Earlier this year, we sat down with Nick Chism (KPMG’s Global Head of Infrastructure) to examine the state of the infrastructure market and identify some of the key trends that, in our opinion, will change the way infrastructure will be delivered in the future.
Around the world, consumers are feeling the pinch of infrastructure-related costs. Governments – strapped for cash and keen to unload long-term expenses – are increasingly starting to consider how they can shift their infrastructure spend from the taxpayer to the consumer.
This will invariably be political; rising energy costs or water bills are always sensitive topics. Regardless, one thing is clear: we have shifted onto a path of increased transparency and true user pay pricing.
While achieving this transition will be tough for most governments, it is the inevitable answer to infrastructure funding. More realistic pricing and user-pay services will lead to clearer price/consumption signals to users (thereby reducing the need for increased investment in the future), and allow governments to channel funds into higher priority or higher risk projects.
Governments are recognizing the need to take a more significant role if they hope to meet their citizens’ infrastructure demands. The simple truth is that not every infrastructure project can attract sufficient private investment, meaning that governments are being forced to step up and fill the gap.
With direct public investment quickly becoming an option of last resort, many governments are finding more indirect – yet equally powerful – ways to influence the private sector development and financing market. In some cases, governments are directly intervening by structuring credit enhancements for riskier projects or offering guarantees to investors. In other markets – particularly in the developing world – we are seeing a rise in the role of multilateral-backed funding.
At the same time, governments are also looking at how they can create a more positive environment for investment through better regulation. Where the user can pay, at least in part, enhanced regulation is as close as one can come to a silver bullet.
With few exceptions around the world (most notably China), the past year has seen a scarcity of infrastructure deals moving through the pipeline. But this does not mean there is any lack of projects in development; in fact planners and project owners have been active over the past year thinking through their programs and preparing to take their projects to market while waiting for the right economic, financing, political and social conditions to emerge to support project success.
The upside of this, clearly, is that projects are spending much more time in the planning phase. As a result, we anticipate the next crop of projects coming down the pipeline will – for the most part – be better thought out and ultimately more successful.
Based on our work and experience in the market, we believe that deal flow will improve in the medium-term and that we will start to see a welcome increase in numbers of new projects hitting deal tables.
Cities have become the crucibles of a nation’s economic activity. As a result, all levels of government – municipal, state/provincial, national and even international – are increasingly focused on creating the right mix of urban infrastructure to drive and support economic growth, and cities are leading the charge.
Out of cities, a new trend is starting to emerge that ties infrastructure investment to economic growth. Rather than being driven by investment in individual projects or sectors (an occupational hazard for siloed local governments), a growing number of cities now realize they can maximize their investment and enhance long-run economic returns by carefully considering what project or, more importantly, combination of projects will provide the best bang for their buck.
In Greater Manchester (in the UK), for example, city leaders focused on improving connectivity with the suburbs, revitalizing the downtown core and attracting tourists through infrastructure development which, in turn, has increased economic activity and tax revenues collectable by government across the region.
As project owners struggle to get new projects off the ground, more focus is being given to existing assets. In some cases, owners are looking to extend the lifespan of their assets to the limits which, in turn, requires improved operational management to ensure that maintenance and investments are being properly deployed.
In other cases, asset owners are exploring ways to ‘bolt on’ new technologies and innovations that enhance the asset’s long-term value, expand capacity or make it more resilient for the future. Others are investing in technologies to improve the overall efficiency of their assets, meaning fewer new assets need to be developed in the future.
Governments are also looking at how they can make the most of their existing financial assets by conducting asset sales in order to recoup their investment which, in turn, can be ‘recycled’ into new projects and assets.
Over the past few years, infrastructure participants, governments and the private sector have become painfully aware of the importance of resilience planning. In large part this is because of increased interconnectivity among elements of society’s infrastructure, meaning that a failure of one piece of infrastructure may have significant knock on effects across the system.
