When the money runs out
The lofty goals of government-sponsored infrastructure megaprojects are falling short because of funding.
By SARAH FISTER GALE // ILLUSTRATION By OTTO STEININGER
When the economy crashed in many parts of the world, governments attempted to stem the crisis by pouring money into massive stimulus programs. Much of that funding was earmarked for infrastructure projects, which have long been considered key drivers of economic growth.
Three years later, it's unclear if stimulus spending on infrastructure projects has had the desired impact. In many countries, economies remain sluggish, job growth is weak, and stimulus funding is quickly running out. There are few infrastructure megaproject success stories that serve as a recent model for driving economic growth.
The problem stems from a lack of focused infrastructure spending, says Richard Little, director of the Keston Institute for Public Finance and Infrastructure Policy at the University of Southern California, Los Angeles, California, USA. “It was the lack of vision for what we wanted the projects to accomplish.”
The rush to spend money on infrastructure projects belied the need for long-term planning. “When your sole purpose is to break ground in 30 days, the criteria for funding changes,” he says, noting that little thought was put into prioritizing which projects would have the greatest impact or economic purpose. “There was a lot of emphasis on accelerated spending, but there were no Hoover Dams.”
When your sole purpose is to break ground in 30 days, the criteria for funding changes. There was a lot of emphasis on accelerated spending, but there were no Hoover Dams.
—Richard Little, University of Southern California, Los Angeles, California, USA
The total value of global infrastructure projects per year rings in at US$1 trillion, with megaprojects under way across the globe, according to the consulting firm CG/LA Infrastructure. The initiatives run the gamut of investments, including a US$20 billion high-speed rail project in Brazil, a US$11 billion highway project in Turkey and a US$20 billion air traffic control project in the United States.
While many of these projects are supported, in part, by stimulus money, most countries’ government funds were spread too thin and funneled toward smaller projects to boost local economies rather than programs with nationwide reach. As a result, stimulus spending on infrastructure had only a moderate impact on long-term job growth or increased gross domestic product.
In the United States, for example, only US$51 billion of the US$787 billion stimulus package was dedicated to infrastructure, and those funds were spread to hundreds of projects across the country.
“The amounts were too small to achieve critical mass,” says Scott Hazelton, director of construction services for IHS, an information services company in Lexington, Massachusetts, USA. “A lot of jobs were saved by the money, but it didn't create the big boost people hoped for.”
China has made better progress. Its CNY4 trillion infrastructure spending program and lack of political wrangling over how to allocate the funds allowed the country to ramp up projects faster, driving a boom in infrastructure spending that led to the construction of thousands of miles of expressways and nearly 100 new airports. But these projects are only partly funded by stimulus money, and as the massive program of funds runs out and debt piles up, it's unclear whether the building boom can continue.
MADE IN AMERICA
Art Daniel was one of many small contractors who benefitted from stimulus spending on infrastructure projects in the United States. His family-owned contracting company, AR Daniel Construction Services in Dallas, Texas, specializes in pipelines, and he has worked on several projects funded, in part, by stimulus money during the past four years.
The experience wasn't that different from managing conventional government projects, he says. “The biggest challenge was the requirement to ‘buy American.’”
Because these projects often use steel casing pipes that were built in surplus, stored for years and have changed hands multiple times, it can be difficult to trace their origins.
“It required a lot of due diligence because we knew the government audits would require more than just a letter of certification from the supplier, who most likely was not the manufacturer,” Mr. Daniel says.
The made-in-America stipulation led him to expand his supply chain network and to build stronger relationships with vendors.
“This part of the process takes a lot of trust,” he explains, “because in the end I have to be satisfied that the materials are what I say they are before I will use them on the project.”
Mr. Daniel also had to revamp his payroll process to accommodate the transparency demands of the stimulus grants. While he was accustomed to federal requirements to verify that he's paying fair wages for his community, the timing and scrutiny of additional reporting requirements for stimulus projects was cumbersome.
The biggest obstacle was the need to submit reports on the first of the month that detailed the total hours worked to validate the project's job creation goals. Often, the first day of the month fell mid-week, before his team members would normally log their hours.
The demands required his team to change its reporting process and track hours more frequently. That added time and paperwork to the project, but it was necessary for the organization to receive funding.
“For us, this was the biggest frustration,” Mr. Daniel says. “It made the piece of paper more important than the thing that we were trying to build.”
In the United Kingdom, government officials made big promises in 2008 about spending on schools, housing and energy infrastructure. But after the general election in 2010, many of those plans were scrapped, says John Thorpe, managing director of Arras People, a project management recruiting firm in London, England. “There were a lot of forgotten promises as reality set in,” he says.
While construction projects focused on the 2012 Olympics continue, most of the localized investments in schools and housing are now in limbo. And the few projects that are continuing today face intense scrutiny over resource management. This has forced project managers to deliver better results with fewer resources, Mr. Thorpe says. “The days of open-checkbook spending on infrastructure projects are over,” he adds. “There is a lot of navel-gazing now about the value for money spent.”
That demand for accountability is driving conversations across the United Kingdom about the role of stakeholders in overseeing project progress, and pushing proactive strategies to address problems sooner—before they impact budgets and timelines.
