Bridging Global Infrastructure Gaps : McKinsey Global Institute June 2016

McKinsey Global Institute (MGI), focused on business and economic research, with its Capital Projects and Infrastructure Practice, concentrating "on the planning, financing, delivery, and operations of infrastructure, real estate, and large capital projects and portfolios worldwide" (p. 2) produced this report. A follow-up of a report written over three years ago, Infrastructure Productivity: How to save $1 trillion a year, this report assesses progress on developments and adds new insights from clients and case studies. The authors acknowledge the impact that the global recession had on both reports. MGI has the mission "to help business and policy leaders understand the forces transforming the global economy, identify strategic locations, and prepare for the next wave of growth" (p. 3).




The report begins with the premise, "Global infrastructure gaps have widened" (p. 4). From this premise, the authors asserted the importance of infrastructure socially and economically. They detailed the size of the infrastructure market, the amount of investment allocated globally to spending, the trends of the spending within the major economies worldwide--especially among the G20 countries, and the impact that technologies will have on the gap.


After developing their basic premise, the authors explained the solutions promoted by governments, private companies and institutional investors. Additionally, the authors outlined the benefits of well functioning infrastructure in the areas of the basic asset classes: transport, power, water, telecom, social infrastructure, oil and gas, mining, and real estate.




The report listed its seven findings from the research: (1) The amount of funding projected between 2016 and 2030 constitutes "3.8 percent of GDP, or an average of $3.3 trillion a year, in economic infrastructure just to support expect rates of growth"  (p. 8). According to current trends, the author calculated an annual deficiency of worldwide spending of 11 percent of GDP or $350 billion. (2) Worldwide spending trends indicate an overall decline after the recession of 2008-2009. The United States, European Union, Russia, and Mexico realized cuts in spending, while Canada, Turkey, and South Africa saw increases. Between 2008 and 2013, China invested 8.8 percent of GDP in infrastructure spending, in contrast, the U. S. spent 2.4 percent of GDP. (3) Numerous sources of increased funding exist, which might decrease the cyclical nature of funding, such as "raising user charges, capturing property value, or selling existing assets and recycling the proceeds for new infrastructure" (p. 8). Accounting changes that do not negatively affect the bottom line during construction would remove financial statement biases. (4) Regulatory certainty and reduced price fluctuations "produce an acceptable risk-adjusted return as well as enablers such as spectrum or land access, permits, and approvals" (p. 8). (5) Public Private Partnership (PPPs) entail one option for infrastructure financing, however, currently PPPs total only 5 to 10 percent of infrastructure spending. Facilitating public and private investment poses a far more important challenge. (6) Matching funding resources with infrastructure need, for advanced economies have 87 percent of the financial resources but middle income economies have the greatest need. "Matching these investors with projects requires solid cross-border investment principles" (p. 8) that would minimize perceptions of high risk and defaults. (7)  Finally, the authors cited the need to increase and improve infrastructure construction productivity, "which has flatlined for decades" (p. 8). The authors, also, reiterate their findings of three years ago that "improving project selection, delivery, and management of existing assets could translate into 40 percent saving. . . a rigorous assessment that benchmarks each aspect of infrastructure development against global best practices can identify the areas where a well-targeted transformation could yield substantial results" (p. 8). Numerous graphs and charts support these assumptions throughout the report.




Among the benefits of improved infrastructure, the authors estimated a rate of return of approximately 20 percent--20 cent per dollar spent--an increase in global GDP of .6 percent, and an increase in jobs, about 1.5 million in the United States. Wild cards include climate change and future technology changes, such as the impact of autonomous cars and drones on transport, 3D printing on manufacturing, and digital technologies on logistic networks and construction. According to the authors, "China's Broad Group, for example, erected a 30-story tower in just 15 days" (p. 13). When possible, entities should consider alternative to new infrastructure and maximize the use of existing. The authors suggest three methods to prolong asset life: congestion pricing, increased asset efficiency, and consistent maintenance.




McKinsey developed an Infrastructure Diagnostic, which contained first the Construction in Progress
(CIP) financial information from the organization's balance sheet with projected final cost based on historical spending. The second component of the Diagnostic detailed the "effectiveness of the infrastructure delivery system" (p. 40). As the Evaluation stage of the process, it involved "Fact-based project selection, streamlined delivery, making the most of existing infrastructure, strong infrastructure governance and capabilities, robust funding and finance framework" (p. 40). The last stage, Productivity, requires benchmarking organization performance against local industry and international standards.




For successful execution, the authors proposed, as one possible solution, "delivery units" (p. 44). The delivery units "report to the highest level of government and are charged with overcoming technical as well as political bottlenecks. . . alternatively, dedicated infrastructure units could be semi-independent agencies that bundle the responsibilities and capabilities to build and sustain world-class infrastructure at benchmark cost" (p. 44). Despite the method used, organizations seeking to provide infrastructure for citizens in a timely, cost effective, and efficient manner can employ the strategies outlined in the McKinsey report.