Unlocking investor interest by reinventing the demand

BRIEFING PAPER 3

Unlocking investor interest by reinventing the demand-side A new Trans-European Network, a Pathfinder Programme and other solutions for maximising public value though private investment in social infrastructure Jonathan Watson, Fausto Felli, David Wood and Barrie Dowdeswell

INTEGRATE – Practical thinking for long-term investment in innovative social infrastructure across the EU Stichting number 56946023 Copyright © INTEGRATE 2015

Reinventing the demand side

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Contents 1 INTRODUCTION .................................................................................................................................... 3 2 CURRENT SITUATION ............................................................................................................................ 3 WRONG ASSUMPTIONS AND INAPPROPRIATE EVIDENCE .................................................................................5 3 APPLYING THE INNOVATION PRINCIPLE............................................................................................. 7 NEW INVESTMENT CHANNELS ......................................................................................................................7 EXAMPLES OF PRACTICAL APPLICATION .......................................................................................................8 4 ORGANISING DEMAND FOR CAPITAL THAT DELIVERS PUBLIC VALUE .............................................. 9 LONG-TERM PLANNING ..............................................................................................................................9 INFORMED CONSULTATION .......................................................................................................................11 CAPACITY TO EXECUTE INFRASTRUCTURE INVESTMENTS .................................................................................11 STANDARDS THAT COORDINATE INPUTS INTO INVESTABLE PROJECTS ...............................................................12 IMPACT METRICS TO VALUE PUBLIC BENEFITS ................................................................................................13 5 SUPPORTING REINVENTION OF THE DEMAND-SIDE ......................................................................... 14 A TRANS-EUROPEAN NETWORK FOR SOCIAL INFRASTRUCTURE .....................................................................14 A ‘PATHFINDER’ PROGRAMME .................................................................................................................15 KIM (KNOWLEDGE, INVESTMENT AND MANAGEMENT) ................................................................................16 KEY TERMS ............................................................................................................................................. 18


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1 Introduction The world is becoming smaller, older, more city focused, more cautious and more polarised between rich and poor. And if that is not enough, the climate is changing, food prices will rise, governments are withdrawing from social contracts and economic power is shifting. While innovative social infrastructure is fundamental to vibrant and resilient communities in this changing world, there are too few public resources available to address the infrastructure gap especially in the EU. This is compounded by a degree of uncertainty among public authorities about whether, when and how private investment is the right path to take. There are common challenges and opportunities here for institutional investors and demand-side public authorities. Good solutions will need, among other things, new thinking and approaches to private sector investing in social infrastructure and associated public service renewal. Putting into play some predictable preconditions are essential for generating investable and resilient social infrastructure projects that are to scale for long-term investing. For institutional investors this is not about using them as shock absorbers against some of these macrotrends. There is a basic need for more informed dialogue and behaviour between Institutions that carry out maturity transformation for savers, intermediaries who act as a conduit for funds, and end-users that place investments in physical and human capital. In short, in a networked and shared economy, investors, intermediaries and end-users need to be more proactive in delivering patient and productive capital. This briefing paper looks at the why and how of the need to reinvent the demand-side as part of this paradigm shift. In particular, a new Trans-European Network for Social Infrastructure and a Pathfinder Programme will help facilitate the required shift.

2 Current situation Currently, there are nearly 300 regions and 91,000 municipalities in the EU28. They have major powers in key sectors (education, environment, transport, economic growth, housing, social care, urban renewal and sometimes healthcare). But they are largely unable to address the current infrastructure gap. Public investment in the EU declined by 20% - and 60% in some countries - between 2008-2013. The only current alternative for some of the EU13 will be to rely on European Structural and Investment Funds (ESIF) for more than 50% of public infrastructure funding. In Slovakia, Hungary and Bulgaria, ESIF will be responsible for 90% of public infrastructure projects. This is because local government revenues have declined in real terms in many European countries that provided data for 2009-2010, for example, by 19.7% in Bulgaria, 13.1% in Germany and 11.3% in Ireland1.

1 Davey K (Ed.) (2012) Local government in critical times: Policies for Crisis, Recovery and a Sustainable Future, Council of Europe texts 2011, Strasbourg, February 2012.


