Building a new economy
BY SANDRA A. SWANSON PHOTO BY MARTIN BEDDALL
THE STAKES ARE HIGH FOR INFRASTRUCTURE MEGAPROJECTS—AND EVERYONE WORKING ON THEM.
Tim McManus, AECOM, Boston, Massachusetts, USA
Photographed in London, England
Apparently there's nothing like a recession to get governments moving on all those less-than-glamorous but much-needed infrastructure megaprojects they've been putting off for ages.
The list is long and impressive. CG/LA Infrastructure LLC put the value of the top 100 global infrastructure projects at more than US$540 billion in November. High-speed rail projects claimed the top slot, with US$138.2 billion of initiatives in the works, including the 1,318-kilometer (819-mile) line scheduled to connect the Chinese cities of Beijing and Shanghai by 2013. Other leading sectors included surface transport and renewable energy, with megaprojects slated everywhere from Albania to Zimbabwe.
Many projects have already launched, as governments in search of economic salvation released a flood of money for infrastructure work.
France approved a stimulus plan in December 2008 that had €10 billion earmarked for infrastructure. Then in January 2009, Germany approved a package with €18 billion in infrastructure spending. Three months later, Japan announced a stimulus plan with JPY2.6 trillion for infrastructure, including airport runways and road extensions. A November study by The World Bank states that Africa is spending US$45 billion a year on infrastructure. And the U.S. stimulus package called for US$100 billion in new transportation and infrastructure projects.
The estimated value of the global infrastructure market in 2009
But it's China that's leading the way, with approximately US$274 billion of its stimulus package dedicated to improving rural and transportation infrastructure.
Overall, the global infrastructure construction market hit US$2.1 trillion in 2009, and annual spending is expected to stay at that level through 2015, according to IHS Global Insight.
FOOLS RUSH IN
Given the stakes, governments want results—now.
And that is fundamentally altering the dynamics of infrastructure projects, says Robert Kroon, project manager and director at Arcadis, a global engineering and project management services company in Arnhem, Netherlands.
“The great political pressure on these projects is rising, due to force from the politicians to actually speed up the process,” says Mr. Kroon.
That may not be the wisest move, however.
“In the rush to use projects as economic stimulus, we may not necessarily be doing the most-needed projects, but rather the ones that promise the most ‘bang for the buck,’” says Richard Little, director of the Keston Institute for Public Finance and Infrastructure Policy at the University of Southern California, Los Angeles, California, USA.
Under pressure to “make something happen,” much-needed pre-project planning is also being neglected. And that could come back to haunt project sponsors and the teams tasked with actually carrying out the initiatives.
“Despite the illusion of projects being ‘shovel-ready,' they generally are not,” Mr. Little says.
Especially with megaprojects, project managers need adequate lead time to ensure the work is well-planned and coordinated.
“There are innumerable studies that show the greatest opportunity for cost efficiency exists at the pre-project planning stage,” says Mr. Little.
When project managers are forced to go barreling in, they end up laying the foundation for a troubled project.
“Because of the size of these large projects, the impacts are magnified,” he says. “Just the coordination and scheduling of the multiple contractors on a large project is a real challenge.”
PHOTO COURTESY OF WIKIPEDIA
Going in without a proper plan can make for chaos—and probably the dreaded scope creep—down the line, says Barry B. LePatner, author of Broken Buildings, Busted Budgets: How to Fix America's Trillion-Dollar Construction Industry [The University of Chicago Press, 2007].
“Construction managers, especially on large projects, always recommend a fast-track process, which gets the project started before the design documents of the architects and engineers are completed,” says Mr. LePatner, founder of LePatner & Associates LLP, a law firm in New York, New York, USA. “The contractors, subcontractors and suppliers are all starting with incomplete information to bid on.”
With that setup, he says, project managers “don't just face a challenge, they are immediately in jeopardy of total lack of control.”
When the design documents for the balance of the project come in months after it has already started, problems are bound to arise, he says.
