Quantum Leap-What Will It Take To Double Serbia S Economic Growth in The Next Decade?

Quantum Leap- what will it take to
double Serbias economic growth

in the next decade?
Quantum Leap Conference
Belgrade, Serbia
October 3rd, 2013
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Our topic today what can the Serbian government do to achieve a

DATA FOR THE 1990'S SHOULD
quantum leap in growth over the next 10 years?
BE CONSIDERED ILLUSTRATIVE
Real GDP growth, USD (base 2010)
Countries that experienced single

year economic declines above 35%
grew by an average of ~10% in the
decade that followed the decline1
Is sustained >5% growth

possible for the first time
since Serbia became a
market society?
6-8%
5%
~0
2x
3-4%
3%
~0
-48%
1980s
1990
1991-2000 2000-2008 2008-2012 Forecast2
Illustrative (low data quality)3
Aspiration
The next decade
NB: ~Two thirds of Serbias economy is managed by the government

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
SOURCE: McKinsey Global Growth Model
McKinsey & Company
| 3
The government may choose to launch one of five types

of pragmatic Transformation Programmes
Program
typology
Main interventions associated

to typologies
1 Hands on1
Actively support
private sector growth
Sector support/subsidies
Infrastructure investments
Investing in private companies
2 Hands off"
Reduce governmentcontrolled constraints

for economic activity
Privatization
Liberalization/sector reform
Remove administrative burden
Streamlining
3 government
costs
Keep the same quality

of government services at lower costs
FTE & OPEX reductions

Reducing government scope
Optimizing support functions
Enhancing
4 government
output
Enhance quality of
government services
at similar cost levels
Organizational changes
Operations changes
IT solutions
Achieving
5 more for
less
Enhance quality of
government services
at lower cost levels
Boosting
economic
growth
Enhancing
government
efficiency
Main objectives
Most likely to meet

Quantum Leap objectives
Mix of the two types of

programmes above
1 Smaller economies trying to boost economic growth have historically tended to choose a hands on approach to Transformation
SOURCE: McKinsey
McKinsey & Company
| 4
Recent, high and sustained economic growth is possible
Lower income3
All countries with over 5% average growth for at least a decade1 plus benchmarks <5%; Since 1980
Middle income
Economic growth
High income (76 countries)
%; Real GDP growth (USD, base 2010); Highest average growth 10 year period selected
11
Botswana (1980)
Although no country
China
(1980-2010)
Korea (1980)
Kazakhstan (2000)
10
9
Singapore (1980)
Estonia (1996)
(except China and

Botswana) has grown
at a rate >10% for
longer than a decade1,
41 countries have
grown in the 5-10%
range2
Ireland (1994)
Serbia
(2013)
Growth rates over 45% subjectively feel

like growth (e.g.
companies start
aggressively
employing)
6
Russia (1999)
Cyprus (1981)
Romania (2000)
Bulgaria (2000)
4 Serbia
(2000) Montenegro (2000)
US (1992)
With a growth rate of
Germany (1983)
Croatia (2000)2
Italy (1983)
7%, roughly double of

the forecast rate,
Serbia could almost
reach high income
status in a decade
from now
Austria (1990)
2
1
Slovenia (1987)
0
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Real GDP per capita

USD (Base 2010)
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 Croatias 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
McKinsey & Company
| 5
which, data suggest, more than half of the high growth countries (>5%)
Before
have achieved through a Quantum Leap in growth since 1980
All countries with over 5% average growth for at least a decade1 since 1980; n=41
After
9.3%
7.3%
Estonia
-3.3%
Continued
34.1%
high growth2
Achieved a
Quantum
65.9%
Leap since
19801
5.9%
Malta3
2.4%
6.1%
UAE
Average
size of
Quantum
Leap
-2.6%
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 1980-1985
3 Uganda, Tanzania, Israel, Ireland, Dominican Republic, Costa Rica and Belize have a similar growth profile
SOURCE: McKinsey Global Growth Model; Global Insight, World Bank
McKinsey & Company
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Ideas others have leveraged to achieve a quantum leap

growth strategy
1Sector
What do we all need to do?
& institutions
2 Policies
What actions could the
3 Delivery
How do we actually get it done?
government take?
Set a compelling vision of

what Serbia will be the
best at
that will be achieved by

a prioritized sectorspecific growth strategy ...
... supported by a change

in mindsets and behaviors
SOURCE: McKinsey
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
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
McKinsey & Company
| 7
SECTOR GROWTH STRATEGY
1 For growth, sector performance matters more than sector mix in both
developing and developed countries
Contribution to total value added, 19952005
Compound annual growth rate, %
Growth
Growth momentum
(growth predicted by
initial sector mix)1
Total growth
High
United
States
3.3
United
Kingdom
Low
6.0
3.9
Mexico
2.6
0.4
3.4
5.2
5.5
India
Japan
5.7
9.1
China
Differences in
performance
of sectors2
0.3
-2.1
2.3
0.9
2.2
2.1
0.4
-1.7
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.
SOURCE: Global Insight; McKinsey Global Institute analysis
McKinsey & Company
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1 Example of a Sector strategy overview, similar to what many other

ILLUSTRATIVE
countries have developed
Value generated per person
Bubble size: additional

growth in the next 10
years
Labor productivity; EUR per employee
300,000
Primary/growth sectors
Enabling sectors
280,000
260,000
Energy
240,000
Health and
social work
Manufacturing
Electricity, gas
and water supply
220,000
200,000
180,000
Financial
intermediation
Other
activities
160,000
140,000
Transport, storage
and communication
120,000
Public administration
and defense
100,000
Agriculture
80,000
60,000
Retail and
wholesale trade
40,000
Construction
Education
Hotels
and restaurants
20,000
0
0
20,000
40,000
60,000
80,000
100,000
Number of people employed

Source: McKinsey
McKinsey & Company
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1 Middle income benchmarks suggest that most growth is likely to come

from productivity improvements, rather than increased employment
Sector contribution to growth of value added, labor productivity, and employment for middle-income countries1
Contribution to compound annual growth rate 19852005
BASED ON PEER COUNTRY BENCHMARKS
Growth of labor productivity, %

2.1
1.5
Growth of value added, %

Goods
Services
Total
3.6
2.3
2.7
Growth of employment, %
5.0
0.2
1.2
1.4
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
SOURCE: Global Insight; International Labor Organization; National Statistics;

McKinsey Global Institute analysis
McKinsey & Company
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1 while some sectors are much more likely to generate employment

than others
Share of US employment, August 2009 (percent of nonfarm employment)
100% = 130 million
New innovative sectors
Existing large employment sectors
11.3
4.9
0.2
0.3
0.6
Biotech
Semiconductor
Cleantech
Construction
SOURCE: The Clean Energy Economy, PEW, 2009; Bureau of Labor Statistics; Haver analytics
5.9
Financial
activities
Retail
trade
McKinsey & Company
| 11
1 FDI data suggest that Serbias rate of return on Foreign Direct

Investment (FDI) is low compared to benchmarks
BASED ON IMF AND EIU DATA
Inward FDI rates of return1, 2009-2011 average, %
62.4%
5.5%
4.0%
3.3%
2.4%
Serbia
(105/117)
CEE
EU-27
World average Angola
1 Calculated as FDI income/FDI stock based on UNCTAD methodology as presented in the World Investment Report
SOURCE: IMF; EIU; UNCTAD; team analysis
McKinsey & Company
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1 Export data suggest that Serbia has export strengths in ammunition

and agricultural products
Serbias top 10: Revealed comparative advantage exports; 2012
1 Arms and ammunition
Difference to 2007
9.26
2 Cereals
8.28
+5.05
+4.57
3 Products of the milling industry
6.60
-3.97
4 Edible fruit and nuts
6.48
-1.67
5.36
5 Sugars and sugar confectionery

