In 2012, when three of India’s northern electricity suppliers failed simultaneously, a tenth of the world’s population, some 670 million people, was plunged into darkness. Earlier this year, more than 290 people died when an illegally constructed factory building collapsed in Bangladesh. These aren’t anomalies. Far from benefiting from the smart grid or the energy efficiencies of green buildings, many of the world’s governments struggle to provide basic services to their citizens.
International infrastructure—the world’s roads, bridges, electric grids and water systems—is in desperate need of modernization, at a cost estimated by the McKinsey Global Institute at $57 trillion by 2030 ($3.2 trillion annually) just to keep up with the world’s GDP growth. That represents an almost 60 percent increase from spending over the past 18 years.
The numbers are big, but not totally out of reach. In a 2012 Washington speech, then-Secretary of State Hillary Rodham Clinton estimated that global construction spending would increase “from $6 trillion a year today to nearly $9 trillion a year by 2020.” That growth, she says, “represents enormous demand, both for traditional roads and bridges, and for the smart, technologyenabled infrastructure of tomorrow.”
For companies willing to see beyond the taboos that discourage investment in the developing world, demand equals opportunity. According to a Deloitte report on the global crisis, “Contrary to doomsayers, it is not insolvable.” An increasing percentage of available investment capital is coming from the private sector.
Putting together the funding to make major but long-delayed projects finally happen is a challenge but a worthy one, and a number of Wharton graduates— operating all over the world—have made it their life’s work.
Serving Public Development
Tom Lockard, WG’84, is managing director for public finance at Stone & Youngberg, which through its parent company Stifel Nicolaus is the nation’s top underwriter of California’s municipal bonds. Since joining S&Y as an investment banker in 1984, Lockard has put together more than 400 newissue municipal bond transactions representing more than $4.5 billion in debt.
“Cities and states are complex organisms,” says Lockard, who points out that California’s “progressive system” uses a combination of elected officials and professional managers to make development projects happen.
“New development pays for itself, because new residents are assessed to help pay for water hookups, curbs, gutters and sidewalks,” Lockard says, adding that infrastructure projects in the state have been less hampered by budget-cutting than is commonly thought.
Inviting foreign investment is another approach to raising funds. Luis Fernando Andrade, WG’86, an ex-McKinsey partner, leads Colombia’s construction efforts as president of the Colombian National Infrastructure Agency (ANI). Last year in a London speech, he stated that Colombia would triple its transportation infrastructure spending (including a 50 percent increase in railway lines and a 100 percent increase in four-lane highways) by 2014.
There’s a considerable unmet need for new projects and financing strategies in Latin America, and Colombia in particular. The countries of Latin America and the Caribbean currently invest only 2.5 percent of GDP per year in infrastructure, reports Eduardo Cavallo of the Inter-American Development Bank. Colombia’s figure for roads and railways was 0.75 percent of GDP between 1981 and 2006.
Andrade tells us that the ANI plan, which he describes as Colombia’s “biggest program in road infrastructure in 20 years,” is on track. The concession to build the $700 million Girardot-to- Puerto Salgar road connecting southern Colombia to the Caribbean coast, for instance, has attracted interest from 48 companies, 25 of them foreign based. It’s a prime example of the kind of public-private partnerships (PPPs) that are being used by big infrastructure projects around the world to meet their funding goals.
“We contacted big road concession companies worldwide that had never considered Colombia as a destination for investment in transportation infrastructure,” Andrade says. “The challenge here is to move the capital markets, and achieving this would mean that I was able to put into practice what I learned at Wharton.”
Andrade’s recipe for attracting foreign investment to Colombia—a country that has a reputation to overcome, he admits— includes transparency in the bidding process, standardization and financing through allocation of toll-road revenue to investors.
According to Richard Moh, WG’03, PPPs are “one possible way,” but “most infrastructure still needs to be funded by the government or through official donor’s assistance (ODA) funds, such as the World Bank and Asian Development Bank.” In Taiwan, the government is firmly in control of major projects, he says. Moh is the senior vice president and special assistant to the chairman at Moh and Associates Inc. in Taiwan, a part of the MAA Group Consulting Engineers, an engineering consultancy group of firms established by his father and uncle to serve the Asian market.
With 1,000 engineers and other staff in Beijing, Shanghai, Taiwan, Hong Kong, Bangkok, Singapore and Yangon, MAA Group has been involved in major infrastructure projects including highways, bridges, tunnels, the Taiwan High-Speed Rail, new town developments such as Saigon South, the Taipei 101 skyscraper, mass rapid transit systems and Thailand’s Suvarnabhumi Airport.
Moh has two engineering degrees from Cornell University on top of his Wharton degree. He says that MBAs are rarely seen in his field, but the training has proven very useful on the ground.
Meeting the Need in Africa
Economic development in Africa has been stymied by the poor state of the continent’s infrastructure. A recent World Bank study estimated that the associated challenges cut national economic growth by two percentage points annually and business productivity by as much as 40 percent.
