The challenges that block InfraTech adoption
Paul Lam, CFA, FRSA
Director of Corporate Strategy & Development at TuSimple; former Strategy & Policy Officer (Digital & Technology) at Asian Infrastructure Investment Bank
This article is the first in a series exploring the challenges and solutions to scale up Infratech. Read on for a deeper understanding of common challenges that block Infratech adoption and for a preview of how they can be removed (the focus of part two in this series).
The G20 Riyadh InfraTech Agenda defines InfraTech as the integration of material, machine, and digital technologies across the infrastructure lifecycle. Using InfraTech can improve the value, efficiency, longevity, resilience, sustainability, and inclusiveness of infrastructure.
The McKinsey Global Institute showed that using technology can deliver up to a 15% productivity gain in the construction of projects, translating to up to 6% cost savings. InfraTech solutions can help narrow the funding gap by making more efficient use of investment and of the existing stock of infrastructure assets. InfraTech is crucial to bridge the infrastructure funding gap from the supply side and make our infrastructure fit for purpose in the new era of sustainability and resilience. However, McKinsey also finds that the construction and infrastructure industry is one of the laggards in adopting technology and trails in productivity growth.
So, why is InfraTech adoption still challenging for investors and operators, even in the case of mature technologies like artificial intelligence (AI), Internet of Things (IoT), and cloud computing technology? It’s because applying technology in the infrastructure sector takes a lot of work. InfraTech has the potential to amplify existing problems in the infrastructure value chain, such as lack of a sufficiently strong value case, disparate interests among the parties or across the timeline, and lack of functional and suitable partnerships.
Lack of a sufficiently strong value case
This problem often arises when infrastructure is seen solely as a physical asset rather than as an asset that provides both a service (e.g. roads provide mobility) and an outcome (e.g. roads allow people and communities to get and stay connected). With the addition of a focus on outcomes, the benefits of technology can be fully understood and leveraged.
The lack of value capture in economic activities related to infrastructure typically leads to less willingness to build more than the basics. We are only incentivised to build infrastructure assets that meet minimum specified requirements at the lowest cost.
Not all value cases are the same. Infratech can deliver value in various forms, from quality to efficiency, longevity, sustainability, and more. Values from InfraTech are also delivered on a continuum, from progressive (incremental benefits within the existing value chain) to disruptive (changing the whole sector structurally for better). There is no one-size-fits-all. Realising the optimal value case requires infrastructure stakeholders to explore and reimagine.
There need to be more use cases showing the value of outcomes and the common commercial arrangements in which values can be captured or monetized. This would allow planners to include technology in their roadmaps. It is also important to remember that value is not only generated from cost savings but also from additional revenue generated by the technology.
Disparate interests among the parties or across the timeline
Even when the value case is clear, it is possible for the parties to have disparate or misaligned interests and for interests and expectations to be disparate and disjointed across the asset lifecycle. One reason for this is that decisionmakers often favour solutions that require minimum capital expenditure at the outset over those that provide better value over time.
Public investors might ask themselves why they would spend more today (especially as they are likely to face budget pushback) on the chance of realising some savings in the future. Procurement decisions in traditional infrastructure projects are risk averse and path-dependent. The benchmarks of success are the approaches that have been used before, and assessments of the merits of a decision are based on the past, not the future.
Challenges to realising value at a portfolio level
For most private investors, infrastructure is treated as ‘fixed income’ that generates stable passive cash flow with little active management. Most infrastructure investors don’t typically engage in value-creation activities or manage their portfolios actively as private equity investors or venture capitalists.
This hands-off treatment of infrastructure creates challenges when infrastructure returns deteriorate and when infrastructure subsectors face transformational changes. To navigate, infrastructure investors should increase their focus on technology growth opportunities and risk management. Investors are increasingly attracted to Infrastructure Asset Managers who can offer differentiated value propositions such as technology enablement and new (digital) infrastructure exposures that provide additional return.
The costs and benefits of using InfraTech may not stack up in a single asset or project, given the high overhead costs and positive spillover effects across the sector. Technology applications are sometimes more easily and effectively adopted at the portfolio level of infrastructure investors and conglomerates who oversee more than one project, because the costs of application in these cases are shared among projects and the benefits are greater because they aggregate across multiple projects.
Lack of functional and suitable partnerships
Improving InfraTech adoption requires changes in practice and more industry-level partnerships.
The current top-down planning processes and restrictive procurement arrangements that are typical of the infrastructure sector leave little room for process innovations or for flexibility in the architecture of a program or project. Procurement of technologies may require a process that is more collaborative and outcome-based than the processes typically used. Contracts today are also often disconnected and highly specific, which can prohibit collaboration and lessen opportunities to maximise outcomes. An alternative, outcomes-based contracting approach may be able to deliver much more.
Many capabilities needed in the application of technology may be best acquired through partnerships with technology companies, given in-house development can be risky and costly, and outsourcing can maximise positive externalities. However, corporate development and partnership functions in large infrastructure companies typically focus more on the existing value chain of engineering, building materials, and the like, as they do not have exposure to emerging technology companies. Infrastructure companies should build their technology ecosystems, as CLP Connect and Sidewalk have done.
Public-private partnership is key to thriving in the application of technology in many sectors, says CEO of Intel Pat Gelsinger. Given the fast-moving pace of technology and the comparative disadvantage of the government in keeping up with technology movements, PPP is a great tool. However, PPPs are still seen as a tool for infrastructure and their use is not well understood in the tech context. There is a need for more dialogue and for PPP models to be designed for digital infrastructure and technology.
Finally, the complicated and conventional nature of the construction and infrastructure ecosystems makes it hard to promote change and innovative solutions. The information costs of doing so should be lowered. Information tools should be adopted to help increase strategic sponsorship for technology – it’s not just about project delivery; the bigger digital transformation and capability framework of the company can be positively transformed.
To remove blockers to InfraTech adoption, here are a few strategies:
- Develop the value framework and case. Make the benefits and business cases clear for the decisionmakers by demonstrating what, why, and how InfraTech can improve outcomes. This is the first step.
- Better allocate risk and return through improved procurement approaches, funding models, and financial structures. This helps ensure all stakeholders are aligned and each party is incentivised.
- Develop better collaboration and an ecosystem. Innovation and technology applications require partnership because these activities are highly specialised. No one person or entity holds the key to success, and success will never be achieved if working in silos and measuring against past ways of working.
These paths forward will be discussed in more detail in the next article in this series.