A (0:00)

As you know, Ariat is the official Dirt Talk podcast sponsor and at this point we've talked plenty about their footwear, their workwear. But now it is winter and boy is it cold. It was 17 degrees this morning. I had to warm the truck up. But just because it's cold does not mean the work stops. So to get the job done, you need the best, warmest work wear possible. And Ariat has a long list of outerwear, amazing jackets, pants and other goods available now. You can shop at their website ariat.com dirt talk that is ariat.com dirt talk hi everybody. Welcome back to welcome to Dirt Talk. This is a Monday episode. I'm here in Nashville, Tennessee, post mine Expo, still detoxing from Vegas. Even though I didn't talks, I haven't drank this here and it's been quite nice. So it was nice to go to Vegas and not be hungover for once. I for this episode to get into it, want to cover one of the more fascinating articles I have read about the industry ever. I found this a few years ago, maybe a year ago, someone sent it to me. I read it, I reread it, I contacted the author, talked to him about it. It's, it's quite fascinating because I'm obviously on the, the, the pro infrastructure side of the equation. I'm on the pro dirt world side of the equation. But there's, there's a lot of humans are very binary, so it's either you're pro infrastructure or you're, you're not pro infrastructure. But I have realized everything is a lot more gray and nuanced, especially infrastructure. And I can still be pro infrastructure, but also ask questions like, hey, why are we spending so much on some ridiculous projects that are not achieving anything? Or why are infrastructure costs going so, so high nowadays and why are we missing so many deadlines? So on and so forth. And this article addresses a lot of those things and asks a lot of those questions and provides some pretty valuable context. So that's why I wanted to cover it because I, I have, I have pulled a lot from this, from this, this writing and I, I think you will too. I'm not going to read the whole thing. I, I read through it and highlighted some, some key, some key areas that I think are quite interesting. And this was written By Brian Baucus June 9, 2022. Why America Can't Build is the title and it was published on Palladium. So to get into it, just as unattainable as a shortened commute is the Californian dream of building a bullet train that could take you from Los Angeles to San Francis under three hours. In 2008, a year before the Sepulveda project began, the state tried to turn this dream into a reality after voters approved a 512 mile high speed rail project, or HSR, amid failing overseas wars and financial crises. At the time, it could have become a symbol of renewal not just for California, but the entire country. Instead, it came to exemplify a dysfunctional government that lacks the capacity to build. At the time California began accelerating the development of its HSR system, it only had 10 employees dedicated to overseeing what was the most expensive infrastructure project in US history. It ended up 14 years and counting behind schedule and $44 billion over budget. Incredibly, the state has not laid a single mile of track, and it still lacks 10% of the land parcels it needs to do so. Half of the project still hasn't achieved the environmental clearance needed to begin construction. The dream of a Japanese style bullet train crisscrossing the state is now all but dead due to political opposition, litigation, and a lack of funding. Despite its failure, the HSR project inaugurated the US's megaproject era. Once a rare type of project, by 2018, megaprojects comprised 33% of the value of all US construction project starts. An alarming number of these have spiraled out of control for many of the same reasons that killed the California bullet train. The decade that followed the financial crisis was a kind of inflection point in the industry. This was when construct projects became noticeably worse and when the long term implications could no longer be ignored. One of the most cited Studies of the US's declining ability to build reviewed 180 transit megaprojects across the country, revealing that today US projects take longer to complete and cost nearly 50% more on average than those in Europe and Canada. Construction projects are undertaken within a legal and regulatory system that prevents persistent costly obstacles, while projects are being overseen by agencies who lack the resources and in some cases even the expertise to manage them. Sepulveda's numerous lawsuits and stakeholder conflicts are an example of the phenomenon that can be traced back to the passage of the National Environmental Policy act, or NEPA, in 1969. NEPA mandates developers to provide environmental impact statements before they can obtain the permits necessary for construction on huge swaths of infrastructure. Shortly following the passage of nepa, California's then Governor, Ronald Reagan signed the California Environmental Quality act into law, which required additional environmental impact analysis. Unlike nepa, it requires adopting all feasible measures to mitigate those impacts. Interest groups wield CEQA and NEPA like weapons. One study found that 85% of CEQA lawsuits were filed by groups with no history of environmental advocacy. The nimby, which is not in my backyard attitude of these groups have crippled the ability of California to build anything. As California Governor Gavin Newsom succinctly put it, nimbyism is destroying our state. One thing that Gavin Newsom has said to be correct, that's my opinion. It is also destroying the US's ability to build nationally. The economist Eli Dorado