Voices On Infrastructure Major Projects: Improving The .
Voices on InfrastructureMajor projects: Improvingthe odds of successJune 2018
Table of contents03 Introduction04News from the Global Infrastructure Initiative05 Smarter infrastructure: Solving the productivity puzzle09 High stakes: How investors can manage risk in the new infrastructure environment17 How to thrive in the engineering and construction sector: A conversation with Steve Demetriou21 How financial products can attract infrastructure capital from institutional investors25Collaborative contracting: Making it happen30Digitizing an E&C company34Realizing the full potential of BIM technology39Leading the world’s largest capital projects: Where science meets art43Getting capital projects back on track: Six elements of a successful turnaround49Innovation Site Visit: Major projects in Moscow58Video: Rewiring contracts for collaboration
IntroductionWelcome to the June issue of Voices onInfrastructure, a collection of insights onimproving the odds of success for majorprojects.Major projects—those defined asMichael Della RoccaStefano Napoletanohaving a value of more than 1 billion—Partner, PhiladelphiaPartner, Milanaccount for an increasing share of globalMcKinsey&CompanyMcKinsey & Companyconstruction spending. In 2014, majorprojects accounted for 21 percent ofglobal construction spending, up from just 4 percent in 2005. However, major projects areespecially challenging. They are multilayered, nonlinear, frequently in remote locations, andoften highly regulated. As a result of these conditions, their productivity tends to suffer.This issue of Voices explores how to buck this trend. We look across sectors at the keyenablers of success for major projects and ask big questions: As major infrastructure needscontinue shifting to developed markets, how can we connect these projects to much-neededprivate sector financing? What is the role of government in supporting and scaling notablemajor project outcomes?We hear from CEOs on the bets they’re placing for long-term success, such as pursuing newcommercial strategies, prioritizing culture and talent development, and investing in digitalinnovation.In addition, we explore critical levers for improving project delivery. As major projects continueto grow in number, size, and complexity, owners and contractors who wish to see longterm success must embrace more collaborative contractual structures, apply digital toolsthroughout the process, and define clear road maps for recovering distressed projects.We hope the insights collected here help spur new ideas about major project innovation andscale best practices in your own organizations and geographies.3
News from the GlobalInfrastructure InitiativeWelcome to our 12th edition of Voices, which compiles insights onimproving the odds of success on major projects. Such projects,often referred to as megaprojects, are continuously buffeted bystrong forces, including cost overruns, politics, regulations, andcivic protests. Therefore, it is essential to structure major projectsto be resilient to these inevitable stressors by clearly allocatingrisks and roles. We hope that the perspectives collected here willengage readers in some of the global best practices in developingand delivering similar projects.Tony HansenDirector of the GlobalInfrastructure Initiative,McKinsey & CompanyIn just four months, the 5th Global Infrastructure Initiative Summit, which takes place in London onOctober 29–31, is shaping up well. We are fully subscribed with a strong list of participants and arobust agenda that focuses on major project delivery and digital transformation. Additionally, weare delighted to announce our partners for the 2018 GII Summit: Bentley Systems, Clifford Chance,Spencer Stuart, Trimble, and our host partner, the UK Infrastructure and Projects Authority. The bestideas from the summit will be shared with the GII community in our December edition of Voices.In May, we hosted a roundtable in Sydney on technology in transport, and in Dubai we hosted aroundtable on construction productivity in the digital era. We also cohosted a fascinating series ofsite visits in Moscow, exploring the city’s major projects. These visits allowed us to better understandhow the territory of Moscow has more than doubled in geographical size since 2011, based on thelaunch of the largest construction program in the history of modern Russia. On June 12, we ran ourfirst of three scheduled roundtables on infrastructure investing. The Toronto roundtable focused onthe implications of disruptive technologies for infrastructure investors. A recap of these events can befound by visiting globalinfrastructureinitiative.com.Looking ahead, in September GII will be hosting a roundtable in Zurich on managing risk in a digitizedinfrastructure environment. With AECOM we will also cohost what promises to be a fascinating sitevisit to New York’s supertall towers (defined as structures equal to or taller than 300 meters), focusingon the innovations that have enabled a boom in their construction since 2014. Please contact usat info@giiconnect.com if you would like to attend any of our forthcoming events or subscribe acolleague to Voices.We hope you enjoy this edition of Voices and that it stimulates discussion of what needs to changeto ensure a greater percentage of major projects are successful. Our September issue will addressthe important topic of resilience and future-proofing infrastructure in a fast-changing world. We lookforward to sharing it with you, and we welcome your thoughts on Voices at any time.4
