Mr. Sven Smit, Director, McKinsey&Company - What will it take to double Serbia’s economic growth in the next decade?

Quantum Leap- what will it take to double Serbia’s economic growth in the next decade?

Quantum Leap Conference

October 3rd, 2013

Belgrade, Serbia

CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited

McKinsey & Company | 2

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Today's focus

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– National and regional economic transformations

– Private sector development

– Job creation– FDI attraction– City development– Development cooper-

ation effectiveness

– Delivery– Green growth– Agriculture and rural

development– Financial inclusion– Private public

partnership– Infrastructure– Water

and waste


Our topic today – what can the Serbian government do to achieve a quantum leap in growth over the next 10 years?

2x3%

6-8%

AspirationForecast2

3-4%

2008-2012

~0

2000-2008

5%

1991-2000

~0

1990

-48%

1980s

The next decade

Countries that experienced single year economic declines above 35% grew by an average of ~10% in the decade that followed the decline1

1The countries included are: Rwanda (1994), Lebanon (1989), Iraq (1991), Kuwait (1991), Georgia (1992), Armenia (1992); Only other major exception is Georgia whose economic decline lasted for 3 years, after which it grew at 6%2 EIU projects growth at 3.3% from 2014 to 2023, while WMM Global Insight projects growth of 4.2% for the same period 3 Other data sources: -5.5% (1991-2000) from WMM, 2.2% (1995-2000) from EIU

Real GDP growth, USD (base 2010)

SOURCE: McKinsey Global Growth Model

Is sustained >5% growth possible for the first time since Serbia became a market society?

DATA FOR THE 1990'S SHOULD BE CONSIDERED ILLUSTRATIVE

Illustrative (low data quality)3

NB: ~Two thirds of Serbia’s economy is managed by the government


“Enhancing government output”

Enhance quality of government services at similar cost levels

▪ Organizational changes

▪ Operations changes

▪ IT solutions

Actively support private sector growth

▪ Sector support/subsidies

▪ Infrastructure investments

▪ Investing in private companies“Hands on”1

Reduce government-controlled constraints for economic activity

▪ Privatization

▪ Liberalization/sector reform

▪ Remove administrative burden

“Hands off"

Keep the same quality of government ser-vices at lower costs

▪ FTE & OPEX reductions

▪ Reducing government scope

▪ Optimizing support functions

“Streamlining government costs”

“Achieving more for less”

Enhance quality of government services at lower cost levels

▪ Mix of the two types of programmes above

The government may choose to launch one of five types of pragmatic Transformation Programmes

Boosting economic growth

Enhanc-ing govern-ment efficiency

Main objectivesProgram typology

Main interventions associated to typologies

Most likely to meetQuantum Leap objectives

1 Smaller economies trying to boost economic growth have historically tended to choose a “hands on” approach to Transformation

SOURCE: McKinsey

1

2

3

4

5


0

1

2

3

4

5

6

7

8

9

10

11

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000

US (1992)

Italy (1983)

Germany (1983)

Austria (1990)

Serbia(2013)

Real GDP per capitaUSD (Base 2010)

Economic growth%; Real GDP growth (USD, base 2010); Highest average growth 10 year period selected

Romania (2000)

Kazakhstan (2000)

Russia (1999)

Serbia(2000)

Estonia (1996)

Croatia (2000)2

Ireland (1994)

Slovenia (1987)

Cyprus (1981)

Botswana (1980)

Singapore (1980)

Korea (1980)

China (1980-2010)

Montenegro (2000)

Bulgaria (2000)

Recent, high and sustained economic growth is possible …All countries with over 5% average growth for at least a decade1 plus benchmarks <5%; Since 1980

1 Excluding countries that have rebounded from major economic declines, which include Rwanda, Bosnia, Kuwait, Iraq, Azerbaijan and Turkmenistan; From a list of 115 major world countries, including Serbia, tracked by McKinsey's Global Growth Model 2 Croatia’s highest growth was in the 10 y. from 1994, however 2000 was used here for regional comparability 3 Based on 2012 thresholds; Includes low income

SOURCE: McKinsey Global Growth Model; Global Insight, World Bank

▪ Although no country (except China and Botswana) has grown at a rate >10% for longer than a decade1, 41 countries have grown in the 5-10% range2

▪ Growth rates over 4-5% subjectively “feel like growth” (e.g. companies start aggressively employing)

▪ With a growth rate of 7%, roughly double of the forecast rate, Serbia could almost reach high income status in a decade from now

Lower income3

Middle income

High income (76 countries)Q

uant

um

Leap


… which, data suggest, more than half of the high growth countries (>5%) have achieved through a Quantum Leap in growth since 1980

Continued high growth2 34.1%

Achieved aQuantum Leap since 19801

65.9%

All countries with over 5% average growth for at least a decade1 since 1980; n=41

1 Defined ac countries that have achieved an increase in economic growth between the period of the highest 10 year average economic growth since 1980 and the 10 years prior to the first year of that period (in 9 cases between 5 and 10 years were considered due to data availability, however no less than 5 years were included in the data set)

2 Highest post 1980 10 year economic growth phase started in the 1980-1985 period, suggesting that high economic growth started prior to 1980-19853 Uganda, Tanzania, Israel, Ireland, Dominican Republic, Costa Rica and Belize have a similar growth profile

Average size of Quantum Leap

9.3% 7.3%

-3.3%

6.1%

-2.6%

Estonia

UAE

5.9%

2.4%Malta3

Before

After

SOURCE: McKinsey Global Growth Model; Global Insight, World Bank

McKinsey & Company | 8SOURCE: McKinsey

Ideas others have leveraged to achieve a quantum leap

Sector growth strategy What do we all need to do?

Policies & institutionsWhat actions could the government take?

DeliveryHow do we actually get it done?

▪ Set a compelling vision of what Serbia will be the best at …

▪ … that will be achieved by a prioritized sector- specific growth strategy ...

▪ ... supported by a change in mindsets and behaviors

▪ Committed and visible high level political leadership...

▪ … focusing on delivering big outcomes in few priority areas fast ...

▪ ... supported by Delivery Labs, a Delivery Unit and transparent performance management

▪ Enable local and foreign (incl. FDI) enterprises to deliver the vision through private investment and entrepreneurship...

▪ ... by orchestrating policies and institutions to increase sector and economy wide competitiveness …

▪ ... and making it easier to do business

1 2 3


2.1

2.2

2.3

6.0

5.2

5.7

For growth, sector performance matters more than sector mix in both developing and developed countries

SOURCE: Global Insight; McKinsey Global Institute analysis

Total growth

0.4

2.6

3.3

3.9

5.5

9.1

Growth momentum (growth predicted by initial sector mix)1

Differences in performance of sectors2

-1.7

0.4

0.9

-2.1

0.3

3.4

Contribution to total value added, 1995–2005Compound annual growth rate, %

1 Country growth rate calculated as if all sectors would have grown with the sector-specific growth rate average across all benchmark countries.2 Actual country growth minus growth momentum of initial sector mix.

China

India

Mexico

UnitedStates

United Kingdom

Japan

SECTOR GROWTH STRATEGY

1

Growth

High

Low


0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

220,000

240,000

260,000

280,000

300,000

0 20,000 40,000 60,000 80,000 100,000

Transport, storageand communication

Financialintermediation

Electricity, gasand water supply

Energy

Number of people employed

Value generated per personLabor productivity; EUR per employee

Otheractivities

Hotelsand restaurants

Education

Retail andwholesale trade

Health andsocial work

Manufacturing

Public administrationand defense Agriculture

Construction

Example of a Sector strategy overview, similar to what many other countries have developed

Bubble size: additional growth in the next 10 years

Source: McKinsey

Primary/growth sectors

Enabling sectors


1ILLUSTRATIVE

McKinsey & Company | 11SOURCE: Global Insight; International Labor Organization; National Statistics;

McKinsey Global Institute analysis

Growth of value added, %

Growth of labor productivity, %

Growth of employment, %

5.0

2.3

Total

Services 2.7

Goods 3.6

2.1

1.5

1.4

0.2

1.2

Sector contribution to growth of value added, labor productivity, and employment for middle-income countries 1

Contribution to compound annual growth rate 1985–2005

Middle income benchmarks suggest that most growth is likely to come from productivity improvements, rather than increased employment…

1 World Bank defines middle-income countries as those with 2008 per capita GNI from $976 to $11,905. Value-added and employment data available in Argentina, Bolivia, Brazil, Bulgaria, China, Colombia, Costa Rica, Egypt, Hungary, Jordan, Malaysia, Peru, Philippines, Poland, Romania, Slovakia, Sri Lanka, Thailand, Turkey, and Uruguay


1

BASED ON PEER COUNTRY BENCHMARKS


… while some sectors are much more likely to generate employment than others

SOURCE: The Clean Energy Economy, PEW, 2009; Bureau of Labor Statistics; Haver analytics

Share of US employment, August 2009 (percent of nonfarm employment)100% = 130 million

0.60.30.2

11.3

5.94.9

New innovative sectors Existing large employment sectors

Biotech Semi-conductor

Cleantech Construc-tion

Financial activities

Retail trade


1



1 FDI data suggest that Serbia’s rate of return on Foreign Direct Investment (FDI) is low compared to benchmarks

1 Calculated as FDI income/FDI stock based on UNCTAD methodology as presented in the World Investment Report

Angola

62.4%

World average

5.5%

EU-27

4.0%

CEE

3.3%

Serbia (105/117)

2.4%

SOURCE: IMF; EIU; UNCTAD; team analysis

Inward FDI rates of return1, 2009-2011 average, %

BASED ON IMF AND EIU DATA



1 Export data suggest that Serbia has export strengths in ammunition and agricultural products

Serbia’s top 10: Revealed comparative advantage – exports; 2012

3.51

3.60

4.06

4.07

4.71

5.36

6.48

6.60

8.28

Explosives; pyrotechnic products

Arms and ammunition 9.26

EU-271 = 2.0%

Footwear, gaiters and the like

Live animals; animal products

Aluminum and articles thereof

Copper and articles thereof

Sugars and sugar confectionery

Edible fruit and nuts

Products of the milling industry

Cereals

Difference to 2007

+5.05

+4.57

-3.97

1 Top 10 average for EU-27 countries

1

2

3

4

5

6

7

8

9

10

SOURCE: Comtrade; MGI Economics Research Team

-1.67

+5.53

-0.11

+0.18

+2.46

-0.28

+0.45

McKinsey & Company | 15SOURCE: Working group

8. Transition toward sustainable practices

10. Change in social values

9. Increasing demand for food

7. Global energy demands rise, but supply sources remain uncertain

A country sector growth strategy should be squarely positioned to take advantage of major global trends

Detailed next


1

2. Urbanization rates increase rapidly – mostly in the developing world

1. Economic center of gravity shifts to developing world

3. Global consumer class expands rapidly in emerging economies

5. Race to increase productivity through technology and the knowledge economy

4. Labor force growth decreases globally, but mostly developed countries

6. Trade increases and new flows emerge

Global trends that influence country growth programs through 2050

http://www.sxc.hu/browse.phtml?f=download&id=1170030


Increasing demand for food – the global food and agriculture sector is facing severe pressure from demand-supply gap

SOURCE: FAO World Food and Agriculture to 2030/2050; FAO Expert Meeting on How to Feed the World in 2050; Sage; PEAT; USDA; UNEP; World Bank; Resource Revolution, McKinsey

1 On a per-day basis, global food consumption is ~17 trillion Kcal in 2000, ~18 trillion Kcal in 2005, and ~28 trillion Kcal in 2050

