Wed 29 Jun 2016 - Impact

How Do We Pay for the Infrastructure We Need?

Bruce Upbin Author

Bruce Upbin

VP of Strategic Communications

Sixty years ago this week the U.S. embarked on one of the greatest public works projects since the Roman Empire, the Interstate Highway System. It was a bonanza of productivity for an American economy emerging with brawn from WWII, at one period yielding an annual return of 54 cents for every dollar spent. But in recent years the federal government has fallen behind on its maintenance budget by almost a third (spending $20 billion a year of a needed $33 billion). Congestion is on the rise and roads and bridges are often in disrepair.

The same story is played out across the world. It's one of the great underreported economic crises of our time and is one you can’t see, but its impact is evident in a dizzying variety of statistics: poverty, poor health outcomes, stunted education gains, global trade waste, job immobility, pollution and inequality.

It’s the infrastructure gap and not only is it huge, it’s widening.

The world spends some $2.5 trillion a year on big capital projects projects: water, power, energy, transportation and telecom. As big as that number seems, it’s not keeping pace with a growing world. According to a June report from McKinsey Global Institute, we should be spending $3.3 trillion a year just to meet expected economic growth out to 2030.

In some parts of the world, the gap can be deadly. About 768 million people worldwide lack access to clean water; 2.5 billion do not have adequate sanitation; 2.8 billion people still cook their food with solid fuels (such as wood); and one billion people live more than two kilometers from an all-weather road. Twenty percent of the world population still has no electricity, per the World Bank.

In the developed world, the infrastructure gap is a check on growth and a pernicious hidden cost of doing business. As James Fallows wrote in the Atlantic last year, “... democratic societies are systematically prone to spend far too little on normal civic infrastructure. Bridges, canals, new schools, new parks — we repeatedly under-imagine their benefits in the long run, and over-emphasize their hassles and costs.”

Source: OECD, McKinsey Global Institute analysis

How do we close an $800 billion annual gap? By tapping new sources of money. In addition to the billions allocated by governments each year to capital projects (a number that is unfortunately shrinking in half of the G20 countries despite all the talk of building beautiful walls) some $120 trillion is currently locked up with banks and institutional funds that haven’t gotten into the game as much as they should. Infrastructure, if done properly, can yield highly attractive returns to long-term investors such as pension and sovereign wealth funds. But private capital has been cut off from potentially game-changing infrastructure projects as a result of obsolete cross-border investment rules, a lack of transparency in project finance and lack of a good pipeline of bankable infrastructure deals.

This doesn’t have to be. McKinsey Global Institute recently published a 45-page report, ‘Bridging Global Infrastructure Gaps,” that lays out some compelling ideas such as enforcing standards on the infrastructure market, creating regulations that provide more certainty for investors, charging users higher fees, capturing property value increases, or selling existing assets and recycling the proceeds for new infrastructure. Public-private partnerships are gaining in popularity as a way to fund new infrastructure, but they account for only 5 to 10 percent of total investment, and are unlikely to be a “silver bullet” to solve the gap.

McKinsey sees an even bigger potential in making infrastructure spending more effective by improving project selection, delivery, and management of existing assets. Even the most advanced economies, they say, have lots of room to learn from each other.

As part of a series we’re running on financing breakthrough new infrastructure, I put a few questions to Jan Mischke, senior fellow at McKinsey Global Institute, and an author of the Bridging Gaps report.

The report mentions “disruptive ideas in the way infrastructure is built” (one example being how China’s Broad Group put up a 30-story tower in 15 days). What other examples are there of building infrastructure faster, better, cheaper?

Mischke: Research has found the construction sector to be a technological laggard, with low levels of digitization and R&D spending. However, McKinsey’s research has shown that emerging technologies could boost productivity by 25-30%. A new report just released identified five trends disrupting the construction industry: higher-definition surveying and geo-location, next generation 5-D building information management software (including integration of augmented reality devices), digital collaboration and mobility, the IoT and advanced analytics, and “future proof design and construction,” which spans from new building materials, such as self-healing concrete, aerogels, and nanomaterials, to innovative construction approaches, such as 3-D printing and preassembled modules.

Which institutional investors (or which countries) you’ve spoken with have shown the most interest in infrastructure as an asset, as in, which funds are really closing the gap between their current holdings and allocation targets for infrastructure investment?

