China manufactures the majority of the typical products that we (the US population and most of the developed world) purchase, consume and otherwise acquire. Maybe that is not entirely true, especially with autos, as we purchase a great many products from Japan and Europe. But we must recognize that many of the parts that go into an assembled automobile are manufactured in China, even Japanese cars, and China has begun to export cars, primarily to the underdeveloped countries, in a big way, much the same way Japan and Korea first did in years past. Even gasoline is now exported from China to under developed Asian countries because of the rapid expansion of Chinese refineries in the past three years.
This reality was brought home again and again to me when I was getting my PhD in Japan (2003 to 2005). One of my fellow PhD candidates was a woman business professor from Harbin, China. I wanted to bring her a gift to thank her for teaching Pat Galloway and me how to make and cook Chinese dumplings. We asked what we could bring her from the US. She thought for a long time and then responded, “There is nothing I can think of because you get everything from China.” Ever since that night I have evaluated and focused on this phenomenon from a geopolitical standpoint. Now there is talk coming out of Washington DC about how we should reinvigorate rust belt manufacturing. So, is this the right time to re-evaluate where products are manufactured
The US economy is gathering momentum and starting the long process to return to growth. There is much discussion in the media about the strong corporate profits as the first quarter results are showing. Yet, there is also a lot of discussion about the slow return of jobs as the jobless rate hovers at approximately 10%. There is the usual bashing of China as well, much as was done in the 1980’s about exporting jobs to Japan during that severe recessionary period. All these events create high-level arguments that underlie most of the political rhetoric behind the concept of re-creating "new" jobs by bringing manufacturing “home.” This rhetoric ignores reality and history.
First, the US economy creates most jobs from small businesses or through evolution of technology based firms. Small businesses primarily offer management technology or specialized and focused consulting. Larger firms are focused at the current time, for instance, on nanotechnology based products, supply logistics, and the like. Both provide jobs that reflect the fact that the US work force primarily relies on employees who have a high level of knowledge. Despite criticism of our education system, we forget the fact that most sought after higher education by foreign students is American. I have to ask, what benefit comes from bringing back rust-belt jobs which do not require education and a knowledgeable work force, and also lower wages.
Second there is another important historical fact that politicians often over look. The global financial system as we know it was created as the US and their allies emerged from WWII. In the aftermath of the World War, Germany and Japan had been crushed, and nearly all of Western Europe lay destitute. Bretton Woods at its core was an agreement between the United States and the Western allies that the allies would be able to export at near-duty-free rates to the U.S. market in order to boost their economies. In exchange, the Americans were granted wide latitude in determining the security and foreign policy stances of the rebuilding states. The US took what they saw as a minor economic hit in exchange for being able to rewrite first regional, and in time global, economic and military rules of engagement. For the Europeans, Bretton Woods provided the stability, financing and security backbone Europe used first to recover, and in time to thrive. Most Americans actually focus on other outcomes of Bretton Woods. The strategy proved so successful that the US quickly extended it to Germany and Japan, and shortly thereafter to Korea, Taiwan, Singapore and others. The US began with substantial trade surpluses with all of these countries, simply because other counries had no productive capacity due to the devastation of war. After a generation of favorable trade practices, surpluses turned into deficits, but the net benefits were so favorable to the US that the policies were continued despite the increasing economic deficits that the US experienced.
Bretton Woods is the ultimate reason why the Chinese have succeeded economically for the last generation. As part of Bretton Woods, the US opened its markets, eschewing protectionist policies in general and mercantilist policies in particular. All China has to do is produce and it will have a market to sell to. But in every case there comes a point at which the beneficiary country must transition from wasteful export-driven economies to the development of an in-country, consumer driven demand and must shift from currency control which provides the money to increase capacity cheaply. This happened for the Japanese in 1990 and the Southeast Asian countries in 1997, and is beginning to happen to China as the US asserts itself.
Thinking about these two history lessons gives us the answer to the question: is now the time to re-evaluate where products are manufactured? As our economy recovers, the US consumer is and will be the best educated and earn the most income if we continue to do what we have done for the last 65 years. With each market wrenching economic contraction the US renews its productivity and thus expands its economic horizons. Returning to manufacturing which we have shed and which requires little expanding knowledge would indeed be foolish. And abandoning Bretton Woods would be equally foolish. The US population represents approximately 5% of the world population and still accounts for over 25% of world GDP. It may take time to recover even as the recovery accelerates, but there will be and could not be any benefit that comes from a trying to re-capture rust-belt manufacturing!
