Say goodbye to everything you thought you knew about risk. We are seeing significant changes in the way risk is both perceived and managed.
In the past, perceptions of risk were largely based on some time-tested historic fundamentals. Investors trusted certain truisms — OECD markets were inherently low-risk; emerging markets were high-risk, for example. But no more. In today’s environment, few of these notions remain valid. The fundamentals are unreliable. The macro ‘rules of thumb’ now serve only as the barest of guides; objective due diligence has never been more important.
The problem is that — while the ground shifts underneath the historic risks — we, as an industry, are facing a set of evolving risks that must now be much better understood and managed; cyber risks, technology risks, political and social risks, funding and financing risks, to name but a few. These risks increasingly require a much more sophisticated (and analytical) approach if managers hope to fully understand and measure their potential incidence and significance.
On the positive side, these tectonic shifts in the world’s risk environment are creating new opportunities for those looking for higher margins. As we note in Trend 4 (Winds of globalization blow from the East), infrastructure capital and capabilities are flowing into new markets and new sectors as investors look to take advantage of the gap between risk perceptions (which influence pricing) and risk realities (which influence rewards).
On the negative side, construction companies are getting squeezed as risk/reward ratios shift and margins come under further pressure. This, in turn, is limiting construction companies’ ability to reinvest into innovation, capabilities and technologies, thus undermining their longer-term viability.
In fact, in the most recent Global Construction Survey, KPMG International found that only 1-in-5 construction companies were properly investing in innovation; an equal number admitted they were doing nothing at all while the vast majority essentially said they were playing around the edges. The future risk seems increasingly worrying.
As the weakness of the construction sector becomes clearer, expect to see more governments follow the lead set by markets such as the UK, Australia and Hong Kong, where policy makers are actively implementing programs aimed at improving the future resilience of domestic construction companies. More emphasis will come as more infrastructure owners, both public and private, realize it is in their interest to proactively support and invest in the health of their construction supply chains.
Over the coming year, we also expect to see significant changes in the way that risk is measured and managed. Rather than allowing received wisdom to inform decisions, infrastructure providers, investors and owners will start to leverage predictive analytics and scenario planning as ways to create robust forecasts of future trends and expectations. Much more sophisticated use of data and AI-driven decision-making will also help mitigate risks.
Our view, however, suggests that the greatest changes will come in the perception of risk. Indeed, as executive management, risk managers and investors start to use data and analytics to achieve a better understanding of their risks, we expect to see much greater alignment between risk perception and reality, thereby addressing an issue we have been deeply concerned about for several years.
As this happens, don’t be surprised to see a handful of fast-movers start to reap disproportionate rewards as they use their proprietary risk insights to uncover new and highly-profitable opportunities ahead of their competitors.
Look back: What did we predict? In 2019, we predicted that “a growing number of infrastructure players are looking to emerging markets for new opportunities — and better yields and margins.”