“There will be a flood of claims for extras—claims for the work shown on the new drawings—and an enormous flood of requests for information that will lead to inevitable extensions of the original project,” warns Mr. LePatner.
Not everyone agrees.
North-South Express Railway, Vietnam
Running the length of the country—from Hanoi down to Ho Chi Minh City—the railway holds the dubious distinction of being perhaps the slowest in the world. The Vietnamese government has committed to a US$38 billion megaproject spanning the next decade to speed up service.
The group graded infrastructure under the following system:
- A Exceptional
- B Good
- C Mediocre
- D Poor
- E Failing
U.S. infrastructure isn't making the grade—and it would take a five-year US$2.2 trillion investment to pull up those marks.
The country's tangle of transportation, energy, public facilities, water and waste systems averaged a D, or “poor,” in the American Society of Civil Engineers (ASCE) 2009 Report Card for America's Infrastructure.
“Years of delayed maintenance and lack of modernization have left [the United States] with an outdated and failing infrastructure,” ASCE president D. Wayne Klotz said in the report. “Infrastructure has a direct impact on personal and economic health, and the infrastructure crisis is endangering our nation's future prosperity.”
Not a single category received a grade above C+, and just one—energy—improved since 2005, going from a D to D+. Here's a breakdown of the report's major findings:
〉 ENERGY: D+
U.S. electricity needs have grown by 25 percent since 1990, but a surge of opposition to regulations has blocked much of the needed modernization. Even though the country has made strides in grid reinforcement, as much as US$1.5 trillion in projected electric utility investment will be needed by 2030.
〉 PUBLIC FACILITIES
Public Parks and Recreation: C-
Despite adding an annual US$730 billion to the U.S. economy, park acreage per resident is declining in urban areas.
Infrastructure spending in the category soared from US$17 billion in 1998 to US$29 billion in 2004 before dipping to just more than US$20 billion in 2007. That's a far cry from the estimated US$322 billion the National Education Association estimates is needed to bring schools up to par.
Despite the Federal Aviation Administration projecting a 3 percent annual increase in air travel, the nation still relies on an outdated air-traffic control system. The category needs a US$87 billion upgrade.
More than a quarter of the nation's bridges are either “structurally deficient or fundamentally obsolete.”
Inland Waterways: D-
Of the 257 locks still in use on the country's inland waterways, 30 were built in the 1800s and another 92 are more than 60 years old.
U.S. freight and passenger trains typically share the same network, leading to bottlenecks in critical areas.
One-third of major roads are in poor or mediocre condition and 45 percent of urban highways are congested, translating to wasted time—and fatal accidents.
Even though transit use increased 25 percent between 1995 and 2005, nearly half of U.S. households don't have access to bus or rail lines. The Federal Transit Administration estimates US$15.8 billion is needed annually just to maintain these sub-par conditions.
Hazardous Waste: D
As of 2008, 188 U.S. cities had brownfield sites awaiting cleanup and redevelopment. Additionally, federal funding for the worst toxic waste sites has declined steadily, dropping to US$1.08 billion in 2008, its lowest level since 1986.
Solid Waste: C+
More than one-third of the nation's 254 million tons of municipal solid waste were either recycled or recovered in 2007. But there's a caveat: Electronic waste is on the rise and without any uniform disposal regulations, it could end up in landfills, which would pose a “significant threat to public safety.”
Aging systems discharge billions of gallons of untreated wastewater into U.S. surface waters each year. The Environmental Protection Agency estimates US$390 billion must be invested over the next 20 years.
The number of deficient dams has risen to more than 4,000, including 1,819 labeled “high hazard.”
Drinking Water: D-
The country faces a US$11 billion annual shortfall to replace or modernize old drinking water facilities. Leaking pipes lose an estimated 7 billion gallons (26.5 billion liters) of clean drinking water a day.
As Hurricane Katrina demonstrated, the country's levees are in danger, with an estimated US$100 billion needed to repair or rehabilitate the structures.
