simplistically adopt; seeking to marry early and mid 20th century roadways with 21st century technological advancement. Satellite enabled GPS technology may have 'over-laid' the simulacra of an electronic map over old roads, and been used to good effect even with glitches, but the task of inter-connecting and organising both the old physical and new ethereal worlds into a unified, intelligent entity appears to still be in its gestation phase.

As such, the overall shape of a contemporary road infrastructure programme, seeking to efficiently manage nationwide traffic-flow and generate additional income streams, is very different to that of a copy-book EM nation exercise.

Its ambitions and challenges far greater, its programme activity chain more complex encompassing more stakeholders and the infrastructure investment formula more informed and nuanced. Hence convincing the proposed financier of project credibility, time-cost-quality attainability and return on investment assurance becomes a far greater challenge – but also indeed opportunity - than is the case with ground-up development in an EM region.

Given the innate scale of that challenge, it perhaps then makes sense to set the ultimate goal sought even higher; to create 'leap-frog' infrastructure advancement. So that ultimately the overall cost and delivery pains undergone provides for a truly long-lasting and critically income earning transport solution. This requires the deployment of ever more sophisticated risk management approaches to macro and micro manage the overall programme and its separate individual projects.

If necessary, and not already the case, such ambitions may require the re-modelling of infrastructure planning approaches. Planners and financiers should then perhaps create a three-tier approach, reflecting the typical business modelling 'staircase' of high / medium / low ambitions set against like-wise costings schedules.

This enables the flexibility for some of those inevitably failed high ambitions to become naturally absorbed into the lower tier solution. Naturally contingencies would be put in place to ensure the planners and builders do not immediately 'default' to the lowest and easiest deliverable position, and instead under an incentive and pressure to perform, would need to work more closely between themselves and critically with new R&D integrating third parties, instead of what appears the typical manner of 'throwing the plans over the wall to be built'.

It is only such a modified infrastructure planning and delivery approach, centred around 'new perspective' possibilities that will deliver a wholly evolved new road infrastructure.

A New Perspective -

This then a holistic re-vision of the component parts that constitute 21st century road infrastructure.

Undertaken to improve all aspects of transportation usage and so policy-setting direction: spanning road safety, network efficiency and CO2 impact. Instigation of a fundamental 'wide-aperture' review which explores every dimension of road infrastructure; ranging from the very basics of material-types and construction methods used in building various 'road architectures' through to understanding how individual journey requirements and the overall capacity of the traffic network might benefit from the emergence of 'cloud computing'.

Thus spanning across re-assessment of 'age-old' conventions to exploration of the 'new-age' possibilities.

One area ripe for a new era of in-depth research and development – in parallel with the myriad of arenas - is that of road surfaces.

Evolving the Road -

Road materials science, development and implementation over the last 100 years appears (to the layman) to be ironically almost snail-like in its progress. No doubt because of real-world constraint aspects such as the traditional (and so well understood) cost-quality-durability equation and of course the apparent need for road surface standardisation .

Yet even so, the development of modern 'tarmac' (tarmacadam), tarvia and asphalt concrete might be argued as 'arrested development' by an advanced guard of progressive civil engineers, road safety campaigners and indeed the automotive industry itself.

This sits in stark contrast to the hard-pressed consumer-led and regulatory-led advances made in vehicle engineering. Undoubtedly, as part of its own advancement the car became ever more capable primarily because of inter-product competition and the sales and income reward available to progressive manufacturers. The car necessarily had to adapt to the roadway; from the invention of the pneumatic tyre to that of ever more survivable crash structures to that of Anti-Lock Braking Systems, which themselves are used for Traction Control Systems - which must arguably compensate for unfavourable road conditions.

Moreover, whilst vehicle capabilities have improved by leaps and bounds, the regulatory environment and thus the road infrastructure is still stuck somewhere in 1959.This was the year that Britain's M1 motorway was opened and the national speed limit of 70mph (10mph above the A-road) was established when nearly all the cars on the road, exempting sports-cars, struggled to reach that limit, trundling along at 50mph and 60mph given their mechanical capabilities. Today , and for many years since, even a notional 'city-car' easily surpasses that boundary-point, with greater bhp, more gears and higher gearing and can stop far more easily given the inventions previously described.

Thus even with today's inherently un-evolved road limitations cars and drivers are perhaps more restrained – given inbuilt capabilities - than their counterparts half a century ago.

An answer to one part of the infrastructure jigsaw then perhaps requires a true meeting of minds between what have typically been very conservative infrastructure builders (using 'age-old' proven materials for known durability performance and cost) and the necessarily far more exploratory nature of car manufacturers and their supplier networks.

Primarily to improve – via scientific exploration and R&D – the dynamic properties of the road surface and tyre relationship – ie mutually evolving tyre composition and advanced surface materials, which ideally provide for reduced constant speed and increasing speed friction whilst also providing greater grip characteristics for braking.

This the most obvious avenue of exploration that could improve general safety, reduce driver fatigue, improve behaviour etc.

And at its futuristic extreme, there perhaps could be a day when a privately constructed and operated road offered a 'scaletrix' type electrical feed built into the centre-line of the road to pass electrical current to the under-body “road-brushes” of a petrol-electric or diesel-electric hybrid vehicle, so one-day overcoming the distance limitation inherent in electric vehicles' given limited battery charge storage and the inconvenience of overnight or plug-in charging. Under such a scenario, the driver would simply pay for the electricity used on the journey, and could indeed lead to the idea of group managed 'car-trains' that offer massive efficiency savings as depicted 50 years ago by GM's Futurama exhibitions and been 'prototyped' (via cruise-control sensing) ever since.

Whilst a distant view perhaps 30+ years away, such road planning could make roads 'future-proofed' just as cars are 'package-protected' today in their engineering development.

