McKinsey report | Infra project delays may cost $200 bn

McKinsey report | Infra project delays may cost $200 bn
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First Published: Thu, Aug 13 2009. 01 15 AM IST

Vital links: The projected opportunity cost of not setting up infrastructure would amount to 10% of the country’s GDP, assuming 7.6% average growth rate till 2017. Ramesh Pathania / Mint
Vital links: The projected opportunity cost of not setting up infrastructure would amount to 10% of the country’s GDP, assuming 7.6% average growth rate till 2017. Ramesh Pathania / Mint
Updated: Thu, Aug 13 2009. 11 00 AM IST
New Delhi: Tardy progress in awarding and executing infrastructure projects over the next nine years could cost India $200 billion (Rs9.68 trillion) in lost gross domestic product (GDP), according to a report by consulting firm McKinsey and Co.
Vital links: The projected opportunity cost of not setting up infrastructure would amount to 10% of the country’s GDP, assuming 7.6% average growth rate till 2017. Ramesh Pathania / Mint
This would also mean a loss of 30-35 million jobs, which could have lowered the unemployment rate by as much as 6 percentage points and potentially moved nearly 4% of the country’s population above the poverty line, said the report, titled Building India: Accelerating Infrastructure Projects.
The projected opportunity cost of not setting up infrastructure would amount to a tenth of the country’s GDP, assuming an average growth rate of 7.5% between 2008 and 2017. This is besides an estimated $160 billion arising from lost industrial productivity, the report said.
Half the $200 billion projected loss would be on account of India not sticking to the planned award of projects alone, with time and cost overruns estimated to cost $60 billion more, and capital constraints accounting for the rest.
The report comes even as both government and consulting firms point to a shortfall in capital flows to the sector. McKinsey, in an infrastructure financing report released earlier this year, estimated this shortfall at as much as $190 billion. This equals 35% of the investment planned in power, roads, ports, airports, irrigation, water storage and natural gas in the five years to March 2012.
Despite the government’s best intentions—and ambitious targets such as $500 billion of planned spending on infrastructure—India typically goes ahead with only seven of every 10 projects planned.
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Only 10-15% of the planned highway stretches were awarded in fiscal 2008 and 2009. In ports, the award rate was just half of the planned rate. And projects for only some $4 billion of the $14 billion National Maritime Development Programme scheduled for implementation between 2005 and 2015 have been awarded.
Projects are often delayed because of poor planning and engineering design in the tendering phase. And some projects are rendered unviable because cost estimates are dated.
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In the construction phase, ineffective dispute resolution and performance management also delay projects.
While there has been much focus on the government, it is also useful to look at practices of private providers that could help accelerate project execution, said Prashant Gupta, partner, McKinsey, and co-author of the report. “Companies need to look at improving their risk management expertise as many construction companies are also now taking developer risks. In value engineering as well, there is significant scope for Indian providers to achieve global best practices,” Gupta added.
The report recommends that a high-level group be set up to monitor projects worth $25-50 million and measure the performance of nodal agencies. Other initiatives suggested include changing land availability norms, tightening penalties for delays, selecting design and engineering consultants on both cost and quality rather than only hiring the cheapest consultants.
The government should also identify a few large programmes to be put under independent entities and start a construction-focused training programme to generate two-three million skilled or semi-skilled workers every year to bridge a shortage of construction workers, the report said.
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First Published: Thu, Aug 13 2009. 01 15 AM IST