World demand will grow around 70% between 2000 and 2050

Growth on the supply side is constrained

▪ Population growth – 7 billion today to 9.2 billion by 2050

▪ Urbanization – 50% today to 70% of population by 2050

▪ Higher calorie consumption and diet shifts: more wealth = more protein

Global annual food consumption1

Kcal consumption, quadrillions

▪ Water – 40% deficit expected by 2030

▪ Land – over 20% of arable land already degraded; require additional 175-220 million ha of crop land to meet the 2030 demand (11-14% increase)

▪ Climate change – lead to 3-16% lower productivity by 2080

▪ Productivity gain – steadily declined since the 1960s (2.2% average annual yield increase) to today (1.2%)

▪ Energy – over 50% of cash costs are fertilizers and fuels (63% for U.S. corn production)

▪ Need to produce ‘more with less’

▪ Increased pressure on food price volatility

▪ Opportunity for discontinuities and investment

▪ Quality in addition to quantity

6.0

2050

10.2

2000

+70%


1


900

710

280

67

300020001000500

Serbia is well positioned to play a significantly larger role in food production in the next decades…


1

Agriculture labor costs in Serbia are significantly lower than in Western Europe

Serbia has a high percentage of arable land, almost 50% of which is considered higher quality soils

Serbia’s central location means access to almost a billion people within two days truck drive (2k km)

1.9

3.4

6.8

SerbiaCroatiaWE

Agriculture labor costs(EUR per hour, gross)1

Serbia2

47%=~5 m ha

CEE

37%

WE

23%

Share of total land which is arable

Smart investors (e.g. UAE based Al-Dahra, EBRD, IFC) have already invested over 2bn EUR in the Serbian agriculture sector

SOURCE: Republicki Zavod za Statistiku RS; Agri-info.eu; The Government of the Republic of Serbia; IAMO; Agripolicy

1 Last available comparable year used (2007); Serbia’s wage calculated based on monthly wage, assuming 20 day work week and 8 hours per day2 Only about 6% of arable land remains unused; while only 1.5% is irrigated (which is low)

Population by distance bandDistance in KM; Millions of people

# of cities with >1M pplxx

9472215


… as well as in food processingSECTOR GROWTH STRATEGY

1

Food processing labor costs in the region are significantly lower than in Western Europe

Building on the existing research institutions, Serbia can build it’s position as an agro R&D hub

Serbia has significant potential to add more value by exporting more processed agricultural products

-9%

WE CEE

All other costsLabor costs

Serbia

66

Quality of scientific research institutions, rank out of 148 countries

SOURCE: Eurostat, McKinsey analysis; WEF, Comtrade, MGI Economic Research

“The greatest opportunity for Serbian agriculture is in fruit processing and in meat production. Those are areas where you can advance significantly”

– Laurent Stokvis, Ambassador of Holland to Serbia, at the 2013 Agricultural Fair in Novi Sad

30 27 23

26 2921

44

Serbia

44

World

56

CEE

Share of total agricultural product exports by degree of processing; 2012

Commodities

Semiprocessed products

Processed products

Indexed food processing costs, 2012



1 However, Serbia has increased it’s exports of commodities, while other countries in the region have moved up the productivity ladder

0.92

0.81

1.09

0.99

1.04

1.112007

2012

Semiprocessed products

0.750.80

Processed products

1.251.16

Commodities

0.850.84

SerbiaSerbia

CEECEE

Revealed comparative advantage index1

▪ Serbia agriculture sector has been increasingly relying on exporting commodities (e.g. corn, fruit, sugar beet, tobacco)…

▪ …while countries in the Central and Eastern Europe1 have significantly increased exports of processed agricultural products (e.g. processed fruit/vegetables, prepared meat, dairy products)

1 or Balassa index is the ratios of the industry’s share in the country’s exports relative to the share in world trade. If the index takes a value of more (less ) than 1, the country is (not) specialized in exporting selected industry products

SOURCE: Comtrade; Team analysis

Threshold 1


Benchmarks suggest a number of measures are needed to grow agricultural productivity, especially investment in automation and developing scale economies

CEEEU-15

Share of irrigated landPercent of arable land

Agricultural machineryTractors per 100 sq km of arable land

Fertilizer consumptionKg per hectare of arable land

3724

817

344

1,125

138172

7

34

10

33

1 Growing of perennial (cereals and vegetables) and non-perennial (fruits) crops, plant propagation and animal production 2 CEE average plot size figure excludes Czech and Slovakia 3 Data point for 20094 Data point for 2010 according to the World Bank methodology

SOURCE: World Bank; World Development Indicators database; Eurostat; team analysis; European Commission

43

344

4728

113

18155

14178

28

2.5

▪ Higher share of arable land vs. EU 15, gives Serbia a good starting position to further build on its agricultural base

▪ Significant investments and incentives needed in irrigation and to push machinery driven production

▪ Consolidation of plots highly desirable to allow for economics of scale

▪ The Economics Institute recently estimated the potential of the Serbian agriculture sector to 12 billion, almost three times the current 4.5 billion agricultural production gross value

Share of arable landPercent of total land

ScalabilityAverage plot size, hectare2

Agriculture value added per worker (thousands of US$ per year, constant 2005)


1

McKinsey & Company | 21Source: Green Morocco Plan

Agriculture as the main engine for economic growth

and social development

Reform of key transversal areas

Pillar II

Social Agriculture:

Social investment and fight against rural poverty

Pillar I

Commercial Agriculture:

Private sector investment on high productivity/ high value

Focus on aggregation and contract farming

Focus on aggregation and contract farming

Market access and trade policy (FTAs)

Access to inputs & services (incl. distribution networks)

Integrated Water management (Supply & Demand)

Institutional reform & public services (incl. extension / R&D)

Doing business & access to financing (incl. taxation & subsidies)

Land reform & industry structure

Integrated rural development


1 Agriculture Transformation example: “Green Morocco” has achieved a jump of almost 50% in agro GDP and production in under 5 years




1 2 3













The overall findings of the latest 2013-2014 Global Competitiveness Report mirrors the public perception that change in Serbia is required…

POLICIES AND INSTITUTIONS

2

4th place: Germany

1 A measure of the degree of sophistication of business practices and strategies of companies in Serbia

Global Competitiveness Index 2013-2014; Ranking of countries in Europe (out of a total of 148 countries worldwide)

Top 3 Bottom 3

3rd place: Finland

1st place: Switzerland

91st place: Greece

95th: place: Albania

Serbia’s competitiveness has fallen by 14 positions in the past 7 years to the lowest position in Europe

101st place: Serbia

SOURCE: World Economic Forum Global Competitiveness Report 2013-2014


… while suggesting that productively channeling the great talent available in the country is key to Serbia’s path forward


2

Detailed set of indicators (total of 114) that together make up the overall country rank

…Greatest competitive strength?

…Most significant barriers blocking the further development of the strengths

▪ Tertiary education enrollment

▪ Quality of math and science education

▪ Quality of scientific research institutions

▪ Number of international patent applications1

▪ Mobile broadband subscriptions

▪ Flexibility of wage determination

…Greatest competitive weaknesses?

▪ Ability to attract talent (2nd lowest place globally)

▪ Ability to retain talent (3rd lowest place globally)

Professionalize management▪ Willingness to delegate authority▪ Reliance on professional management▪ Nature of competitive advantage2 Extent

of staff training▪ Firm level technology absorption▪ Quality of management schoolsImprove access to financing▪ Ease of access to loans▪ Financing through local equity market▪ Venture capital availabilityImproving government effectiveness▪ Burden of government regulation ▪ Efficiency of legal framework▪ Quality of overall infrastructure▪ Intensity of local competition

NB: ~Two thirds of Serbia’s economy is managed by the government1 PCT patents, applications/million population 2 Busines sophistication/ competitiveness of company strategies/production process sophistication

SOURCE: World Economic Forum Global Competitiveness Report 2013-2014

What are Serbia’s …

Serbia is a source of great talent …

.. .however we do not seem to be

providing adequate opportunities for

our talent to develop…

…mainly because managers are not inspiring, financing is hard to come by and it feels like the government is not

helping


However, countries should not implement policies blindly – following a reform agenda focusing only on macro enablers is not the whole answer

1 1 = most "reformed"; 0 = least "reformed". Includes measures of trade, financial, tax, privatization, and labor policies. From Lora (2001)SOURCE: Lora (2001); World Bank; Rodrick (2004); EconDev KIP team


2

▪ Similar evidence in Eastern Europe and Subsaharan Africa

▪ At the same time, evidence that– "Growth champions" (Asian Tigers, India, China) had employed policies that were contrary the

Washington consensus ("planned growth 2.0")– Rise of contemporary economic super-powers similarly been associated with heavy interventionism

0.34

0.58

Latin America Average

1.7x

Latin America Average

4,0193,533

+1% p.a.

Countries in Latin America implemented "Washington Consensus" economic reforms…Structural Reform Index1

… but these reforms were not associated with strong economic growth in most countriesGDP per capita, constant 2000 USD

1999

1985


1.6

1.2

0.8

0.4

0

-0.4

-0.8

100101

The priority and supporting sectors can be grouped by degree of differentiation and tradability of products…

Size of circle = relative amount of sector value added in 2005

Differentiation index0 = average

Tradability of products

Imports plus exports divided by sector gross output, %

Low High

Infrastructure

Local services

Business services

Resource-intensive industries

Manufacturing

R&D-intensive manufacturing

Dif

fere

nti

atio

n o

f p

rod

uct

s

High

Low

Electricity

Construction

Hotels and restaurants

Land transport

Wholesale and retail trade

Post and telecommunication Finance and

insurance

Real-estate activities

Computer and related activities

R&D

Pulp, paper, printing, and publishing

Agriculture, forestry,

and fishingWood products

Rubber and plastics

Basic metals

Fabricated metals

Machinery and equipment

Motor vehicles

Pharma

Chemicals

Radio, TV, and communication

equipment

Medical instruments

Aircraft and spacecraft

Other

Other


2

Sectors can be grouped into clusters based on two key sector competitiveness drivers, tradability & differentiation

SOURCE: EU KLEMS growth and productivity accounts; OECD input-output tables; McKinsey Global Institute analysis



2 … which allows governments to tailor policy based on the sector group needs which both targets and simplifies policy formulation

Grouping of sectors into clusters enables a tailoring of government policiesby cluster to simplify policy development and increase its effectiveness

Low High

Degree of intervention

InfrastructureResource-intensive industries

Infrastructure

R&D-intensive manufacturing

Business services

Local servicesManufacturing

Government as principal actor

Tilting the playing fieldBuilding enablers

Setting ground rules/direction

SOURCE: McKinsey Global Institute/Public Sector Office Competitiveness Project


Example of a best practice proactive investment attraction approach

Investment excellence

Investment excellence

Supporting enablers

Supporting enablers

Design Execute Enforce

Customized pitch books Army of investment officers to source and pitch deals

Investment and Enforcement agency to ensure quality of committed and deployed investment

Plug-and-play industry ecosystem

Business friendly environment and a cosmopolitan society

▪ Prioritising and segmenting investor target list

▪ Tailoring pitch book (and proactive proposals) for priority investors in each segment

▪ Delivering a targeted number of deals each p.a. through 20-401 dedicated officers

▪ Conducting fact-based performance dialogues to review progress, resolve issues and problem-solve concrete action

▪ Overseeing commitment of investment

▪ Reviewing on an on-going basis the quality of investment, investments gaps against stated targets, performance management of investment officers

▪ Providing large scale infrastructure for investors to come in▪ Developing plug-and-play facilities with well connected logistics and supporting

infrastructure

▪ Providing clear and transparent investment rules and governance▪ Ensuring ease of establishing and operating business

▪ Tailored value proposition to prioritized investors in key sectors

▪ Attract enough investors to meet the required level of investment levels p.a.

