Contenidos curriculares

A1.1

Cost projections

For the purpose of assessing the cost of London’s infrastructure requirements to 2050, Arup has established a cost model (the Model) which compiles inputs and calculations for each of seven infrastructure sectors:

 Housing infrastructure;  Transport infrastructure;  Energy infrastructure;

 Schools infrastructure; Water infrastructure;  Waste infrastructure;

 Green infrastructure; and

 Digital connectivity infrastructure.

This work has been conducted working with members of the GLA infrastructure investment plan team and sector-specific specialists working for the GLA and other parts of London government. Our work is intended to provide an early indication of possible costs associated with the potential investments in different infrastructure. Our projections, unless otherwise stated, relate to the costs

associated with investment occurring within both the public and private sectors. High-level parameters, including the Mayor’s own policy objectives, have framed the type and quantum of infrastructure required for each sector. Our approach to modelling has varied for each sector, reflecting differences in regulation,

ownership and control and GLA requirement (in order to inform the investment plan), as well as information available.

Infrastructure typically is considered as an enabler of growth. Its development is correlated strongly with population growth and economic expansion. Working with the GLA, it has been assumed that projected population growth is the

primary driver of infrastructure requirements across the majority of sectors. As we discuss below, it has been assumed that, with such long-term investment,

London’s economy will grow at a rate outpacing historical levels. As the GLA refines its understanding of different policy objectives and

investment requirements, these indicative costs will change. Our projections are reported on an ‘order of magnitude’ basis and are not presented for reliance by the GLA, funders or potential investors.

A1.2

Funding ‘gap’ and revenue projections

In order to inform an understanding of future funding requirements, the GLA requested that Arup provide a preliminary indication of the “gap” between projected costs and revenues. Informed by on-going discussion with the GLA, its advisory group and other stakeholders, our analysis has varied across the different sectors considered. Given variation in our approach and some of the assumptions

made, the gap estimated is intended for indicative purposes and should not be considered complete, as we discuss below.

We have focused upon the transport and housing sectors in particular detail, as these two sectors represent the large majority of projected capital expenditure over the study period and are likely to be funded in part by local government. Our approach has been to provide an indicative estimate of the gap between projected expenditure requirements and projected revenues from taxes, grants, borrowing268 and other such sources. User charges, particularly in the utilities sectors, are likely to fund a significant portion of both operating and capital expenses. Because of this, we have agreed with the GLA to focus on the potential impact of projected expenditure on bills for those sectors. For the remaining sectors, we have assumed that projected costs at present are ‘unfunded’, as we discuss in chapter 10 of this report.

A1.3

Cost model

The Model consolidates different modelling approaches, which have been built in conjunction with each individual sector work stream. Sector-specific modelling sits ‘behind’ the cost model for those sectors where additional supply and demand considerations have been reviewed and projected. The transport, energy and water sectors each relate to independent sub-models that are active in the assumptions section of the associated Microsoft Excel file.

The Model includes four sections:

 Inputs (In_), which consolidates hard-coded and variable inputs to the model as a whole and each infrastructure sector. Variable inputs are intended to enable the GLA leads to address questions around supply and demand factors raised in the course of this engagement. Inputs that are variable have been colour-coded ;

 Calcs (C_), where calculations take place for each sector, broken down as one sector per sheet;

 Results (R_), which consolidates and summarizes outputs from the calculation sheets; and

 Assumptions, which contains any ‘sub-models’ of supply and demand factors or further calculation steps that are particularly complex or relate to a time basis inconsistent with the cost model; and which references

documents and analysis used as source to certain inputs.

The model incorporates flexibility around different scenarios. As stated in section 1 of this annex, we have included population growth as the basis for three scenarios (central; high; low) informing each of the infrastructure sectors.

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Please note that it was agreed with the GLA that borrowing potential should be carried forward as a source of revenue but that debt servicing costs should not be included in our projections. This makes it likely that our estimate of the gap between costs and revenues is conservative, below the amount likely to be required in order to meet expenditure requirements and debt servicing costs.

Further to this, certain sectors also rely upon a number of sub-scenarios which can be chosen in a similar manner; these represent a variety of situations and are explained in each sector section. The outputs sheet (R_Summary) includes a summary of all selected scenarios (and selection drop-downs) so as to provide a reminder of what scenarios are being modelled and have consequently provided the outputs shown.

A1.4

Five-year reporting periods

In order to avoid spurious accuracy we have considered project delivery in five- year periods for each of the sectors. This approach is intended to reflect the fact that projects often ‘slip’ (forward or backward). Each period in the model refers to the five years prior to and including that year. For example, the period ‘2015’ refers to the years 2011-2015 (inclusive), and the period ‘2050’ refers to the years 2046 to 2050 (inclusive).

It is therefore important to distinguish figures stated as per annum (pa) and per (five-year) period (pp). Each sector calculation sheet contains a summary per annum and per period.

A1.5

Baseline costs

Arup has set the period 2015 (2011-2015) as the baseline against which we then compare projected costs. This cost baseline is presented through best efforts as an indication of sector capital and operating expenses. Historical costs have been derived from public accounts, other reporting statements, third-party reports and parliamentary questions. We have referred to outturn costs wherever possible. Where these costs are not available, there is some visibility of investments in the remainder of 2014 and in 2015. In some cases, where information is more limited, the baseline has been calculated using our own cost assumptions in relation to known infrastructure delivery. Please refer to individual sector chapters or the Model for additional detail.

A1.6

Important notice

We have used a wide range of data and sources in completing this report. We have noted these sources throughout the document and, in relation to primary

assumptions, in this appendix. Underlying inputs, including population forecasts, GVA forecasts and demographic trend forecasts, have been provided by the GLA and/or GLA Intelligence. Our analysis of transport infrastructure costs relies on inputs provided by Transport for London (TfL).We have supplemented data where relevant through independent research and our own industry knowledge. The costs presented by Arup are indicative projections only. The projections and conclusions set out within this report are dependent upon the validity of the

assumptions and the data upon which they are based. Actual costs will be different from the projections shown, because events and circumstances frequently do not occur as expected. The difference between actual costs and our projections may be significant and material. The results shown in this report are for informational purposes only and are not intended to inform investment decisions, whether by the GLA, London government, national government or other public or private

investors. We accept no responsibility for the realisation of projected demand, projected costs or associated prospective financial results.

We explicitly do not permit circulation and/or reliance upon any of our reports or other deliverables, including but not limited to Arup’s cost model, to/by retail investors, and we will not accept any extension of responsibility and/or liability to retail investors and you agree to expressly indemnify Arup against any such liability arising from such risk.

Ove Arup & Partners July 2014