Infrastructure Productivity: How to save $1 trillion a year

Well, McKinsey pubs are always a pleasure to read, since they combine relatively sound analysis with relative readability. I say “relatively” because academic journal articles normally are more innovative in their analysis, while being much less readable. (As one prof once said in a seminar I attended, “It makes you want to tear your hair out.”) So that's nice.

This report is a nice, comprehensive overview of the global infrastructure challenge. I say challenge because the authors note that, just to keep present-day infrastructure needs met, we'd need a global investment of $57 trillion (if not more). This doesn't address improving existing infrastructure: so that's, well, most of the developing world out the window. This is just to keep the status quo. And that's pretty crazy.

The other big message is that governments tend to repeatedly make a mistake when thinking about infrastructure: first, they tend to invest in building new infrastructure, instead of modifying, maintaining and improving existing systems. And second, they tend to think about things in terms of singular projects (e.g. a highway expansion program), rather than systems (e.g. overall transportation and commutes into and out of the city). The authors note that governments could make huge savings if they just (1) adopted best practices and became more efficient and productive in soliciting infrastructure bids, (2) put a preference on integrated, systems thinking, and (3) put an additional preference on working with what we have, rather than building new stuff.

There were two (I think, major) things which the authors abstracted away from, and so this is - by design - an insufficient story: First, the authors intentionally abstract away from corruption and political economy matters. This is huge. As Acemoglu and Robinson noted, governments know exactly what they're doing. They're not choosing crappy, say, infrastructure or development programs because they lack the technical capacity to ID good ones - they're choosing them purposefully, because of (perverse) incentives to, say, reward a particular company, or be swayed by bribes. Infrastructure investments match the electoral cycle, don't they? An example of such incentives: there was an interesting World Bank report about the port at Dar es Salaam, and how its inefficiencies may have less to do with crappy infrastructure, and more to do with perverse incentive structures and, for example, protectionist behaviors by the local private sector. That is, if you make the port so bad and so inefficient, then imports become very pricey and local companies become much more competitive. This is a huge issue which the McKinsey report doesn't tackle, and only briefly acknowledges.

Another missing piece of the story is alternatives and “future proofing” your infrastructure investment. As the technology of alternative energy sources improves - solar, wind, hydro - then it may become more and more feasible (and cost-effective) to use them to supplement the traditional, non-renewable sources. I'm thinking specifically of how it's much cheaper to install solar panels in the village than drag out the electricity infrastructure; much lower initial investment, surely? And, in a place like Tanzania, where 75% of folks still work (and live, presumably?) on farms, it's a highly relevant alternative? Again, this is something that could both change the $57+ trillion price tag McKinsey sets, and something that could have provided some good food for thought in their prescriptive “best practices” section.

Actually, gosh, now I've convinced myself the report was totally insufficient! I guess you'll have to read it for yourself. It's certainly a good starting place for thinking about these issues - and fascinating issues they are!

A note for (my own) future reference: this was the week 0 reading for the EdX MOOC, Next Generation Infrastructures (University of Delft). Very excited for the rest of the course!