6 Copper and articles thereof
4.71
+5.53
-0.11
7 Aluminum and articles thereof
4.07
+0.18
8 Live animals; animal products
4.06
+2.46
9 Footwear, gaiters and the like
3.60
-0.28
10 Explosives; pyrotechnic products
3.51
+0.45
EU-271 = 2.0%
1 Top 10 average for EU-27 countries
SOURCE: Comtrade; MGI Economics Research Team
McKinsey & Company
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1 A country sector growth strategy should be squarely

positioned to take advantage of major global trends
Detailed next
Global trends that influence country growth programs through 2050
1. Economic center of
gravity shifts to
developing world
6. Trade increases and new

flows emerge
2. Urbanization rates
increase rapidly mostly
in the developing world
7. Global energy demands

rise, but supply sources
remain uncertain
3. Global consumer class

expands rapidly in
emerging economies
8. Transition toward
sustainable practices
4. Labor force growth

decreases globally, but
mostly developed
countries
9. Increasing demand
for food
5. Race to increase
productivity through
technology and the
knowledge economy
10. Change in social values
SOURCE: Working group
McKinsey & Company
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1 Increasing demand for food the global food and agriculture sector is
facing severe pressure from demand-supply gap
World demand will grow around
70% between 2000 and 2050
Growth on the supply side is

constrained
Water 40% deficit expected
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
10.2
+70%
6.0
Need to produce
more with less
Increased
pressure on food
price volatility
Opportunity for
discontinuities
and investment
Quality in
addition to
quantity
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 316% 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

2000
2050
costs are fertilizers and fuels

(63% for U.S. corn production)
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
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
McKinsey & Company
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1 Serbia is well positioned to play a significantly larger role in food

production in the next decades
Agriculture labor costs in Serbia
are significantly lower than in
Western Europe
Agriculture labor costs
(EUR per hour, gross)1
Serbia has a high percentage of

arable land, almost 50% of which
is considered higher quality soils
Share of total land which is arable
47%
=~5 m ha
6.8
Serbias central location means

access to almost a billion people
within two days truck drive (2k km)
Population by distance band
Distance in KM; Millions of people
xx
# of cities with >1M ppl
37%
900
710
23%
3.4
1.9
280
67
WE
Croatia
Serbia
WE
CEE
Serbia2
500
1000
2000
3000
21
72
94
Smart investors (e.g. UAE based Al-Dahra, EBRD, IFC) have already
invested over 2bn EUR in the Serbian agriculture sector
1 Last available comparable year used (2007); Serbias wage calculated based on monthly wage, assuming 20 day work week and 8 hours per day
2 Only about 6% of arable land remains unused; while only 1.5% is irrigated (which is low)
SOURCE: Republicki Zavod za Statistiku RS; Agri-info.eu; The Government of the Republic of Serbia; IAMO; Agripolicy
McKinsey & Company
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1 as well as in food processing

Food processing labor costs in
the region are significantly lower
than in Western Europe
Indexed food processing costs, 2012
Labor costs
All other costs
Building on the existing research

institutions, Serbia can build its
position as an agro R&D hub
Quality of scientific research institutions,
rank out of 148 countries
Serbia has significant potential to

add more value by exporting more
processed agricultural products
Share of total agricultural product exports by
degree of processing; 2012
Processed products
-9%
Commodities
Semiprocessed products
66
44
44
26
29
56
21
WE
CEE
Serbia
30
27
23
Serbia
World
CEE
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
SOURCE: Eurostat, McKinsey analysis; WEF, Comtrade, MGI Economic Research
McKinsey & Company
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1 However, Serbia has increased its exports of commodities, while other

countries in the region have moved up the productivity ladder
Revealed comparative advantage index1
2007
1.11
1.09
2012
1.04
Threshold 1
0.99
0.92
Serbia
0.81
1.25
1.16
CEE
0.84 0.85
Commodities Processed
products
0.80
0.75
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)
Semiprocessed
products
1 or Balassa index is the ratios of the industrys share in the countrys 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
McKinsey & Company
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1 Benchmarks suggest a number of measures are needed to grow

agricultural productivity, especially investment in automation and
developing scale economies
EU-15
Agriculture value added per

worker (thousands of US$
per year, constant 2005)
CEE
344
33
10
Share of arable land

Percent of total land
24
Share of irrigated land

Percent of arable land
17
Agricultural machinery
Tractors per 100 sq km
of arable land
1,125
Fertilizer consumption
Kg per hectare of arable
land
172
Scalability
Average plot size,
hectare2
34
43
37
28
13
344
47
155
18
141
138
78
28
7
1 Growing of perennial (cereals and vegetables) and non-perennial (fruits) crops, plant propagation and animal production
4 Data point for 2010 according to the World Bank methodology
2.5
Higher share of arable

land vs. EU15, 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
2 CEE average plot size figure excludes Czech and Slovakia
SOURCE: World Bank; World Development Indicators database; Eurostat; team analysis; European Commission
3 Data point for 2009
McKinsey & Company
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1 Agriculture Transformation example: Green Morocco has achieved a

jump of almost 50% in agro GDP and production in under 5 years
Agriculture as the main engine
for economic growth
and social development
Pillar II
Pillar I
Social Agriculture:
Commercial
Agriculture:
Social investment
and fight against
rural poverty
Private sector
investment on high
productivity/ high
value
Focus on aggregation
and contract farming
Reform of key transversal areas

Integrated
Water
management
(Supply &
Demand)
Land reform
& industry
structure
Market
access and
trade policy
(FTAs)
Access to
inputs &
services (incl.
distribution
networks)
Doing
business &
access to
financing
(incl. taxation
& subsidies)
Institutional
reform &
public
services (incl.
extension /
R&D)
Integrated
rural
development
McKinsey & Company

Source: Green Morocco Plan
| 20

growth strategy
1Sector
& institutions
2 Policies
3 Delivery
government take?

best at


SOURCE: McKinsey

entrepreneurship...
competitiveness
do business

leadership...
big outcomes in few

management
McKinsey & Company
| 21
POLICIES AND INSTITUTIONS
2 The overall findings of the latest 2013-2014 Global Competitiveness

Report mirrors the public perception that change in Serbia is required
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
4th place: Germany
1st place: Switzerland
101st place: Serbia
Serbias competitiveness
has fallen by 14 positions
in the past 7 years to the
lowest position in Europe
95th: place: Albania
91st place: Greece
1 A measure of the degree of sophistication of business practices and strategies of companies in Serbia
SOURCE: World Economic Forum Global Competitiveness Report 2013-2014
McKinsey & Company
| 22
2 while suggesting that productively channeling the great talent

available in the country is key to Serbias path forward
Detailed set of indicators (total of 114) that together make up the overall country rank
What are Serbias

Greatest competitive
strength?
Tertiary education
enrollment
Quality of math and
science education
Quality of scientific
research institutions
Number of
Serbia is a source
international patent
of great talent
applications1
Mobile broadband
subscriptions
Flexibility of wage
determination
Greatest competitive
weaknesses?
Most significant barriers blocking the

further development of the strengths
Ability to attract
Professionalize management
Willingness to delegate authority
Reliance on professional management
Nature of competitive advantage2 Extent
of staff training
Firm level technology absorption
mainly because managers are not
Quality
of management schools
inspiring, financing is hard to come by
Improve access to financing
and it feels like the government is not
Ease
of access to loans
helping
Financing through local equity market
Venture capital availability
Improving government effectiveness
Burden of government regulation
Efficiency of legal framework
Quality of overall infrastructure
Intensity of local competition
(2nd
talent
lowest
place globally)
Ability to retain talent
(3rd lowest place
.. .however we do
globally)
not seem to be
providing adequate
opportunities for
our talent to
develop
NB: ~Two thirds of Serbias economy is managed by the government

