Sustaining and Enhancing Londons Leadership Position

Venkie Shantaram Partner

McKINSEY GLOBAL INSTITUTE Presentation to the LSE March 2012

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

The McKinsey Global Institute (MGI) An overview

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Overview Founded in 1990 as McKinseys business

and economics research arm

MGI mission and aspirations Help leaders in the commercial, public,

and social sectors develop a deeper understanding of the evolution of the global economy

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MGIs core research areas

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Productivity and growth

Urbanization

Global capital markets

The future of work

Technology and innovation

Resources

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MGIs report Urban World highlighted the importance of 600 cities in driving future global growth

Today

1.5 billion people live in the top 600 cities 22 percent of global population $30 trillion of GDP in 2007 more than half of global GDP 485 million households, with average per capita GDP of $20,000 $21 trillion of GDP in 2007 generated by the top 100 cities

Tomorrow

2.0 billion people will live in these 600 cities in 2025 25 percent of the global population $64 trillion of GDP in 2025, nearly 60 percent of global GDP 735 million households will live in these cities, with average per capita GDP of $32,000 235 million households in developing world cities will have income above $20,000 per annum
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1 The 600 are the top cities by contribution to global GDP growth from 2007 to 2025. SOURCE: Urban world: Mapping the economic power of cities, McKinsey Global Institute; McKinsey Global Institute Cityscope 1.0

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Successful cities will be the key to future economic growth in the UK

78% share of English GDP growth from urban areas in last 10 years
73% share of English population living in urban areas 26% local government share of public sector expenditure

81% of central government targets are on local spending

SOURCE: ONS, DEFRA, CLG Local Government Financial Statistics England 2010, Barker Review,

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Key messages

London is one of the worlds great cities An economic and cultural powerhouse
It has the potential to remain so, and generate significant economic growth over the next 20 years However, there are potential threats to Londons pre-eminence A clear strategy for London would increase the chances of it achieving its full potential

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London is the third largest city in the world by GDP

2007 city rankings
Rank
1 2 3 4 5

Grey italic text Developing regions Normal text Developed regions1

GDP2
Tokyo

Total population
Tokyo

Children3
Mexico City

Total households
Tokyo

Households with annual income over $20,0004

Tokyo

New York

Mumbai
Mexico City Sao Paulo Osaka New York Shanghai Kolkata Beijing Delhi Chongqing

Mumbai
Karachi Kolkata Tokyo Sao Paulo Dhaka Delhi New York Kinshasa Manila Lagos Buenos Aires Cairo Chongqing Los Angeles Istanbul

Osaka
New York Shanghai

Osaka
New York

London
Paris Los Angeles Osaka Chicago Rhein-Ruhr Nagoya Randstad Milan Washington, D.C. Houston Dallas Philadelphia Belgian central metro San Francisco Boston Moscow Sao Paulo Madrid Mexico City Atlanta Miami Rhein-Main

London
Rhein-Ruhr Paris Los Angeles Moscow Chicago Nagoya Mexico City Seoul Milan Randstad Istanbul Fukuoka Philadelphia Taipei Sao Paulo Hong Kong Miami Dallas Washington, D.C. Madrid Belgian central metro

London
Beijing Sao Paulo Rhein-Ruhr Chongqing Paris Mumbai Mexico City Los Angeles Moscow Seoul Buenos Aires Delhi Kolkata Rio de Janeiro Chicago Nagoya Milan Tianjin Istanbul Randstad

6
7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

London
Dhaka Buenos Aires Los Angeles Karachi Paris Manila Rio de Janeiro Rhein-Ruhr Istanbul Cairo Moscow Seoul Bangkok

London
Osaka Lahore Rio de Janeiro Paris Baghdad Jakarta Lima

1 Developed regions comprise the United States and Canada, Western Europe, Australasia, Japan, and South Korea 2 GDP 2007 in predicted real exchange rate 3 Population below age 15 4 Households with annual incomes greater than $20,000 in purchasing power parity (PPP) terms 5 Mexico City Metropolitan Region NOTE: For metropolitan regions, we use the first name of the region: e.g., New York for New York-Newark

SOURCE: McKinsey Global Institute Cityscope 1.3

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 and the largest in Europe

2007 city rankings
Rank
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Grey italic text Eastern Europe Normal text Western Europe

GDP
London
Paris Rhein-Ruhr

Total population
London
Paris Rhein-Ruhr

Share of retirees1
Trieste Genoa Chemnitz

Children
London
Paris Rhein-Ruhr

Households with annual income over $70,000

London
Paris Rhein-Ruhr

Randstad
Milan Belgian central metro Madrid Rhein-Main

Milan
Randstad Madrid Barcelona (ESP) Belgian central metro

Ravenna
Livorno Parma Salamanca Florence

Randstad
Milan Madrid Lille Belgian central metro

Milan
Randstad Madrid Barcelona (ESP) Rhein-Main

17 18 19 20 21 22 23 24 25

Munich Barcelona (ESP) Rome Vienna Hamburg Stuttgart Lille Athens Stockholm Birmingham Oresund Oslo Dublin Rhein-Neckar Berlin Noord Venice

