Overcoming the Infrastructure Gap
By Robert Prieto
We must change the perception of infrastructure from a taxpayer cost to a societal investment. This means translating macroeconomic arguments into the language of citizens – jobs; improved quality of life; lower future governmental costs; better futures for our children; and a more resilient place to live and work.
Business as usual = failure
We must link desired outcomes (jobs, reduced congestion, resilience) with the investments we make and demand transparency for all infrastructure investments. Pork must be slaughtered quickly. Sacred cows must be gored. Corruption, still a major challenge, stamped out.
Business as usual cannot be our planning basis. We must set broad, audacious goals such as reducing the life cycle cost of new infrastructure put in place by 50% by 2025 and reducing the large project “failure” rate from 2 out of 3 to 1 out of 10!
We must encourage innovation by shifting codes and standards from prescriptive to performance based recognizing that this requires new analytical tools.
Our infrastructure gap exists based on a business as usual framework.
Needs project today’s practices with respect to efficiency of use and capital efficiency with limited considerations of alternative policy and modal solutions that may be too polite. Net US investment in infrastructure today stands at a shocking 0% of GDP (Investment – Depreciation)
Funding is based on extrapolation of existing mechanisms – more tax, more user fees and limited considerations of alternative revenue sources which are often institutionally constrained. In today’s discussions we too often confuse funding and financing, they are not the same. Other people’s money must be repaid within a context of huge unfunded societal liabilities.
The resulting gap is poorly served. Prioritization of projects is weak to non-existent and transparency is not a universal phenomena. Time is not adequately valued by government owners of infrastructure and project management does not adequately address the governance dimension – 2/3 of all large projects fail; half of those due directly to project initiation/governance shortcomings – lack of articulation, agreement and communication of SBOs; failure to have strong, unbiased foundations.
We have met the definition of Insanity: Doing the same thing and expecting a different outcome. We need to move from a classical to a neo-classical approach for preparing and managing projects.
Today’s infrastructure gap is defined largely on a business as usual basis. The future state requires other than business as usual. Throughput of infrastructure systems must be increased; demand must be managed on a multi-infrastructure basis; and all levers of capital efficiency must be pulled.
CAPEX reduction can be driven through competition of ideas; new delivery models (PPP;D/B; DBM); vertical integration of industry (steel erection; modules); performance based procurements/performance based specifications; and an expanded basis of design.
OPEX reductions are possible from new processes, materials, chemistry but also through earlier considerations of these factors at the project conception and initial definition stages.
Operating philosophies must shift and be strongly policy linked addressing demand management (HOT Lanes); load shifting; and modal incentives.
Time must be fully valued – up-front time is not currently valued. Slow decision making and long processes are presently viewed as free – they are anything but.
Financing structures must be better mapped to asset life cycle costs. Today, life cycle cost methodologies are not well employed and generally ignore revenue profiles (except PPP). We must recognize distortions in financing policy (taxable vs. tax exempt)
New revenue sources are available if institutional constraints relaxed (longitudinal utilities on interstates)
Infrastructure prioritization methodologies that are more often than not lacking must be redressed and a broad recognition created that current project models are delivering “failure” and understate the importance of governance and owner readiness. Governance needs are equally internal and external. Solutions to internal governance challenges are available but under used. External governance requires political will; transparency; and complete and continuous communication. We must strengthen our recognition of stakeholder to stakeholder issues which affect their relationship to the effort at hand.
Transparency = trust
Governance must recognize and respond to uncertain and unpredictable futures. We must recognize that in addressing our infrastructure gap we must manage under uncertainty. We must recognize that at time long, large infrastructure projects require management of chaos, management of trajectories, but always focused on outcomes vs. outputs. This means scenario planning is essential especially if we wish the resultant infrastructure systems to be resilient.
The projects we undertake must be part of a long term plan, developed with extensive stakeholder involvement (better project preparation); transparency of process (trust); and with more rigorous testing of candidate investments for risk based realism. Recognition that the future is uncertain and we must be resilient under a wide range of scenarios is essential.
Fundamentally we must become life cycle driven, not first cost driven. If we don’t sustaining capital will limit our ability to expand and transform if we do not focus on the life cycle of these generational assets.
A well developed project pipeline must be established to facilitate industry investment in innovation and improvement. Our project pipeline must utilize the best project execution strategies without preclusions. It must address capital market concerns including special concerns associated with asset and investment time frames that are multiples of debt tenors (refinance risk). We must recognize that the infrastructure gap can only be closed by mobilizing private as well as public capital. Scope control in this now prioritized and robust project pipeline is sine qua non. We must keep our focus on needs to meet promised outcomes versus the seemingly endless list of wants. We must be brutal in our protection against corruption.
Closing the infrastructure gap requires us to transformation our project execution processes. The productivity “flat line” in construction can no longer be tolerated; manufacturing type productivity improvement is required. Systemic innovation in the industry requires national level investments in R&D and anti-trust protections; tort protection for select targeted areas of transformative innovation (similar to what we saw after 9/11); and smarter tools and processes available in other industries must be accelerated into engineering and construction.
Finally we must sustain the investments we make by earmarking life cycle funding to “approved” assets, equivalent to “sinking funds” and performance obligations we require in PPPs.
Robert Prieto is a senior vice president of Fluor, one of the largest, publicly traded engineering and construction companies in the world. He is responsible for strategy for the firm’s Industrial & Infrastructure group which focuses on the development and delivery of large, complex projects worldwide. The group encompasses three major business lines including Infrastructure, with an emphasis on Public Private Partnerships; Mining; and Industrial Services. Bob consults with owners of large engineering & construction capital construction programs across all market sectors in the development of programmatic delivery strategies encompassing planning, engineering, procurement, construction and financing. He is author of “Strategic Program Management”, “The Giga Factor: Program Management in the Engineering and Construction Industry” and “Application of Life Cycle Analysis in the Capital Assets Industry” published by the Construction Management Association of America (CMAA) and “Topics in Strategic Program Management” as well as over 450 other papers and presentations.
Bob is a member of the ASCE Industry Leaders Council, National Academy of Construction and a Fellow of the Construction Management Association of America. Bob served until 2006 as one of three U.S. presidential appointees to the Asia Pacific Economic Cooperation (APEC) Business Advisory Council (ABAC), working with U.S. and Asia-Pacific business leaders to shape the framework for trade and economic growth and had previously served as both as Chairman of the Engineering and Construction Governors of the World Economic Forum and co-chair of the infrastructure task force formed after September 11th by the New York City Chamber of Commerce.
Previously, he served as Chairman at Parsons Brinckerhoff (PB), one of the world’s leading engineering companies. Bob Prieto can be contacted at Bob.Prieto@fluor.com.