Economic Development 411 | 2015 | Robert Palter

Information about Economic Development 411 | 2015 | Robert Palter

Published on December 8, 2015

Author: Columbus2020



1. Getting more out of infrastructure to drive economic development Robert Palter, Global Head Infrastructure Practice McKinsey & Company Economic Development 411 December 4, 2015

2. #ED411 Key messages ▪  Infrastructure has an important role to play in economic development ▪  The US (and the rest of the world) has as significant infrastructure gap to close and many people argue PPPs, creative financing and other capital sources are required ▪  However, there are opportunities to get more out of existing infrastructure to offset the capital shortfalls plus drive continued economic benefit

3. #ED411 Investments in infrastructure are amongst the highest stimulus multipliers and create more than 30,000 jobs for every $1 billion spent SOURCE:; Federal Highway Administration’s (FHWA) Office of Transportation Policy Studies 1 year $ change in GDP for a given $ increase in spending 0.27 0.29 0.30 0.37 0.48 1.02 1.03 1.26 1.29 1.36 1.59 1.64 1.73 Unemployment benefits Food stamps Infrastructure spending Across-the-board tax cut Make expiring dividend and capital gains tax cuts permanent Make income tax cuts permanent Non-refundable tax rebate Payroll tax holiday Reduce corporate tax rates Accelerated depreciation Extend alternative minimumtax patch Refundable tax rebate Transfers to state governments Moody’s estimates For every $1 billion spent on ▪  New roads and bridges, 27,000 jobs are created ▪  Maintenance and repair of old roads and bridges, 30,000 jobs are created ▪  Public transportation systems, 32,000 jobs are created Other studies cite similar multipliers (e.g., White House’s report puts the spending multiplier at 1.57 versus tax cuts at 0.99)

4. #ED411 2.6 3.3 2.9 3.4 2.8 3.6 3.3 5.0 2.6 2.3 2.7 2.2 2.6 2.4 Germany CanadaUnited Kingdom FranceUnited States JapanSweden Most advanced economies must raise infrastructure spending by nearly 1 percentage point of GDP to support economic development and maintain competitiveness Gap between historical spend and estimated future spending need Percent of GDP Estimated need Actual spend -1.0 -0.9 -0.6 -0.7 -0.6 -0.7 Ohio is at 3.2%

5. #ED4115 17 15 7 48 72 28 Rail 1 Aviation 4 TransitRoads, highways, bridges Total 100 Parks, recreation, schools Energy 3 Waste 4 Water, waste water Water transport 2 SOURCE: American Society of Civil Engineers; US Department of Transportation; McKinsey Global Institute Transportation infrastructure Other infrastructure Estimated infrastructure investment shortfall for the United States Percent; 100% = $1.1 trillion over 5 years The shortfall in US infrastructure investment is felt most acutely in transportation

6. #ED411 Electricity Roads Telecom Rail Water Ports Airports When aggressively deployed, PPPs range from 5% to 25% of infrastructure spend…not enough to close the gap 100 10 100 58 90 1176 35 13 7 89 118 21 20 4 56 84 18 96 100 20 36 16 28 64 52 82 9 10 66 81 156 47 0 4 26 SOURCE: HM Treasury, United Kingdom; Planning Commission, India; McKinsey Global Institute analysis Planned public, PPP, and private investment in core infrastructure Ratio per sector United Kingdom 2011-15 100% = $257 billion India 2007-11 100% = $485 billion Private Public-private partnership (PPP) Public 64% (164) 23% (59) 13% (33) 31% (150) 64% (310) 5% (24) Transport Energy Telecom Waste Water Percent; $ Billions

7. #ED411 Cost of capital argument for economic development §  Many observers argue that the government has the lowest cost of capital and thus should develop, own and operate all infrastructure not private enterprise §  However, research is clear that private sector efficiency in construction and operations relative to public sector offsets the higher cost of private capital §  Moreover, government cost of capital is likely higher than observers think and governments’ ability to raise financing is limited –  Cost of debt does not equal cost of capital –  Cost of equity in a public sector context is the tax base’s willingness to have its taxes raised §  Therefore, private sector should probably take on infrastructure projects where the economics support the project and governments should use their limited financing ability to undertake state/nation building projects that do not make sense for the private sector but do have long-term social and economic benefits –  Eglinton Crosstown project done as a PPP –  Ring of Fire road done through public sector financing

