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Building
India
Accelerating
Infrastructure
Projects
August 2009
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Building
India
Accelerating
Infrastructure
Projects
Prashant Gupta
Rajat Gupta
Thomas Netzer
Building India
Accelerating Infrastructure Projects
Contents
Preface
Executive Summary
7
11
Chapter 1
Inefficiencies in Infrastructure Impede Growth
19
Chapter 2
Major Bottlenecks Hamper Infrastructure Implementation in India
25
Chapter 3
Way Forward for Government, Policy Makers and Nodal Agencies
37
Chapter 4
A Call to Action for Providers
47
Annexure
GDP Impact of Inefficiencies in Infrastructure Implementation
57
Building India
Accelerating Infrastructure Projects
Preface
Over the past 10 years, India has successfully executed projects such as the Golden Quadrilateral road programme and
the expansion of ports in the country. Recognising that infrastructure is key to enable economic growth, the government
has also committed massive investments of close to USD 500 billion in the infrastructure sector in the Eleventh Plan
period (2008 to 2012). This plan follows several progressive initiatives taken in recent years, including the Electricity Act
2003, the National Highways Development Project (NHDP), the National Maritime Development Programme (NMDP),
and Dedicated Freight Corridors (DFCs). However, much more needs to be done to accelerate the implementation of
infrastructure in India.
Indias rapid economic growth over the last decade has placed tremendous stress on its limited infrastructure. The
sector has received growing attention from the government and the public, bringing the shortage of infrastructure
to the fore. Fulfilling Indias aggressive economic growth aspirations would be seriously challenged due to this
shortage. The country needs to urgently accelerate the conceptualisation and implementation of all its infrastructure
development to enable planned growth.
Trends during the first two years of the Eleventh Plan have raised doubts over whether India will be able to realise
its ambitious infrastructure plans. Issues that plague the sector include a shortfall in awarding projects as per plan,
inefficient project execution and constrained capital flows to the sector.
McKinsey & Company has conducted proprietary research in the areas of infrastructure financing, infrastructure
implementation, logistics strategy and power strategy. This report is a part of our four-part series, Building India, a
comprehensive perspective on infrastructure development in the country. It provides a perspective on the potential
GDP loss due to the inefficiencies in infrastructure implementation and the challenges that drive these inefficiencies,
and proposes a set of measures that the various stakeholders can take.
This study has benefitted enormously from the valuable inputs provided by business leaders, policy makers and
current and former government officials across ministries and agencies. We are grateful to all of them for sharing
their experiences and insights.
In particular, we would like to thank Mr. Deepak Dasgupta, former Chairman, National Highways Authority of India;
Mr. Ajit Gulabchand, Chairman and Managing Director, Hindustan Construction Company; Mr. Gajendra Haldea,
Principal Advisor (Infrastructure), Planning Commission; Mr. Vimal Kaushik, Managing Director, Punj Lloyd Limited;
Mr. Cyrus Mistry, Managing Director, Shapoorji Pallonji and Company Limited; Mr. Amitabh Mundhra, Director,
Simplex Infrastructures Limited; Mr. Yogendra Prasad, former Chairman and Managing Director, NHPC Limited;
Mr. Abhijeet Rajan, Chairman and Managing Director, Gammon India; Mr. K. V. Rangaswami, Director and Head,
Engineering and Construction Division, Larsen & Toubro; Mr. T. Sankaralingam, former Chairman and Managing
Director, National Thermal Power Corporation; Dr. A. Didar Singh, Member (Finance), National Highways Authority
of India; Mr. Mangu Singh, Director (Works), Delhi Metro Rail Corporation Limited; Mr. Nirmal Jit Singh, Additional
Director General, Department of Road Transport and Highways; Mr. K. Subrahmanian, Managing Director, Afcons
Infrastructure Limited; Mr. Mohan Tiwari, Managing Director, IRCON International Limited; Mr. Sanjay G. Ubale,
Managing Director and Chief Executive Officer, Tata Realty and Infrastructure Limited; and Mr. S. K. Vij, former
Member Engineering, Railway Board.
We would also like to express our thanks to our colleagues, Sriram Jambunathan, an associate partner based in
our New Delhi office, and Anu Madgavkar, a partner based in our Mumbai office, for the direction and support they
provided to this study.
This report has benefitted from the expertise of Benjamin Cheatham, Ehren Corey, Per-Nicklas Hoglund, Stefan
Larson, Jules Seeley, Carrie Thompson, Jay Walder and Markus Zils, all leaders of our global Travel, Infrastructure
and Logistics Practice. Vivien Singer from the McKinsey Global Institute and Manish Sharma from the McKinsey
Knowledge Centre also provided key inputs.