1 PCT patents, applications/million population 2 Busines sophistication/ competitiveness of company strategies/production process sophistication
SOURCE: World Economic Forum Global Competitiveness Report 2013-2014
McKinsey & Company
| 23
2 However, countries should not implement policies blindly following a

reform agenda focusing only on macro enablers is not the whole answer
Countries in Latin America implemented
"Washington Consensus" economic
reforms
Structural Reform Index1
0.58
but these reforms were not associated

with strong economic growth in most
countries
GDP per capita, constant 2000 USD
1985
+1%
p.a.
1999
1.7x
4,019
0.34
Latin America Average
3,533
Latin America Average
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
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
McKinsey & Company
| 24
2 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 index
0 = average
High 1.6
Pharma
Differentiation of products
R&D
Business
services
1.2
0.8
Real-estate
activities
0.4
Local
services
Other
Wholesale and
retail trade
Post and
telecommunication
Radio, TV, and

communication
equipment
Chemicals
Computer and
related activities
Finance and
insurance
Other
Resourceintensive
industries
Aircraft and spacecraft

Medical
instruments
R&D-intensive
manufacturing
Pulp, paper, printing,

and publishing
Fabricated metals
Rubber and plastics
0
Electricity
Infrastructure
-0.4
Construction
Hotels and restaurants
Low -0.8
1
Low
Land
transport
Basic
metals
Agriculture,
forestry,
and fishing
Wood
products
Motor vehicles
Machinery and
equipment
Manufacturing
10
100
Imports plus exports divided by sector gross output, %
Tradability of products
High
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
McKinsey & Company
| 25
2 which allows governments to tailor policy based on the sector group

needs which both targets and simplifies policy formulation
Degree of intervention
Low
High
Setting ground
rules/direction
Building enablers
Tilting the
playing field
R&D-intensive
manufacturing
Business services
Local services
Government as
principal actor
Manufacturing
Infrastructure
Resource-intensive
industries
Infrastructure
Grouping of sectors into clusters enables a tailoring of government policies

by cluster to simplify policy development and increase its effectiveness
SOURCE: McKinsey Global Institute/Public Sector Office Competitiveness Project
McKinsey & Company
| 26
2 Example of a best practice proactive investment attraction approach

Design
Customized pitch books
Prioritising and
segmenting investor
target list
Tailoring pitch book (and
proactive proposals) for
priority investors in each
segment
Investment
excellence
Supporting
enablers
Execute
Tailored value proposition to

prioritized investors in key
sectors
Army of investment officers

to source and pitch deals
Attract enough investors to

meet the required level of
investment levels p.a.
Providing large scale infrastructure for investors to come in

Developing plug-and-play facilities with well connected logistics and supporting
infrastructure
Business friendly environment and a cosmopolitan society
Investment and
Enforcement agency to
ensure quality of committed
and deployed investment
Overseeing commitment of
investment
Reviewing on an on-going
basis the quality of
investment, investments
gaps against stated targets,
performance management
of investment officers
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
Plug-and-play industry ecosystem
Enforce
Providing clear and transparent investment rules and governance

Ensuring ease of establishing and operating business
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
1 Number of investment officers varies across countries and investment needs

SOURCE: McKinsey
McKinsey & Company
| 27
2 A relatively low level of financial depth in Serbia suggest that

availability of capital is a key precondition for growth
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
417%
217%
127%
93%
Serbia
100%
Bosnia
Croatia
Eastern
Europe
Western
Europe
1 Calculated as FDI income/FDI stock based on UNCTAD methodology as presented in the World Investment Report
SOURCE: McKinsey Global Institute Financial Assets Database; McKinsey Global Institute analysis
McKinsey & Company
| 28
2 Infrastructure example: benchmarks suggest a major rise in

infrastructure spend may be needed to support a Quantum Leap
Serbia; Infrastructure investment gap analysis3
BASED ON BENCHMARKS
Historical
Quantum Leap scenario
% of GDP, 5% growth, 2000-2008
% of GDP, assuming 7% growth, 2013-2023
6.7%
5.3%
4.7%1
3.3-4.3%
3.4x
2.0%
1-2%
Actual
historical
spend4
Target
spend
Gap
Recent
spend2
Target
spend
Gap
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
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
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)
McKinsey & Company
| 29

growth strategy
1Sector
& institutions
2 Policies
3 Delivery
government take?

best at


SOURCE: McKinsey

entrepreneurship...
competitiveness
do business

leadership...
big outcomes in few

management
McKinsey & Company
| 30
DELIVERY
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 in
reaching the targets your organization set?
Percent (Public=974, Private=4,572)
Extremely successful
100
5
Very successful
30
Somewhat successful
51
Not successful at all

Dont know
5
9
Private
100
9
40 percent of government
transformations succeed
30
41
10
10
Public
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)
McKinsey & Company
| 31
DELIVERY
3 Why transformation is hard a few thoughts from former

transformation leaders
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.
Gran Persson, former Prime Minister, Sweden
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
Dont 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 didnt expect to encounter inertia of such

magnitudeinertia 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
McKinsey & Company
| 32
DELIVERY
3 Lessons a government can leverage to increase chances of success (1/3)

10 key learnings from an analysis of 40 government led Transformation Programs across the world
1 Shoot for the sky

Around the world, governments have
achieved remarkable transformations resulting in improvements that
many believed beforehand to be
impossible
2 Set a clear and compelling target
Be very clear about what it is that you
wish to achieve (growth, efficiency or
quality)
3 You have only one shot at the goal

Successful transformations build the
foundations for impact: the usual focus
is the mandate term, but simultaneously they also ensure quick wins and
plan for persistent, long-term impact
Past Transformation Programmes (TPs) aimed at boosting

growth were able to create additional annual GDP growth
of ~1.5% (range from 0 to 4%)
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
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
4 Be persistent and consistent, but flexible

Changing targets half way will
undermine confidence in the program,
but shifts in circumstances demand
flexibility
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
McKinsey & Company
| 33
DELIVERY

5 Capture the right moment

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
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
6 Agree on what you want to change and the program will follow
What you want to do (the portfolio of
interventions) significantly shapes the
options for how you do it (the
program design)
A hands-on growth TP is most likely to be successful if

driven top down by a centralized, highly skilled administrative team through a delivery unit1
7 Do not neglect the basics

Ensure you give due regard to the key
success factors that apply to all
transformation programs
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
1 Unless existing structures with sufficient experience in terms of transformation already exist
2 Often with an infusion of the private sector, however depending on existing capabilities
McKinsey & Company
| 34
DELIVERY

8 No one expects to travel into space in a propeller plane

Transformation in the public sector are TPs are very complex (average of ~250 interventions
extremely complex, and demand
grouped in 22 categories), large (Serbias govt manages
significant investment and high-quality
~2/3 of the economy and is the biggest employer), require
resources over the long term, requira large central team (average of 1,300 FTEs involved over
ing a major effort on capability building
7 years) and a scale-up in capabilities (e.g. through
academies for civil servants building leadership, functional
and operational capabilities)
9 Personal commitment matters 100%
Transformations leaders lead from the
front, investing significant time and
reputational capital
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
10 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
1 Including succession planning after they are gone
McKinsey & Company
| 35
DELIVERY
3 Malaysia case example: The Prime Minister outlined 4 elements to