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More recent figures for 2011 show that: sub-national revenue (excluding borrowing was stable) [+0.2% in volume terms]; subnational expenditure (excluding redemption of the debt in capital) was slightly down [0.2% in volume]; subnational direct investment was down by 6.6% following a 7% drop in 20102. Overall, it seems that public authorities have protected current expenditure on existing services at the cost of capital accumulation. This is critical as regional and local authorities are directly in the front line on issues that affect economic performance, such as business closures, unemployment and social problems. The key problem is that despite rhetoric, since the 2007-2009 financial and economic crashes, the demand-side has been locked into an embrace with short-termism by national governments. This is largely driven by political resistance to a perceived risk of thinking and acting strategically combined with the financial pressure on public services to continue fighting fires by pursuing further efficiency savings instead of looking ahead. Cuts are sold as growth enhancing. But all EU countries that pursued austerity since 2010 now have more debt and not less. They got the timing of austerity wrong. Keynes said the time for austerity is a boom and not a slump. This is not to say that regions, cities and municipalities are sitting still. New initiatives such as 100 Resilient Cities (pioneered by the Rockefeller Foundation), the Amsterdam Institute for Advanced Metropolitan Solutions and the European PPP Expertise Centre provide examples of how public authorities are innovating in order to address the challenges and stresses of macro-trends and how preventive and resilient actions are reinventing the demand-side (see Section 4 below`). Cities such as Birmingham have strong and sophisticated relationships with communities and the third sector that should be tapped into to ensure that investment opportunities are fully maximised. Strengthening the social infrastructure is highlighted as a significant feature in its new package (actions to address youth unemployment, transport and enterprise). In order to do this cities need to move on from the so called 'triple helix' partnerships with business and academia to furthering 'quadruple helix' initiatives that embed the voice of people and communities through 3rd sector organisations in the growth agenda3. Using the Livinglab approach, Amsterdam shows how this next step can be taken (see below).

Finland faced a severe banking crisis in the 1990s. In this context, Kymenlaakso (in South East Finland) was faced with a combination of changing service demand due to an ageing population and a shift of younger working citizens to major urban areas. This necessitated a reappraisal of health strategy and a decision to reform the health care model. Long-term projections saw the population declining by 3% and tax paying capacity by reducing by 5%. The effect on the regional health system would be to move from small surplus to large deficit. This would be driven by a projected growth in primary care costs to manage chronic disease and sharp increase in borrowing costs as tax income declined. So the current service model was 2

CCRE/CEMR (2012) Further decline in European subnational investments in 2011. Council of European Municipalities and Regions/Dexia Crédit Local. Press Release, Brussels and Paris, 18 September 2012 3 Bore A, A regional reflection on long-term investment opportunities. In: Garonna P and Reviglio E (eds.) (Pending) Investing in long-term Europe: re-launching fixed, network and social infrastructure. FEBAF/CdP, Rome.


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not sustainable. The new strategic plan for health care takes a 30-year view (2005-2035) to introduce a new integrated regional model of health care delivery, with a specific focus on an ageing population. A new approach to capital (infrastructure) investment holds the key to effective change. Reform models needed to move from separate sectoral resources defined by hierarchal levels of care, to a shared resource structure linked through a disease pathway system (a patient-focused service network). This moves away from a hospital model of care and needs significant resource realignment to a more flexible care model as a feature of urban redevelopment. Health is moved from its usual remote, geographical and cultural separation from society to becoming an integral part of the urban community and fabric of the city. Implicit in this is the principle of healthy ageing. The headline route map in key social sectors where common good can be realised with economic and social benefits is clear: integrate, reorganize, improve and invest.

Wrong assumptions and inappropriate evidence There is an assumption that future growth will happen at a level sufficient to re-populate those pension and social security reserve funds that have been used to reduce national debts in some EU MS. Donʼt rely on this assumption. The recession was unprecedented in its breadth and depth. There is so much turmoil that all bets are off. A fair degree of financial repression will continue to undermine social policy with consequences for the nature of economic activity. In effect, the various obligations that societies have taken on (debt repayment, pensions payments etc.) will likely be repudiated/refused either by confiscation or engineered inflation. In sum, most societies cannot conceivably grow fast enough for governments to pay off the promises they have made. People are at the heart of what society is all about. But we make assumptions about them as well. For example, most of us live in ageing societies and we all carry stereotypes of older people. How they should behave. How they should live. But this growing population group is incredibly diverse and public authorities need to tear up their stereotypes. As the baby boomers and future generations retire (or continue to work) their behaviours and the lives they choose will conform less and less with our expectations. If active and healthy ageing is encouraged and supported this might help to ease some of the strains on pensions and social security budgets. But that means creating new narratives about lifecycles and the contribution of pensions and social security to these. In summary, in a world overloaded with problem compression and information overload, government ministers, their advisors and senior decision-makers are tempted to look for quick and easy solutions. Flawed academic/expert work is used without critical appraisal to support such decisions. The assumption that such thinking is based on is: that supply creates its own demand, that tighter fiscal rules reassure financial markets and stabilise the public sector and; that the social consequences of austerity-driven policy is acceptable. Such solutions are often wrongly timed, inelegant and have negative social and financial impacts4. An example of how this played out and lessons to be learned by public authorities is found with the NHS Private Finance Initiative (see below).

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Legrain P (2014), European Spring: Why our economies and politics are a mess.