▪ Committed investments timely and fully deployed

▪ Committed investments reached targeted outcome

▪ Quick ramp-up times and assured supply

▪ Proximity to efficient ports and logistic providers

▪ Top position in Ease of Doing Business

▪ Top position in Most Liveable Countries

SOURCE: McKinsey

1 Number of investment officers varies across countries and investment needs


2


A relatively low level of financial depth in Serbia suggest that availability of capital is a key precondition for growth

1 Calculated as FDI income/FDI stock based on UNCTAD methodology as presented in the World Investment Report

Western Europe

417%

Eastern Europe

127%

Croatia

217%

Bosnia

100%

Serbia

93%

Financial depth, stock of financial assets (debt + equity) as a % of GDP, 2012

GDP growth is strongly correlated to growth in the stock (household and corporate) stock of financial assets with a World correlation of 0.83 and 0.81 for Emerging Markets

SOURCE: McKinsey Global Institute Financial Assets Database; McKinsey Global Institute analysis


2


Infrastructure example: benchmarks suggest a major rise in infrastructure spend may be needed to support a Quantum LeapSerbia; Infrastructure investment gap analysis3 BASED ON BENCHMARKS

Quantum Leap scenario % of GDP, assuming 7% growth, 2013-2023

Gap

3.3-4.3%

Target spend

5.3%

Actual historical spend4

1-2%

Target spend

Recent spend2

4.7%1 6.7%

Gap

3.4x

2.0%

1 The gap in the 1990's is at least 1%, on top of the gap generated in 2000-2008 2 2007-2010 3 Benchmark is: 1.8% of GDP + 70% of growth 4 Illustrative due to data quality issues

Implies total investment of up to 30-40 billion USD over ten years

▪ Current infrastructure is strained due to decades of underinvestment1, further increasing the importance of adequate infrastructure investment to support sustainable growth in the next decade

▪ However, the situation may not be as critical as suggested by benchmarks due to major economic decline in the 1990s and solid infrastructural base in the 1980s

Historical % of GDP, 5% growth, 2000-2008


2

SOURCE:ITF, Buildecon Reports and GWI, OECD 1998 report on the perpetual inventory method, Farewell to Cheap Capital (McKinsey report, 779371, p. 65), Various IFIs (e.g. World Bank) and data providers (e.g. Global Insight)




1 2 3













Achieving a transformation is hard, but it is not harder in the public sector than in the private sector

How successful was the transformation inreaching the targets your organization set?

105

10

51 41

3030

5 9

9Don’t know

Not successful at all

Somewhat successful

Very successful

Extremely successful

Public

100

Private

100

SOURCE: Public Sector Transformational Change (TC) survey 2012 to U.S. Government Leaders GS15-SES (n=974); Private Sector TC survey ’06, ’08, ’10 to a panel of business leaders (n=4,572)

Percent (Public=974, Private=4,572)

40 percent of government transformations succeed

DELIVERY

3


Why transformation is hard – a few thoughts from former transformation leaders

DELIVERY

3

“The difficult thing is not to see what to do, the difficult thing is to do it… If I had to do it all again, I would perhaps set up some centralized unit just to monitor progress and to spread ideas and best practices.”

– Göran Persson, former Prime Minister, Sweden

“Don’t think you can simply have a good idea and not manage and build stakeholders who will support it and who will argue for it.”

– Tony Blair, former Prime Minister, United Kingdom

“I didn’t expect to encounter inertia of such magnitude—inertia that is due to the scope of the program, the number of workers involved, and the strength of habits anchored for decades or more in the public sector.”

– F.D. Migeon, Head of Department for Modernization, France

“You cannot transform anything until you change what is in the minds of people.”

– Roel Bekker, former Secretary General for Government Reform, the Netherlands

“How many times in administration we had super perfect strategies that stay on the shelves, were not implemented and thus produced no results.”

– Ahmed Chami, former Minister for Industry, Morocco


Lessons a government can leverage to increase chances of success (1/3)DELIVERY

3

▪ Past Transformation Programmes (TPs) aimed at boosting growth were able to create additional annual GDP growth of ~1.5% (range from 0 to 4%)

Around the world, governments have achieved remarkable transforma-tions – resulting in improvements that many believed beforehand to be impossible

Shoot for the sky

▪ The average duration in power of national leaders since 1945 has been 7 years, which is ~ as long the average TP

▪ Not a single TP was implemented in less than 3 years

Successful transformations build the foundations for impact: the usual focus is the mandate term, but simultane-ously they also ensure quick wins and plan for persistent, long-term impact

You have only one shot at the goal

1

▪ Successful transformations usually focus on two goals simultaneously (but not three)

▪ Smaller countries are more likely to take a hands on approach in growth programmes

Be very clear about what it is that you wish to achieve (growth, efficiency or quality)

Set a clear and compelling target2

3

▪ Once you have set a target, stick to it. Clarity in the ambition is one of your most powerful tools

▪ Be open to modifying your approach when and where necessary – as when new opportunities arise

Changing targets half way will undermine confidence in the program, but shifts in circumstances demand flexibility

Be persistent and consistent, but flexible4

10 key learnings from an analysis of 40 government led Transformation Programs across the world


DELIVERY

3

▪ The two most common reasons for starting a TP are:– The election of new leaders (in 70% of cases)– A crisis (in 50% of cases)

▪ The most powerful mandate for change was based on both a crisis and a change in leadership

Successful leaders require a mandate for change and take full advantage of the opportune moment – the kairos – as well as of an aspiration for change in the public opinion

Capture the right moment5

“What you want to do” (the portfolio of interventions) significantly shapes the options for “how you do it” (the program design)

Agree on what you want to change and the program will follow

▪ A hands-on growth TP is most likely to be successful if driven top down by a centralized, highly skilled adminis-trative team through a delivery unit1

6

Ensure you give due regard to the key success factors that apply to all transformation programs

Do not neglect the basics

▪ E.g. develop a clear change story linked to a national vision, establish a central team, set targets centrally, link targets to budgets, harness the energy of transparency by communicating targets and results, assign the best public servants to the job2, assign accountabilities and manage performance, leverage change agents, etc

7

1 Unless existing structures with sufficient experience in terms of transformation already exist2 Often with an infusion of the private sector, however depending on existing capabilities

10 key learnings from an analysis of 40 government led Transformation Programs across the worldLessons a government can leverage to increase chances of success (2/3)


DELIVERY

3

Transformation in the public sector are extremely complex, and demand significant investment and high-quality resources over the long term, requir-ing a major effort on capability building

No one expects to travel into space in a propeller plane

▪ TPs are very complex (average of ~250 interventions grouped in 22 categories), large (Serbia’s gov’t manages ~2/3 of the economy and is the biggest employer), require a large central team (average of 1,300 FTEs involved over 7 years) and a scale-up in capabilities (e.g. through academies for civil servants building leadership, functional and operational capabilities)

Rewards will follow (through sometimes posthumously)

Some criticism is inevitable, but the record shows transformations leave a long-lasting legacy

▪ Successful TP leaders find ways to push beyond the initial criticism to achieve their aims. Looking back, these leaders often point to their leadership of the TP as one of their greatest achievements in office. Once the program has reached many of its goals, their achievements are also frequently acknowledged internationally

8

Transformations leaders lead from the front, investing significant time and reputational capital

Personal commitment matters 100%

▪ Almost all TPs had at least one person at the helm whom have given their name, face and reputation (and political career) to achieving the goals of the program

▪ These TP leaders invested as much as 10-50% of their time to driving the TP over the whole programme duration1

9

10

10 key learnings from an analysis of 40 government led Transformation Programs across the world

1 Including succession planning after they are gone

Lessons a government can leverage to increase chances of success (3/3)


10th & 11th Malaysia Plan10th & 11th Malaysia Plan

People First Performance Now 1

2

4

3“Then Government is set to begin the transformation process in strengthening the efficiency of its delivery system”

“Our real work will begin as we make the transformation of government services happen”

Malaysia case example: The Prime Minister outlined 4 elements to Malaysia’s transformation Programme

DELIVERY

3


Malaysia case study – cross functional full time delivery labs were used to detail out the concrete reform plan for each priority initiative

DELIVERY

3

What is the purpose of a lab?

▪ An intense 6-8 week, “locked in together in a room until the work is finished” approach in taking a high level reform programme and translating into an actionable (who does what when) initiative by initiative implementation plan

▪ The lab includes key stakeholders (20-30 people) relevant to solve the defined problem, and are selected from the government, state owned enterprises, private and social sectors

Who participates in a lab?

▪ The key political leaders are engaged early and continuously (~every 1-2 weeks)

▪ Initiative level owners sign off on programmes and are accountable for implementation

How is commitment secured?

▪ A “3-feet“ level implementation programme, including agreed solutions, detailed execution plans with responsible owners (across organizations), timelines and targets

What are the end products?

▪ The invited cross-organizational team works full-time in one location

▪ The lab involves an intense closely facilitated/managed problem solving process

What happens in a lab?


Malaysia case example: 500 people, primarily from the private sector, worked across 12 labs for 8 weeks to develop a program with ambitious targets through the Delivery Labs

Jobs

Investment

TransformationalActions

Gross National Income (GNI)ENTRY

POINTPROJECTS

PER CAPITA GNI IN 2020

USD

ADDITIONAL JOBS

INVESTMENT

USD

DELIVERY

3


Malaysia case example: 12 National Key Economic Areas (NKEAs) were selected

Oil, Gas &Energy

Education

Tourism

W’sale& Retail

E&E

Health Services

Palm Oil

Telco

Agri-culture

Business Svcs

Greater KL

Financial Services

NKEA Labs:

11 Economic Sectors

+

Greater KL

Within the first 8 months, the ETP was able to a

major jump in FDI to reach 55 billiion USD (for a country of 27 million

people) within 8 months, which compares to

Serbia’s total FDI stock to date of 26 billion USD

DELIVERY

3


Some transformations specifically drive concrete changes in behaviors by tackling change in the most obstructive mindsets

SOURCE: Team analysis

To …

From ...

