By: Gerardo Weihmann and Esteban Figueroa

Infrastructure projects, whether developed by the public sector or by private enterprise, are complex and have a tremendous impact on society, so they require careful planning, particularly when each project is not replicable, but is rather sui generis..

Every problem of complex nature presents at least one of the following properties: i) multiple attributes; ii) large number of factors; iii) more than one decision-maker; and iv) uncertainty. With respect to this last property, uncertainty exists when we are unbable to predict with precision the result of a future event; however, only uncertainty that has a significant impact on the well-being of individuals can be considered a risk¹. Thus, all risks entail uncertainty, but not every uncertain event entails risk. Peter L. Bernstein sustains that the revolutionary idea that marks the boundary between the past and the modern age is the understanding and quantification of risk.¹ The capacity to manage risk enables us to make more rational decisions, and this has been the driving force in technological progress, economic growth and improvements in quality of life for all humanity.

Considerations on the development of infrastructure projects

Every infrastructure project, but particularly those that Mexico needs today, involves the following key factors: i) a comprehensive vision and long-term strategy for the different types of infrastructure projects across the nation; ii) the ability to address a social problem or situation; and iii) environmental protection.

Comprehensive vision and long-term strategy

In today’s world, both technological and social changes have been accelerating almost without interruption, and as the pace of change increases, so has the complexity of problems and with it the time needed to solve them. This increase in the speed of change makes problems more variable and reduces the lifespan of any given solution; thus when we finally seem to have found a solution to a certain problem, the problem has changed so much that the solution is no longer effective or becomes irrelevant.

Russell Ackoff notes that until recent times, changes were slow enough to give people time to assimilate them, either by making occasional minor adaptations or by simply accumulating and transferring them to the next generation, for it to deal with these changes. In the past, because changes put no significant pressure on individuals, they did not receive the appropriate attention. Today, adaptation to accelerated change, both at the business and government levels, requires more frequent, greater and more effective adjustments, both in what is done and how it is done. With the growing inter-connectivity and interdependence of individuals, groups, organizations, institutions and societies, the environments have become much more complex and less predictable, in other words, more turbulent.

The time that elapses between the stimulus and the response leaves room for crisis situations to emerge and develop. Ackoff also says that a growing proportion of society’s responses to the problems it faces are reactions, born out of desperation, not proactive initiatives, born out of deliberation. Furthermore, solving a problem correctly requires finding the right response to the right problem; many times, the failure of a given solution lies more in the misidentification of the problem than in a poor solution to the right problem.

In the past, every problem of complex nature, like an infrastructure project, could be broken down into simpler problems that could be managed by different disciplines. Thus, every discipline solved part of the problem and all these partial solutions were once again integrated into a single solution, in which the total was equal to the sum of the parts.

But with the increasing complexity and interrelatedness of the components of a problem today, this method of optimizing each component separately no longer brings us to the best total solution. Consequently, in both public and private strategic planning, we must incorporate a systemic view, in which the system is divisible from a structural standpoint, but from a functional perspective it is indivisible, in the sense that when separated out into components, it loses some of its essential properties. Thus, the performance of the system depends critically on how well each component works and how they all fit together, not simply how well each component works separately and independently.

With this in mind, infrastructure projects require comprehensive, long-term strategic planning, that seeks to maximize financial and economic returns of resources, which are generally much less than those required to meet all the needs of the population. So, besides deciding on the optimum allocation of the scant available resources, we must necessarily clarify, at least, another three key purposes of this planning process:

• Adapt the private or public entity to deal with both future threats and opportunities, identify relevant strategic options and adjust to its environment.
• Integrate strategic activities to magnify strengths and minimize weaknesses in order to attain goals as effectively and efficiently as possible.
• Create a learning system so that human resources can benefit from the feedback of strategic decisions made in the past.

¹ The development of the mathematical theory of probability is recent, because it only began to emerge around the middle of the 17th century, when French nobleman Antoine Gombauld, also known as the Chevalier de Méré, put a series of questions to mathematician Blaise Pascal regarding games of chance, and Pascal exchanged ideas with his fellow mathematician and lawyer Pierre de Fermat.

We therefore need to specify clear strategic objectives and prepare detailed strategic programs to create the infrastructure each sector most requires. We must also prepare detailed budgets to control strategic and operating activities. In Mexico’s case, these programs must be planned to transcend each six-year presidential administration, extending for at least the next 25 years, to determine when, where and what type of project will be executed, both initially and in subsequent phases. Finally, because we cannot administer what we cannot measure, we must establish monitoring and control systems, as well as incentive systems aligned with the objectives and the programs created. This process is more complex when dealing with the public sector than the private sector.