The NHS Private Finance Initiative – The infrastructure mapping exercise did not stimulate thinking about new models of care, new design concepts, new ways of working – it simply informed decisions about bed numbers and changes in the level of provision of supporting diagnostic/emergency admission/and intensive/operating theatre capacity. The performance outcome of the new hospitals suggests significant failure of this stand-alone hospital investment package. There is well-documented and authoritative evidence to support this conclusion. There is now universal agreement that the cause of the problems are: • • •

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A single minded focus on replacing hospitals at the expense of balanced investment funding for primary and health related social care services and facilities Lack of any mechanism (or will) to plan hospital provision / investment as part of an integrated continuum of care Weaknesses in the mapping system that failed to take sufficient account of the future needs of an ageing population and rapidly rising rates of chronic disease – and perceived weaknesses in primary and social care provision A clinical technology focused project strategy instead of a more balanced care related programme

More than €100 billion debt has been created to fund the acute hospital investment programme (with contractual pay back over 25 years). This represents a missed opportunity to reform the healthcare model towards a more inclusive and integrated system as is now emerging as the potential universal model of the future. Mapping on is own will not determine the conceptual model for the hospital of itself – it will simply feed into decisions about the way in which the hospital should in future be positioned within the healthcare model of choice. This requires decisions about: • •

• •

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How the hospital will fit into the (integrated) model of care proposed The extent of reconfiguration necessary e.g. the need to rebalance services as between (for example) an emphasis on local community support vs. super-specialisation and all options in between these two poles Capacity assessment to inform decisions about the organization of clinical work, including patient flow, work process systematization, outreach services etc.. Capacity and flow will also inform decisions about hospital design to support new ways of working see also references on the ‘layers model of design (to ensure future adaptability and lifecycle economy and functionality) It will also feed into decisions about a supporting range of other health facilities that fit together to produce a portfolio investment strategy to support progressive healthcare reform.

Mapping is therefore simply the means to an end – the information necessary to flesh out and fine-tune the concept model for the hospital.

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3 Applying the innovation principle Some EU governments have adopted a storyline to justify budget cuts that blames public spending and poorer people for their own situation and so distracts from the responsibility of Government, regulatory bodies and financial markets for the 2007-2009 crises and consequences. The Welfare State should be a buffer but now just another stick to beat the poor with - reflecting a weaker commitment to social solidarity. Opening up public services to different providers and/or transforming them into social businesses would not be so bad if the principle of full coverage was written into service contracts. Limiting opportunities for public services to compete for contracts does not ensure service improvement. It contributes to locking these services into short-term performance cycles for the benefit of shareholders, reduces motivation to secure added social/economic/environmental value whilst also reducing coverage. The irony is that this limits returns on investment and sustainability and provokes distrust of the private sector while undermining public authorities. This play does not benefit Institutional investors who are waking up to impact of the macro-trends (mentioned in ʻ1ʼ above), the instability of financial capital markets, the need to diversify their asset portfolios and reorienting towards inclusive prosperity. Longer-term investment in innovative social infrastructure (some of it with complex public service contracts) is one way to stabilise the ménage a trios that is financial markets, the real economy and society.

New investment channels Institutional investors, including pension and sovereign wealth funds, are increasingly interested in infrastructure investments both for their long-term characteristics and their role in determining broader economic performance5. But they find conventional investment structures difficult to reconcile with either their financial or their social goals, and some have begun to turn to new investment structures, including direct investment or captive managers, in response to these challenges. 6 These kinds of alternative channels of investment may support the demand side for high-social-value investments by marrying the needs of the end users of investment to forms better suited to serve their purposes7.

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On this topic see Ashby Monk, “The New Dawn of Financial Capitalism,” Institutional Investor, September 8, 2014, found at: http://www.institutionalinvestor.com/Article.aspx?ArticleId=3377773#.VTgsQ_D9mH0 6 See for instance the announcement of CalSTRS and APGʼs new program for infrastructure investment, “CalSTRS, Dutch Manager Team Up for Infrastructure Investment,” Pensions and Investments April 6, 2015, found at: http://www.pionline.com/article/20150406/PRINT/304069984/calstrs-dutch-manager-team-up-for-infrastructure 7 Wood D, Organizing demand for infrastructure investment with high social value. In: Garonna P and Reviglio E (eds.) (Pending) Investing in long-term Europe: re-launching fixed, network and social infrastructure. FEBAF/CdP, Rome


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Financial models for social housing in Scotland - A recent report for Homes for Scotland Attracting new sources of funding to expand a growing market (2013) identified several reasons for lack of investment in social housing: investor mandates within financial institutions that do not include residential property and building specifications which do not meet the specific requirements of the private rented sector. Equally, the different stakeholders often speak different ‘languages’, even when talking about core issues such as the meaning of planning and development risk, determinants and interpretation of yield, and the implications of legislative change. In considering ways forward this same report shows several financial models that are currently being developed to provide routes to financing rental housing. Four approaches where there are functional models in place were identified: leasing models; direct purchase models; aggregated bond financing models; and those that harness the borrowing powers of local authorities and housing associations. Most of these involve some form of subsidy or guarantee, at least initially. They are therefore most suited as means of expanding the provision of social or intermediate rental products, where there is a growing need for additional sub-market but low-subsidy provision (Homes for Scotland 2013: 27-34).

