Mid-September the conference ‘The replacement wave: Fact or Fiction?’ took place. More than 100 executives, managers and consultants active in the asset management domain joined the event in the Netherlands, with eight speakers from a range of backgrounds invited to provide their views on key trends and developments in the landscape. Jan Schipper, Managing Director of UMS Group and chairman / moderator of the conference, reflects on the day’s key highlights and lessons learned.
Firstly it was explored if the participants see an investment wave coming and whether this would be an issue. Here the first interesting observation can be made. When looking at the different sectors it became clear that especially for the infrastructure business the replacement wave is seen as a fact. Especially technical specialists have found evidence that confirms, in their opinion, this. Looking at how significant this expected wave of replacement is, the audience indicated a major impact on the annual budget.
From here the conference programme kicked off, with eight different speakers that shared their insight on asset management topic. The conference was structured in two parts of which the morning session, titled “To Maintain and Replace, or not”, focused on how companies deal with the investment challenge from a technical viewpoint, while the afternoon session, titled, “The impact of technology and innovation”, looked at the impact of external factors on the expected replacement wave.
To Maintain and Replace, or not!
The first perspective was given by Rijkswaterstaat (Governmental Road and Water Infrastructure). Jenne van der Velde (Asset Management) showed that the infrastructure is ageing; the need for more maintenance and pro-active replacement strategies was clearly articulated. What he added to the equation was the perspective that after 50 years of utilisation of the assets the environment in which these infrastructures have been built dramatically have changed, down the line implying that straightforward replacement is not just as simple and evident.
What also became clear is that due to the growth of activities in certain urban and rural areas, concentrations (nodes) of different infrastructure have developed. These nodes of infrastructure (road, waterway, electrical, gas, water, telecom infrastructures) all are critical to the economic performance in such areas. A strong consensus was found amongst the audience, that a coordinated effort in such nodes to execute major replacements of infrastructure would be beneficial for all. So there is a clear win-win case, however organising such a coordinated approach is expected to be a challenge – or opportunity depending from which perspective you look at the situation!
The second speaker that set the stage was Marcel van der Haar from Brabant Water, a water utility. He confirmed the replacement wave and explained how his Board has decided to pro-actively start up a replacement program based on pre-defined performance KPI’s. He also highlighted the benefits of close cooperation with other infrastructure companies in electricity and gas. But he also indicated that synchronising with telecom infrastructure is a challenge mainly due to the volume of replacements that can be done in telecom infra which other infrastructure companies cannot realise.
Replacement is for Brabant Water a fact but can, according to Van der Haar, be managed by exploring more than the technical lifetime only. By collecting data of several dimensions of the asset base and analysing this data from different perspectives, solutions can be distilled that allow the business to spread the investments needed for replacement without putting the operations at risk (oil on the waves!).
The third speaker Joost Goderie (Managing Partner) represented a telecom infrastructure investment fund, CIF, that invests mainly in replacement of telecom infrastructure in rural areas. He first explained how different technologies have quickly merged in the last decade (cable TV, cable phone, internet). From just a technical infrastructure perspective, he said it is difficult to find a positive business case to roll-out telecom infrastructure in less dense areas. However, a different approach was shown to the audience.
People at home are looking for connectivity as a product (which goes beyond a cable connection), this gives a glimpse of our future where all devices at home will be connected to the internet. All kinds of services will be possible; not only in telecom, but also services related to safety at home, fire protection, eating pattern (flow of products in your refrigerator), etc. Based on this vision of connectivity, one which widens the scope beyond a cable connection, it is relatively easy to deliver a positive business case. This other way of looking at the same problem (through the eyes of an asset owner), was a very interesting perspective of the morning session.
During lunch I tried to imagine what would happen at home when I would assume that electricity will become a free product like air. I have solar panels at home producing my own electricity and warm water. Suppose the future is that we all would have homes like that. I would not need a contract with an energy supplier! I would not even need a separate contract with a telecom provider or electricity provider. I would only need one contract with a company that offers me connectivity. Hmm.. at least the benefit for my administration would be clear; it would be simplified significantly. “I wonder what company will offer me connectivity and what will happen to the others..?”.