RAISING THE GRADES
In response to the dire report card, ASCE offers a five-pronged strategy for improving the ailing U.S. infrastructure:
- Create a strong national vision led by the federal government.
- Promote sustainability and resilience to disaster.
- Develop infrastructure plans that reflect the national vision and define federal, state, local and private-sector roles and responsibilities.
- Perform life cycle analysis for initial construction, operation, maintenance, environmental and safety costs, as well as ongoing maintenance.
- Foster a renewed commitment to infrastructure improvement among all levels of government, owners and users.
A design-build approach can have significant advantages, particularly with megaprojects, says Tom Porter, owner of the construction consultancy Tom Porter Services LLC, Grosse Pointe, Michigan, USA, and 2009 chairman of the Design-Build Institute of America.
Along with freeing up schedules, it means the project owner doesn't have to mediate between the contractor and architects or engineers—the design-builder has full responsibility. That alone can lead to cost savings, he says.
“There are an astonishing number of megaprojects in the United States recently completed or underway using design-build,” says Mr. Porter. The lineup includes the new US$1.6 billion Meadlowlands stadium scheduled to open later this year, the US$8.7 billion tunnel project between New York and New Jersey, and the US$1.67 billion Colorado Transportation Expansion project dubbed T-REX.
All that project planning must include a solid understanding of what's going on in the rest of the world.
“The total current global construction market is estimated to be close to US$5.5 trillion, and the demand for new infrastructure programs has continued at a tremendous pace,” says Tim McManus, director of program and construction management for the Boston, Massachusetts, USA office of AECOM, a global engineering and project management company. “Many developed and developing countries see the advancement of expanded and new transportation, energy and water infrastructure as the key to further economic growth.”
Some emerging markets such as India and parts of South America haven't seen this kind of infrastructure project investment in decades, he says. AECOM, for example, is currently working on an array of infrastructure megaprojects, including Saadiyat Island and Masdar City in Abu Dhabi, United Arab Emirates, Trinidad's national highways program and Libya's infrastructure development program.
Project and program management professionals must not only be “globally mobile, but knowledgeable and understanding of the various cultures and mores of the different countries we serve in,” Mr. McManus says.
Sometimes that means helping out the local political players.
“Many governmental agencies involved with major capital programs don't have sufficient staff expertise or experience, and seek to participate in various knowledge-sharing and development programs,” he says.
Of course this gets complicated. Many major infrastructure programs— such as the US$25 billion Crossrail program in the United Kingdom, the US$15 billion 2016 Olympics program in Brazil and the US$70 billion highway program in India—extend so far in the future they could fall victim to changing political regimes with shifting priorities.
Such megaprojects “span across several years and, in some cases, different government administrations and leaders,” says Mr. McManus. “It becomes a challenge to ensure the funding commitments remain in order to continue the work to progress at the planned levels, and that the companies involved can maintain the staff and other resource commitments with comfort and assurance.”
Dubai World has long been known for providing the financial heft behind the United Arab Emirate's lavish megaprojects, including the world's tallest building.
But when the government-owned holding company sought to delay payment of US$26 billion of its debt last November, the world markets trembled in fear.
Economists—and project managers—worried Dubai's default would have far-reaching effects on large-scale projects around the world. Yet once the news was fully digested, the general consensus turned into more of a shrug.
“The impact on the sum total of megaprojects may not be that bad,” says Scott Hazelton, senior principal and director, construction services, at IHS Global Insight, Lexington, Massachusetts, USA.
Part of the reason is the feeling that much of the problem lies within the emirate itself.
While other Middle Eastern countries boast large energy resources and rely on those earnings to fund new investments, he explains, “Dubai is somewhat unique in that its construction financing was built to a significant degree on credit.”
Dubai's focus on largely commercial and residential megaprojects is also coming under fire.
“While there are certainly other commercial megaprojects in the region, many of the largest projects are industrial- or energy-related,” Mr. Hazelton says. “These are less speculative in nature.”
