Industry Insight No.4: Can sustainable projects be profitable?

January 20, 2016

 

Construction analysis: Sarah Schütte of Schutte Consulting Limited discusses whether sustainable projects in the construction industry are profitable.

 

The New Year encourages resolve to implement ideas, so now seems a good time to write about sustainability in the built environment. School taught me that consumption could not last ad infinitum and 20 years later the situation is urgent. I did not study sciences, but my chosen field of legal expertise, construction and engineering projects, demands a basic technical understanding of materials and processes. A decade in this industry has taught me the reality of how businesses operate, how regulations impact and how stakeholder and investor demands steer particular courses. Yet environmental concerns must be central to planning buildings and infrastructure. So, can these issues co-exist comfortably, and can sustainable projects be profitable?

 

What does ‘sustainability’ mean?

Sustainability is commonly understood to mean ‘the ability of something to be maintained, or to sustain itself at a certain level, indefinitely’. In environmental terms, it refers to the conservation of the ecological balance by avoiding, or minimising, depletion of natural resources.

 

Sustainability is not new. What’s the urgency now?

It is not new, eg the EU Directive (75/442/EEC) on Waste came into force in 1975. However, sustainability came firmly back in the news in 2015, for example:

  • the UK Government stops subsidies for large solar projects from 1 April 2015 and for large wind projects from 1 April 2016

  • the government backs the Hinckley Point nuclear project to the tune of £2bn

  • in October 2015, the UK Government introduced a 5p levy on single-use plastic bags

  • El Niño is linked to severe floods in the UK, and the mildest December on record

  • across the Atlantic, North America records one of the mildest winters, with little snow in the north, and severe flooding in the south

  • a confidential UK Government memo is leaked, warning that the UK will miss its 2020 renewable targets

  • a surplus in crude oil sends the price plummeting 35% to about $35 per barrel.

In December 2015, the Paris climate change conference witnessed 195 countries pledging to reduce greenhouse gases emissions, signalling consensus for a renewed effort to protect the environment. Dr Eric Moritz (US climate change secretary) described the need for clean energy as ‘mission innovation’.

 

But oil is plentiful and cheap, so why the need for ‘mission innovation’? Plenty of reasons. For example:

  • oil is finite and renewable energy is sustainable

  • disasters such as Deepwater Horizon must be avoided (in 2010, a fire on a BP platform in the Gulf of Mexico caused 11 deaths, and 3 million barrels of oil to be spilled, washing up on the shorelines of five US states and badly damaging ecosystems, and the local economies. BP paid £3bn to the US in 2012 to settle its criminal liability and £13bn in 2014 in respect of its civil liability. BP’s Chief Executive described it as a ‘near death’ experience for the company. Some environmental problems remain).

  • the current low oil price creates instability, as reduced income for the energy industry means reduced investment in sustainable projects or infrastructure

  • the Paris Agreement may also impact in the future—the Governor of the Bank of England, Mark Carney, has suggested that energy companies may be left with ‘stranded assets’ (ie oil and gas reserves, which cannot be tapped due to the imposed limits). BP, for one, disagrees.

 

So what is the answer?

There are perennial ideas and competitions, and thanks to the Paris Agreement, sustainability is the buzzword.

 

What kind of ideas?

One of the craziest, and yet logical, ideas in recent years is to cover the Sahara with solar panels because the sun provides 15,000 time more than the energy than is currently used. The initiative, named Desertec is progressing, despite the area’s political turbulence.

 

In November 2015, Bill Gates, Mark Zuckerberg and others started the Billionaires Biofuels Club to kick start investment in smart energy firms. This is exciting because they are role models to future entrepreneurs, as well as having cash to invest.

 

What are the main inhibitors as to whether sustainable projects get off the ground?

  • likely benefits of participation

  • perception of risk—corporate and project risk factors need to be considered

  • novelty—a design or engineering solution which has not been done before

  • undermining private sector confidence to investconfidence—the UK Government’s recent withdrawal of renewable project subsidies is already problematic, 

  • other participants’ outlooks—who are the other parties? What are their interests? Do they align to mine? Where might clashes occur? Who is in it for the long haul?

Can you share an example of a sustainable infrastructure project?

The Thames Tideway Project, London’s new ‘super-sewer’, is being funded by a consortium and delivered via an NEC3 Option C contract. The planning has been meticulous, drawing heavily on smart programming software, experienced project management and collaboration. It aims to bring sustainable infrastructure benefits to London for a century.

 

What funding options exist for infrastructure projects?

Against the backdrop of governments’ and public bodies’ continued struggles with deficits and cuts, private money could step in. There is room for small and big investment and everything in-between. It is exciting to think about how this could work. Some examples include:

  • crowd-funding—several individuals and/ or organisations taking a stake—can be used to kick start small projects—this is currently gaining traction

  • match-funding, grants, subsidies and loans by public authorities to ease the pressure (risk) on them and the private investor, particularly in local community projects—this is well-established

  • joint ventures and consortia— currently in its infancy for small projects, but I think the model presents an exciting opportunity for SMEs

  • major projects require deeper pockets—insurance companies and private equity funds, for example, are becoming interested in these solid investments, and there is a certain PR benefit and therefore I think we will see this idea grow in 2016, but it may take another year or two before investment is made

 

Isn’t this private finance initiative (PFI) or public-private partnerships (PPP)?

