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How “infratech” upends the infrastructure investment model

Infratech – the intersection of infrastructure and technology – promises to eradicate one of the biggest reasons why capital construction projects go over time and budget: lack of productivity.

René Lavanchy, Journalist
19 March 2019

Infratech – the intersection of infrastructure and technology – promises to eradicate one of the biggest reasons why capital construction projects go over time and budget: lack of productivity.

Soaring over a development site, a drone scans the concrete skeleton of a building and sends back a model of the structure. On a train, sensors pick up changes in vibration and report a worn-out wheel to the driver. A cloud-based application sends out a call for spare stored electricity to a network of household grid-connected batteries, to deal with a peak in demand. These, and other technologies, are visible signs of "infratech" – the collision of the fourth industrial revolution with the infrastructure sector.

For many observers, this revolution can't come soon enough. Across the globe, urbanisation, economic growth and climate change are all driving increased demand for infrastructure. To keep pace with forecast investment needs to 2040, worldwide infrastructure spending has to increase by $14.9tr, reveals the Global Infrastructure Hub, a G20-funded body. At that scale, simply raiding public and private sector coffers is unlikely to close the gap. On this analysis, we need to make our existing funds – and our existing infrastructure stock – go further.

For years, infrastructure has struggled to make productivity gains. Global productivity growth in the construction industry over the past two decades has been less than 20%, compared with up to 40% in the overall economy, according to figures compiled by consultancy McKinsey. The average capital project, it added, runs 20 months behind schedule and finishes 80% over budget. If construction caught up with the efficiency gains seen in the manufacturing industries in recent decades, productivity could rise by one-third, states Mark Enzer, chief technical officer at global engineering consultant Mott MacDonald. "If you take 30% of what's spent on the built environment globally each year, it's an unbelievably huge number. But that's what's lost to inefficiencies and can potentially be saved," he says.

Industry and government are starting to look to the fourth industrial revolution to deliver that saving. Technologies such as artificial intelligence, big-data analytics and the internet of things (IoT), are being touted as promising impressive benefits. This is not just about new build, either. "Physical infrastructure in the UK is mature. The challenge is to utilise technology to drive more capacity, customer value, resilience and safety out of existing infrastructure," says Miles Ashley FRICS, partner at UK consultancy Wessex Advisory.

A new model

But the revolution won't be simple. Infrastructure is costly and risky to build but, once finished, lasts for decades, provides a dependable public service and, in many cases, a long-term, low-risk revenue stream to private investors. Adding cutting-edge technology into the mix threatens to turn this model on its head. High- tech infrastructure doesn't always pay off, as investors found after the 1990s dot.com bubble burst. And, as technology disrupts life and work patterns, it could render traditional steel-and-concrete infrastructure extinct. If public and private sectors are to spend wisely and close the funding gap, they need to understand the real benefits – and risks – of digital transformation.

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If there was any doubt that digitally enhanced infrastructure is more than just a gimmick, it was dispelled in January 2018 when financial services giant Macquarie, which manages more than $100bn of infrastructure assets worldwide, announced the launch of Macquarie Capital Venture Studio. The business incubator is a home for young digital companies, part- financed by Macquarie, to hone new technologies aimed squarely at making infrastructure smarter.

"We are a financial investor, so getting a return on our investment is really what's driving this," says Stephan Feilhauer, senior vice-president at Macquarie Capital in New York. The focus is not only on creating profitable companies, but finding applications for their technologies in infrastructure projects being developed and financed by their colleagues. Or, as Feilhauer puts it: "To have these technologies provide significant benefits in terms of lower construction costs, faster construction, [and] lower operation and maintenance costs as projects are under way. Pushing technologies into projects where we're looking to be an investor, a developer or an adviser is ... a key way for us to deliver more value than just the dollars we're investing into companies."

Companies invested in so far include Hangar, a provider of drone-based imaging and data services, and Sunfolding, a developer of networked, algorithm-driven pneumatic solar trackers – the devices that point solar panels in the right direction. Hangar's drones provide 4D datasets of building sites – 3D images that update over time – and detailed information about structures so that faults can be identified, and progress checked without the need to send humans on site.

Macquarie's interest is widely shared. A 2017 report, commissioned by law firm Pinsent Masons, found that 98% of infrastructure investors surveyed said they would be more likely to bid for greenfield project opportunities in the next three years where those projects included new technology.

