It’s been quiet around here lately thanks to some demands around the AEC Labs home office, but we’re happy to be back and have some great content and initiatives planned around here in 2019, so I hope you will stick with us!
As some of you may know, I spent a lot of time last fall thinking about how blockchain technology could apply to the construction industry in conjunction with an external presentation and an internal initiative at AECOM. (You can read my thoughts on what blockchain might mean for construction industry insurance, supply chain, payment systems, contracts, and more in this long-form article.)
In the course of working through these efforts, I also found myself increasingly thinking more specifically about how a blockchain solution or protocol (but not necessarily a standalone cryptocurrency) could help bridge the $3.5 trillion infrastructure funding gap (for maintenance on existing infrastructure alone!) through 2025. And, with infrastructure getting a single mention 55 minutes into last week’s State of the Union Address, I think it remains timely to consider how the country can possibly meet that shortfall.
But first, why is it that the private capital pouring into infrastructure investment funds over the last few years remains mostly sidelined, not deployed on projects?
Large P3s that reached financial close in the US were on track (as of Q4) to be at their lowest levels (by sheer number) in several years (in the end, the number of deals that closed ended up not being the lowest, but the total deal volume by dollar was, in fact, lower than 2017).
Take a look at this, from Bloomberg:
“The total assets under management in infrastructure funds had ballooned to $450 billion at the end of 2017, from just $7 billion in 2000 . . . . But there’s a big disconnect between capital raised and actual dealmaking.
During the second quarter [of 2018], global infrastructure deals fell to $49 billion, their lowest quarterly level in five years . . . . The bulk of the money may not even get channeled into repairing or rebuilding crumbling public infrastructure in the U.S. The lion’s share of cash will go to assets that are already in private hands, such as electric utilities, gas pipelines, and cell towers.
Public-private partnerships are often a slog for investors. They can take years to come to fruition, and can be thwarted by politics—which can turn off anyone with a time constraint to deploy capital.
As a federal infrastructure bill failed to materialize, and large greenfield P3s like the Red River diversion project in North Dakota and the Central 70 project in Denver have stalled at the RFP stage or faced regularly approval issues over the last few years, industry players like Skanska and AECOM announced last year that they would no longer look to participate as equity investors as the concessionaire/developer level on large greenfield P3s.
The reasons for this are many, and complex, but in my view they boil down to the duration of P3 procurements, the political uncertainty around them thanks to our domestic regulatory regimes, and the expense of preparing a proposal (which will typically include 30% design drawings which underpin the bid, and cost into the seven figures to develop).
The Bloomberg article continues:
As a result, “a lot of the money being raised isn’t going find its way to U.S. bridges, roads, and airports, where needs are staggering,” says D.J. Gribbin, who was a special assistant to Trump on infrastructure policy until April. There are some funds dedicated to navigating public-private deals, but they’re generally smaller. Gribbin says governments need to find ways to make it easier for the private sector to invest.
This is a huge lynchpin, I think, to addressing the infrastructure funding crisis. Until further notice (or perhaps 2020 at the earliest), the federal government seems unwilling to step up; in fact, state and local governments still fund 77 percent of all infrastructure in this country. This is a staggering figure which is clearly not sustainable: simply put, state and local governments need help. And this is where I believe a blockchain-powered infrastructure funding solution could gain real traction.
But we’re not necessarily talking about new cryptocurrencies (which, as you may know, have had a rough go of things over the last few months). Instead, I am suggesting that blockchain-based protocols could facilitate hard currency investment in worthy infrastructure projects. The protocol would underpin a either a “utility” or, possibly, a “security” token.
Security tokens versus utility tokens – what’s the difference, and why does that matter?
I think the best way to think about this important difference is that a “security” token is essentially a fractional ownership stake in a company or an asset that is then traded freely on a blockchain-powered exchange (like Ethereum).
On the other hand, a “utility” token is earned by users for participating in some activity that is tied into the underlying blockchain protocol. It enables real-world access to certain tangible items or experiences. In other words, the utility token is practical and tangible; the security token is an intangible investment. (Note that there are SEC and securities laws implications here between the two that I will not be getting into in this article, but could have significant impacts on how utility token projects are launched in the future.)