Non-bank options such as long-term investment by pension funds and insurance companies using the European Long-Term Investment Fund (ELTIF) model needs the requisite space that would be available from allowing: pooled projects for scalability purposes that also included policy priority added value e.g. improving environmental performance through stock that produces energy savings by efficient use of utilities and type & quality of build; providing subsidies for what is a socially necessary low-rent sector in Scotland in order to meet investorʼs ratio of return expectations.

Examples of practical application 100 Resilient Cities8 - Pioneered by the Rockefeller Foundation (100RC) is dedicated to helping cities (currently 67) around the world become more resilient to the physical, social and economic challenges that are a growing part of the 21st century. 100RC supports the adoption and incorporation of a view of resilience that includes not just the shocks – earthquakes, fires, floods, etc. – but also the stresses that weaken the fabric of a city on a day to day or cyclical basis. Four dimensions of urban resilience provide a focus: health and wellbeing, economy and society, leadership and strategy, infrastructure and environment. Each dimension has three drivers. One critical problem that 100RC helps cities overcome is the difficulty of sharing information about more and less successful initiatives and practice, which prevents existing resilience solutions from scaling. Early in 2015 they launched a Chief Resilience Officer (CRO) Network Exchange Program through which member cities have the opportunity to co-create immersive learning experiences around common resilience challenges they face

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http://www.100resilientcities.org/pages/about-us#/-_Yz45MDY4NydpPTEocz5j/


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The Amsterdam Institute for Advanced Metropolitan Solutions (AMS) p ut s int o p lay t he ‘living lab’ research concept. A living lab is a user-centered, open-innovation ecosystem, often operating in a territorial context (e.g. city, agglomeration, region), integrating concurrent research and innovation processes within a public-private-people partnership. In this way, AMS seeks to develop a deeper understanding of the city – sense the city -, design solutions for its challenges, and integrate these into the city. Amsterdam will be the AMS living lab to develop and test these metropolitan solutions – especially involving the Amsterdam citizens as testers, users and co-creators. Current projects include9: Urban Pulse (Understanding resource flows and dynamics in Amsterdam) Urban Mobility Lab (Unraveling transport flows in Amsterdam) Rain Sense (Citizens preparing Amsterdam for future weather)

4 Organising demand for capital that delivers public value The key for generating investable social infrastructure projects on the demand-side can be found in three skill-sets (i) long-term planning and associated risk assessment supported by informed consultation (ii) knowing when private investment for social need is the right path to go down and (iii) long-term project management that maximises public value and delivers resilience-focused performance.

Long-term planning Something that needs particular attention in Europe but is unpopular politically and often misused is longterm planning. Institutional investors, governments, public authorities, business and financial markets have different experiences of what is meant by ʻlong-termʼ: 10 years from start to finish for projects relying on Structural Funds; 5 years is seen as long-term for public authorities; 4-5 years for politicians although reelection seems to be a priority after 18 months; 12 months for a SME and 60 seconds is long-term for financial traders. But cities, regions and sectors in the US, Australia, Canada etc. understand that 30-40 year plans/forecasts are needed in the competition to attract investment, generate economic growth and build vibrant and attractive communities. The confidence of institutional investors relies on these strategic plans, risk assessment and projections. In the EU, some of the regions we have worked with have gamed local, national and EU-level systems to plan and deliver long-term (e.g. Norbotten, Berlin-Brandenburg and Kymenlaakso). For them, long-term planning is about aligning local needs with clear growth goals through a continuous process that is: intelligent, innovative, integrated and implementable. Long term planning is about aligning local needs with clear growth goals through a continuous process that is: 1) Intelligent, grounded in a solid evidence base but capable of action where evidence is weak; 2) Innovative, breaking from tradition; 3) Integrated, involving stakeholders from across the organisation/partnership/community; and 4) Implementable, designed for action. 9

http://www.ams-amsterdam.com/category/research-programs/


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The essence of long-term planning is not a static list of investment priorities. It is about having a clear and transparent set of strategic principles to guide planning decisions informed by big data analytics for prevention, prediction and personalisation. And then blending this with participation through genuine consultation to identify the needs and priorities of the people you provide services for (see below about ʻInformed Consultationʼ. This is critical for social security policy when in competition and collaboration with other economic and social policy agendas. Perhaps most important, long-term planning and associated risk assessment supported by informed consultation can help communities work the economy to achieve their priorities rather than hollow-out communities to serve the economy.

Future proofing investments in Bristol10 – Bristol is one of a few UK cities with an elected mayor and made a successful bid for European Green Capital in 2015. In contrast, most “…cities are not in control of their own destiny” given the boundaries of national legislation, central funding and political mandate. Central funding can help meet immediate needs but not their needs 25-40 years ahead. As one of the current 67 cities in the 100 Resilient Cities Initiative, Bristol is developing a resilience plan with input from local government, the third sector and infrastructure-related businesses. But it also needs to address immediate the concerns of local people about 20 mph speed limits, residential parking limits and local food campaigners who want to protect the best local food-producing soil from plans for a new Park & Ride site. For local stakeholders there is sometimes no quick benefit from long-term thinking but choosing the right moments to conduct public conversations about energy, flooding or housing can perhaps help to manage tensions between short-term politics and a deeper, longer-term resilience agenda.