Mischke: Our report focused on financing sustainable infrastructure found that private institutional investors could fill up to half the financing gap. In that report, we evaluated 8 groups of institutional investors: banks, investment companies, insurance companies and private pensions, public pensions, sovereign wealth funds, infrastructure operators and developers, infrastructure and PE funds, and endowments/foundations. The investors with the greatest value of infrastructure assets under management (AUM) are as follows: banks ($40.2 trillion in AUM), investment companies ($29 trillion in AUM) and insurance companies and private pensions ($26.5 trillion in AUM). However, this report also found that it is important to note that one of the biggest barriers is not the availability of capital, but rather the lack of a transparent pipeline of bankable projects for investors.

Another report from MGI, “Diminishing Returns,” noted that a continuing environment of low interest rates and low returns could lead life insurers to reexamine their investment strategies, and therefore they could look toward longer-dated and less liquid assets with a higher expected return, such as infrastructure investments, or commercial real estate (particularly given recent reductions in Solvency II risk charges for such investments).

More broadly, McKinsey’s asset management practice research shows that investment flows are increasingly moving away from active investment in equities, and toward passive equities, active or passive fixed income, or to alternatives and multi-asset products. This trend could be exacerbated by low returns. In a low-return era, the proportion of returns given up to management fees in a high-return period becomes less acceptable. To confront this, asset managers may have to rethink their investment offerings. One option would be for them to include more alternative assets such as infrastructure and hedge funds in the portfolios they manage. Such alternative assets already account for about 15 percent of assets under management globally today, and flows into such alternative investments have outpaced flows into more traditional assets by three to six times.

A new class of financing vehicles to get construction projects off the ground are emerging with names like venture fund structures or early concept development units. Can you tick off some examples?

Mischke: The sustainable infrastructure report referenced above cites the following: The International Finance Corporation’s (IFC) InfraVentures unit helps to develop projects, but also takes equity stakes in them as well, which helps to attract other financing. Funds like InfraCo, a publicly funded, privately managed early-stage financier of projects in deeloping countries, have succeeded in such challenging markets as Kenya, Uganda, and Zambia.

What’s the state of the art in property value capture, in which the project developer is paid from the increased value of surrounding real estate? Is it a growing trend? Spain went so far as to anchor the notion of property value capture in its constitution.

Mischke: One of the best-known examples is MTR in Hong Kong, where land value capture funds much of the rail build-up as well as affordable housing programs. The CEO of MTR authored an article for our Global Infrastructure Initiative publication that lends additional insights. Singapore has traditionally bought up private land before redeveloping, thus capturing land value increases. More recently, the cantons of Switzerland are in the process of instituting property value uplift taxes.

Changes in government accounting (specifically capitalizing infrastructure investment over time versus expensing it all at once) could unlock more investment by not blowing such a big hole in federal and state budgets. How much do we know about how to account for social returns and depreciation rates for long-term, broadly used investments such as new transportation?

Mischke: There is both wide uncertainty and wide divergence between individual projects. For transportation, depreciation rates of 2.5% annually are typical. From top-down econometric analyses, socio-economic returns of about 20% on investment are typical. Bottom-up cost-benefit analyses, that account also for non-GDP impact, are often above 30%. One of the stumbling blocks is that public infrastructure assets often do not have dedicated revenue streams attached to them that could be securitized, and long-term tax uplifts are difficult to measure.

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  • Q. What is Virgin Hyperloop?

    We're a privately-held company on a mission to create fast, effortless journeys that expand possibilities and eliminate the barriers of distance and time.

  • Q. Why are you building a hyperloop?

    There are too many people caught bumper-to-bumper in traffic, who have to make a hard choice with their family on where to live and work, and who are limited in their access to experiences and opportunities. We're building a system that will give back time and deliver the travel experience of the future.

  • Q. Why do we need hyperloop now?

    The number of cars is set to double worldwide by 2040, same with air and trucking. We are already dealing with the effects of pollution, lack of access, and congestion. If we only invest in the same technologies we’ve had for more than a century, tomorrow will look like today, only much worse. It’s been over a century since the Wright Brothers first showed us human flight was possible. It’s time for a new era in transportation capable of carrying us forward for the next 100 years.

  • Q. How much funding has Virgin Hyperloop received?

    To date, we have received over $400 million.

