Emerging infrastructure trends in Asia Pacific Emerging infrastructure trends in Asia Pacific

Even the best-laid business plans were upended in 2020 following COVID-19’s sudden and unexpected arrival. But despite continuing market uncertainty and new virus variants emerging, the Asia Pacific region is already moving forward and appears well positioned to meet the challenges of a resilient, post-pandemic world.

Within the infrastructure sector, there are many strands of the industry which could emerge with renewed vigor in coming months and serve as a catalyst for sustainable economic recovery. KPMG has attempted to look into the future to identify key areas of change in infrastructure which will likely influence the industry’s growth over the next decade.

Several of these imminent market shifts have undoubtedly been shaped by the global pandemic. But while COVID-19 defined 2020, themes such as growth, sustainability, and resilience are coming to the fore. We believe this will be the year the world rolls up its sleeves and capitalizes on new opportunities to drive growth and innovation in the infrastructure sector.

Specifically, for the Asia Pacific region, we believe that these five trends are likely to come to the fore in the years ahead.

We can expect the pace of change in infrastructure and construction supply chains to accelerate as organizations focus on resilience. We also anticipate developers thinking more broadly about factors which influence their supply strategies. In some cases, this might mean a business transition towards re-shoring and near-shoring. As there are geopolitical considerations associated with managing secure supply-chain networks, we also expect that countries in Southeast Asia should play an increasingly important role in global manufacturing networks.

The implications of this trend for the infrastructure sector can broadly be summarized in three categories.

• We anticipate seeing significant investment and development channeled into strengthening regional, national, and local supply-chain and logistics infrastructure. This can put pressure on transport and logistics providers — including ports, airports, and railways — to transform their operations, cost structures, and business models to remain flexible and agile.
• We envisage a growing shortfall in certain key capabilities as the flow of global talent remains restricted - senior project managers will be in particularly short supply. Infrastructure and construction leaders are likely to need sustained focus on how to source and retain skilled staffers in this new work environment.
• We can expect to see infrastructure developers and operators start to re-map supply needs and networks. Some might look to new technologies, such as 3-D printing, to help reduce reliance on niche suppliers; others will likely re-shore or near-shore many internal supply lines and networks. It is likely that prospective buyers will seriously examine the supply risks inherent in any bid.

Recent years have brought a flood of new financing options to the sector. These shifts have finally put infrastructure financing on a solid footing, particularly in emerging markets.

The drivers of growth in this space include several varied factors — there has been a sustained period of low interest rates; institutional capital has emerged targeting infrastructure as an asset class; there’s been a rise in local-currency financing; sustainable investment vehicles have multiplied — and even more innovation is coming to the sector.

Some commercial banks, for example, are now working to monetize project-finance debt into structured bonds (with first-loss protection) for use in institutional capital. Other financial institutions are starting to link the cost of borrowing to sustainable performance parameters. Green financing is also on the rise. The ongoing recycling of capital by companies divesting operating infrastructure assets should only provide further motivation to unlock capital markets and attract long-term institutional investors.

A flood of new capital is also poised to flow in from pension funds and insurance companies. For well-prepared governments, the timing couldn’t be better. The ability to tap different sources of funding — including institutional finance and sustainable funds — in addition to local/regional banks and capital markets should lead to substantial additional revenue. Furthermore, new investors are likely to gravitate towards infrastructure vehicles that provide sustainable inflation and protected long-term annuity returns, particularly if treasury rates remain low.

While the pandemic introduced challenges everywhere, it has also been a catalyst for positive change and innovation. Unsurprisingly, as the infrastructure space moves to reinvent itself, society is now calling for a greener, fairer, more sustainable rebuild — a new reality which helps create more opportunities for equitable and sustainable growth.

Governments are aligned on environmental change, with over 30 regions and 700 cities globally^[1] having signed up to the United Nations’ Race to Zero campaign, which aims to reduce carbon emissions to zero by 2050. In driving a green recovery, infrastructure has a critical part to play; its construction and use account for around 70% of all carbon emissions^[2], largely via the energy and transport sectors, and the production of materials such as cement and steel.

Recent conversations surrounding infrastructure have been dominated by net-zero considerations — a trend that is likely to intensify. Simultaneously, we’re also seeing a growing push towards investors prioritizing sustainable assets. BlackRock, one of the world’s largest global asset managers, announced last year that environmental, social, and corporate governance (ESG) metrics would be introduced as part of its investment strategy. Other financial institutions have taken similar steps to encourage eco-friendliness.

We have been seeing a rapid change in core market economics here. Recent estimates suggest that renewable energy is now the cheapest form of power in countries that represent two-thirds of the world’s population^[3]. Vietnam, for instance, has commissioned nearly five gigawatts of utility-scale solar independent power producer (IPP) projects in recent years, including many wind-energy projects. We expect to see the infrastructure agenda being powerfully influenced by a focus on environmental, social, and governance imperatives designed to promote a fairer, more inclusive and more equitable world.

We have entered an era of hyper-connectivity in which businesses that cannot adapt to the new digital economy could quickly fall behind. Pressure is also mounting on governments to provide secure and trusted online solutions. But digital infrastructure capabilities remain uneven across the globe.

In markets and regions with strong digital capabilities, many critical public-service infrastructure owners — water, electricity, and public transport providers, for example — have taken heroic steps to ensure remote productivity during lockdowns. Now they need to normalize these approaches while reducing complexity and cost.

The roll-out of high-speed 5G networks will be a vital component to successful service delivery and key to unlocking technological advances, such as big data and the internet of things, artificial intelligence, and augmented reality. Cloud-based and mobile-networking technologies should also prove crucial to driving infrastructure innovation.

For smart cities and venues, hyper-connected infrastructure can enable space and energy needs to be fully optimized, smart-waste and water-management facilities to be implemented, and connected mobility solutions to be integrated. It can also help utility providers secure smart energy grids, as well as deploy systems reliant on sustainable energy and dynamic asset management.

Over the coming year, the commercial world’s focus on connectivity will sharpen significantly as governments’ emphasis on building digital infrastructure continues to grow. However, as global connectivity increases, concerns related to cyber-security will also continue to mount.

Governments are increasingly viewing the private sector as a trusted delivery partner, and a new range of opportunities for private-sector participation is emerging. While public/private partnerships have existed for decades, their relationship is evolving. In addition to traditional financing conglomerations, many governments are now looking to create partnerships which provide access to enhanced expertise and capabilities.

Consider, for example, the global partnerships that underpinned the rapid development and distribution of multiple COVID-19 vaccines. In emerging markets, we’re also seeing a growing drive towards the recycling of public capital through the privatization of existing government assets. Increasingly, governments and investors are looking at partnering on green-field assets. Many governments are also now thinking critically about whether they really need to be directly delivering all services using self-owned assets — and re-evaluating which services they can outsource to private-sector organizations, re-considering the role that the private sector can play.

Increasingly, this will be evident at the regional and sub-sovereign levels as municipal authorities seek to leverage private-sector expertise and technological innovation in areas such as waste, water, land management, and e-governance. These collaborations, driven by a desire to offer added innovation and value, should provide enhanced performance and results.

This article highlights Asia Pacific themes arising from our recent global report “Emerging trends in Infrastructure”. Explore chapters in-depth to understand the trends and their potential impact on your organization.

Footnotes:

¹ _{Race to Zero campaign website. Accessed on 29 April 2021.}

² _{Data from the World Bank Group. Example source: “Low-carbon infrastructure: an essential solution to climate change?”}

³ _{Analysis by BNEF. As quoted by EdieNetNews.}