Here are 10 trends – and some interesting markets and projects to watch – from KPMG’s Global Infrastructure leaders Nick Chism, James Stewart, Julian Vella and Stephen Beatty.
TREND 1: Population drives demand
The challenge of moving projects from development into procurement has likely been the hottest infrastructure topic over the past few years. But, while much debate has been had, little progress has been made.
If governments hope to stay ahead of increasing demand, however, they will need to take action now and commit investment decisions. The rise in demand is unyielding: populations are steadily increasing and – in the developing world – urbanization is rapidly becoming the norm. Yet, while there should be no doubt that more infrastructure will be needed, many governments seem ill-equipped or unprepared to manage the program of work required.
This is a shame. The reality is that any lack of clarity on how to pay for infrastructure will result in projects lingering in the development pipeline when they should be moving forward.
TREND 1: Market to watch - Brazil
Brazil has invested heavily in stadiums, transport and urban regeneration in the run-up to the 2014 World Cup. The impressive scale and pace of public investment will continue in the near-term as the country prepares for the 2016 Olympic Games in Rio de Janeiro.1The challenge for Brazil will be to transfer this momentum to the wider infrastructure program while international investors wait for much anticipated market reforms to be implemented.
TREND 2: Investment cataly zes growth in developing markets
There should be little doubt that infrastructure represents a path to economic growth. But achieving the required improvement in infrastructure will cost dearly; Asia alone is thought to need some US$11 trillion in basic infrastructure investment between now and 2030.2 Africa and Latin America may require substantially more.
Not surprisingly, these new markets continue to be the focus of growth for many infrastructure players as companies push the boundaries of their traditional markets to develop projects and sell materials in faster developing jurisdictions. We’ve also seen increasing outbound capital from investors in Japan, South Korea and China making a strong push into lucrative global markets, and we expect this to continue in 2014 and beyond.
TREND 2: Market to watch - Africa
There are several rapidly emerging markets for infrastructure investment in Africa, with many countries enjoying long periods of political and economic stability. While it seems that the continent has turned a corner in recent years with countries like Nigeria, Kenya and South Africa carving out expanded roles in the global economy, affordable power and clean water remain critical issues that need to be addressed, with improved education and healthcare not far behind.
TREND 3: Coaxing out the new models
One area that will require significant attention over the next few years will be the development of new infrastructure models to better recognize long-term objectives and lifecycle value. Unfortunately, new funding and finance models have been slow to develop and the institutional debt market has made less progress than anticipated.
But new models must emerge if deal flow increases as expected and capacity in the financial markets comes under significant pressure. We believe that this, coupled with the need to finance complex assets such as nuclear power and highspeed rail, will ultimately force new models to emerge.
TREND 3: Market to watch - India
While India has made solid commitments to infrastructure, creating a robust domestic market for private investment, the country will undergo a critical election in 2014 that will shape its future for the next 5 years. If the new government comes with a strong mandate to get the slowing Indian economy back on track, we can expect an uplift of business sentiment, pro-growth policy reforms by the government and fast decision-making by the bureaucracy.
TREND 4: People will pay , but what can they afford?
The affordability of infrastructure continues to be a major issue as governments strive to shift the cost burden to the end-user and cost reduction continues to come more sharply into focus. In their struggle to cope with increasing demand and get the funding balance right, many governments concede that they cannot go it alone. Difficult political decisions need to be made.
The reality is that consumers in recovering economies are still feeling the economic pinch while, in the developing markets, ‘affordability’ is often a question of survival. This is where the private sector can lend support by proactively identifying potential solutions. More could be done to accurately reflect the long-term benefit and value of developing infrastructure – particularly analyzing all of the wider economic impacts and providing that critical link to economic growth.
TREND 4: Idea - Creating sustainable sources of funding in Canada
Public authorities around the world are looking for creative ways to sustainably pass the cost of building infrastructure on to those who will benefit the most. In Toronto, for example, a provincial government-appointed industry panel supported by the private sector has recommended raising local gasoline and corporate tax rates to fund congestion-reducing transit improvements,3 similar to the structure in place for London’s Crossrail.
TREND 5: Release the projects
While many governments publish their infrastructure pipeline, the reality is that a significant number of the projects they contain are stuck in the development and approval stages. However, some progress is being made as multilaterals and other public sector finance institutions increase their support.
The Asian Development Bank, for example, has completely changed its engagement model to focus more on assistance during the development stage of a project. Development finance institutions operating in Latin America and Africa have started to offer project development facilities to support feasibility studies and other earlystage development. And in Europe, the European Investment Bank deployed its Project Bond Initiative in Spain, while Infrastructure UK actively promoted a new British government guarantee scheme targeting similar long-term capital.
TREND 5: Idea - Decoupling politics from infrastructure in the United Kingdom
The decoupling of infrastructure and politics is a widely debated topic in many countries and very few have found an effective solution. In the UK, a review of infrastructure planning released in September 2013 suggested that Britain should set up an independent commission to plan longterm infrastructure and keep major projects from being derailed by political infighting.4 Sound advice, but ironically muffled by the fact that the report was commissioned by the shadow government.
