As technology changes the ways in which we live, commute, and work, infrastructure investing is becoming more complicated. Evolution in infrastructure usage patterns—for instance, trends in car ownership and mobility—means that asset classes which were a sure bet in the past are facing major disruption. These technological trends are also opening non-traditional avenues for potential investment plays, such as infrastructure to enable drones or new forms of energy storage.
Technology is also having radical implications for the way construction projects are delivered. Tools such as digital twins, advanced analytics, and real-time performance management platforms are already sophisticated enough to be applied on projects in pursuit of better budget and schedule outcomes. When combined at maximum efficiency, McKinsey research finds that these tools can create up to 45 percent reductions in capital costs and 15 percent improvements in operating margins.
On June 12, 2018, McKinsey’s Global Infrastructure Initiative convened 20 of Canada’s leading infrastructure investors and owners to discuss these trends and insights. This peer-to-peer discussion explored the implications of technological disruptions on today’s major infrastructure investments. Seven key themes emerged:
- Construction tech investment and adoption are on the rise. McKinsey research finds that investment in construction technology has doubled in the past decade, largely driven by venture capital and mergers and acquisitions. At the same time, the barriers to adopting these technologies are lowering. For example, data collection methods and tools have become significantly more accessible in recent years, making it more feasible to collect the data required to deploy advanced analytics within a project or across a portfolio.
- Change may be imminent, but it will not happen uniformly. While some degree of increased digitization is arguably inevitable across the industry, the reality is that outcomes will vary across asset classes and geographies. Conducive regulation, political will, and public buy-in will be critical for large-scale innovation; yet they are also uncertain elements that investors can rarely control. For example, we may see more fundamental changes happen in telecom and transportation than in power generation; or we may see bigger evolutions in some jurisdictions than others. One participant commented that it may be helpful to think of “disruption” as happening along a spectrum, rather than as a binary outcome.
- Investors and owners must prepare for technology to fundamentally change the asset classes in which they invest. As one participant put it: “Are we building the right things?” What do trends such as autonomous vehicles mean for traditional infrastructure investments such as parking garages? Stakeholders must develop new frameworks to evaluate the implications of these long-term patterns and react accordingly. Another participant pointed out the need for infrastructure assets to be flexible and scalable. Specifically, assets must be able to adapt to evolving needs and future technical capabilities given the long lifespan of infrastructure assets compared to the relatively rapid iteration cycles of technology.
- Existing contract structures are not set up to support efficient digitization. Contractual frameworks often do not allow for the type of risk-taking and experimentation that it takes to implement new digital methods—particularly when these methods come with high up-front costs compared to status quo solutions (e.g. new equipment or training). Additionally, public procurement processes are rarely able to scope and broadcast technological solutions without potentially placing a partner’s intellectual property at risk. One participant surfaced the idea of pushing bidding toward outcomes, rather than tactics—for instance, seeking a partner to help lower the average commute time, rather than seeking a partner to add a new lane to a highway.
- Significant questions remain about data privacy. For the industry to successfully digitize, its stakeholders will need to grapple with questions about who owns the data that digital solutions generate. Take, for instance, a public private partnership project in which sensors collect information about a rail corridor’s usage and maintenance. Who owns what aspects of that data, and how can they use it? How should that data be regulated? And who should take the lead on developing answers to these looming questions? Cybersecurity is also a concern—as assets become more connected and dependent on software systems, they also become more vulnerable to cyberattacks.
- Upgrading culture and skills will be crucial. Many participants agreed that the industry will need to close significant skill gaps to take full advantage of new technology. Investors and owners must develop internal capabilities that allow them to understand technologies and forecast their effects on assets or asset classes. This must be paired with an ingrained culture of innovation, which may initially need to start at the top (i.e. be driven and incentivized by leadership).
- Maintaining customer-centricity is key. Seeing value on an asset does not solely come down to a successful return on investment—investors must also evaluate that asset by its societal value in terms of the mobility, sanitation, or power it creates. Technology can be a powerful tool for changing the way we operate existing assets to improve the customer experience, rather than simply looking for returns on hard asset investment.