It is similar in so far as private money is used to achieve a public benefit. Both PFI and PPP were designed to be long- term, but the calibrated return was often too low. In addition, in the rush to complete projects, the build quality was sometimes questionable. Using these experiences, more sophisticated ways to fund both initial build, and maintenance/ operation with sustainability at the core, can be developed.

 

What measures can encourage industry organisations to participate, and how important is political support?

Political support is essential, for example:

  • support within the jurisdiction—eg Germany has ploughed millions of Euros into creating a solar energy industry

  • support for cross-border projects—eg Boston (US) partners with Quebec (Canada) to source electricity

  • international support—eg harness the World Bank’s ability to fund projects. The World Bank endorses FIDIC

  • contracts, and therefore the form is a good basis for contracting sustainable infrastructure

In my experience, organisations want to see:

  • projects being ‘de-risked’, so as to increase their ability to sell to their stakeholders more Early Contractor Involvement (ECI) to share expertise and experience

  • better partnership between public and private sectors

  • more fair and balanced contracts

  • financial incentives and/or tax-free benefits

  • more publication that it is ethical to be a sustainable investor eg kite-marks

  • more financial investment by big business commonly seen as ‘greedy’, such as insurance companies and banks

  • sustainability efforts publicised as part of CSR (corporate social responsibility)

  • more research and development grants for specialist SMEs dedicated to developing sustainable technology

These above measures will also discourage a short-term outlook. The UK Government can assist, given the number and size of public projects, by:

  • maintaining sustainability policies—unpredictability makes businesses lack confidence to make investment and inhibits long-term thinking

  • taking charge of energy security and stability of supply, stated to be the UK Government’s ‘number 1 priority’ (18 November 2015)

  • underwriting major public project risk

  • requiring minimum sustainability standards for public projects eg product lifespan

  • encouraging long-term investment eg tax on profits derived from short-term investment or a ‘sustainability tax-free wrapper’ (like an ISA, an idea which I am trying to kickstart)

  • implementing a compliance requirement on companies to publish data on sustainability performance (eg CO2 outputs) or consumption (sources of energy) or percentage investment in renewable projects

  • subsidising small ideas to improve efficient energy consumption eg insulation for private homes, smart meters

  • supporting local authority efforts to grow their local economies in a sustainable way eg refuse and recycling, B2B collaboration

  • supporting smart technology to increase efficiency/waste and reduce cost

What about social change?

Each of us can do a little more to reduce consumption.

 

On a bigger scale, experienced project deliverers could include proposed beneficiaries in the solution eg Africa grows at about 5% per annum, but around 30% of the population have no access to electricity, according to the African Network for Solar Energy. Social progress can follow technological progress—an electricity network is essential, but build it in a way that minimises harm.

 

On a global level, there is talk of developing a more sophisticated commodities market to avoid the ‘turn on and turn off’ of trading peaks and troughs.

 

What role can lawyers play?

Many lawyers will say they are not involved until after the decision about the form of contract has been made, but I believe lawyers can play a positive influential role in the structuring process. They could, for example:

  • suggest a fair and balanced contract incentivising the parties to co-operate and draft sustainable outcomes into the required outputs eg NEC3

  • encourage clients to consider partnering contracts to balance risk and reward to all project parties eg PPC 2000

  • moot giving equity stakes to participants and link performance and reward

  • emphasise the long-term benefits of collaboration and the positive PR associated with a sustainable project

 

So is it possible for projects to be sustainable and profitable?

I have been working with various organisations (big and small) and individuals who are trying to push design boundaries and/or bring on-stream inventions and ideas, including:

  • water source security/efficiency engineers

  • civil engineers focussed on establishing sustainable practices

  • architects designing out inefficiencies and designing in smart solutions for buildings and infrastructure to control energy consumption

 

We explore corporate risk (eg how much time and resource to devote to new initiatives, corporate structure, insurance cover and market profile, reputation matters, protection of intellectual property rights) and project risk (eg design life and long-term fitness for purpose). Exciting ideas and cold hard business have to be balanced.

 

It is an exciting time, but it is a difficult environment to operate in profitably. This is frustrating for solutions-driven people, but they remain optimistic that projects can be sustainable and profitable, given the right political and private sector support. With one or two clients each, they are making a difference already— to the quality and longevity of design/engineering and thus reducing project and maintenance cost.

 

Next month’s Industry Insight will look at the role of project managers.

 

 

 

 

Sarah Schütte is a solicitor-advocate and runs her own legal and training consultancy, Schutte Consulting Limited. She has over 15 years’ experience as a construction and engineering solicitor, including ten years in industry. She works with a wide variety of industry clients, law firms, seminar organisers and educational establishments to support their projects, disputes, risk management and insurance strategies and training programmes. 

 

This article was first published on Lexis®PSL Construction on 19 January 2016.

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