The utility token is not necessarily meant to be an investment, but it can increase in value as demand for the service or item underpinning the token increases, particularly if that service or item improves (in quality, level of service, etc.) over time on account of the funds that are being invested in the project.
To help understand this distinction further, consider the startup, “SweatCoin.” Essentially, SweatCoin allows you to earn individual “sweatcoins” just for walking; 1 sweatcoin is equal to every 1000 steps you walk (the system is tied in to the health app on your smartphone).
The key is that you can exchange sweatcoins not only for real currency (backed, I suppose, by the startup’s investor capital?), but also tangible, real-world items – things like fitness gear, gym classes, and more. Provided they are “listed” on the blockchain protocol, anything relevant that users might be interested in acquiring and, therefore, would drive their behavior towards walking more and being healthier, could be tied into the protocol.
This all sounds interesting, but what’s the point of a utility token if I can just take my hard currency to go buy whatever I want?
Great question! I think, from a big-picture perspective, the idea behind a utility token is to help drive human behavior. For example, in SweatCoin’s case, it’s encouraging people to be healthier and more active. And, at least until recently, the idea of a utility token was a clever way to get around the thorny problem of securities laws, offering memoranda, and other regulatory red tape standing in the way of getting a distributed ledger project off the ground. (For example, it remains to be seen whether the SEC will regulate utility tokens as they have security tokens.)
Okay, but how in the world could a utility token be applied to infrastructure and the AEC industry?
Somewhat incredibly, the idea of a blockchain-powered AEC utility token platform is not novel. In fact, it’s happening right now in Sao Paolo, Brazil, where the government is using a blockchain-powered utility token called a “buildcoin” to compensate engineering firms who participate in preparing feasibility studies for local infrastructure projects (my emphasis added below):
The state is partnering on this initiative with CG/LA Infrastructure, a Washington, D.C., consultancy, and the BuildCoin Foundation, based in Zug, Switzerland.
The pilot project will leverage CG/LA’s global network of 60,000 infrastructure experts with the foundation’s eponymous token, which is designed to create an alternative payments ecosystem for the construction industry.
First, study proposals would be submitted by governments to the BuildCoin Foundation for vetting. Selected projects would be green-lighted and floated to experts in CG/LA’s database.
That’s where the coin, an ERC-20 token that runs on top of the ethereum blockchain, comes in.
For example, an engineer in Finland who specializes in bridges could receive an invitation to collaborate on a feasibility study for a bridge commissioned by a local government in Brazil. He would receive remuneration in buildcoin based on his overall contribution to the project, measured with a Reddit-like system where other participants can vote up or down the quality of his work.
Why would the engineer accept payment in a specialized digital token rather than money he can spend at the local grocery? If all goes according to plan, the buildcoins would eventually be redeemable for other services in the same ecosystem, such as subcontracting from other participating firms, market research and professional training.
Similar to many token-based blockchain projects, the value proposition gets stronger the more participants join the network – provided the initial chicken-and-egg problem is overcome.
In this way, CG/LA and BuildCoin believe that a blockchain and a native cryptocurrency for the infrastructure and construction industry will not only ease burdens on governments, but also open up new opportunities for subject matter experts around the world who are eager to contribute to projects but have historically had difficulty finding studies or colleagues to match up with their particular skill sets.
In other words, because governments are strapped for cash, particularly when evaluating the “feasibility” of projects that don’t have dedicated funding in place yet or even political support behind them, creating this alternative utility token universe could start turning the wheels for projects while also giving service providers potential upside (and less risk of not getting paid).
I have been fascinated by this idea since I read about it last year, and would suggest it might even be possible to take it one step further, by following a SweatCoin “gamification” model.
How to “build” on a “buildcoin” protocol by “gamifying” infrastructure investment.
Perhaps it could be possible to authorize a broader range of people (say, certain other licensed professionals or individual firms or even the general public) to earn infrastructure utility tokens for performing other kinds of infrastructure-related tasks beyond feasibility studies.