Upper Silesian metro Lille Rhein-Main Athens Rome Naples Berlin Vienna Munich Warsaw Stuttgart Hamburg Birmingham Budapest Lisbon Rhein-Neckar Venice

Perugia Lubeck Nice Turin Leipzig Rostock Oviedo Hannover Toulon Dresden Braunschweig Modena Burgos Limoges Bremen Kassel Corunna

Barcelona (ESP) Naples Upper Silesian metro Rhein-Main Birmingham Rome Athens Vienna Munich Stuttgart Manchester Budapest Warsaw Hamburg Lisbon Noord Liverpool

Athens Munich Rome Lille Vienna Stuttgart Birmingham Belgian central metro Rhein-Neckar Luxembourg Venice Gelderland Manchester Hamburg Noord Stockholm West Yorkshire

1 Share of population aged 65 and above. 2 Households with annual incomes greater than 70,000 in PPP terms.

SOURCE: McKinsey Global Institute Cityscope 1.3

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The 3 largest economies in Europe have different profiles UK is unusually dependent on London
Number of cities

Small cities & Rural areas Middleweights Top city

Share of GDP %
24 40 37

Share of population %

Per capita GDP gap to country Indexed, country = 100

79 82 86

30 49 43

43 31 49 46 33 44

94

96

112

138
33 29 15 24 18

157 106

14

United France Kingdom

Germany

United France Kingdom

Germany

United France Kingdom 33 26

Germany 29
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SOURCE: McKinsey Global Institute Cityscope 1.2

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In terms of growth, while London outpaced the UK comfortably, Paris and Rhein-Ruhr were unable to outpace middleweights
Share of country GDP growth 2000-07 by city type %
Small cities & Rural areas Middleweights

CAGR, 2000-07, %

Megacities

United Kingdom
2.5
22

France
1.8

Germany
1.6

2.3
38 Middleweights (examples): Birmingham Manchester

1.7

40

1.7

39

2.2

33

Middleweights (examples): Lyon Lille

46

Middleweights (examples): Munich Stuttgart

2.0
London
39

1.5
Rhein-Ruhr 14

3.0
29

Paris

1.9

1.5

SOURCE: McKinsey Global Institute Cityscope 1.2

McKinsey & Company

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Key messages

London is one of the worlds great cities An economic and cultural powerhouse

It has the potential to remain so, and generate significant economic growth over the next 20 years
However, there are potential threats to Londons pre-eminence A clear strategy for London would increase the chances of it achieving its full potential

McKinsey & Company

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Top 25 hot spots in 2025 from MGI Cityscope

2025 city rankings
Rank
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Grey italic text Developing regions Normal text Developed regions1

GDP2
Tokyo New York

GDP growth 2007-25

Shanghai Beijing Shenzhen Guangzhou Tianjin Chongqing Los Angeles New York So Paulo Wuhan Moscow Shenyang

Total population
Tokyo Mumbai Shanghai Beijing Delhi Calcutta Mexico City5 So Paulo Dhaka Chongqing New York Karachi Osaka

Children3
Kinshasa Karachi Lagos Mumbai Dhaka Calcutta Mexico City5 Delhi Manila Tokyo New York Los Angeles So Paulo Cairo Lahore Buenos Aires

Total households
Tokyo Shanghai Beijing Chongqing Osaka New York Mumbai

Households with annual income over $20,0004

Tokyo Osaka New York

London
Los Angeles Shanghai Paris Beijing Osaka Rhein-Ruhr Chicago So Paulo Shenzhen Moscow Houston Dallas Guangzhou Washington, D.C. Tianjin Randstad Mexico City5 Seoul Nagoya Singapore Hong Kong Atlanta

London
Beijing Shanghai Paris Rhein-Ruhr Los Angeles So Paulo Moscow Mexico City5 Seoul Nagoya Chicago Milan Mumbai Istanbul Hong Kong Dallas Randstad Bangkok Shenzhen Taipei Houston

London
So Paulo Delhi Paris Lagos Rhein-Ruhr Mexico City5 Calcutta Tianjin Shenzhen Hangzhou Chengdu Los Angeles Moscow Wuhan Dhaka Buenos Aires Seoul

London
Hangzhou Chengdu Singapore Dallas Nanjing Tokyo Foshan Bangkok Istanbul Paris Houston Seoul

London
Lagos Manila Kinshasa Los Angeles Shenzhen Buenos Aires Cairo Istanbul Paris Tianjin Bangkok

17 18 19 20 21 22 23 24 25

London
Baghdad Kabul Luanda Istanbul Khartoum Paris Nairobi Dar es Salaam

1 Developed regions comprise the United States and Canada, Western Europe, Australasia, Japan, and South Korea. 2 GDP 2007 to 2025 in predicted real exchange rate. 3 Population below age 15. 4 Households with annual incomes greater than $20,000 in purchasing power parity (PPP) terms. 5 Mexico City Metropolitan Region. NOTE: For metropolitan regions, we use the first name of the region: e.g., New York for New York-Newark.