Wednesday, May 12, 2010
Friday, March 19, 2010
Now Is The Time For Vision And Imagination, And Boards Should Be Leading The Way
My early mentor in the business world was Jim Taylor. Jim shaped a lot of my thinking on the world and internationalism, especially regarding business and the holistic relationship between seemingly unrelated events.
When I met Jim he just finished a decade (approximately the 1970’s) at the helm of Booz, Allen & Co. It was during his term that Booz expanded globally and became the first management consulting firm with revenues greater than $1 billion. Surprisingly, he agreed to serve on Neislen-Wurster's Board of Directors. I had founded Nielsen-Wurster, the parent company of Pegasus-Global in 1976, but by 1980 NW was still a small firm with a little over 97 percent of its business in the US.
Jim taught me that Boards should be partially made up of individuals who are aware of past patterns and trends and who were able to offer management insight into evolving patterns and trends.
In 1982, we had an assertive (some would say brash) young woman join the firm – Pat Galloway. She presented to the Board her vision that we should become an international niche management consulting firm and laid out a ten year plan to accomplish those objectives. One of the underlying reasons for diversifying was the economic ills in the US at the time. Frankly, the future of management consulting looked bleak at the time. When the Board heard her ideas, the reaction was mixed. Even Jim Taylor was against the idea at first. Fortunately, I was convinced by Pat’s arguments. Within four years she accomplished her goals and we never looked back. Jim Taylor later complimented her vision.
I am currently seeing a great deal of unimaginative thinking globally by Boards, the kind of resistance to change that Pat Galloway faced and succeeded in spite of. Because of the current world wide economic shock, many industry sectors continue to struggle.
This year will be telling for the Oil & Gas, Power Generation, and the public Infrastructure as well as the Engineering & Construction sectors. In the first two sectors (Oil & Gas and Power Generation) there has been a fundamental shift from the historic growth patterns in energy demand. Demand will be there for decades, but may have peaked (oil usage), will not grow as fast (power generation), and may have a different geographic locus (Asia and South America versus Europe and North America).
In the Public Infrastructure sector the knee jerk reaction of governments to economic downturn has sealed the fate of “stimulus spending” on infrastructure around the globe – the world economy cannot afford the huge debt that all of nations have accumulated in the last two years.
As public stimulus spending is winding down, it will not and should not be replaced with several years of normal, pre-crisis spending levels. For the Engineering & Construction sector, similar problems are emerging as a result of the lack of intelligent spending in the other three sectors.
Legacy (pre-mid 2008) project backlogs are rapidly disappearing because uncertainty about the global strength. Timing of the recovery is affecting investment decisions throughout the private and public sectors. At the current time it appears the E&C industry will not see increased interest from either public or private owners until the second half of 2011, at the earliest.
Now, why I am I telling you these facts? There are several seemingly unrelated events that leave me questioning whether Boards of Directors are able to provide management direction with the twin goals of being aware of past patterns and trends and using that understanding to provide insight into evolving patterns and trends. For instance:
•Last week Pat Galloway and I attended the annual conference of the Society for Social Management Systems (SSMS) in Kochi, Japan. Kochi is a typical medium sized city (population 1+ million) in Japan, 1 ½ hours by air from Tokyo, with no dominant international firm, but rather many firms that support the glamour names of industrial Japan. I have been going to Kochi for most of this decade. Unlike past years, the feeling of despair and resignation was evident everywhere. The people evidenced a sense that they merely treading water. Japan for most of this decade has sent the greater percentage of their exports to Asia rather than the US.
•The SSMS has as its goal the creation of a new quasi-profession that combines the thinking of the social sciences with the thinking of engineering to better serve societal needs. As Dr. A.K.W. Jayawardane, Dean of Engineering at the University of Moratuwa in Sri Lanka said, “Any action that is taken to improve the safety of people, property, infrastructure and health, welfare and standard of living of people can be considered as improving our social management systems.” Pat Galloway and I have been active in the society for the six years it has been in existence because it fosters creative thinking regarding problems of owners and private companies. Over the years many creative ideas have come forth from the SSMS. But, last week, it seemed that the same old themes were being presented among the representatives from 11 countries (10 from developed, developing and under developed Asian countries). Even conversations from professional friends in SSMS were surprising. Again, it was a repeat of merely treading water! No one had imagination.
•I have observed several boards in the last few months turning back to the “tried and true” business practices “that have always worked in the past.” All businesses suffered from shock in 2009, and managers are now turning from survival plans to future strategic plans. Take the advice that Booz & Co. (the old Booz, Allen & Co. and the same company that my old mentor headed), offered their clients when they wrote: “Each year Booz & Company’s industry teams write perspectives for their clients, reflecting on the previous year and considering what may come in the year ahead — and how to respond to it.”