For example, firms or individuals that identify problems with infrastructure assets – trash on the tracks, or potholes, or graffiti, or who notify local agencies about other components of infrastructure that are deteriorating – could then “earn” tokens that could be exchanged for real-world assets like discounted fares, monthly passes, credits against rent, parking, transit fares, or even property taxes or utility bills, or any other items that a local government might want to tie into the protocol.
As demand for these tokens increases, and their value increases, so would the number of the underlying items or assets that they could be exchanged for (i.e., today your tokens might only be worth one round-trip fare, but next week they might be worth ten round trips or increased credits against your utility or property tax bills).
Proof of work (i.e., did you actually perform the work or service that’s tied into the protocol, and are therefore are entitled to a token?) will be a critical technical issue to solve for. But this could be a neat, simple solution to incentivize certain infrastructure-related activities that stretched local governments might not otherwise be able to afford. (In the Sao Paolo project, for example, the proof of work comes from an “upvote/downvote” Reddit-like system.)
There is no shortage of other functions that cash-strapped governments could outsource and tie to a blockchain protocol, essentially “gamify,” and then offer in exchange for tokens to participants (like Governor Cuomo’s recent plans to clean the subways with Tide!). And, of course, infrastructure/transit enthusiasts or other investors that care about this issue could potentially purchase the tokens on a cryptocurrency exchange themselves, understanding that their “investment” is backed only by the number of overall participants in the network (which at least initially would be quite small).
Unfortunately, there are at least in my mind a lot of open questions surrounding this idea. How, exactly, will these tokens have initial value in the real world? Is the number of tokens capped? How will they be listed and traded on a cryptocurrency exchange? Would there be a market for them at all? It is very much the “chicken-or-the-egg” problem noted in the article above; until enough users are working for, trading, and exchanging tokens, there is no real value to the network at all.
But, once again in my view, all of these questions are worth thinking through. Blockchain technology is still in its infancy and despite the awful press recently, it will be transformative across industries in short order. The sooner the infrastructure industry starts thinking through some of these issues, the better, as the funding gap is only going to increase in the years ahead.
The concept of a “buildcoin” utility token ecosystem isn’t necessarily the only bite at the apple.
Indeed, there are other startups out there working to “tokenize” investment funds. One, called Neighborly, is working with Berkeley, CA (of course) to create what is in essence a tokenized municipal bond.
According to CityLab:
The paper-based municipal bond issuance process as it exists now is complicated, and involves multiple stakeholders. By transferring the whole system to a digital platform, thereby creating a more efficient process, Berkeley is hoping to encourage more residents to invest in social impact projects.
The city can create a public ledger that lays out the city’s financial statements transparently, and cuts out the middle man. This reduces the transaction costs normally associated with bond issuances.
“It’s not a speculation tool,” said Bartlett. “It’s like a non-profit, special purpose vehicle, meant to fund social good.” The key distinction will be that it’s backed by a real asset. “It’s ‘crypto-impact’ and that’s its purpose,” he said. “It’s not meant to be traded all over the world,” like other cryptocurrencies are.
More recently, and on the other side of the country here in the New York City area, the blockchain real estate startup RealBlocks announced a $3M seed round as it works on a solution allowing investors to purchase “micro-shares” in private equity real estate funds using either hard currency or cryptocurrency.
In exchange, its investors will receive an asset-backed utility token or a share representing ownership in each offering. That token can be traded on a peer-to-peer protocol (like Ethereum). Could this type of technology also apply to infrastructure funds, which are notoriously difficult for retail investors to access? This seems like a much easier jumping off point for the industry to explore blockchain applications than a full-blown, gamification model.
At this point, I think the actual mechanics of how these companies will operate is less important than considering the problem they’re trying to solve for. As I noted at the top of this (very long) article, it is difficult for the typical investor to put money into infrastructure! The reasons, again, are myriad. But technology solutions that can grease the skids for funds to flow into worthwhile projects will get a lot of attention, both here at AEC Labs and across the industry.
What do you think?