The process of strategy definition requires us to identify, measure, and manage risk, and to implement techniques to find an optimal relationship between risk and return in infrastructure projects. It is also increasingly necessary that we have a systemized process for reviewing risk management strategies.

Identify: Find the greatest risks, which requires a comprehensive view, because there may be one risk that has a negative correlation with another, so that its negative effect would be partially neutralized by the opposite effect of the other.

Measure: Quantify the exchange ratio between the risks, their costs and likelihood of occurrence, and the benefits of different infrastructure options.

Manage: There are different ways to manage risk, the most prominent of which are:

• Avoiding risk
• Controlling risk to reduce its negative impact through actions taken previously, concurrently, or after the appearance of the event.
• Absorbing risk, including the option of deferring a decision when there is not yet available some relevant information that might be accessible in the immediate future and that could change our decision if we were to decide at this time.
• Transferring risk, which is a strategy that is generally the most efficient in economic terms.

Implement: Apply the selective strategy, with an eye to minimizing its costs.

Review: Systematically review strategies for infrastructure projects, because it may be that when all the answers are finally in place, the questions have changed.

Addressing social problems

Mexico is the world’s 11th largest economy in terms of gross domestic product;² but in terms of income distribution, in the year 2011 this country had a Gini coefficient (an indicator of income inequality among inhabitants) of 51.7.³ This indicator was 48.2 in the year 2008.

This inequitable distribution of wealth and regional disparities pose a serious problem for Mexico. Mexico City, Campeche and Nuevo León present much higher levels of development than the states of Guerrero, Oaxaca and Chiapas. It is primarily because of this disparity that in 2011 Mexico ranked second in the world in terms of wage remittances from abroad (22.73 billion US dollars), coming in only behind India (56.43 billion dollars), but above China (19.80 billion dollars). These revenues also represent the nation’s second largest source of foreign revenues, after oil exports (56.43 billion dollars) and greater than tourism revenues (11.66 billion dollars), which accounted for 2.0% of GDP in 2011. Infrastructure is highly necessary, though not in itself sufficient, for reducing this regional disparity.

Mexico’s 115 million inhabitants comprise 29 million families, almost three-quarters of which live in urban areas. It is estimated that in half a century, the number of families in urban zones will double, while those of rural areas will have grown by only around 30%. So, Mexico faces the challenge of doubling, in less than 50 years, the urban environment that it has created throughout its entire existence and also modifying the prevailing socioeconomic framework of the rural sphere to reverse this trend of migration toward major cities, with an effort to reduce inequality, exclusion and extreme poverty and ensure alimentary self-sufficiency. Infrastructure projects are key to meeting these challenges.

Creating new sources of jobs is also a pressing need, because it is estimated that out of 46 million Mexicans that currently earn a wage, 20 million are employed in the informal sector of the economy. So, in the same 50 year period, our country faces the challenge of increasing its supply of formal jobs to incorporate at least another 60 million Mexicans.

Although major infrastructure projects bring significant benefits to Mexican society as a whole, at times the incremental costs exceed the corresponding benefits at the local level. Adding to this asymmetry is the presence of outside economic and political interests, which further complicate the societal problem, reduce economic efficiency and may even lead to the project’s cancellation, even though it may be feasible from a technical, financial and economic standpoint. It is essential that we promptly and effectively address any potential social problem with a proactive, rather than reactive, vision, before it grows and becomes more complex.

There are a number of possible strategies for reducing negative societal effects; some of which are: i) maintain direct and constant communication with local leaders, seeking to involve state and municipal governments, because they are more familiar with the idiosyncratic problems in the region than the federal government and because otherwise they might sabotage the project; ii) open the possibility of new jobs and training for the inhabitants of the communities by developing new activities related to the infrastructure project, both during the construction phase and during its operation; iii) undertake complementary works not directly related to the project but which benefit the community, like schools, health centers, new roads, bridges and interchanges; sewage and water supply, electrical energy, and others.

Environmental protection

In infrastructure planning, the issue of environmental sustainability has become an inevitable concern, both nationally and globally, in light of increasingly stringent environmental legislation. We must analyze and incorporate environmental considerations into the project, starting from the planning and design phases, and their costs, which are also steadily rising, must also be factored into the financial and economic evaluation of the project. Inappropriate environmental management of the project, like ignoring the societal aspects, could punish the financial return on a project and, in extreme cases, lead to its cancellation for lack of budget resources.