Strong leadership could reverse those trends, and that’s where Darius Lilaoonwala, WG’86, comes in. Lilaoonwala started his career at the World Bank and in 1989 moved to the International Finance Corporation (IFC). From 2001 to 2010, he managed IFC’s power and renewable energy sector and financed 90 power projects in 34 countries during that time. He recently moved to the IFC Asset Management Company, where he heads the IFC Global Infrastructure Fund and is well placed to advance major African development projects.
“Africa’s infrastructure needs are huge,” Lilaoonwala says. “Many people do not have access to safe drinking water, reliable electricity or proper transportation options. But in the last decade, more and more African governments are reforming their infrastructure and inviting private capital to invest.”
One reason development is picking up is a perceived lessening of endemic political corruption. Countries have recognized the need to foster the proper environment to attract quality investors.
“We hold our clients to a high standard,” Lilaoonwala says.
For Africa, he sees major opportunities for renewable energy, especially for remote villages far from centralized fossilfuel power stations. Some wind and solar projects represent smaller and localized appropriate technology, but others are quite large. A prime example is the now operational Cabeolica wind project in Cape Verde, a 30-turbine wind farm spread across four islands providing as much as 25 megawatts, which is 20 to 25 percent of the fast-growing country’s total power needs.
Cabeolica is the first commercial-scale, PPP-financed wind farm in sub-Saharan Africa, with the international African Finance Corporation (AFC) as its lead investor.
Kudzayi Hove, WG’03, a native of Zimbabwe, is AFC’s head of equity investments. She “conservatively” estimates Africa’s infrastructure needs and investment deficit at $40 billion per year for the next 10 years.
“The scale and magnitude of infrastructure deficit African economies face can only be addressed with engagement of the private sector,” says Hove, formerly a director at Emerging Capital Partners. The largely private AFC, with the participation of eight countries, was launched in 2007 with a focus on infrastructure—it has invested more than $881 million in more than 20 projects. Hove was involved with many of them, including the Main One Cable Company (supplying fiber-optic connectivity to Ghana and Nigeria); the Henri Konan Bedie toll bridge in the Ivory Coast; and ARM, a cement company operating in East Africa.
“When I left for business school, I knew that whatever I ended up doing, I wanted to stay working in Africa,” Hove says. “Infrastructure is so fundamental to every African country that it has huge multiplier effects on each economy. So I knew that I would be making an impact in many ways.”
Insurance as Relief
In emerging and developed economies alike, the roads, bridges and buildings are further threatened by natural disasters that have become increasingly common.
Howard Kunreuther, co-director of the Wharton Risk Management and Decision Processes Center and Wharton’s James G. Dinan Professor, says that natural disasters expose the inadequacies of some infrastructure projects, such as New Orleans’ weak levee and flood control structures in place before Hurricane Katrina. By contrast, he says, the Netherlands lost nearly 2,000 people and suffered severe damage from flooding in 1953 and responded with a very robust system of dikes and storm infrastructure that has provided protection since.
Such solutions are not cheap, however, and countries exposed to natural calamities are contemplating ways to fund infrastructure resilience and reconstruction. A traditional approach in the developing world with international relief aid may no longer be viable as budgets tighten in donor countries and climate change intensifies storms and other phenomena. National insurance programs may offer a way forward, Kunreuther says. He cites the government of Turkey which, supported by the World Bank, developed an affordable earthquake insurance program for urban dwellings following the 1999 Marmara disaster, which killed more than 17,000 people. According to the World Bank, Turkey’s program has inspired more than a dozen countries, including China, Greece, the Philippines, Iran and India, to develop their own catastrophe coverage.
Unfortunately, low-cost insurance programs don’t guarantee public participation. According to Kunreuther, whose latest book in the field is titled Insurance and Behavioral Economics: Improving Decisions in the Most Misunderstood Industry, fewer than one in three Americans living in flood-prone areas participate in the U.S. National Flood Insurance Program. One untried solution, Kunreuther says, would be for communities to buy their own insurance policies to rebuild after disasters and improve infrastructure.
Brian Owens, WG’95, is a London based senior director for RMS, a company that specializes in catastrophic risk modeling. Since Wharton, Owens has worked in insurance, but he expressed his interest in natural disasters by earning a 2001 master’s degree in atmospheric science at the University of Miami.
Many of RMS’ clients are reinsurance companies, insurance companies for insurance companies that are becoming increasingly interested in climate change and how it may affect their future losses, Owens says.
His employer’s products can calculate the probability of various disaster scenarios and the vulnerability of rail lines, bridges, buildings and other infrastructure, factoring in not only design codes, but also code enforcement—likely a critical failure in the Bangladesh factory collapse.
“The codes may be in place,” he says, “but not enforced.”
Infrastructure needs, international and local, remain complex and daunting. The bad news is that risks are not going away—whether they be from corrupt local officials who let shaky buildings through inspections, or earthquakes that spawn tsunamis and raze coastlines.
Erwann O. Michel-Kerjan, managing director of the Wharton Risk Center and author of the book Seeds of Disaster, Roots of Response: How Private Action Can Reduce Public Vulnerability, says that planners are now thinking the unthinkable and are contemplating relocation after vulnerable properties have been repeatedly damaged by natural disasters.
The good news is that a rising tide of smartly targeted development and infrastructure solutions are meeting a vital need in a growing world.