Rahul Raswant, a consultant based in McKinseys New Delhi office, worked closely with us to provide overall
leadership for the project team comprising Anupam Agarwal, Mukul Arora, Nitesh Gupta and Vaibhav Poddar, all
consultants in McKinseys New Delhi office.
We would also like to thank Leela Kirloskar for her editorial contribution; Sunali Rohra and Nandita Surendran for
their external relations support; Gurpreet Singh Bhatia and J. Sathya Kumar for their visual aids support; and our
Building India
Accelerating Infrastructure Projects
executive assistants Surbhi Duggal, Tessie DSilva, Margaret Fernandes, Rita Motiani and Poonam Sodey for their
much-needed administrative support.
Our goal in this report is to provide business leaders, government, policy makers and nodal agencies with an
outline of suggested structural reforms required to de-bottleneck infrastructure implementation in India. This work
is independent and has not been commissioned, sponsored or endorsed by any business, government, or other
institution.
10
If current trends
continue, McKinsey
estimates suggest
that India could
suffer a GDP loss of
USD 200 billion in
fiscal year 2017
Building India
Accelerating Infrastructure Projects
11
Executive Summary
Executive Summary
India has set an ambitious target of investing USD 500
billion in infrastructure during the Eleventh Plan period.
However, the country has consistently fallen short
of meeting such targets over the last few years and
early signs of implementation challenges are already
visible. During the first two years of the Eleventh Plan,
fewer infrastructure projects have been awarded than
planned. We estimate that the average rate of awarding
projects has been around 70 per cent of the planned
rate. Further, government data1 suggest that a majority
of projectsclose to 60 per centare plagued by time
and cost over-runs.
Inefficiencies
Growth
In
Infrastructure
Impede
1 Project implementation status report of central sector projects costing INR 20 crore and above (April to June, 2008), Ministry of Statistics and Programme Implementation.
2 Based on an exchange rate of INR 41 per USD.
3 Based on an average GDP growth rate between 2008 and 2017 of 7.5 per cent.
12
Building India
Accelerating Infrastructure Projects
13
6 The National Highways Act, 1956, defines land as free from all encumbrances after issuing a 3D notification. This does not necessarily imply the absence of
physical encumbrances such as dwellings.
7 Paper titled Challenges before Construction Industry in India, 2004, by Arghadeep Laskar and C.V.R. Murthy, Indian Institute of Technology (IIT), Kanpur.
14
Building India
Accelerating Infrastructure Projects
15
16
* * *
Building India
Accelerating Infrastructure Projects
Setting an
ambitious target
for infrastructure
investment is
only the first step
towards improving
infrastructure in
India
17
18
Impediments and
inefficiencies plague
the sector in India,
seriously threatening
the achievement of
the current plan
Building India
Accelerating Infrastructure Projects
19
Chapter 1
Inefficiencies in Infrastructure Impede Growth
Exhibit 1.1
9th Plan
10th Plan
Planned and actual spend across sectors in 9th and 10th Plans
Planned spend
USD billion
3
Airports
59
77
16
Irrigation
91
22
93
40
75
Power
68
12
Railways
58
94
15
115
10
Roads
141
28
121
20
Exhibit 1.2
This translates
into ~10%
reduction in
Indias GDP1
in FY 2017
30-35
35 million jobs, in infrastructure and other
dependent sectors, e.g., steel, cement
5-6% reduction in unemployment rate
3-4% of the population not being lifted
above the poverty line
1 The loss of revenues of the upstream industries that supply to the creation of projects, is driven only by the projects that will not be created in fiscal year 2017.
Building India
Accelerating Infrastructure Projects
21
Exhibit 1.3
Providers
Government, policy makers
and nodal agencies
503
20
100
20
200
45
10
155
Tendering1
Sub-optimal design
and engineering
Procurement
inefficiencies
Low prevalence of
construction practices
Financing constraints
Total opportunity
cost in FY 2017
Execution
Key assumptions
Only 70% of
planned
capacity is
awarded
Optimisation
opportunity of
10% in
procurement
cost4,5
Only 65% of
planned capacity
gets financial
closure
1 Assumes that actual tendering underperformance in 2007-09, which was 30%, will continue from 2009-17
2 As per McKinsey Building India: Financing and Investing in Infrastructure, 2009, even if there was sufficient capital, still 30% of projects would not get executed because of underperformance in tendering. Therefore, real impact due to capital constraints is 5% not 35%.
