by James Stewart, Global Infrastructure Chairman, Stephen Beatty, Americas and India Head of Global Infrastructure, and Julian Vella, Asia Pacific Head of Global Infrastructure, KPMG
Infrastructure and the way we approach it is in a state of constant evolution. Power is shifting, as are political agendas, social expectations and the impact of developing technologies. In a period of time when uncertainty is rife and institutions are weakening globally, we look to the world of infrastructure to determine how it will proceed amidst these changing circumstances.
In 2016, we led our Emerging Trends in Infrastructure report with the prediction that “no normal will become the new normal”. Since then, not much has changed. Political uncertainty continues, both in the developed and the emerging markets. Funding, as opposed to finance, remains a key challenge. The demand to get more from existing investments has only heightened.
At the same time, new trends are emerging (or, in some cases, evolving). Governments are rethinking their approach to funding and capital investment. Transparency in public sector decision making is increasing as public discourse rises. And access to new technologies is changing the way governments and investors plan and manage infrastructure.
This year, we expect a shift towards more responsible leadership, both from governments and from the private sector. And this will require the public and the private sector to rethink their approach to funding, developing and operating infrastructure. It will also require them to gain a better understanding of what their constituents, stakeholders and users actually want.
While much uncertainty remains, we believe there are ten trends that will have a significant impact on the infrastructure sector over the next twelve months. Here are our predictions for how they will play out.
Trend 1: The confluence of energy, transportation and technology sharpens
The traditional lines between energy, transportation and technology have been blurring for years. As governments start to think more holistically about their long-term infrastructure objectives, many are starting to recognise the need for a new approach.
Over the coming year, we expect governments to look for new ways to improve alignment and drive integrated planning across the three sectors. We also expect this year to bring some exciting developments and ideas that will continue to disrupt the way governments and consumers view energy, new transportation and technology. This will not only lead to a shifting of priorities (as we note in trend four), but also significant challenges as governments decide which technologies to invest in and when.
The long view
Infrastructure planning will be difficult for governments as they balance increased demand for low-carbon energy against the realities of their current energy mix. For the developing world, this will create significant opportunities to leapfrog the West. But delivering against growing demand for energy-intensive technology and electric transportation will be a continuous struggle for all governments over the next decade.
Trend 2: The populist agenda disrupts infrastructure markets
Last year, we predicted that political and social uncertainty would rise. It seems we (like many) may have understated the extent.
What is clear is that the underlying current has shifted towards more populist agendas. And that has pushed infrastructure onto centre stage as a form of policy mitigation. We believe this will lead to three key “sub” trends for the infrastructure sector: bigger public budgets, shifting priorities and rising protectionism.
While some of these shifts will be positive, great care will need to be taken to ensure that protectionist ideals do not diminish the value that international experience, ideas and capabilities can offer. Leaders should remember that, at its ugliest, protectionism only increases the cost of infrastructure delivery and results in lower-quality assets.
The long view
Governments will continue to put “people first” projects at the top of the agenda, thereby allowing social equality and other issues to influence infrastructure planning and shift priorities. For governments and international developers, contractors and operators, the long- term challenge will be to articulate a much clearer story about the value they plan to deliver while seeking to allay local concerns.
Trend 3: Understanding consumer behaviour will be the key to infrastructure planning and management
Changes in the way consumers now interact with infrastructure are turning common wisdom on its head. And infrastructure planners are struggling to keep up.
Over the coming year, we expect governments to take a more “bottom-up” approach to infrastructure planning and development, taking the time to understand the changing demands of both current users and future generations to help shape their infrastructure agendas.
We also expect some governments to take advantage of these changes to solve some of their larger infrastructure challenges.
Incentivising millennials to ride bicycles to work, for example, would respond to their desire for low-carbon, low-cost transportation.
Improving access to solar generation sources in Africa would not only provide power to rural areas, it would also drive economic growth and help create a new consumer class.
The long view
While this trend may cause some consternation for planners over the next decade or so, we believe that changing consumer preferences and demographics may eventually bring demand and supply back into line. However, as the micro-decisions of consumers start to influence the macro infrastructure agenda, new areas of demand may emerge.
Trend 4: Investors starting to care about social and environmental impacts, not just financial returns
Over the past year, we have seen increasing pressure on decision-makers to prioritise infrastructure investments that deliver greater social and environmental benefit; simply put, to become more responsible leaders.
To be clear, this is not about sacrificing returns in the pursuit of social benefit. This is about measuring and assessing the wider basket of benefits that an investment delivers to understand its true value.
The challenge will be in formulating a consistent and appropriate approach to measuring and reporting on social and environmental impacts. But over the coming year, we expect investors (public and private) to make serious efforts in this regard. And this may lead to difficult choices as stakeholders gain greater awareness of their social and environmental footprint.
The long view
Once institutional investors and governments start reporting on social and environmental benefits using a generally accepted set of measures, the pressure to deliver even greater benefits will start to rise. And as measurement and reporting becomes more sophisticated, we expect investors to move towards achieving a true “triple bottom line”.
Trend 5: Technology enables greater infrastructure productivity and increases obsolescence risk
Technology is fundamentally changing how we plan, design, develop and operate our infrastructure. It is also creating growing concerns among investors about technological obsolescence.
This year, we expect infrastructure owners and operators to start focusing on developing robust technology plans, balancing the need for competitive advantage against the desire to achieve quick returns on their investments.