SOURCE: McKinsey Global Institute Cityscope 1.3

McKinsey & Company

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London is expected to both grow substantially in absolute size and increase its GDP/Capita above the European median
GDP/Capita growth 2007-25 USD 000
40
Oslo

Small middleweights (<2 mn inhabitants) Mid-sized middleweights (2-5 mn inhabitants Large middleweights (5-10 mn inhabitants)

Megacities (>10 mn inhabitants)

Bubble size indicative of GDP/Cap, 2007

30
Munich

20

Rhein-Ruhr Randstad

10
Paris Milan

London

Median=9.5
Madrid Barcelona

-10 100

1,000

10,000

100,000

1,000,000 GDP growth 2007-25 USD million

NOTE 1: Only European Cities shown NOTE 2: All figures relate to real exchange rate calculations

SOURCE: McKinsey Global Institute Cityscope 1.3

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 the growth rate figures are in the mid tier of even the largest cities due to Londons high initial size
GDP 2007 USD billion
Warsaw Budapest Upper Silesian metro Munich Hamburg Rhein-Neckar Rhein-Ruhr Stuttgart Rhein-Main Berlin Vienna Randstad Belgian central metro London Paris Manchester Lille Barcelona (ESP) Birmingham Madrid Lisbon Milan Venice Rome Athens Naples 12 17 12 4 14 43 25 37 42 27 44 233 91 300 47 65 128 68 96 59 215 87 66 52 115 2.5% 2.4% 2.2% 2.1% 2.0% 2.0% 1.9% 1.8% 1.7% 1.6% 1.6% 1.5% 1.2% 1.2% 1.1% 1.0% 0.9% 0.9% 0.6% 0.6% 0.5% 0.5% 0.2% 112 3.9% 3.7%

GDP growth rate, 2007-25 Percent CAGR

5.2% Warsaw Upper Silesian metro Budapest Stuttgart Rhein-Ruhr Rhein-Main Rhein-Neckar Munich Hamburg Berlin Randstad Vienna Lille Belgian central metro Paris London Manchester Birmingham Lisbon Athens Venice Naples Rome Milan Barcelona (ESP) Madrid

GDP/Cap 2007 USD 000

23 12 23 49 43 53 46 62 51 35 54 51 34 53 64 64 42 42 30 33 42 22 46 47 38 42

GDP/Cap growth rate, 2007-25 Percent CAGR

5.1% 4.0% 3.5% 2.2% 2.2% 2.0% 1.9% 1.8% 1.7% 1.6% 1.3% 1.2% 1.2% 1.0% 0.9% 0.9% 0.7% 0.6% 0.5% 0.2% 0.2% 0.2% 0.2% 0.2% 0.1% 0.1%

NOTE 1: Only European Megacities, large- and midsized middleweights shown NOTE 2: All figures relate to real exchange rate calculations

SOURCE: McKinsey Global Institute Cityscope 1.3

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Key messages

London is one of the worlds great cities An economic and cultural powerhouse

It has the potential to remain so, and generate significant economic growth over the next 20 years

However, there are potential threats to Londons pre-eminence

A clear strategy for London would increase the chances of it achieving its full potential

McKinsey & Company

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Potential threats to Londons pre-eminence

Reduced open-ness to skilled immigrants and international students Loss of competitiveness in global financial services due to super-equivalent regulation Restrictions on Londons physical expansion

Reduced attractiveness as a HQ location due to poor infrastructure, uncompetitive tax regimes and restrictions on skilled immigration

Under-investment in Londons cultural and artistic heritage a major driver of quality of life and essential to under-pin its attractiveness to global talent Under-investment in primary, secondary and tertiary education in London

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Despite the crisis, London remains the leading international financial centre
Financial services contribute 3-6X more to the overall balance of payments in the UK than they do in other countries EUR billions
51 40 30 9 11 13 9 11 12 3 3 4 3 5 5 3 3 4 -1 -1 -1 -1 5 -5 -5 -6 -5 -5 -6
2006

