Across the world, rising urbanisation, population growth, government debt and advances in technology are creating challenges and opportunities in the transport sector. City transport systems are experiencing congestion, pollution and community severance, and this is creating the need for new approaches to deliver better outcomes for people, businesses and the environment.
Intelligent Mobility (IM) is a new way of thinking about how to connect people, places and goods across all transport modes. It uses a combination of systems thinking, technology and data to inform decision making, improve network management and enable behavioral change. It puts the user, and their journey experience, at its heart, lessening the need for major infrastructure investment to serve rising demand.
For the private investor, the signs are good. The IM market is expanding and expected to be worth £900 billion (US$ 1.15 trillion) globally by 2025 with strong growth in fields as diverse as data collection and management, journey planning, mobility as a service, cybersecurity, and autonomous vehicles.
However, most observers may take the view that the technological advances underpinning IM are a significant challenge to public policy. As cities and nations become more sensitive to comparative ratings of infrastructure as a benchmark of their economic competitiveness, how do they frame investment policy to fully exploit IM and the potential game changer it represents?
To go back to basics, the factors which make transport infrastructure a sound and investible proposition as an asset class include, inter alia;
The technology required, and the practice of financing projects, in emerged economies should mostly address the above points, except for the first, which is yet unproven for IM despite emergence of embryonic new business models. For emerging economies, policy makers will be well served on focusing on points 2 and 3, ensuring that the private sector can invest based on clear, fair and proportionate regulation. However, much will also depend, irrespective of income level, on cities’ ambition and leadership in embracing IM. In this context, examples such as Singapore, UK and Sweden are already progressing proof of concept and showing both the benefits and practical challenges involved in early IM models.
The problem for much of the technology and smart infrastructure required to facilitate IM is that it may be seen by the private sector as a major investment ahead of revenue generation, build up and profile. Therefore, for a very heavy outlay of capital expenditure, the repayment profile for debt and equity will be, at best, uncertain. One can point to the precedent of large telecoms project financing exercises for broadband and fiber optics which faltered largely because this delicate balance was not achieved. The risk is that investing in, for example, a metropolitan fleet of autonomous taxis would raise similar issues. This would be difficult to resolve without robust risk analysis of future market demand and public sector assurances, for example in relation to initial funding, integrated changes to public transport networks, regulation of private car ownership and appropriate changes to traffic laws.
The other financing issue for policy makers is that, since the global economic crisis of 2008, the world of transport infrastructure finance has changed from both public and private perspectives. On the public sector, there are now tough rules on accounting for PPPs or equivalent models, and budget constraints and reductions in national or local credit ratings. Where IM will fit into the economic prioritisation of public sector investment will be interesting to watch. Equally, on the private sector side, despite generational low interest rates and substantial global pools of equity, banks and lenders are operating on a far tighter regulatory environment and therefore have a more limited risk appetite. This may affect, for example, willingness to invest when the start-up companies which lie behind many embryonic IM activities seek capital to fund expansion and scaling up of prototype applications to broader commercial deployment.
Despite some conservatism, there is some evidence that backing of start-ups in some IM sub-sectors is growing rapidly as appreciation of the long-term potential grows. Interestingly established transport operators may also have a role to play here if they regard IM, rather than a competitive threat, as essentially a diversification of their brand and operating model. This will bring capital investment, commercial acumen and public-facing experience to what is still a relatively immature sector.
This diversification of an existing operating model with IM integration is likely to be part of the first phase of private sector investment, and may pave the way for more meaningful large-scale initiatives. Bolt-on opportunities to upscale or expand revenue opportunities limits investment risk compared to investing heavily in a new operating platform and brand; alongside making financing opportunities more attractive as cash flows are identifiable and impacts measurable.
Public sector kickstart
Perhaps the best way to look at funding and financing for large-scale IM initiatives, beyond the current small-scale pilots and demonstrations, is to treat these as the creation of a new market to which a private sector solution is not yet in place to any state of maturity, confidence or established practice.
Therefore, on the condition that cities are prepared to provide leadership, initial investment may need to be funded, subsidized or underwritten initially on the public-sector balance sheet, before the capital assets and operating models are transferred to the private sector, as occurred, for example, with Electric Vehicle charging infrastructure in London.
In time, such hybrid practices will build knowledge of the IM market, give time for public sector policy and regulation to catch up with technology, and increase the likelihood of the private sector funding mainstream IM deployment on an increasingly commercial basis. In addition, the role of established transport operators will be a key area to watch. They have the potential to bring investment, real-life operating expertise and commercial awareness to the new models around autonomous on-demand mobility services and payment platforms and bring them to a state of maturity.
Roddy Adams, managing director, infrastructure finance, Atkins Acuity
Jonathan Spear, director, strategic transport, Atkins Fellow, Atkins Acuity
A fuller article on this topic was first published in Project Finance International.
Let's start a conversation.
Keep up to date with our work and thinking.