Infrastructure Investment Will Be a Slow Economic Stimulus Path

by: Steven Hansen November 28, 2008    

Steven Hansen

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America needs infrastructure investment, and to target stimulus money to infrastructure is a great idea. However, the devil is in the details.

Infrastructure Renewal and Development Requires a Specific Plan. Okay, we need power plants, light rail, highway system repair and many other things. In the mid 70s I was part of the senior management team who was tasked to set up, manage and execute the largest infrastructure complex in history. This complex would have been worth more than a trillion dollars if built in the USA today. Just to develop the plan to effectively spend the money (master plan) took a year. Even three years after we began, we could only burn $20 billion per year (today’s dollars) – and this was with an unlimited budget and a client who wanted the project completed yesterday. It is easy to throw money away, but to effectively use money it takes time to plan.

Infrastructure requires time for designing the project. Hoover Dam is thought to be one of make work projects of the depression. The design of the dam began in 1928, but the construction did not begin until 1931. Detailed design of a project takes time.

Infrastructure requires manpower resources. There have been few major infrastructure projects in America in the last 10 years. The last major infrastructure project was the interstate highway system legislated by the Federal-Aid Highway Act of 1956 and was completed 35 years later at a cost of just under $500 billion in today’s dollars. The engineers, construction hands, and management have long retired. The equipment used to build this system was scrapped years ago. In 1987, I tried to find these “hands” for a project – all had retired and refused to come back to work even for a very large salary. I understand we are not building highways, but infrastructure requires civil works and these kinds of people. I have witnessed the disasters of using a person experienced in small projects when using them for large projects. We do not have enough experienced people in America for large infrastructure projects.

It is important to understand that a major project requires trained personnel. You do not take a manager at Wal-Mart to manage building a light rail system unless you do not care that the project comes in at cost and on schedule. I will ignore the issue of quality. And let us not forget designing a project. You cannot snap your fingers to have 500 experienced transportation engineers at your service. Or would you prefer an unemployed electronics engineer design your light rail? America is short experienced tradesmen – fitters, welders, boilermakers, ironworkers, etc. For you union bashing economists, the construction trades had been our pool of experienced labor to build major projects around the USA. They were the only source of craft training and apprenticeship – and their numbers are down significantly in recent years due to lack of infrastructure projects and right-to-work laws.

People have pointed out to me the success of building Liberty Ships during WWII. We did it then, we can do it now. Yes, but this was done in a “factory” setting where time and motion can be carefully controlled and taught. Since you have repetitive tasks, you can train your workforce and management quickly. In infrastructure building, although there are repetitive tasks, there are also continuous transitions to new tasks. The learning module is different and takes significantly longer to train.

A large Infrastructure program will have too many projects competing for too few resources – and we will be getting our resources from around the world. A rough rule of thumb – approximately 1/3 of a project’s cost is purchased materials. Of course this varies by the type of project. A wind farm may be 80% materials. And do you think our free trade agreements allow us to source these materials only in the USA?? And many items we need are no longer manufactured in any great quantity in the USA. Maybe we cannot ramp up cement production quick enough and costs skyrocket. The faster we want to build infrastructure projects, the greater the share of the project’s materials will come from overseas.

Infrastructure Projects are Pork Barrels. With congress involved, the projects will have a bias towards the states with the most powerful congressmen, and the lobby groups with the most influence. Will the government create a non political commission to pick what projects should be done, and how it will be done?

Government Sponsored Projects are More Costly than Private Sector Projects. Somehow these projects must be shoved into the private sector for implementation in a competitive environment.

Creation of Transparency. We need an audit team. We need to audit more than numbers, we need to continuously audit the effectiveness of what we are doing. This team would be headed by someone like Ron Paul - and would use its own auditors and contract outside financial, quality, and systems auditors. Why someone like Ron Paul? Someone against this whole process would be trusted to expose every pebble out of place.

Summary

Infrastructure is a good use of public money during a recession if properly targeted towards projects which are needed and will be used in the ensuing recovery. But if economic recovery occurs before the end of 2009 as predicted, then I do not understand the push towards infrastructure projects to stimulate the economy.

Infrastructure spending ramps up slowly and I cannot see much if any economic benefit occurring during 2009 unless there are projects already designed waiting for funding,

I have personally witnessed the effects of governments trying to ramp up infrastructure investment quickly, and can guarantee the financial waste is significant.

Disclosure: no positions

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This article has 12 comments:

  •  
    Nov 28 08:05 AM
    Good article

    It would make sense however to ensure funding of infrastructure projects that are already at an advanced design stage but are threatened with cancellation because of the financial crisis.
    Reply | Link to Comment
  •  
    Nov 28 09:14 AM
    Yes, the trick is somehow getting these large potential projects requiring large taxpayer funds out of federal hands. We know our congress is not capable of making the right choices so we need to discover/appoint a non-profit third party - something like a Ford, Carnegie or Pew Foundation or other such 'grant making' organization - to wisely rank and appropriate federal tax set-aside infrastructure funds, based on project merit. Otherwise pork-barreling and earmarking will continue and we'll have more unneeded shipyards and bridges leading to nowhere.
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  •  
    Nov 28 09:27 AM
    A very interesting presentation. While many dream of a quick turn around they miss the meaning of real recovery which is found only in serious infrastructure projects. Yes, it will take time but it will have worldwide impact as much of the raw material comes from the rest of the world. The key here is well planned projects with transparant oversight and regulations. A audit group is vital and while the idea of a person like Ron Paul is creative OMB does a great job and needs only to be expanded. Crookedwood
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  •  
    Nov 28 11:07 AM
    Yes, it will be inefficient and decades too slow to resolve current problems, but the value of education reform and productive infrastructure building spurred by this crisis can begin to move this society along from unbalanced, dumb, wasteful consumerism to global competitiveness. Whatever it takes, let's get going.
    Reply | Link to Comment
  •  
    Nov 28 11:26 AM
    Steve - - -