Malaysias transformation Programme
1 People First
Performance Now
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
4
10th & 11th Malaysia Plan
McKinsey & Company
| 36
DELIVERY
3 Malaysia case study cross functional full time delivery labs were used
to detail out the concrete reform plan for each priority initiative
What is the
purpose of a
lab?
Who
participates in
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
The invited cross-organizational team works fullWhat happens

in a lab?
How is
commitment
secured?
time in one location

The lab involves an intense closely
facilitated/managed problem solving process
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
A 3-feet level implementation programme,

What are the
end products?
including agreed solutions, detailed execution

plans with responsible owners (across
organizations), timelines and targets
McKinsey & Company
| 37
DELIVERY
3 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
ENTRY
POINT
PROJECTS
Gross National
Income (GNI)
USD
PER CAPITA GNI IN 2020
Transformational
Actions
Jobs
USD
ADDITIONAL JOBS
Investment
INVESTMENT
McKinsey & Company
| 38
DELIVERY
3 Malaysia case example: 12 National Key Economic Areas (NKEAs) were

selected
Financial
Services
Oil, Gas &

Energy
Education
Greater
KL
Business
Svcs
Tourism
NKEA Labs:
11 Economic Sectors
+
Greater KL
Agriculture
Wsale
& Retail
E&E
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
Serbias total FDI stock to
date of 26 billion USD
Health
Services
Telco
Palm Oil
McKinsey & Company
| 39
HIGHLY ILLUSTRATIVE EXAMPLES
DELIVERY
3 Some transformations specifically drive concrete changes in

behaviors by tackling change in the most obstructive mindsets
Detailed further
To
From ...
Hard work does not pay off no one can

pay me as little as I can work
employment through connections
It will not get better for me until it gets

worse for someone else
Hard work pays off and the more I work the

work the better off I will be
We can achieve more working together

(moving from a win/lose to a win/win
mindset)
I can only change and effect my own
It is always someone elses fault

(government, system, corruption, external
powers, etc)
With the people and institutions that we
behavior to make things better- I am

responsible for what happens to me
Things were once better, and they will be

better in the future
have here, things will never get better
I know what I dont know

I know the best
SOURCE: Team analysis
McKinsey & Company
| 40
DELIVERY
3 I know the best mindset example: moving from unconsciously

unskilled to consciously unskilled is the necessary first step for further
growth
Requires
no conscious
thought
Personal realization
Personal experiences
Owned as normal,
Pleasure
Ease
Satisfaction
natural and effortless
Unconsciously
skilled
I can do it but I need

Requires practice
to think about it
Consciously
skilled
Requires
a point
of choice
Requires incident leading

to insight
Aware of what I have

to learn,
but dont know how to
do it
Consciously
unskilled
Dont know what I

dont know/have to
learn
SOURCE: Gita Bellin and Associates, 1999
Choose to change
Skill building
Nurturing by others
Courage and humility
Persistence
Confusion
Go in learning
Aha! moment
Realization
Upsetting situation or
Unconsciously
unskilled
relationship
McKinsey & Company
| 41
DELIVERY
3 While growth is a critical outcome, over time the Transformation

Program could also address other drivers of happiness
United Nations World Happiness Report 2013; Score out of 10
xx
Difference:
Happiest to Serbia
Explained by
Perceptions of corruption
Generosity
+0.3
+0.4
+0.4
7,50
Freedom to
make life choices
Healthy life expectancy
Social support
4,81
GDP per capita

Base country + residual
2,93
+0.4
Average of top
10 happiest
countries1
Serbia
(106/156)
Least happy
country2
1 Denmark, Norway, Switzerland, Netherlands, Sweden, Canada, Finland, Austria, Iceland, Australia
SOURCE: UN
According to the UN World

Happiness Report, an increase
in income to highly developed
country levels1 would increase
Serbias happiness by +0.4,
the same as an increase in
generosity and slightly more
than a decrease in perceptions
of corruption (+0.3)
2 Togo
McKinsey & Company
| 42
THANK YOU
McKinsey & Company
| 43
BACKUP
McKinsey & Company
| 44
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
McKinsey & Company
| 45
Day zero hypothesis

growth strategy
1Sector
PRELIMINARY DRAFT
& institutions
2 Policies
3 Delivery
government take?
A vision does not exist today and

one is desperately needed.
Potential messages include:
Best human capital in the region

Primary sectors: agriculture, food
As talent is infused, a result
processing, automotive cluster, It

sector, mining (tbc), outsourcing
& offshoring (tbc),
semiconductors (tbc)
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
Secondary sectors: education,

infrastructure, retail, energy
SOURCE: McKinsey
A culture of meritocracy should

continue to be transitioned to in 2-3
years (in both SOE and the govt)
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
McKinsey & Company
| 46

growth strategy
1Sector
& institutions
2 Policies
BACKUP
3 Delivery
government take?

best at


SOURCE: McKinsey

entrepreneurship...
competitiveness
do business

leadership...
big outcomes in few

management
McKinsey & Company
| 47
1 100 largest companies in Serbia (1/2)
Source: APR
McKinsey & Company
| 48
1 100 largest companies in Serbia (2/2)
Source: APR
McKinsey & Company
| 49
1 Manufacturing, professional services and mining sectors pay the

highest salary in Serbia
Top 10 industries by highest income, RSD, 2011
Industry
Sub-industry
Mining and quarrying
Extraction of crude
petroleum and natural gas
89,167
Activities of head offices;

management consultancy activities
86,682
Professional, scientific and technical

activities
Average net salary
Manufacturing
Manufacture of tobacco products
Manufacturing
Manufacture of coke and

refined petroleum products
79,349
Financial service activities,

except insurance and pension funding
77,611
Transportation and storage
Air transport
75,616
Other service activities
Activities of membership organizations
74,136
Manufacturing
Mining support service activities
Financial and insurance activities
Warehousing and support

activities for transportation
64,969
n/a
64,837
Professional, scientific and

technical activities
Electricity, gas, steam and air conditioning

supply
SOURCE: RZS
84,239
71,367
McKinsey & Company
| 50
1 Number of people employed in Serbia by Sector (1/2)

Top 10 industries by growth in employment, 2011
Industry
Sub-industry
Arts, entertainment and recreation
Gambling and betting activities
Real estate activities
Real estate services
Financial and insurance activities
Insurance, reinsurance and pension

funding, except compulsory social security
Administrative and support service activities
Services to buildings and landscape

activities
Information and communication
Information service activities
Office administrative, office support and

other business support activities
Professional, scientific and technical activities
Activities of head offices; management

consultancy activities
Professional, scientific and technical activities
Legal and accounting activities
Employment activities
Arts, entertainment and recreation
Sports activities and amusement and

recreation activities
SOURCE: RZS
Number of employees, 2011

4,688
Growth,
2008-2011, %
14.89
3,125
11.41
7,843
11.08
10,205
10.42
1,532
7.04
3,024
6.99
15,821
5,766
6.18
5.68
4.73
1,991
6,421
4.12
McKinsey & Company
| 51
1 Number of people employed in Serbia by Sector (2/2)