Booz’s basic message was summarized as follows: “In addition to the long shadow cast by the economic crisis, this year’s industry outlooks also contain a collective note of warning that deserves even more attention: A handful of underlying structural changes — in demographics and consumer economics, globalization, and sustainability — are having a more irrevocable, dislocating effect on virtually every industry than the financial meltdown ever could. Worse yet, although most companies recognize that they must transform to survive and succeed in the future, they are ill equipped to do so. Many lack the capabilities they will need; most are not properly structured to respond to these changes as they unfold.” In regards to two of the industries, Oil & Gas and Chemical, they suggested looking “to the left side of the supply curve.”
It may be proper advice, but there is no imagination or vision in this solution.
Considering all these disparate thoughts, I fault management and the Boards they turn to for intelligent ambitious advice throughout North America, Asia, Europe, South America and Australia. Boards are being too conservative.
I suggest that the current crisis should be looked upon not as a downturn to be endured but an opportunity for revival and growth. Carlota Perez suggested in 2003 in her Technical Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages that there is a cyclical period in all business sectors, The difference between the first half of the cycle and the second half of the cycle are some wrenching, traumatic events, such as those that have happened in the last two years, which cause industries and governments to wring their hands and do.....nothing.
Perez concludes that the “linchpins of the golden age will include the worldwide build-out of a new services-oriented infrastructure based on digital technology and a general shift to cleaner energy and environmentally safer technologies.”
This statement could be read to state that the future of the Oil & Gas and Chemical sectors will be bleak. Thus all our directors' and manager's “treading water.” But I would suggest that the future of both industries may be much different.
The Oil & Gas industry is a large source of carbon. Different usage concepts causing a shift to cleaner energy using environmentally safer technologies will mean that a greater amount of carbon is available. Carbon is one of the basic building blocks of today’s chemical industry. Seeking niches in which both industries can benefit from the creation and/or use of carbon is the type of thinking that would be useful to many firms in these two industries. Thus, the “golden age” will create a greater and greater need for carbon which coincides with societal demand that carbon production be reduced.
It is only through the stimulation and questioning of the thought processes behind strategic thinking that a new vision will emerge. From new visions, rather than old thinking, will emerge the ideas that fuel imagination. Unless people are given some purpose, they will continue to tread water and despair.
When I met Jim he just finished a decade (approximately the 1970’s) at the helm of Booz, Allen & Co. It was during his term that Booz expanded globally and became the first management consulting firm with revenues greater than $1 billion. Surprisingly, he agreed to serve on Neislen-Wurster's Board of Directors. I had founded Nielsen-Wurster, the parent company of Pegasus-Global in 1976, but by 1980 NW was still a small firm with a little over 97 percent of its business in the US.
Jim taught me that Boards should be partially made up of individuals who are aware of past patterns and trends and who were able to offer management insight into evolving patterns and trends.
In 1982, we had an assertive (some would say brash) young woman join the firm – Pat Galloway. She presented to the Board her vision that we should become an international niche management consulting firm and laid out a ten year plan to accomplish those objectives. One of the underlying reasons for diversifying was the economic ills in the US at the time. Frankly, the future of management consulting looked bleak at the time. When the Board heard her ideas, the reaction was mixed. Even Jim Taylor was against the idea at first. Fortunately, I was convinced by Pat’s arguments. Within four years she accomplished her goals and we never looked back. Jim Taylor later complimented her vision.
I am currently seeing a great deal of unimaginative thinking globally by Boards, the kind of resistance to change that Pat Galloway faced and succeeded in spite of. Because of the current world wide economic shock, many industry sectors continue to struggle.
This year will be telling for the Oil & Gas, Power Generation, and the public Infrastructure as well as the Engineering & Construction sectors. In the first two sectors (Oil & Gas and Power Generation) there has been a fundamental shift from the historic growth patterns in energy demand. Demand will be there for decades, but may have peaked (oil usage), will not grow as fast (power generation), and may have a different geographic locus (Asia and South America versus Europe and North America).
In the Public Infrastructure sector the knee jerk reaction of governments to economic downturn has sealed the fate of “stimulus spending” on infrastructure around the globe – the world economy cannot afford the huge debt that all of nations have accumulated in the last two years.
As public stimulus spending is winding down, it will not and should not be replaced with several years of normal, pre-crisis spending levels. For the Engineering & Construction sector, similar problems are emerging as a result of the lack of intelligent spending in the other three sectors.