  • Q. Who are the key investors in Virgin Hyperloop?

    A major investor of ours is DP World, a leading enabler of global trade who sees the potential of sustainable hyperloop-enabled cargo systems. Additionally, we are backed by the Virgin Group, an industry leader across rail, aviation, ships, and even spacecrafts. For more on our investors, visit the company page.

  • Q. Does Virgin Hyperloop have any partners?

    Virgin Hyperloop One is the only hyperloop company that has a strategic partnership with a mass transportation company, the Virgin Group, an industry leader across rail, aviation, ships, and even spacecrafts. Another key partner of ours is DP World, a leading enabler of global trade who sees the potential of sustainable hyperloop-enabled cargo systems. Other industry-leading partners include KPMG, Foster + Partners, Systra, BIG, SNCF, GE, Deutsche Bahn, Black & Veatch, McKinsey, Deloitte, Jacobs, Turner & Townsend, ARUP, and Steer, among others.

  • Q. Is Elon Musk an investor or affiliated with Virgin Hyperloop?

    No, there’s no connection with Elon Musk.

  • Q. How do you plan to scale up operations around the world?

    We aren't just building a hyperloop; we're building a network of public and private partners to scale an integrated supply chain ecosystem. Our business model is based on partnerships that create local jobs and opportunities for those who choose to invest in this technology. We are working at the highest level of governments around the globe to put in place commercial agreements to make hyperloop a reality.

  • Q. What is hyperloop?

    Hyperloop is a new mode of transportation designed to eliminate the barriers of distance and time for both people and freight. It can travel at speeds approaching 700mph, connecting cities like metro stops - and it has zero direct emissions. The journeys can be booked on demand so there’s no wait time or delays.

  • Q. How does hyperloop work?

    With hyperloop, vehicles, called pods, accelerate gradually via electric propulsion through a low-pressure tube. The pod floats along the track using magnetic levitation and glides at airline speeds for long distances due to ultra-low aerodynamic drag.

  • Q. Has hyperloop technology been proven?

    On May 12th, 2017, we made history two minutes after midnight when we successfully launched our vehicle using electromagnetic propulsion and levitation under near-vacuum conditions at our full-scale test site in the Nevada Desert. We've since run hundreds of tests, acquiring validated knowledge that only comes from real-world testing. For more info on DevLoop, our 500 m test track, visit our progress page.

  • Q. How fast can hyperloop go?

    We estimate that the top speed for a passenger vehicle or light cargo will be 670 miles per hour or 1080 kilometers per hour. That is about 3 times faster than high-speed rail and 10-15 times faster than traditional rail. The average speed vehicles travel will vary based on the route and customer requirements.

  • Q. Why keep the tube at low-pressure and not at a perfect vacuum?

    A perfect vacuum would decrease the drag on the vehicle even more, but not significantly. We have already gotten rid of 99.9% of the air in the tube. Lower levels of vacuum than this are important if you are performing scientific experiments, but the cost would not be worthwhile.

  • Q. How is hyperloop different from high-speed trains?

    Hyperloop is an entirely new mode - think the best of trains, planes, and the metro. Hyperloop is on-demand, offering flexible travel schedules with no stops, no transfers, and no weather delays – all at speeds about 3 times faster than high-speed-rail and less cost. Hyperloop is highly efficient, with a smaller environmental impact than high-speed rail because the closed system can be tunneled below or elevated above ground, avoiding dangerous at-grade crossings. The VHO system is 100% electric and can reach higher speeds than high-speed rail for less energy due to our proprietary electric motor and low-drag environment.

  • Q. Is hyperloop safe?

    Fast, effortless journeys go hand-in-hand with journeys where everything works reliably without interference, and where all passengers feel comfortable and safe. The Virgin Hyperloop is designed to be inherently safer than other modes, with multiple redundancies in place. Our system operates autonomously in an enclosed tube and is not susceptible to weather delays, accidents from at-grade crossings, human error, or power outages. Our proprietary high-speed switching architecture eliminates unsafe track configurations and moving trackside parts, a failure point of traditional rail with mechanical switches.

  • Q. How do you plan to get hyperloop certified?

