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