FE Editorial : Saving on infrastructure
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Proper planning could cut investments by 40%
While India plans to more than double infrastructure spending over the 12th Plan, to $1 trillion over the next 5 years, a recent McKinsey report has some wise counsel. Based on insights from more than 400 examples globally, McKinsey points out that adoption of global best practices can help shave around 40% from this capital need. How important this is can be seen from the fact that, according to McKinsey analysis, just to keep up with the needs of a growing economy, all countries will need to invest up to around $57 trillion over the next 18 years to 2030—not only is that a 60% jump over the spend in the last 18 years, keep in mind the world is terribly capital-starved right now. While best practices differ from one project to another, McKinsey points out that, even in many developed countries, labour productivity has hardly increased over the past two decades in the construction sector.
In the case of India, McKinsey points out the best solution is to speed up land approvals and environment/forest clearances to keep project costs down. Up to 90% of road projects, the report says, face delays of 15-20% due to these clearances not coming about. The GMR and GVK groups, in fact, walked out of two prestigious projects after delays of up to 16 months in getting the necessary permissions. A major point of course correction, going by the McKinsey report, is in the planning of who will build the required infrastructure. While the 12th Plan envisages 48% of the requisite projects being taken up by the private sector, McKinsey says the share of PPP was between 0 and 12% in the EU between 2006 to 2009; just 40% of transport PPPs planned in the US since 1985, the report says, were funded by the end of 2010. India could well buck the trend, but the decision-making process has to change quite dramatically.
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