The new Crossrail station at Custom House built off-site in DerbyshireSmarter infrastructure: A solution tothe productivity puzzle?What elements lay the groundwork for “smart infrastructure,” and how can the public sectordrive them?Tony MeggsChief executiveUK Infrastructure and ProjectsAuthority5Global Infrastructure Initiative
Infrastructure has the ability to change lives. Ithelps us travel, communicate, and prosper. Itpowers our homes and businesses, supportinggrowth, boosting productivity, and improving ourcompetitiveness. But is our infrastructure smart?Are we embracing the manifold opportunitiespresented by technology in how we plan, deliver, andoperate our infrastructure systems and networks?Are we learning fast enough from innovation andbest practice at home and internationally? Canwe articulate clearly what we mean by smarterinfrastructure and can we describe what highperforming infrastructure looks like?The short answer to these questions is “Not yet – butwe do have a plan.”Building on previous efforts, this past Decemberthe Infrastructure and Projects Authority(IPA) published an ambitious ten-year plan—Transforming Infrastructure Performance (TIP)—aimed at improving the delivery of economicand social infrastructure. The plan defines howthe government will work with the constructionindustry to design, build, and operate our transport,energy networks, schools, prisons, hospitals, andother public works. By focusing on effectivenessrather than volume, we aim to close the constructionproductivity gap, representing an opportunity of 15billion a year, and ensure our infrastructure servesour communities in both the near and long term. Webelieve this plan can serve as an example to othernations seeking to improve efficiency and returnon the massive investment we make each year oninfrastructure.The state of infrastructureLike many other developed nations, the UnitedKingdom has mature construction systems andnetworks. The public and private sectors togetherinvest around 60 billion per year (2.5 to 3 percentof GDP—similar to spending levels in the UnitedStates, Canada, and Western Europe) in projects andprograms across economic and social infrastructure.This is a huge commitment both in scale andambition, but we need to invest not just to create butalso to improve.A significant share of this investment is devoted tomajor projects—Government’s largest and mostcomplex. Construction and infrastructure projectsrepresent the largest growth area in the GovernmentMajor Projects Portfolio (GMPP); in 2016–17 alone,the government was engaged in 37 infrastructureand construction projects with a whole-life costexceeding 222.5 billion—almost half of the GMPPtotal of 455.5 billion.1And like other nations, our approach toinfrastructure needs to evolve. This is notsimply about delivering the same projects moreefficiently; it’s about delivering more ambitioussocial, economic, and environmental outcomes. Itis about building skills, driving growth, supportingdecarbonization, improving performance, andboosting productivity. It is about making smartinfrastructure investments.Of course, making these investments can be difficult.Construction as a sector is characterized by lowprofitability and productivity compared withother sectors. With low margins, it’s not possible tocompete to deliver cheaper solutions. This is wheretechnology will play an increasingly crucial role—not only helping us build smarter new infrastructurebut also improving how our current operationalassets perform.The elements of smarter infrastructureTIP is intended to improve the way the UnitedKingdom’s infrastructure is planned, procured,delivered, and operated, thus boosting nationalproductivity. Other sectors have made similartransformative changes and have seen hugeproductivity leaps as a result. For example, automanufacturing has made large investments in aSmarter Infrastructure: A solution to the productivity puzzle? Voices June 20186
standard, automated manufacturing platform thatcan be used across vehicle types but that also enablesuser mass customization. Applied to infrastructure,such standardization could enable designs that areuseful in a variety of contexts. For example, hospitaland school buildings both need functional spaces,which require similar building pieces. If we couldstandardize these parts, we could use them time andagain. Such innovations are not yet endemic, andtechnology is not used widely nor consistently.To this end, rather than focusing on capitalefficiency of individual projects, TIP encouragesgovernment departments and leaders in the industryto take a higher-level, portfolio view of projects,prioritizing the whole life of the asset as well asthe performance of the entire system. By workingtogether, they can better benchmark performance,choose the right projects, improve planning acrosssectors, support commercial relationships, andincrease use of new technologies—ultimately leadingto