With technology transforming how we live and
work, infrastructure investing is becoming more
complicated. Self-driving cars, now undergoing
on-road testing, could reduce the need for passenger
railways or metros. As 3-D printing gains traction
and manufacturing becomes distributed, ports may
require fewer storage terminals. And electronic
monitoring systems, which are already available on
many roads, could render toll booths obsolete. For
general partners raising investment funds or direct
infrastructure investors, such as pension plans
and sovereign-wealth funds, such changes could
affect returns on the power, water, transportation,
and telecom assets that were expected to provide
predictable cash flows for many years.
In tandem with these shifts, technology is opening
many important opportunities for investors by
stimulating the need for infrastructure that wasn’t
on the radar a decade ago. The potential for drone
deliveries, for example, could stimulate construction
of docking stations, while the growth of electric
vehicles (EVs) could ultimately make charging
facilities as common as today’s gas stations. What’s
more, technology is improving how construction
gets done. New digital tools are emerging, including
3-D-mapping applications, virtual reality, and real-time
performance dashboards. More companies
are also using advanced analytics to improve
performance and boost productivity, making it
easier to stick to the original budget and time lines
for capital projects.
These technologic shifts come at a time when many
new investors are entering the infrastructure
market, increasing competition for assets. The
key to success involves understanding how
technology is influencing the way assets are built
and operated. It’s also crucial to take a long-term
view of technology’s potential impact, since many
infrastructure assets have a lifespan of 50 or more
years. Any investment decisions made today will
have lasting repercussions.
To help investors deal with disruption, we explored
recent developments in the infrastructure-investment
landscape, with a focus on technological
advances that are changing both asset value and
how assets are delivered. Since there is still much uncertainty about how certain trends will play out,
we also propose a structured approach for evaluating
the risks and opportunities in specific asset classes
as technology influences the market.
How is the infrastructure-investment landscape changing?
Infrastructure has been a rock of stability for
investors, generating consistent inflation-indexed
returns even during tough economic times. With
construction soaring in both emerging markets and
developed economies, the value of privately owned
infrastructure assets—those not traded on public
exchanges—rose from approximately $99 billion in
2007 to about $418 billion by June 2017 (Exhibit 1).
Fundraising was remarkably fast and successful in
2017, with the average fund closing more rapidly than
any year since 2009. Many funds also exceeded their
target size by a large margin.
A more active role for investors
The surging infrastructure market has attracted
new players who want to capture value, including
private-equity managers that want to expand their
fund offerings and pension-fund managers that
formerly limited their investments to infrastructure
funds. While the potential for good returns still
exists, the increased competition for traditional
brownfield infrastructure assets is leading to higher
entry multiples and lower overall returns.
In this competitive market, infrastructure investors
are broadening their focus. Traditionally, they
concentrated on core assets—those that are highly
regulated in terms of pricing and access, such as
water utilities or power generation. Now, their
investing targets increasingly include noncore
assets, such as port operations or rolling stock,
which may not be regulated. Investors look for
noncore assets with higher barriers to entry, in the
form of capital intensity, long contracts, and very
robust client needs at specific physical-access points.
The management approach for core and noncore
assets is a study in contrasts. With core assets,
investors typically look at potential deals, estimate
their returns, and fund those that promise to
produce free-cash flow annually and appreciate
over time—a traditional buy-and-hold approach.
For noncore assets, investors have the potential for
higher returns, but also more volatility. They can
maximize return by taking an active role in strategy,
operations, risk management, organization, and capital planning—an opportunity that they should
seize but which will require new capabilities.
The growing impact of technology
In addition to the forces just discussed, many other
factors are reshaping infrastructure investment,
but technological advances are potentially the
most important (see sidebar, “Beyond technology:
Other shifts that could affect infrastructure
investment”). Although it is difficult to single out
the most important technologic shifts, we have
identified several that may have a particularly
dramatic impact. First, companies across industries
are increasingly relying on big data and advanced
analytics during the construction process, which significantly decreases costs and timelines. Similar benefits come from automating manual tasks or using robots. Other technologic stand-outs include the development of fully autonomous vehicles, also called self-driving cars or level-five vehicles, which could alter demand for transportation-related assets, and the increased interest in distributed renewable energy, which could change the infrastructure needed to generate and store power.