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http://www.100resilientcities.org/blog/entry/future-proofing-cities-bristol-starts-planning-for-a-more-resilientcharact#/-_Yz45MDY4NydpPTEocz5j/


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In summary, long term planning may be sectoral specific (e.g. transport, utilities, health) or integrated and place-based. There are four clear questions for a LTP: What do we want to achieve? What needs to change? What are the risks? How do we make it happen? Actions themselves will be targeted at several levels — quick hits, incremental change and transformation.

Informed consultation In the newer EU MS structural reform in health care and related policy fields are needed to help create a more dynamic and resilient operating environment for public services. This example from Hungary was radical for the public sector in Hungary and was the idea of their former health minister (Miklos Szocska) who held his post for 48 months when average ministerial periods are 18-22 months.

Healthcare reform in Hungary 11 – Informed consultation guided the most recent healthcare reform process in Hungary and had two elements: a data mapping exercise to provide realistic insights and three tours of Hungary by the Health Minister and his staff. The data mapping exercise had three parts (i) health systems capacity e.g. where do patients go for care, what are the access times and where various services are operating? (ii) a hospital indebtedness network analysis that found that a monopoly market had formed supported by a few banks: something illegal in the public sector in Hungary (iii) a management control analysis. Then the Minister did 3 tours of all Hungary: in the first tour he met each mayor, each hospital, each county council to discuss their healthcare services and communities; in the second tour the focus was on agreeing the focus of reforms; the third tour agreed roles in the new health system. Changes made included: taxing coca cola and chips purchases. From this taxation they raised the salaries of doctors & nurses to try and reduce migration that is a huge issue in the EU13; a national joint energy procurement initiative for the health sector led to saving 20% on gas and 15% on electricity; made the case for eHealth infrastructure because the wider ICT ecosystem already has a culture of use of smart phones - so link ‘at risk’ people and their carers to specific services. Overall, this showed that using data mapping and real consultation in the public sector could save taxpayers money and liberate resources to invest somewhere else where there can be more life years saved.

Capacity to execute infrastructure investments In the United States, private infrastructure investment has typically taken shape through the bond markets – public finance is and will remain the most significant financing vehicle for infrastructure finance. However, growing attention to alternative financing vehicles for infrastructure investment suggests ways that public, private, and civil society stakeholders might adapt to new roles in infrastructure finance. One response to the challenge of developing deals of this type has been the seeding of capacity-building organizations that can work to develop effective local demand for socially valuable infrastructure 11

Szocska M. Investing in responsible and sustainable health infrastructure. In: Garonna P and Reviglio E (eds.) (Pending) Investing in long-term Europe: re-launching fixed, network and social infrastructure. FEBAF/CdP, Rome


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investment. The idea here is that the political bodies who are likely to oversee the creation of potential infrastructure investments are not necessarily designed to explore new and different kinds of financing options; and there is likely a substantial information and capacity asymmetry between political bodies and places with a limited set of infrastructure needs that are suited for alternative financing vehicles, and the investment intermediaries who make such financing a specialty12. Capacity building using intermediary bodies – One example of these capacity-building organizations has been intermediary bodies designed to identify and bring to market quality projects, such as the West Coast Infrastructure Exchange and Partnerships British Columbia.13 The West Coast Infrastructure Exchange (WCX) – created by political authorities in California, Oregon, Washington, and British Columbia – was designed to help the public sector identify and nurture infrastructure investments that capture public benefits and build paths for private sector participation. The goal of the WCX is to open space for infrastructure project development and provide technical capacity to places that helps make high-value infrastructure deals investable.

Standards that coordinate inputs into investable projects Infrastructure investments and impact investments both are predicated on the notion that private sector participation enables the use of financial tools to create specific and outsized social value. In order to build investable projects, some set of standards that help identify which projects create this social value is especially important. Standards are tools with which to coordinate inputs into investable projects. From the perspective of the public sector, standards can define what kinds of social and environmental benefits are required to justify public participation and subsidy in infrastructure projects. From the (responsible) investorʼs perspective, standards can help determine how environmental and social performance can help mitigate different kinds of risk and ensure long-term value in project development and operation. From the perspective of civil society, a transparent set of standards—and ways to evaluate potential projects against them—can prove important to building project legitimacy and mitigating political risk. In sum, core performance standards – on issues including carbon mitigation, climate resilience, labor standards, social equity, human rights, governance mechanisms, and so on – can help places prioritize which investments deserve the time, attention, and resources necessary to bring typically complex deals to fruition14.

