Under-investment in infrastructure can cripple lives. Across the world, 1.3 billion people have no access to electricity, 2.5 billion do not have adequate sanitation, and a further 2.5 billion rely on the traditional use of biomass for cooking. Building adequate infrastructure is a vital tool of social development. But it is also a crucial underpinning of economic growth. McKinsey estimates that the world needs to invest $57 trillion in infrastructure between 2013 and 2030 simply to keep up with projected global GDP growth. That’s more than the total estimated value of the infrastructure already on the ground today.
Given perennial financing constraints, we collectively need to improve the way we plan, finance, build, and operate infrastructure—raising infrastructure productivity. While many other sectors have boosted their productivity in past decades, the productivity of the construction sector has not budged for 20 years in each of Japan, Germany, and the United States.
The inefficiency of infrastructure is widespread—but so are ideas and innovation that improve the cost-benefit equation. McKinsey’s research finds that there is a range of practical measures that would boost infrastructure productivity and cut the global infrastructure bill by 40 percent—a saving of $1 trillion a year.
There are three main opportunities: making better decisions about how projects are selected; streamlining the delivery of those projects; and making the most of the infrastructure that we already have.
Planning is paramount. Before projects get off the ground, they need to be designed and planned rigorously. High-performing countries think 25 to 50 years in advance. It is important to select projects that align with a country’s long-term strategic vision, and kill bad projects early. One delegate at a recent meeting in Rio de Janeiro of the Global Infrastructure Initiative (GII), a McKinsey initiative that aims to forge leadership and develop practical solutions to meet the global infrastructure challenge, said, “Bad private projects never start; bad public projects never end.”
Governance must be accountable, sponsors competent, incentives aligned, and risk taking appropriate. In Panama, the administration is required to put an economic development plan forward to the national assembly. In the massive project to expand the Panama Canal, the government has appointed a board that sits independently for nine years. In Australia, infrastructure plans are put together at arm’s length from government, but linked closely to finance vehicles in way that builds confidence.
Improving the selection of projects and optimizing infrastructure portfolios could save $200 billion a year globally, according to McKinsey research. Reprioritizing projects and picking more cost-effective alternatives have produced savings of up to 20 percent in China and South Korea.
Streamlining the delivery of projects could save another $400 billion a year. Speeding up approvals and land acquisition are imperatives in order to cut delays and therefore unnecessary cost. Speaking at the GII conference, the head of one government agency—said, “Our permitting process resembles a relay race across 13 agencies, which we need to turn into a concurrent process.”
South Korea’s Public and Private Infrastructure Investment Management Center (PIMAC), has saved 35 percent of spending. PIMAC rejects 46 percent of projects that it reviews compared with the 3 percent that were rejected before its establishment. In Australia, the state of New South Wales cut approval times by 11 percent in just one year by clarifying decision rights, harmonizing processes across agencies, and measuring performance.
Another imperative in the delivery of infrastructure is structuring contracts to encourage cost savings. Japan’s Ministry of Land, Infrastructure, Transport, and Tourism, for instance, has cut the average project delivery time by 16 percent by moving to best-value tendering.
Encouraging contractors to use advanced construction techniques including prefabrication and modularization and lean manufacturing methods adapted for construction, strengthening the management of contractors, and upgrading the way construction works are all important. McKinsey finds that there is potential to shave 15 percent off the overall cost of an infrastructure project in the delivery phase alone by employing best practice in these respects.
Too often, governments rush to build new infrastructure, disregarding the option of making more out of what they have already built—which could generate savings of up to $400 billion a year. Improving the management of demand for infrastructure, using new technologies and the data they generate, is vital. Pricing remains the most powerful way to manage demand—just one example of this approach in action is Israel’s dynamic pricing of use of the fast lane in one highway. Sharing data—letting customers know when traffic is at its peak and how they can avoid delays—is an important ingredient in demand management. At its best, data can reduce the need for physical infrastructure by increasing the capacity of what’s already there—moving from asphalt to silicon, as one GII delegate put it. In one country, for instance, a simple tweak to the timings of traffic lights led to a 30 percent increase in traffic flow. Technology allows hard shoulders to be opened selectively when traffic is heavy and closed immediately if there is an accident and emergency vehicles need access. GPS-enabled improvements to air-traffic control can boost available capacity by one landing in eight.
Maximizing revenue from existing infrastructure is another key imperative. At one North American airport, revenue per passenger doubled within three weeks of outside service providers being brought in. In another airport, a customer survey of retail concessions was conducted every six months, and those concessions that had good results received bonuses.
To bring these opportunities to life will require a radical overhaul of the way the infrastructure sector is run. The trouble is that the planning, delivery, financing, and operation of infrastructure—even within a single economy—is highly fragmented, contributing to low productivity. Integration of functions has proved successful in some countries. For instance, Singapore’s Urban Redevelopment Authority, Land Transport Authority, and Development Planning Committee that work together seamlessly to translate national priorities into plans, goals, and individual projects that are entirely consistent with one another. Until sound infrastructure systems are in place, countries will continue to fund the wrong projects, place priorities in the wrong areas, and fail to meet the needs of their people.