3 Cost and time over-runs on account of customer include delays in land acquisition, approvals, clearances etc.; over-runs due to scope changes have been included in the sub-optimal
design and engineering bucket
4 Procurement costs have been assumed to be 50% of the total project cost
5 Assumes that savings from optimisation of design, procurement and construction are reinvested in infrastructure
Note: All the numbers are in 2006-07 prices
SOURCE: Global Insight; industry interviews; Planning Commission; McKinsey analysis
22
***
2 For details, please refer to McKinseys report Building India: Financing and Investing in Infrastructure, 2009.
Building India
Accelerating Infrastructure Projects
23
Inefficiencies
in infrastructure
implementation have
substantial negative
impact on Indias
economic growth
24
Infrastructure in
India is plagued
with complex issues
requiring urgent
attention
Building India
Accelerating Infrastructure Projects
25
Chapter 2
Major Bottlenecks Hamper Infrastructure
Implementation in India
Infrastructure in India is plagued with complex
issues requiring urgent attention. While the focus on
infrastructure growth has led to policy initiatives such as
the Committee on Infrastructure and the PPP Appraisal
Committee, much more is required to improve the
situation. Similarly, while providers of infrastructure have
matured from small, unorganised contractors to large,
well-organised construction companies, notable skill
gaps remain.
Discussions with stakeholders interviewed for this
report, including contractors, developers, nodal
agencies and policy makers, reveal several bottlenecks
that affect different phases of project implementation.
Challenges in
Affect Viability
Implementation
26
Exhibit 2.1
Cost over-runs
Per cent
6-9
24
Scope
changes
High
project
costs
Building India
Accelerating Infrastructure Projects
27
28
Exhibit 2.2
Agencies involved
Preparation of
feasibility report
Nodal agency
Approval from
Planning commission
Planning commission
Preparation of DPR
Review of DPR
12
Submission for
approval by
concerned ministries
24-36 weeks
6 weeks
4 weeks
MoF2
MoEF3
CWC4
2 weeks
MoF
MoEF
CWC
Submission for
approval by CCEA
Nodal agency
Approval granted by
CCEA
CCEA5
23
4 weeks
Admin ministries
Planning commission
Nodal agency
EFC/PIB1
Stipulated timeline
Typical timeline
(no stipulation)
12-16 weeks
Nodal agency
External consultants
Approval from
EFC/PIB1
Approval granted by
all ministries
01
Approval processes
24-36 weeks
4 weeks
4 weeks
4 Cabinet Working Committee
5 Cabinet Committee for Economic Affairs
SOURCE: Guidelines for formulation, appraisal and approval of government funded plans; expert interviews
Building India
Accelerating Infrastructure Projects
29
Exhibit 2.3
70
Delayed
due to land
acquisition
Typical delay as a
percentage of total
project time
80 - 90
15 - 20
30
1 Paper titled Challenges before Construction Industry in India, 2004, by Arghadeep Laskar and C.V.R. Murthy, IIT Kanpur.
Building India
Accelerating Infrastructure Projects
31
Exhibit 2.4
70 - 80% of the
existing workforce
is untrained, which
impacts the pace
and quality of
project
implementation
The situation is
expected to worsen
with infrastructure
investments driving
high growth in
demand for skilled
manpower
Annual addition to
workforce
Annual vocational
training capacity
12.8
3.1
Current stock
Certified
75%
0.90
0.25
72%
SOURCE: Planning Commission; World Bank report 2005; FICCI; expert interviews; McKinsey analysis
32
Exhibit 2.5
Bid-win ratio
Percent
40 - 60
20 - 30
2-3
Best-in-class
global players
India players
Best-in-class
global players
India players
Building India
Accelerating Infrastructure Projects
33
Exhibit 2.6
1
2
3
4
2.6
2.7
2.8
Impact on performance
(average score on a scale of 4)
Continually improve
designs to save cost
and execution time
2.0
Never
Sometimes
Often
Always
Sub-optimal (<2.7)
2.5
3.1
2.5
2.2
Average: 2.5
SOURCE: McKinsey EPC 360 survey
***
34
Exhibit 2.7
1
2
3
4
Never
Sometimes
Often
Always
Sub-optimal (<2.7)
2.2
2.7
Impact on performance
(average score on a scale of 4)
1.9
2.9
2.4
2.4
2.2
Long-term, mutually
beneficial relationships
with suppliers
3.0
Suppliers provide
preferential rates and
assured supplies all the
time e.g., even during
supply constraints
2.4
Sourcing department is
able to save substantial
amounts year on year
2.4
2.7
2.2
2.5
Average: 2.4
Exhibit 2.8
1
2
3
4
2.4
2.9
2.6
2.5
2.1
3.5
2.7
3.1
2.7
Average: 2.7
SOURCE: McKinsey EPC 360 survey
Impact on performance
(average score on a scale of 4)
2.2
Project
execution
Never
Sometimes
Often
Always
Sub-optimal (<2.7)
2.6
2.5
Building India
Accelerating Infrastructure Projects
Most providers
in India are either
unaware of lean
construction
principles, or have
not really adopted
them in a
meaningful way
35
36
In all, government,
policy makers and
nodal agencies
need to take nine
initiatives to address
the bottlenecks
Building India
Accelerating Infrastructure Projects
37
Chapter 3
Way Forward for Government, Policy Makers
and Nodal Agencies
For Indias infrastructure to grow as envisaged,
stakeholders need to urgently address the
implementation bottlenecks described in chapter 2.