• It will not get better for me until it gets worse for someone else

• We can achieve more working together (moving from a win/lose to a win/win mindset)

• With the people and institutions that we have here, things will never get better

• Things were once better, and they will be better in the future

• I know the best

• I know what I don’t know

• Hard work does not pay off… no one can pay me as little as I can work… employment through connections

• Hard work pays off and the more I work the work the better off I will be

HIGHLY ILLUSTRATIVE EXAMPLES

• It is always someone else’s fault (government, system, corruption, external powers, etc)

• I can only change and effect my own behavior to make things better- I am responsible for what happens to me

Detailed further

DELIVERY

3


“I know the best” mindset example: moving from unconsciously unskilled to consciously unskilled is the necessary first step for further growth

Unconsciously skilled

Consciously skilled

Consciously unskilled

Unconsciously unskilled

Personal realization Personal experiences

Requires no conscious thought

▪ Owned as normal, natural and effortless

▪ Pleasure▪ Ease▪ Satisfaction

Requires practice▪ I can do it but I need

to think about it▪ Choose to change▪ Skill building▪ Nurturing by others▪ Courage and humility▪ Persistence

Requires a point of choice

▪ Aware of what I have to learn, but don’t know how to do it

▪ Confusion▪ Go in ‘learning’▪ ‘Aha!’ moment▪ Realization

Requires in-cident leading to insight

▪ Don’t know what I don’t know/have to learn

▪ Upsetting situation or relationship

SOURCE: © Gita Bellin and Associates, 1999

DELIVERY

3


While growth is a critical outcome, over time the Transformation Program could also address other drivers of happiness

7,50

Least happy country2

2,93

Serbia(106/156)

4,81

Average of top 10 happiest countries1

1 Denmark, Norway, Switzerland, Netherlands, Sweden, Canada, Finland, Austria, Iceland, Australia 2 Togo

United Nations World Happiness Report 2013; Score out of 10

According to the UN World Happiness Report, an increase in income to highly developed country levels1 would increase Serbia’s happiness by +0.4, the same as an increase in generosity and slightly more than a decrease in perceptions of corruption (+0.3)

Base country + residual

GDP per capita

Social support

Healthy life expectancy

Freedom to make life choices

Generosity

Perceptions of corruption

Explained by

SOURCE: UN

+0.3+0.4

+0.4

+0.4

Difference: Happiest to Serbiaxx

DELIVERY

3


THANK YOU


BACKUP


Looking forward, time is of the essence

A karios may be approaching – Serbia can capture the opportunity

Achieving a Quantum Leap is possible… with the right prioritization, including many already existing ideas

The implementation of the Transformation/ Reform agenda is likely to be a key challenge… and it can be done


Day zero hypothesis



▪ The next 6-12 months will be a highly opportune moment for the government to launch a Transformation

▪ The Transformation should follow the hand-on growth model with a strong central Delivery Unit

1 2 3

▪ A vision does not exist today and one is desperately needed. Potential messages include:

– Best human capital in the region

– Primary sectors: agriculture, food processing, automotive cluster, It sector, mining (tbc), outsourcing & offshoring (tbc), semiconductors (tbc)

– Secondary sectors: education, infrastructure, retail, energy

▪ A culture of meritocracy should continue to be transitioned to in 2-3 years (in both SOE and the gov’t)

▪ As talent is infused, a result oriented government effectiveness transformation should be pushed within the government to fix the basics (e.g. tax collection)

▪ Sector based policy enablers should be defined in implemented across time horizons (incl. policy guillotine)

▪ Global Competitiveness “quick fixes” (including perception drivers) should be launched

PRELIMINARY DRAFT











1 2 3

BACKUPIdeas others have leveraged to achieve a quantum leap






100 largest companies in Serbia (1/2)SECTOR GROWTH STRATEGY

1

Source: APR


100 largest companies in Serbia (2/2)SECTOR GROWTH STRATEGY

1

Source: APR


Manufacturing, professional services and mining sectors pay the highest salary in Serbia

Mining and quarrying

Professional, scientific and technical activities

Manufacturing

Manufacturing


Transportation and storage

Other service activities

Manufacturing

Financial and insurance activities

Electricity, gas, steam and air conditioning supply

64,837

64,969

89,167

71,367

86,682

Financial service activities, except insurance and pension funding

Manufacture of coke andrefined petroleum products

84,239

Air transport

Activities of membership organizations

Mining support service activities

Warehousing and supportactivities for transportation

n/a

79,349

77,611

75,616

74,136

Manufacture of tobacco products

Extraction of crude petroleum and natural gas

Activities of head offices; management consultancy activities

Top 10 industries by highest income, RSD, 2011

Sub-industryIndustry Average net salary

SOURCE: RZS


1


Number of people employed in Serbia by Sector (1/2)

Arts, entertainment and recreation

Real estate activities

Financial and insurance activities

Administrative and support service activities

Information and communication





Arts, entertainment and recreation 6,421

1,991

4,688

5,766

3,125

Information service activities

Services to buildings and landscape activities

7,843

Office administrative, office support and other business support activities

Activities of head offices; management consultancy activities

Legal and accounting activities

Employment activities

Sports activities and amusement andrecreation activities

10,205

1,532

3,024

15,821

Insurance, reinsurance and pension funding, except compulsory social security

Gambling and betting activities

Real estate services

Sub-industry

14.89

11.41

11.08

10.42

7.04

6.99

6.18

5.68

4.73

4.12

IndustryGrowth,2008-2011, %

Top 10 industries by growth in employment, 2011

Number of employees, 2011


1

SOURCE: RZS


Number of people employed in Serbia by Sector (2/2)

Manufacturing

Manufacturing

Manufacturing

Manufacturing

Mining and quarrying

Manufacturing

Manufacturing

Accommodation and food service activities

Agriculture, forestry and fishing

Transportation and storage 1,499

29,142

3,777

10,740

14,425

Extraction of crude petroleumand natural gas

Manufacture of beverages

8,835

Manufacture of machinery andequipment n.e.c.

Manufacture of other non-metallicmineral products

Food and beverage service activities

Crop and animal production, huntingand related service activities

Air transport

9,537

1,415

15,518

13,505

Manufacture of computer, electronicand optical products

Manufacture of other transport equipment

Manufacture of basic metals

-12.19

-9.11

-8.67

-8.54

-8.38

-8.18

-8.06

-8.00

-7.96

-7.63

IndustryGrowth,2008-2011, %

Top 10 activities by decrease in employment, 2011

Sub-industry Number of employees, 2011


1

SOURCE: RZS


National vision example: Singapore 21 vision- key messagesSECTOR GROWTH STRATEGY

1

We need to go beyond economic and material needs, and reorient society to meet the intellectual, emotional, spiritual, cultural and social needs of our people. In Sony Corporation, they call this "heartware"

In a global, knowledge-based economy, countries which attract and mobilise human talent will thrive. We have to continue to draw in talent but we must also continue to invest heavily in education and training of our own people.

In future, the competitive advantage of nations will lie in their people - how a society is organised to maximise and mobilise the potential of its people.

Our vision for Singapore is not houses of brick and mortar, but homes with hearts and dreams. People who feel confident and secure. People who believe in Singapore and its future. Let’s work together to make Ours the Best Home, for ourselves and our children.

Source: Excerpt from a speech delivered in Singapore’s Parliament, June 5th, 1997

NB: The Economic Development Board, established in 1961 and active since, has been a key factor in driving Singapore’s growth by formulating and implementing national economic strategies, at first focusing on promoting Singapore's manufacturing and logistics sectors


National vision example: Malaysia’s Wawasan 2020 vision established and maintained since 1991- key messages


1

The vision includes 9 key challenges, including developing a society that is: united, psychologically liberated and secure, democratic, moral, liberal and tolerant, scientific and progressive, caring, economically just, prosperous and competitive

Each [developed country], out of a world community of more than 160 states, has its strengths. But each also has its fair share of weaknesses. Without being a duplicate of any of them we can still be developed. We should be a developed country in our own mould.

Malaysia should not be developed only in the economic sense. It must be a nation that is fully developed along all the dimensions: economically, politically, socially, spiritually, psychologically & culturally.

Hopefully the Malaysian who is born today and in the years to come will be the last generation of our citizens who will be living in a country that is called 'developing'. The ultimate objective that we should aim for is a Malaysia that is a fully developed country by the year 2020.

Source: www.wawasan2020.com

A number of creative approaches were used to bring the vision to life, including the Wawasan 2020 patriotic song in Malay and English


National vision example: Malaysia’s Wawasan 2020 vision established and maintained since 1991- recent update


1

Source: Malaysia Investment Development Authority


On a total economy level, productivity and employment drive growth

Source: MGI

Productivity growth doesn’t matter

1 Productivity growth is closely correlated with competitive-ness, and it is the key driver of rising living standards

Productivity is a job killer

2 Productivity growth and employment growth are often positively related

Productivity is only about cutting costs and labor

3 Productivity growth in many sectors comes from increased top line revenue and higher value goods

Myth Reality

Productivity growth

Employment growth

GDP growth

Economy level


1


Serbia should target sectors according to four criteria

SOURCE: McKinsey; team analysis

Description

“Countercyclical sectors” (traditional and high-tech/ high-productivity)

A ▪ Sectors not effected (or slightly effected) by crises

▪ Biggest potential in the next couple of years in terms of investing (FDI potential for Serbia)

▪ Larger growth and GDP enhancement potential in the current crises

Development of clusters centered around existing "champions" or revamp of past clusters

B ▪ Good base for further growth, especially for exports

▪ Existing infrastructure and labor supply▪ Shorten time needed until beginning of

production and achievement desired quality levels

Infrastructure developments

C ▪ Serbia’s substantial infrastructure lag (especially in transport) compared to developed countries

▪ Growth opportunity in telecom services (especially mobile)

▪ Growth opportunity in energy production

Targeted ad hoc efforts with relevant multinationals, Serbia-friendly companies and efficiency-seeking FDI

D ▪ Large FDI inflow by multinationals▪ Utilizing Serbian Diaspora to attract FDI▪ Efficiency-seeking FDI amidst cost-

cutting crisis initiatives

Priority sectors

▪ Chocolate production▪ Water and soft drink production▪ Generic pharma▪ Bio-molecule pharma▪ Specialty chemicals▪ Household chemicals

▪ Office machinery▪ Electronic photo cells, transistors▪ Wire, Cable, Patterns Lighting▪ Medical equipment (basic)▪ Automobile parts▪ Software research and maint.

(focus on mobile and gaming)▪ Wood processing

▪ Power generation▪ Mobile/diversified operators▪ Shipping▪ Road construction▪ Railway construction▪ Air carrier

▪ n/a

PRELIMINARY

Pharma

Chemicals

Software

Infrastructure

Electronics

Food

Automotive

Wood


1


Most growth is likely to come from productivity improvements, rather than increased employment

SOURCE: The Conference Board; Eurostat; Global Insight; International Monetary Fund; team analysis

20.4

4.5

34.9

19.0

EU15

Labor utilization contribution

Productivitycontribution

CEE1

GDP per capita, 2011, PPP, $ thousand

1 CEE excluding Croatia


1


Given Serbia’s middle income status, more than half of Serbia’s future growth can be expected to be in service related sectors

Low-income countries

0

10

20

30

40

50

60

70

80

1970 1980 1990 2000

Middle-income countries (incl. Serbia)

High-income countries

% of GDP, 1970–2001

1 Industry: manufacturing, mining, and construction; services: personal, professional, and public-sector services and utilities. 2 The World Bank defines middle-income economies as those with per capita GNI in 2003 between $766 and $9,385 measured with average exchange rate over past two years.

