In a special edition of Foresight, three of KPMG's infrastructure leaders look back at 2012 and share their views on the ten trends that are expected to change the way infrastructure will be delivered in the future. A review of the sector in Russia is provided separately.
2012 was a challenging year for the infrastructure sector. Many governments around the world struggled to bring projects to market and, as a result, pipelines were thin. Financing markets continued to be tight, economic stability remained elusive and activity subdued. Even so, looking ahead the foundations for future growth are being laid and –for many markets– the prospects are exciting. KPMG expects the following trends to change the way infrastructure will be delivered in the future:
1. The cost burden shifts to the consumerIn some cases, this may mean developing more toll-funded infrastructure or charging business levies to support development. But it will also require consumers to start paying the real costs of the infrastructure they use, and this will invariably lead to questions for politicians and to greater transparency and more realistic pricing.
2. Governments having to become more activeNot every infrastructure project can attract private investment –particularly in today's market– meaning that governments are being forced to take a leadership role; to step up and fill the gap. In some cases, this means 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.
3. Pipelines are subdued but will returnWith few exceptions around the world (most notably China), the past year has seen a dearth of infrastructure deals moving through the pipeline: politicians are firmly focused on the short-term horizon, financial markets are subdued, and development budgets are constrained. However, this does not mean there is a lack of projects ready and waiting to move into the pipeline –projects are spending much more time in the planning phase. As a result, we anticipate the next crop of projects to pop out of the pipeline will –for the most part –be better thought out and ultimately more successful.
4. Focus moves onto citiesOut 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.
5. Making the most of existing assetsAsset owners and infrastructure planners are having to reconsider how they are managing their existing assets:
6. Resilience rises up the agendaModern infrastructure is much more susceptible to external factors because there is more interconnectivity among its elements. Just consider the increasing reliance of cities on a single source of power and the implications of failure. Protecting valuable assets from the impact of disasters –natural or otherwise– is therefore key to economic and political stability. Another critical resilience issue that has rocketed up the agenda is the risk of cyber-attack.
7. New infrastructure models emerge Many countries are now carefully considering how infrastructure models will need to change in order to deliver their 'green agendas' and make them affordable for the taxpayers and users. 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.
8. The pace of technology quickensMany assets take years –sometimes decades– to move from planning to operation, which often means technology becomes obsolete before it even becomes operational. But 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.
9. Cost reduction comes into focusMany governments are starting to put the cost of their infrastructure under the microscope to see if there are opportunities to help make their infrastructure more affordable. From one market to the next there can be major variations in the cost of infrastructure (labour costs, cost of materials, import tariffs, etc.). However, some of the factors driving up costs are preventable.
10. The war for talent and skills heats upIt is not just skilled boots on the ground that are lacking; so too is leadership. Today's infrastructure leaders must exhibit a new set of skills in order to bring together multiple stakeholders and execute massive projects, all while under the scrutiny of regulators, politicians, investors and the general public.
The Russian market: private initiative is playing a key role in transport infrastructure development
Russian infrastructure is developing apace thanks to initiatives from both the public and private sectors. Private investors are backing large-scale transport projects, not least in the airport sector. Following the concession agreement for one of Russia's biggest airports, St Petersburg's Pulkovo, a number of other regional airports have been subject to a concession or privatised. Major recent deals include those for Perm's Bolshoye Savino Airport and Krasnoyarsk's Yemelyanovo Airport. Such projects typically aim to increase handling capacity through upgrading terminals and runways. In the next few years, we can expect further consolidation of the sector in the form of a small number of interregional airport holding companies.
The port sector is developing not only through an influx of private capital, but also through business optimisation by major companies, which are creating vertically integrated structures. Notable projects include those for port construction and redevelopment (at Ust Luga), privatisation (at Vanino and Murmansk commercial ports), and deals between private companies (the sale of a grain terminal at Taman and the sale of a stake in the Vostochnaya Stevedoring Company). Further investment in increasing handling capacity, including in the construction of new container terminals, is expected.
One of the main trends in the roads sector is wider use of public-private partnerships (PPPs) for projects on both a federal and regional level.
The end of 2012 saw the financial close of one of the biggest regional projects –the Western High-Speed Diameter in Saint Petersburg. The project's creditors include major financial institutions such as VEB, VTB, the EBRD and Gazprombank. In addition, calls for investment in the following projects are expected: M4 (Don); construction of the M11 Moscow–Saint Petersburg motorway; Perm eastern bypass; Central Ring Road (CCR); construction of the M1 (Belarus) highway; and construction of a bypass for Balashikha and Noginsk.
In terms of health, social infrastructure and housing, some regional level projects have been launched, but they are insignificant in terms of number and scale compared to projects in other infrastructure sectors.
Without doubt, one event that will have an impact on the development of transport and social infrastructure will be the 2018 FIFA World Cup. In addition, the government is expected to pass a law on PPPs that may also boost the development of various forms of partnership between the state and business in infrastructure projects.