Booz Allen Hamilton suggests how to reinvigorate electricity, water, and transportation systems

Although the circumstances vary from one urban area to the next, they all have one thing in common: The critical infrastructure that is taken for granted by both their citizens and their government leaders is technologically outdated, woefully inadequate, increasingly fragile, or all of the above. In some cities, the quality of water, power, and transportation infrastructure is noticeably declining. In others, it was never very good to begin with. And few cities have enough of it to meet future needs.

"The Middle East region faces the same challenges as any other region in the world when it comes to electricity, transportation and water systems," said Walid Fayad of Booz Allen Hamilton.

"The countries here must work alongside the private sector to build a lasting infrastructure that will have positive benefits for years to come,"

he added.

An estimate developed by Booz Allen Hamilton suggests the magnitude of the problem. Over the next 25 years, modernizing and expanding the water, electricity, and transportation systems of the cities of the world will require approximately $40 trillion — a figure roughly equivalent to the 2006 market capitalization of all shares held in all stock markets in the world.

But the cost of not meeting the challenge could be even greater than $40 trillion. A city's ability to respond effectively to a crisis for instance, such as pandemic disease or a terrorist attack, also depends on robust infrastructure: not just standard access to water, power, and mobility, but the extra capacity and backup needed for life under duress. In short, although the threats of global climate change and terrorist attack have occupied much of the industrialized world's collective attention, inadequate and fragile urban infrastructure could well do more harm to a larger number of people. Sooner or later, the money needed to modernize and expand the world's urban infrastructure will have to be spent.

Infrastructure fatigue

The demand for essential infrastructure is exploding. The world's population is projected to increase by one-third, to exceed 8 billion by 2050, with — for the first time in human history — more than 50 percent of humanity living in metropolitan areas. The requirements for water, power, and mobility will rise accordingly, even as population density makes it more difficult to build and protect the robust infrastructure needed to satisfy that demand.

The typical life cycle of urban development also reinforces demand for infrastructure. As more people live and work in metropolitan areas, they need and expect more affordable housing. The default result, barring a coordinated effort to align mass transit systems and transit-oriented development, is a sprawling metropolitan area encompassing miles of suburbs — and in less-developed countries, shantytowns. In such low-population-density environments, roads and highways become the only transportation mode that works. This, as we have seen time and again, becomes a recipe for gridlock. Water and electricity grids must also serve more people over greater distances than in the past.

Meanwhile, the quality and quantity of supply are increasingly threatened everywhere in three primary areas: power, transportation and water. The need for better facilities and infrastructure to deliver more of these to growing populations is greater than ever.

These three problem areas would be challenging enough if they were happening separately. But they may all be hitting a crisis point simultaneously. Cycles of infrastructure fatigue seem to be timed in many metropolitan areas so that major replacement efforts will have to occur within a few years of each other — and decay in one technological arena may well exacerbate decay in others.

Citizens seem unwilling to make many concessions to improve the quality of their infrastructure. Urbanites regularly say they want to live in a place with high quality of life, but they resist the easiest means by which governments can pay for it: increased highway tolls, abandonment of water and heating fuel subsidies, and energy taxes. Because the political will to provide more than minimal services at the lowest possible cost doesn't exist in many places, delivering infrastructure services on a sustainable cost-recovery basis is beyond the financial ability of most urban authorities.

Many governments have responded to these pressures during the last few decades by muddling through. They fix problems in a piecemeal fashion, "satisficing" the population, giving residents just enough improvement so that they don't boil over in anger or move away. Some localities cope by refurbishing archaic technologies, without either the up-front investment or the eventual savings that a complete redesign would provide. Such incremental solutions not only fail to address the need for infrastructure, but exacerbate it in the long run, by drawing more people into the region without satisfying the need for better service.

Interdependence and imagination

What, then, would a comprehensive solution look like? It would start with recognition of the interdependence of the many players involved. Water, energy, and transportation, for example, are typically administered by different regulatory bodies and innovated by separate companies. That should change.

The roles played by the public and private sectors also need rethinking. Since the early 1990s, politicians and economists have engaged in a heated debate over a false dichotomy: Which form of authority is better at developing infrastructure, government or business?

Experience suggests that the best projects are those that make best use of the public-private relationship. The three basic stages of infrastructure management: design and approval, oversight and financing, and construction and operations, are the best ways to take advantage of this relationship.

Light-handed government

A genuinely effective planning process uses the government's convening power to create a transparent, open discussion from the start, with sufficient opportunities to hear from stakeholders and anticipate possible problems before the design is finalized. This requires straightforward and complete statements of the plan's objectives (unfortunately a real-world rarity), along with its costs and benefits, made clear to the public. It may also require a more coherent overlap between the geographic scale of a project and the coordination of authority.

Government, in short, is best positioned to lead the initial planning stages, but deftly and selectively, with a firm but light-handed oversight role that emphasizes goals instead of means.

Sustainable financing

The private sector should take the lead, meanwhile, in financing, pricing, and ownership. The most appropriate government role in financing is explicit without direct oversight management: setting up a transparent, non-preferential financing process and then allowing capital markets to bear the risk and reap the financial reward. Allocating and syndicating risks is one of the things that the private sector does best. It is particularly attractive to institutional investors because it is largely uncorrelated with other classes of financial assets available to them. And it can be profitable: Booz Allen estimates suggest that in 2006, five-year returns included 11 to 13 percent for airports, 10 to 13 percent for toll roads, 8 to 10 percent for rail passenger lines, and 10 to 14 percent for wastewater plants.