Arguably the most risk-loaded of the region's construction markets, Dubai was already raising questions before the default.
“To the extent that one sees a key asset being propped up by a central government, there will be doubts about how long that asset will be supported,” he says. “Emerging markets—and not just in the Middle East— generated a lot of interest in the 2006 to 2008 period and not all the investments were wise.”
The end result may be a new scrutiny of megaprojects.
“Any venture that is not tied to a clear market objective or which is not backed by energy revenue is going to get a second and third look in this environment,” Mr. Hazelton says. “Within Dubai itself, there are already literally hundreds of projects that are being suspended.”
Given the current economic climate, project managers should try to build in as much flexibility as possible.
“Construction margins are under pressure globally in this environment,” he says. “It is better to work with your partner to defer work, cut costs and adapt to their financial needs to the extent possible than to have the entire project face cancelation or indefinite suspension due to default.”
Still, project managers need to keep a very close eye on their projects—just in case.
“Signs of trouble are usually there in advance,” says Mr. Hazelton. “Project managers should know to be looking for indicators, such as a pattern of late payments, requests to defer milestones, etc.”
FARMING OUT THE RISK
It's clear that the only way for the great infrastructure overhaul to work is with massive cooperation between the public and private sectors.
In many cases, that leads to the public-private partnership (PPP) model.
“Typically this means the government outlines performance specifications for a new large public asset but leaves the design, finance and maintenance to a consortium of private-sector parties,” says Bert Clark, managing director and Canadian head of global infrastructure finance at Scotia Capital, Toronto, Ontario, Canada.
Given the general economic malaise in the global market, the trend probably won't abate any time soon, he says.
“Megaprojects are subject to mega-risks relating to price, schedule, asset performance and long-term asset quality,” he says. “There has been a recognition that any ambitious infrastructure renewal program will only succeed if risks are managed by those who are best qualified and positioned to do so.”
It also means not everything falls on the public sector.
“By using a PPP approach, a portion of the schedule and budget risk is transferred to the private partner, which relieves the public partner of a major cause of budget creep,” Mr. Little says.
But that extra security usually figures into the bottom line.
“The private party will price this into the bid, so nothing really is free,” he explains. “However, the increased certainty of on-time delivery is certainly worth the extra cost.”
PHOTO COURTESY OF ANNA CLOPET/KOSMOS ENERGY
Jubilee Oil Field, Ghana and Uganda
Tullow Oil has pledged US$6 billion for a megaproject to develop wells for oil discovered in Uganda and offshore Ghana. The company says drilling and facilities fabrication remains on track and plans to deliver the first supply of oil in the fourth quarter of 2010.
“There has been a recognition that any ambitious infrastructure renewal program will only succeed if risks are managed by those who are best qualified and positioned to do so.”
—Bert Clark, Scotia Capital, Toronto, Ontario, Canada
Even countries that once seemed above the economic fray are relying on partnerships.
In recent years, government spending on infrastructure had risen to as much as 30 percent of the budget in some of the Gulf Cooperation Council (GCC) countries of Bahrain, Saudi Arabia, Oman, Kuwait, Qatar and the United Arab Emirates. Now, though, lower oil prices and budget deficits have increased pressure on the GCC, according to Weather the Storm and Prepare for the Future: Impact of the Global Downturn on Infrastructure Developments in the GCC Countries, a report published in 2009 by consulting firm Booz & Co.
On top of the approximately US$400 billion in infrastructure projects that had already been awarded, another estimated US$424 billion of investment was expected between 2008 and 2012.
Then the recession hit and PPPs started gaining momentum in the GCC, says Alessandro Borgogna, coauthor of the report and principal at Booz & Co., Dubai, United Arab Emirates.
“As governments move away from leveraging their budget surpluses to finance infrastructure projects, PPPs are emerging as the preferred vehicle for GCC infrastructure development,” the report says.
