2020 is a year that will go down in history as one of the most challenging yet. It was a year of uncertainty, complexity, and change. As we forge ahead into the new year, we take with us valuable lessons and renewed strength.
Based on the collective experience of our KPMG professionals, we've identified key trends in the Infrastructure sector to offer indications and insights on how the world is changing and how the industry might prepare for our new reality ahead.
- Renewable and Environmental, Social and corporate Governance (ESG) take centre stage: Over the past year, governments have been setting unprecedented goals for creating ‘net zero’ economies. Not surprisingly, investment into renewables and other ESG-linked assets has been growing rapidly. In many ways, 2019 was a tipping point wherein solar and wind power capacity additions stood at 67 per cent of total new power capacity additions, exceeding total fossil fuel capacity addition, for the first time.
Yet carbon-neutrality is only part of the ESG agenda; infrastructure players will also need to focus on ensuring their investments and assets are contributing to a fairer, more equitable world. We expect further momentum in renewable energy capacity addition in the region with solar and wind projects in countries like Indonesia and Vietnam. We also anticipate increased activity in primary markets deals, and for secondary markets transactions to keep the renewable energy ecosystem lively. Increased investment in clean technology innovation including carbon capture, hydrogen as a fuel, energy efficiency will get a leg up in the coming year, supported by green funds.
- Technology and digital transformation to drive strong infrastructure delivery: With everything from construction procurement processes to consumer buying moving online, infrastructure providers and governments will need to pay much closer attention to how they deliver and manage projects in a virtual world. We will see more and more companies using technology to improve operational performance, project monitoring and construction supervision. Customer access and engagement will be a driver for leveraging technology across sectors. For example, the Public Utilities Board, the national water utility in Singapore, has announced the deployment of 300,000 smart water meters as part of their Advanced Metering Infrastructure to better engage with customers and ensure optimisation of water consumption and management.
- Partnerships to drive innovation and new delivery models: Financially strained governments will likely have limited capacity to invest in infrastructure to stimulate economic growth. Against this backdrop, we see multilateral agencies like the Asian Development Bank (ADB), Asian Infrastructure Investment Bank (AIIB) and the World Bank group playing an important role in catalysing sector reforms and helping develop the pipeline of economically viable as well environmentally sustainable projects.
As the focus moves to cities/urban authorities, there will be a pressing need to help develop frameworks for sub-sovereign financing. There will also be the need to create institutional capacity and to offer standardisation of contracts for faster and bankable project development.
Secondly, more brownfield projects are expected to be offered to the private sector to own and operate, freeing up funds for investment in greenfield projects. While there is availability of institutional capital for low-risk annuity kind of operational brownfield projects, investor demand for risk-laden greenfield ones remains tepid. The Limited Concession Scheme (LCS) proposed in Indonesia is one example wherein capital tapped from financial and institutional investors can be redeployed for greenfield infrastructure projects. This will not only unlock risk capital but will also help set up a successful precedence of public-private partnership in operating infrastructure projects.
Finally, investors hungry for emerging market exposure are expected to look for joint venture and partnership opportunities with local players in Southeast Asia. Renewable energy projects and the logistics sector are expected to attract strong partnership interest from foreign players. Indeed, many governments, including India and Indonesia, are looking to privatise existing assets in order to recycle the capital into new developments. Brunei has initiated a process to induct a technical partner with a minority equity stake in its national power sector utility while Vietnam has an on-going programme of equitisation (inviting the private sector to take an equity stake) of national infrastructure entities.
We expect increased activity to reach out to both traditional sources of capital (developers, infrastructure funds) as well as alternate capital from investors with long-term capital sources (pension funds, insurance companies, etc.).
Start the new year armed with key insights to tackle new opportunities. Talk to us to find out how our Infrastructure industry specialists can help you solve the most complex business problems and improve performance in a digitally connected world.