² Ten years ago (2001) it was the ninth largest economy in the world.

³ Maximum equality in income distribution is indicated by a coefficient of zero, and maximum inequality is indicated by a coefficient of 1.00 (all income concentrated in a single person). Sweden has the lowest coefficient: 0.23, and Namibia the highest: 0.70. The more developed European countries and Canada have Gini coefficients of between 0.24 and 0.36. The average Gini coefficient for the world is estimated at between 0.56 and 0.66.

Need for human resources

Technology cannot in itself produce development. It must be accompanied by increasing productivity among workers. For Ackoff, development bears little correlation with the accumulation of wealth; it does not depend so much on what one has, but on what one does with the resources at hand, in pursuit of a continuous improvement in quality of life. Project development requires the ability to develope and apply knowledge; it requires the ability to adapt to both internal and external change.

Around the world, engineering and its importance as a driver of development must be better understood, both by those in charge of developing and enforcing public policy, and by society at large. This need is even greater in times of global financial crisis, because infrastructure projects can have multiplying effects that trigger and lead economic reactivation and job generation.

The United Nations Millennium Development Goals state that science, technology and engineering are the pillars of every socioeconomically sustainable development, because they can reduce poverty and attenuate climate change. The UNESCO’s first world report on engineering⁴ concludes that today more than ever, the world needs solutions contributed by engineering, particularly in developing countries. The current and projected supply of engineers is not up to the level of this growing demand for engineering skills, a problem magnified by “brain drain” from these countries. The reduction in the number of young people, particularly women,⁵ studying engineering is not limited to developing countries. In Germany, the number of engineering students is declining and in Denmark, one study estimates that by the year 2020 there will be a deficit of 14,000 engineers. In Japan, Norway, the Netherlands and South Korea, since the end of the last century, enrollment of engineering students has declined by between 5% and 10%.

In contrast, many young people are focusing on finance and other fields of study not related to science and engineering, in which wages and benefits are often more attractive, but ourthese are professions that make no sense without the existence of productive projects, developed from based on scientific knowledge and technological application.

The quality of higher education and professional training is also a source of concern. According to the World Economic Forum 2012, Mexico ranks 72nd in this category and 114th in terms of labor market efficiency.

Impact of infrastructure investment

The Executive Board of the International Monetary Fund saidstated in 2011 that it is crucial for Mexico to undertake ambitious structural reforms to increase productivity and promote investment. The success of these reforms lies in the ability to make labor markets more flexible, improve access to credit for small and midsize businesses, generate greater work opportunities in the formal sector and improve regulations on competition, while strengthening corporate governance in state-owned enterprises.

In its August 27, 2011 number 27, the British magazine The Economist reported that economic growth in Mexico in the last 15 years, albeit unspectacular, hads been significant. The article also pointed out that Mexico could have seen stronger performance had it not been for monopolies and cartels, both private, governmental and union. In the year 2008, the OECD reported that the lack of competitiveness in Mexico places a substantial drag on its economic growth, citing, for example, that 30% of household spending goes to markets that are either monopolies or where competition is limited, while companies face high input costs that directly affect their sales prices.

An infrastructure development plan, as good as it may be, is not enough to change this momentum. We must start from a view of reality, perform an accurate diagnosis and take measures to modify what is necessary. Although correcting this lack of competitiveness requires in-depth legislative changes and political will, intense investment in infrastructure is also crucial, particularly given that the Global Competitiveness Report 2011-2012 ranks Mexico 66th in the world in terms of infrastructure quality. Of the nine variables that make up this index, mobile telephony and electrical supply earned the worst ratings, coming in 96th and 83rd., respectively.

Although infrastructure projects are regional, they have nationwide effects. Investment in these projects, both public and private, through joint public- private partnerships, bring a series of benefits to society as a whole, including:

• Supporting the integration of the national territory and helping to create productive chains as a way to make the country more competitive.
• Magnifying international opportunities for the benefit of the nation, creating a logistical platform that takes advantage of our geographic position and Mexico’s network of international treaties.
• Encouraging sustained development and productive activity, including tourism (the country’s third-largest source of foreign currency revenues), which reduces regional socioeconomic imbalances.
• Increasing and improving access to public services and promoting education, health and housing, particularly in the neediest areas of the country.
• Generating new needs and driving other investments.
• Intensively promoting direct and indirect jobs.
• Joining short-term challenges and immediate actions to put people to work in quickly developed, efficient projects (water, drainage, housing, highway maintenance) as a countercyclical measure, with long-term strategies and development plans that facilitate and accelerate the generation of human capital, the basis of productivity and growth.
• Protecting and preserving the environment.
• Helping to prevent and mitigate natural disasters.