Legacy (pre-mid 2008) project backlogs are rapidly disappearing because uncertainty about the global strength. Timing of the recovery is affecting investment decisions throughout the private and public sectors. At the current time it appears the E&C industry will not see increased interest from either public or private owners until the second half of 2011, at the earliest.
Now, why I am I telling you these facts? There are several seemingly unrelated events that leave me questioning whether Boards of Directors are able to provide management direction with the twin goals of being aware of past patterns and trends and using that understanding to provide insight into evolving patterns and trends. For instance:
•Last week Pat Galloway and I attended the annual conference of the Society for Social Management Systems (SSMS) in Kochi, Japan. Kochi is a typical medium sized city (population 1+ million) in Japan, 1 ½ hours by air from Tokyo, with no dominant international firm, but rather many firms that support the glamour names of industrial Japan. I have been going to Kochi for most of this decade. Unlike past years, the feeling of despair and resignation was evident everywhere. The people evidenced a sense that they merely treading water. Japan for most of this decade has sent the greater percentage of their exports to Asia rather than the US.
•The SSMS has as its goal the creation of a new quasi-profession that combines the thinking of the social sciences with the thinking of engineering to better serve societal needs. As Dr. A.K.W. Jayawardane, Dean of Engineering at the University of Moratuwa in Sri Lanka said, “Any action that is taken to improve the safety of people, property, infrastructure and health, welfare and standard of living of people can be considered as improving our social management systems.” Pat Galloway and I have been active in the society for the six years it has been in existence because it fosters creative thinking regarding problems of owners and private companies. Over the years many creative ideas have come forth from the SSMS. But, last week, it seemed that the same old themes were being presented among the representatives from 11 countries (10 from developed, developing and under developed Asian countries). Even conversations from professional friends in SSMS were surprising. Again, it was a repeat of merely treading water! No one had imagination.
•I have observed several boards in the last few months turning back to the “tried and true” business practices “that have always worked in the past.” All businesses suffered from shock in 2009, and managers are now turning from survival plans to future strategic plans. Take the advice that Booz & Co. (the old Booz, Allen & Co. and the same company that my old mentor headed), offered their clients when they wrote: “Each year Booz & Company’s industry teams write perspectives for their clients, reflecting on the previous year and considering what may come in the year ahead — and how to respond to it.”
Booz’s basic message was summarized as follows: “In addition to the long shadow cast by the economic crisis, this year’s industry outlooks also contain a collective note of warning that deserves even more attention: A handful of underlying structural changes — in demographics and consumer economics, globalization, and sustainability — are having a more irrevocable, dislocating effect on virtually every industry than the financial meltdown ever could. Worse yet, although most companies recognize that they must transform to survive and succeed in the future, they are ill equipped to do so. Many lack the capabilities they will need; most are not properly structured to respond to these changes as they unfold.” In regards to two of the industries, Oil & Gas and Chemical, they suggested looking “to the left side of the supply curve.”
It may be proper advice, but there is no imagination or vision in this solution.
Considering all these disparate thoughts, I fault management and the Boards they turn to for intelligent ambitious advice throughout North America, Asia, Europe, South America and Australia. Boards are being too conservative.
I suggest that the current crisis should be looked upon not as a downturn to be endured but an opportunity for revival and growth. Carlota Perez suggested in 2003 in her Technical Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages that there is a cyclical period in all business sectors, The difference between the first half of the cycle and the second half of the cycle are some wrenching, traumatic events, such as those that have happened in the last two years, which cause industries and governments to wring their hands and do.....nothing.
Perez concludes that the “linchpins of the golden age will include the worldwide build-out of a new services-oriented infrastructure based on digital technology and a general shift to cleaner energy and environmentally safer technologies.”
This statement could be read to state that the future of the Oil & Gas and Chemical sectors will be bleak. Thus all our directors' and manager's “treading water.” But I would suggest that the future of both industries may be much different.
The Oil & Gas industry is a large source of carbon. Different usage concepts causing a shift to cleaner energy using environmentally safer technologies will mean that a greater amount of carbon is available. Carbon is one of the basic building blocks of today’s chemical industry. Seeking niches in which both industries can benefit from the creation and/or use of carbon is the type of thinking that would be useful to many firms in these two industries. Thus, the “golden age” will create a greater and greater need for carbon which coincides with societal demand that carbon production be reduced.
It is only through the stimulation and questioning of the thought processes behind strategic thinking that a new vision will emerge. From new visions, rather than old thinking, will emerge the ideas that fuel imagination. Unless people are given some purpose, they will continue to tread water and despair.
Wednesday, February 17, 2010
Rural Health Care – Do Rural Areas Have to Accept Lower Quality or Availability of Health Care?
