Robert Palter—director, McKinsey & Company—leads the global Infrastructure Practice at McKinsey & Company, and specializes in helping clients identify infrastructure investment opportunities and manage infrastructure assets.

1. Getting more out of infrastructure
to drive economic development
Robert Palter, Global Head Infrastructure Practice
McKinsey & Company
Economic Development 411
December 4, 2015

2. #ED411
Key messages
▪ Infrastructure has an important role
to play in economic development
▪ The US (and the rest of the world)
has as significant infrastructure gap
to close and many people argue
PPPs, creative financing and other
capital sources are required
▪ However, there are opportunities
to get more out of existing
infrastructure to offset the capital
shortfalls plus drive continued
economic benefit

3. #ED411
Investments in infrastructure are amongst the highest stimulus multipliers and create more than
30,000 jobs for every $1 billion spent
SOURCE: Moodys.com; Federal Highway Administration’s (FHWA) Office of Transportation Policy Studies
1 year $ change in GDP for a given $ increase in spending
0.27
0.29
0.30
0.37
0.48
1.02
1.03
1.26
1.29
1.36
1.59
1.64
1.73
Unemployment benefits
Food stamps
Infrastructure spending
Across-the-board tax cut
Make expiring dividend and capital
gains tax cuts permanent
Make income tax cuts permanent
Non-refundable tax rebate
Payroll tax holiday
Reduce corporate tax rates
Accelerated depreciation
Extend alternative minimumtax patch
Refundable tax rebate
Transfers to state
governments
Moody’s estimates
For every $1 billion spent on
▪ New roads and bridges,
27,000 jobs are created
▪ Maintenance and repair of old
roads and bridges, 30,000 jobs
are created
▪ Public transportation systems,
32,000 jobs are created
Other studies cite similar
multipliers (e.g., White House’s
report puts the spending
multiplier at 1.57 versus tax
cuts at 0.99)

4. #ED411
2.6
3.3
2.9
3.4
2.8
3.6
3.3
5.0
2.6
2.3
2.7
2.2
2.6
2.4
Germany CanadaUnited
Kingdom
FranceUnited
States
JapanSweden
Most advanced economies must raise infrastructure spending by nearly 1 percentage point of
GDP to support economic development and maintain competitiveness
Gap between historical spend and estimated future spending need
Percent of GDP
Estimated need
Actual spend
-1.0
-0.9
-0.6
-0.7
-0.6
-0.7
Ohio is at
3.2%

5. #ED4115
17
15
7
48
72
28
Rail
1
Aviation
4
TransitRoads,
highways,
bridges
Total
100
Parks,
recreation,
schools
Energy
3
Waste
4
Water,
waste
water
Water
transport
2
SOURCE: American Society of Civil Engineers; US Department of Transportation; McKinsey Global Institute
Transportation infrastructure
Other infrastructure
Estimated infrastructure investment shortfall for the United States
Percent; 100% = $1.1 trillion over 5 years
The shortfall in US infrastructure investment is felt most acutely in transportation

6. #ED411
Electricity
Roads
Telecom
Rail
Water
Ports
Airports
When aggressively deployed, PPPs range from 5% to 25% of infrastructure spend…not enough
to close the gap
100
10
100
58
90
1176
35
13
7 89
118
21
20
4
56
84
18
96
100
20
36
16
28
64
52
82
9
10
66
81
156
47
0
4
26
SOURCE: HM Treasury, United Kingdom; Planning Commission, India; McKinsey Global Institute analysis
Planned public, PPP, and
private investment in core
infrastructure Ratio per sector
United
Kingdom
2011-15
100% =
$257 billion
India
2007-11
100% =
$485 billion
Private
Public-private partnership (PPP)
Public
64%
(164)
23%
(59)
13%
(33)
31%
(150)
64%
(310)
5%
(24)
Transport
Energy
Telecom
Waste
Water
Percent;
$ Billions

7. #ED411
Cost of capital argument for economic development
§ Many observers argue that the government has the lowest cost of capital and thus
should develop, own and operate all infrastructure not private enterprise
§ However, research is clear that private sector efficiency in construction and
operations relative to public sector offsets the higher cost of private capital
§ Moreover, government cost of capital is likely higher than observers think and
governments’ ability to raise financing is limited
– Cost of debt does not equal cost of capital
– Cost of equity in a public sector context is the tax base’s willingness to have its
taxes raised
§ Therefore, private sector should probably take on infrastructure projects where the
economics support the project and governments should use their limited financing
ability to undertake state/nation building projects that do not make sense for the
private sector but do have long-term social and economic benefits
– Eglinton Crosstown project done as a PPP
– Ring of Fire road done through public sector financing

