Infrastructure: Building smarter and more efficiently
With promises to improve America’s infrastructure being carefully watched, the question of how innovation can be tapped for best return on investment becomes key.
The Trump administration has pledged a $1 trillion investment in the nation’s infrastructure. Bridges, roads, tunnels, sewers, water systems and dams are an essential part of the country’s framework, and financial institutions, project owners, architects and construction companies are awaiting details of the government’s infrastructure improvement plans. They will be examining how to build these projects at a cost that will stay within budget, provide a quality result and yield profits for any private parties that might be involved. Fortunately, today’s planners can turn to innovations in technology and materials, as well as economical financing programs, to control costs.
The growth of big data has provided new tools for both construction and finance, according to Bruce D'Agostino, president and CEO of the Construction Management Association of America (CMAA), an organization located in McLean, VA dedicated exclusively to the interests of professional program and construction management. D’Agostino went on to comment on how evolving technology has become more mobile and is reducing human error associated with documenting and transferring data. Real-time information sharing improves productivity, which translates into greater efficiencies.
In addition to decreasing mistakes and stimulating production, utilizing big data also helps in the earliest stages of planning a large infrastructure project.
According to Willem Sutherland, managing director, head of Infrastructure Finance & Advisory Americas for ING Capital LLC, digital data also provides information that can be used in planning and operating projects. "Big data not only helps us, it helps both the government and the private developers who bring these projects to life," Sutherland said.
Developers can use digital tools to obtain better data on which to make decisions on building projects such as bridges and roads, said Sutherland. For example, sophisticated devices in cars & trucks as well as along roads can indicate the amount of traffic, the weight and destination which helps in designing roadways and bridges. Beyond just the simple numbers of vehicles, data from smart phone devices is revolutionizing how we understand and utilize infrastructure. Not only is it providing much more in depth data around usage numbers, it can also provide information about times, locations, fueling or coffee stops and even alternative routes.
"If you have that insight, you don't have to over-engineer your bridge," Sutherland said. “It allows the government to make better decisions if they need a new lane."
According to D'Agostino, project owners are finally embracing not only the issue of first costs of a project, but are accepting the concept of lifecycle costs of projects.
"This has become evident with the increasing use of sustainable materials and the necessity of meeting LEED, Green Globes and other sustainable standards," he said. "This is definitely a plus for projects since it leads to usage of newer materials, less energy usage and reflects a lifecycle cost advantage."
Projects are more likely today to use different physical materials and processes that can improve the project schedule and overall costs, including pre-fabrication and modularization methods to improve construction speed.
"Today, the important issue should not be the project’s initial cost as much as it should be about the true cost of the project over the next 50 or 100 years," D’Agostino said.
Contingencies should be added to the budget to allow for unforeseen situations, D’Agostino advises. Cost overruns can occur as a result of design flaws, scope change, substandard construction materials and unforeseen environmental site conditions.
Without financing, there would be no improvement to infrastructure, and those who finance projects, whether private or public, are the ones most affected by cost overruns. Owners of projects will need to decide whether to use public sector financing through the tax-exempt municipal bond market or pursue private lending. ING's Sutherland said there could be a cost implication. U.S. projects historically are financed through the municipal market, which is large, liquid and well-tested, as well as tax exempt. There are also private activity bonds which are also tax exempt. Public debt, however, comes with a lot of regulations.
Tax exemptions are another way the government subsidizes projects, which makes a very competitive financing source – but they are not without their limitations as a fully public funded project. Weighed against the full upfront issuance of tax exempt debt, private sector financing offers greater flexibility in committed construction financing. Further, having a private entity develop a project allocates much of the risks, budget discipline and timing away from the public sector.
Sutherland said there will be much more bank financing if the private sector is involved. “I don’t think the cost will be higher than it is today," said Sutherland, but he said there will need to be a determination that the private sector can build the project and run it at a lower cost than the government could do.
Public/Private Partnerships (P3s) could also be involved. A Brookings-Rockefeller study *) indicated that these P3s are becoming integral to the overall capital investment and infrastructure strategy of the nation. ING’s Sutherland said most lenders look for a solid framework. "We lend and we advise. If we work with a private sector client, we want to make sure the regulatory framework is there and that they are properly protected against changes."
But along with securing financing, using big data and securing efficient materials, clear risk management processes should be established before the project is executed. "Without the appropriate protocols, unanticipated delays can and will occur," D’Agostino said. "Unplanned events, potential risks and impact to the project must be accounted for early, with proper contingencies in place to mitigate them."
In an age of big data and more efficient construction standards, there is not only pressure to build, but to build smarter. If this financial challenge is to be met, then America should consider funding through a public private split.
*) Moving Forward on Public Private Partnerships: U.S. and International Experience with PPP Units. Brookings-Rockefeller Project on state and Metropolitan Innovation. Emilia Istrate and Robert Puentes. Accessible at: https://www.brookings.edu/wp-content/uploads/2016/06/1208_transportation_istrate_puentes.pdf