"The challenge is to utilise technology to drive more capacity, customer value, resilience and safety out of existing infrastructure,” says Miles Ashley FRICS, partner at UK consultancy Wessex Advisory" - Miles Ashley FRICS, Partner, Wessex Advisory.

How investment will be secured is an open question. The rapid improvement that makes digital technologies exciting also means they are constantly becoming obsolete. This is problematic where new hardware and software has to be implanted, such as sensors in a water pipe. Infrastructure assets traditionally enjoy long lives and, although conventional examples like streetlights still need parts replacing now and then, the level of risk in changing a light bulb is far below that of installing new software, which may contain bugs and vulnerabilities.

Risk-averse investors such as the pension funds may find this hard to swallow, as may public treasuries. Last year, the opening of London's Crossrail railway project was pushed back by at least nine months. Construction News reported this was partly due to problems developing and testing the train control software.

"There isn't an inherent lack of interest or appetite for funding in relation to technology. It all depends on the funder and their investment parameters," argues Nick Ogden, a partner at Pinsent Masons in London who advises clients on infrastructure projects. "I don't think there'll be a fundamental shift in the funding base, because long-term infrastructure is naturally suited to long-term investors. Stakeholders will need to start thinking about how technology risk will work alongside construction risk." Ogden says that riskier elements such as new technology may attract more bullish investors. Such investors would have very different risk and return expectations to traditional infrastructure financiers, so would be unlikely to co-invest in the same deals. One potential way forward is to deploy nascent technology on existing assets before they are installed in new ones.

Technology poses other challenges, however. In France, telecoms operator Orange plans to turn off its switched telephone network to replace it with IP-based dialling. As a result, it will no longer earn revenue from line rental. Telecoms markets could be further disrupted if fibre networks are supplanted by wireless 5G technology. In the US, the rising use of rooftop solar panels and home batteries, and the promise of smart grids – in which software and sensors allow consumers to avoid using power during peak times – are undermining the business model of established electric utilities.

"Stakeholders will need to start thinking about how technology risk will work alongside construction risk" - Nick Ogden, Partner, Pinsent Masons

One potential solution is to embrace the disruption. French power and renewables multinational EDF, for example, announced in October 2018 a new venture in vehicle-to-grid charging. Chargers provided by EDF can be used to sell surplus power from electric vehicles back into the grid. But the disruptors are also moving in on traditional infrastructure – and providing more of the funding. At the forefront is Google, which has invested in wind and solar farms and telecoms satellites; but Amazon, Microsoft and Apple have also laid undersea communications cables. Concentrating technology and the hard infrastructure that supports it in the same company allows them to control – and exploit – the whole value chain, while raising questions over competition.

Direction of travel

Not all disruption is bad news for public authorities. Blockchain, for example, could replace traditional sources of road funding. In the US, the federal “gas tax” that funds roadworks has long failed to meet investment needs. Electric cars, ride-sharing and autonomous vehicles will erode tax revenues still further. But charging car users on a vehicle-miles-travelled (VMT) basis has not been feasible, according to Jean-Francis Strayer, director of Grant Thornton’s public-private partnerships advisory service. Even with modern computing, he says, “a weak link in the chain has remained the timely, reliable and secure calculation, and servicing of assessments, on those millions of vehicles.” Blockchain provides a distributed ledger – a permanent record of each transaction across multiple computers – and offers a way of recording distances and charges in a reliable, tamper-proof way.

The infrastructure and technology industries are not natural bedfellows. The former is stereotypically conservative and bound by rules, plans and processes; the latter embraces agile development and views itself as a disruptive interloper. It’s not just about culture, but business models. Software can be taken apart and iterated in a way freshly hardened concrete cannot.

Nonetheless, change is coming. Arcadis has launched a programme, dubbed “Spirit Orange”, in which the firm collaborates with clients on developing innovative solutions to infrastructure needs – which could be digital instead of bricks and mortar. “We are taking the start-up principles from Silicon Valley,” says David Glennon, Arcadis’s UK head of digital. “Already you’re seeing a company that doesn’t typically work in this way, working on prototypes and minimum viable products, so the business model is starting to change.”

But if digital technologies are going to unlock serious savings and enhance existing infrastructure, sources agree they must be part of a joined-up strategy. “There’s a direct link from data to outcomes, and it provides a structure that offers a place for every bit of information- related technology,” Enzer argues. “Until we recognise that, there’s a danger of having lots of fun technology [that] won’t connect up for a common purpose.”

Smart infrastructure, then, requires a smart vision.

  • This article originally appeared in the March 2019 edition of Modus