8. #ED411
Project delivery
▪ Delays in land acquisition and approvals
▪ Insufficient planning resulting in risky projects with costly claims
▪ Lack of collaboration and inappropriate tendering stifling innovation and design to
value
▪ Lean techniques and modularization in their infancy
▪ Insufficient oversight and coordination during construction resulting in delays and
claims
▪ Construction sector held back by lack of education, fragmentation, overregulation,
lack of innovation, informality
Making the most of existing infrastructure
▪ Inefficient operations as capacity bottleneck, particularly in ports, airports, and rail
stations
▪ Maintenance backlog increasing total cost of ownership
▪ High transmission and distribution losses in water and power
▪ Insufficient pricing and demand management
Project selection
▪ Blurred lines between political and technocratic aspects
▪ Unclear methods to assess and prioritize alternatives
▪ Lack of coordination between assets
Typical issues along the infrastructure value chain
SOURCE: McKinsey Global Institute

9. #ED411
2.7
0.4
1.70.1
0.2
Optimized
need
0.2
Making the most
of existing
infrastructure
0.1
Streamlining
delivery
Improving project
selection/optimizing
infrastructure
portfolios
Infrastructure
need
0.61
Global infrastructure investment need and how it could be reduced
Yearly average, 2013-30
$ trillion
The $1 trillion-a-year infrastructure productivity opportunity
SOURCE: McKinsey Global Institute analysis
1 Telecom investment need beyond the scope of this paper.
Demand management
Operations and
reduction of transmission
and distribution losses
Optimized maintenance

10. #ED411
Value engineering yields significant savings – example road surface
Impact – reduced amount of hot mix base by
differentiating between light and heavy traffic lanes
RW2
RW1
Reinforcement layer
Surface
Thickness of
hot mix base
Heavy traffic
only in left lane
Heavy traffic lane Light traffic lane
Incentives
introduced to
apply active
design (profit
sharing)
Same thickness of
hot mix base in all
lanes independently
from traffic
expected per lane
Source of waste
SOURCE: McKinsey

11. #ED411
Construction productivity has been flat or falling in many advanced economies
SOURCE: OECD Labour Productivity by Industry (ISIC Rev. 3); McKinsey Global Institute analysis
120
100
140
90
130
80
110
150
0
1989 95 052000 2009
Labor productivity
Index: 100 = 1989 for the United States, 1991 for Germany
Rest of economy
Construction

12. #ED411
But, rather than always looking for new money for infrastructure, technology can be used to get
more out of existing infrastructure
9.7
25.0
2.7
17.0
14.0
62.0Optimized traffic signals
39.0
National real-time traffic information
system
Integrated corridor management
7.5
8.7
3.62.8
Commercial vehicle information
systems and networks
Electronic freight management system
Maintenance decision support system
2.0
1.3
"Traditional" road capacity
Intelligent traffic management
Upper range
Lower range
Average benefit-to-cost ratios

13. #ED411
Emerging technologies could improve productivity in airports
Beacon, thermal imaging Robotic technology
Connectivity based apparel Cashless payment
WAZE ▪ Community based traffic
and navigation to enable
getting more out of existing
road infrastructure
iBeacon
by apple
▪ Personalized Bluetooth –
based location – push
notifications
Thermal
imaging
▪ Infrared thermal imaging
camera and strategically
located optical sensors to
provide an estimate of how
long the queue will take to
pass (Vaernes)
▪ Shoe insoles placed in
shoe communicate with
smartphones SAT NAV
and vibrate when change
of direction needed,
enabling faster move
from A to B (airports,
train stations, urban
areas)
‘Super-
shoes’
by D Dand
‘Ray’ by
Boomerang
Systems
▪ Automated parking
system can be controlled
and booked via an app.
“Ray” parks vehicles
dropped off at the
designated area
(Dusseldorf airport)
▪ Increase parking area by
60%
HENN
– NA
▪ Hotel 90% operated by
robots from check-in to
in-room butler (Nagasaki,
Japan)
▪ Facebook- and twitter-
based, cash-less
payment offered to
customer via private
message with link to
preferred payment
method
Social
media-
based
payment
by KLM

14. #ED411
But, do these technologies create value for infrastructure asset owners and operators? US
airport case example
16.8
14.514.4
Piloting and refining Maturity
+16%
Pre-launch baseline
Average retail, food, and beverage spend per passenger
USD
Oct 13-Apr 14 May 14-Dec 14 Jan 15-May 15

15. #ED411
What does this all mean for a community like Columbus and greater Ohio?
• There are many technology solutions that apply to urban and rural infrastructure assets
which could unlock more potential from those assets, delay the need for more capital and
improve economic development and competitiveness in Ohio
• While infrastructure is – by definition – very local, successfully building and maintaining
competitive infrastructure (and thus a competitive economy) requires municipal, state and
local governments to work together
• PPPs are likely more attractive to larger urban projects vs rural community building type
projects that will have long-term economic benefit but need short-term economic support.
However, Ohio will need both types of financing to ensure competitive infrastructure and
economic development
• We are now at a time when all stakeholders in infrastructure need to innovate their
approaches to project selection, planning, financing, construction and operations.
Governments can lead the charge on this front

16. #ED411
THANK YOU