I am defined as a senior citizen. I live and work in a rural area. Yet, our firm operates and competes around the globe. The county in which I live is half the area of the state of New Jersey – the most densely populated state in the United States and the state I relocated from. The population of Kittitas County is less than 40,000 people compared to approximately 4.5 million people in a comparative area of New Jersey. New Jersey is the home of many pharmaceutical companies and the general region has some of the finest health and medical care available, whereas in our rural county in Washington State there are neither pharmaceutical companies nor great health care.
There is great health care in Seattle, but to access this great health care requires a trip of more than 100 miles (140 km) over a mountain pass. The debate here is not just affordable health care – a national passion at the current time – it is more personal in rural areas. It is whether we have any access to any quality health and medical care period. So, with trepidation, I enter the debate.
Not surprisingly, the OECD (Organization for Economic Co-operation and Development) reported in their “OECD Health Data 2009” that health care spending in the US per person was $7,290 and average life expectancy was slightly greater than 78 years. France spent approximately half as much per person and had an average life expectancy of 81 years, and Japan spent one third as much as the US on average and has an average life expectancy of slightly less than 83 years.
This news is discouraging for me. The US medical system, despite much criticism, is widely admired for its astonishing advancements, but even Switzerland spends only two thirds of the US per capita expenditures, and their health care is equally admired. The high cost of US medical care is due to our fee-for-service concept which leads to innovation because the service is available for anyone that can pay. The real national debate is over the nearly 50 million people who are not covered by medical insurance for a variety reasons and the growing cost of existing health services such as “Medicare,” which is causing the national debt to soar. (Also, I must acknowledge the national debt is soaring in addition because of the government efforts to counter the global recession this year.)
So why am I bothered about the health care debate? Because in rural America, the problem is wider than in urban and suburban America. In our area, there is a community operated and funded hospital within ten miles of us, but only basic services are available. As the average age of County residents increases (along with my my medical care needs) I worry more and more about whether I will have to return to New Jersey, where I lived for nearly 40 years. I think not! I am of the baby boom generation. I can and do, as I have said, offer my services internationally. I am unwilling to give up my quality of life here in Cle Elum, Washington.
I offer the following solution to keeping the best attributes of private health care combined with local initiatives which can serve as a broad model for rural areas such as ours.
We have established a philanthropic organization funded by the citizens of the community and government sources. We “facilitate” the availability of quality health services through our community efforts and a partnership we have established with one of the largest private medical centers in Seattle.
Through a combination of donor funding and the entrepreneurial efforts of the local residents, we are building a local, private medical center as a part of working to create a quality rural health care system. The Medical Center will use innovative techniques, such as, “Tele-Stroke,” whereby a patient accesses the latest heart diagnostic technologies at the medical center (for which we have provided CAPEX and OPEX funding) through Internet communications with the Emergency Room at the Medical Center. Thus, the patient is getting the same medical care as available in Seattle!
We are also matching the medical needs of the rural area with services that were not available before our efforts. The concept builds upon the willingness of the local population to provide for themselves and the willingness of a private medical center to fill a niche without the huge bureaucracy - we both make out. The private medical center does not have to charge “city rates” and we receive quality health care at a cost that most rural residents can afford.
The “health care debate” nationally can rage on, but in this rural community we have begun to solve our problem. We can both afford quality health care and have ready access to it. Our successful efforts may offer insights to others on how to solve many current problems as we continue our national health care debate.
There is great health care in Seattle, but to access this great health care requires a trip of more than 100 miles (140 km) over a mountain pass. The debate here is not just affordable health care – a national passion at the current time – it is more personal in rural areas. It is whether we have any access to any quality health and medical care period. So, with trepidation, I enter the debate.
Not surprisingly, the OECD (Organization for Economic Co-operation and Development) reported in their “OECD Health Data 2009” that health care spending in the US per person was $7,290 and average life expectancy was slightly greater than 78 years. France spent approximately half as much per person and had an average life expectancy of 81 years, and Japan spent one third as much as the US on average and has an average life expectancy of slightly less than 83 years.
This news is discouraging for me. The US medical system, despite much criticism, is widely admired for its astonishing advancements, but even Switzerland spends only two thirds of the US per capita expenditures, and their health care is equally admired. The high cost of US medical care is due to our fee-for-service concept which leads to innovation because the service is available for anyone that can pay. The real national debate is over the nearly 50 million people who are not covered by medical insurance for a variety reasons and the growing cost of existing health services such as “Medicare,” which is causing the national debt to soar. (Also, I must acknowledge the national debt is soaring in addition because of the government efforts to counter the global recession this year.)