    We have crossed opinion swords previously on SA, but this time my sword is completely in sync with yours. You have astutely defined the infrastructure development problem and proposed some excellent solutions. In spite of the lack of short-term stimulus from infrastructure investment, I still hope the current short-term problems do not become an excuse to delay that process further. I strongly believe our economic future depends on building things and developing new technologies. That was the basis of our economic successes in the second half of the 20th century.

    I totally agree with the need to have government facilitate much of this new investment implementation, not do it itself (as with the Hoover dam, for example) in as many cases as possible. I also agree that politicians (especially Congress) can not do the planning in an effective way.

    The American voters have elected "The Change We Need". It remains to be seen if we actually get it.
    Reply | Link to Comment
  •  
    Nov 28 11:54 AM
    Mr. Hansen obviously has experience in this field and he is right on every point. Infrastructure spending is good but it's not quick. On the other hand there may be lots of alt energy engineering firms ready to move forward with ideas. As he notes, there may be unfunded project plans already on some local or state government wish list, ready to go. There may be enough quick-start projects to get this initiative going while more plans are being designed. The lack of experienced large scale project builders will put a brake on the thing no matter how fast new projects are designed, so for one reason or the other infrastructure spending cannot efficiently be done fast. Probably realistic best case is that infrastructure spending could sustainably support a steady volume of these kinds of projects over a decade or more.
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  •  
    Nov 28 01:13 PM
    Some infrastructure planning, notably the power grid, have plans ready to advance which lack funding. Construction of at least one new state of the art refinery and rendering plant would take about four years as plans for this already exist. There are other projects with plans in advanced stages which would provide immediate benefits while in progress and sustain them profitably thereafter. Let's hope that politics doesn't get in the way of common sense.
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  •  
    Nov 28 09:46 PM
    i agree with many of the points made, particularly regarding timeframes, etc.. however, i strongly disagee with the assertion that ultra-large scale project experience, and the personnel to manage such projects, is unavailable domestically. see, e.g., the development of deepwater GOM fields, tension-leg platforms and subsea wells, wellheads, pipelines, etc. by Shell, XOM, and others. These are massive, integrated, cross-discipline projects, drawing on virtually every engineering discipline. projects with price tags > 1 trillion.

    The fundamental dilemma is that the talented engineers and project managers who realize these amazingly complex and difficult projects will find ZERO incentive to work for the government at 1/2 the wages, with 10x the red tape and bureaucracy. Talent goes where the money is. Talent also flees idiocy (i.e., anything even tangentially related to the U.S. government).

    Lamenting the lack of highly skilled, innovative personnel to handle these projects is simply incorrect. The talent is there. This is analogous to lamenting the lack of highly motivated, qualified teaches. Those folks are out there in abundance. But, in similar fiashion, they go where they will be paid commensurate with their skill and intelligence.

    Change the metrics, change the management from government-style waste and bureaucracy to industrial methods (goal and performance oriented), change the rewards to be competitive with industry, and you will recruit and retain the best and brightest.


    Reply | Link to Comment
  •  
    Nov 29 12:45 AM
    Perception, you are confusing billions for trillions. I have worked on offshore platforms including tension legs (conoco hutton), gravity base (statoil Statfjord b), and conventional (mobil beryl b). although these are major undertakings, they are not even a billion each. Mobil has a massive investment in the North Sea including wells, pipeliines, platforms, and refineries and their total investment is $40 billion in todays dollars - and it took them 40 years to spend that money.

    www.elmep.net/resource...

    Despite the economic slowdown, the offshore oil industry is overheated with fabrication yards booked five years in advance worldwide. This particular industry is already balls-to-the-wall (labor, design, and fabrication) and should not be considered for infrastructure.

    steven hansen
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  •  
    Nov 29 12:32 PM
    Spending money like this is just a huge recycling bin of waste. The only ones to benefit are crooked politicans, contractors and illegal aliens who get hired at cheap labor prices. Sure the government will report that 2 million jobs were created and that will make them look good in the eyes of voters because we always fail to see where it all went. True stimulus will come from tax incentives for businesses that produce stuff here in America made by Americans that the world will buy. If we don't do this then you can bet in another 10 years the next recession will be a depression we will never recover from. OO what the hell let's just all go to work at wall-mart and make China our true employer.
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  •  
    Dec 01 02:39 PM
    Fastest way of getting infrastructure stimulus dollars circulating is with the 3 R's : Replace, repair, rehabilitate. If lucky, old plans, blueprints, etc. can be found somewhere.
    Gov. of Conn. this morning expressed hopes of getting money for projects that were "shovel ready". Everything done except getting the money,
    Huge projects needing permits, original design etc. would be better left alone for now.
    Reply | Link to Comment
  •  
    Dec 23 03:08 PM
    Steven, I agree with all you say. However, one of the few "infrastructure&q... type projects which may be able to ramp up a little more quickly is bridge repair, which is sorely need.
    Reply | Link to Comment
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