In our discussions with providers, public sector units,
and government officials across nodal agencies and
regulators, a common theme emerged for action, which
we set out in this chapter.
In all, government, policy makers and nodal agencies
need to take nine initiatives to address the bottlenecks.
Of these initiatives, five can have immediate impact;
four will need sustained efforts over the long term.
Independent of how long these initiatives will take to
have impact, decisions need to be taken immediately to
address the USD 200 billion risk to Indias GDP by 2017.
1 Global best practices suggest that 100 per cent of the land should be acquired before tendering. However, this would be difficult to impose for India, given the high
private ownership of land. In cases where it is feasible, acquiring 100 per cent of the land before tendering will increase the attractiveness of Indian projects for foreign
institutional investors.
38
Building India
Accelerating Infrastructure Projects
39
Exhibit 3.1
15.0
-70%
-97%
4.5
1
Australia1
United
Kingdom2
Mumbai
High
Court
Mumbai
debt
recovery
tribunals
Civil
courts
Motor
accident
claims
tribunals
40
Exhibit 3.2
Examples of countries/agencies
following this approach
Suggested process
Optimise
project
scope
tendering
Take the cash vs. concession decision on the basis of
size the project should be large enough to justify
the transactional costs (e.g., litigation) of PPP model
Subsequently, assess the revenue potential and
projects costs to decide between toll and annuity
modes (where applicable), with the agencys funding
constraints and VGF limits in perspective
United
Kingdom
Ireland
South
Korea
United
Kingdom
USA
(FHWA1)
Building India
Accelerating Infrastructure Projects
41
Exhibit 3.3
Cost overruns
Canada
(Ontario Ministry
of Transportation)
USA
(FHWA, State
DOTs2)
India
6-8%
9%
24%
India
Technical rating, wherever used at final tendering stage, delivers better results
Factoring the consultants past performance in his technical rating makes the
pre-qualification very robust
1. Reform contracts
42
Exhibit 3.4
High EPC
EPC
Roads
(large)
Sophistication of providers
Airports
Airports
(large)
(large)
Thermal
power
projects
Ports
(large)
Hydro
power
projects
Roads
(small)
Airports
(small)
Ports
(small)
Irrigation
Low
EPC/item-rate
Nuclear
power
projects
Item-rate
Low
High
Complexity of project
Adopt contracts used in multi-lateral agencyfunded projects: This will distribute the risks in
item rate contracts in a more balanced away, and will
make them less prone to dispute. Our discussions
with diverse stakeholders suggest strong approval
for these contracts in the Indian context. Clauses
that would improve by this adoption are those
related to price escalation, variation, advances and
retention of payment. For example, the optimal way
of ascertaining price escalation would be to split
material costs into major commodities and to link
the price of each commodity to an appropriate index
(Exhibit 3.5). Cement can be linked to the actual price
of cement (average across 30 cities), available from
the Cement Manufacturers Association.
Building India
Accelerating Infrastructure Projects
43
Exhibit 3.5
Comments
Cement
Steel
Bitumen
2 Based on a perspective McKinseys Infrastructure Practice is evolving on how India should develop its future logistics infrastructure.
