KPMG experts point out ten trends that will define the development of infrastructure over the next five years.
1. Changes in the macro risk environment
The reality is that 'no normal' will probably be the 'new normal' for the foreseeable future and investors will need to get comfortable with uncertainty and learn how to properly price these new and emerging risks. This trend is like no other applicable in Russia that over the past few years found itself in the midst of large-scale geopolitical changes and experienced the volatility of the situation to the full extent. The change in the macroeconomic and geopolitical environment had a direct impact on financial institutions' capacities to provide long-term loan financing for infrastructure projects and altered their approach to forming its value which produced an adverse effect on the infrastructure market in the country.
2. Competition for investments heats up
With more and more equity entering the market, competition for 'investable' infrastructure projects has reached fever-pitch. In part, increased flows are being driven by institutional investors eager to put their capital to work. But it is also being impacted by increased investment activity by multinational and sovereign sources which often prioritize objectives other than pure return on investment (ROI) and therefore tend to distort capital market flows and returns.
Unfortunately, this global trend is not yet confirmed in Russia despite the availability of a relatively small number of well-structured infrastructure projects that might be of interest to investors and financial institutions.
3. Focusing on the larger benefits to unclog the pipeline
The reality is that many governments are starting to recognize that – by striving to take a minimalist approach to risk or to achieve structural and contractual 'perfection' – they have in fact been missing the point and, in doing so, have been making projects more complicated, less attractive to investors and slower to take to market. Simply put, they have been putting too much focus on being clever rather than reaping the larger rewards (such as economic and social prosperity).
Government leaders are recognizing that – in many cases – establishing markets and getting projects delivered (and realizing the long-term economic and social benefits thereof) is more important than minimizing risk or perfecting other variables.
At the moment the number of projects that enter the Russian market and are at the same time attractive for investors is obviously insufficient. One of the reasons is that government bodies focus on financial aspects of projects implementation, often at the expense of comprehensive consideration of non-monetary and indirect social and economic effects that are very important to assess in full detail.
4. Asset management gets sophisticated
Advances in technology, including the use of data and analytics, are also adding to the sophistication of asset management. Russia is at the beginning of a road to introduce advanced methods and technologies for asset management in infrastructure. Despite the great prospects in this area in our country, in particular with regard to operations optimization, Russian companies are only beginning to consider a more systematic approach to this issue. This is in part explained by the fact that much of infrastructure is owned and managed by the public sector, whereas this process is primarily initiated by the private sector mostly by engaging foreign investors and asset management specialists.
5. Technology rockets up the infrastructure agenda
Infrastructure has remained largely untouched by the technology revolution underway around the world. But the reality is that the technology revolution is now upon us. And it is rapidly and fundamentally disrupting the way we plan, design, develop and operate our infrastructure. Solar power technologies, for example, are not only redefining the way power is generated, they are also disrupting the 'centralized' generation and distribution models that underpin most of the developed world's energy investment strategies.
With regard to infrastructure technologies of the traditionally conservative Russia there is still a long way to go in this direction and in many aspects we will have be guided by our foreign colleagues' experience.
6. Security becomes a mainstream issue
With political unrest on the rise in many parts of the world and several high-profile, cross-border infrastructure projects underway or currently being planned, the physical and cyber security of assets will only increase in importance. Ensuring security has always been a key task for Russia.
7. The gap between public and private narrows
The reality is that public sector capability and capacity has in many aspects significantly improved. Recognizing they are now being benchmarked against private sector performance measures, many have learned valuable lessons and have now incorporated private sector practices into their own organizations.
Over the past 10 years the quality of public administration in Russia has significantly improved, in particular certain experience and competences in infrastructure projects, including PPP, has been gained. Nevertheless, the gap between competences of the private and public sectors still remains significant. This matter is particularly acute at the regional level.
8. Innovative new ways to fund infrastructure emerging
For now, innovations in terms of raising funds have been largely isolated to developed markets and, as such, approaches for value capture have yet to penetrate into the developing world.
Over the long term, we expect to see the more progressive emerging markets quickly adopt these methods, both at the local and at the central level, with the more risk-averse markets following up in a 'second wave' of value capture.
Unfortunately, in Russia the opportunities of introducing innovations in funding infrastructure projects still remain limited.
9. The institutional debt market takes off
Over the past year, we have seen a significant uptick in the volume and size of institutional debt deals. Unfortunately, many international development banks, such as EBRD and IFC, have suspended their funding of projects in Russia due to the introduction of international sanctions.
10. China and India have arrived
While this story is only just formulating, it seems clear that the center of gravity in the global infrastructure market is fundamentally shifting towards Asian countries. Rapid growth and activity on the part of China and India have been seen in Russia for a long time but became particularly relevant after the introduction of economic sanctions.
Asian investors and financial institutions started to show their interest in the Russian infrastructure market, however, their prerequisites are still winning construction contracts and supply of equipment. Another acute issue is closing the currency risk for such investors in projects.
The full version of the survey with comments on Russia is available here (only in Russian). The global survey is available here.
MN – KPMG Mongolia – © 2020 KPMG Audit LLC, the Mongolian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.