So why am I bothered about the health care debate? Because in rural America, the problem is wider than in urban and suburban America. In our area, there is a community operated and funded hospital within ten miles of us, but only basic services are available. As the average age of County residents increases (along with my my medical care needs) I worry more and more about whether I will have to return to New Jersey, where I lived for nearly 40 years. I think not! I am of the baby boom generation. I can and do, as I have said, offer my services internationally. I am unwilling to give up my quality of life here in Cle Elum, Washington.
I offer the following solution to keeping the best attributes of private health care combined with local initiatives which can serve as a broad model for rural areas such as ours.
We have established a philanthropic organization funded by the citizens of the community and government sources. We “facilitate” the availability of quality health services through our community efforts and a partnership we have established with one of the largest private medical centers in Seattle.
Through a combination of donor funding and the entrepreneurial efforts of the local residents, we are building a local, private medical center as a part of working to create a quality rural health care system. The Medical Center will use innovative techniques, such as, “Tele-Stroke,” whereby a patient accesses the latest heart diagnostic technologies at the medical center (for which we have provided CAPEX and OPEX funding) through Internet communications with the Emergency Room at the Medical Center. Thus, the patient is getting the same medical care as available in Seattle!
We are also matching the medical needs of the rural area with services that were not available before our efforts. The concept builds upon the willingness of the local population to provide for themselves and the willingness of a private medical center to fill a niche without the huge bureaucracy - we both make out. The private medical center does not have to charge “city rates” and we receive quality health care at a cost that most rural residents can afford.
The “health care debate” nationally can rage on, but in this rural community we have begun to solve our problem. We can both afford quality health care and have ready access to it. Our successful efforts may offer insights to others on how to solve many current problems as we continue our national health care debate.
Thursday, January 21, 2010
Mega Projects, Politics and Investment - Are These Concepts Mutually Exclusive?
Public Infrastructure and Energy Infrastructure projects, today's so-called Mega Projects, require some of the largest engineering and construction investments seen to date. Mega Projects (projects nominally costing $1 Billion and up) are an essential aspect of our economies, improving the quality of our lives while encouraging the kind of constant technological improvements that make our public infrastructure endeavors productive.
In 2008 the global recessions led to the tremendous effort to re-ignite economic growth from the financial and institutional paralysis caused by the recession pandemic that had swept around the world. Virtually every nation subsequently announced “stimulus packages”, hoping to enable some kind of normalcy in their individual economies, whether they could afford the cost of stimulus programs or not.
Last year we saw a massive push for public infrastructure spending in the US. With a new administration and a friendly Congress, politicians lauded a new era of infrastructure investment and proposed many mega projects. In the Electric Utility sub‑sector, politicians and utilities alike proposed new power generation facilities with the goals of including renewable green and nuclear sources. Smart grid upgrades to replace aging plants and old distribution systems were proposed in order to bring power generation more into line with the administrations policy objectives.
These goals were to be accomplished with the added benefit of reducing carbon emissions. These are very lofty and worthy goals indeed. These goals were to be embedded in projects that would take years to accomplish – one of the very characteristics of Mega Projects and their purpose in recovering economies.
Now as we begin 2010, political rhetoric has turned from the eloquent goals of a new administration' policy dreams to the goals of winning mid-term elections in 2010. The US public is realizing that the stimulus fund packages were not directed towards infrastructure goals, and the Mega Projects that were promised and necessary were not funded. The US public is leery of the huge debt the country has amassed. Politicians now talk of either no further stimulus packages, or a curtailment in public bailout spending. Improvements to the Energy Sector are bearing the brunt of this political wind in the form of virtually no increase in public investment in infrastructure projects .
As I noted last year in an address before the Society for Social Managements Systems, the Harvard Business Review stated in its November 2006 issue:
Few things are more fragile than institutional memory. We build amnesia in to our processes – wiping our computers’ memories and shredding our files or entombing them in distant warehouses. The very psychology is business people are memory adverse. Executives who can quote chapter and verse of next year’s plans struggle to remember the rationale behind last year’s goals. Managers would rather scan the horizon than look back…it dooms us to unproductive repetition of our predecessors’ blunders. [Emphasis Added]
As businesses suffer from the lack of institutional memory, so do politicians as they deflect necessary investment into the future. As usual they will present a whipping boy – corporate malfeasance - or a “sacrificial lamb” – newly found fiscal responsibility, a balanced budget - hoping to deflect public concerns away from the current issues of infrastructure spending and investment climates. They repeat the blunders of their political predecessors as surely as do businesses.