an increase in the sector’s efficiency.Before beginning this change program, we have toenvision what harnessing smarter infrastructurewill look like across the sector. We see opportunitiesin five specific areas.DataData will drive effective decisions, prioritizinginvestment in schemes that meet the needs ofusers and maximize the wider socioeconomic andenvironmental outcomes for society. Benchmarkswill measure whole-life costs, schedule, in-serviceperformance, and the delivery of benefits.Commercial modelsThese models will be collaborative, supportinginnovation and boosting the competitiveness ofUK supply chains to deliver safely and predictably.Procurement will focus on whole-life outcomes, andcontracting strategies will deliver rapid payment toall levels of the supply chain.7Global Infrastructure InitiativeDeliveryDelivery will be more productive, exploitingdigital technology in design to enable smartermanufacturing and construction techniques thatspeed delivery, minimize disruption, and maximizeefficiency, helping to build new skills in the economy.Infrastructure assetsThese assets will be intelligent, producing andusing data to perform measurably better throughtheir whole life, meeting exacting standards ofsustainability, resilience, and availability.Productivity and competitivenessBoth the infrastructure industry’s and the widereconomy’s productivity and competitiveness willbe boosted with investment delivering betterservices and driving growth. Both qualitativeand quantitative measures would place UKinfrastructure at the top of international rankings.Making smarter stridesSo how do we get there? With these goals in mind, theUK has made moves to improve its infrastructure.Certain projects and programs, leaning oninnovation and best practice, are starting to make adifference. Some parts of our networks are alreadyintelligent—for example, Highways England’ssmart motorways program—but overall we could besmarter.The TIP program is under way, and helping us reachthese goals in diverse ways.BenchmarksWe are developing benchmarks that measure not justcost but also performance. With these benchmarks,we can gauge performance at a network level, in howit reduces congestion, and at the system level, interms of how productive the economy is. Thus, thesebenchmarks enable us to look beyond just a singleproject and to map operational success.
International collaborationsWe are collaborating internationally to ensureworld-leading best practice helps to shape ourstrategies. We will be using these benchmarks tomake investment decisions, inform procurementchoices, and measure performance.Innovative incentivesThe construction industry has long been fragmented,underinvested in, and operated on wafer-thinmargins. These are not the conditions that supportinnovation and enable productive growth. We arelooking at new commercial models that incentivizeindustry to innovate, invest in more productiveskills, such as digital and manufacturing, and delivervalue in the long term.Government participationAs the largest client to the construction sector,government must also play a key role. How wespecify, produce, and contract must create the rightconditions for transformative change. Within theAutumn Budget 2017, the government announcedthat five of its departments—the Department forTransport, the Department of Health and SocialCare, the Department for Education, the Ministryof Justice, and the Ministry of Defense—wouldadopt a presumption in favor of off-site constructionby 2019. We believe bringing manufacturingprocesses off-site will drive huge productivitygains into construction. By working together, thesedepartments, which are responsible for 20 billionper year in building and transportation projects, candrive scale and standardization in manufacturing.This collaboration also stimulates demand, becausethe collective, larger-sum budget is attractive toinvestors.innovation leaders across the public and privatesectors will we be able to make the transformationalchange to smarter infrastructure and boost ournation’s productivity. As we start on this journey,I will always welcome the input from innovatorswho can support us on this path to smarterinfrastructure.1Annual report on major projects 2016–17, Infrastructure andProjects Authority, July 18, 2017, gov.uk/IPA.Voices highlights a range of perspectives byinfrastructure and capital project leaders fromacross geographies and value chains. McKinsey &Company does not endorse the organizations whocontribute to Voices or their views.Copyright 2018 McKinsey & Company.All rights reserved.We must remember that TIP is a change program,not a magic switch, and that the IPA cannotdeliver this alone. Only by continuing to work withSmarter Infrastructure: A solution to the productivity puzzle? Voices June 20188
High stakes: How investors canmanage risk in the new infrastructureenvironmentTechnology is disrupting construction on multiple fronts. What are the consequences forinfrastructure-investment managers?9Fredrik DahlqvistAlastair GreenPaul MorganRobert PalterSenior partner, StockholmMcKinsey & CompanyPartner, Washington, DCMcKinsey & CompanyAssociate partner, LondonMcKinsey & CompanySenior partner, TorontoMcKinsey & CompanyGlobal Infrastructure Initiative