reported in the New York Times that per mile spending on the Interstate System of highways tripled between the 1960s and 1980s. This directly correlates with the passage of NEPA. If anything, the problem has gotten worse over time. Projects receive funding through the $837 billion stimulus plan passed by Congress in the aftermath of the financial crisis were subject to over 192,000 NEPA reviews. The NEPA process incentivizes the public agencies to seek what is often termed as a bulletproof environmental compliance document to future legal challenges. This takes time, with the average EIS taking 4.5 years to complete. Some have taken even longer than a decade. A cottage industry of consultants is devoted to completing these documents, earning themselves millions in fees. The NEPA consultants are just one of the numerous types of consultants that benefit from the way we build. Most infrastructure in the US is built through a number of state and local agencies. For example, there are 51,000 community water systems alone in the United States. This decentralized structure makes it much more difficult to develop the depth of expertise needed to manage the complexities posed by megaprojects. Often the multiple public agencies that are involved with projects also have overlapping authorities, creating bureaucratic delays and slowing decision making. The expertise problem is compounded by the fact that agencies are often staffed with a workforce of people either just at the beginning of their careers or near the end of them. Those at the beginning tend to leave if they are ambitious, which leaves senior positions in the hands of agency lifers. Because of this dynamic and the fact that it is not economically feasible to have the wide range of expertise needed in house, public agencies employ engineering consulting firms. These firms fill a valuable niche. If you are building a complex project, say a long span bridge or a desalinization plant, you want advice from someone who has designed and built dozens of them. The problem arises when you become too dependent on such advice. The high speed rail project was undermined by such a failure at its peak. The agency responsible for the project. The California High Speed Rail Authority had fewer than 30 permanent employees managing the $105 billion project. Instead of hiring staff, the authority relied heavily on outside consultants. These consultants were well paid, with the primary consultant compensation for HSR at $427,000 per engineer compared with the authorities in house cost of 131,000 dol per engineer. This structure creates a principal agent problem where they're incentivized to maximize their billable hours. As a California state auditor assessment of the project noted, consultants may not always have the state's best interest as their primary motivation. Go figure. This lack of in house institutional expertise leads to bad decision making. Brent Fliveberg, a professor at Oxford University who has written extensively about mega projects, summarized the problem when asked about California's HSR project. If you depend on consultants to know what you are doing, then you are in real trouble. A good balance is where the owners are not outsourcing all of the knowledge. A bad balance guarantees a bad outcome. The pitfalls of this lack of balance appeared before large parts of the project began in 2014. The contractor for a 63 mile section of the HSR proposed radical design changes that they Projected could save $300 million. The fact that their bid was $500 million lower than its competitors and that it rested upon a design concept that had not been thoroughly vetted should have caused alarm. As a senior engineer who worked on the original environmental compliance document for HSR and reviewed the concepts told the Los Angeles Times, it is mind boggling they would entertain some of the things that the contractor proposed. The contractor's approach may have been driven by the fact that it didn't have the experience of its competitors. It had never built a rail project in the US before and needed an edge to be selected. It was a measured risk because they knew there were ways to limit its financial exposure if the design ideas didn't work. An LA Times investigation of the project in 2021 found that the contractor had issued 273 change orders for additional payment and had completed less than 50% of its planned work. Four years after its section was supposed to be complete, its design ideas had almost been completely abandoned as unworkable and their section of the work was $800 million over budget. Going to the next section, called the future. President Biden has signed executive orders strengthening construction unions and increasing the stringency of NEPA requirements. Meanwhile, consulting firms are already promoting to investors the lucrative opportunities presented by the anticipated wave of retirements at public works agencies. Up to 41% of the construction industry's workforce is nearing retirement age as well, and the construction industry has an estimated worker shortage of 650,000 people, partly because many who left the industry following the financial crisis never returned. Meanwhile, trillions of dollars are projected to be spent on the infrastructure needed to decarbonize our economy, address crisis level drought in the Western U.S. and replace aging bridges and highways. These trends all point to a future where we lack expertise and capacity at every level of the construction industry, while regulatory costs only increase. The result is that the US Gets less and less every year for every dollar spent on construction. This means decline. Should the US Ever commit to a