We all have a stake in the infrastructure surrounding us — the roads, buildings, power lines, and telephone networks that we rely on daily. How well they're built and operated is crucial to economic growth and is a key arbiter of an economy's competitiveness — and yet, virtually every economy faces an array of infrastructure challenges, write Jimmy Hexter and Jan Mischke in HBR Blog.
We all have a stake in the infrastructure surrounding us — the roads, buildings, power lines, and telephone networks that we rely on daily. How well they're built and operated is crucial to economic growth and is a key arbiter of an economy's competitiveness — and yet, virtually every economy faces an array of infrastructure challenges.
Just a few examples illustrate some of the pressing issues: South Africa's power distribution network has an estimated maintenance backlog of $4 billion — equivalent to half of the country's total investment in electric power generation and distribution in 2011. The U.S. Department of Transportation estimates that 15% of the country's roads are in an unacceptable condition and says that road congestion costs the U.S. an estimated $100 billion per year. In Jakarta, from 2005-2009, the number of cars rose by 22% annually, while the distance of usable roads actually declined (PDF). The UN Economic Commission for Latin America and the Caribbean estimates that investment equivalent to 7.9% of GDP (PDF) is necessary to raise infrastructure in the region to the standard of developed East Asian countries.
Just to keep pace with anticipated global GDP growth, the world needs to spend $57 trillion, or on average $3.2 trillion a year, on infrastructure over the next 18 years. That's more than the entire worldwide stock of infrastructure on the ground today — and nearly 60% more than the world has invested over the past 18 years. Tackling maintenance backlogs, future-proofing infrastructure to cope with climate change, and meeting development goals such as access to clean water and all-weather roads to transport goods to markets would cost a great deal more.
The bill for all of that looks prohibitive at a time when many governments are highly indebted and capital is tight. A focus on the huge need for additional investment and potential difficulties in financing it dominate the debate. Pessimism rules, but it needn't be that way. There are ways of cutting the bill down to size and meeting the challenge. The answer lies in improving the way we plan, build, and operate infrastructure — in other words, we need to boost its productivity.
We have analyzed 400 case studies that show that there's plenty of opportunity to boost infrastructure productivity, and in turn save 40% on the global infrastructure bill (or $1 trillion a year) and boost global GDP by about 3% by 2030 if reinvesting the savings. There are three routes to getting there:
1. We need to make better choices about the projects we're investing in. Projects need to be clearly linked to broader economic and social development, rather than being vanity exercises. Governments need to evaluate costs and benefits rigorously and prioritize accordingly. South Korea's Public and Private Infrastructure Investment Management Center has saved 35% on its infrastructure budget by rejecting 46% of the projects it reviews, compared with only 3% previously. Making more strategic choices has the potential to save $200 billion a year worldwide.
2. We need to streamline delivery. There is huge potential to speed up permits and land acquisition particularly for new transport infrastructure, to structure contracts to encourage innovation and cost savings, and to strengthen collaboration with contractors. This could save up to $400 billion a year and accelerate the timeline for the completion of projects. For example, in Australia, the state of New South Wales cut approval times by 11% in just one year.
3. Instead of rushing to build new capacity, we need to do more with what's already on the ground. This, too, has the potential save $400 billion a year. The United Kingdom, for instance, achieved reductions of 25% in journey times, and 50% in accidents on the M42 motorway by implementing an intelligent transportation system solution that directs and controls traffic flow. Smart grids could help the United States avoid $2-$6 billion a year in power infrastructure costs.
None of this is rocket science, but bringing these opportunities to fruition will require a much less fragmented way of running infrastructure policy. The many agencies involved in various kinds of infrastructure (roads, power, water, etc.) at different levels (city, state, country) need much better coordination. And the public and private sectors need to forge far deeper and broader partnerships. Most collaboration between the two is around financing and construction, but the private sector could certainly do much more with planning and delivery. This isn't an overly radical thought — Chile, the Philippines, South Africa, South Korea, and Taiwan are all developing frameworks for giving private players greater roles in project and portfolio planning.
Saving money with higher infrastructure productivity is a win-win that would be particularly useful at a time of capital constraints and anemic growth in many parts of the world. There is every incentive to be smarter about tackling our infrastructure problems.
This article originally ran in HBR Blog.