With technology transforming how we live andwork, infrastructure investing is becoming morecomplicated. Self-driving cars, now undergoingon-road testing, could reduce the need for passengerrailways or metros. As 3-D printing gains tractionand manufacturing becomes distributed, ports mayrequire fewer storage terminals. And electronicmonitoring systems, which are already available onmany roads, could render toll booths obsolete. Forgeneral partners raising investment funds or directinfrastructure investors, such as pension plansand sovereign-wealth funds, such changes couldaffect returns on the power, water, transportation,and telecom assets that were expected to providepredictable cash flows for many years.In tandem with these shifts, technology is openingmany important opportunities for investors bystimulating the need for infrastructure that wasn’ton the radar a decade ago. The potential for dronedeliveries, for example, could stimulate constructionof docking stations, while the growth of electricvehicles (EVs) could ultimately make chargingfacilities as common as today’s gas stations. What’smore, technology is improving how constructiongets done. New digital tools are emerging, including3-D-mapping applications, virtual reality, and realtime performance dashboards. More companiesare also using advanced analytics to improveperformance and boost productivity, making iteasier to stick to the original budget and time linesfor capital projects.These technologic shifts come at a time when manynew investors are entering the infrastructuremarket, increasing competition for assets. Thekey to success involves understanding howtechnology is influencing the way assets are builtand operated. It’s also crucial to take a long-termview of technology’s potential impact, since manyinfrastructure assets have a lifespan of 50 or moreyears. Any investment decisions made today willhave lasting repercussions.To help investors deal with disruption, we exploredrecent developments in the infrastructureinvestment landscape, with a focus on technologicaladvances that are changing both asset value andhow assets are delivered.1 Since there is still muchuncertainty about how certain trends will play out,we also propose a structured approach for evaluatingthe risks and opportunities in specific asset classesas technology influences the market.How is the infrastructure-investment landscapechanging?Infrastructure has been a rock of stability forinvestors, generating consistent inflation-indexedreturns even during tough economic times. Withconstruction soaring in both emerging markets anddeveloped economies, the value of privately ownedinfrastructure assets—those not traded on publicexchanges—rose from approximately 99 billion in2007 to about 418 billion by June 2017 (Exhibit 1).Fundraising was remarkably fast and successful in2017, with the average fund closing more rapidly thanany year since 2009. Many funds also exceeded theirtarget size by a large margin.A more active role for investorsThe surging infrastructure market has attractednew players who want to capture value, includingprivate-equity managers that want to expand theirfund offerings and pension-fund managers thatformerly limited their investments to infrastructurefunds. While the potential for good returns stillexists, the increased competition for traditionalbrownfield infrastructure assets is leading to higherentry multiples and lower overall returns.In this competitive market, infrastructure investorsare broadening their focus. Traditionally, theyconcentrated on core assets—those that are highlyregulated in terms of pricing and access, such aswater utilities or power generation. Now, theirinvesting targets increasingly include noncoreassets, such as port operations or rolling stock,High stakes: How investors can manage risk in the new infrastructure environment Voices June 201810
Web 2018 High stakes risk infrastructure Exhibit 1 of 2 Exhibit 1Privately owned infrastructure assets reached a value of about 418Privatelyinfrastructure assets reached a value of aboutbillionbyownedJune 2017. 418 billion by June 2017.Unlisted infrastructure assets under manag
major projects—Government’s largest and most complex. Construction and infrastructure projects represent the largest growth area in the Government Major Projects Portfolio (GMPP); in 2016–17 alone, the government was engaged in 37 infrastructure and construction projects with a whole-life cost
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political difficulty presented by a major infrastructure project is that: ‘Economic infrastructure has diffuse benefits and concentrated costs, creating small groups of highly vocal “losers” who are likely to oppose projects.’10 In other words, while some benefits of a major infrastructure project are local, most
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Development Company 09 Putting the digital customer first: Rethinking real-estate megadevelopments 13 Using power and technology to deliver resilience in Hudson Yards 17 Leading with vision in real-estate major projects: A conversation with Vikas Oberoi 21 Capturing success in major projects: A series of options 25 A forward-looking approach to .
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