Nicklas GaremoHead of Infrastructure and Capital Projects

Role of PPPs in addressing global infrastructure challenges

1. The global infrastructure pipe-line

2. Financing challenging but PPPs only part of the answer

3. Infrastructure system peformance and productivity - the real problem

4. Opportunities to significantly boost productivity by replicating best-practices across countries

5. Primary benefit of PPP often not lower cost of capital but ratherbetter execution

Role of PPPs in addressing global infrastructure challenges

1,100700400

400Transport

TelecomPower and water

Infrastructure spend USD billions2, 2012

1 Represents 12% of global GDP2 Nominal investment in Infrastructure in 2012

SOURCE: Global Insight; Euroconstruct; IMF; McKinsey; World Bank; OECD

4,150 4,150

2,300

2,600

TotalReal estate

750

1,200350

Social infra-structure

Oil, gas and mining

1Real estate

Narrow Infrastructure definition

Broad Infrastructure definitionThe world spends USD 9 trillion each year across infrastructure assets

SOURCE: IMF, Bloomberg, Infrastructure Journal, Public Works Financing newsletter, Infrastructure Investor magazine; McKinsey Global Institute analysis

2

10%Average reduction, as a proportion of GDP, of G20 government spending to achieve debt targets

Fiscal pressure

60:40Debt-to-equity ratio of the Pennsylvania Turnpike in 2008, versus 85:15 for the Indiana Toll Road just two years earlier

Constrained debt

70%Share of current investment pipeline comprising riskier green-field projects

Emerging markets

Significant challenges to finance and funding of new infrastructure going forward

While some countries have successfully used PPPs to finance as much as 20-25% of spend………

76

10

35

100

100

11

58

90

13

7

21

4

20

118

89

36

20

100

96

18

84

56

64

28

16

44

4

52

82

47

81

66

156

26

10

9

Planned public, PPP, and private investment in core infrastructure Ratio per sectorUnited Kingdom

2011–15100% = $257 billion

India2007–11100% = $485 billion

64%(164)

23%(59)

13%(33)

17%(82)

19%(92)

64%(310)

Transport

Energy

Communications

Waste

Water

Electricity

Roads

Telecom

Rail

Water

Ports

Airports

Percentage. $ billion

SOURCE: HM Treasury, United Kingdom; Planning Commission, India; McKinsey Global Institute analysis

Private

Public

Public-private partnership2

2.01.4

0.9

1.2

0.6

0.6

0.4

0.4

High case

3.8

Base case

2.4

’As is’ case

1.6

0.3

Total investment capital available for infrastructure investment

Pension funds

Sovereign wealth

Life insurance

All investors at target allocation

Infra allocation in line with private equity

All investors maintain current allocation

US$ trillions of financing available over 2012 – 2030

SOURCE: McKinsey Global Banking Pools; McKinsey Global Insurance Pools; SWF Institute; TheCity UK; Preqin

…..PPPs will only be part of the answer at the global level2

SOURCE: OECD Labour Productivity by Industry (ISIC Rev. 3 & Rev. 4); McKinsey Global Institute analysis

Delivery system challenges

Poor project delivery

Biased project selection

Bias towards new investments

Sub-par labor productivity growth

Value added per hour workedIndex: 100 = 1989 for the US, 1991 for Germany

0

09052000951989

Rest of economy

Construction

140

80

120

100

160

2013

Infrastructure delivery system performance and productivity3

SOURCE: McKinsey Global Institute analysis

Strong infrastructure governance & capabilities

D E

Robust funding & finance framework

Optimizedspend

Infra-structurespend

Fact-basedproject selection

A Stream-lineddelivery

B Making the most of existing infrastructure

C

~8%~15%

~15%-38%

Percent

Proven best practices rolled out globally could save about 40% of spend

4

Cost and time overruns historically

Example: Mega project construction cost$ billion

Seoul-Busanhigh-speed rail

Incheon Inter-national airport

18

5

7

3

AdjustedPlanned

46 54

97

After ’99

Before ’99 341

122

After ’99Before‘99

Overrun

..were reduced…

Cost overrunPercent

Between 1999 and 2006, ~60 $ billion saved (~1% of GDP) and allocated for other uses

Rejected

1 Private Infrastructure Investment Center of Korea; 2 Public Investment Management Center; 3 Public & Private Infrastructure Management Center

SOURCE: IEEE Transactions on Engineering Management, KDI, Construction & Economy Research Institute of Korea, APA Journal

… and project screening significantly improved

Projects rejectedPercent

Korea enhanced the efficiency and transparency in infrastructure development by establishing an objective supervisory organization

4

SOURCE: McKinsey analysis

Effective Governance

Commitment

Executional excellence

Robust and trans-parent pipeline of viable PPP projects

Clear vision for role of PPP in infrastructure delivery

Positive perception of PPP by all key stakeholders

21 3

Standardized PPP-models with clear parameters for project selection

Robust legal and institutional framework and regulations

Effective, capable government institutions

54 6

Transparent and robust tender process

Robust business plans with attrac-tive and stable risk allocation

Effective controlling and feedback processes

87 9

Effective approach to PPPs4

… primary benefit is improved project performance due to better aligned incentives and risk allocation

Lower financing costs in some countries but…

Financing costs 2011-12Percentage

4.5

India6.4

8.2

Portugal9.3

12.9

2.6

Brazil5.9

5.6UK

Project Finance

Public Debt

2008 Findings in UK on performance of PPPsComparison 114 PPPs in 11 sectors vs. conventional projects

OTHER BENEFITSDesign for operations Design f. maintenanceLevel playing fieldBetter TCO optimizationetc

30

100 -70%

Budget over-runs1

Percent of projectsMeeting budgets

Meeting schedules

Reducing overall costs

35

100 -65%

Time over-runsPercent of projects

80100

-20%

Project costs2

Indexed to 100

Traditional PPP

Primary benefits of PPPs often not lower cost of capital but rather improved execution

5

Note. Similar study in Australia showed 52.4 percent of conventional projects having cost overruns whereas only 27.8 percent of PPPs did

SOURCE: McKinsey Global Institute analysis; UK National Audit report on “Private Finance Projects”, 2009

• USD 60 trillion needed until 2030 for Transport, Power and water alone

• Severe headwinds to funding and finance and PPPs are only a part of the answer

• Poor infrastructure system performance and productivity is the real challenge for the industry

• Replicating existing best-practices at the global scale could help get significantly more and better infrastructure out of every dollar spent

• Primary benefit of PPP often not lower cost of capital but rather improved execution due to better aligned incentives

Summary of key messages