Infrastructure productivity: How to save $1 trillion a year 09-08

Infrastructure productivity: How to save $1 trillion a year

Insufficient or inadequate infrastructure—and the resulting congestion, power outages, and lack of access to safe water and roads—is a global concern. Typically, the debate about the growing need for infrastructure focuses on whether financing is sufficient to meet it. But, in fact, there are clear ways to create more and better infrastructure for less.

Just keeping pace with projected global GDP growth will require an estimated $57 trillion in infrastructure investment between now and 2030. That’s nearly 60 percent more than the $36 trillion spent over the past 18 years, according to Infrastructure productivity: How to save $1 trillion a year, a report from the McKinsey Global Institute and McKinsey’s infrastructure practice. The $57 trillion required investment is more than the estimated value of today’s infrastructure. And this figure does not include costs such as clearing maintenance backlogs, meeting development goals in emerging countries, and making infrastructure more resilient to climate change. But given widespread fiscal constraints in the wake of the global financial crisis, even assembling the minimum investment required to meet growth predictions is a challenge.

Yet practical steps could boost productivity in the infrastructure sector—a long-time laggard—by as much as 60 percent, thereby lowering spending by 40 percent for an annual saving of $1 trillion. Over the next 18 years, this would be the equivalent of paying $30 trillion for $48 trillion worth of infrastructure.

Improving infrastructure productivity could save $1 trillion a year.

These steps do not require reinventing the wheel. Eliminating waste, improving the selection of projects, streamlining their delivery, and other best-practice examples from around the world would make a decisive difference if scaled up globally.

We have identified three broad types of moves that could help deliver savings:

1. Optimize project portfolios. One of the most powerful ways to reduce the overall cost of infrastructure is to avoid investing in projects that neither address clearly defined needs nor deliver sufficient benefits. Choosing the right combination of projects and eliminating wasteful ones could save $200 billion a year globally. Project owners must use precise selection criteria to ensure that proposed projects meet specific goals, develop sophisticated methods for determining costs and benefits, and evaluate and prioritize projects—in a transparent and fact-based way—by their potential effects on the entire network, instead of looking at individual projects in isolation.

2. Streamline delivery. This area presents an opportunity to save up to $400 billion annually and accelerate timelines. To streamline delivery, it will be necessary to speed up approval processes, invest heavily in the early stages of project planning and design, and structure contracts to encourage time and cost savings. Contracts can lead to costs savings by, for example, encouraging the application of lean manufacturing to construction and the adoption of advanced construction techniques such as prefabrication and modularization.

3. Make the most of existing infrastructure. Rather than invest in costly new projects, governments can address some infrastructure needs by getting more out of existing capacity. Boosting asset utilization, optimizing maintenance planning, and expanding the use of demand-management measures can generate savings of up to $400 billion a year.

To spur change programs and capture potential savings, governments must move beyond a project-by-project view and upgrade systems for planning, operating, and delivering infrastructure. A well-functioning system entails close coordination between the authorities responsible for different asset classes, clear separation of political and technical responsibilities, and clarity about the roles of (and effective engagement between) the public and private sectors. Other requirements include improved stakeholder management, better operational and financial information to guide decisions, and upgraded capabilities across the infrastructure value chain.

The private sector, too, has a role to play: it can drive productivity within its own operations, engage in a productive dialogue with public-sector stakeholders, and develop business and contracting models that promote the productivity opportunities outlined above.

Reproduced from Mckinsey Global Institute Report