Why is it so hard to plan for infrastructure?

Lyon: "Health policy is going to be an area of consistent focus,  discussion and experimentation over the next 15, 30, 50 years."

When it comes to development, innovation often loses out to crowd-pleasing projects.

Great infrastructure is the lifeline of a nation.

Roads, rail and ports connect cities and communities, while energy, water and telecommunications services contribute to the national wellbeing. Prioritising spending on such big-ticket items, however, is a constant challenge for governments in an era when revenue streams are shallow.

Should the focus be on highly populated cities where initiatives will have the biggest impact on the most people? How do you strike a balance between traditional sectors such as energy and relatively new areas such as digital infrastructure?

The Australian Government, in its recent federal budget, opted to splash cash at roads and the long-mooted second Sydney airport, raising concerns that potentially more innovative elements of infrastructure are missing out.

INTHEBLACK spoke to three experts to explore the right way to evaluate national requirements and where money is spent on the development of infrastructure.

Brendan Lyon

Chief executive
Infrastructure Partnerships Australia, www.infrastructure.org.au

Brendan Lyon provides a neat summary of why governments must get their infrastructure right.

“Infrastructure is the enabler of economic activity,” he says.

The Australian Government’s most recent budget has drawn some criticism for its focus on road investments. But Lyon says sensible debate should not fall into “modal biases” about the relative merits of transport, telecommunications, energy and other infrastructure.

“I don’t think anyone, including the Australian Government, thinks that roads alone are the answer, [but] if you have your diagnostic tools right and you have your pricing models right, then there should be a mature recognition that roads and rail and other modes of transport have a role to play and they are all part of a single network for mobility.”

With serious economic headwinds affecting the capacity of state governments to deliver major infrastructure projects, Lyon says there is a legitimate discussion to be had about where the national government should be investing its capital.

“We need to be very squarely looking at how we make every dollar stick.”

The best investments should help grow the economy, which in turn can stimulate the government’s own revenues through the tax base. With this in mind, Lyon notes that transport congestion is a major economic impediment, so any focus on funding capital city motorways and other investments in the freight and regional road network makes sense.

There is a natural desire to prioritise infrastructure spending that delivers the greatest national benefit, but that should not rule out valuable, smaller projects outside the major cities. Lyon cites the example of replacing a small timber bridge in a regional area which may cut 20km to 30km off a freight journey.

“Some of the projects that have struggled to win funding and support over time are relatively modest in terms of the funding requirement, but very substantial in terms of the level of efficiency that they produce.”

Transparency and “science and analysis” should guide infrastructure investment decisions, says Lyon. Therein lies a conundrum.

“The challenge we have is that wider economic benefits have rarely if ever been accurately forecast and, more particularly, we don’t routinely go back and check on outcomes … so we are not back-casting and back-checking the evidence that we have used to make decisions.”

Given Australia’s ageing population, significant infrastructure development is likely in the health sector in the years to come. Old assets across the health network will have to be retired or replaced.

“So health policy is going to be an area of consistent focus, discussion and experimentation over the next 15, 30, 50 years,” Lyon says.

While infrastructure priorities require a significant element of science and the use of diagnostic tools, Lyon says it’s important communities and governments work together to devise the best strategies.

“We never want to end up in a situation like Hitchhikers’ Guide to the Galaxy where the answer [is always] 42 and it’s spat out by a supercomputer,” Lyon concludes.

Brendan Lyon heads peak body Infrastructure Partnerships Australia, and has written a number of research and policy papers on infrastructure.

Wind: Sometimes it’s not easy to be cost-effectiveor sustainable. But it can have a huge impactin terms of making a city much more pleasant.

Wind: Sometimes it’s not easy to be cost-effectiveor sustainable.

But it can have a huge impactin terms of making a city much

more pleasant.

Phillippe Wind

Infrastructure Consultant
Prodegia, www.prodegia.com

To get an appreciation of the potential impact of visionary infrastructure projects on societies, Philippe Wind suggests taking a quick history lesson.

The Romans with their aqueducts and roads. The Incas and their ground-breaking transport networks. And the Egyptians with their port and canal developments to support the construction of their pyramids.

“One of the key factors behind their success was infrastructure,” says Wind, who notes that modern Asian powerhouses such as China and Singapore are among those that have also benefited from forward-thinking developments. Such examples underline the importance of governments and communities adopting smart master planning of infrastructure, with coordination between local, regional and national decision-makers.

“Sometimes what you have to do today is for a very long time tomorrow,” Wind says.

“It’s not always obvious what the right thing is to do.”

Wind points to South Korea as one country that has taken a more sophisticated approach to national developments, ranging from world-class airports through to a broadband rollout that serves homes and stimulates business.

On the back of a mix of public and private financing, the South Koreans have built great infrastructure, generated talent and wealth and maximised the impact through the targeting of international markets.

“They not only mastered planning aspects for their country, but they also built an industry that today is exporting all over the world,” he points out.