    As new mode, we have to prove our safety case to regulators and work with them to develop a regulatory framework, so passengers can ride the hyperloop in years not decades. We are encouraged by the support we are seeing at the local and federal level around the world to support hyperloop certification based on the fundamentals of safe operating that are already standard practice. In March 2019, the U.S. Secretary of Transportation, Elaine Chao, created the Non-Traditional and Emerging Transportation Technology (NETT) Council to explore the regulation and permitting of hyperloop technology to bring this new form of mass transportation to the United States. This Council is an important step forward in recognizing hyperloop is a new transportation mode and that we need to shift our mindset and acknowledge that this technology does not fit into a regulatory structure that is over 100 years old. The European Commission’s Directorate-General for Mobility and Transport (DGMOVE) has also been leading discussions with hyperloop companies to advance regulatory standards and, in India, the Principal Scientific Advisor (PSA), Prof. Vijayraghavan, has set up an independent committee called the Consultative Group on Future of Transportation (CGFT) to explore the regulatory path for hyperloop. For more, visit our regulatory progress pages.

  • Q. What will it feel like to ride hyperloop?

    While flying through a tube at more than 1000km/h might seem like a thrill ride, the truth is we are able to mitigate any uncomfortable acceleration forces within our controlled environment. The journey will be so smooth, you could sip a coffee the whole time without spilling a single drop. Normal acceleration and deceleration of 0.20 Gs will feel similar to a train. As a comparison, flooring a typical sedan gives between 0.4-0.5 Gs and commercial airplanes see 0.3-0.5Gs depending on the plane and load.

  • Q. What happens if there's a sudden breach in the tube?

    Pods will continue to travel safely to the next portal even with a large breach. Our response to a breach would be to intentionally repressurize the tube with small valves places along the route length while engaging pod brakes to safely bringing all pods to rest before it is deemed safe to continue to the next portal. A sustained leak could impact performance (speed) but would not pose a safety issue due to vehicle and system architectural design choices. This assessment is based in solid understanding and analysis of the complex vehicle load behaviors during such an event.

  • Q. Is hyperloop sustainable?

    Without a massive leap forward, pollution from the transportation industry is expected to almost double by 2050 - well above the carbon budget. By combining an ultra-efficient electric motor, magnetic levitation, and a low-drag environment, the VHO system can reach airline speeds for 5-10x less energy (depends on route length) and can go faster than high-speed rail using less energy. In regions like the Middle East, we could power the system completely by solar panels which cover the tube. As fighting against climate change becomes an existential issue for cities across the globe, hyperloop will create a new, shared, electric mobility model for helping to permanently reform an industry with some of the world’s highest carbon emissions.

  • Q. How much energy does hyperloop use?

    We are designing Virgin Hyperloop to be more efficient than other modes of transportation. Modern jetliners use up to 10 times the energy we use per passenger-mile over the entire journey. We can cruise at 500 miles per hour for less energy (per passenger) than an electric car doing 60 miles per hour. At peak speed, the VHO system consumes approximately 75 watt hours per passenger kilometer (Wh/pax-km). To put this in perspective, the fastest conventional maglev train travels at about half our speed and consumes 33% more energy.

  • Q. Where will hyperloop get its power?

    Our system is 100% electric with zero direct emissions. We're energy-agnostic. Our system can draw power from whichever energy sources are available along the route and support a transition to a renewable energy-powered future. In regions like the Middle East, we can completely power the system with solar panels which cover the tube.

  • Q. How much noise does hyperloop make?

    It’s similar those new electric vehicles that are so quiet they need to create noise to indicate movement. With hyperloop, we eliminate sources of mechanical noise, like wheels on track, and we actually have a sound barrier inherent in our tube design

  • Q. Can hyperloop be used for cargo?

    DP World Cargospeed is a global brand for hyperloop-enabled cargo systems operated by DP World and enabled by Virgin Hyperloop technology. These systems will deliver freight at the speed of flight and closer to the cost of trucking for fast, sustainable, and efficient delivery of palletized cargo.

  • Q. What type of cargo would a hyperloop system transport?

    The focus would be on high-priority, on-demand goods – fresh food, medical supplies, electronics, and more.

  • Q. How can hyperloop help transform logistics?

    With DP World Cargospeed, deliveries can be completed in hours versus days with greater reliability and fewer delays. It will expand freight transportation capacity by connecting with existing modes of road, rail, ports, and air transport, and will provide greater connectivity with manufacturing parks, economic zones, distribution centers, and regional urban centers. This can shrink inventory lead times, help reduce finished goods inventory, and cut required warehouse space and cost by 25%. DP World Cargospeed networks can also enable just-in-time, agile manufacturing practices.

