Overcoming the Infra$tructure Gap

Overcoming the Infra$tructure Gap

by BOB PRIETO, senior vice president, FLUOR | April 12, 2015

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.

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 = FAILURE

"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 U.S. 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.

Spanning the Hudson River, the first half of the $3.9B replacement Tappan Zee Bridge is scheduled to open in 2016 -- the second span in 2018. It is being designed & built by Tappan Zee Constructors, an all-star consortium that includes Fluor, American Bridge, Granite, and Traylor Bros., along with design firms HDR, Buckland & Taylor, GZA, and URS (now part of AECOM).

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 reductions can be driven through competition of ideas; new delivery models – i.e. public-private partnerships (PPP); design-build (D/B); design-build-maintain (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 are 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.

“A well-developed project pipeline must be established to facilitate industry investment in innovation and improvement.”

Fundamentally, we must become life-cycle driven, not first-cost driven. If we don't focus on the life cycle of these generational assets, sustaining capital will limit our ability to expand and transform.

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.

A recognized thought leader and expert in program management, the author has been a senior executive with Fluor since 2004. Prior to that, he spent 20 years with Parsons Brinckerhoff, serving the last six years as chairman of the board. He holds multiple degrees in nuclear engineering from New York University. This article first appeared April 3rd here.