Nicklas Garemo "Role of PPPs in addressing global infrastructure challenges" Никлас Гаремо "Роль частно-государственного партнерства в решении проблем глобальной инфраструктуры"

1. Nicklas Garemo
Head of Infrastructure and Capital Projects
Role of PPPs in addressing global
infrastructure challenges

2. 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 rather
better execution
Role of PPPs in addressing global infrastructure challenges

3. 1,100
700
400
400
Transport
Telecom
Power and
water
Infrastructure spend
USD billions2, 2012
1 Represents 12% of global GDP
2 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
1,200
350
Social
infra-
structure
Oil, gas
and mining
1
Real estate
Narrow Infrastructure definition
Broad Infrastructure definition
The world spends USD 9 trillion each year
across infrastructure assets

4. 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
60:40
Debt-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

5. 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
2011–15
100% = $257 billion
India
2007–11
100% = $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

6. 2.0
1.4
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

7. 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 worked
Index: 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

8. SOURCE: McKinsey Global Institute analysis
Strong infrastructure
governance & capabilities
D E
Robust funding & finance
framework
Optimized
spend
Infra-
structure
spend
Fact-based
project
selection
A Stream-
lined
delivery
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

9. Cost and time overruns historically
Example: Mega project construction cost
$ billion
Seoul-Busan
high-speed
rail
Incheon
Inter-national
airport
18
5
7
3
AdjustedPlanned
46 54
97
After ’99
Before ’99 3
41
122
After ’99Before
‘99
Overrun
..were reduced…
Cost overrun
Percent
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 rejected
Percent
Korea enhanced the efficiency and transparency in infrastructure
development by establishing an objective supervisory organization
4

10. 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

11. … primary benefit is improved project performance due to better aligned
incentives and risk allocation
Lower financing costs in some
countries but…
Financing costs 2011-12
Percentage
4.5
India
6.4
8.2
Portugal
9.3
12.9
2.6
Brazil
5.9
5.6
UK
Project Finance
Public Debt
2008 Findings in UK on performance of PPPs
Comparison 114 PPPs in 11 sectors vs. conventional projects
OTHER BENEFITS
Design for operations
Design f. maintenance
Level playing field
Better TCO optimization
etc
30
100 -70%
Budget over-runs1
Percent of projectsMeeting
budgets
Meeting
schedules
Reducing
overall costs
35
100 -65%
Time over-runs
Percent of projects
80
100
-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

12. • 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