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Improving the Efficiency and Effectiveness of the Global Infrastructure Industry
Presentation at RIFs høstmøteNovember 10, 2015
CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited
McK Infrastructure PracticeNicklas Garemo
Introduction to McKinsey & Co
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The Firm
• Founded 1926• 102 offices in 52 countries• 18,000 firm members incl. 10,000 consultants• Over 3,400 clients past 5 years• 90 of top 100 corporations worldwide and 90+ governments• 50% of work for clients served 10+ years
Our Infrastructure Practice
• 1,500 studies last five years• 400 clients (private and public)
– Governments, regions and cities– Infrastructure delivery entities (developers, rail and road agencies, etc)– Projects (80 mega projects last three years)– E&C firms (50 leading firms last five years)
• Entire value-chain from planning to construction and operations• All asset classes
What we doin projects
• 600+ McKinsey studies last five years• 80 mega-projects ($1bn) last three years• From concept optimisation and Design-to-Value to project sourcing and time
acceleration (lean construction)– Average cost reduction: 10-15 percent– Average schedule compression: 15-30 percent
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The global infrastructure industry performance and challenges
1. The global infrastructure pipe-line
2. Infrastructure challenges including system performance and productivity
3. Boosting Infrastructure productivity by replicating existing best-practices across countries
4. Top-down approach to designing the transformation road-map
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USD 9 trillion each year across infrastructure assets globally
SOURCE: Global Insight; Euroconstruct; IMF; McKinsey; World Bank; OECD
1 Represents 12% of global GDP 2 Nominal investment in Infrastructure in 2012
Real estateNarrow Infrastructure definition Broad Infrastructure definition
1
4
1,100700400
400Transport
TelecomPower and water
Infrastructure spend USD billions2, 2012
4,150 4,150
2,300
2,600
TotalReal estate
750
1,200350
Social infra-structure
Oil, gas and mining
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More infrastructure investments needed1
SOURCE: ITF; GWI; IHS Global Insight; Perpetual inventory method, OECD, 1998; McKinsey Global Institute analysis
1 Estimated need based on projected growth, 2013–30 to ensure 70% of GDP in 20302 Weighted average annual expenditure over years of available data, 1992–2011
World
4.13.8
2.51.5
3.4
4.7
3.4
7.0
4.94.0
5.1
6.9
NigeriaBrazilRussiaIndiaSouth Africa
Estimated needActual spend2
8.5
China
6.4
Most developing countries require significant step-up
5
Spending on economic infrastructure
% of GDP
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Significant challenges to finance and funding going forward
2
SOURCE: IMF, Bloomberg, Infrastructure Journal, Public Works Financing newsletter, Infrastructure Investor magazine; McKinsey Global Institute analysis
10%Average reduction, as a proportion of GDP, of G20 government spending
Fiscal pressure
60:40Debt-to-equity ratio of the Pennsylvania Turnpike, versus 85:15 for the Indiana Toll Road just two years earlier
Constrained debt
70%Share of current investment pipeline comprising green-field projects (riskier than brown-field)
Emerging markets
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Infra. delivery system performance and productivity – The real problem
SOURCE: OECD Labour Productivity by Industry (ISIC Rev. 3 & Rev. 4); McKinsey Global Institute analysis
Delivery system challenges
Poor project delivery
Biased project selection
Bias towards new investments
Value added per hour workedIndex: 100 = 1989 for the US, 1991 for Germany
0
09052000951989
Rest of economy
Construction
140
80
120
100
160
2013
Sub-par labor productivity growth
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Cost variations of 2-3X across countries
SOURCE: Published reports, IATA data, press search; team analysis
185
City 1(80% under ground)
410
City 6(50% under ground)
125
City 5(80% under ground)
100
City 4(100% under ground)
185
City 3(50% under ground)
230
City 2(20 % under ground)
City 2
300
City 1
500
City 8
100
City 7
105
City 6
125
City 5
140
City 4
150
City 3
290
RAIL/METROCost per linear km
AIRPORTCost perPassenger/year
ROADSCost/square meter
Country 4Country 3
100120-145
Country 2
140-160
Country 1
230-250
Index at 100Project under constructionCompleted project
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Construction, % Development, %
Installation, % Materials, %
Ø 16.5
Ø 15.0
Ø 14.5
Ø 15.0
Ø 15.5
Ø 14.5
Ø 13.5
Ø 8.0
Still supplier industries perform well
9
-20
-10
0
10
20
30
40
201211100908070605042003
-20
-10
0
10
20
30
40
201211100908070605042003
-20
-10
0
10
20
30
40
201211100908070605042003
-20
-10
0
10
20
30
40
201211100908070605042003
Average ROCE Median ROCE
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Bridging the infrastructure gap
Regulatory
conditions to
enable private
investments
More public sector
investment
Efficiency &
effectiveness of
spending
10SOURCE: B20 2015 recommendations to G20 governments
Bridge between
institutional
investors and
infrastructure
assets
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B1. Effective construction and supply markets
B2. Strong value assurance process
B3. Adequate owner team
B4. Concept, design and engineering optimization
B5. Seamless permitting and land acquisition
B6. Effective procurement, tendering and
contracting
B7. Advanced procurement with synergies across
projects
B8. Rigorous execution and contract management