Deutsche Bank analysts last month stated with regards to the Oil & Gas sub-segment of the Energy Industry:
For 2010, the biggest risk for oil companies emerging from DC for oil and gas companies is tax….The pressure on President Obama to limit additions to the budget deficit while also advancing key job and social programs is enormous, which necessitates finding new sources of revenue without directly raising voters’ taxes. Oil and gas producers remain tremendously unpopular with the public – again, go to the polls, and find that oil and gas is consistently the most unpopular industry, even this year far outscoring banks (mid range) and are thus an easy target for increased taxation … The key tax threats are,
The repeal of the Section 199 manufacturing tax deduction for oil and gas companies. For 2009 the deduction was frozen at 6%, could be fully eliminated for [producers]. Under the budget, that would be worth $13.3 billion between 2010 and 2019.
Proposed changes to the Gulf of Mexico royalty and leasing regime. From a Democratic energy staffer: “The question is, are we getting a fair return on our asset leases in the Gulf of Mexico.” The legal success by Anadarko in winning back tax is seen as a short term victory, a long term potential defeat, and furthermore raising Gulf of Mexico taxes was cited as a process started under the Bush administration. Under the budget, that would be worth $5.3 billion between 2010 and 2019.
Reinstating superfund taxes for the industry. If reinstated in 2010, it would apply to the 2011 tax year.
Restriction of dual capacity tax creditability to instances of foreign income tax thus eliminating creditability for other trade or business taxes. This is a massive threat to [producers], given their huge foreign income; the offset to this threat has been the argument that it will disadvantage US oil companies relative to major foreign oils, European majors such as Shell and BP, but also Chinese or other majors. That argument has been sufficient to offset the risk so far..
Repeal of the intangible drilling costs deduction; more likely a headline threat than reality because of the stronger political power of gas producers...
Repeal LIFO inventory accounting. This change now appears unlikely, but if enacted would cost the industry approximately $24bn in one fell swoop (depending on the prevailing oil price).
Eventually, policy makers and politicians will have to turn to private investment as the appetite for public debt wanes. This will require creating an investment environment that is positive for investors. Taxing the Energy Sector is not the answer. Attracting private investment requires a commitment to creating and maintaining a “predictable and stable” climate for their investments.
Public Utility Commissions exist to regulate private industries like electric utilities in order to create a balance between long term investment needs, projected energy demand and the public's capacity (or desire) to pay for new electricity. The current building atmosphere emphasizes new construction or facility improvements that recognize long‑term service and maintenance regimes as well as expedient and justifiable construction costs. The public utility Mega Project that recognizes these requirements will need the kind of public and private investment that can only be attracted by a stable and predictable investment climate.
Mega Project investment requires a predictable and stable environment over long periods of time. Commissions must not allow themselves to create an investment disincentive by being pressured by politicians with a short term focus.
In other words it requires a sense of institutional memory and institutional wisdom lacking in today's political climate.
Providing predictability for all stakeholders, public and private, should be the concept that underlies attracting investment to these projects. With this kind of investment scheme, the public interest will be furthered by new infrastructure Mega Projects.
Short‑sighted political agendas result in an investment climate that does not enable the kind of balance so important to the completion of Mega Projects. For the time being the three concepts of long-term investment stability, public benefit and short-term political gain appear to be mutually exclusive.
I sincerely hope that private investors and the public will prevail over the politicians and their short sighted political agendas.
Kris
In 2008 the global recessions led to the tremendous effort to re-ignite economic growth from the financial and institutional paralysis caused by the recession pandemic that had swept around the world. Virtually every nation subsequently announced “stimulus packages”, hoping to enable some kind of normalcy in their individual economies, whether they could afford the cost of stimulus programs or not.
Last year we saw a massive push for public infrastructure spending in the US. With a new administration and a friendly Congress, politicians lauded a new era of infrastructure investment and proposed many mega projects. In the Electric Utility sub‑sector, politicians and utilities alike proposed new power generation facilities with the goals of including renewable green and nuclear sources. Smart grid upgrades to replace aging plants and old distribution systems were proposed in order to bring power generation more into line with the administrations policy objectives.
These goals were to be accomplished with the added benefit of reducing carbon emissions. These are very lofty and worthy goals indeed. These goals were to be embedded in projects that would take years to accomplish – one of the very characteristics of Mega Projects and their purpose in recovering economies.
