Infrastructure and economic development: An interview
with John Rice
Since joining GE in
1978, John Rice has
worked all over the world in departments as diverse as auditing, power,
finance, and transport. Based in Hong Kong, he leads the company’s global
growth organization, which accounts for more than half of total revenues. In
this interview with McKinsey’s Bill Wiseman, he talks candidly about the
slowness of bureaucracy and the role of the private sector in encouraging
sustainable growth.
McKinsey: What role does infrastructure play in
supporting growth in developing markets?
John Rice: Everybody is looking for “sustainable”
or “inclusive” growth—growth that improves quality of life for all. Growth in
and of itself is no longer good enough. If you’re not creating jobs, you are
never going to have sustainable and inclusive growth.
But before you can create jobs, you’ve got to
do a few things. You’ve got to have electricity. You’ve got to have
healthcare—you can’t have sustainable growth if people die when they’re 45 or
50. You’ve got to have the basic building blocks of a society, and then you
have to have a combination of financial and human-capital development. Only
then do you have a shot at sustainable and inclusive growth.
McKinsey: Do you find that countries value that
way of thinking?
John Rice: In many democratic countries (and not
just developing ones), there is often a short-term focus on the next election
cycle. In countries that don’t have elections, there might also be a short-term
focus on keeping the population happy. Also, when budgets are constrained, you
tend to punt the long-term stuff. Infrastructure is long-term stuff.
I think there has been what you might call a
“cycle compression” when it comes to how fast governments want investments to
pay back. When I meet with senior government officials, they want to know what
can be done quickly—temporary power, quick investments in clinics and
healthcare—so that they can show visible progress. But those kinds of actions
do not necessarily address the broader challenges.
There’s no question that social media, and the
ability of people to communicate and transfer information and assess their own
circumstances, is increasing the pressure on governments. Even people who have
very little disposable income are still connected. Expectations are being built
up that problems are going to be solved quickly, and governments pick up on
that and feel pressure to respond.
McKinsey: The McKinsey Global Institute has estimated
that up to three billion people could join the global middle class by 2030. How
will this affect the demand for infrastructure?
John Rice: The growth of the global middle class is
creating another, higher set of expectations. For example, the growth in
China’s aviation industry over the past several years is evidence that the
middle class will want to travel; the roads can’t handle the increase in
demand, and as a result, you are seeing the government invest in both aviation
and rail infrastructure. Across emerging markets, there is broad recognition
that problems need to be tackled, that people aren’t going to wait forever for
the ability to travel, to read at night, to treat their sick child, and so on.
At the same time, I think you also have to
remember that something like 1.3 billion people still don’t have electricity,
most of them in Africa and South Asia. You’re not going to get to the middle
class if you don’t have the basics.
McKinsey: What is the role of the private sector
in developing the human and financial capital needed to help deliver
infrastructure?
John Rice: The private sector is right in the
middle of it. In 50 countries where GE is bidding for big projects, we’re
expected to train and develop people. It’s moved beyond just creating jobs, any
jobs; we’re talking about higher-scale, more sophisticated manufacturing value
creation. If GE is not prepared to invest in capacity building, we are going to
have fewer opportunities.
Whether we are building manufacturing
facilities in Pune, India, or planning them in places like Calabar, Nigeria, we
have to think about and fund capacity building for our own employees and
suppliers. This investment can be a multiple of the plant-and-equipment cost
and usually involves partnering with local universities.
McKinsey: How do you scale up that kind of
program?
John Rice: You base it on markets and regions. Our
expectation is that the work we do in places like India and Nigeria will
support the local and regional market. The fact is, sometimes the volume won’t
support the investment; programs have to work from a financial perspective.
McKinsey: The need for infrastructure is huge, but
progress has been slow in many places to create public–private partnerships.
Why is that?
John Rice: Part of what slows things down is that
bureaucracies don’t get paid to move fast or take risks—and this is true in
Europe and the US, as well as in developing countries. How do you give
governments the confidence that they can make these decisions and not be
attacked? And how can you get private capital to invest in a power project in
difficult political environments? For that to happen, third-party investors
need to have an assurance on the fuel supply and cost; they also need a
bankable off-take agreement.
Public opinion is another factor. Many
countries subsidize power, which in effect means that the investor return must
be subsidized too. The “private” part of the partnership is looking for a
risk-adjusted market return, while the “public” side wants local energy prices.
The difference becomes a political issue, sometimes leading to accusations of
mismanagement and corruption.
McKinsey: What, if anything, can the private
sector do to improve these circumstances?
John Rice: It would be interesting to combine the
efforts of institutions like the World Bank, a couple of export-credit
agencies, and a half a dozen companies and say, “OK, we’re going to build a
model for how to get this stuff done quickly and honestly.”
Something’s got to give, because governments
alone are not going to fix the electricity problem. And they won’t attract a
lot of third-party capital without certainty around fuel, costs, and off-take
arrangements.
McKinsey: Is there any particular type of
infrastructure program or product that is working well?
John Rice: Distributed power comes to mind, meaning
small-scale, often on-site sources of electricity. These are technologies that
have been around for a while, but there has only recently been a general
recognition that this is an important way to get electricity to those who don’t
have it. It will take decades to create transmission and distribution networks
to carry electrons from big centralized plants to everyone who needs power.
You need smaller power sizes that run on a
variety of fuels. It could be liquefied natural gas or biofuels or solar or a
lot of different things. This idea is really beginning to capture people’s
attention, not least because these projects can be done fast.
Distributed power is also a good option for
places that today rely on power from generators that run off trucked-in diesel,
which is expensive and environmentally awful. Smaller gas turbines that can
produce cleaner power at about half the price are a huge step forward; we’re
seeing a lot more demand for this type of technology.
About the author
Bill Wiseman is a director in McKinsey’s Taipei office.
http://www.mckinsey.com/insights/sustainability/infrastructure_and_economic_development_an_interview_with_john_rice?cid=other-eml-alt-mip-mck-oth-1508http://www.mckinsey.com/insights/sustainability/infrastructure_and_economic_development_an_interview_with_john_rice?cid=other-eml-alt-mip-mck-oth-1508
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