The infrastructure sector is facing challenges from various disruptions, including changing social and environmental priorities, urbanization, and capital availability. The COVID-19 pandemic has introduced new challenges, which will intensify the industry’s focus on operational resilience, affordability, sustainability, and the deployment of new technologies. The success of infrastructure delivery depends on collaboration among various stakeholders with different agendas. Therefore, no single player can bring about real change in the sector. In the upcoming articles of this series, the focus will be on the future of the infrastructure industry, including financing, technology impact, resilience, and sustainability.
FOUR WAYS THAT COVID-19 COULD RESHAPE THE INFRASTRUCTURE INDUSTRY
In October 2019, infrastructure CEOs were asked to anticipate the year 2020. While they expected economic growth to slow down, they couldn’t have predicted the impact of the COVID-19 pandemic. With its sudden and severe impact, the pandemic is expected to test the resilience of the infrastructure sector due to its potential long-lasting effects.
POLITICAL CHANGES IN DEMAND
The COVID-19 pandemic has had far-reaching impacts on various sectors, including infrastructure. Travel restrictions, disruptions in supply chains, and changes in consumer behavior are among the effects that have affected the infrastructure sector. Public transportation and road infrastructure usage have seen a significant decline due to lockdown measures. This sudden shift to remote working has caused transport asset owners to question whether it will lead to a permanent change in working patterns, affecting other industries such as real estate. Moreover, the air travel and freight industries are also facing uncertainty, with the possibility of fundamental changes in how airports are designed and built and a shift to more localized supply chains. The power sector has also been affected by a decline in demand for electricity, which is likely to affect the transition to renewable energy in the short term. The crisis is expected to impact the infrastructure sector’s operational resilience, technology adoption, affordability, and sustainability in the short term, but the overall effects are impossible to predict at this time.
The COVID-19 pandemic has highlighted the fragility of supply chains, particularly the Western reliance on Asian manufacturing. Infrastructure CEOs will need to rethink their supply chains to build resilience to global shocks and disruptions. New assessment criteria, supply chain visibility tools, and predictive models for proactive planning could be introduced. COVID-19 has also impacted construction, with closures of sites and labor restrictions. To adapt, management teams may need to re-examine their approach to project delivery and maintenance by exploring new types of project workflows, such as modular and offsite production, which are faster, safer, and more efficient.
We have highlighted that infrastructure is lagging behind other capital-intensive industries in terms of investment in advanced technologies. However, in the current environment, pressure from reductions in capacity and rising costs may drive asset owners and project managers to accelerate the adoption of technologies such as artificial intelligence and robotics. The use of intelligent drones can also help reduce maintenance capital expenses by reducing the need for onsite workers and improving preventative maintenance. Furthermore, the shift to remote working has emphasized the need for secure, resilient, cloud-based technologies and connective infrastructure, which is likely to increase demand for data transmission and storage assets such as fibre networks, data centres, and telecommunication towers.
The infrastructure industry is lagging behind other capital-intensive industries in terms of investment in advanced technologies. The current environment, with reduced capacity and rising costs, may accelerate the adoption of technologies such as artificial intelligence and robotics, as well as reducing maintenance costs using intelligent drones. The shift to remote working arrangements has emphasized the growing need for secure, resilient, cloud-based technologies and connective infrastructure, which is expected to boost demand for data transmission and storage assets, including fibre networks, data and edge data centres and telecommunication towers.
Despite the need for increased infrastructure spending in developing economies, the measures taken to bolster economies may divert construction spending to social initiatives such as unemployment benefits and healthcare. However, larger economies are considering investment in labour-intensive infrastructure projects as part of their stimulus efforts. These projects are likely to be ‘shovel-ready’ and quickly boost economic output. The main challenge for the infrastructure sector is to identify projects that provide significant long-term economic benefits and address priorities such as digital connectivity, robust utility infrastructure and healthcare provision. The limited capacity of the construction industry to deliver such projects is another challenge.
Demand-based contracts used for assets such as airports and toll roads under public-private partnerships (PPPs) are vulnerable to shocks, while those under an availability-based structure are exposed to reduced government budgets. The current crisis will prompt a reassessment of investment risk and stress testing, increased demand-side forecasting and planning, a move towards more conservative PPP deal structures and risk allocation.
The private sector is likely to be risk-averse in the future, and government interventions to mitigate disruptions arising from the crisis will affect the risk perception of infrastructure going forward. Although infrastructure needs have not decreased, fiscal positions have deteriorated, making it more challenging to narrow the infrastructure gap. Financing has been a focus for many commentators rather than how it can be repaid, which is crucial in an overtaxed and overborrowed world. Therefore, affordability is key.
Some people may see the pandemic’s impact on emissions as a positive result of what climate change activists have been advocating for, with factories closing down and planes being grounded leading to reduced pollution and the rediscovery of lost landscapes. However, this respite is only temporary and unsustainable, distracting from the urgent need to find solutions to transition towards a cleaner economy. The pandemic’s climate consequences do not provide a long-term solution to environmental issues, with greenhouse gases still being emitted and carbon dioxide levels remaining high.
One solution is to focus on transitioning towards low-carbon, climate-resilient infrastructure assets. It is estimated that 70% of future greenhouse gas emissions will come from infrastructure that is yet to be built, so any infrastructure-related stimulus should prioritize reducing carbon consumption. Recovery efforts offer an opportunity to advance the decarbonization agenda by promoting renewable energy, cleaner construction methods, and environmentally friendly transportation.
Investors are increasingly interested in environmentally sustainable assets, as many infrastructure investors are focusing on their environmental, social, and governance (ESG) criteria, with more standards and frameworks emerging to integrate climate-related factors into investment decisions. As ESG reporting becomes more mainstream and policy pressure increases, there is a growing demand for sustainable assets.
Overall, the pandemic has severely tested the infrastructure industry, but the sector remains essential and will respond to underlying demand. By understanding the pandemic’s impact on the industry, leadership teams can position themselves to capitalize on opportunities when the rebound comes.