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Wood D, Organizing demand for infrastructure investment with high social value. In: Garonna P and Reviglio E (eds.) (Pending) Investing in long-term Europe: re-launching fixed, network and social infrastructure. FEBAF/CdP, Rome 13 West Coast Exchange http://westcoastx.com/. Partnerships British Columbia, http://www.partnershipsbc.ca/ 14 Wood D, Organizing demand for infrastructure investment with high social value. In: Garonna P and Reviglio E (eds.) (Pending) Investing in long-term Europe: re-launching fixed, network and social infrastructure. FEBAF/CdP, Rome


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Impact metrics to value public benefits In May 2014 the Rockefeller Foundation ran a seminar in Bellagio on Sustainable Infrastructure. This was attended by two INTEGRATE Advisory Board/Scientific Committee members. Three interdependent needs were identified in relation to metrics in order to build an industry that is defined not only by risk and financial return, but also by social and environmental impact: • •

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Management information systems for fund managers and other data aggregators, who otherwise often rely on a patchwork of Excel spreadsheets to track impact data on their portfolios; Impact ratings (performance standards) for asset managers and owners, who reported lacking the tools needed to assess their pipeline and active portfolios on the basis of non-financial performance; Standardized definitions of impact performance measures that serve as building blocks for the above as well as enable benchmarking.

Systematic use of Benefit Cost Analysis in infrastructure projects –" The Tiger Grant Program, a multi-billion dollar, multi-year merit based grant program utilizes a common approach to BCA to sort through thousands of merit based funding applications to select those that represented the greatest overall value for money including the value of public benefit or social benefit. Tiger has awarded more than $6 billion since 2008. Applicants that were not able to articulate an objective, transparent, and consistent approach to their business case were passed over (In 2014 TIGER applicants requested 15 times the available funds15). In the private sector and more specifically publicly traded companies are seeing benefits.

The triple bottom-line –"The TBL means the financial, social and environmental attributes associated with a given undertaking (TBL results). TBL Analysis can be Affordable especially for public authorities and NGOs that often represent demand-side interests - thanks to advances in technology. Technology including cloud based computing allows access to and efficient analysis of vast amounts of high quality, infrastructure and community specific data (much of which is available in the public domain, free of charge and in real time). That data includes peer reviewed research and meta-analysis studies (studies of large numbers of studies) that address the majority of concerns related to sourcing adequate amounts of objective information on which to base comprehensive assessments. In addition, advances have been made in the development of sector specific metrics and analytical tools. Those tools account for geographic specificity including market factors like labor, real estate, energy prices, and carbon valuations. Thanks to the minimal cost of applying BCE analysis, comprehensive TBL based business cases can be utilized at each step in the project development process from the initial TBL case of early planning to revisions at conceptual, preliminary and final design, throughout construction and long term operations. Cases can be

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U.S. Transportation Secretary Foxx Announces 72 TIGER 2014 Recipients http://www.dot.gov/briefing-room/ustransportation-secretary-foxx-announces-72-tiger-2014-recipients


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run and re-run each time key decisions are made so that the certainty associated with the case and project improves as additional data becomes available16.

Responding to the various macro-trends and financial insecurity exposes the ultimate performance signifiers for public authorities and related long-term investment in social infrastructure projects: adaptability and resilience. You need to show added value from your service and investments and when and how to adapt to changing circumstances. As the discovery conversations about investment in social housing in Scotland showed, stakeholders saw added value being realized in three obvious ways: (i) the public value that LTI can and should generate (ii) aligning complementary impact investments with the life cycle of long-term investment projects (iii) that both (i) and (ii) deliver concrete contributions to addressing policy priorities. Specifically, how the approach to social (and other forms of) housing in Scotland can contribute to creating the social and economic resilience by helping tenants to feel safe and secure; vibrant communities with economic life; social housing designed to help meet climate change targets.

5 Supporting reinvention of the demand-side A recent OECD report makes clear that moving from the current mindset to a longer-term investment environment requires a transformational change in government and investor behaviour17. Promotion of a public-private dialogue ensuring a coordinated approach between investors, the financial industry and the public sector will be a key element to develop this new “investment culture”. And yet, review of the full report shows that the “demand-side” is largely missing. This means, there is a need to support the demand-side in finding out what it doesnʼt know in order to strengthen its contribution to an effective new investment culture. In short, we need an ecosystem that effectively marries investment capital; public sector capacity, and social needs for that to work18. Introducing a new Trans-European Network for Social Infrastructure and a parallel ʻPathfinderʼ programme can facilitate reinvention and strengthening of the demand-side as a stakeholder in accessing and implementing long-term investments with a degree of predictability for sustainable returns on investment.