While acknowledging that cost-benefit analyses are often fraught with danger, Wind believes infrastructure policy-makers must take an inspired view. Building high-speed trains, for example, is very expensive and pure investors are unlikely to recover their money from such initiatives.

However, the exponential impact on society through the creation of jobs, developing a knowledge economy and connecting towns and cities should not be underestimated.

“The impact on the economy is incredible,” Wind says.

Then there are the intangibles of infrastructure such as light-rail projects in cities.

“Sometimes it’s not easy to be cost-effective or sustainable. But it can have a huge impact in terms of making a city much more pleasant.”

Although most world leaders on some level understand the social and economic benefits of major infrastructure projects, Wind says short-term political objectives often curb enterprising action. Many countries also struggle to transform their infrastructure needs into bankable projects because of the complex interplay between the private sector and local and national politicians.

Wind urges decision-makers to back the right projects for society, rather than those that may contribute to their re-election.

“Yes, we need to do more infrastructure, but we also need to think about it more carefully and do the right ones,” he says.

Philippe Wind is the Singapore managing director of Prodegia, a consultancy firm which specialises in Asian infrastructure projects. He has more than 20 years’ experience working on infrastructure projects across Europe, the Middle East and Asia.

Macomber: Effective deployment of the world’s limited resources are alldirectly improved by investments in urban infrastructurethat reduce transit time and distance.

Macomber: Effective deployment of the world’s limited resources

are alldirectly improved by investments in urban infrastructure that

reduce transit time and distance.

Professor John Macomber

Finance lecturer, sustainable cities expert
Harvard Business School, www.hbs.edu

For John Macomber, any discussion of infrastructure priorities will depend on the point of view. Is it from the view of a citizen? The government? An investor? A promoter?

The objectives and decisions will vary dramatically for each entity.

For example, a group of citizens might prioritise investment based on current need (clean water in informal housing in Brazil, for example) or by future need (IT projects to support jobs in South Korea).

“These are very different desires in very different situations,” Macomber says.

An investor, on the other hand, might prioritise by “bankability”.

He notes that World Bank group chief financial officer, Bertrand Badré, argues that there is no “funding gap” for international infrastructure projects, but rather a “project gap” – that is, the projects are not investible.

To prioritise bankable projects, Macomber says early projects must build the foundation for later developments, with the pipeline typically moving in order from roads, power and water to IT.

“It’s similar to how a software company or consumer products company thinks: we can’t do everything at once, but let’s have a coherent sequence,” he says.

“Having a sequence, or road map, or project plan also allows for a steady pipeline of approvals, financial modelling, contracts to award and incremental investment to attract.”

This, in turn, builds a deep pool of talent and a consistent flow of capital and projects.

For governments, other factors also come into play. The first is around the revenue that might be earned from a project.

“It’s counterintuitive, but the revenue-generating projects like power generation, some roads and some transit should be financed with private capital if private capital can be attracted,” Macomber says.

“The non-financeable ones should be the purview of government since private capital cannot fund them if there are poor prospects for repaying the investment.”

The second centres on political considerations. If an important constituency or voting block or industry group is enamoured of a project, sometimes those investments go ahead.

“This is a poor way to rank projects and it leads to a chaotic portfolio, expensive to procure and inefficient to operate, but it happens,” Macomber says.

The massive flow of infrastructure investment to cities makes sense, he contends, given that the world is half urban today and another 3 billion urban dwellers will be in cities 20 years from now. As a result, investing in urban infrastructure is a very direct route to sustainability.

“The effective deployment of the world’s limited resources of clean air, clean water, power and time spent in transit are all directly improved by investments in urban infrastructure that reduce transit time and distance, use district-scale power and water interventions, build for density in housing and offices while preserving public green space, and help people get to work in a reasonable amount of time,” he says.

Macomber believes it is also crucial to consider how not to spend money.There are a lot of ways to spend infrastructure capital poorly, and “ill-considered though fashionable” public-private partnerships can exacerbate the pain.

To avoid this, he says infrastructure developments need three key elements: a source of repayment, competence of all parties, and the good intent of all parties.

“The pitfall is that these three aspects are seldom present together on one project, at least outside of Canada, Singapore and Australia,” he observes.

Therefore, the art is to either rank and select and fund the projects that meet this bar of repayment, competence and good intent; or figure out an alternative.

“This is the key to assembling a coherent, value added, bankable pipeline of projects that over time, with the input of both public and private capital, lead to economic growth, environmental friendliness and the realisation of human potential,” Macomber explains.

* Professor John Macomber is a senior lecturer in finance at Harvard Business School. He is faculty chair of the Investing in Sustainable, Competitive Cities program.

Key takeaways

  • Visionary infrastructure decisions have contributed to the success of many civilisations.
  • Robust diagnostic tools should be used to inform infrastructure policy.
  • Small, highly efficient projects often have as much merit as big-ticket developments.
  • A pipeline of complementary projects typically delivers better outcomes than one-off projects.

This article is from the August 2014 issue of INTHEBLACK.

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