Friday, January 18, 2013

Optimum infrastructure planning and better utilization of existing infrastructure: An alternative to new capacity building

Driving further into the 2010s, one gets a feeling that inadequate and poor performance of infrastructure available present a grave economic as well as social problem for economies. For economies to meet their full growth potential along with human and economic development, the lever that's imperative is more investment in infrastructure, be it transport or grids or water pipelines.

As we stare at the wide gap between existing infrastructure and the one required for optimized growth, one of the major concerns is how to find the money to fund the bridge. However, one of the other key factors which one needs to consider is to improve planning, delivery and operations of the infrastructure to get more and high quality capacity for less money to improve infrastructure efficiency. The attention needs to be focused on how governments together with the private sector, select, design, deliver and manage the infrastructure projects and make more out of the existing infrastructure available.

The exhibit below shows the estimated infrastructure sector-wise investment required in the period 2013 - 2030:
Sector-wise investment required in global infrastructure

The key challenges in the poor service delivery of the infrastructure are:

  • inaccurate planning and forecasting leading to poor project selection
  • bias of the public administrations to build new capacity rather than make use of existing ones, leading to more expensive and less sustainable infrastructure
  • lack of incentives, accountability, and capabilities clubbed with risk aversion towards new technology and 
  • a general inability of the public administrations to negotiate on equal terms with the infra developers, thereby leading to inefficient oversight and poor performance monitoring
The levers controlling the cost efficiency of the project portfolios of economies are:
  1. Improving the project selection and optimizing infrastructure portfolio - 
    • Clear definition of needs for the infra projects together with the due consideration provided for complimentary capacity planning is required to ensure lowered spending on projects
    • Sophisticated evaluation methods to determine costs and benefits and prioritizing the project selection based on transparent, fact based decision making, is another critical factor
    • One estimates US $200 billion saving in the infrastructure spending globally, if the project selection is done appropriately
  2. Delivery Streamlining -
    • Heavy investment in the project planning and design phase bears an importance in stream-lining the project delivery
    • Appropriate incentives need to be designed and incorporated into the contract design helps in achieving prescribed performance specification
    • An estimated saving of US $400 billion annually can be achieved by streamlining the project delivery 
  3. Optimizing existing infrastructure assets - 
    • One may end up with a savings of US$ 400 billion a year by boosting the asset utilization, optimizing maintenance planning and better demand-management. For eg., reducing transmission and distribution losses in water and power may come at a nominal cost of just 3% of the cost required for equivalent new production 
    • Governmental measures, through the use of tools and charges to allow the demand management, are an effective solution for greater benefits 
  4. Up-gradation in infrastructure governance systems - 
    • A wholistic understanding of broad socio-economic growth and common understanding between various infrastructure development authorities, is basic requirement in the governance of infrastructure
    • Clear division of technical and political responsibilities for infrastructure management will be required to ensure a more transparent and efficient asset management
    • Appropriate role-definition for public and private players providing for role clarity on market structure, regulation, pricing and subsidies, ownership and financing, is the key
    • Most importantly, a trust based engagement of all stakeholders through-out the process is must to avoid sub-optimal solutions and unnecessary delays
The figure below shows an estimated savings that can be achieved by implementing appropriate measures towards optimum infrastructure deployment:

Estimated savings possible through optimization in infrastructure portfolios and better asset utilization

Ref: Infrastructure Productivity: How to save $1 trillion, January 2013, McKinsey Global Institute

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