SOURCE: World Development Indicators, World Bank; McKinsey Global Institute analysis

Services1

Industry2

Agriculture

0

10

20

30

40

50

60

70

80

1970 1980 1990 2000

0

10

20

30

40

50

60

70

80

1970 1980 1990 2000


1


EU-15 economic growthIndexed numbers1, 1970 = 100

GDP per capita has been increasing with time, mostly driven by productivity increase, with simultaneous growth in employment

Sources: The Conference Board; MGI

Employmentper capita

Hours per capita

GDP per capita

Productivity

50

100

150

200

250

Year

2000199019801970

1 The trends are based on real growth

U.S. economic growthIndexed numbers1, 1970 = 100

50

100

150

200

250

Year

2000199019801970


1


Both higher efficiency and higher output value lead to productivity growth

Drivers for productivity performance

Reduce input for a given output

Increase output with a given input

Consolidate to better leverage scale

Sell more goods to increase ca-pacity utilization

Sell higher- value goods

Improve opera-tional perform-ance

Close gap to best- practice operations

Shift to higher-value goods within existing product portfolio

Find innovative processes to improve operations

Create innovative high value added products and services

▪ Productivity driven by:– Efficiency, which

can lead to (temporary) job losses on firm and sector level

– Increases in value/volume, often enabled by higher efficiency and lower prices, potentially leading to job creation

▪ Productivity crucial for economic development and without negative implications on employment

Source: MGI analysis


1


Low-income countries100% = 324

Medium-income countries100% = 50

High-income countries100% = 74

Driving service sector growth is critical, particularly in terms of jobs growth

32

68

9

91

SOURCE: International Labor Organization; National Statistics; McKinsey Global Institute analysis

29

129

Sector contribution to a country's net growth of employment, 1985–2005%, million employees

Goods

Services

100%


1


900

710

280

67

500 1000 2000 3000

Within a 3000km radius, Serbia has access to ~900 million people, >650 airports and ~100 cities with >1M population

42 170 513 671

65 202 618 819

# airports

# of cities with > 100k ppl

# of cities with >1M ppl 5 21 72 94

Population by distance bandDistance in KM; Millions

SOURCE: ESRI World data

500 1000 2000 3000


1


▪ By 2050, urban areas will add about 2.6 billion people – absorbing almost all population growth globally

▪ Over 80% of the developed world population will be urban and over 60% of the developing world population will be urban

Urbanization rates increase rapidly – mostly in the developing world

2

▪ Most growth through 2050 will be in emerging markets across Asia, Africa, Middle East, and Latin America, which will drive 80% of GDP growth through 2050Economic center of gravity

shifts to developing world1

▪ An extra 3 billion people will join the middle class by 2050 – mostly from emerging markets

▪ By this time, the share of global consumers in emerging markets will be 2/3, up from 1/3 today

Global consumer class expands rapidly in emerging economies

3

▪ Largely driven by decreasing labour force, most GDP growth will need to come from productivity advances as discussed in trend 4

▪ This will depend on new and disruptive technologies like mobile internet, 3D printing, robotics, etc.

▪ The rise of knowledge economy and innovation – particularly in the developing world – will also play a major role

Race to increase productivity through technology and the knowledge economy

5

▪ Many developed economies will see almost no labor force growth due to aging populations and decreasing labor force participation in some population segments

▪ Over 70% of global labor force growth through 2030 will come from China, India and Young Developing economies

Labor force growth decreases globally, but mostly developed countries

4

Trends Description

Trade increases and new flows emerge

6 ▪ Global trade volume will be about 8 times larger by 2050, as trade within emerging markets increases from ~10% of global share to ~40%.

▪ Worldwide demand for transport infrastructure will grow rapidly, as supply struggles to keep pace

Serbia’s sector growth strategy should be squarely positioned to take advantage of the major global trends (1/2)Global trends that influence country growth programs through 2050


1


Transition toward sustainable practices

▪ Largely due to resource and cost constraints, governments will need to improve resource productivity and implement more sustainable practices in waste management, recycling, manufacturing and water conservation

Change in social values▪ Increasing demand for political and economic freedom▪ Declining focus on family unit and values▪ Less focus on religion globally

Increasing demand for food▪ Global demand for food is projected to double in the next 2-3 decades as world

population increases and agricultural land becomes more scarce and less arable▪ Much of this demand will be in emerging markets like China, which will begin eating

higher calorie diets rich in meat – as developed countries currently do

Global energy demands rise, but the source of supply remains uncertain

7

▪ Exploding demand from emerging markets will lead to ~1% p.a. rise in final energy demand – an over 50% increase in total energy demand by 2050

▪ However, future sources of energy are uncertain, since the rise of new technologies could enable major improvements for natural gas or renewables - and the various scenarios would have differing impacts on oil prices

Trends Description

8

10

9

Serbia’s sector growth strategy should be squarely positioned to take advantage of the major global trends (2/2)

Detailed on next slide


1

Global trends that influence country growth programs through 2050




1 2 3













The overarching goal of policy is to increase country competitiveness by making it easier for businesses to do business…


2

1019593

87

201320122006 2009

Efficiency enhancers

83

132

119

115

60

69

Innovation and sophistication factors 112

137

Higher education and training

Goods market efficiency

Labor market efficiency

Financial market development

Technologies readiness

Market size

Business sophistication

Innovation

Institutions

Infrastructure

Macroeconomic environment

Health and primary education

Basic requirements

126

90

136

69

Top 5 most problematic factors for doing business

▪ Corruption

▪ Inefficient government bureaucracy

▪ Access to financing

▪ Government instability

▪ Inadequate infrastructure

1

2

3

4

5

Global Competitiveness Index- Economy wide score for SerbiaRank out of 148 countries

Fall of 14 positions in 7 years to the lowest position in Europe

Top 50%

Bottom 20%

2013 global rank (148 countries)

SOURCE: World Economic Forum Global Competitiveness Index


GCI detail: Serbia (1/2)POLICIES AND INSTITUTIONS

2


GCI detail: Serbia (2/2)POLICIES AND INSTITUTIONS

2


FDI attraction activities should be aligned with the sector strategy

SOURCE: McKinsey analysis

Criteria

▪ Fit with priority sectors ▪ Value added to the GDP (e.g.

through DIA)▪ Environmental/social image▪ Fit with other development goals

(e.g. job creation)

II

Define pool of investors in

priority investors

Shortlist players who optimally

match local value chain

Select the best

investors to pursue

IIII ▪ Value chain fit where investors optimally positioned to compete

▪ Synergies with current local industry ecosystem

IIIIII ▪ Management team▪ Breadth, depth and quality of

product offering▪ Financial standing▪ Strength of supporting network▪ Branding ▪ Appetite for investment


2 ILLUSTRATIVE


Governments should differentiate their interventions and sector-level policies by the degree and target of intervention

Degree of intervention

HighLow

Government as principal actor

Tilting the playing field

Building enablersSetting ground rules/direction

Governments can limit sector policies to▪ Setting the

regulation covering labor, capital and land markets;

▪ Establishing the general business environment,

▪ Setting broad national priorities and road maps

Without interfering with market mechanisms, governments can support private-sector activities by ▪ Expanding hard and

soft infrastructure;▪ Helping to ensure

adequate skills through education and training,

▪ Supporting R&D activities

Governments can choose to create favorable conditions for local production through▪ Trade protection

from global competition

▪ Providing financial incentives for local operations

▪ Shaping local demand growth through public purchasing or regulation

Governments can play a direct role by▪ Establishing state-

owned or subsidized companies;

▪ Funding existing businesses to ensure their survival

▪ Imposing restructuring on certain industries

SOURCE: MGI/PSO Sector Competitiveness Project


2


Governments have a broad array of options available to them across this spectrum of interventions

D Government as principal actor

Degree of interventionHighLow

C Tilting the playing fieldB Building enablersA Setting ground rules/direction

1

Set regulatory environment

Define labor and unionization laws, rights, and taxesStreamline bureaucracy to reduce transaction costs and time frames of doing businessManage exchange rates

Define market environment

Develop infrastructure Incentivize domesticproduction

1

2

Impose import restrictions▪ Tariffs▪ Quotas▪ Domestic content

requirementsSubsidize investments (e.g., financial incentives such as tax breaks for Greenfield projects)Regulate capital flows (e.g., limits on FDI and profit repatriation)Incentivize exports

3

1

Establish companies

Establish state-owned enterprises (SOE) to buildup sector from scratch

3

Negotiate free-trade agreements with foreign governments on sector exportsEnact vehicle operating restrictions (e.g., speed limits, driver qualification, and vehicle inspections)Regulate vehicle safety, environmental, and other performance standardsControl fuel prices (via tax and subsidy levels)Set vehicle acquisition costs (e.g., VAT, registration fees)Define vehicle approval process before market entry

4

5

6

7

1 Expand and develop the national road networkAllocate specialized infrastructure (e.g., lanes for efficient vehicles)

Stimulate demand

5

6

Create vehicle purchase incentives (e.g., scrap schemes, technology rebates)Provide liquidity support along the automotive value chain (e.g., credit for auto loans)Leverage government as an automotive consumer to guarantee minimum demand

Restructure industry

3 Control number of producers and level of competition (e.g., via monopoly restrictions or antitrust legislation) to moderate overcapacity and competitive levels

10Set sector direction

Create a vision and define a strategy for the development of the domestic sector

7

2 Infuse cash into automotive producers▪ Governmental loans

during crises (with/without expected repayment)

▪ By acquiring an equity stake

Support ongoing operations

2 2

8

6

7

Support innovation

Subsidize sector research and developmentSupport technology transfer (JVs with global leaders)

3 Fund sector-specific education programs (e.g., automotive engineering degrees)

Build skilled labor pool

Facilitate sector processes

4 Facilitate discussion among domestic sector stakeholdersSimplify interaction with authorities (e.g., one-stop-shop regulation interaction partner)

5

4

SOURCE: MGI/PSO sector competitiveness project

9


2


1980-1990s: Washington consensus (1/2)

SOURCE: Literature review, McKinsey

▪ "Unified" position of required reform measures to stimulate and sustain economic growth in developing countries of World Bank, IMF, US Treasury, several academics (espc. Chicago)

▪ Focus on fixing (macro) enablers, e.g.,

– Fiscal discipline

– Tax reform

– Financial/interest rate liberalization

– Unified/competitive exchange rates

– Fostering trade and FDI

– Privatization

– De-regulation

– Secure property rights

▪ Later complemented by strong push for good governance and strong institutions

▪ Otherwise "hands-off" government role


2


Best-practice example of "go to market" country strategy: Singapore

SOURCE: Economic Development Board, Singapore; Country Commerce Report (Economist), WB

World-class country sales approach Why Singapore?

2 Targeting and proactive approach to preferred investors

1 Streamlined governance and fast implementation3

▪ Promotes itself as a ‘dynamic global city’ and cites its competitive factors as follows:– Trust : integrity, quality, reliability,

productivity, a strong legal system– Knowledge: knowledge-based

manufacturing and services, a thought and information hub, commitment to education and skills

– Connected: physical connectivity as well as people and business networks

– Life: an excellent place to live, work, learn and play

▪ Financial and Other incentives– Schemes range from assistance

in manpower development, technological/equipment upgrading, to R&D, intellectual property and industry development

– Offers a competitive tax regime: no capital gains tax, corporate tax rate of only 17%)

▪ All industries are open to foreign investment in Singapore’s free-enterprise economy

▪ The top three core sectors that attract maximum investment are: chemicals, electronics and biomedicals (including pharmaceuticals)

▪ The Economic Development Board (EDB) has unveiled a new International Headquarters Award programme in 2003 to attract more company operations to Singapore. The award is open to all organizations incorporated in Singapore, and it offers customized incentive packages with lower concessionary taxes

▪ Incentives are also given if companies chose Singapore as their regional or global headquarters

▪ Other secotrs it is now promoting for investment: Logistics and supply-chain management, healthcare, education and IT

▪ Ranks no.1 on World Bank’s Doing Business Ranking;– just takes 4 days and 4

procedures to start a business– 3 days to register property

▪ The Economic Development Board and the EnterpriseOne Portal serve as one-stop shops for those looking to invest in Singapore– Cater to all needs right from

registering a business, obtaining licesnes and permits, finding business premises

– Complete information on govt. laws, regulations, funding options, etc all available through them

– All services are available online 24*7


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Best-practice example of "go to market" country strategy: France

SOURCE: Invest in France Agency

World-class country sales approach

▪ Launching the project– Presentation of the advantages offered by

France – Support and assistance in defining business

project, and link to a network of regional partners in order to determine the best site proposals to satisfy business requirements and constraints.

– Assistance with the project: presentation of the legal framework best adapted to the project, interface with local authorities and presentation of public funding available for the business.

– Services to assist the expatriate personnel

▪ Long-term support (after-care service)– Businesses receive two visits per year: one

visit to their development site in France and the second in their home country.