developmentalist strategy, it will have plenty of examples to Learn from Between 1995 and 1999, the city of Madrid designed and built 39 new metro rail stations, laid 35 miles of rail, including 23.5 miles which required expensive tunneling, and completed all work at an average cost of $65 million per mile. It has subsequently completed multiple other phases of similar size with similar results. How did Madrid accomplish this? It used simple modular designs for each station. It did not use any new construction techniques, novel engineering designs, or train technology. When tunneling segments, instead of using one tbm, as is typical, it deployed up to six at a time, a number previously unheard of. Most importantly, Madrid ran its construction crews 24 hours a day, seven days a week, and achieved consistent worker productivity gains, reducing complexity and repeatedly building the same simplified design made iterative improvements possible. This kind of solution isn't as easily copied as it may appear. The reason the contractor's bid was given credibility by the authority is likely that it was a subsidiary that built the Madrid project. It is one of many European construction giants that expanded into the US Market following the financial crisis, when their home markets contracted. By selling lower costs. In a sophisticated approach that was proven to work in Europe, these firms were awarded mega projects. Across the US Many of these projects have blown up in similarly spectacular fashion, such as the HSR project. Meanwhile, US Firms have completed mega projects in Europe and elsewhere at costs that would not be possible in places like New York or California. The problem isn't that US Contractors have forgotten how to build. It is that we have made it impossible for even the best builders to succeed in America. However, not every building environment in the US is the same. Roughly 40% of US megaprojects are in New York, California, or Texas. While megaprojects run into issues everywhere, the Texas projects have a significantly better track record than either of its coastal peers. Other states have learned from Their example, Arizona explicitly studied lessons learned from Texas while building the largest public works project in its history, the $1.7 billion Loop 202 South Mountain Freeway project. By using a non standard project delivery approach, this project was completed in 2019 in fewer than 1,000 days, an estimated three years earlier than what would normally be expected. Early coordination between the contractor and engineer ensured that the design issues that appeared on the HSR were avoided, saving the project an estimated $100 million. Texas and Arizona have a much less stringent regulatory environment. As a result, much of our industrial capacity is being built in these states, and these industrial projects are achieving remarkable productivity gains. Pure the Bureau of Labor Statistics productivity and industrial building construction went up 70% from the mid-2000s to 2015, even outpacing the productivity growth and manufacturing over the same period. A prime example is Tesla's recently completed Austin Gigafactory, a building three times the size of the Pentagon that was completed in 18 months. Like Madrid, Tesla Ride on modular construction and other proven methods to increase productivity and speed. These strategies are widely employed on energy and industrial projects in these states, from semiconductor fabrication plants in Arizona to utility scale solar projects in Texas. Renewable energy developers often work with the same engineering, procurement and construction companies on repeated projects, enabling iterative learning and productivity improvements on each subsequent project. In the energy sector, these techniques are being employed on genuinely innovative projects. For example, the energy company OXY is currently in pre construction on a $1 billion direct air capture plant in Texas, which removes carbon dioxide from the air and then converts it into concentrated carbon that can be sequestered or reused. By using modular construction techniques, standardized design, and the same group of project participants, it plans to achieve economies of scale and drive down costs over time. This approach requires OXY to know it will likely lose money on the project. It is a $1 billion experiment that has no real parallel to the public sector infrastructure projects. That is because none of the public agencies can afford a costly project it knows will likely fail. Real physical innovation requires a trial and error approach and a tolerance for risk and loss. Historically, the only group in the US Capable of this approach has been the federal government. Through the Defense Advanced Research Projects Agency, it funded the research that led to the creation of many of the fundamental technologies of our modern economy, such as the semiconductor. This story is well known, but what is less recognized is that NASA and the Department of Defense were the primary buyers of semiconductors and other computer technology. For years. The government funded the creation of the technology in the market, both of which are required for physical innovation There are promising technologies emerging that could fundamentally alter how we build. Examples range from quantum sensors, which could eliminate the risk posed by unknown underground conditions, to 3D printers that can print everything from the concrete base of a wind turbine to structural steel components. But there is no systematic attempt to further these new technologies, invent new ones, or deploy them at scale on real world projects. Improving construction productivity