NYC 2018: Implications of disruptive technologies for infrastructure investors

July 2018

Technology is having a profound impact on the way real assets are designed, built and operated. A full ecosystem of asset-specific and industry-wide solutions are emerging across the project lifecycle to improve top line revenue and cut operating costs—McKinsey research finds that construction technology received $18 billion of investment between 2013 and 2018.

Despite the proliferation of digital solutions, questions remain. Why aren’t these solutions being adopted on a broader scale? How can various stakeholders accelerate their implementation to realize the benefits at stake? What does this mean for investors as they consider the changing business cases that drive projects and portfolios?

On July 19, 2018, McKinsey’s Global Infrastructure Initiative convened leading investors from across asset classes to discuss these trends and insights. This peer-to-peer discussion explored the evolving technology landscape in infrastructure and capital projects, discussed barriers to technology adoption, and identified potential levers for moving innovation forward.

The following themes emerged:

  1. Innovation is happening but is generally sub-scale. Clusters of rapid disruption and activity are developing in the construction technology ecosystem—artificial intelligence and analytics, robotics, twin models, and marketplaces for tools or labor. At least some of these technologies are already changing the way the industry builds and envisions projects. As one participant put it, “If someone were proposing a large capital project with no plans to build a digital twin, I’d walk away. It’s that important.” However, participants also shared experiences with invention on a more granular level, including cloud-connected key duplication machines and modular construction that can quickly reconfigure living areas to maximize space utilization. Despite these technologies and innovations existing and having positive results, wide scale adoption has not yet occurred
  2. Mitigate project risk by adopting technology, not by avoiding it. Given the critical nature of services provided by infrastructure and capital projects—such as power or housing—factors like reliability and safety have rightfully been top priorities. Additionally, due to the high volume of capital at risk on a single project, financiers and other stakeholders have long been discouraged from investing in unproven technologies, conservatively favoring implementation of tried-and-true methods. However, embracing technology need not mean a sacrifice of reliability or safety. Solutions like virtual-reality safety walkthroughs or IoT-enabled maintenance actually can enhance those outcomes.
  3. Start early to foster a culture of innovation. Project managers on large infrastructure and capital projects are often rewarded for keeping a tight focus on efficiency and for running lean budgets and schedules. While efficiency and austerity are helpful in project management, these leaders may retain a conservative focus on those values as they move up the ladder and take on top management roles. This can inadvertently permeate the organization with a culture of risk-aversion and rigidity. Top management should consider new ways to incentivize innovation throughout the chain of command, so leaders maintain a blend of rigor and creativity throughout their careers. 
  4. Change contractual structures to encourage technology adoption. Under cost-reimbursable contracts, contractors often have few incentives to embrace new solutions, as they absorb most of the risk of doing so. They take on the technologies’ implementation cost and risks, yet any resultant benefits (e.g. cost and schedule savings or improved safety) are enjoyed by the project’s owners. However, pockets of innovation have emerged—for instance, the rise of fixed-bid contractors who are willing to embrace the risk of new technology in pursuit of better cost efficiency and other positive project outcomes. Nevertheless, the need to rework contractual structures is one of the industry’s most intractable problems, and recurs in GII conversations across every geography.
  5. Regulation can enable technology adoption. The government’s regulatory ability presents a key opportunity to advance technology into the construction process. As a major owner and financier of infrastructure, it certainly has a vested interest in realizing the benefits of new approaches. However, the political environment and increasing fiscal pressures in the United States is making it difficult to create incentives for capital investment in new construction technology. Looking north, Infrastructure Ontario provides a regulatory model that has enabled experimentation with new technologies by incorporating innovation into bid submissions.The challenge, however, is that governments should specify their objectives and goals and let the market deliver them rather than being directive about how the market should achieve a particular result.
  6. Model the financial sector’s fintech response to survive industry disruption. Participants observed that the potential gains offered by emerging tech dictate that E&C companies cannot continue to operate at their low margins, without inviting attention from activist investors looking for a turnaround. When emerging fintech was nipping at the heels of traditional finance operations, incumbents created and tasked divisions with identifying the real attackers and destabilizers at the center of the disruption. E&C companies need to invest in a similar approach so they are prepared to not just survive, but to thrive under the new conditions.
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