– Maintaining collective links with foreign business networks set up in France: collaboration with international chambers of commerce and foreign business clubs set up in France, such as the IFA “Japan Club”

– Intervening rapidly at the request of businesses to assist them in the event of a specific challenge, particularly concerning contact with French administration

– Facilitating the integration of foreign businesses into the fabric of the local economy, particularly through the mobilization of potential partners, sub-contractors and suppliers.


▪ France targets innovative companies and adopts a targeting and proactive approach offering, for example, the best research tax credit in Europe

▪ In France, the research tax credit (Crédit Impôt Recherche – CIR) represents a reliable element of an innovative company’s financial plan, and is particularly well adapted to the needs of SMEs. This tax incentive enables companies to increase their competitiveness by supporting their Research & Development efforts

▪ The French Government has undertaken a major reform of the research tax credit by means of the Financial Law of 2008, which is in line with the "Lisbon strategy" (knowledge-based economy) and the "Barcelona objective" (3% of total GDP dedicated to R&D)

1 Streamlined governance and fast implementation

▪ Invest in France Agency was established under the New Economic Measures Law of 15 May 2001. IFA is a public industrial and commercial body (EPIC), placed under the responsibility of the Minister for Economy, Finance and Industry, and the Minister for Regional Development. The Agency is responsible for promoting, prospecting and facilitating international investment in France. IFA works closely with local authorities to achieve this objective.

▪ Invest in France Agency has 154 members of staff in 2007, 72 of which are based in 21 offices around the world

3


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Best-practice example of "go to market" country strategy: France

SOURCE: IFA Website, WB

World-class country sales approach2 Targeting and proactive

approach to preferred investors


▪ Invest in France Agency (IFA) has been set up that provides assistance at every stage of the investment process. It provides:

– Provides complete information to enhance decision making for foreign investors

– Information on the economic and regulatory environment

– Act as an intermediary for contact with French administration

– Provides after-care services as well such as visas for family members, work permits, information on education for children, health insurance etc

▪ Ranks 31/181 economies on World Bank’s Doing Business Rankings 2009;– Takes just 7days and 5 procedures to

start a business– 113 days to register property

▪ Foreign investment permitted in most industries, especially when it creates jobs, contributes new technology or increases exports; but sensitive to takeovers in defence or public services

▪ EU Member states have a lot of incentives available to them as part of the EU framework such as:– Assistance for R&D activities– Assistance for professional training of

employees– Environmental subsidies for SMEs– Employment subsidies etc

▪ At an overall level other benefits available are:– financial grants upto 15% of the total

investment for large companies and a quarter of the total investment for mid-sized companies

– Subsidies for business premises– Tax incentives– Employment and research activities

grants etc

▪ France promotes itself as “a land of innovation and creativity centrally located in the heart of Europe that offers a skilled workforce, a high quality of living and competitive business advantages”

▪ Major attractions include:– World’s 5th largest economy; has

20,000 subsidiaries of international companies

– According to KPMG1, France has the lowest cost structure among the European countries. Business set-up costs: including payroll, location, transport, utilities and tax

– Offers 71 competitive clusters that offer partnership environment, research labs, universities etc at one place

– High quality transport and ICT sector– Highly developed financial services

sector– Productive workforce– Spends ~2.2% of GDP on R&D

1 Competitive Alternatives: KPMG’s Guide to International Business Location, 2008


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Best-practice example of "go to market" country strategy: Ireland

SOURCE: IDA Ireland Website, WB

World-class country sales approach2 Targeting and proactive

approach to preferred investors


▪ IDA Ireland (Industrial Development Agency) is responsible for the attraction and development of foreign investment in Ireland

▪ The IDA meets its objective by:– focusing on business sectors that are

closely matched with the emerging needs of the economy and that can operate competitively in global markets from an Irish base

– Building links between international businesses and third level education and research centres to ensure the necessary skills and research and capabilities are in place

– Building world-leading clusters of knowledge-based activities

– Strongly active in the development of infrastructure and business support services, telecoms, education, regulatory issues especially in relation to EU policy.

▪ Ranks 7/181 economies on World Bank’s Doing Business Rankings 2009;– Takes just 13 days and 4


▪ IDA Ireland Services– Provides information on key business

sectors and locations within Ireland– Assist in setting up a business in

Ireland– Introduce potential investors to local

industry, government, service providers and research institutions.

– Offer advice on property solutions

▪ Almost 1,000 overseas companies have chosen to invest in Ireland as their European base and are involved in a wide range of activities in sectors as diverse as engineering, information communications technologies, pharmaceuticals, medical technologies, financial and international services.

▪ Ireland Offers: – The lowest corporation tax rate in

Europe at 12.5%– A young skilled well educated

English-speaking workforce– A competitive economy – Strong legal framework and

Intellectual Property (IP) protection– R&D Environment

▪ Financial Incentives– The main criteria applied to determine

the availability of incentives include the quality of employment created and location chosen within Ireland

– Grants that are available include: Employment Grants, R&D Grants, Training Grants, Capital Grants

▪ Ireland has one of the most advanced and competitive telecommunications infrastructures in Europe. The telecommunications sector has state-of-the-art optical networks with world class national and international connectivity


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Best-practice example of "go to market" country strategy: United Kingdom

SOURCE: UK Trade and Investment, WB

World-class country sales approachWhy UK?



▪ UK Trade & Investment’sis the government agency that help overseas companies/investors in growing their UK-based operations

▪ UK Trade & Investment helps with:– New UK business opportunities– Choosing a new UK location– Growing your industry networks– Having your say in Government– Trading overseas– Setting up a European headquarters

etc– Other services and information is

available at http://www.ukinvest.gov.uk/How-We-Help/en-GB-list.html?nav

▪ Ranks 6/181 economies on World Bank’s Doing Business Rankings 2009;– Takes just 13 days and 6


▪ No limits as such on any sectors

▪ Limits exist in some privatized companies on the amount of voting shares an individual or group may own. The government has in the past imposed limits on foreign holdings in a few strategically important, privatized companies, like Rolls Royce (aircraft engines) and BAE Systems (aircraft and defence), through clauses in their articles of association.

▪ An internationally competitive tax environment for foreign investors

▪ Flexible labour market

▪ Least barriers to entrepreneurship in the world

▪ World leader in innovation: The UK ranks

▪ second only to the USA for the quality of its research base

▪ Stable political and regulatory environment

▪ Progressive transport and communications network

▪ Home to Europe’s number one city for business: London is the world's leading financial services centre

▪ Other Opportunities: London will host the Olympic Games in 2012. Procurement started in 2007. Contracts will be available for firms of all sizes and the total budget will run into billions


2

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http://www.ukinvest.gov.uk/How-We-Help/en-GB-list.html?nav


Best-practice example of "go to market" country strategy: Georgia

SOURCE: Invest in Georgia, website-National Investment Agency, WB

World-class country sales approachWhy Georgia?



▪ Georgian National Investment Agency (GNIA) under the Ministry of Economic Development of Georgia is designed to act as a "one-stop-shop" for comprehensive information about investment opportunities in Georgia

▪ Primary functions of GNIA include: – Providing up-to-date information about

setting-up business operations in Georgia – Researching investment opportunities and

informing potential investors about investment advantages in Georgia

– Arranging site visits for potential investors leading to the increase of investment opportunities

– Facilitation of communication with government agencies

– Besides these, also performs export promotion functions and helps local businesses find foreign partners

▪ Ranks 7/181 economies on World Bank’s Doing Business Rankings 2009;– Takes just 3 days and 3 procedures to

start a business– 3 days to register property

▪ There are no restrictions on the foreign ownership of companies in Georgia.

▪ As a result of changes to the Tax Code and Law on Entrepreneurs in 2005 and 2006, business registration is simple, cheap and efficient, taking only three days for legal entities and one day for individuals

▪ Georgia has dramatically simplified licensing and permitting requirements to ease constraints on business. Only 86 licenses and 50 permits now exist.

▪ - Reduced statutory time limits for government action: 30 days for issuing licenses and 20 days for issuing permits.

▪ "Silence is consent" - a permit or license is automatically granted if no government action is taken within statutory time limits

– World’s Leading Reformer: On World Bank’s Doing Business Rankings, it has moved from rank 112 in 2005 to rank 15 in 2009; just four years

– Strategic geographic location; at crossroads of Europe and Central Asia with excellent infrastructure

– Stable macroeconomic environment

– Liberal trade regimes with low tariffs, preferential agreements and streamlined border clearance procedures

– Low corporate (15%) and personal income tax (12-25%) levels

– Dynamic banking sector; share of banking assets expected to reach 60% of GDP by end-2009

– High degree of labor freedom and labor force literacy

– Simplified licensing and permitting procedures

– Aggressive privatization policy

– Diverse investment sectors: Economy has been highly resilient to oil and commodity price shocks, Russian embargo and the sub-prime meltdown


2




1 2 3













DELIVERY


A multi-year culture change journey can be tailored based on the transformational change toolkit

▪ Such a journey would typically be agreed in a facilitated workshop with the top leaders in the country, taking a “we don’t leave until it’s finished” approach

▪ Managing the communication and the expectations of the citizens would be a critical part of the process

SOURCE: Scott Keller and Colin Price, 'Performance and Health: An evidence-based approach to transformingyour organisation', 2010.

Healthessentials

Vision

Capability building

ContinuousImprove-

ment

AspireWhere do wewant to go?

AdvanceHow do we keep moving forward?

Develop a vision around performance and health; understand the current performance and health of the country and develop first hypothesis of the target sectors that will then iteratively be updated later in the journey

Ensure continuous learning and improvement of all leaders along existing and new initiatives

Performance Health

Deliverymodel

Changeengine

ActHow do we managethe journey?

Group, prioritize and sequence change initiatives; create a change architecture that is capable of delivering the programme while sustaining energy; start the learning process by piloting and experimenting

Portfolio ofinitiatives

Influencemodel

ArchitectWhat do we need to do to get there?

Identify a set of initiatives – existing and new – that will deliver the specified changes in mindsets and behaviours, along with an understanding of how to organize (people, structure, processes) to deliver on them

Capabilityplatform

Discoveryprocess

AssessHow ready are we to go there?

Take the time to deepen your understanding of the journey the country has been on to where it is today; discover the changes in mindsets required to achieve the desired shift in working practices and behaviours. Generate alignment, momentum and ownership among leaders

DELIVERY

3

1

5

4

3

2


Depending on complexity, a typical transformation program can take up to a year to become established

Objective

EXAMPLE

SOURCE: McKinsey Organization Practice

1 2 3 4 5 6 7 8 910

1112

Month

Leadership alignment workshop

Frame

Aspire – Where do you want to go?

Define clear organizational aspirations tied to the mission; understand public sector factors at play


Assess capabilities, mindsets, and implications of the public sector factors

Begin to developchangeleadersTop team

Set up mechanisms for continuous improvement,knowledge and best practices sharing and governance.Develop leaders. Monitor factors and leverage change actions

Design and execute approach to rolling out initiatives across theorganization; build broad ownership and adjust and refine the programbased on on-going monitoring and review. In particular draw upon thefive critical public sector change actions, while avoiding the major pitfall

Begin to developchangeleadersTop 100

Begin to developchangeleadersTop 500

Develop initiatives to transformorganization, and properly address the public sector factors


Assess – How ready are we to go there?

Architect – What do we need to get there?

Act – How do we manage the journey?

Advance – How do we keep moving forward?

