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Report: Global Infrastructure Underfunded

Wednesday, June 22, 2016

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A new report from the McKinsey Global Institute looks at infrastructure spending from a global perspective, and proffers suggestions as to how the industry might bridge the spending gaps that continue to grow.

Road construction
© iStock.com / Charles Mann

The United States alone needs to spend about $125 billion more each year in order to keep up, according to the report.

The Institute, the research arm of international business consulting firm McKinsey and Company, this month issued “Bridging Global Infrastructure Gaps” as a follow-up to its 2013 study “Infrastructure Productivity: How to Save $1 Trillion a Year.” The new report revises estimates of how big the spending gap is, and contains new advice on dealing with it.

The Gap

McKinsey says the world needs to invest about 3.8 percent of total GDP in infrastructure to keep up with worldwide growth, but predicts that if industry continues as it is, it will come up some $350 billion short each year. That figure balloons if the industry hopes to make enough investments to keep up with more recent U.N. goals regarding sustainable development.

Chart showing needed infrastructure investment
Charts: McKinsey Global Institute

The greatest spending in the next 15 years will need to be on power-related infrastructure, with roads ranking second, according to the report.

The United States alone needs to spend about $125 billion more each year in order to keep up, according to the report. Just last month, the American Society of Civil Engineers issued a report on the infrastructure spending gap in the U.S.

The report cites “years of chronic underinvestment” as the basis for the gaps; the Institute says it is “critical to get finance flowing into urgently needed projects.”

It also notes that government investment in infrastructure projects has been declining worldwide; Japan is the only major economy it cites where infrastructure spending in 2014 was greater than it was five years prior.

The greatest spending in the next 15 years will need to be on power-related infrastructure, with roads ranking second, according to the report.

Make Investing More Attractive

One major suggestion coming from the report: Pair big banks from advanced economies with middle-income nations that need infrastructure support. Banks and institutional investors have $120 trillion in assets that could help the cause, the report says.

Government spending image

Japan is the only major economy the report cites where infrastructure spending in 2014 was greater than it was five years prior.

How to make that happen? Make investment in these infrastructure projects more attractive to investors, the Institute says. The top options include:

  • Strengthening the pipeline of upcoming projects with better development and preparation and better communication;
  • Removing regulations and risks that limit how attractive infrastructure projects are to investors, especially internationally;
  • Standardizing how projects work as investments, to make it easier for investors to find and pursue them; and
  • Concentrating on facilitating cross-border investment.

Greater Efficiency

Construction in general has shown lags in productivity, the Institute posits, leading to inefficiency. There are many reasons for this, the report says, including an aversion to using technology and the fragmentation of the industry.

Analysis and benchmarking could improve best-practices knowledge as well, the report states, leading to greater efficiency and up to 40 percent savings.

“Financing may seem scarce in a world of debt and deleveraging,” the report concludes, “but a number of tangible steps could attract more public and private finance—and the opportunities to make spending more effective actually constitute an even bigger opportunity."

The entire report is available for free on the McKinsey website.

   

Tagged categories: Asia Pacific; EMEA (Europe, Middle East and Africa); Funding; Government; Infrastructure; Latin America; North America; Program/Project Management; Research; Roads/Highways

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