The Pegasus-Global February 2010 Newsletter
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Industry Sectors
Infrastructure
Where are the cranes?
(Continued from our email newsletter...)
We wish there was a simple answer; unfortunately there is no simple answer.
Certainly there are reasons for the gap between talk and action, among them:
- The allocation of the funds among various infrastructure
projects is first and foremost political and like all political
appropriations there are certain specifically defined steps
which must be taken before that money ever is spent on an actual
infrastructure project. First, the money does not flow
immediately or directly into an infrastructure project with its
appropriation by a political body; a process and procedure must
be put in place within which the money can be distributed.
Second, in appropriations for stimulus funds, the money actually
flows from one political/governmental entity (federal) to
another political/governmental entity (state), and sometimes
even a third political/governmental entity (local) before it is
actually allocated to a specific infrastructure project. Third,
money from any level of government comes with strings attached
and those strings define where the money can be used. It is not
at all unusual for those strings to be a mismatch to the
infrastructure needs of the community that needs an
infrastructure project executed. Finally, every level of
government is accountable to the next level of government, which
means that every infrastructure project which is to be funded
has to align with the strings attached, which means that the
project planning and execution process is generally slower than
one would expect.
- Prioritization of the infrastructure projects to be funded
is competitive and inclusive. There are literally thousands of
needed infrastructure projects, from replacement of hundred year
old water lines to replacement bridges to new highway
construction. Projects range from immediate public safety issues
to improved access to facilities and services. What gets funded,
and why? Do you take the infrastructure stimulus money as a
bonus opportunity to undertake a single mega-project which
consumes most of the money but has long lasting effects on a
region or do you fund the 3,000 critical repairs which will
enable you to increase the practical life cycle of an aging
infrastructure system? Many at the receiving end of the stimulus
appropriation have extremely hard decisions to make, and often
those decision go through a number of different bodies (such as
departments of transportation or water and waste water
departments) before a final decision can be made on where the
funds will be spent. In some instances, even after the initial
decisions have been made, those decisions are subject to review
and comment by the public at large and other governmental
levels.
- All projects have a life cycle which adds a significant
amount of time prior to and during construction which further
extends out the date before the project is completed and in
service. Depending of the type and magnitude of the project the
benefits of that project may not be fully realized for several
years after the project has been approved for funding and
execution. Mega-projects, such as a complete replacement of a
100 year old water system under a major city, may have to be
done in stages spanning 10 to 20 years so as not to interrupt
water service during the construction period.
Unfortunately, when stimulus funding programs are announced, the public is
led to believe that the projects will begin almost immediately, which raises
everyone’s expectations. The reality is that it takes time. It has been
approximately one year since the initial announcements relative to an
infrastructure stimulus package were made, and some projects are just now moving
through the project planning and engineering stages.
The second most asked question recently is "Can’t this process be speeded
up?" Actually government at many levels is trying to find ways to streamline at
least the project delivery time (if not necessarily the political time), one of
which involves moving to other project delivery methodologies such as
design-build. That is the topic of this month’s Solutions Article by Dr. Kris
Nielsen, Dr. Pat Galloway and Jack Dignum, "Execution Risk Management in
Design-Build Infrastructure Projects". This article is an update of a
presentation made by Dr. Kris Nielsen in May, 2004 to the Construction
Institute.
Oil and Gas
What the heck is going on?
(Continued from our email newsletter...)
As we consistently remind our clients, one cannot view capital investment and
construction as separate or apart from other industries or market forces. When
asked if a particular project is a good investment one has to look beyond that
project or that industry to the broader issues which are driving social and
political discussions and decisions. This is as true in the oil & gas sector as
it is in the power sector and the infrastructure sectors. For example, among the
forces which are impeding the expected rate of recovery in Oil & Gas sectors are
economic and social dynamics which at first glance would appear to have little
to do with Oil & Gas:
- Economic - times are hard for the
individual consumer right now. In hard time people become very
conservative and risk averse; major purchases are postponed,
money is allocated on the basis of priorities and not desires,
and habits are modified to fit real conditions. What happens to
the individual consumer ripples upward through the supply and
production chain of goods and services used by those consumers.
Fewer new cars purchased ripples through the production chain
which manufactures and sells cars, which are both dependent on
power generated by Oil & Gas and which produce a product which
is dependent on Oil & Gas. Likewise if the cost of gasoline is
such that the consumer is forced to make a choice between
driving the car and purchasing warmer clothing because the heat
in the house is turned lower to reduce the cost of power
consumed or the cost of using those cars is so great that it
does not allow purchase of other quality of life needs, the
choice will be to reduce driving, lower the heat and buy
clothing. One of the strengths of the Oil & Gas industry has
been how pervasive it is throughout the human need chain; no one
can escape the fact that some portion of their basic human needs
are dependent on Oil & Gas. That same strength can also be a
weakness as people are forced to make decisions as to which
needs must be met and at what cost. If car manufacturing has
been cut and gasoline sales are down, can the oil & gas firms
make up the losses from those two consumer sectors by increasing
the cost of fuel? What happens if the consumer turns down the
heat? In short, no industry, and in particular the Oil & Gas
industry, is immune from a harsh economy.
- Social dynamics - change occurs when
enough people in a society accept that there is a reason and
need for change. This is commonly referred to as a "tipping
point"; that point at which the forces for change overtake the
natural inertia of a society to resist change. Factors which
drive a society to a tipping point for change tend to be diverse
and cumulative; there are relatively few tipping points in
history which were created by a singular event or issue. We
recently discussed with various Oil & Gas investor clients our
view that a tipping point relative to global environmental
concerns was drawing nearer and that the Oil & Gas sector would
be impacted when that tipping point arrived. The general
reaction to that position was that the tipping point we were
describing would never happen and that Oil & Gas would continue
growing as it always had in the past, even though there would be
minor "adjustments" along the way. We still believe that in the
not too distant the future the environmental tipping point will
be reached when fossil fuels will become the exception rather
than the rule. The signs are all around us that momentum for
change is growing:
- The renewed interest in generating power
using "clean" nuclear fuels;
- The social pressure to increase investment
in alternative energy generation technologies;
- The increased investment in non-fossil fuel
technology, such as hybrid vehicles, and
electric storage;
- The increased social pressure to address
climate change;
We also see a dramatic rise in the number of traditional large Oil & Gas
corporations shifting their public image from fossil fuel providers to energy
providers, investing in those technologies which are specifically intended to
reduce the dependence on fossil fuels. While the actual tipping point may still
be years in the future it will happen.
Will the Oil & Gas sector "come back"; the obvious answer is yes. We also
think that the growth, retreat, growth cycle will continue for our lifetimes.
However, with each passing year additional weight will be added to the push for
change, making the cycles shorter and each recovery longer, until the actual
tipping point is reached. Is this doom and gloom from us? No, Oil & Gas will
always be a part of the energy answer and will always figure importantly in
manufactured chemicals and products. What is important is to realize that "all
things change" and so to will the Oil & Gas industry’s dominant position as a
social necessity.
To view some of our past newsletters or to read other articles, visit the Pegasus-Global Archives.
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