A Concept for Optimizing Strategic Energy Infrastructure?

A timely new report published by the World Economic Forum in April 2014 titled “Strategic Infrastructure Steps to Operate and Maintain Infrastructure Efficiently and Effectively” addresses an important area for necessary investment globally: infrastructure. The current focus in the US is on energy infrastructure – whether this concerns the need to build out the petroleum pipeline system – or in general, the transportation network – to deliver domestic shale gas, light sweet crude oil or liquids from all the rapidly burgeoning US shale plays to market. The infrastructure push also concerns indispensable upgrades to the vast and aging US electrical grid in order to protect the bulk-power system and defense-critical electric infrastructure against, for example, physical or cyber threats. Interestingly, Stefan Heck and Matt Rogers shared research from their upcoming book in the McKinsey Quarterly finding that “just 20 to 40% of the transmission and distribution capacity in the United States is in use at a given time, and only about 40% of the capacity of power plants.” This only strengthens the case for attempting to optimize the use of any existing resources/infrastructure and, as a consequence, boost their respective productivity.

While developed and developing countries around the world share the common need for more investment flows into critical infrastructure in order to maintain or establish a comparative advantage vis-à-vis their economic competitors in a globalized world, the point of departure for those two groups of countries is distinctly different: Countries in Africa and Asia primarily need to address the needs of their fast growing populations by means of new and previously non-existing infrastructure build-out whereas developed nations primarily need to preserve and most likely upgrade existing but aging infrastructure.

The World Economic Forum tries to emphasize the importance of infrastructure development, optimization, maintenance and investment with the following comparisons and data points: “the worldwide stock of existing infrastructure is worth about US$ 50 trillion, which is of the same order of magnitude as the global stock market capitalization (US$ 55 trillion) and comparable, to a certain extent, to the global GDP (US$ 72 trillion).”

Overall, the World Economic Forum identifies a “global infrastructure gap” as a most pressing issue:

“The global demand for infrastructure investment is huge and estimated at about US$ 3.7 trillion annually. In developing countries, it is driven by growing population, economic growth, urbanization and industrialization. In the developed world, a particular concern is that so much legacy infrastructure needs maintenance and rehabilitation, owing to the ageing of assets, stricter environmental regulations and the globalization of supply chains. The high demand is not being met, however, as only about US$ 2.7 trillion is invested each year.”

The reasons for this mismatch fall into at least two different categories:

“The supply of new infrastructure cannot keep pace with demand because of various impediments; notably, the public sector’s budget constraints following the global financial crisis, and the reluctance of private financiers to commit capital to long-term and risky projects. In addition, the delivery of infrastructure [programs] is hampered by several issues in the project origination and preparation phase including biased project identification and prioritization, low-quality master-planning, slow permit and procurement processes, and inadequate risk allocation and delivery models.”

Nevertheless, the report offers interesting steps to narrow or close the infrastructure gap by explaining: “Given the world’s huge infrastructure stock, substantial value can be unlocked through proper O&M [Operations & Maintenance]. (…) Governments can reduce infrastructure demand, build new assets or optimize existing infrastructure assets.” Especially, the latter point seems to deserve thorough consideration given the significant potential for cost savings and for relatively fast improvement. The first chart below lists a variety of reasons responsible for the costly underperformance in operating and maintaining existing infrastructure assets followed by a proposed straightforward ‘best practice framework’ to tackle the identified root causes. Both charts are very instructive in how to think in abstract terms about existing and lacking strategic energy infrastructure in the US.

Source: World Economic Forum

O&M Best Practice Framework

Source: World Economic Forum

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