In the first post in this series I explained just how significant engineering is in today’s sluggish world economy, both in the developed world and developing world. In this post I will explain why investors are so reluctant to back engineering ventures.
Engineering performances are slipping, engineers are frustrated, business owners are even more frustrated and billions of people languish in misery because of engineering performance failures. These are not spectacular failures like Fukushima or Deepwater Horizon. Instead they are silent failures that have remained mostly out of sight, in many cases deliberately hidden by their owners.
See the last pages of chapter 11 in my book for an example based on a real project. The Ravensthorpe nickel project is another example from here in Australia – see the image. The Gorgon LNG project and the Australian National Broadband Network project are other public projects which cost far more than forecast but there are so many more that will never be publicized.
There is no sense in blaming ourselves, other engineers, or even looking for scapegoats. Given appropriate support and encouragement, most engineers are extremely dedicated and hard-working, and have been doing their best. Working with my students, we have interviewed around 350 engineers on several continents over the last 15 years and lazy engineers are rare.
No, these failures are occurring because of engineering knowledge and skill gaps that remain hidden from most of us. Hence the frustration by all concerned.
Understanding these knowledge gaps can lead to lucrative opportunities for engineers who can master the expertise that a few engineers have already developed, as I have described in my book.
The question is, how can we take advantage of these opportunities and reverse the decline in engineering performances, and help reinvigorate the world economy?
And how can we gauge our performances?
In industrial economies, the best indicator is interest rates, now near zero. What that tells us is that actual returns from investments are so low that you’re better off giving your money to a bank for next to nothing. In some countries now, you actually have to pay the bank to keep your money!
If investors could find opportunities to gain higher returns, they would invest. We could be offering better returns, but our recent record has helped undermine investor confidence.
How do we know that it is engineering performances causing this?
IPA Global is a company measuring the actual performance of engineering projects that publishes some of its data, based on more than 10,000 projects. These days, less than one in three engineering projects over a billion dollars succeed in giving investors more than half the return they were promised. 10-15% are complete failures, resulting in near complete loss of investors’ original cash. We have to be concerned that IPA data also shows that engineering performances are getting worse. Further, IPA data does not include projects supported by governments where performance can be even worse.
Most of these project failures are kept secret by their owners, fearing retribution from investors and shareholders. Even engineering firms that work on these projects may be unaware of the project’s failure.
How did I get to know this? I have interviewed countless engineers over the last decade who have told me this is happening. Bankers too.
Scandinavian research backs these observations in a different way: operations and maintenance mistakes are costing even well-organised firms 30-50% of turnover (available on request).
An oil and gas engineer told me: “We must have burned at least one or two billion on that project, but because the oil price was so high, we capitalised the loss and the shareholders didn’t notice.”
Well, now they have noticed.
These failures have frustrated business owners and politicians alike, and most engineers unsurprisingly have a poor reputation in investment circles. As one owner and board chairman put it to me, “Whenever I find engineers in my organisation, I sack them on the spot.”
Some economists will say that the problem now is lack of demand. Even if engineers could build a much more economical petrochemical plant, for example, there’s such an oversupply it would not be able to sell products into a flooded market.
Maybe in the developed world, just now, demand is weak. But there is certainly demand in the developing world.
Average productivity in developing countries has not advanced as much as in industrialised countries in the last 50 years. On average, it is five or more times less than in advanced countries, and that ratio has not shifted in several decades. Strong improvements in South Korea and China hide much weaker performances elsewhere.
How does low productivity influence ordinary life at street level? It is not hard to work that out. Five times lower productivity translates into higher prices: it costs much more to get the same service (or product) at the same level of quality and performance as in the leading economies. Take electricity for example. The official meter price in Pakistan is about 16-20 cents a unit, but because the supply is intermittent, you need a generator or batteries to get power when you need it. When you add depreciation, opportunity costs, lower life and inefficiencies due to low quality infrastructure, the real cost of electrical energy for typical users at the point of useful application is typically five times higher than in typical advanced economies.
As I have explained in my book, in South Asia the real cost of safe drinking water, an essential engineered service, varies between $50 and $150 per tonne, compared with $3 or tonne in Australia.
Where there are such high costs, there are commercial opportunities for engineers to provide supplies that cost less and make good profits. So why doesn’t that happen?
It turns out to be so much more difficult for engineers to provide results that satisfy investors in the social, political and economic environment of a developing country. Read my book for detailed explanations. Engineers would love to fix these issues, but they need new knowledge (& education) to do that as I will explain in later articles.
Engineering performances are disappointing everywhere, and my research has pointed to knowledge gaps among engineers as one of the most likely factors.
Certainly we engineers, as a community, have enormous influence and there are so many opportunities for improvements.
It is not, as Bill Clinton said, “The Economy”.
In the coming weeks I will write about ways that we engineers can improve our performances and help to fix the global economy. I will also explain some reasons that emerged from our research that explain why major projects fail. Read a recent post in this series on value and value creation.
[Added Nov 15, 2016] Donald Trump’s election win showed that the sluggish performance of American engineering enterprises is frustrating everyone. Yet, only engineers can fix that. Without engineers who know how to create value in today’s world, Trump will be unable to deliver on his promises.
If you know about more of these engineering project failures, by all means let me know about them using the contact form below.
For further reading:
In my book, Chapter 11, pages 411 – 417.
Also, see these reports from the Australian Business Council