Business Today

Making most of the infrastructure opportunity

Nearly 80 per cent of the India we envisage in 2030 is yet to be built. The opportunity for private sector is huge. A McKinsey study identifies five points of action.

Prashant Gupta & Thomas Netzer        Print Edition: November 15, 2009

Infrastructure is undoubtedly one of India’s top most priorities. For nationwide infrastructure development to take off in key sectors like power, roads and railways, the government needs to undertake bold policy measures. Nevertheless, 80 per cent of the India we envisage in 2030 is yet to be built and if project conceptualisation and development accelerates, the opportunity for the private sector is huge. This opportunity exists across the entire value chain (development, design and engineering, procurement, construction, and operations and maintenance). But, are Indian providers ready to capitalise on this and maximise returns? Our analysis suggests providers need to act on five fronts to truly be able to reap the benefits of building India’s infrastructure.

INFRA GIANTS IN BT 500
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Larsen & Toubro5
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Strategy and business model: Most Indian providers often overlook risk-return tradeoffs in their exuberance to pursue growth opportunities. Now is the time to change this approach and consciously and explicitly decide strategy and business model. This would mean choosing the segments and the value chain footprint, and correspondingly building the right capabilities to compete in that space. For example, participating in water projects entails working across state agencies as compared to national highways projects that are entirely under the purview of the National Highways Authority of India. Similarly, to become an infrastructure integrator who participates in the entire value chain, from design to operations and maintenance, it is critical to build robust risk-assessment skills, creative project financing expertise and design and engineering capabilities.

Risk management: India’s emerging infrastructure landscape will significantly increase the risk for providers and require them to handle increasingly large projects and complex delivery models. Our analysis suggests there is significant room for players to effectively identify, prioritise, calculate, and manage risk. The gap between estimated and actual margins, for example, is between 6 and 8 percentage points for Indian providers. This is almost three times higher than margins of best-in-class global counterparts. Best-in-class risk management includes using a simple and well defined risk register, screening opportunities through risk-return filters, using a cross-functional bidding team, defining acceptable risk limits and options for mitigating risk, and developing a robust mechanism to track risks for ongoing projects. While on paper some of these systems are in place, implementation and compliance can be much better.

Design and engineering capabilities: Another source of competitive advantage will be world-class design and engineering capabilities. Winners will be those that adopt a valueengineering mindset. For example, a large airport project in India saved more than 20 per cent by changing design specifications, reducing equipment sizes, postponing some procurement, etc. But developing a valueengineering mindset is not without its challenges, particularly when most Indian providers are executing some of these projects for the first time and are relying on outsourced global engineering firms for support.

Lean construction: Our experience with large Indian construction companies suggests that workers typically do actual work for only 20 per cent of their total time. This points to a huge opportunity to adopt lean techniques and eliminate waste. Doing so can dramatically enhance productivity by as much as 100 to 200 per cent and reduce the time taken to complete projects by 20 to 30 per cent. Thus, if implemented well, lean construction can become a real source of competitive advantage. Such improvements can be captured through three levers. First, enhancing productivity of each step in the construction process through automation and better training. Second, modifying resource allocation to balance construction activities to minimise non-productive actions. And third, carefully managing the critical path of the project by conducting activities in parallel to reduce project durations.

Procurement practices: Equipment and material costs typically comprise 40 to 60 per cent of total project costs. Even where contractual terms restrict the choice of suppliers, providers can still save between 5 and 20 per cent. For example, a Total Cost of Ownership (TCO) approach could lead to the decision to invest in more expensive equipment that has lower life-cycle costs. Similarly, building a genuinely strong vendor base in low- cost countries such as Russia, China and Eastern Europe could help bring down costs. Most companies are well equipped to manage localised, project-level procurement activities but this needs to change to enable some of these best practices.

In summary, as infrastructure projects gain momentum, there will be many opportunities for providers to participate. Adopting suitable business models and building capabilities on the fronts identified above will be vital for success in a market that is likely to become much more competitive in the years to come.

Prashant Gupta and Thomas Netzer are Partners in McKinsey’s Mumbai office

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