44
Develop
comprehensive
quantitative
performance metrics (Exhibit 3.6)
Determine nodal agencys value drivers that
are linked to its vision and goals (e.g., timely
execution of projects)
Prioritise value drivers and define specific
performance metrics (e.g., average time overruns)
performance
to
Set up incentives
management systems
and
increase
consequence
Exhibit 3.6
Vision:
Connecting
people and
places safely
and efficiently,
with
accountability
and
environmental
sensitivity
Metrics
Definition of measure
Make our
transportation
network safer
Make our
transportation
network move
people & goods
more efficiently
Travel time
Congestion (level of
service)
Book value of
transportation network
Delivery on schedule
Delivery on budget
Employee satisfaction
index
Make our
infrastructure
last longer
Make our
organisation a
place that works
well
Make our
organisation a
great place to
work
SOURCE: McKinsey experience in performance transformation at a state Department of Transportation in US; McKinsey analysis
Building India
Accelerating Infrastructure Projects
45
***
3 MESS was introduced by the Ministry of Labour and Employment, the objective of this scheme is to provide vocational training and certification to school dropouts,
existing workers and ITI graduates to improve their employability.
46
Capabilities and
practices of Indian
providers are below
par compared with
best-in-class global
providers
Building India
Accelerating Infrastructure Projects
47
Chapter 4
A Call to Action for Providers
48
Building India
Accelerating Infrastructure Projects
49
Exhibit 4.1
Complexity
Project cost
savings1
3-4%
Illustrative ideas
Brownfield
expansion of an
Asian airport to
increase
passenger
capacity by 2.5X
Large scale real
estate (office)
project in India
~3%
DISGUISED
CLIENT EXAMPLES
8-10%
1 Dependent on the extent of project scope covered by the value engineering exercise
SOURCE: McKinsey
50
Exhibit 4.2
Illustration
Preparation
Lifting
Assembly
Descent
Total
Process Step
Productivity
Enhancement
Construction
Flow
Balancing
Critical Chain
Project
Management
SOURCE: McKinsey
Time
reduction
Step 1
Step 2
Step 3
Step 4
From
To
Buffer
From
To
Probability of
task duration
Buffer
Building India
Accelerating Infrastructure Projects
51
Exhibit 4.3
DISGUISED
CLIENT EXAMPLE
Actions
Impact
Pre-assemble 2 serpentines
Duration
Days
fastening system
lifted per cycle
Critical Chain
Project Management
SOURCE: McKinsey
11
Construction
Flow Balancing
23
13
-46%
Baseline
Optimisation
Target
1,700
1,600
Costs
Man hours
3,300
-52%
Baseline
Optimisation
Target
52
Exhibit 4.4
Small-medium
sized projects
(<US$1 billion)
Development
Multiple
segments
Design and
engineering
1
Infrastructure
integrators
Procurement
5
EPC attackers
1-2
segments
Large projects
(>US$1 billion)
Segment specialists
1-2
segments
Multiple
segments
1
Infrastructure
integrators
2
Global project
management specialists
Construction
4
Construction
specialists
Operations
and
maintenance
Building India
Accelerating Infrastructure Projects
53
Exhibit 4.5
Source of competitive
advantage
1 Robust risk assessment
Development
Design and
engineering
2 Creative project
financing
3 Design and engineering
for complex projects
4 Value engineering
5 Best-practice
procurement
Procurement
6 Mega-project
management
7 Contract management
Construction
8 High construction
productivity
9 Regulatory
management
Operations
and
maintenance
10 Operational and
commercial excellence
Infrastructure
integrators
Global project
management
specialists
Segment
specialists
Construction
specialists
EPC attackers
54
***
Building India
Accelerating Infrastructure Projects
A sustained
effort by all holds
the key to India
fulfilling its
infrastructure
needs
55
56
Infrastructure
investments impact
a countrys economy
in two ways:
direct and indirect
revenue impact, and
productivity impact
Building India
Accelerating Infrastructure Projects
57
Annexure
GDP Impact of Inefficiencies in Infrastructure
Implementation
Infrastructure investments impact a countrys economy
in two ways:
Revenue Impact
To estimate the revenue impact in 2017, we have
extrapolated from the actual performance during the
58
Exhibit 1
Description
Illustration
Investment in infrastructure
ICOR
Output
multiplier
GDP
multiplier
GDP impact
a power plant
Building India
Accelerating Infrastructure Projects
Productivity Impact
The growth in a countrys GDP growth is a function of
the growth in its capital and labour stock, and of the
growth in its total factor productivity (TFP). The growth
in TFP is attributable to the various sectors of economy,
such as infrastructure. One of the approaches of growth
accounting1 links the growth in a sectors contribution to
TFP, to the capital creation in that sector.
59
***
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