We have seen a number of definitions, but the one that best encapsulates it is the following from Cambridge University:
“The result of combining physical infrastructure with digital infrastructure, providing improved information to enable better decision making, faster and cheaper."
Despite challenging conditions in the broader infrastructure market (which include macroeconomic volatility, an undersupply of core infrastructure investment opportunities, and a compressing of investor returns), investor appetite for the sector remains strong. Sixty two per cent of EMEA investors describe current demand for the infrastructure asset class as high, while a further 34% consider it moderate. Seventy per cent predict demand will increase still further throughout 2018 and 2019.
Perhaps not unsurprisingly, investors see challenges relating to how to value the specific impact of technology. This ranks alongside more established concerns such as high asset prices and dry powder. In an evolving smart infrastructure market, there is likely to be an evolutionary rather than revolutionary approach in relation to this, as investors become more comfortable with how to assess its impact based on their experiences. We think that this is part of a much wider discussion to be had around aligning incentives for sponsors and authorities in a way that could provide more certainty and opportunities around this.
Our research indicates there are two distinct views on smart infrastructure within the market. One camp of investors is embracing the impact of digital technology and exploring how it might be used to optimise performance across a portfolio or a specific asset. A similar proportion are adopting a wait and see approach. The reluctance to engage is being driven in part by concerns over obsolescence, while individual remits and accompanying risk appetites also play their part.
Eighty four per cent of Private Investors think obsolescence is a risk given the rate at which technology is moving. While smart infrastructure clearly has the potential to enhance asset portfolios, there is always a concern that the pace of technological change can lead to solutions that are obsolete before the end of their operational lifecycle. This is particularly the case where the operational cycle tends to be very long for traditional infrastructure – so we can understand why that is a key concern.
Seventy seven per cent of investors recognise that current risk models need to change to properly assess the impact of smart infrastructure. This report makes some initial suggestions for how to achieve this through a shift in perspective, and an evolution of proven processes, rather than a wholesale shift in approach. All projects are different, and there is always scope for looking at certain risks in a more nuanced and collaborative way.
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