Top 10 activities by decrease in employment, 2011
Industry
Sub-industry
Number of employees, 2011
Manufacturing
Manufacture of other transport equipment
Manufacturing
Manufacture of basic metals
Manufacturing
Manufacture of computer, electronic

and optical products
8,835
-8.67
Manufacturing
Manufacture of beverages
9,537
-8.54
Mining and quarrying
Extraction of crude petroleum

and natural gas
Manufacturing
Manufacture of machinery and

equipment n.e.c.
Manufacturing
Manufacture of other non-metallic

mineral products
Accommodation and food service activities
Food and beverage service activities
Agriculture, forestry and fishing
Crop and animal production, hunting

and related service activities
Transportation and storage
Air transport
SOURCE: RZS
3,777
Growth,
2008-2011, %
-12.19
14,425
-9.11
1,415
-8.38
15,518
-8.18
13,505
-8.06
10,740
-8.00
29,142
1,499
-7.96
-7.63
McKinsey & Company
| 52
1 National vision example: Singapore 21 vision- key messages

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. Lets work
together to make Ours the Best Home, for ourselves and our
children.
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.
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"
NB: The Economic Development Board, established in 1961 and active since, has been a key factor in driving Singapores growth by
formulating and implementing national economic strategies, at first focusing on promoting Singapore's manufacturing and logistics sectors
Source: Excerpt from a speech delivered in Singapores Parliament, June 5th, 1997
McKinsey & Company
| 53
1 National vision example: Malaysias Wawasan 2020 vision established

and maintained since 1991- key messages
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.
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.
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
A number of creative approaches were used to bring the vision to life, including the Wawasan 2020 patriotic song in Malay and English
Source: www.wawasan2020.com
McKinsey & Company
| 54
1 National vision example: Malaysias Wawasan 2020 vision established

and maintained since 1991- recent update
Source: Malaysia Investment Development Authority
McKinsey & Company
| 55
1 On a total economy level, productivity and employment drive growth
Economy level
Myth
1 Productivity
growth doesnt
matter
Productivity
growth
GDP
growth
Employment
growth
Source: MGI
Reality
Productivity growth is closely
correlated with competitiveness, and it is the key driver
of rising living standards
2 Productivity is a Productivity growth and

job killer
employment growth are often
positively related
3 Productivity is
only about
cutting costs
and labor
Productivity growth in many

sectors comes from increased
topline revenue and higher
value goods
McKinsey & Company
| 56

PRELIMINARY
1 Serbia should target sectors according to four criteria

A
Countercyclical sectors
(traditional and high-tech/
high-productivity)
Description
Priority sectors
Chocolate production
Water and soft drink production
Generic pharma
Bio-molecule pharma
Specialty chemicals
Household chemicals
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
Good base for further growth, especially

Development of clusters centered
around existing "champions"
or revamp of past clusters
for exports
Existing infrastructure and labor supply
Shorten time needed until beginning of
production and achievement desired
quality levels
Office machinery
Electronic photo cells, transistors
Wire, Cable, Patterns Lighting
Medical equipment (basic)
Automobile parts
Software research and maint.
Infrastructure developments
D
Targeted ad hoc efforts with
relevant multinationals,
Serbia-friendly companies
and efficiency-seeking FDI
SOURCE: McKinsey; team analysis
(focus on mobile and gaming)

Wood processing
Serbias substantial infrastructure lag

(especially in transport) compared to
developed countries
Growth opportunity in telecom services
(especially mobile)
Growth opportunity in energy production
Power generation
Mobile/diversified operators
Shipping
Road construction
Railway construction
Air carrier
Large FDI inflow by multinationals

Utilizing Serbian Diaspora to attract FDI
Efficiency-seeking FDI amidst costcutting crisis initiatives
Food
Pharma
Chemicals
Electronics
Automotive
Software
Wood
Infrastructure
n/a
McKinsey & Company
| 57
1 Most growth is likely to come from productivity improvements, rather

than increased employment
GDP per capita, 2011, PPP, $ thousand
CEE1
19.0
Productivity
contribution
Labor utilization
contribution
EU15
20.4
4.5
34.9
1 CEE excluding Croatia
SOURCE: The Conference Board; Eurostat; Global Insight; International Monetary Fund; team analysis
McKinsey & Company
| 58
1 Given Serbias middle income status, more than half of Serbias future
growth can be expected to be in service related sectors
Services1
% of GDP, 19702001
Industry2
Agriculture
Low-income countries
Middle-income countries
(incl. Serbia)
High-income countries
80
80
80
70
70
70
60
60
60
50
50
50
40
40
40
30
30
30
20
20
20
10
10
10
0
1970
1980
1990
2000
0
1970
1980
1990
2000
0
1970
1980
1990
2000
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
McKinsey & Company
| 59
1 GDP per capita has been increasing with time, mostly driven by
productivity increase, with simultaneous growth in employment
Productivity
Hours per capita
GDP per capita
Employment
per capita
EU-15 economic growth

Indexed numbers1, 1970 = 100
U.S. economic growth

Indexed numbers1, 1970 = 100
250
250
200
200
150
150
100
100
50
1970
1980
1990
50
1970
2000
Year
1980
1990
2000
Year
1 The trends are based on real growth

Sources: The Conference Board; MGI
McKinsey & Company
| 60
1 Both higher efficiency and higher output value lead

to productivity growth
Reduce
input for a
given output
Consolidate to
better leverage
scale
Improve operational performance
Drivers for
productivity
performance
Find innovative
processes to improve
operations
Create innovative high
value added products
and services
Sell highervalue goods

Increase
output with
a given input
Source: MGI analysis
Close gap to bestpractice operations
Sell more goods

to increase capacity utilization
Shift to higher-value
goods within existing
product portfolio
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
McKinsey & Company
| 61
1 Driving service sector growth is critical, particularly in terms

of jobs growth
Sector contribution to a country's net growth of employment, 19852005
%, million employees
Low-income
countries
100% = 324
Medium-income
countries
100% = 50
High-income
countries
100% = 74
29
100%
Goods
9
32
129
91
Services
68
SOURCE: International Labor Organization; National Statistics; McKinsey Global Institute analysis
McKinsey & Company
| 62
1 Within a 3000km radius, Serbia has access to ~900 million people, >650
airports and ~100 cities with >1M population
Population by distance band
Distance in KM; Millions
900
710
280
67
500
SOURCE: ESRI World data
1000
2000
3000
500
1000
2000
3000
# airports
42
170
513
671
# of cities with
> 100k ppl
65
202
618
819
# of cities with
>1M ppl
21
72
94
McKinsey & Company
| 63
1 Serbias sector growth strategy should be squarely positioned to take

advantage of the major global trends (1/2)
Trends
Economic center of gravity
1
shifts to developing world
Urbanization rates increase
2 rapidly mostly in the
developing world
Global consumer class expands
3
rapidly in emerging economies
Labor force growth decreases
4 globally, but mostly developed
countries
Race to increase productivity
5 through technology and the
knowledge economy
Description
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 2050
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
6
Trade increases and new flows
emerge
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
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
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
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
McKinsey & Company
| 64
1 Serbias sector growth strategy should be squarely positioned to take

advantage of the major global trends (2/2)
Trends
Global energy demands rise, but
7 the source of supply remains
uncertain
Transition toward sustainable

8
practices
Description
Exploding demand from emerging markets will lead to ~1% p.a. rise in final energy
9 Increasing demand for food
10 Change in social values
Detailed
on next slide
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
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
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
Increasing demand for political and economic freedom
Declining focus on family unit and values
Less focus on religion globally
McKinsey & Company
| 65

growth strategy
1Sector
& institutions
2 Policies
BACKUP
3 Delivery
government take?