A Trans-European Network for Social Infrastructure There are currently three TENs in the EU: the Trans-European Transport Networks (TEN-T); TransEuropean Energy Networks (TEN-E or TEN-Energy) and the Trans-European Telecommunications 16

Williams JF, Valuing long-term public benefits of investments in infrastructure. In: Garonna P and Reviglio E (eds.) (Pending) Investing in long-term Europe: re-launching fixed, network and social infrastructure. FEBAF/CdP, Rome 17 OECD (2014). Institutional Investors and Long-term Investment. Project Report, May. OECD: Paris http://www.oecd.org/daf/fin/private-pensions/OECD-LTI-project.pdf 18 Watson J et al. (2014), The unexplored business within social infrastructure. INTEGRATE Briefing Paper 1, Maastricht, Netherlands: 18


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Networks (eTEN). There is support from the European Commission, The European Parliament and major demand and supply-side voices to establish a Trans-European Network for Social Infrastructure Network (TEN-SI). The pathfinder (public authorities) mentioned below will form part of the membership of the proposed TEN-SI together with institutional investors and intermediaries (financial, policy and regulatory).

A ‘Pathfinder’ programme We are starting a ʻPathfinderʼ programme (at regional, city or municipality level) where analysis of bottlenecks and concrete proposals for institutional investors will be studied and generated by public authorities (governance and sectors). Each pathfinder will focus on a specific sub-set of social infrastructure and extend knowledge sharing and experimentation by leading an associated EU Network of public authorities who have prioritised the same sub-set e.g. from one of the following from two types of social infrastructure assets: in-place infrastructure (also called fixed infrastructure) such as: civic and leisure, culture, education including pre-school, health and social care, social housing, urban green space; network infrastructure including ambient living, green energy, ICT, public transport connections, waste management and water systems. This will guide changes in the specific sectors needing long-term investment through the individual funds that together will comprise a European Long-Term Investment Fund [of Funds] for Innovative Social Infrastructure. To this end, INTEGRATE is seeking 10-12 regions/cities/municipalities from across the EU that are interested in becoming a pathfinder. We are currently in deep discussion with Scotland 19, the Assembly of European Regions and Committee of the Regions. To be considered as a pathfinder, regions/cities or municipalities need to: •

Demonstrate political stability, transparent decision-making and no corruption

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Are committed to maximising the public value of long-term investment in social infrastructure using the principles of (i) full coverage (see definition in Annex 1) (ii) innovative concepts that are practicable under difficult financial conditions (see definition of innovative social infrastructure in Annex 1)

•

Show a good track record in infrastructure projects using ESIF, national or private funds

•

Understand the necessity of political commitment to and competencies in long-term planning, longterm risk assessment, valuing public benefits from infrastructure investment and measurable sustainability/resilience

•

Are prepared to contribute to a dialogue with institutional investors who support the need for a stronger Demand Side.

Overall, evidence of commitment to, competencies in and intelligence from such work will (i) support the development of investable projects and (ii) boost investor confidence.

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Watson J, Wright S and Marr I (2015), Social housing in Scotland: exploring the potential for long-term investment. INTEGRATE Briefing Paper 2, Maastricht: Netherlands.


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Large-scale EU Networks – Each network will focus on an individual sector and be led by a Lead Pathfinder region. These networks will be aligned to the sectoral platform concept proposed as part of implementation of the Junker Plan. The remit of each network will be agreed with INTEGRATE (via its Scientific Committee). It will include members (EU Member States, regions, cities and municipalities) that are committed to a shared methodology for securing and sustainable use of long-term investment in their individual sector (as shown above). Do note that development priorities for each individual sector will need to fit within transparent and integrated long-term plans for Places (Regional/City/Municipality Development Plans/Master Plans) and/or Sector Strategic Plans. A high quality process that generates credible evidence for appraisal by investors of financial returns and public benefit will drive a shared methodology for use by demand side stakeholders in generating a portfolio of investable projects for each Network. A Pathfinder region can join other EU Social Infrastructure Networks that are relevant to its development priorities. And other AER/CoR regions may become members of these networks and thus contribute to preparation for the launch of the proposed ELTIF. As well as building a portfolio of individual projects, the networks will enable the scaling up of investment opportunities by allowing individual projects to be pooled if this is feasible i.e. create a mini-investment portfolio.

KIM (Knowledge, Investment and Management) KIM would be a centralized European Public Private legal entity providing an interface between (and the application of) practical knowledge for local long-term planning according to European standards, investment and project management during the whole lifetime cycle of investments in collaboration with public authorities seeking access to the proposed ELTIF Fund of Funds for Innovative Social Infrastructure and other appropriate financial instruments. Moreover: a) For Investors (a special analysis for pension funds because workers are both investors and beneficiaries of social services) • A standardized, homogeneous centralized interlocutor (administration, R&D, training, quality control, egovernance etc.) • Lower Risk for the Long Period • No corruption and political risk • R&D oriented to improve performances and technological innovation so to improve compliance and customer satisfaction • Long-Term Planning towards full coverage and middle class involvement including the working poor • Financial returns from management beyond the ones coming from pure investment • Added value at the end of lifecycle of investment • Co-Ownership of the structure b) For Institutions • Receiving Public Services without increasing Public Debt • Avoiding breaking Maastricht parameters and the rules of stability and growth pact