  • Q. Will the first hyperloops be passenger or cargo systems?

    The Virgin Hyperloop is unique in that it doesn’t need to be passenger-only or cargo-only. We are designing a mixed-use system that fully utilizes system capacity while maximizing economic and social benefits. However, it is possible to run cargo commercial operations while certification and regulation are still ongoing for passenger use.

  • Q. When will hyperloop systems be ready for cargo and passengers?

    We are working with the most visionary governments around the world to make sure you can ride the hyperloop in years, not decades. Our goal is to have operational systems in the late 2020s. Our ability to meet that goal will depend on how fast the regulatory and statutory processes move.

  • Q. Where will the first hyperloop get built?

    We are working with visionary governments and partners around the world to make hyperloop a reality today. To learn more about our projects around the world, visit our progress page.

  • Q. How much will hyperloop cost to build and operate?

    Capital and operating costs will range widely based on the route. We recently released a study that showed our linear costs are 60-70% that of high-speed rail projects. In addition, we expect the operational costs to be significantly lower than existing forms of transportation.

  • Q. How much will hyperloop cost to ride?

    It’s simple – if it’s not affordable, people won't use it. We are looking to build something that will expand opportunities for the masses, so they can live in one city with their family and work in another. Currently, that kind of high-speed transport is not feasible for most people. The exact ticket price will vary for each route, but a recent study showed that riding a hyperloop in Missouri could cost less than the gas needed to drive.

  • Q. How are hyperloop routes selected?

    We are in the business of serving local needs, not the other way around. Public and private support is key. In some cases, we will respond to solicited bids with partners when we feel the technology matches the project’s objectives. In other cases, we will make an unsolicited bid for a project when we see that hyperloop could offer a unique solution to market needs.

  • Q. What is the process for getting a passenger route up and running?

    While the technology is different, the process for building a hyperloop is similar to that of building a highway, railway, or any other type of linear infrastructure. The first stage is project development. This phase includes feasibility studies, and then more detailed engineering reports and environmental impact studies. Once a project is approved to move forward, a consortium is formed to finance and deliver on the project.

  • Q. How much land does hyperloop require?

    Many infrastructure projects succeed or fail based on right-of-way issues. We are designing a system that requires only about half the right-of-way as high-speed rail and can more easily adapt to existing right-of-ways. At high speeds, the VHO system has a 4.5 times tighter turn radius compared to high-speed rail and can climb grades that are 6 times steeper, reducing the disturbance at crossings. Portals will be purposely integrated into and support existing communities and landscapes. Low noise levels will expand opportunities to build hyperloops closer to the city center.

  • Q. With the focus on connecting cities, how will hyperloop support rural communities?

    Hyperloop also holds enormous promise for rural communities. Virgin Hyperloop systems can be built below or above ground, which means no one’s farm needs to be cut in half. Our system enables rural areas to retain residents, who can now have more access to urban job centers, educational opportunities, and health care facilities. Additionally, hyperloop could enable freight distribution centers to be placed in rural areas, leading to job growth and industrial clusters. After a system is built, there is the opportunity to add additional on and off-ramps, supporting a greater number of people along the route.

  • Q. How will hyperloop projects be financed?

    Transportation infrastructure has traditionally relied on extensive government funding. This is because the benefits of clean, safe, and efficient transportation are enjoyed by the entire community, not just the user buying a ticket. However, most existing mass transportation modes are unprofitable and hindered by existing infrastructure built in the past century or by legacy systems. We want to change that and are focused on public-private partnerships. By developing a new mode of transportation from scratch, we're able to leverage technological developments that have occurred in the last century, especially the IT revolution. We're able to keep maintenance costs low, energy efficiency high, and transport tens of thousands of passengers per hour. This keeps margins and accessibility high, contributing to more financially attractive returns than if the corridor was served by existing modes. These benefits aren’t just hypothetical. While this is an exceptional case due to high demand, a third-party evaluation found that our Mumbai-Pune Hyperloop Project could be funded 100% by private capital. In the U.S. we see enormous potential to attract investment from the private sector, leveraging public investments. Involving government stakeholders as well as potential private investors early in the project development process is critical.

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