Guest post: Emerging Trends in Infrastructure 2023
The infrastructure team at GIIA member KPMG provide an overview of 10 themes set to shape the investor landscape over the coming 12 months.
1. Tilting towards territorialism & shifting alliances
Investments in cutting-edge infrastructure can enhance economic opportunities, increase overall productivity and improve public trust in the government. But an uncertain economic climate is hampering infrastructure development, significantly affecting the industry's rate of growth.
Heightened political risks across the globe has resulted in volatile trade and security alliances. For global infrastructure players — developers, investors, and operators in particular — shifting allegiances are creating greater business complexities, resulting in significant delays when it comes to critical decision-making.
To stay relevant, infrastructure players will need to adopt an agile approach by adapting and responding to geopolitical and supply chain security issues with greater resilience.
2. Sustainability comes to the fore
As the catastrophic effects of climate change continue to affect livelihoods and economies, the role of sustainability in infrastructure development is once again in the spotlight.
Energy and infrastructure players will have to devise strategies aimed at solving the trilemma of security, affordability and sustainability at both speed and scale. This is expected to trigger significant shifts in investments towards research into cleaner fuels, carbon abatement and energy efficiency.
Sustainability also looks set to become a basic pre-requisite for all new infrastructure projects with developers, owners and investors looking beyond financial margins to pay closer attention to other aspects like carbon allocation strategies.
3. The age of mass customisation emerges
By providing customer experiences that are tailored to the consumer's individual needs and preferences, customised solutions are helping make existing infrastructure frameworks more inclusive and accessible. This means that users get more value from products and services — wherever and whenever they want.
To keep pace, companies will have to embrace digitisation along with new business and services models. While the focus has shifted towards creating unique user experiences, organisations must also put in place measures to protect users' privacy, data and interests.
As new technology players continue to disrupt customised service delivery models, governments will need to recalibrate and rethink their approaches in delivering tailored citizen experiences that deliver value.
4. Inflation, pricing and supply elevates the risk
The increased economic volatility and financial disruptions over the past few months have been particularly challenging for infrastructure players. With inflationary shocks, supply-chain constraints and volatile commodity prices part of the new norm, profit margins are increasingly being put under pressure.
As a result, owners and investors in the infrastructure sector will be forced to revaluate the cost and price risks of their assets and investments.
Developing mutual trust and cooperation amongst key stakeholders like the public and private sectors, owners, contractors, developers, operators and buyers and suppliers will be key in creating resilient infrastructure solutions for the future. The challenge here lies in maintaining price discipline while allowing for prudent risk sharing.
5. Getting the most from digital
Infrastructure players are increasingly looking towards tech to enhance the long-term efficiency and performance of their assets. These include using AI to enhance decision-making, IoT to enable predictive maintenance and digital dashboards to drive monitoring and reporting.
With data playing a key role across the infrastructure asset lifecycle, key stakeholders will have to work closely alongside designers, contractors and developers to create robust, future-ready digital ecoystems.
The cost of digital transformation and having the right expertise to translate digital capabilities into actual insight and value creation will remain topline concerns during this transition.
6. Cities look for purpose
The ongoing pandemic has significantly altered the way people interact with infrastructure. Hybrid work has moved workers out of office buildings and into the suburbs while the rapid adoption of e-commerce which has transformed consumer patterns. New ways of living and smart innovation are rapidly changing the infrastructure sector, paving the way for cities to become engines for economic growth.
As the lines between live, work and play are increasingly blurred, infrastructure players will have to radically reshape cities to meet new and emerging needs.
Policy makers will need to pay heed and translate these expectations and demands into the design of their cities — especially in the areas of housing, transport and commercial infrastructure. With new business models and novel approaches to living and working, private sector players can play a key role in helping government leaders drive change by leveraging smart infrastructure solutions.
7. Institutional players drive the climate agenda
While governments remain steadfast in their green ambitions, the required costs to enact structural changes will likely be enormous, with some estimates suggesting an upwards of 7% of global GDP between now and 2050.
Institutional investors can play a critical role in financing net-zero targets by encouraging public policies, investment practices and corporate behaviour to address the long-term effects of climate change. In fact, many investors have adopted a more proactive approach towards asset management by working with their clients to deliver real and measurable decarbonisation goals. For example, some asset managers have indicated plans to raise the cost of capital for clients without concrete decarbonisation frameworks.
Urgent issues surrounding energy security and rising energy costs in many markets may force some owners to keep their assets running longer or to continue investing into assets they had once disavowed. Current market volatility is also forcing some asset managers to rebalance their portfolios as they achieve their objectives.
8. Globalisation gets buffeted by security
Rising geo-political risks have altered the dynamics of supply chain frameworks. With greater calls for transparency and accountability across the supply chain network, infrastructure players will have to re-examine existing business relationships and plan ahead for new ones.
Ongoing trade regulations and tariff wars will complicate the process and demand new ways of approaching supply and demand — both from a logistical and political standpoint.
As nations race to secure their supplies, build up inventories and develop new redundancies, governments are playing a stronger role in helping infrastructure owners find reliable and robust trade partners.
9. Dealing with sunk costs & abandoned assets
Given the large costs involved in creating infrastructure assets, it is no surprise that nations tend to be largely apprehensive when it comes to replacing or phasing them out. But rapid digitalisation along with changing societal needs and a renewed drive to ensure sustainability are forcing infrastructure players to rethink their approaches.
Scenario planning will be key as countries come face to face with multiple paths to adaptation and evolution for systems, assets and individuals.
The message is clear: infrastructure owners and investors need to be willing to walk away from sunk costs and assets in order to find a better way forward.
10. The definition of infrastructure evolves
Beyond delivering a specific asset, the role of infrastructure has evolved to serve the collective needs of society instead. For example, traditional energy players have now rebranded themselves as providers of technology, mobility, energy and infrastructure.
To meet evolving consumer needs in infrastructure, investors, operators and owners may shift towards collaborative evolving partnerships and ecosystems — flexible federations of organisations that work together on clear outcomes and use cases.
By fluidly combining capabilities and approaching emerging uncertainties with dynamic solutions, they will be better positioned to respond to citizen needs as a collective unit.
Find out more about the Emerging Trends at the KPMG website.