But how will these changes, as well as other technologic advances, affect infrastructure investment? To get the most complete view, we looked at technology from two angles: its influence on asset value and its ability to improve the construction process.
How is technology changing asset value?
Many long-term investors, including the most experienced players, haven’t yet determined how technologic advances will affect demand for infrastructure—both traditional assets like railway stations and innovative structures that weren’t on the radar ten years ago, such as vertiports for drones. Here’s what they need to know about both categories.
Rethinking traditional infrastructure assets
Even if investors have long received reliable returns from traditional infrastructure assets, technology could upend these expectations. Take parking garages. These structures have typically been a solid investment, but a combination of two trends could reduce their appeal: the growth of ridesharing services and advances in autonomous vehicles. If
fully autonomous cars become a reality within the
next 15 to 20 years, ridesharing services might rely
on them. After dropping off their passengers, the
cars would immediately leave to pick up their next
fare, potentially reducing, or even eliminating, the
need for parking in some areas.
But this potential trend doesn’t mean that
infrastructure investors should entirely write off
parking garages—they just need to take a more
nuanced view of the risks and opportunities. For
instance, infrastructure investors have typically
forecast demand for parking garages and other
assets based on factors like population size,
economic growth, local industrial activity, the
number of available parking spaces, and a few other
variables. Now they’ll need to go much further
than a rudimentary supply-and-demand analysis
by examining additional variables, including those
from new data sources, such as vehicle-tracking
data that show the typical routes for local journeys
or information about new government policies
designed to support use of autonomous vehicles.
The new algorithms must also account for factors
that could be disruptive over the long term, including
the projected growth rate for self-driving cars or
ride-sharing services on a location-by-location basis.
Investors might also need to consider whether other
technology trends could affect demand or revenues.
For instance, the rise of parking apps could direct
drivers to garages with capacity. And garage owners
could potentially see a big jump in margins if they
use software programs that allow them to predict
demand and adjust prices accordingly.
After their analysis, investors might determine
that demand for parking is so low that their garages
should be repurposed or provide a broader set of
services. As one example, garages that have off-curb
parking could be transformed into service centers for e-commerce package delivery or turned into
vertiports for delivery drones.
Evaluating new infrastructure assets
An even more difficult puzzle involves determining
how technology trends will increase demand for—or
affect the value of—unconventional assets. Consider
charging stations for EVs. In an age where most cars
use gas, demand for these facilities is relatively low.
But EVs are becoming more popular in many major
markets, with registration increasing 70 percent
in China and 37 percent in the United States from
2015 to 2016. Over the long term, farsighted private-management
firms that invested early in charging
stations could receive greater returns than those
that focused on traditional infrastructure.
With so much uncertainty ahead, investment
firms should consider a range of scenarios when
estimating the value of unconventional assets. For
instance, the market for renewable energy, including
wind and solar power, is increasing. But there are
still many uncertainties regarding the extent of their
growth and the amount and type of infrastructure
assets required to support them.
Consider one recent innovation related to
renewables—the development of liquid-air storage.
Using this technology, energy-storage plants use
off-peak or excess energy to clean and chill air until
it becomes liquid. It can be stored in large tanks until
needed. Such plants might be critical to the success
of renewables like solar and wind power, which have
supply peaks and troughs. These facilities are in
their early stages, and it’s not yet clear how popular
they will become or how their infrastructure
needs might change as the technology advances.
Investors will need to manage these uncertainties
by developing scenarios in which technology, market
growth, and infrastructure requirements evolve in
How is technology changing the construction process?
In addition to affecting asset value, technology is also transforming basic construction processes. Construction-technology firms received $10 billion in funding from 2011 through early 2017, and they’ve used this capital to develop and scale a host of innovative technologies to assist with tasks ranging from off-site fabrication to portfolio management to yard inspection. Automation is streamlining multiple manual processes, such as productivity monitoring, just as it has in many other industries. And companies have improved decision making by applying advanced analytics to a much broader range of data than they did in the past. For instance, project leaders that want to determine the most efficient time, location, and strategy for land moving can now analyze geologic surveys, equipment-demand projections, and forecasts about when they’ll meet project milestones.
When experimenting with new, untested tools, companies may sometimes be disappointed, since it is difficult to predict which ones will succeed. The cost outlays for each tool can be significant, and a bad choice could reduce the bottom line for years. What’s essential for success is an expert view of digital tools and their potential—one that helps investors sort through the confusion and focus their investment in the most promising areas.