requires institutions that can serve the role of DARPA, NASA, and the DoD plague in the technology industry while simultaneously creating a more permissionless environment for innovation. One approach is to create a state institution to serve this role. Another would be to expand the use of public private partnerships, which are P3s, the model used to deliver the South Mountain and Madrid projects. The P3 project delivery method has been proposed for multiple hyperloop projects in the US and could enable the creation of public sector equivalents of Oxy's DAC project. More recently, geopolitics has forced Germany to act as an example for accelerating the development of new infrastructure. Germany has experienced the same megaproject issues as the us, and for many of the same reasons. But facing the urgent necessity of replacing Russian gas, the German government is set to pass a law that will waive procedural requirements mandated by the eu, including its version of NEPA, to accelerate the construction of liquefied natural gas infrastructure. Sometimes the most innovative thing to do is just cut through the red tape and build. Like Germany, the US regularly shows that its current stall is ultimately a political choice. In February 2017, heavy rain damaged the nation's tallest dam, Oroville Dam, creating the risk of catastrophic and deadly flooding in the Sacramento Valley. Over 180,000 people living downstream along the Feather river in Northern California were evacuated from their homes. As the current German case, the risks posed by inaction necessitated a bypassing of the usual rules. Within 10 days of the damage incident, Kiewit was awarded the contract. A little over two weeks later, Kiewit's team and equipment were fully mobilized at the site. After only 165 days, Kiewit had brought the dam's main spillway into working condition. It then completed a second phase where it built a 1.2 million square foot spillway, an area so large that 25 NFL regulation sized fields could fit inside it. The combined project was completed in only 18 months. When the barriers to construction are removed, the US can still build big things, even in California. Given the US's resources, excellence in building is a choice. But sticking with the status quo represents another type of choice. It is a decision to accept decline, and so that is the article, like I said, it really got me thinking. I am all for infrastructure, I'm all for spending on infrastructure. But it's hard to ignore the realities of the ridiculous inflation in some of these projects and just spend, spend, spend on infrastructure that necessarily doesn't benefit people. It does everybody a disservice. It does the industry disservice, it does our society disservice, our country a disservice. And so it's really important not just to build stuff, but build stuff. We need build stuff that helps the economy and our people and make sure we do it in the most cost effective way possible. And the high speed rail project I think is the best worst example of this. But there's a lot of other examples across the United States of something similar. And like Brian was saying in this article, it seems like it's only going in one direction. So I, I bring all this up just for awareness. I don't necessarily have any solutions. A lot of this is at the government level. A lot of it is at the lobbying level. A lot of people ask if we have lobbied before and we've not. We're a startup. I'm, I'm, I'm just a kid. There are a lot of associations out there lobbying, but more often than not they're lobbying ironically, for, for more of these controls. Because like he was saying, there's a lot of companies that make money from it as a result. There's a lot of lawyers that make a lot of money from it as a result. That cottage industry he was referencing, they exist because of those regulations. And then the infrastructure world, it seems like all they're after is just more money, more money, more money, more money. But it's similar to, oh, we need to make college free. Let's just give people college tuition and let's not ask why college tuition has exploded over the past 20 years. Like, well, no, that's not the problem. The ridiculous inflation. Let's not consider that. Let's just pay more money for it and get less. It just, it doesn't make sense. And I think this is, this is a big issue that is going to, if unresolved, drag our entire country down. Because a country is only as strong as its infrastructure. And I travel around the world, I see a lot of infrastructure. The US is not ahead of the game. We are not best in class anymore. And our infrastructure is only getting worse and degrading over time. We passed what they said was a historic infrastructure bill, the biggest bill ever on infrastructure spending in the United States. Twice what the industry, what we spent on the US interstate system and I don't know about you but I have seen very little as a result. I don't see our infrastructure dramatically improving. It's been years now I have not seen any kind of dramatic improvement and it doesn't seem like like that's happening anytime soon and it's honestly very very alarming to me. So I hope you enjoyed this article as much as I did. This is a really big deal. We take infrastructure for granted our power, our water, our roads, bridges and a lot of it is in disrepair, a lot of it is vulnerable to attack and we are we are not aggressively doing anything about it which is a shame and something I hope changes in due time. So as always thank you for listening. If you have any suggestions on anything else you'd like us to cover, any comments you can always write in@dirt talkillwood.com I would love to.