Infrastructure Development is Key to the Development of Any Economy.
Infrastructure development is key to the development of any economy. In western nations, it is major part of the extraction from the post financial crisis economic environment. For emerging and newly emerged economies, properly designed and developed infrastructure is critical to underpinning growing economic prospects that will lead to increased social and political peace.
The challenge is that major projects focus on the engineering and finance.
The Stratos consultancy practice specialises in the strategic assessment, economic analysis and governance of major infrastructure projects for public and private sector clients in Asia, the Middle East and Australia.
The following are some brief observations on strategic assessment, economic analysis and governance issues associated with major infrastructure projects based upon the many years of experience of our consultancy team:
The success or failure of major infrastructure projects can invariably be traced back to the quality, or lack of quality, of the initial strategic assessment.
Quite often there is an overriding political imperative when proposing infrastructure projects to respond quickly to stakeholder pressures, and to commence projects before the benefits and risks of alternative approaches have been properly evaluated. Moreover, in order to appease stakeholders with conflicting expectations there can be a tendency to add or subtract specific project elements regardless of the impact on a project’s overall viability. The inevitable consequences of these avoidable mistakes are a lack of clarity and coherence in the scope of projects, unrealistic budgets and timescales, exaggerated claims of project benefits and inadequate consideration of project risks
An objective and independently conducted strategic assessment of potential infrastructure projects is an essential tool to mitigate project risks and to make informed investment decisions.
Two key features of major infrastructure projects, which distinguish them from other forms of investment, are the presence of economically significant externalities or indirect costs and benefits and the long timeframes over which costs and benefits may accrue. It is unsurprising, therefore, that major infrastructure investments tend to be funded in whole or in part by public funds.
Project externalities such as social and environmental impacts and economy-wide productivity and competitive effects are not easily captured, if at all, by entirely commercial infrastructure investments. However, partial public funding of essentially commercial infrastructure projects is feasible where the net risk-adjusted economic value of project externalities to the economy as a whole exceeds the value of the public investment.
The economic evaluation of project externalities is not an exact science and can never be entirely objective, particularly when modelling economic impacts on an economy-wide basis over long timescales. Nevertheless, it is important to identify and quantify as far as possible all project externalities and to compare the economic effects of each project investment against the counter factual case (absence of the investment) under a range of probably scenarios.
The need for effective project governance commences immediately upon the decision to proceed with any given infrastructure project. Regardless of how effective the strategic assessment and economic analysis of a given infrastructure project may have been, lack of effective project governance will inevitably lead to project failure.
Project governance is not something that can be outsourced to contractors tasked with implementing a project or to high level committee of stakeholders. It needs to be undertaken by an independent body with specialist project experience, appointed by the project owner. The primary role of the project governance body is to identify and continuously monitor all material project risks. These may include but are not necessarily limited to: technical, economic, financial, environmental, socio-cultural and political risks.
Making Infrastructure Work
The challenge with extracting value from infrastructure development is that major projects focus on the engineering and finance. The need to meet deadlines and budget, as well as avoiding associated issues that add to cost. But, planning to avoid failure to deliver benefits to the community, should also play a large part in sound project planning.
Built infrastructure often sits within the public sector so there is invariably an opportunity to look at how the management of this works and whether operating and organisational aspects work in conjunction with one another: in short, efficiency and effectiveness needs looking at. Process around revenue and spending can need tightening to avoid leakage and work done to create a ‘business-like’ culture. This will ensure that infrastructure investment achieves economic outcomes.
The reality is that people matter. Transformative change at a middle east airport proved challenging precisely because it was change that impacted key executives with vested interests rather than inherent issues with the project. Therefore, building capacity that is aligned to national economic interests can be challenging and our recent experience has proven this. In addition, inter-departmental rivalry and policy interpretation differences can undermine the best laid plans.
The private sector participants also provide challenges. There, the focus will be on financial structures and the financiers have the upper hand when doing this as they have a keen idea about the price of risk. The problem is that this is often not challenged sufficiently resulting in the determination of capital cost discount rates that create too much potential upside for financiers as the project proceeds and actual risk recedes creating an inherent capital gain for the debt / equity participant.
We have found that rather than pricing every eventuality of an event, more robust and definitive analysis would help the project owner push back on the estimates used. While capital cost discount rates may be a financial measure, they do, in fact, encapsulate the operational, design, cultural and other issues that surround the project.
Thinking outside the box means thinking beyond finance and engineering, which is what we do. Talk to us for more detailed insights into how to get the best from your infrastructure ideas.