best at


SOURCE: McKinsey

entrepreneurship...
competitiveness
do business

leadership...
big outcomes in few

management
McKinsey & Company
| 66
2 The overarching goal of policy is to increase country competitiveness

by making it easier for businesses to do business
2013 global rank
(148 countries)
Top 50%
Global Competitiveness IndexEconomy wide score for Serbia

Rank out of 148 countries
Innovation and
sophistication
factors
Fall of 14 positions in 7 years to

the lowest position in Europe
Business sophistication
137
Innovation
112
Higher education and training
83
101
87
93
95
Efficiency
enhancers
Bottom 20%
Top 5 most
problematic factors
for doing business
Goods market efficiency
132
1
Corruption
Labor market efficiency
119
Financial market development
115
2
Inefficient
government
bureaucracy
Technologies readiness
60
Market size
69
3
Access to
financing
4
Government
instability
Institutions
2006
2009
2012
2013
Basic
requirements
Infrastructure
126
90
Macroeconomic environment
136
Health and primary education
69
SOURCE: World Economic Forum Global Competitiveness Index
5
Inadequate
infrastructure
McKinsey & Company
| 67
2 GCI detail: Serbia (1/2)
McKinsey & Company
| 68
2 GCI detail: Serbia (2/2)
McKinsey & Company
| 69
2 FDI attraction activities should be aligned with the

sector strategy
ILLUSTRATIVE
Criteria
I
Define pool of
investors in
priority investors
Shortlist players
who optimally
match local
value chain
II
SOURCE: McKinsey analysis
III
Select the
best
investors to
pursue
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)
Value chain fit where investors
optimally positioned to compete
Synergies with current local
industry ecosystem
Management team
Breadth, depth and quality of
product offering
Financial standing
Strength of supporting network
Branding
Appetite for investment
McKinsey & Company
| 70
2 Governments should differentiate their interventions and sectorlevel policies by the degree and target of intervention
Low
Setting 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
High
Building enablers
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
SOURCE: MGI/PSO Sector Competitiveness Project
Tilting the playing

field
Government as
principal actor
Governments can
Governments can play
choose to create
a direct role by
favorable conditions for Establishing statelocal production
owned or subsidized
through
companies;
Trade protection
Funding existing
from global
businesses to
competition
ensure their survival
Providing financial
Imposing
incentives for local
restructuring on
operations
certain industries
Shaping local
demand growth
through public
purchasing or
regulation
McKinsey & Company
| 71
2 Governments have a broad array of options available to them

across this spectrum of interventions
Low
High
A Setting ground rules/direction
B Building enablers
C Tilting the playing field
D Government as principal actor
Set regulatory environment
Develop infrastructure
Establish companies
1 Define labor and unionization

laws, rights, and taxes
2 Streamline bureaucracy to
reduce transaction costs and
time frames of doing business
3 Manage exchange rates
1 Expand and develop the

national road network
2 Allocate specialized
infrastructure (e.g., lanes for
efficient vehicles)
Define market environment

4 Negotiate free-trade
agreements with foreign
governments on sector exports
5 Enact vehicle operating
restrictions (e.g., speed limits,
driver qualification, and vehicle
inspections)
6 Regulate vehicle safety,
environmental, and other
performance standards
7 Control fuel prices (via tax
and subsidy levels)
8 Set vehicle acquisition costs
(e.g., VAT, registration fees)
9 Define vehicle approval
process before market entry
Build skilled labor pool
Incentivize domestic
production
1 Impose import restrictions
Tariffs
Quotas
Domestic content
requirements
2 Subsidize investments
(e.g., financial incentives
such as tax breaks for
Greenfield projects)
3 Regulate capital flows (e.g.,
limits on FDI and profit
repatriation)
4 Incentivize exports
Set sector direction

10 Create a vision and define a
strategy for the development
of the domestic sector
6 Subsidize sector research

and development
7 Support technology transfer
(JVs with global leaders)
3 Fund sector-specific
education programs (e.g.,
automotive engineering
degrees)
Facilitate sector processes
4 Facilitate discussion among
domestic sector stakeholders
5 Simplify interaction with
authorities (e.g., one-stopshop regulation interaction
partner)
Support innovation
SOURCE: MGI/PSO sector competitiveness project
Stimulate demand
5 Create vehicle purchase
incentives (e.g., scrap
schemes, technology
rebates)
6 Provide liquidity support
along the automotive value
chain (e.g., credit for auto
loans)
7 Leverage government as an
automotive consumer to
guarantee minimum demand
1 Establish state-owned
enterprises (SOE) to build
up sector from scratch
Support ongoing operations

2 Infuse cash into automotive
producers
Governmental loans
during crises (with/without
expected repayment)
By acquiring an equity
stake
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
McKinsey & Company
| 72
2 1980-1990s: Washington consensus (1/2)
"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
SOURCE: Literature review, McKinsey
McKinsey & Company
| 73
2 Best-practice example of "go to market" country strategy:

Singapore
1 Targeting and proactive
approach to preferred
investors
All industries are open to foreign

investment in Singapores 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
2 World-class country
sales approach
Why Singapore?
3 Streamlined governance
and fast implementation
Ranks no.1 on World Banks 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
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%)
SOURCE: Economic Development Board, Singapore; Country Commerce Report (Economist), WB
McKinsey & Company
| 74

France
investors
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 (Crdit
Impt Recherche CIR) represents a
reliable element of an innovative
companys 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" (knowledgebased economy) and the "Barcelona
objective" (3% of total GDP dedicated to
R&D)
sales approach
Launching the project
Presentation of the advantages offered by
SOURCE: Invest in France Agency
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, subcontractors and suppliers.
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
McKinsey & Company
| 75

France
investors
sales approach
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 midsized companies
Subsidies for business premises
Tax incentives
Employment and research activities
grants etc
1 Competitive Alternatives:
SOURCE: IFA Website, WB
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:
Worlds 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
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 Banks

Doing Business Rankings 2009;
Takes just 7days and 5 procedures to
start a business
KPMGs Guide to International Business Location, 2008

McKinsey & Company
| 76

Ireland
investors
sales approach
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.
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-ofthe-art optical networks with world class
national and international connectivity
SOURCE: IDA Ireland Website, WB
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
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.

Takes just 13 days and 4
McKinsey & Company
| 77

United Kingdom
investors
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.
SOURCE: UK Trade and Investment, WB
sales approach
Why UK?
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 Europes 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
UK Trade & Investmentsis the government

agency that help overseas
companies/investors in growing their UKbased 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-WeHelp/en-GB-list.html?nav
Takes just 13 days and 6
McKinsey & Company
| 78

Georgia
investors
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
sales approach
Why Georgia?
Worlds Leading Reformer: On World Banks

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

Business Rankings 2009;
Takes just 3 days and 3 procedures to

start a business
McKinsey & Company
| 79

growth strategy
1Sector
& institutions
2 Policies
BACKUP
3 Delivery
government take?