B9. Well-planned commissioning and ramp-up
B10.Well-defined approach to projects in distress
Proven best-practices rolled out globally could save 40% of spend
C1. Demand management
C2. Increased economic utilization of assets, including loss reduction
C3. TCO oriented maintenance
A1. Clear socio-economic objectives
A2. Master planning across asset classes
A3. Optimization prioritized before new build
A4. Fact-based standardized project evaluation
A5. System-wide portfolio prioritization
OptimizedInfrastructure
spend
CurrentInfrastructure
spend
Making the most of existing infrastructure
~8%
~15%
~15%
-38%
Strong infrastructure governance & capabilities
Robust funding & finance framework
Fact-basedproject selection
Stream-lineddelivery
E1. Attractive overall investment climate
E2. Sufficient financial capacity
E3. Suitable conditions for private funding
E4. Clear strategy for degree of market competition and ownership structure
E5. Strong framework for long-term public infrastructure funding
E6. Suitable regulation, pricing and value capture for infrastructure investments
E7. Effective approach to PPPs
D1. Robust institutions and process for combatting corruption in infrastructure
D2. Strong governance and collaboration across levels and stakeholders
D3. Robust infrastructure data
D4. Strong capabilities
CA B
D
E
Percent
SOURCE: McKinsey Global Institute analysis 11McKinsey & Company
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Proven best-practices rolled out globally could save 40% of spend – ExamplesPercent
Optimized Infrastructure
spend
Current Infrastructure
spend
~8%
~15%
~15%
-38%
Lean construction reduced cost by 10% and schedule by 40% in a European tunnel project
TCO optimization reduced annual road costs in a Scandinavian country with 15%
South Korea’s PIMAC organization reduced average cost overruns from 122% to 41%
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Importance of Project Managers
131 Project managers with at least 3 projects (56% of total revenue)2 Based on 1000 projects over 5 years and only production manager with more than 10 projects
Client 22
12.4
8.0
4.3
Average gross margin
Project manager performance groups
9
65
26
Consistentlow performing
Mixed
Consistenthigh performing
Client 1 – Projects finished in 2007-111
60
40
20
0
-20
-40
80
Gross margin per project manager
-3
11
16
23
-5
0
5
10
15
20
25
Gross margin per quartile
Bottom 25%50-75%25-50%Top 25%
Top 25%
25-50%
50-75%
Bottom 25%
Project managersSorted
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Why is it not happening?
How effective is my current infrastructure delivery system?
What do top-performers do differently?
What are my major improvement opportunities?
Lack of transparency of starting point and best practices!
Lack of incentives
Lack of Capabilities
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Primary benefits of PPPs often improved execution
SOURCE: McKinsey Global Institute analysis; UK National Audit report on “Private Finance Projects”, 2009
Note. Similar study in Australia showed 52.4 percent of conventional projects having cost overruns whereas only 27.8 percent of PPPs did
… primary benefit is improved project performance due to better aligned incentives and risk allocation
Lower financing costs in some countries but…
Financing costs 2011-12Percentage
9.3
12.9
UK5.6
2.6
Brazil5.9
India
4.5
6.4
8.2
Portugal
Project FinancePublic Debt
30
100 -70%
Budget over-runs1
Percent of projects
2008 Findings in UK on performance of PPPsComparison 114 PPPs in 11 sectors vs. conventional projects
Meeting budgets
Meeting schedules
Reducing overall costs
35
100 -65%
Time over-runsPercent of projects
80100
-20%
Project costs2
Indexed to 100
Traditional PPP
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Integrated diagnostic identified a potential of 35% in country x
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Six areas of under-performance
Starting point
Performance outcomes
Effectiveness of the infrastructure delivery system
The McKinsey Infrastructure Diagnostic
Transformation plan and journey4
Pipe-line of x+ Billion USD next 8-10 years
More expensive cost of inputs i.e. material, equipment and labour
2
Large variation orders in project execution3
Frictional costs of doing business4
Challenges with the owner organization5
Insufficient project phasing/prioritization6
▪ Project phasing
▪ Techno-commercial review
▪ Strengthen key owner entities
▪ Optimise government permitting processes
▪ Supply chain for key input materials
1 2 3
i
ii
iv
v
iii
• Like-for-like comparison suggests “over-spending” of at least 20-25% on real estate and 45-65% on roads
• More complex projects 2X more expensive than benchmarks
• Savings potential of USD y billion
• More expensive concept selection, scope and design
– Over-engineering/gold-plating
– Unclear robustness of business cases
– Choosing iconic infrastructure
1
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Summary of key messages
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• Large but still insufficient spend on infrastructure
– 9 trillion USD annually of which 2.7 on economic infrastructure
– USD 15-20 trillion gap next 15 years for Transport, Power and water
• Severe headwinds to funding and finance as well as Poor infrastructure system performance and productivity
• Closing the gap requires actions along four key levers with PPPs only
a part of the answer
• Replicating existing best-practices at the global scale could help get more and better infrastructure out of every dollar spent
• Levers differ by country and require top-down planning approach to address
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