• • • • • • • • • •

Reducing bureaucracy Avoiding corruption Improving local and national GDP Improving growth and employment Improving fiscal income Better income to pay pensions Fighting inequalities and improving quality of life of low -income population Reducing the costs of healthcare due to ageing populations and the reduction of social diseases Valuing local workforces including young people and older workers Producing true European Added Value

c) For Society • Obtaining high level social services with progressively increasing coverage • Widening social protection • Reducing inequalities • Increasing dignity and quality of life • Common European standards, safety and quality of services d) For political decision makers • Getting fresh investments out of fiscal income with reliable management • Solving huge social problems • Improving the image of politics after years and years of cuts • Learning to manage also no-fiscal opportunities and how to facilitate investments • “Right-skillingʼ the political management of wider negotiating tables • Knowing the right regulatory framework to reduce financial risks • Managing policies for a "regulatory easing" in term of state guarantees, fiscal benefits etc. • Protecting Single Market improving customers' purchasing power

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Key terms Common good

European Long-Term Investment Fund

Financial innovation

Full coverage

Housing Association

The common good is a good to which all members of society have access, and from whose enjoyment no one can be easily excluded. The common good...consists primarily of having the social systems, institutions, and environments on which we all depend work in a manner that benefits all people. The proposed European Long-Term Investment Fund, or ELTIF, is a new type of collective investment framework allowing investors to put money into companies and projects that need long-term capital. It is aimed at investment fund managers who want to offer long-term investment opportunities to institutional and private investors across Europe, e.g. in infrastructure projects. To benefit from this cross-border passport the new Funds would have to meet rules designed to protect both investors and the companies and projects they invest in. Financial innovation is a broad term that is used to describe the generation of new and creative approaches to different financial circumstances. In the context of social infrastructure and longterm investing, this includes innovative products and services that break from pre-crisis models, avoid short-termism and that do not manipulate or conceal risks. In particular, they are driven by hybrid strategies that blend financial innovation with social and/or environmental innovation in order to maximise impacts. The principle of full coverage means a public service should be available and accessible to everyone it exists to serve e.g. the NHS was based on a consensus that health care should be available to all. Applied to long-term investment in social infrastructure, full coverage generates a wider and more permanent area of business that will be good for investors and facilitates better capital absorption capacity from places and sectors A housing association is a voluntary organisation dedicated to helping people obtain decent, affordable accommodation that meets their needs.

Infrastructure

The set of interconnected structural elements (economic, social, environmental) that provide a framework supporting an entire structure of development.

Infrastructure investment

Investments in assets that provide sustainable services that are essential for a functioning economy. The services provided are typically monopolistic or quasi-monopolistic in nature as a result of geography or regulation. Demand for these services is often inelastic to price changes and these investments can therefore provide predictable and sustainable cash flows.

Innovative social infrastructure Long-term planning

Negotiating table

Pathfinder

Social Social capital Social housing Social impact

Using innovative concepts to develop and safeguard social infrastructure provision that take account of demographic change, new knowledge, and shifts in societal preferences – and which are practicable under difficult financial conditions. Long term planning is about aligning local needs with clear growth goals through a continuous process that is: 1) Intelligent, grounded in a solid evidence base but capable of action where evidence is weak; 2) Innovative, breaking from tradition; 3) Integrated, involving stakeholders from across the organization/partnership/community; and 4) Implementable, designed for action. Sustainable investment requires informed collaboration between supply, institutional and demandside stakeholders. It is a problem-solving process in which each party are potential advocates. However, the capacity, competency and confidence of demand-side stakeholders have to be improved while the role of the institutional side needs review. A core group of 10-12 EU regions/countries. Each pathfinder will lead a EU network on a social infrastructure sub-set that matches a current planning priority e.g. social housing, kindergartens, health care, education. These networks will come together in a Trans-European Network for Social Infrastructure and inform the work of a High-Level EU Task Force for Social Infrastructure. Relating to individuals and communities, and the interaction between them; contrasted with economic and environmental. The links, shared values and understandings in society that enable individuals and groups to trust each other and so work together Housing provided for people on low incomes or with particular needs by government agencies or non-profit organizations. The reflection of social outcomes as measurements, both long-term and short-term, adjusted for


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the effects achieved by others (alternative attribution), for effects that would have happened anyway (deadweight), for negative consequences (displacement), and for effects declining over time (drop-off).

Social infrastructure

Social infrastructure is a sub-sector of infrastructure that consists of the social connections and the organisations and services that build them in a community. Strong social infrastructures create strong communities with resilience and the foundations for growth in both economic capital and social justice.

Social outcome

Social effect (change), both long-term and short-term achieved for the target population as a result of the activity undertaken with a view to social change taking into account both positive and negative changes.

Sustainable return on investment

A package of monetary and non-monetary returns on investment to get an imputed capital value. Measuring the value of investments looks beyond traditional lifecycle cost analysis that focuses on direct cash benefits to include intangible and external costs and benefits represented in monetary and non-monetary terms. SUROI is distinct from Social Return on Investment (SROI) used in the UK and EU.