The impact of technology and Innovation
After lunch the conference continued exploring whether technology and innovation could make a difference in managing the expected wave of replacements. The programme continued with Wim Beukers (CEO) of Allinq. This company used to be the contractor for the Dutch national telecom provider replacing cupper cables. This seems to be a long time ago, however in just two decades the telecom market has completely changed. Allinq is one of the few successful companies that managed to grow into the new market and technology. Wim Beukers explained how he transformed the strategy of the company completely by focusing on on customer intimacy and innovation. His successful strategy changed his company from just a contractor to a trusted partner of asset owners. He grew from executing maintenance and replacement work into the domain of being an asset manager with longer term concessions to maintain and operate infrastructure assets.
My take away after these two perspectives from the telecom market: New business models for new infrastructures related to connectivity include strategies to prevent the wave by replacing after a fixed number of years despite the condition or technical lifetime. In this way, they create the possibility to anticipate on rapidly changing circumstances and to apply the newest technologies for optimal serving their customers. Investors such as pension funds seem to be interested in funding these businesses while their return is guaranteed. Customers can fully enjoy the newest technologies and seem to be willing to pay a higher price.
After this presentation DSM presented their approach. Jacko Aerts (Corporate Expert Health, Nutrition and Materials) explained how over the years DSM transformed from a bulk producer in chemicals, in the Netherlands, to a worldwide company with diverse smaller production locations in Health and Nutrition products. Compared to the infrastructure business this industry is highly competitive. For DSM replacement is not a strategy; life extension of a plant is. Jacko explained the method that the corporate department has developed and how (based on this method) a quick scan is made for each plant to identify what is needed to extend the life cycle. As long as there is a market for the produced products the plant is in business, otherwise not! This is an interesting perspective on the topic from an industry with a very short business life cycle compared to infrastructure business.
After this presentation Dick Timmermans, from construction firm Heijmans, gave his perspective. He explained that the organisation needed to adopt a strategy as a construction and maintenance company in infrastructure, utility and real estate in the recent economic downtime. Despite the hard market conditions Heijmans kept on investing in innovation and technology. Compared to Allinq the strategy was not purely on customer intimacy, however they also focused on product leadership. Dick presented many examples of innovation and technologies that been developed and I have to say, several of them are very appealing all nice technology I would like to have.
The conference continued with Carolien Gehrels (Arcadis) the former deputy major of Amsterdam. She was challenged by the audience with the opening statement that government and politicians are only interested in innovations, since maintenance and life time extension of old stuff is boring! She immediately acknowledged that this certainly can be the case. Especially knowing that politicians are elected every four years and as such have to perform to be re-elected. So it is a highly competitive arena. However things that bring your city high in international rankings of sustainability, water management, safety, tourism, or university rankings will certainly count and in that perspective maintenance of things that are old is a difficult story.
But most politicians are very committed to the city, area or country that they govern and are certainly open for putting a significant budget on replacement, especially when a combination can be made with innovation or other improvements that will raise the different scores in international indexes. There seems to be a bridge to be built in how organisations should sell their replacement wave to politicians; this is, says Gehrels, more of a communication strategy rather than a technology problem.
Last speaker of the day was Mark de Bruijne (assistant professor at the TU Delft). Mark is related to the Next Generation Infrastructure organisation. This group, funded by several infrastructure owners, is doing research on future cooperation of the different infrastructure companies to figure out how to manage infrastructure development more on a system level to define an approach for the “nodes-issue” as described at the beginning of the conference.
At the end of the day the participants were again asked whether the replacement wave is a fact or a fiction. More people (than at the start of the day) had formed an opinion. Interestingly enough the number of people that thought the replacement wave is fiction did not shrink, contrary to what I had expected! My hypothesis: over the cause of the day it has become clear that infrastructure business we will be faced with a wave of investments. Technology changes and innovation will help solve this issue, however partly. As could be learned during the conference the complexity of the expected wave of replacements is going up significantly due to changes in technologies, changes in society, etc. New business models will be developed that will change the market.
But probably the biggest challenge to be managed will not be a technical issue, but the organisational question how to bring different infrastructure managers together to solve the replacement issue in the “nodes” where all seems to come together. To think that we easily can solve this issue is probably fiction, that it needs to be done is a fact!