Now as we begin 2010, political rhetoric has turned from the eloquent goals of a new administration' policy dreams to the goals of winning mid-term elections in 2010. The US public is realizing that the stimulus fund packages were not directed towards infrastructure goals, and the Mega Projects that were promised and necessary were not funded. The US public is leery of the huge debt the country has amassed. Politicians now talk of either no further stimulus packages, or a curtailment in public bailout spending. Improvements to the Energy Sector are bearing the brunt of this political wind in the form of virtually no increase in public investment in infrastructure projects .
As I noted last year in an address before the Society for Social Managements Systems, the Harvard Business Review stated in its November 2006 issue:
Few things are more fragile than institutional memory. We build amnesia in to our processes – wiping our computers’ memories and shredding our files or entombing them in distant warehouses. The very psychology is business people are memory adverse. Executives who can quote chapter and verse of next year’s plans struggle to remember the rationale behind last year’s goals. Managers would rather scan the horizon than look back…it dooms us to unproductive repetition of our predecessors’ blunders. [Emphasis Added]
As businesses suffer from the lack of institutional memory, so do politicians as they deflect necessary investment into the future. As usual they will present a whipping boy – corporate malfeasance - or a “sacrificial lamb” – newly found fiscal responsibility, a balanced budget - hoping to deflect public concerns away from the current issues of infrastructure spending and investment climates. They repeat the blunders of their political predecessors as surely as do businesses.
Deutsche Bank analysts last month stated with regards to the Oil & Gas sub-segment of the Energy Industry:
For 2010, the biggest risk for oil companies emerging from DC for oil and gas companies is tax….The pressure on President Obama to limit additions to the budget deficit while also advancing key job and social programs is enormous, which necessitates finding new sources of revenue without directly raising voters’ taxes. Oil and gas producers remain tremendously unpopular with the public – again, go to the polls, and find that oil and gas is consistently the most unpopular industry, even this year far outscoring banks (mid range) and are thus an easy target for increased taxation … The key tax threats are,
The repeal of the Section 199 manufacturing tax deduction for oil and gas companies. For 2009 the deduction was frozen at 6%, could be fully eliminated for [producers]. Under the budget, that would be worth $13.3 billion between 2010 and 2019.
Proposed changes to the Gulf of Mexico royalty and leasing regime. From a Democratic energy staffer: “The question is, are we getting a fair return on our asset leases in the Gulf of Mexico.” The legal success by Anadarko in winning back tax is seen as a short term victory, a long term potential defeat, and furthermore raising Gulf of Mexico taxes was cited as a process started under the Bush administration. Under the budget, that would be worth $5.3 billion between 2010 and 2019.
Reinstating superfund taxes for the industry. If reinstated in 2010, it would apply to the 2011 tax year.
Restriction of dual capacity tax creditability to instances of foreign income tax thus eliminating creditability for other trade or business taxes. This is a massive threat to [producers], given their huge foreign income; the offset to this threat has been the argument that it will disadvantage US oil companies relative to major foreign oils, European majors such as Shell and BP, but also Chinese or other majors. That argument has been sufficient to offset the risk so far..
Repeal of the intangible drilling costs deduction; more likely a headline threat than reality because of the stronger political power of gas producers...
Repeal LIFO inventory accounting. This change now appears unlikely, but if enacted would cost the industry approximately $24bn in one fell swoop (depending on the prevailing oil price).
Eventually, policy makers and politicians will have to turn to private investment as the appetite for public debt wanes. This will require creating an investment environment that is positive for investors. Taxing the Energy Sector is not the answer. Attracting private investment requires a commitment to creating and maintaining a “predictable and stable” climate for their investments.
Public Utility Commissions exist to regulate private industries like electric utilities in order to create a balance between long term investment needs, projected energy demand and the public's capacity (or desire) to pay for new electricity. The current building atmosphere emphasizes new construction or facility improvements that recognize long‑term service and maintenance regimes as well as expedient and justifiable construction costs. The public utility Mega Project that recognizes these requirements will need the kind of public and private investment that can only be attracted by a stable and predictable investment climate.
Mega Project investment requires a predictable and stable environment over long periods of time. Commissions must not allow themselves to create an investment disincentive by being pressured by politicians with a short term focus.
In other words it requires a sense of institutional memory and institutional wisdom lacking in today's political climate.
Providing predictability for all stakeholders, public and private, should be the concept that underlies attracting investment to these projects. With this kind of investment scheme, the public interest will be furthered by new infrastructure Mega Projects.
Short‑sighted political agendas result in an investment climate that does not enable the kind of balance so important to the completion of Mega Projects. For the time being the three concepts of long-term investment stability, public benefit and short-term political gain appear to be mutually exclusive.
I sincerely hope that private investors and the public will prevail over the politicians and their short sighted political agendas.
Kris
Subscribe to:
Posts (Atom)