Conclusions

Infrastructure projects provide an instrument for articulating public policy strategy toward a set of interrelated objectives. Promoting any productive activity that can help turn the current economic and social situation into the desired and idealized future, requires a modern and efficient infrastructure. It also encourages the development of financial markets, because behind every financial instrument, an intangible asset in the economy, there must always be a productive structure that generates real tangible wealth; the former cannot subsist and flourish without the latter.

In the last decades of the 20th century, there was a pressing need for infrastructure and a number of structured projects were planned, but there were serious financial limitations for their execution, particularly in developing countries. Now, however, the start of the 21st century, global financial markets enjoy a certain liquidity, which is awaiting investment options. Unfortunately, investment opportunities in infrastructure have been scarce because of the lack of professional capacity to develop them. This scarcity is the result of a bias in education toward disciplines that support production, like law, systems development, finance and marketing, among others. It is urgent, then, that we align the need for infrastructure with the available financial resources and professional training, so that we can develop projects at the pace society requires.
?

About the authors:

FIGUEROA PALACIOS Esteban:

General Director AFH consultores y asociados, S.C., a consulting firm specialized in planning, financing and management of infrastructure; as well as associations public and private and risk analysis infrastructure investments. Professor of Planning at the Faculty of Engineering at UNAM. Civil Engineer from the Faculty of Engineering at UNAM, Master of Science in Civil Engineering in Infrastructure Planning and Administration at Stanford University.

EIHMANN ILLADES Gerardo Johannes:

Associate Consultant at AFH consultores y asociados, SC, a consulting firm specialized in planning, financing and management of infrastructure; as well as associations public and private and risk analysis infrastructure investments. He has experience of more than 23 years as a Professor at I.T.A.M. Professor at School of Law, Panamericana University, for 15 years. Civil Engineer graduated with honors ( Gabino Barreda Medal of University Merit) at UNAM, Faculty of Engineering. Master of Science in Civil Engineering, Infrastructure Planning and Management at Stanford University. Master of Management Science and Engineering at Stanford University, and Master in Business Administration at Pennsylvania University.

References

Ackoff, Russell L., Creating the Corporate Future, John Wiley and Sons, 1981.

Ackoff, Russell L., Redesigning the Future: A Systems Approach to Societal Problems, John Wiley and Sons, 1974

Banco de México, Informe Anual 2011, Banco de México, abril de 2012.

Bernstein, Peter, Against The Gods: The Remarkable Story of Risk, John Wiley and Sons, 1996.

Bodie, Zwi, Merton, Robert C., Cleeton, David L., Financial Economics, Pearson Prentice-Hall, 2a. ed., 2009.

Central Intelligence Agency, The World Factbook, 2011.

Colegio de Ingenieros Civiles de México, Infraestructura Estratégica: Programa para el Desarrollo de México: 2007-2030.

Colegio de Ingenieros Civiles de México, Planeación Estratégica de la Infraestructura en México: 2010 – 2035, México, Universidad Nacional Autónoma de México, Instituto Politécnico Nacional, Universidad Tecnológica del Valle de Chalco, Secretaría de Educación Pública, 2009.

Hollloway, Charles, Decision Making Under Uncertainty: Models and Choices, Prentice-Hall, 1979

Lorange, Peter, Corporate Planning: An Executive Viewpoint, Prentice-Hall, 1980.

OCDE, The Mexico-OECD Co-operation to Strengthen Competitiveness in Mexico, 2008.

Piña Garza, José, Políticas Públicas y Acciones de Fortalecimiento para el Desarrollo de la Infraestructura en México, documento inédito, agosto de 2012.

Presidencia de la República, Programa Nacional de Infraestructura 2007 – 2012, julio de 2007.

⁴ UNESCO: “Engineering: Issues, Challenges and Opportunities for Development”

⁵ Worldwide, in the last two decades of the 20th century, the proportion of women with engineering degrees went from 10% to more than 20%. But starting in 2000, this portion began to decline again, and in some countries, the figure is now less than 10%.