All too often, a surprisingly stable status quo persists in which inaccurate planning
and forecasting lead to poor project selection. A bias among public officials to build
new capacity, rather than make the most of existing infrastructure, is common, leading
to more expensive and less sustainable infrastructure solutions. A lack of incentives,
accountability, and capabilities as well as risk aversion has prevented infrastructure
owners from taking advantage of improvements in construction methods such as the
use of design-to-cost and design-to-value principles, advanced construction techniques,
and lean processes. Infrastructure authorities frequently lack the capabilities necessary
to negotiate on equal terms with infrastructure contractors, rendering them unable to
provide effective oversight and thereby drive performance.
McKinsey’s research finds that pulling three main levers can deliver the potential savings.
LEVER 1. IMPROVING PROJECT SELECTION AND OPTIMISING INFRASTRUCTURE
PORTFOLIOS
A review of global best practices indicate that one of the most powerful ways to reduce
the overall cost of infrastructure is to optimise infrastructure portfolios—that is, simply
to select the right combination of projects. All too often, decision makers invest in
projects that do not address clearly defined needs or cannot deliver desired benefits.
Equally often, they default to investments in additional physical capacity (for example,
widening an arterial road into a city) without considering the alternatives of resolving
bottlenecks and addressing demand through, for instance, better planning of land use,
the enhancement of public transit, and managing demand. Improving project selection
and optimising infrastructure portfolios could save 20 per cent of the total productivity
opportunity. To achieve these savings, owners must use precise selection criteria
that ensure proposed projects meet specific goals; develop sophisticated evaluation
methods to determine costs and benefits; and prioritise projects at a system level, using
transparent, fact-based decision making.
For example, to guide its selection of transit projects, the Government of Singapore has
a clear metric: to support its broad socioeconomic goal of building a densely populated
urban state, any project must contribute to the specific objective of achieving 70 per
cent use of public transit. In Chile, the National Public Investment System evaluates all
proposed projects using standard forms, procedures, and metrics, and rejects as many
as 35 per cent of all projects. The organisation’s cost-benefit analyses consider, for
instance, non-financial costs such as the cost of travel time, and a social discount rate
that represents the opportunity cost for the country when its resources finance any given
infrastructure project. Final approval rests with Chile’s finance ministry, which allocates
funding based on a combination of these cost-benefit analyses and national goals.
LEVER 2. STREAMLINING DELIVERY
Streamlining project delivery can save up to 15 per cent of total investment annually while
accelerating timelines materially. Speeding up approval and land acquisition processes
is vital given that one of the chief drivers of time (and time overruns) is the process of
acquiring permits and land. In India, up to 90 per cent of road projects experience delays
of 15 to 20 per cent of the planned project timeline because of difficulties in acquiring
land. England and Wales in the United Kingdom have, for instance, implemented onestop
permitting processes. In Australia, the state of New South Wales cut approval times
by 11 per cent in just one year by clarifying decision rights, harmonising processes across
agencies, and measuring performance. Both the United Kingdom and Australia have
implemented special courts to expedite disputes over land acquisition. A key source
of savings in project delivery is investing heavily in early-stage project planning and