'Unbundling' the Department for Transport -

The UK's Department for Transport has a plethora of past and present scientific research and development projects, with no doubt efforts for cross-pollination of results to gain additional learning. Yet to the average 'put-upon' UK motorist there seems little evident advanced thinking and implementation, beyond the usual traffic management practices of speed camaras, ill considered generically implemented safety measures and reduced parking capacity – all or none of which may be related to the DfT's R&D work.

Whilst the DfT's internal R&D work, along with that of R&D at the 7 Research Councils, has undoubtedly been useful and beneficial to society. Yet whilst the costs may be understood by the senior few, it seems likely that the actual value of the work itself – theorised, in testing phase or implemented - is hard to ultimately socially and commercially value. Those costs borne by the UK public are absorbed by the UK motorist and broader population, yet the average – critically uninformed - motorist is not prive to the socio-economic good achieved.

The socio-economic importance of this this 'invisible' work should be given greater profile, as should a transparent ability for the private sector and commercial world to understand its cost structure; no doubt also surely a concern for the Treasury seeking to make spending reductions by out-sourcing non-confidential operations.

If the Ministry of Defence was able to divest a DERA function by way of QinetiQ in 2001, and the likes of Cobham plc along with many others are able to operate both privately and efficiently in areas of state interest, then it appears a natural consequence that the DfT should seek to divest major portions of its costly in-house activities regards road R&D and infrastructure.

Promoting Competitive Commercial Interests -

As part of the UK's own road infrastructure renaissance, now to be expectantly paid for by foreign concerns and respective income seeking agenda, it may be argued that a similar 'spirit of progressive competition' should be fostered. Indeed must be fostered.

It is only by doing so that the presently disparate yet increasing number of stakeholder sectors involved in road infrastructure might be better coalesced into a far more powerful, transformative force – to the good of the UK's entrepreneurial health, that of the economy and that of the public good to society in general.

It should be remembered that the invention of the legendary safety device the “cat's eye” was conceived outside of officialdom by the singularly minded Percy Shaw in 1933, who then patented the invention, developed it and manufactured the item via 'Reflecting Roadstuds Ltd' from 1935 onward. Today seen the world over and having saved countless lives.

Such private party 'visioneering' should be nurtured.

Nurturing The New Perspective -

Whilst vehicle evolution will continue to benefit buyers, drivers, passengers and society in general, the prime question posed by this web-log is...

...“how the roadway itself – in physical and network form – can better evolve to suit modern-day vehicles of all types and various user requirements, whilst offering potential for additional ROI / income streams?”

Such a question opens-up the issue beyond traditional practice and the conventional envelope 'norm' which presently sees what appears a massive unintentional gulf between various stakeholders: government policy-setting, road & environment planning bodies, civil engineering construction sector, vehicle producers & autos supply chain, road-side commercial interests reflected by the retail and hospitality sectors and critically the core interests of large-fund investor types such as SWFs (singular and combined) and the increasingly cautious institutional investor base.

Infrastructure Programme 'Bundling' -

Relative to the broader road infrastructure picture, there looks to be a good possibility of 're-grouping' (ie operational bundling) in the infrastructure sector, seeking to create new 21st century delivery mechanisms consisting of a closely linked corroborative 'vertical' value-chain. So seeking to consolidate the traditional loosely-linked or short-linked vertical value chain, aswell as posing a new operational challenge to those players which primarily operate on a 'horizontal' 'business consolidation' basis. (Though undoubtedly they to will grow in their fashion given the global opportunity to do so).

[NB No doubt this a critical part of the intention of those infrastructure funds that have been formed to date].

Conclusion -

Compared to step-change examples of yesteryear, infrastructure planning in Britain's over the last 60 years has been a shadow of its former self. Partly a result of the car having come into its own as transport king by the 1960s, seen in the re-moulding of town-scapes, the building of the motorway network and creation of the near hallowed town and village by-pass.

But today, Britain 'cracks and creeks' visibly and audibly. Visibly from the weight of network over-capacity across the motorways, A-roads, B-roads and elsewhere, with accordant loss of logistical efficiency. Audibly from the frustrated private motorist, company motorist and corporate fleet operator, all of whom are unable to understand the opaque cost-benefit equation of the scaled road fund licence and hefty fuel tax, and would be better served by an evidently clear road pricing mechanism with inherently clear investment impetus and advantages.

Thus a radical overhaul of the UK's road infrastructure is required and the vision that is painted by government must be one of clear advantage to all from the motorist to R&D scientists, to vehicle producers to civil engineering companies to network operators to the SWFs offering funds for what must be very well constructed infrastructure business cases.

Post Script -

Though there has been heavy criticism of the Treasury's 100 year gilt offering given its lacklustre coupon by historical standards and the exposure to inflation and interest rate volatility, investment-auto-motives suspects that recipient buyers will do so for mixed reasons – politic reasons for Eastern buyers and cultural reasons for Western buyers.

Politically 'BRIC' and 'Next 11' corporations – themselves 'backed by national SWFs' - would presumably gain good favour so promoting a 'quid quo pro' approach when seeking FDI 'incentivisation'.

Conversely, in an increasingly marginalised West, the 'olde-worlde' powers of the UK, Europe, America and even Japan would seek to help safeguard each-other's long-term interests by participating in intra-national and intra-regional debt purchase programmes. The near parity value of Sterling and Euro assisted by the ECB liquidity initiative and the UK's still far stronger rating by Fitch, Moody's and S&P creates a good basis for such mutuality. Whilst the US Dollar could feasibly re-strengthen over the long-term to ultimately meet Sterling and Euro valuation. This 'united west' scenario even more plausible if the growing national and regional protectionist mindset that has been seen becomes very much a part of the 'new norm'].