This article first appeared in Forum, The Edge Malaysia Weekly on August 21, 2017 - August 27, 2017

The gap between the infrastructure and housing that is being built and what the world needs is rising, compromising economic growth and depriving people of basic services. In this context, the chronic productivity problem of the construction industry is a pressing concern.

From 2016 to 2030, the world needs to invest about 3.8% of gross domestic product (GDP), or an average of US$3.3 trillion a year, in economic infrastructure just to support expected rates of growth, McKinsey Global Institute (MGI) research has found. That’s a cumulative US$49 trillion. Emerging economies account for some 60% of that need. But if the current trajectory of underinvestment continues, the world will fall short by roughly 11%, or US$350 billion a year. The size of the gap triples if we consider the additional investment required to meet the new UN Sustainable Development Goals. Beyond infrastructure, there are significant gaps in housing, too. An estimated 36 million new housing units will be required in the 20 largest cities alone by 2025, three-quarters of them in Asia.

Construction-related spending every year is the equivalent of 13% of global GDP. The sector employs 7% of the world’s working population and fuels activity in many other sectors. MGI estimates that infrastructure typically has a socioeconomic rate of return of around 20%. In other words, one US dollar of infrastructure investment can raise GDP by 20 US cents in the long run. And efficient infrastructure construction creates jobs. We find that increasing infrastructure investment by one percentage point of GDP could generate an additional 3.4 million direct and indirect jobs in India, and 700,000 in Indonesia.

However, globally labour productivity growth in construction has averaged only 1% a year over the past two decades, compared with growth of 2.8% for the total world economy and 3.6% in the case of manufacturing. In a sample of countries that MGI analysed, over the past 10 years, less than a quarter of construction firms have matched the productivity growth achieved in the overall economies in which they work.

Productivity in Asian construction sectors has been rising rapidly, but from a very low base, and still lags far behind that of other industries. In Malaysia, for instance, construction productivity was only US$3 an hour, only one-third of average productivity in the total economy. That represents a loss of value to the economy of US$11 billion every year. It’s a similar story in Singapore, where despite rapidly rising productivity in construction, the level was still only one-third of the total economy, costing the economy US$15 billion a year in lost value. In Indonesia, the productivity underperformance is even more overwhelming. In 2014, construction productivity was US$2 an hour, compared with US$14 an hour in the economy as a whole — that’s an annual loss of value of over US$190 billion.

There are huge benefits to a productivity revolution in construction. Making changes in seven areas — regulation, design processes, contracts, procurement and supply-chain management, on-site execution, the infusion of technology, new materials, and advanced automation, and skills — could boost productivity by up to 60%. Globally, that would create an additional US$1.6 trillion a year, adding about 2% to the world economy, or the size of the economy of Canada, and meeting about half of the world’s infrastructure need.

For some parts of the industry, construction productivity could be utterly transformed — a fivefold to tenfold lift — by a manufacturing-like system of mass production with a high degree of standardisation and modularisation and the bulk of construction work taking place in factories off-site. We are beginning to see increasing use of prefabrication in Malaysia and elsewhere in Asia. In China, standard prefabricated units are being used in large infrastructure projects such as the 10,000km high-speed-rail network under construction. By using standard viaducts fabricated in temporary factories erected along the route, the cost per kilometer is around 65% lower than it would be in the US and around 80% lower than in the UK. In residential and commercial buildings, innovative new methods are increasingly being used to cut costs. China’s Broad Sustainable Buildings Co Ltd constructs large buildings such as hotels, prefabricating 90% of what is needed on-site in a factory. It can build a 30-storey hotel in just 15 days and estimates that its buildings cost 10% to 30% less than those built in the traditional way.

With the right push from government and from the industry itself, low construction productivity can be turned around, but concerted and sustained effort is needed. Since the mid-2000s, Singapore put in place a range of policies to boost the sector’s productivity and achieved steady annual increases of 1.4% a year, and 2% annually, over the past three years. The government of Singapore aims to achieve annual productivity growth of 2% to 3% as the result of its ongoing efforts to revolutionise construction.

Measures have included a quota limiting the number of foreign work permits, a programme promoting labour-efficient building decision, including a target for 80% of the industry to use business information modelling (BIM) by 2015, the launch of the world’s first BIM electronic submission system and the roll-out of a Productivity Gateway Framework that helps government procurers to achieve a 25% to 30% productivity improvement from the 2010 level for all new projects.

The government followed up in 2015 with new programmes focused on the adoption of new technologies and off-siting. Singapore is strongly encouraging prefabrication, modularisation and automation. A global first is the development of multi-storey integrated construction and prefabrication hubs equipped with advanced automation. The world’s tallest 40-storey prefinished modular concrete condominium is now being built with 40% less manpower than a traditional building.

This is the time for such activism from government and the private sector alike. Demand is rising. Construction labour costs are rising, too. And innovation — including digital technologies, new lightweight materials and advanced automation — are becoming less expensive and gaining traction in the industry, offering an open door on which the industry can push to engineer radical change in the way it operates.

Mukund Sridhar is a partner at McKinsey & Company, based in Singapore, where Oliver Tonby is the managing partner, Southeast Asia

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.