DELIVERY

3


Education

There are a number of ways to bring the vision of having the top talent to life

DELIVERY

3

Meritocracy

Diaspora

Transition to a culture where the best for the job are chosen with few upfront defined exceptions. This is likely to be the hardest and the most impactful change, and should therefore be planned and implemented gradually over the next decade (starting with quick wins, strong signals of intent and building on the strengths over time)

Develop a world class knowledge collaboration platform between professionals in Serbia and their expert counterparts around the world, including a knowledge repository (documents, access to experts, etc),, online real time presentations (e.g. Webex), structured mentorship scheme, etc, all supported by a world class IT backbone and signature processes (e.g. diaspora expert certification)

Set the education of the next generation as the national priority which we can all work towards. Build on the strengths of the current education system in a targeted way (e.g. math and science) and linking to the sector specific talent needs


How to get it Done – Setting in Motion the Virtuous Cycle: the Six Elements of Agriculture Transformation

3

▪ Developed as part of the World Economic Forum’s New Vision for Agriculture initiative in collaboration with McKinsey & Company

▪ Based on an examination of large-scale agriculture transformations around the world

▪ The most successful agricultural transformations are founded on multi-stakeholder partnerships and have six elements in common

DELIVERY


The sector growth strategy should be framed as part of a change story that will rally the nation behind a single vision over the next 10 years…

1. Develop the story structure 3. Deliver the story2. Write the story

▪ Start with the political leader’s personal vision

▪ Crystallize the key messages (e.g. changes in mindsets such as )

▪ Back them up by facts/proof points

▪ Set the stage – where we are today and why do we need to change

▪ To be consistently delivered by the political leadership and cascaded throughout the government institutions as well as society at large

▪ Multiple creative formats can be used, e.g. Videos, Webcasts, Cartoons, etc.▪ Introduce the dramatic conflict

“burning platform” or “shining beacon”

▪ Reach resolution – description of our plan and why we can achieve it

DELIVERY

3

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There are many examples of effective delivery units set up by governments to implement their growth agendas across the world

▪ Set up: 2008 ▪ Focus areas: State and central

administration’s operating expenditures; improving quality of public service

▪ Example of impact: ~EUR15 billion savings between 2009-2013, 28% reduction in average waiting time in emergency room

France’s President and Ministry of Budget’s RGPP1

▪ Set up: 2010▪ Focus areas: Economic growth; Employment;

Urban safety; Education; Healthcare; Poverty, Quality of democracy

▪ Example of impact: 563k+ new jobs created, 50% increase in number of top students choosing teaching as a profession

Government of Chile’s Delivery Unit

US (Los Angeles’ Performance Management Unit)

▪ Set up: 2006 ▪ Focus areas: 7 focus areas including public

safety and homeland security, fiscal responsibility and management, education and housing

▪ Example of impact: 500+ new police officers, cut more than $200 million without raising taxes

▪ Set-up: 2001, closed in 2010

▪ Focus areas: 10-20 national priorities across 4 ministries: Health; Education and skills; Home office; Transport

▪ Example of impact: 50% reduction in education gap between targeted boroughs and national average

UK Prime Minister’s Delivery Unit

▪ Set up: 2010

▪ Focus areas: social security, fuel prices, crime and affordable access to electricity

▪ Example of impact: 24 million workers eligible for affordable social security; up to THB 7.3 billion savings from reduction in LPG subsidies

Thailand Delivery Unit

▪ Set up: 2010 ▪ Focus areas: Job creation in 5 economic

sectors (e.g. agriculture and tourism); improvements across 5 key public sector services (e.g. healthcare and education)

▪ Example of impact: 13,000 new jobs created, 120+ government services streamlined

Bhutan’s Performance Facilitation Unit

▪ Set up: 2009 ▪ Focus areas: 7 National Key Results Areas

(Education, Corruption, Crime, Rural basic infrastructure, Low income households, Public transport and Cost of living) and 12 National Key Economic Areas

▪ Example of impact: 35% reduction in street crime; 60,000 additional pre-school seats

Malaysia’s PEMANDU

l

1 RGPP stands for Révision générale des politiques publiques or General Review of Public Policies

DELIVERY

SOURCE: McKinsey

3


An effective delivery unit needs to establish routines, solve problems early and build momentum and sustain progress

Build momentum and sustain progressRoutines and problem-solving are the mechanisms to drive delivery, but they must be supported by delivery mindsets and behaviors. The delivery unit must model and cultivate the right mindsets

Use routines to monitor performance

Identify, classify, and solve problems

A B

C

Cycle of effective delivery

… and the delivery unit constantly monitors and confronts problems

Routines are the formal mechanisms to identify and solve problems …

At the same time, the delivery unit must always respond to cultural or behavioral challenges that may hinder the progress of delivery

DELIVERY

SOURCE: McKinsey

3


Text

Three main roles must be clearly defined when setting up a delivery unit

▪ Head of a specific organization within the state system (e.g. Head of secondary education)

▪ Owns and is ultimately accountable for the delivery agenda in his/her area

▪ Steers the delivery unit towards priorities

▪ Takes action when delivery plan is off track

Delivery unit

▪ Composed of senior Delivery Leader and talented and motivated Delivery Staff

▪ Relentlessly orchestrates the day to day delivery process by establishing the routines and master calendar

▪ Tracks progress and conducts root cause analysis

▪ Proactively communicates to all relevant parties (plays the “spider in the web” role)

▪ Proactively identifies potential bottlenecks, escalates and suggests solutions

Department leaders and staff members

▪ Provide data and other key information required by the Delivery Unit to track progress

▪ Participate in routines (e.g., meetings) at the request of delivery unit leader

▪ Detect “red flags” and report issues to department leader and the delivery unit

▪ Work with delivery unit to analyze leading indicators and performance data

System leader

DELIVERY

SOURCE: McKinsey

3

Description of roles and responsibilities


Once the routines are planned, create and publish a master calendar that should be followed in a draconian fashion

Routine 1 2 3 4 5 6 7 8 9 10 11 12Month

Meeting or report

Quarterly progress review ▪ Data trends▪ Issues▪ Recommendations

Stock-takes with system leader

Quarterly progress review



Monthly updates sent to system leader

Monthly notes submitted

System actors submit performance data to delivery unit for monthly notes and quarterly progress reviews

System actors

Delivery reports Semiannual delivery reports submitted to system leader

DELIVERY

SOURCE: McKinsey

3


Frequent reports are an effective way to provide a short-term synopsis on the progress of delivery plans …

Source: McKinsey delivery team

Sample monthly report

▪ Description of challenges▪ May also recommend

solutions

▪ Concise data summary▪ Specific facts on “gap”

to aspirations

High-level analysis of data; not intensive preparation

Short; easy to see progress “at a glance”

No overall judgments given – only updates

U.S

. K-

12

ed

uca

tion

DELIVERY

3


Performance of ‘type X’ departments yet to reach 90% National aggregated position hides variation - in October 2003,

44% of type Xs are still below 90%, handful are still below 80%

Method for dealing with breaches now clear, public consultation completed, and final decision now made

Evaluation of new initiative for improving processes in every Department currently underway

What will success look like in 6 months?

Average performance at 95% and rising No department below 85%, no more than 10% of departments

below 90% Incentive system operational and early results evaluated Clear arrangements established and in place for maintaining

performance at higher level Contingency arrangements operational for possible late

breaches Results communicated to wider public

Action required Urgent

Communicate the 98% decision clearly to the front line Agree performance ratings with audit body for 2003/04 and

2004/05 respectively; agree any other incentives needed in the course of 2004; and communicate these to the front line

Plan and start roll out of effective management intervention system

Performance manage front line departments against their trajectories through the taskforce, and continue reporting at unit level, with a focus on the ‘tail’ of poor performers.

PMDU/Dept will review performance and these actions at an official-level review in early January and at a PM stocktake on 15 January. We will agree further actions, including a risk analysis, at that stage

Performance has sustained at 90% since July but is now static and increasingly off-trajectory

4 HOUR TOTAL TIME IN A&E, ENGLAND TOTAL

70%

75%

80%

85%

90%

95%

100%

30-Mar-03

13-Ap

r-03

27-Ap

r-03

11-May-03

25-May-03

08-Jun

-03

22-Jun

-03

06-Jul-03

20-Jul-03

03-Au

g-03

17-Au

g-03

31-Au

g-03

14-Sep

-03

28-Sep

-03

12-Oct-03

26-Oct-03

09-No

v-03

23-No

v-03

07-Dec-03

21-Dec-03

04-Jan-04

18-Jan-04

01-Feb

-04

15-Feb

-04

29-Feb

-04

14-Mar-04

28-Mar-04

LDP profile2003/04 floor4 week moving average - all types4 week moving average - type 1

3-6 Month Delivery Report example

What DU will do to help

The steps necessary to achieve that success

Clear measurable statement of “what success looks like”

Progress against trajectory

An analysis of progress

Source: USEDI Delivery Handbook

EXAMPLEDELIVERY

3


Establish in detail what needs to be done

Share lab output with people and seek their feedback

Tell the people what we are going to do

Tell the people what we have delivered

Setting KPIs for the whole Cabinet

Problem solving, on the ground imple-mentation

External validation on results achieved

Delivery Labs

Open DayBRNRoadmap

Annual Report

KPItargets

Imple-mentation

IPR/Audit

Strategic Direction

Multiple Cabinet retreats to ascertain the direction needed

“”

Delivery labs plays a crucial role in the 8 step transformation approach used recently in Tanzania

“8 Steps of Transformation”

DELIVERY

3


To get started – what exactly is a “delivery lab”?

What is the purpose of a lab?

▪ Labs are set up to create transparency, debottleneck and help resolve the most critical challenges facing a sector, and hence achieve key milestones faster than in a “business as usual” context

▪ The lab includes key stakeholders (20-30 people) relevant to solve the defined problem, and are selected from the public, private and social sectors

Who participates in a lab?

▪ Key stakeholders are engaged early and continuously (~every 2 weeks)

▪ Critical stakeholders sign off on programmes and are accountable for implementation

How is commitment secured?

▪ A “3-feet“ level implementation programme, including agreed solutions, detailed execution plans with responsible owners (across organizations), timelines and targets

What are the end products?

▪ The invited cross-organizational team works full-time in one location (6-8 weeks)

▪ The lab involves intense problemsolving, supported by a facilitator team

What happens in a lab?

