The Infrastructure Solution
Failure to make the right infrastructure investments has impaired many countries’ potential to boost economic growth and employment. It is time for policymakers to ensure that infrastructure is realised to its full potential, so that the people who depend on it can realize theirs, write Martin Neil Baily and Robert Palmer.
Martin Neil Baily is Senior Fellow at the Brookings Institution and former Chairman of President Bill Clinton’s Council of Economic Advisers. Robert Palter, a McKinsey director, is the global leader of McKinsey’s Infrastructure Practice.
“Infrastructure, by the nature of the word,” former US Secretary of State Madeleine Albright said in February 2013, “is basic to the functioning of societies.” And yet infrastructure has arguably been the forgotten economic issue of the twenty-first century. Indeed, failure to make the right infrastructure investments has impaired many countries’ potential to boost economic growth and employment.
Though the debate about infrastructure tends to focus on the need for more money and more creative financing, the real problem is not insufficient investment. Rather, the built environment is deteriorating as a result of a fragmented approach to infrastructure planning, finance, delivery, and operation, which emphasizes cost, asset class, and geographical location.
Developing a new approach – based on a broad, systemic perspective – should become a top priority of those with the capacity to deliver change, including CEOs and senior public officials. That is precisely what McKinsey’s Global Infrastructure Initiative, which held its second meeting in Rio de Janeiro last month, aims to do, by promoting practical global solutions aimed at raising the productivity and efficiency of every aspect of infrastructure.
Without such solutions, an estimated $57 trillion of infrastructure investment would be needed in 2013-2030, just to keep pace with GDP growth. That is more than the value of the entire existing stock of infrastructure.
More productive infrastructure could reduce the world’s infrastructure bill by 40%, or $1 trillion annually – savings that could boost economic growth by about 3%, or more than $3 trillion, by 2030. This would facilitate higher infrastructure investment, with an increase equivalent to 1% of GDP translating into an additional 3.4 million jobs in India, 1.5 million in the United States, 1.3 million in Brazil, and 700,000 in Indonesia.
Increasing infrastructure’s productivity begins in the planning phase. A more pragmatic approach to selecting infrastructure projects in which to invest – including a systematic evaluation of costs and benefits, based on precise criteria that account for broader economic and social objectives – could save the world $200 billion annually.
Some countries are already reaping the benefits of such an approach. South Korea’s Public and Private Infrastructure Investment Management Center has reduced infrastructure spending by 35%; today, officials reject 46% of the proposed projects they review, compared to 3% previously.
Similarly, the United Kingdom established a cost-review program that identified 40 major projects for prioritization, reformed overall planning processes, and then created a cabinet sub-committee to ensure faster delivery of projects, thereby cutting infrastructure spending by 15%. And Chile’s National Public Investment System evaluates all proposed public projects using standard forms, procedures, and metrics – and rejects as many as 35%.
Additional opportunities for savings – to the tune of $400 billion annually – lie in more streamlined delivery of infrastructure projects. There is massive scope to accelerate approvals and land acquisition, structure contracts to encourage innovation and savings, and improve collaboration with contractors.
In Australia, the state of New South Wales cut approval times by 11% in just one year. And one Scandinavian road authority reduced overall spending by 15% by updating design standards, adopting lean construction techniques, and taking advantage of bundled and international sourcing.
Opportunities to save are not limited to new capacity. Governments could save $400 billion annually simply by increasing the efficiency and productivity of existing infrastructure. For example, smart grids could cut power infrastructure costs by $2-6 billion annually in the US, while reducing costly outages.
Similarly, intelligent transportation systems for roads can double or triple the use of an asset – typically at a fraction of the cost of adding the equivalent in physical capacity. The UK’s intelligent transport system on the M42 motorway has reduced journey times by 25%, accidents by 50%, pollution by 10%, and fuel consumption by 4%.
Congestion pricing can also reduce the need for new capacity, while providing significant savings in terms of fuel costs and time. Such a charge has enabled the City of London to cut congestion by 30%.
None of these solutions is particularly earth-shattering. They simply require a less fragmented approach within government, and more cooperation between the public and private sectors.
This goal is achievable in rich and poor countries alike. Switzerland’s Department of the Environment, Transport, Energy, and Communications, for example, incorporates national goals, set by the Federal Council, into a unified infrastructure strategy that accounts for the needs of specific sectors. Likewise, Rwanda’s Ministry of Infrastructure coordinates the activities of other ministries and public agencies – ensuring that infrastructure strategies align with the East African Community’s regional integration plans – and monitors downstream delivery and operations.
Governments must recognize that the private sector can provide more than infrastructure financing; it can also offer know-how in the planning, construction, and operation phases. Chile, the Philippines, South Africa, South Korea, and Taiwan are all developing frameworks that expand the role of private players in planning projects.
Infrastructure increases economies’ competitiveness, while providing the physical framework for people’s lives. Policymakers’ goal should be to ensure that infrastructure realizes its full potential, so that the people who depend on it can realize theirs.
©Project Syndicate, 2014