The slump is also sparking a shift in how infrastructure megaprojects are structured, says Mr. Borgogna. As the commercial lending industry becomes more risk-averse, megaprojects will have to be developed “in multiple phases over a longer time span,” he explains.
UNDER WATCHFUL EYES
With more than half of the world's population now living in urban environments, there can be no doubt of the need for massive infrastructure investment around the globe.
“These programs are providing essential transportation, water and energy networks that will enable economies to grow and populations to develop,” Mr. McManus says.
Yet with the kind of money being invested, megaproject managers and their teams are certain to be under heavy scrutiny.
“Regardless of the type of funding, large projects will always face the challenge of living up to expectations,” says Mr. Little.
Megaproject managers have to go in armed with data.
“Because every penny has to be explained, a great deal of your effort goes to verifying the delivered products with the contract,” Mr. Kroon explains.
In High Demand
As the world embarks on its massive urban renewal, the same types of infrastructure programs are cropping up around the globe—triggering a race of sorts.
“Each of these programs is competing for the same resource base of professionals, contractors, suppliers and labor forces,” says Tim McManus, AECOM, Boston, Massachusetts, USA.
Those responsible for the multibillion-dollar efforts “need to develop and implement industry outreach campaigns to market the program, and attract the types of firms and companies that can provide the best value.”
The old practice of sitting back and waiting to see who submits proposals or tenders is no longer acceptable, Mr. McManus says. Instead, organizations have to make sure the supply chain buys into the program, which in turn enables it to be implemented and delivered within the planned timeframe.
Intertwining stimulus funds with megaproject management often adds some twists to the game, according to Leonardo Monti, Booz & Co., Dubai, United Arab Emirates.
Expect more bureaucracy. “Projects financed through stimulus funds typically involve a significantly higher number of public entities, which often have different interests to serve and different requirements to fulfill,” he says. “This means an additional administrative burden on the project management team and additional project risks, which can easily result in project delays and cost overruns.”
Install more audit requirements. “When money comes from stimulus funds, the taxpayer becomes the key stakeholder of the project, and most governments introduce control procedures to ensure proper accountability to the taxpayer,” Mr. Monti says. “Frequently, these layers of procedures result in an additional burden to the project management team, draining valuable project resources and at times even causing actual delays.”
Reconcile public and private interests. “The public stakeholder is typically focused on minimizing the usage of public resources, whereas the private stakeholder focuses on the financial viability and return rates of the project,” he says. Those differing views are even more pronounced in current economic conditions, when many governments see their financial resources shrinking due to lower GDP and consumer spending.
“The private sector faces the cash shortage in the credit market, the higher cost of financing and the higher risks passed along by the credit institutions,” Mr. Monti says. “As a result, many infrastructure projects are being delayed, restructured and in some cases put on hold or even canceled. Project managers today face the challenge of project restructuring—ensuring the success and feasibility of the project goals and the availability of sufficient resources via a complex mediation process among the different stakeholders.”
And the same economic slump that sparked so much of the spending only increases the burden of proof.
“Today, versus a year ago, the performance and financial risks have increased, putting even greater pressure on the project managers for infrastructure megaprojects,” says Leonardo Monti, associate at the Dubai office of Booz & Co.
All of this adds up to a rapidly morphing infrastructure project landscape that's altering the very definition of the project manager.
“The project manager in this kind of project isn't the project manager of a couple of years ago,” says Mr. Kroon. “The magnification of the project in these kinds of surroundings makes a project manager more like a project director.”
People skills, political awareness, risk management and financial management are the new must-have skills.
“You have to see the project as an enterprise itself,” Mr. Kroon says, “and give it the same attention to let it grow and prosper.”
The burden of accountability is falling squarely on project managers.
“They are looked at as playing the leading role for the project's success,” Mr. Monti says. “They have to proactively improve their project management and reporting tools. But also equally as important, they need the ability to make well-supported decisions and stand by them in front of the project stakeholders.”
And in the case of infrastructure megaprojects, there are an awful lot of those stakeholders who have invested an awful lot of money. PM
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