Protecting valuable assets from the impact of disasters is therefore key to economic and political stability. But so too is recovery time. Consider the experiences this past year of Hong Kong and New York, both hit by equally violent storm systems. New York took almost one week to restore power and bilge out subways and road tunnels; Hong Kong was back to ‘business as usual’ within 24 hours.
We have also seen increasing incidence of critical infrastructure systems being hacked and hijacked by state-sponsored actors, ‘hacktivists’ and even teenaged ne’er-do-wells. The repercussions of security failure in the face of a well-planned attack could be disastrous, and so governments around the world are putting pressure on infrastructure designers and planners to ensure that every precaution is taken to secure against this growing threat.
As perceptions of infrastructure start to shift and the market matures, many project owners and infrastructure planners are starting to rethink how their development and operational models are structured. How can the cost of renewal and operation be recouped across the lifecycle? How can investment models be adapted to better share, manage and price risk? How can projects be tendered to ensure value is maximized across multiple assets?
In part, this shift in thinking is being driven by a renewed focus on achieving infrastructure’s long-term objectives and value. This requires asset owners, investors, operators and planners to consider how value can be driven across the full asset life-cycle from planning to end-of-life and how the asset should be optimally structured in each stage.
The desire for greater operational efficiency is also catalyzing a shift towards the adoption of commercial models and approaches to infrastructure planning in an effort to capitalize on the efficiency and effectiveness that can often be best delivered through private enterprise or sub-contractors.
Never before has technological change had such a dramatic impact on infrastructure. From efficiency-driving technologies (such as cloud computing) to the emergence of entirely new infrastructure sectors (such as the renewable power sector), we have witnessed a decade of technological advancement that makes the industrial revolution look like child’s play.
But while modern infrastructure systems are generating a wealth of real time data, we seem to have limited ability to analyze that data and turn it into improved decision making. In response, a growing number of infrastructure planners and owners are starting to take a longer-term view of how technology can be integrated into their assets to enhance efficiency and sustain relevance to future users.
More must be done. The reality is that technology has the potential to solve many of the world’s most critical infrastructure challenges (affordability, environmental sustainability, operational efficiency, etc.) if properly commercialized and adopted. The trick will be ensuring the right technologies – those that are economical and viable – are advanced while others are allowed to fail.
Around the world, governments are starting to put the cost of their infrastructure under a microscope to see if there are opportunities to help make it more affordable. Interestingly, our experience shows that – from one market to the next – there can be major variations in the cost of infrastructure.
Some of the reasons for differences in infrastructure costs are obvious: labor costs can vary from city to city within a single market, and the cost of materials can range significantly depending on access, prices, import tariffs and so on. However, in some cases, we have found rather preventable (albeit often institutional) factors that are also driving up costs.
Recognizing the ability to drive change, governments are now beginning to focus on the issue. In the UK, for example, Infrastructure UK recently carried out a Cost Review which found that costs could be reduced by around 15 percent (or GBP£2 to 3 billion per year) if certain issues were effectively addressed.
Given the keen focus on costs worldwide, expect to see a greater focus being placed on this area in the coming years.
Possibly one of the greatest and least appreciated drags on the world’s ability to meet the growing infrastructure challenge is a lack of leadership for projects and lack of available skills and talent. Whether it is skilled infrastructure and master planners, experienced developers, talented infrastructure fund managers, or nuclear engineers, the scope and scale of the skills shortage is evident across the sector. Sadly, all signs indicate that the situation will get worse before it gets better.
Yet some progress is being made. Targeted training programs are beginning to be established in both corporate and academic campuses, governments have started to promote recruitment and education initiatives, and infrastructure companies around the world are ramping up their pool of skilled talent. The developing world is also proving to be a strong source of human capital with countries like India, China and Brazil exporting their infrastructure talent to the mature markets of Europe and North America.
By James Stewart, KPMG in the UK and Stephen Beatty, KPMG in Canada