best at


SOURCE: McKinsey

entrepreneurship...
competitiveness
do business

leadership...
big outcomes in few

management
McKinsey & Company
| 80
DELIVERY
McKinsey & Company
| 81
DELIVERY
3 A multi-year culture change journey can be tailored based on the

transformational change toolkit
Performance
1
Aspire
Where do we
want to go?
Assess
How ready
are we to go
there?
Architect
What do we
need to do to
get there?
Vision
Capability
platform
Portfolio of
initiatives
Act
How do we
manage
the journey?
Delivery
model
Advance
How do we
keep moving
forward?
Continuous
Improvement
Health
Health
essentials
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
Discovery
process
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
Influence
model
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
Change
engine
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
Capability
building
Ensure continuous learning and improvement of all leaders

along existing and new initiatives
Such a journey would typically be agreed in a facilitated workshop with the top
leaders in the country, taking a we dont leave until its 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 transforming
your organisation', 2010.
McKinsey & Company
| 82
DELIVERY
3 Depending on complexity, a typical transformation program

can take up to a year to become established
Frame
Month
Aspire Where
do you want to
go?
10
11
EXAMPLE
12
Define clear
organizational aspirations
tied to the mission;
understand public
sector factors at play
Assess capabilities,
mindsets, and
implications of the
Assess How
ready are we to
go there?
public sector
factors
Architect What
do we need to
get there?
Develop initiatives to transform

organization, and properly
address the public sector

factors
Design and execute approach to rolling out initiatives across the
organization; build broad ownership and adjust and refine the program
based on on-going monitoring and review. In particular draw upon the
Act How do we
manage the
journey?
Advance How
do we keep
moving forward?
Objective
five critical public sector change actions, while avoiding the

major pitfall
Begin to
develop
change
leaders
Top team
Begin to
develop
change
leaders
Top 100
Begin to
develop
change
leaders
Top 500
Set up mechanisms for continuous improvement,

knowledge and best practices sharing and governance.
Develop leaders. Monitor factors and leverage change
actions
Leadership alignment workshop Leadership alignment workshop
SOURCE: McKinsey Organization Practice
Leadership alignment workshop
McKinsey & Company
| 83
DELIVERY
3 There are a number of ways to bring the vision of having the top talent
to life
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)
Diaspora
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
Meritocracy
Education
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)
McKinsey & Company
| 84
DELIVERY
3 How to get it Done Setting in Motion the Virtuous Cycle: the Six
Elements of Agriculture Transformation
Developed as part of the World

Economic Forums 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 multistakeholder partnerships and
have six elements in common
McKinsey & Company
| 85
DELIVERY
3 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
2. Write the story
3. Deliver the story
Set the stage where we are
Start with the political leaders
To be consistently delivered by
today and why do we need to

change
Introduce the dramatic conflict
personal vision
Crystallize the key messages
(e.g. changes in mindsets such
as )
Back them up by facts/proof
points
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.
burning platform or shining

beacon
Reach resolution description

of our plan and why we can
achieve it
McKinsey & Company
| 86
DELIVERY
3 There are many examples of effective delivery units set up by

governments to implement their growth agendas across the world
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
UK Prime Ministers Delivery Unit
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
Frances President and Ministry of

Budgets RGPP1
Set up: 2008
Focus areas: State and central
administrations 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
Government of Chiles Delivery Unit
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
Thailand 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
Bhutans Performance Facilitation 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
Malaysias PEMANDU
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
l
1 RGPP stands for Rvision gnrale des politiques publiques or General Review of Public Policies
SOURCE: McKinsey
McKinsey & Company
| 87
DELIVERY
3 An effective delivery unit needs to establish routines, solve problems

early and build momentum and sustain progress
Cycle of effective delivery
A
Routines are
the formal
mechanisms
to identify and
solve
problems
SOURCE: McKinsey
Use routines
to monitor
performance
Identify, classify,
and solve
problems
and the delivery unit

constantly monitors and
confronts problems
Build momentum and sustain progress

Routines 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
At the same time, the

delivery unit must always
respond to cultural or
behavioral challenges
that may hinder the
progress of delivery
McKinsey & Company
| 88
DELIVERY
3 Three main roles must be clearly defined when setting up a delivery

unit
Description of roles and responsibilities
System
leader
Text
Delivery unit
Department leaders and staff

members
Head of a specific
Composed of senior Delivery
Provide data and other key
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
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
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
potential bottlenecks,
escalates and suggests
solutions
SOURCE: McKinsey
McKinsey & Company
| 89
DELIVERY
3 Once the routines are planned, create and publish a master calendar
that should be followed in a draconian fashion
Meeting or report
Routine
Delivery
reports
Stock-takes
with system
leader
Monthly notes
submitted
Month 1
10
11
12
Semiannual delivery reports submitted to system leader
Quarterly progress
review
Data trends
Issues
Recommendations
Quarterly
progress
review
Quarterly
progress
review
Quarterly
progress
review
Monthly updates sent to system leader
System actors
System actors submit performance data to delivery unit for monthly notes and quarterly
progress reviews
SOURCE: McKinsey
McKinsey & Company
| 90
DELIVERY
3 Frequent reports are an effective way to provide a

short-term synopsis on the progress of delivery plans
Sample monthly report
U.S. K-12 education
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
Description of challenges
May also recommend
solutions
Source: McKinsey delivery team
McKinsey & Company
| 91
DELIVERY
EXAMPLE
3 3-6 Month Delivery Report example

4 HOUR TOTAL TIME IN A&E, ENGLAND TOTAL
Performance has sustained at 90% since July but is now

static and increasingly off-trajectory
100%
95%
Progress against
90% trajectory
85%
80%
LDP profile
2003/04 floor
4 week moving average - all types
4 week moving average - type 1
75%
28-Mar-04
14-Mar-04
29-Feb-04
15-Feb-04
01-Feb-04
18-Jan-04
21-Dec-03
04-Jan-04
07-Dec-03
23-Nov-03
26-Oct-03
09-Nov-03
28-Sep-03
12-Oct-03
14-Sep-03
31-Aug-03
17-Aug-03
20-Jul-03
03-Aug-03
06-Jul-03
22-Jun-03
08-Jun-03
25-May-03
27-Apr-03
11-May-03
13-Apr-03
30-Mar-03
70%
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
operational for possible late
Clear arrangements
measurable
breaches
statement of what
Results communicated to wider public
success looks like
Source: USEDI Delivery Handbook
Performance of type X departments yet to reach 90%

National aggregated position hides variation - in October 2003,
An analysis of
44% of type Xs are still below 90%, handful are still below 80%
Method for dealing withprogress
breaches now clear, public
consultation completed, and final decision now made
Evaluation of new initiative for improving processes in every
Department currently underway
Action required
Urgent
What DU will do
Communicate the 98% decision clearly to the front line
to help
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
The
to of poor performers.
unit steps
level, withnecessary
a focus on the tail
PMDU/Dept
review
performance and these actions at an
achieve will
that
success
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
McKinsey & Company
| 92
DELIVERY
3 Delivery labs plays a crucial role in the 8 step transformation approach

used recently in Tanzania
8 Steps of Transformation
Strategic
Direction
Multiple
Cabinet
retreats to
ascertain
the direction
needed
Delivery
Labs
Establish in
detail what
needs to be
done
Open Day
BRN
Roadmap
KPI
targets
Implementation
IPR/
Audit
Annual
Report
Share lab
output with
people and
seek their
feedback
Tell the
people
what we
are going
to do
Setting
KPIs for the
whole
Cabinet
Problem
solving, on
the ground
implementation
External
validation
on results
achieved
Tell the
people
what we
have
delivered
McKinsey & Company
| 93
DELIVERY
3 To get started what exactly is a delivery lab?