Delivery labs can be run as part of goverment transformation programmes or as a „stand alone problem-solving technique“

DELIVERY

3


…and what you get out of them: a report of 200-300 pages for each lab, detailed implementation plans and powerful KPIs

Main deliverables Description

Executive summary

Labreports

Labreports

Labreports

Labreports

Labreports

Labreport

▪ 20-30 pages version of the full lab report, with summary of each component (no need to include 3-feet plans)

3-feet plan

Budget

KPI

▪ Key deliverable; 200-300 page ppt report per lab▪ Should include following elements

– Sector diagnostic (including key challenges), case for change and theory of change

– Initiative descriptions and impact estimations– 3-feet plans, budget and KPIs (see below)

▪ Detailed plans for each initiative▪ Every activity should be outlined, with planned

start & end date, responsible parties▪ Xls format for easy tracking

▪ Detailed funding requirement for each initiative▪ Should be designed based on input from the

government, depending on level of detail required▪ Xls format for easy tracking

▪ List of KPIs for performance management for each initiative, and also overarching KPIs for the lab

▪ Xls format for easy tracking

DELIVERY

3

McKinsey & Company | 979797SOURCE: Websearch, www.transformation.gov.my

Six key areas were prioritized in Malaysia, in accordance with the country’s vision of “1Malaysia, People First, Performance Now”

1Malaysia

People First Performance Now

Reducing Corruption

Reducing Crime

Reducing Poverty

Enhancing Education

ImprovingRural Basic Infrastruc-

ture

Urban Public

Transport

Reducing

Cost of Living

Introduced

July ’11

DELIVERY

3


In Sept 2009, the Malaysian gov’t brought together civil servants and other stakeholders to participate in “Labs” & define initiatives

6 priority areas… received undivided attention from civil servants, private sector and NGOs…

… who detailed initiatives at 3ft level/ obtained stakeholder sign-off prior to labs’ close

▪ More than 200 civil servants

▪ More than 600 other

stakeholders including representatives from NGOs, private sector and other ministries and agencies

▪ 8 weeks of full-time

participation in labs

▪ Identified and agreed upon KPIs and targets for each key area over 3 years

▪ Defined clear initiatives and budget requirements to deliver targets

▪ Obtained stakeholder sign-off on all initiatives proposed

Reducing Crime

Widening access to quality and affordable Education

Improving Infrastructure in rural areas

Raising living standards of Low Income Households

Fighting Corruption

Improving Urban Public Transport (medium-term)

SOURCE: Websearch, www.transformation.gov.my

DELIVERY

3


Ministerial Meetings

• NKRA front-line• ~500,000 at federal and state

level• (1.2 million civil

servants)• Ministry • DMO + Ministerial

• teams

• PEMANDU

• PM /• Cabinet

DTF Meetings

PSM Meetings

Leveraging Game

Dis

cip

lin

e o

f A

cti

on

Me

eti

ng

s

Monthly(6-8 hrs/month)

Weekly(6-7 hrs / week)

Weekly1

2

3


The secret of the GTP accelerated progress is due to “Discipline of Action” & the “Leveraging Game”

DELIVERY

3


Open Days were…▪ Open to all interested in lab output

(media, bloggers, NGOs, etc)▪ Held in large conf. centers to

accommodate thousands▪ Multi-formatted (incl. booths

displaying lab output, panel discussions from experts on particular topics, voting)

In Dec 2009, 3 “Open Days” were held to syndicate Lab output with the general public by obtaining feedback/ generating buy-in


DELIVERY

3


…informs our approach to building capabilities within governmentExtensive research…

MCG has developed an approach to capability-building in government, grounded in extensive research and adult learning principles

1. 4,000 executives surveyed

2. 300 interviews conducted

3. 2,400 capability-building engagements

4. 20 tours of advanced learning companies

5. Insights from:

a. Adult learning

b. Memory research

c. Positive psychology

d. Behavioral psychology

Must focus on the right set of capabilities Must be linked to value generation and impact Must be tailored to the specific requirements and starting

point of the organization

Must be grounded in adult learning principles: Use proven, interactive learning formats – 90% of lecture-

based training is lost in one month Use repetition and coaching Facilitate learning-by-doing in cycles of action and

reflection Link to real work - ensure immediate, on-the-job

applications of the capabilities

Must be scale-able and institutionalized for sustainability (i.e., organization develops capacity to train itself: “train-the-trainer”)

1

2

3

SOURCE: McKinsey Center for Government

DELIVERY

3


Capability-building programs must be grounded in adult learning principles to increase retention and impact on actual work

1 Numbers determined in concrete example by teaching small, simple chunks of information to 3 groups

SOURCE: Whitmore: Coaching for Performance, 2002; based on IBM and UK Post Office research; McKinsey Interviews

Learning by

“I hear and I forget,I see and I remember,I do and I understand”

Confucius

Recall rate after 3 months in %

▪ Overinvest in interactive classroom sessions and field-based programs

▪ Ensure immediate, on-the-job application of capabilities learned

▪ Develop capabilities through repetition

▪ Use reflection to engage with content prior to formal training

▪ Utilize peer interactions to drive learning from others and reinforce existing capabilities through peer “teaching”

32

65

10

Doing(experience)

Seeing(example)

Hearing(explanation)

ImplicationsRecall rate of simple learning content

DELIVERY

3

McKinsey & Company | 103SOURCE: McKinsey Center for Government, Improving Government Performance Through Lean Management, Oct 2012

Huddles to build a sense of shared goals

Daily walkabouts to touch base with employees

Joint problem solving to involve employees

One-on-one coaching to develop employees

Sit-withs to observe adherence to standard work

Daily Capacity Management (“Every Task Every Day”)

Queue inputs

Pre-Multiplier Total items Task A Task B Task C Task DQueue 1-Mar Tue 1,808 1,512 191 1,136

2-Mar Wed 1,823 1,379 188 1,122 3-Mar Thu 1,775 1,301 179 1,153 4-Mar Fri 1,860 1,188 140 1,053 7-Mar Mon 1,961 1,295 117 913 8-Mar Tue 1,958 1,469 122 843 9-Mar Wed 1,987 1,321 119 752 10-Mar Thu 1,975 1,267 120 745 11-Mar Fri 2,001 1,163 103 730 14-Mar Mon 2,034 1,149 92 734 15-Mar Tues 1,905 1,087 117 737

Source: Open - Suspended ReportNote: Each month, please update the dates; remember to skip weekend daysNote: All numbers in red should be directly input from the OS report.

Multipliers Task A Task B Task C Task DFactor 2 2.5 1 1

Post-Multiplier Total tasks Pmts Maint NIGO OtherQueue 1-Mar Tue 3,616 3,780 191 1,136

2-Mar Wed 3,646 3,448 188 1,122 3-Mar Thu 3,550 3,253 179 1,153 4-Mar Fri 3,720 2,970 140 1,053 7-Mar Mon 3,922 3,238 117 913

Task A Queue

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Tue

Wed

Thu

Fri

Mon

Tue

Wed

Thu

Fri

Mon

Tue

Sat

Sat

Sat

Sat

Sat

Sat

Sat

Sat

Sat

Sat

Sat

Sat

Sat

Sat

Sat

Sat

1-Mar

2-Mar

3-Mar

4-Mar

7-Mar

8-Mar

9-Mar

10-Mar

11-Mar

14-Mar

15-Mar

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

Nu

mb

er

of

tasks (

po

st

mu

ltip

lier)

Task B Queue

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Tue

Wed

Thu

Fri

Mon

Tue

Wed

Thu

Fri

Mon

Tue

Sat

Sat

Sat

Sat

Sat

Sat

Sat

Sat

Sat

Sat

Sat

Sat

Sat

Sat

Sat

Sat

1-Mar

2-Mar

3-Mar

4-Mar

7-Mar

8-Mar

9-Mar

10-Mar

11-Mar

14-Mar

15-Mar

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

Nu

mb

er

of

tasks (

po

st

mu

ltip

lie

r)

Other Items Queue

-

200

400

600

800

1,000

1,200

1,400

Tue

Wed

Thu

Fri

Mon

Tue

Wed

Thu

Fri

Mon

Tue

Sat

Sat

Sat

Sat

Sat

Sat

Sat

Sat

Sat

Sat

Sat

Sat

Sat

Sat

Sat

Sat

1-Mar

2-Mar

3-Mar

4-Mar

7-Mar

8-Mar

9-Mar

10-Mar

11-Mar

14-Mar

15-Mar

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

0-Jan

Nu

mb

er

of

tasks

NIGOs Other Tasks

Building on-the-ground lean management capabilities, for example, can significantly improve governments’ service operations

DELIVERY

3


ADDITIONAL CREDENTIALS


We have developed a working model that is well recognized

Client feedbackDistinctive working model

How we think about change …

How we support delivery …

What we bring to clients …

How we work with clients …

Systems approach

Catalytic initiatives

Private sector as driver

Delivery units

Delivery labs

C4P

Proprietary data

Local/regional presence

Global network

Trust-based relationships

Client service (no agenda)

Co-creation of solutions

… vs. development agencies and economic development boutique consultants

This is the first time I was treated as a client"

– President of Guyana

A large part of the success of the Dortmund project is due to the cooperation with McKinsey"

– Managing Director, Wirtschaftsförderung Dortmund

I have never seen development come alive like this"

– Senior Economist, USAID

This is brilliant – I feel personally moved"

– Head of DFID, Tanzania

We have to thank McKinsey for doing a spectacular, professional job"

– Prime Minister of Ethiopia

You are the first partner to engage on a community level on their ideas rather than yours"

– President of Palestine

This is the best climate strategy in the world"

– Minister of Environment, Norway


We invest significantly in economic development innovation and research and development

SOURCE: Team; MGI Economics; MGI

Integrated approach and topical documents

Proprietary tools and models (selection)

Senior practitioners and topical experts

▪ Sector competitiveness assessment toolkit

▪ Industry cost database

▪ The McKinsey global growth model

▪ Cityscope database

▪ Innovation heat map

▪ (Bilateral) Trade and capital flows analysis

▪ Economic development assessment toolkit

▪ GHG abatement cost curves and carbon markets model

▪ Practitioners – set of ~ 90 colleagues with significant economic development experience, assessed and approved through competitive tendering process (DFID) against leading specialist consultancies (e.g., ASI, DAI)

▪ Experts: > 20 knowledge specialists/experts from MGI economics research and MGI with economics background and econometrics expertise

We collaborate with experts and organizations on a by-case basis to bring the best to our clients, e.g.,

DAI (Jordan)

PEMANDU (Tanzania)

TNS (Ethiopia)

Tony Blair (Palestine)

Paul Collier (resource-based growth)

Nick Stern (green growth)

Swiss Re (climate adaptation)

WORKING DRAFT

Last Modified 6/9/2011 3:54:45 PM India Standard Time

Printed 6/9/2011 2:49:43 PM India Standard Time

How to compete and

grow after the recovery:

A sector approach

McKinsey Global Institute and

McKinsey Public Sector Practice

October 2009

CONFIDENTIAL AND PROPRIETARY

Any use of this material without specific permission of McKinsey& Company is strictly prohibited

White paper

WORKING DRAFTLast Modified 6/9/2011 3:54:45 PM India Standard TimePrinted 6/9/2011 2:49:43 PM India Standard Time

STRICTLY CONFIDENTIAL

Overview of the Firm current capabilities in EcoDevA PS-SSO-MGI joint initiative

June 26, 2009

This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior w

ritten approval from McKinsey & Company. This material was used by McKinsey & Company during an oral pres

entation; it is not a complete record of the discussion.

Steering Committee # 1

WORKING DRAFT

Last Modified 6/9/2011 3:54:45 PM India Standard Time

Printed 6/9/2011 4:15:50 PM India Standard Time

Applications and metho-

dologies for Economic

Development

engagements

MGI Economics Research

June 2011

CONFIDENTIAL AND PROPRIETARY

Any use of this material without specific permission of McKinsey& Company is strictly prohibited


Hours by geography of impact, %

CSS hours on economic development engagements, 2012100% = 232,691 hours

Geographic split

4

13

6

9Indian subcontinent

12

Global North America

Latin America

Europe

Middle East

North AfricaSub-Saharan Africa

East Asia 19

5

19

14

Hours by geography of client, %

4

96

22

Indian subcontinent

North America

Latin America

Europe

Middle East

North Africa

Sub-Saharan Africa

East Asia19

5

19

17

SOURCE: SSO and PSP database


Strong public presence and reputation through major reports

SOURCE: Team

The art ofscienceand delivery

Governmentdesigned for new times

How to compete and grow

Sustaining Vietnam’s growth

Resource revolution

Towards theCircularEconomy V1/V2

Education to employment

EnergyEfficiency – ACompellingGlobalResource

MGI UrbanWorld – Map-ping the Eco-nomic Power of Cities

Trading myths – Misconcep-tions about trade, jobs and competi-tiveness

The world at work

Africa at Work – Job creation and inclusive growth

Manufac-turing the future

Pathways to aLow CarbonEconomy