To develop this perspective, investment firms must replace speculation about a tool’s potential with a fact-based analysis. They’ll need to conduct extensive research that cuts through the hype regarding tools and realistically consider risks, such as the potential for hackers to seize control through cyberattacks. For companies that make the right investment decisions, the rewards can be great. McKinsey research shows that capital-project leaders that select a strong assortment of digital tools can reduce project costs by up to 45 percent.
Even greater benefits may be possible when the tools are applied across all projects—and this will further widen the divide between digital adopters and those who stick with traditional processes.
Although all infrastructure projects face unique challenges, certain ideas and solutions offer universal benefits. For example, 5-D building information modeling (BIM)—the combination of 3-D physical models of buildings with cost, design, and scheduling data—is now sophisticated enough to be applied to most projects, and has proven results for improving execution. Digital twins—virtual models of a process, product, or service—allow teams to address problems before they escalate, identify opportunities to reduce costs or timeline, and conduct simulations that assist with planning. Drones and virtual-reality tools are fundamentally altering traditional inspection and surveying methods on construction sites. Other solutions, such as artificial intelligence or 3-D printing, could have radical implications if deployed at scale.
With so many tools on the market, some investors may be uncertain where to begin, especially if they have multiple problems that digital tools could potentially improve. In those cases, they should consider applying tools to three areas in which they have extensively demonstrated their value: risk management and project planning; field productivity; and collaboration and decision making.
How can infrastructure investors truly estimate the impact of technology?
Many private-investment infrastructure firms have leaders whose backgrounds have given them relatively little exposure to technology, such as engineering or construction. To fill in their knowledge gaps, many are now working with an ecosystem of partners, including companies with specific technology expertise. When we analyzed how investors have capitalized on recent technology trends thus far, a mixed picture emerged. While
some have enhanced value creation, others are still
in the early stages of exploring opportunities.
As investors venture forward, they should take
a more structured approach when evaluating
technology’s impact to ensure that they don’t
overlook any risks or benefits. One possible
framework, shown in a simplified example in
Exhibit 2, examines two variables. First, it considers
the original risk/return profile for each asset, or
what investors could expect to achieve in the
absence of technological advances, either inside
or outside of construction. Next, the framework
quantifies technology’s potential impact on the
building, operation, and monetization of assets.
Within building, for instance, investors would
have to determine if new technologies could cut
costs and timelines for engineering and design, or if
they could improve construction productivity. For
monetization, investors would have to determine if
new technologies, such as drones, could increase an
asset’s revenues by stimulating demand.
Using the framework, we classified solar-power
assets as an important opportunity for multiple
reasons. For instance, technologic improvements
will create new opportunities for localized
generation and distribution of energy, which could
increase demand. Improvements in grid balancing—the ability to match energy supply with demand—are
also increasing revenue growth for solar-power
assets. By contrast, airports received a neutral
rating. Although advanced analytics and greater automation could support more efficient operations, it’s not yet clear whether this will have a significant impact on revenue generation. We also determined that technology would have a negative impact on parking garages, because autonomous vehicles might decrease demand.
Since the framework only looks at technology issues, investors would have to assess the impact of other trends separately to determine the best path forward, and that could alter their perspective. Let’s return to the parking-garage example. These assets might seem relatively unattractive if viewed solely through a technology lens, but investors might still see some potential if they consider how increased urbanization could stimulate demand.
For this framework to be valuable, leaders will have to increase their investment in data collection and analytics. Otherwise, they risk over- or underestimating technology’s impact. Their investment will pay off, however, since investors with the best knowledge might become the “go to” groups for certain asset classes. Government agencies might be particularly interested in hearing their perspectives, which could increase the potential for public–private partnerships.
Of course, investment firms need to apply the framework using the most current data, and their perspective may change as new information becomes available. If they fail to make updates, they may overinvest in tools or systems that soon become outdated, just as the telecommunications industry did with 3G connectivity back in the early 2000s, when no one predicted that it would be eclipsed by later generations in fewer than 20 years.
Investors may be frustrated by the uncertainty ahead. But in selecting their investments, they must consider the inevitability that technology will alter the investment landscape. Likewise, they need to understand how technology is fundamentally changing every phase of construction, from planning through completion. A solid in-house view of digital change won’t guarantee success, but it’s a major step in the right direction.