What is the
purpose of a
lab?
Who
participates in
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
The invited cross-organizational team works

What happens
in a lab?
How is
commitment
secured?
full-time in one location (6-8 weeks)

The lab involves intense problemsolving,
supported by a facilitator team
Key stakeholders are engaged early and
continuously (~every 2 weeks)

Critical stakeholders sign off on programmes
and are accountable for implementation
A 3-feet level implementation programme,

What are the
end products?
including agreed solutions, detailed execution

plans with responsible owners (across
organizations), timelines and targets
Delivery labs can be run as part of

goverment transformation
programmes or as a stand alone
problem-solving technique
McKinsey & Company
| 94
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
Lab
Lab
Lab
Lab
Lab
Lab
report
reports
reports
reports
reports
reports
3-feet plan
Description
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
Budget
KPI
Executive
summary
Detailed funding requirement for each initiative

Should be designed based on input from the
government, depending on level of detail required
List of KPIs for performance management for each
initiative, and also overarching KPIs for the lab
20-30 pages version of the full lab report, with
summary of each component (no need to include
3-feet plans)
McKinsey & Company
| 95
DELIVERY
3 Six key areas were prioritized in Malaysia, in accordance with the

countrys vision of 1Malaysia, People First, Performance Now
1Malaysia
People First
Performance Now
Reducing
Corruption
Reducing
Crime
Reducing
Poverty
Enhancing
Education
Improving
Rural Basic
Infrastructure
Urban
Public
Transport
SOURCE: Websearch, www.transformation.gov.my
McKinsey & Company
| 96
DELIVERY
3 In Sept 2009, the Malaysian govt 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
Identified and agreed upon
Reducing Crime
More than 200 civil servants
Widening access to quality

and affordable Education
More than 600 other
Improving Infrastructure
in rural areas
Raising living standards of

Low Income Households
Fighting Corruption
Improving Urban Public

Transport (medium-term)
stakeholders including
representatives from NGOs,
private sector and other
ministries and agencies
8 weeks of full-time
participation in labs
KPIs and targets for each key

area over 3 years
Defined clear initiatives and

budget requirements to deliver
targets
Obtained stakeholder signoff on all initiatives proposed
McKinsey & Company
| 97
DELIVERY
Discipline of Action Meetings
3 The secret of the GTP accelerated progress is due to Discipline

of Action & the Leveraging Game
1
Weekly
Ministerial
Meetings
PSM
Meetings
DTF
Meetings
Weekly
(6-7 hrs / week)
NKRA front-line
~500,000 at federal
and state level
(1.2 million civil
servants)
Ministry
DMO +
Ministerial
teams
PEMANDU
Monthly
(6-8 hrs/month)
PM /
Cabinet
McKinsey & Company
| 98
DELIVERY
3 In Dec 2009, 3 Open Days were held to syndicate Lab output

with the general public by obtaining feedback/ generating buy-in
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)
McKinsey & Company
| 99
DELIVERY
3 MCG has developed an approach to capability-building in government,

grounded in extensive research and adult learning principles
Extensive research
1. 4,000 executives surveyed
informs our approach to building capabilities within government
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 lecturebased 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-thetrainer)
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
SOURCE: McKinsey Center for Government
McKinsey & Company
| 100
DELIVERY
3 Capability-building programs must be grounded in adult learning

principles to increase retention and impact on actual work
Implications
Recall rate of simple learning content
Learning by
Hearing
(explanation)
Overinvest in interactive classroom
Recall rate after 3

months in %
sessions and field-based programs
Ensure immediate, on-the-job

10
application of capabilities learned
Develop capabilities through repetition

Seeing
(example)
Use reflection to engage with content
32
Doing
(experience)
prior to formal training
Utilize peer interactions to drive

65
learning from others and reinforce

existing capabilities through peer
teaching
I hear and I forget,

I see and I remember,
I do and I understand
Confucius
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
McKinsey & Company
| 101
DELIVERY
3 Building on-the-ground lean management capabilities, for example,

can significantly improve governments service operations
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
Task A Queue
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
Sat
Sat
Sat
Sat
Sat
Fri
Sat
Tue
Thu
Mon
Wed
Fri
Tue
Task D
1,136
1,122
1,153
1,053
913
843
752
745
730
734
737
Thu
Task C
191
188
179
140
117
122
119
120
103
92
117
Mon
Task B
1,512
1,379
1,301
1,188
1,295
1,469
1,321
1,267
1,163
1,149
1,087
Wed
Task A
1,808
1,823
1,775
1,860
1,961
1,958
1,987
1,975
2,001
2,034
1,905
Number of tasks (post multiplier)
Total items
1-Mar Tue
2-Mar Wed
3-Mar Thu
4-Mar Fri
7-Mar Mon
8-Mar Tue
9-Mar Wed
10-Mar Thu
11-Mar Fri
14-Mar Mon
15-Mar Tues
Tue
Pre-Multiplier
Queue
1- 2- 3- 4- 7- 8- 9- 10- 11- 14- 15- 0- 0- 0- 0- 0- 0Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Jan Jan Jan Jan Jan Jan
2,000
1,500
1,000
500
Sat
Sat
1- 2- 3- 4- 7- 8- 9- 10- 11- 14- 15- 0- 0- 0- 0- 0- 0Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Jan Jan Jan Jan Jan Jan
1,400
1,200
1,000
SOURCE: McKinsey Center for Government, Improving Government Performance Through Lean Management, Oct 2012
Sat
Sat
Sat
Sat
Tue
Mon
Fri
Other
1,136
1,122
1,153
1,053
913
Thu
NIGO
191
188
179
140
117
2,500
Wed
Maint
3,780
3,448
3,253
2,970
3,238
Task D
1
Tue
Pmts
3,616
3,646
3,550
3,720
3,922
Task C
1
Mon
Total tasks
1-Mar Tue
2-Mar Wed
3-Mar Thu
4-Mar Fri
7-Mar Mon
Task B
2.5
Fri
Post-Multiplier
Queue
Task A
2
Thu
Factor
3,000
Wed
Multipliers
3,500
Tue
Source: Open - Suspended Report

Note: Each month, please update the dates; remember to skip weekend days
Note: All numbers in red should be directly input from the OS report.
Number of tasks (post multiplier)
Task B Queue
4,000
McKinsey & Company

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200
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Quantum Leap-What Will It Take To Double Serbia S Economic Growth in The Next Decade?

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Quantum Leap- what will it take to

double Serbias economic growth

McKinsey industry and

Specific JVs to jointly

Over 25,000 former

More than 18,000

Global Public Health

More than 100

offices in more than

McKinsey & Company

almost half of which included economic development

Deep functional expertise

Worked for over 90 governments

390 McKinsey partners across the globe with

leading global foundations (Bill and Melinda Gates

recent economic development experience

McKinsey & Company

Our topic today what can the Serbian government do to achieve a

Real GDP growth, USD (base 2010)

Countries that experienced single

Is sustained >5% growth

1991-2000 2000-2008 2008-2012 Forecast2

Illustrative (low data quality)3

The next decade

NB: ~Two thirds of Serbias economy is managed by the government

SOURCE: McKinsey Global Growth Model

McKinsey & Company

The government may choose to launch one of five types

Main interventions associated

Reduce governmentcontrolled constraints

Keep the same quality

FTE & OPEX reductions

Most likely to meet

Mix of the two types of

McKinsey & Company

Recent, high and sustained economic growth is possible

High income (76 countries)

(except China and

Growth rates over 45% subjectively feel

With a growth rate of

7%, roughly double of

Real GDP per capita

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

McKinsey & Company

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

McKinsey & Company

Ideas others have leveraged to achieve a quantum leap

Set a compelling vision of

that will be achieved by

... supported by a change

Enable local and foreign

Committed and visible

... supported by Delivery

McKinsey & Company

SECTOR GROWTH STRATEGY

SOURCE: Global Insight; McKinsey Global Institute analysis

McKinsey & Company

SECTOR GROWTH STRATEGY

1 Example of a Sector strategy overview, similar to what many other

Bubble size: additional

Labor productivity; EUR per employee

Number of people employed