8. #ED411 Project delivery ▪  Delays in land acquisition and approvals ▪  Insufficient planning resulting in risky projects with costly claims ▪  Lack of collaboration and inappropriate tendering stifling innovation and design to value ▪  Lean techniques and modularization in their infancy ▪  Insufficient oversight and coordination during construction resulting in delays and claims ▪  Construction sector held back by lack of education, fragmentation, overregulation, lack of innovation, informality Making the most of existing infrastructure ▪  Inefficient operations as capacity bottleneck, particularly in ports, airports, and rail stations ▪  Maintenance backlog increasing total cost of ownership ▪  High transmission and distribution losses in water and power ▪  Insufficient pricing and demand management Project selection ▪  Blurred lines between political and technocratic aspects ▪  Unclear methods to assess and prioritize alternatives ▪  Lack of coordination between assets Typical issues along the infrastructure value chain SOURCE: McKinsey Global Institute

9. #ED411 2.7 0.4 1.70.1 0.2 Optimized need 0.2 Making the most of existing infrastructure 0.1 Streamlining delivery Improving project selection/optimizing infrastructure portfolios Infrastructure need 0.61 Global infrastructure investment need and how it could be reduced Yearly average, 2013-30 $ trillion The $1 trillion-a-year infrastructure productivity opportunity SOURCE: McKinsey Global Institute analysis 1 Telecom investment need beyond the scope of this paper. Demand management Operations and reduction of transmission and distribution losses Optimized maintenance

10. #ED411 Value engineering yields significant savings – example road surface Impact – reduced amount of hot mix base by differentiating between light and heavy traffic lanes RW2 RW1 Reinforcement layer Surface Thickness of hot mix base Heavy traffic only in left lane Heavy traffic lane Light traffic lane Incentives introduced to apply active design (profit sharing) Same thickness of hot mix base in all lanes independently from traffic expected per lane Source of waste SOURCE: McKinsey

11. #ED411 Construction productivity has been flat or falling in many advanced economies SOURCE: OECD Labour Productivity by Industry (ISIC Rev. 3); McKinsey Global Institute analysis 120 100 140 90 130 80 110 150 0 1989 95 052000 2009 Labor productivity Index: 100 = 1989 for the United States, 1991 for Germany Rest of economy Construction

12. #ED411 But, rather than always looking for new money for infrastructure, technology can be used to get more out of existing infrastructure 9.7 25.0 2.7 17.0 14.0 62.0Optimized traffic signals 39.0 National real-time traffic information system Integrated corridor management 7.5 8.7 3.62.8 Commercial vehicle information systems and networks Electronic freight management system Maintenance decision support system 2.0 1.3 "Traditional" road capacity Intelligent traffic management Upper range Lower range Average benefit-to-cost ratios

13. #ED411 Emerging technologies could improve productivity in airports Beacon, thermal imaging Robotic technology Connectivity based apparel Cashless payment WAZE ▪  Community based traffic and navigation to enable getting more out of existing road infrastructure iBeacon by apple ▪  Personalized Bluetooth – based location – push notifications Thermal imaging ▪  Infrared thermal imaging camera and strategically located optical sensors to provide an estimate of how long the queue will take to pass (Vaernes) ▪  Shoe insoles placed in shoe communicate with smartphones SAT NAV and vibrate when change of direction needed, enabling faster move from A to B (airports, train stations, urban areas) ‘Super- shoes’ by D Dand ‘Ray’ by Boomerang Systems ▪  Automated parking system can be controlled and booked via an app. “Ray” parks vehicles dropped off at the designated area (Dusseldorf airport) ▪  Increase parking area by 60% HENN – NA ▪  Hotel 90% operated by robots from check-in to in-room butler (Nagasaki, Japan) ▪  Facebook- and twitter- based, cash-less payment offered to customer via private message with link to preferred payment method Social media- based payment by KLM

14. #ED411 But, do these technologies create value for infrastructure asset owners and operators? US airport case example 16.8 14.514.4 Piloting and refining Maturity +16% Pre-launch baseline Average retail, food, and beverage spend per passenger USD Oct 13-Apr 14 May 14-Dec 14 Jan 15-May 15

15. #ED411 What does this all mean for a community like Columbus and greater Ohio? •  There are many technology solutions that apply to urban and rural infrastructure assets which could unlock more potential from those assets, delay the need for more capital and improve economic development and competitiveness in Ohio •  While infrastructure is – by definition – very local, successfully building and maintaining competitive infrastructure (and thus a competitive economy) requires municipal, state and local governments to work together •  PPPs are likely more attractive to larger urban projects vs rural community building type projects that will have long-term economic benefit but need short-term economic support. However, Ohio will need both types of financing to ensure competitive infrastructure and economic development •  We are now at a time when all stakeholders in infrastructure need to innovate their approaches to project selection, planning, financing, construction and operations. Governments can lead the charge on this front

16. #ED411 THANK YOU

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