TREND 6: Cities are still the future
With urbanization as the norm in many developing countries, the prominence of cities is once again driving the infrastructure development agenda for regional and even national governments. However, the debate has now started to shift from the fashionable concept of smart cities driven by technology to sound planning practice with viable housing and employment opportunities woven into the urban fabric.
At its root, this is an integrated discussion about creating effective and efficient urban environments and placing sustainability, strong transportation links and an improved quality of life at the core of the conversation. But blue tarpaulins are not a long-term roofing solution. Governments must focus on three key aspects to avoid shanty towns and runaway urbanization – smaller cities (satellites as opposed to megacities), protecting work/ life balance and developing rural economies.
TREND 6: Idea - Successful urban funding models in India
Recognizing the need for a coordinated regional approach to development, the state government created the Mumbai Metropolitan Region Development Authority to take a lead role in preparing infrastructure development plans, formulating policies and programs, implementing projects and helping to direct investments in the region. When it was created, the agency was given large tracts of valuable land which are now leased out with the resulting revenues used to finance infrastructure projects.
TREND 7: The war for talent is more pronounced
Clearly, the more successful governments become at unlocking projects, the greater the demand will be for project managers, engineers and a wide range of other infrastructure skill sets. But with an emphasis on execution in 2014, the war for talent is more of a problem today than ever before.
Yet while some countries (particularly China) are being proactive in developing capacity and managing it forward, we believe that the issue is not being addressed well enough and will remain one of the greatest drags on the world’s ability to meet growing infrastructure challenges. So while some targeted training programs are being established in both corporate and academic campuses, we believe the focus must now turn to governments to start supporting and promoting appropriate skills training.
TREND 7: Idea - Developing skills and capability in the United Kingdom
Opened in 2011 by Crossrail and supported by the British Government,5 the Tunnelling and Underground Construction Academy (TUCA) in London reflects a recognition that the volume of tunneling and underground work planned for the city (projects like the Thames Tideway Tunnel and, potentially, High-Speed 2) was unprecedented and demanded a unique skill set that was already in short supply. It is expected that TUCA will train at least 3,500 people in underground construction alone over its lifetime.
TREND 8: Asset ownership is diversifying
Historically, governments have been the principal owners of infrastructure, with very few exceptions. But with the emergence of direct pension investors and dedicated infrastructure funds, ownership is now diversifying as long-term buy-and-hold investors build market share alongside infrastructure funds, traditional owners and shorterfocused private equity investors. Government and regulators will be challenged to stay ahead of such a diverse set of owners.
The positive side of this asset diversification is stronger competition and better asset management. Increasingly, the new owners want to be more active in their portfolio of investments and are hiring infrastructure management expertise to drive operational and capital efficiency. This should lead to better maintenance and utilization as long-term investors seek to maximize the usable lifespan of a project.
TREND 8: Market to watch - China
China has invested heavily in its own infrastructure and is currently exporting that capacity internationally. As the country’s sphere of influence continues to grow, it has developed a more collaborative approach to outbound investment. And while inbound infrastructure investment opportunities for foreign companies in China remain limited and difficult to execute, there may be some light at the end of the tunnel as discussions about a domestic public-private partnership (PPP) program develop.
TREND 9: Energy goes back to the future
With investment decisions increasingly being driven by cost and the economy, many governments are supporting the view that a diversified mix of energy sources will be needed long into the future. Indeed, the reality is that coal and gas-fired power stations will need to coexist alongside wind farms and solar projects; coal is abundant and remains a massive part of new generation almost everywhere in the world outside Western economies.
Other sources are increasingly making up a greater part of the mix. Shale gas has already caused dramatic disruptions in international energy markets, and will continue to alter new generation developments in North America, while governments from the United Arab Emirates to the United Kingdom will continue to pursue nuclear energy. And, wherever power demand and unexploited resource coexist, largescale hydro will remain attractive
TREND 9: Coming soon? Data drives more effective and efficient infrastructure
As the pace of technology quickens, governments and the private sector are collecting more data about infrastructure than ever before. Yet surprisingly, we have yet to really see anyone bring data and analytics together and effectively utilize them to better plan, deliver, operate and maintain infrastructure. We believe that the sector will soon recognize that the value of data is no longer in the ability to create and store it, but rather in the insights which can be derived from it.
TREND 10: Transparency rises up the agenda
Managing corruption and bribery is one of the many challenges facing governments, investors and their advisors today. In many cases, what should be black and white is often grey. It is not just about procurement; it includes the potential abuse of market power (monopoly), degradation of the environment and so on. At least two major global infrastructure companies have recently been embroiled in corruption crises.
Corruption (broadly defined) is a barrier to developing a consensus on the need to invest, how to invest and attracting infrastructure investment. Attitudes against it are hardening. This, alongside the need to demonstrate valuefor- money, will drive the political agenda for greater transparency in infrastructure. Yet this is only part of the drive for greater transparency. While debating the merits of potential projects, transparency is an important ally for building a stronger business case for infrastructure investment.
4http://www.yourbritain.org.uk/uploads/editor/files/The_Armitt_Review_Final_Report.pdf (PDF 424 KB)