2007
2008

UK

Luxembourg

Switzerland
Banks

Ireland

US
Securities dealers Baltic Exchange

Germany

Japan

France

Hong Kong

Mexico

China
Fee income Other exports

Financial services net exports EUR billions

Fund Managers Insurance

Other financial services

Contribution of Banks to financial services net exports EUR billions

Spread earnings FISIM

2

CAGR1 % 00-05 50,557 40,426 29,893 24,914 26,692 24,283 22,195 15,784 19,307 15,881 41,849 9 16 24 -10 05-09 15 14 8 18,265 52 13,148 14,929 12,150 8,754 9,559 31,049 24,431 25,336

CAGR1 % 00-05 16 05-09 14

28

16

-7
20 6

-11
6,841 6,958 38 3 1999 2000

18 4 12

19 12 -15

1999 2000

01

02

03

04

05

06

07

08

2009

01

02

03

04

05

06

07

08

2009

1 Compounded Annual Growth Rate

2 FISIM stands for Financial Intermediation Services Indirectly Measured

SOURCE: ONS Balance of Payments Pink Book, IMF, The CityUK research

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Multiple factors drive Londons competitive success

Culture of innovation Magnet for global talent Low crime rate Open migration English speaking Openness to foreign ownership Commercially minded employment laws Stable legal framework Benign corporate tax rates Historically predictable tax regime

Strong arts and culture

People and culture

Overall context

Favourable personal tax rates

Cost of living

Deep local talent pool

Noninvasive approach of tax authorities Regulatory system and reputation

Distinctive professiona l services

Leading, but unsupportive financial media

Must visit road-show destination

Global centre for research

Welcome to foreigners

Primary international transport hub

System and services

Robust technology infrastructure/ future capacity

Proximity to eurozone

Customer cluster

Strong ties to US

Extensive transport network

Cutting edge sophisticated complex client needs

Time zone bridging US and Asia

Global client base

London retains top position in the Global Financial Center Index for 2010
Source: Clusters and the New Economics of Competition (Michael Porter) McKinsey & Company

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However, the outlook is worrying on several factors

Culture of innovation Magnet for global talent Low crime rate Open migration English speaking Openness to foreign ownership Commercially minded employment laws Stable legal framework Benign corporate tax rates Historically predictable tax regime

Competitiveness increasing Competitiveness flat Competitiveness decreasing

Strong arts and culture

People and culture

Overall context

Favourable personal tax rates

Cost of living

Deep local talent pool

Non-invasive approach of tax authorities Regulatory system and reputation

Distinctive professiona l services

Leading, but unsupportive financial media

Must visit road-show destination

Global centre for research

Welcome to foreigners

Primary international transport hub

System and services

Robust technology infrastructure/ future capacity

Proximity to eurozone

Customer cluster

Strong ties to US

Extensive transport network

Cutting edge sophisticated complex client needs

Time zone bridging US and Asia

Global client base

London retains top position in the Global Financial Center Index for 2010
Source: Clusters and the New Economics of Competition (Michael Porter) McKinsey & Company

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Key messages

London is one of the worlds great cities An economic and cultural powerhouse

It has the potential to remain so, and generate significant economic growth over the next 20 years However, there are potential threats to Londons pre-eminence

A clear strategy for London would increase the chances of it achieving its full potential

McKinsey & Company

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5 levers provide a common architecture to identify opportunities for economic growth

Concentrations of industries, functions, and occupations Talent production, attraction, retention, and matching to jobs

4 Physical and virtual infrastructure Enablers 5 Public and civic institutions

1 Economic sectors/ clusters

2 Human capital
Linkages and movement of goods, people, and information

3
Innovation and entrepreneurship

Government efficiency
and efficacy Business environment Tax value proposition

Innovation performance Entrepreneurial ecosystem

Source: Team economic development plans; Brookings Metropolitan Policy Program, Chicago Plan for Growth

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Priorities for Londons economic development

Preserving Londons role as the leading international financial centre Expanding leadership in professional and business services Maintaining leadership in creative industries Building on early success in High Tech and bio science

Remaining open to skilled immigration Building on Londons great universities as knowledge factories and magnet for international talent Expanding affordable housing Providing more rented accommodation for young citizens

1 4 Physical and virtual infrastructure Economic sectors and clusters 3 5 Public and civic institutions Innovation and entrepreneurship

2 Human capital

Continued leadershi p

Allowing London to expand rethink green belt policy Building more airport capacity Investing in public transport infrastructure Eliminating road bottlenecks through road-pricing and usage taxes

Openness to global talent Priorities Creative industries Tourism Bioscience High tech Prof & Business Services Financial services

Stronger decision rights for London, as part of de-centralisation of power in the UK to cities Investment in arts and culture, and public spaces Equitable distribution of planning gains to encourage development and reduce local taxes
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Sustaining and Enhancing Londons Leadership Position

Venkie Shantaram Partner

McKINSEY GLOBAL INSTITUTE Presentation to the LSE March 2012

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