Using fees to reflect underlying costs is another critical component of a financially sustainable infrastructure sector. One way to accomplish this is through marginal pricing: charging more for "peak" service, such as rush-hour transportation or residential electricity use during early evening, when or where demand is high. Although this type of pricing is often criticized as making poor people pay more, it turns out to be the most effective way to create the kinds of feedback loops that improve cost performance and quality. And cities already have a great deal of experience using tax policies and targeted subsidies to overcome any regressive implications. Those who can't afford to pay for electricity or water can be guaranteed a minimum amount to maintain a decent quality of life.

Marginal pricing also provides an incentive for suppliers of energy, transportation services, and water to provide higher overall value. And there is increasing evidence that the public will not just accept, but enthusiastically endorse, higher prices in exchange for greater quality. One prominent example is the "road pricing" highway fee system of Singapore and Hong Kong. London adopted the approach in 2002; since then, drivers who bring their automobiles into the inner-city traffic zone have been charged a daily fee (originally £5, later raised to £8). As a mechanism to control traffic, the program is a success. In the first six months of the plan, 60,000 fewer vehicles entered the zone than in the year before. Sixty percent of this reduction was the result of people shifting to public transport, 20 to 30 percent was attributable to drivers avoiding the zone altogether, and the remainder was attributed to car sharing (the British expression for carpooling). Travel times in and out of the zone were reduced by 15 percent.

This scheme has certainly generated some controversy; critics accuse it of merely displacing the gridlock to outer London. But according to a 2006 Royal Automobile Club report, 63 percent of motorists approve of the system, especially if the money is used to improve the roads and public transport. It has also led to stronger support for employer incentives to encourage bicycle commuting (with office showers and secure bicycle parking), telecommuting, car sharing, and other congestion-reducing schemes.

Another example is the willingness with which consumers pay for bottled water and in-home water filtration systems; they will pay a premium for what has historically been viewed as the most essential of infrastructure services, but in return they demand quality and a level of control.

Because marginal pricing reflects the real value of infrastructure services, it is essential for effective development, upgrading, maintenance, and conservation. Without it, private-sector decision makers cannot accurately forecast returns on investment; they will avoid infrastructure projects, believing that they will never truly generate returns adequate for the risks. To avoid some form of marginal pricing is, in effect, to subsidize the users of peak-demand services, which are always more expensive to provide. By contrast, "one-price-fits-all" approaches systematically encourage wastefulness and unsustainable development; consumers are not penalized when their use of water or electricity or their travel burdens the whole system, and thus they continue to waste the city's resources.

Making cities magnetic

The final important area for change is in construction and operations. Governments are rarely equipped with the management skills needed to make projects work in an entrepreneurial, multifaceted global economy. Hampered by cumbersome procurement rules and local political constraints (the demand for local jobs, for example), they can't leverage scale or speed in their supply chains to minimize costs. What's more, the private sector can attract more innovators who could bring novel ideas to a major construction effort.

Therefore, the government's role in construction and operations should be limited to oversight — not through enforcing rules and procedures, but through setting goals and incentives, establishing the criteria for success, and selecting the contractors in a structure that encourages both collaboration and competition within a project. This would allow the private sector to conceive and implement more novel, creative, and profitable infrastructure systems at lower costs. Ideally, excess revenue generated from innovation and efficiency would be retained by the private contractors, since they would also have taken on the lion's share of the risks.

Some of the best-managed airports in the world are run this way. The government of the Netherlands, rather than choosing to manage Amsterdam's Schiphol International Airport directly, formed a private corporation called the Schiphol Group. It operates the airport, leases the retail stores and office space, and runs associated logistics and data center businesses. In this case, it is owned by the State of the Netherlands, the City of Amsterdam, and the City of Rotterdam, but it could also be a publicly held company.

Where this kind of arrangement has worked, private contractors regularly provide comprehensive updates on the operations, detailing ongoing costs, maintenance needs, supply-demand balance, and the status of upcoming phases. The government, as well as non-governmental organizations and local citizens, can easily and publicly respond to this information, pointing out the deficiencies in the company's plans so they can be addressed before it is too late. The profession of asset-management specialists is emerging to help both public and private organizations navigate these new types of partnerships, bringing in awareness of best practices from around the world, and helping to define the incentives and procedures that will lead to better results.

One last change would also help: In conventional infrastructure initiatives, the same engineers who build the project often have a hand in approving it. That is a recipe for abuse, and it led, in the 1970s, to a backlash; one motto of the antidevelopment movement was "don't trust the experts." Both the abuse and the lingering backlash attitude from past abuses must be discarded. The relationship between the builder and the approver must be kept at arm's length, but it need not be adversarial. There should be a thorough, up-front exercise in cost-benefit analysis, open to all onlookers, done in time to influence the decision. Incentives for meeting goals in quality, longevity, environmental impact, and employment should be clarified before companies bid for a project.

As people pour into cities, the abundance of power, water, and mobility will define their lives. Problems like this $40 trillion challenge are not solved overnight, and muddling through will probably work, as a substitute for strategy, for another five years. But the sooner we think about it comprehensively, the less expensive the solution will be.

"We are quite fortunate that we can see the problem that lies ahead," concludes George Sarraf of Booz Allen Hamilton. "Governments and businesses can commit to remaking our future through suitable investment to the benefit of everyone. The only question is one of commitment on their part."

In the end, some cities will organize their infrastructure more effectively than others. They will figure out how to balance public and private interests; how to put the right incentives in place for resilience and growth; and how to leverage the relationships between water, power, and transportation. They will become the cities of opportunity; they will be the cities, for example, where many readers of this magazine will choose to work and live. They will become centers of growth and innovation for the farsighted companies of the next 100 years. And they will become magnets for humanity, standing on the platform of quality infrastructure: a platform that goes generally unnoticed — except when it doesn't work.