At the macro/society level, we expect to see entirely new technologies start to gain traction and become increasingly commercialised. At the same time, the true value of data and analytics will begin to emerge, helping to improve capacity, performance, reliability and reduce operational costs. And automation tools that eliminate human error and enhance performance will be adopted.
Unfortunately, those who fail to take technological change into account will start to fall behind.
The long view
With little experience of forecasting technology trends, infrastructure planners and investors will likely continue to struggle with the longer-term challenge of understanding consumer/citizen behaviour and demand in an ever-changing technology environment. The challenge will be particularly acute in the energy and transportation sectors, where the pace of technological change seems to be picking up speed.
Trend 6: Getting more out of existing infrastructure
With demand for infrastructure at an all-time high, governments around the world are now thinking about demand management and capacity enhancement. Rather than build entirely new capacity to meet ever-higher peaks, governments at all levels are now thinking about ways to smooth out the peaks instead.
In the developing world, the challenge will continue to revolve around the need for basic infrastructure. But in the mature markets, we expect infrastructure owners to focus on making smaller investments that, in turn, unlock improved performance, capacity, reliability and service delivery.
The long view
As consumers get more (and more timely) data and information on their infrastructure, they will increasingly be able to adjust and change their usage patterns and behaviours. As infrastructure systems become more sophisticated, owners will find increased ability to adjust pricing to manage demand and more finely calibrate their operations.
In some cases, technology will allow infrastructure to be delivered at a much smaller – more personal – scale, which should also gradually reduce peak demand on existing power infrastructure in developed markets and create new power models in developing markets.
Trend 7: Governments look to unlock the funding paradigm
Infrastructure pipelines around the world have remained blocked, largely because governments are still struggling to decide how to pay for the assets that must be delivered. And over the past year, governments have continued to devise innovative alternative funding sources.
We expect this year to bring renewed focus on asset “recycling” as governments focus their efforts on selling existing and profitable assets in order to help fund the development of new assets. This, however, will require governments to be clear with their populations about how the proceeds will be used.
We also expect to see governments (particularly in the less developed markets) find ways to use their own money to finance the initial development of infrastructure assets and then sell down once the project is operational and de-risked.
The long view
In the mature markets, populations will become more comfortable with the idea of asset recycling and governments will start to look deeper for less obvious, and potentially more controversial, assets to monetise. In the developing world, asset selection will be key.
The long-term value is there, but strong cash flows and the ability to implement will be key.
Trend 8: Credit enhancement facilities go back to basics
While funding remains a challenge, some governments and multilateral organisations are making valiant efforts to help unclog infrastructure pipelines by developing increasingly sophisticated credit enhancement facilities and vehicles.
But few credit enhancement deals have actually been struck. The challenge seems to be that governments and multilaterals have, on the whole, been far too focused on creating “perfect” structures and not nearly focused enough on getting the deals done.
Over the coming year, however, we expect (and encourage) governments and multilaterals to recognise that – for many of these projects – their choice is to either find a way to work with the private sector or not deliver the project at all. The development of credit enhancement facilities is vitally important. But they also need to work.
The long view
Governments and multilaterals will move at different paces to simplify their financial instruments and take on more risk in order to help build the track record and capabilities of markets. This will be as much about changing culture and historic practices as structural change.
Trend 9: The search for yield drives convergence in the investment market
Increased competition for “investable” infrastructure assets is driving up competition and pushing down yields. And this is driving more sophisticated investors into higher-risk markets, projects and sectors. As a result, infrastructure investment teams are starting to grow and become much more sophisticated in how they hold and manage their investments; many are developing operational capabilities. At the same time, operators are developing financial capabilities and developers are building up strategic and financial skills.
Over the coming year, we expect to see the lines blur further as the search for yield continues. Some will make the transition successfully. The risk, however, is that some may move too quickly and, in doing so, take on risks that they do not fully understand with unexpected results.
The long view
This trend will continue to have an impact on the infrastructure value chain for some time as players jockey for position and assess their capabilities. But over the longer-term, we expect lines to be re-established as players start to focus on one or two areas of expertise. So once the dust settles, don’t expect any of today’s players to look the same.
Trend 10: The globalisation of infrastructure continues
As investors, developers and, increasingly, operators expand their global capabilities and transcend national borders, there has been a significant shift towards the globalisation of the infrastructure sector.
At the same time, we have noted a relative globalisation of models and approaches as governments start to learn from each other and share best practices. This, in turn, is helping international players standardise and improve key capabilities.
In 2017, we expect this trend to continue and, in many cases, pick up speed. But we also recognise that there will be forces acting against globalisation – rising protectionism and nationalist agendas, shifting social preferences, increasing focus on “localisation”, disruptive trade negotiations and other uncertainties will all attempt to dampen enthusiasm for globalisation.
The long view
The big and ultimate test for globalisation is whether it brings down costs, improves accessibility and increases value of infrastructure around the world, through improved competition and greater levels of innovation.
Ultimately, we expect that these benefits will drive governments and their populations to once again shift towards a more open and global marketplace.
To learn more about KPMG’s ten emerging trends in 2017, additional thought leadership or to connect with an infrastructure advisory professional in your country, visit kpmg.com/infrastructure or email Dane Wolfe, Senior Manager, KPMG Global Infrastructure at [email protected]