INFRASTRUCTURE PROJECTS AROUND THE GLOBE
“It's great to say that we should work smarter, but it brings a new set of challenges for project managers,” Mr. Thorpe says. “Ultimately it's about improving gateway reviews, increased progress reporting and more auditing of resources.”
Currently, North American countries are building an economic rebound on an infrastructure matrix that was designed 60 years ago—highways, electricity, ports and logistics—for a world that no longer exists.
This heightened scrutiny offers an opportunity for skilled project managers who have the ability to drive efficiency and transparency into the project management process. “You need good project management practices to make this happen,” Mr. Thorpe says.
As government funding dried up, project sponsors were forced to look beyond traditional revenue sources to keep public projects moving forward. And for many, the solution has been public-private partnerships (PPPs). In this model, private companies take on much of the risk and responsibility of delivering the project in exchange for future revenue from such streams as tolls or fees.
“In the past few years, PPPs have become a popular way to procure infrastructure projects around the world,” says James Stewart, chairman of global infrastructure for KPMG, an audit, tax and advisory services firm in London, England. “They give public projects access to much-needed resources and spread the risk and responsibility to multiple parties.”
PPPs also allow infrastructure projects to take advantage of some of the lean project management practices followed by the private sector.
Because PPP projects have multiple stakeholders that include governments, financial institutions and private contractors, the due diligence tends to be more detailed, Mr. Stewart says. “They have a far more robust review process than is typically the case with public projects,” he says. “As a result, infrastructure projects run by PPPs tend to be more consistently on time and on budget.”
This due diligence process usually involves careful reviews of project plans by developers and contractors to be certain the effort has merit, notes Pat Flaherty, senior vice president of Fluor's global infrastructure group in Greenville, South Carolina, USA. Before agreeing to support a project, team members explore the benefits and risks in great detail, including whether the construction plan is realistic, whether the project team has adequate skills and abilities to manage it effectively, and whether it will deliver the projected ROI.
Big-ticket infrastructure projects, where the need for multiple financing partners pulls many stakeholders into decision-making roles, require extensive due diligence.
“After the U.S. mortgage crisis, single-source syndication financing solutions for major infrastructure projects disappeared,” Mr. Flaherty says. “No banks were prepared to take on that syndication risk in such an uncertain market.”
Instead, project owners began working with groups of banks to secure financing, which meant that a project might have 10 to 12 stakeholder groups on the financial side alone.
“When dealing with a larger group of stakeholders involved in the project, even when everyone is being reasonable, that increases the complexity of the process exponentially,” he adds.
Along with meeting the demands of financiers, project planners must also address the often-conflicting expectations of government stakeholders, community groups and private contractors—all of whom have a seat at the decision-making table.
“With more parties involved, everyone has a different knowledge level, a different appetite for risk and their own governance structure for the project,” Mr. Flaherty says. “It leads to a lot more caution, and there is greater difficulty in reaching decisions to move the project forward.”
Increased accountability drives PPP participants to improve their own due diligence process to ensure that the project is worth pursuing and that they can deliver the expected results.
“These are long, expensive and complicated projects, and they won't all get off the ground,” Mr. Flaherty says. “The last thing an organization wants to do is commit a huge amount of time and resources up-front to a project that won't go or that it can't win.”
To minimize its own risks and up-front costs, Fluor considers all of the project building blocks before it pursues a PPP infrastructure project. These include determining:
- Whether the project has a competent and committed team of companies and public stakeholders to support it
- Whether the technical features of the project are cutting-edge or have been done before—and the likelihood of delivering that technology to schedule and within budget
- The probability that the project will secure environmental approval in a timely manner
The amounts were too small to achieve critical mass. A lot of jobs were saved by the money, but it didn't create the big boost people hoped for.
—Scott Hazelton, IHS, Lexington, Massachusetts, USA
- The level of public support for the project
- Whether it has political support that will transcend future administrative changes
- Whether it will generate enough revenues to cover costs, and if not, whether there will be private funding, bonds, subsidies and/or grants to offset the difference
Poor infrastructure is perhaps the most binding constraint to growth throughout Southeast Asia. Rapid population growth and urbanization threaten to exacerbate infrastructure bottlenecks.
Mr. Flaherty points to his organization's work on the US$2 billion FasTracks PPP public transportation expansion project in Denver, Colorado, USA to build 40 miles (64 kilometers) of commuter rail lines, including one that runs to the airport. Flour only bid the project after its research showed that the client had a good funding stream in place (including grants), a majority of voters supported the use of local taxes, and environmental feasibility studies were well underway.
Even more important, he says, the Regional Transportation District, which owned the project, had a well-formulated project development plan, and it stuck to deadlines throughout the early-phase due diligence, planning and bidding process.
“That's a good sign that they have a clear understanding of what they want to accomplish and that they have a strong team in place,” Mr. Flaherty says.
Achieving a level of confidence through careful due diligence reduces risks for all stakeholders.
“It's a guiding framework that lets you identify and mitigate problems before the financing closes so you can stay with your plan and adhere to your timeframes,” he says. “That builds credibility for the entire team and increases your chances of success.” PM
PM NETWORK November 2011 WW.PMI.ORG