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Fresh thinking for a sustainable city

A city cuts public debt and improves services–taking bold steps to reshape key agencies, generate income from state land, and spend taxpayers’ money better

Challenge

The incoming mayor of a megacity faced a challenge: many of the city’s largest institutions, from sports stadiums to the housing agency to the public transport system, were rapidly losing money. The city was encumbered with more than $15 billion in public debt—and this number was only growing.

The mayor asked McKinsey’s help to dramatically and quickly improve the financial sustainability of six major institutions—while maintaining or improving service levels for citizens.

We worked with the mayor’s team across all the financially troubled agencies, but focused on two—the housing agency and the underground rail network—that together accounted for the lion’s share of financial losses. We soon realized that they had several problems in common: outdated organizational models, a preference to invest in new and risky capital projects rather than extend the life of existing assets, limited project management capability, and unexplored potential to create value from city-owned property.

Discovery

The McKinsey team began by helping the city assess the business models of the housing agency and metro rail system. The housing agency, whose mandate was to provide sufficient affordable housing for low-income residents, had long interpreted this to mean that it must develop and sell apartments itself—creating its own funding stream in the process. But with property prices not yet recovered from the 2008-09 financial crisis, the cost of building was now greater than the sales prices. The result was that the agency was saddled with $8 billion in debt… and rising.

We helped identify several more efficient ways of delivering on the housing mandate. For example, we found that, rather than acting as a developer itself, the agency could partner with private investors and developers who could deliver new housing faster and more cheaply. We also recommended that the city increase the availability of rental housing—again developed by private partners—both to meet social needs and create a steady income stream.

The metro rail system faced an equally pressing set of legacy challenges. Management of the city’s rail services was split between two autonomous institutions, each with its own head office, workforce, and procurement policies. We recommended much closer collaboration between the two, including shared procurement of construction, trains and other major expenditure categories—both to capture economies of scale and to share best practices.

One major issue for the metro rail system was its high personnel costs, which constituted more than half its budget. Due to an inflexible shift system, many staff were on duty at night, when the system was little-used and overtime rates were high. Based on comparisons with other transport systems around the world, we worked with the client to establish a flexible, more efficient staffing model, together with a feasibility study of an unmanned subway system on some of the lines.

Both the housing agency and metro rail system occupied land with major commercial value; we proposed ways to generate income from this property. In the case of the housing agency, one solution was to invite corporate sponsors to “adopt” particular housing developments for two-year periods, during which they would have advertising rights for key sites in those locations. The revenue earned would subsidize maintenance and beautification of the housing estates, to the benefit of both residents and the city.

In the case of metro rail, we recommended active steps to increase non-fare income, including leasing space in stations to businesses such as food stores and drugstores, selling advertising space in high-traffic areas, and offering companies, universities and hospitals the right—for a fee—to co-name stations near their institutions.

Impact

Within a year of kicking off the project, the city achieved major strides in improving public finances.

In the housing agency, the debt levels were projected to be cut by one third within the first 2 years—and by more than 60% after 7 years. Operational improvements were on course to save some $50 million a year. At the same time, the agency’s reconfigured business model was delivering major change in service levels, construction methods, and public-private collaboration. One result was a shift to new-generation construction materials with lower cost and lesser environmental impact. One year after launch, all but one of 29 housing improvement initiatives were on track—and 9 were complete.

In metro rail, the change initiatives adopted were projected to generate nearly $2 billion in additional revenue and saved costs over a 2 year period—so helping to reduce debt levels significantly while avoiding fare increases and maintaining the system’s excellent safety and reliability record. One year after launch, all 31 improvement initiatives were on track.

Overall, the improvements helped to set the city on a course for steady reduction in public debt, and opened the way for bold new steps to strengthen the financial sustainability of other key institutions—including the privatization of major infrastructure such as sports stadiums and the city’s global business center.

FEATURED EXPERTS

Jonathan Woetzel

MGI Director and Senior Partner, Shanghai

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