We could do it a trillion dollars better

We could do it a trillion dollars better

6 February 2013 0 Comments

Global consulting firm McKinsey says a radical upskilling in how governments and industry deliver and manage infrastructure would save $1 trillion a year worldwide. Rod Sweet reports.

If African nations had spent just $12bn more on road repair in the 1990s, they could have saved $45bn in reconstruction costs later.

This calculation, by the World Bank in 1994, is just one example offered by McKinsey & Company, who argue that a smarter approach to infrastructure could save US$1 trillion a year worldwide.

“The measures that we discuss are not about inventing a completely new approach to infrastructure – what we propose is simply rolling out proven best practice on a global scale,” McKinsey wrote in a January report.

The global consulting firm says a radical upskilling in how governments and industry deliver and manage infrastructure would save 40% the next 18 years if they did three things: 1) make better choices about which projects to do, 2) streamline delivery and 3) use existing infrastructure better.

For the first step, McKinsey says governments should stop rushing to build more physical capacity without considering other ways of meeting the need. They should clearly define both the need and the expected benefits. McKinsey praised Singapore for its project metrics: the crowded city state requires that any new project must achieve 70% use of public transit. McKinsey believes that just choosing and using better could save $200bn a year globally.

Streamlining product delivery

The second ingredient is streamlining project delivery, which McKinsey says can save up to $400bn annually. Speeding up approval and land acquisition is one aspect. The report cites India as a bad example. There, McKinsey says, up to 90% of road projects experience delays of 15 to 20% just in acquiring the necessary land. A good example in the report is the Australian state of New South Wales, which cut approval times by 11% in just one year by clarifying decision rights and improving processes.

Construction needs to get its act together as well. Streamlining includes up-front project planning and design: bringing together cross-functional teams from the start can avoid the alterations that lead to 60% of project delays, the report says. McKinsey says construction labour productivity in many developed countries has barely moved for 20 years, despite gains in other sectors. Contractors should use prefabrication, modularisation and “lean” construction methods, and governments should upgrade their construction sectors, which often rely heavily on informal labour, and under-invest in innovation.

Total cost of ownership

The final ingredient is just making the most of what is there. With maintenance planning, controlling demand with usage charges, and understanding the total cost of ownership, the world can save up to $400bn a year, the report says. Intelligent systems for roads, rail, airports, and ports can double or triple the use of an asset, at a fraction of the cost of building more. McKinsey says Denmark has cut the cost of maintaining its roads by 10 to 20% through a total cost of ownership approach

It’s hard to find fault with any of this, but equally hard to escape the feeling that McKinsey makes it sound easier than it is. On streamlining delivery, for instance, in the UK, decades of construction and procurement reform initiatives have not produced substantial improvements.

On the other hand, global infrastructure provision is recognised more and more now as a driver of economic growth and political stability. To stick with the UK as an example, the fact that it is now grappling with how to expand its aviation capacity, whether by building a brand new super-airport in the Thames estuary or instead by integrating its existing airports better, makes McKinsey & Co’s commentary on infrastructure timely and pertinent.