Smarter infrastructure spending needed for growth - study

LONDON Thu Jan 17, 2013 6:22am IST

A woman labourer spreads black ash over a newly constructed road at Raipur village, in the western Indian state of Gujarat January 9, 2013. REUTERS/Amit Dave

A woman labourer spreads black ash over a newly constructed road at Raipur village, in the western Indian state of Gujarat January 9, 2013.

Credit: Reuters/Amit Dave

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LONDON (Reuters) - Countries could increase the productivity of infrastructure investment to make savings of 40 percent, or $1 trillion a year, by adopting proven best practices, McKinsey Global Institute (MGI) said on Thursday.

MGI estimated that the world needs to spend $57 trillion on infrastructure - the sinews of an economy - between now and 2030 simply to keep up with projected growth. That is nearly 60 percent more than the $36 trillion spent over the past 18 years.

Yet government budgets are tight and banks wary of lending, so wringing more out of each dollar of investment is imperative to sustain growth, jobs and development, MGI, the research arm of the consultancy McKinsey & Co, said in a report.

MGI estimated that extending the best practices it identified in 400 projects worldwide could lead to a 60 percent productivity improvement. In the United States, Japan and Germany, for example, construction workers have not increased their productivity in the past 20 years.

"Countries could deliver $48 trillion of infrastructure for only $30 trillion in investment and reinvest the savings," the report said.

Those savings would come from three main sources: selecting projects more systematically and delivering them more efficiently; making the most of existing airports, roads and ports; and managing demand by using tools such as road pricing and water metering.

"The practices that would yield this $1 trillion a year are already in place. We are not looking into the future to see what new technology might bring," Herbert Pohl, one of the report's authors, told Reuters.

MGI cited South Korea, Ontario and Singapore as having model infrastructure organisations that others can emulate, while Switzerland shows how to develop a joined-up national strategy.

It commended Seoul and Stockholm for the integrated approach they took to easing clogged traffic and said Denmark had reduced its road maintenance bills by 20 percent.

JAPANESE SPENDING

By contrast, road congestion costs the United States an estimated $101 billion a year in time and fuel. Trucks entering the United States from Mexico still have to wait for up to two hours at the border.

Atlanta airport, the world's busiest, recently added an international terminal that has no direct links to existing public transport, MGI said.

"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," the report said.

MGI said it recognised that governments and businesses face tough budget choices and that infrastructure, albeit important, is just one item of spending among others.

Indeed, one of the main thrusts of the report is that existing roads and railways can be operated much more efficiently, often obviating the need for new building.

Chile, South Korea and Britain have shown potential capital spending savings of 15 to 20 percent by reordering priorities and picking more cost-effective alternatives.

Without a more systematic approach, there will continue to be waste that has been exemplified by excess power generation capacity across Spain and redundant bridges in Japan, MGI said.

Richard Dobbs, another of the report's authors, said Japan on most measures had already ploughed too much in infrastructure.

As such, it was questionable whether spending 5.2 trillion yen in fast-acting public works projects, as proposed by new Prime Minister Shinzo Abe, was the right tool to galvanise the economy.

"At what point does overinvestment in infrastructure, given the government's debt level, become problematic?" Dobbs asked. (Reporting by Alan Wheatley)

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