Latest global predictions suggest that spending on new infrastructure projects has now overtaken spending on property construction and will continue to lead for the next decade. Kenny Ingram, Vice President, Construction & Engineering at IFS, looks at what this means for the sector, and why the need to embrace modern methods of construction, new technology and digitalization is even more critical.
According to the latest annual forecasts for global construction volumes by Global Construction Perspectives, 2022 will see global construction growth slow to around 3.0%, with infrastructure work usurping housing as the predominant revenue stream for contractors.
As we begin to emerge from the worst of the COVID pandemic, governments across the world are reevaluating the resilience and condition of their critical infrastructure – in particular ‘hard and critical infrastructure’: transportation, telecommunications, energy, water and sanitation.
The result is a widespread investment in physical systems and assets such as roads, highways, high-speed railways, tunnels and bridges. There are two factors driving this. Firstly, a desire to stimulate the economy, create jobs and, most recently, reverse the recession created by the pandemic. Secondly, investing to upgrade transportation infrastructure ultimately enables societies to operate and compete more efficiently, also offering the chance to reduce fossil fuel emissions responsible for climate change.
Research by Oxford Economics in 2017 – conducted before the pandemic – estimated that the global infrastructure investment required between 2016 and 2040 was $94 trillion – an average of $3.7 trillion per year. The trends then already indicated a shortfall of some 19%, with an urgent need for counties to increase infrastructure spending as a proportion of GDP.
The recent “Future of Construction” report, a forecast produced by Oxford Economics and Marsh McLennan companies Marsh and Guy Carpenter, predicts the global construction market will grow by US$4.5 trillion over the decade to 2030 to reach US$15.2 trillion. It expects construction will drive global economic growth in the decade to 2030, with output expected to be 35% higher than in the ten years to 2020.
Analysis of global infrastructure spend by RS reveals that the US, France, India, China and Japan currently spend the most on infrastructure development. But needs are exceeding investment. The global shortfall by sector between infrastructure need and spend shows Road Transport has the largest spending gap (£7.3 trillion), followed by Energy ($2.5 trillion), Rail transport ($925.4 billion) and Telecommunications ($853.7 billion). Water, Ports and Airports all have a spending shortfall of between $597.7 billion and $465 billion each.
Opportunities: New vs. upgrade programs
In contrast to the relatively new infrastructure seen in Asia, countries like the US and the UK are now lagging behind, often ‘making do’ with older infrastructure, an increasing proportion of which is no longer fit for purpose or approaching end of life. Take airports, for example: major termini in China, Singapore or Dubai are typically newer and significantly more advanced than comparably sized airport hubs in the US or the UK.
One of the major advantages of new, modern infrastructure is around lifetime cost. New construction is designed at the outset to be economic to operate and maintain, whilst older infrastructure demands significant continuous investment to keep it operating, as costs rise with age. In the meantime, the opportunity for contractors to secure retrofit, upgrade and maintenance contracts for older infrastructure is significant.
Finance: meeting government requirements
Clearly, from a government perspective, there are societal, economic and political dimensions to encouraging major new infrastructure programs. In the UK, the often-controversial HS2 rail project providing new high-speed links between the South, the Midlands and the North is expected to employ over 34,000 construction workers, engineers, architects, designers and project managers, including 2000 apprentices.
But big infrastructure projects require big investment. The UK Department for Transport’s latest projection for the whole HS2 program is between £72bn and £98bn. In the US, the Biden administration’s infrastructure bill (the Infrastructure Investment and Jobs Act) will see over $1.2tr in spending, with $550bn of new federal spending over the next five years. The American Society of Civil Engineers report card estimates that $61bn a year is lost due to poor road conditions. It estimates that in California alone over $130bn will be needed over the next decade to repair and rectify the system.
Modern construction methods: full digital lifecycles
Governments are understandably keen to optimize value from their infrastructure investment. Increasingly over the last decade in the UK, Building Information Modelling (BIM) compliance has been part of the selection criteria for contractors as procurers look to achieve a full digital lifecycle process for their assets. Over the next 3 years, it’s estimated 65% of the industry will implement digital asset lifecycle strategies such as BIM.
Our own research at IFS suggests that within 5 years, 50% of all construction projects will use offsite/modular manufacturing and/or 3D printing, with prefabricated modules accounting for up to 25% of the construction. Certain UK projects are already insisting contractors use these Construction-integrated manufacturing methods.
As contracting for outcomes becomes increasingly common, construction firms are expected to manage complex, but potentially lucrative, performance-based contracts and model complex whole-life costs. Governments know that contractors using modern methods of construction and a fully data-driven process offer the best way to secure the lowest cost, the optimum quality, the most efficient delivery and the lowest maintenance and operational expense throughout an asset’s lifetime.
Securing new service-based revenues
The adoption of these transformative digital technologies, and in particular industry-honed enterprise software, is playing a pivotal role in realizing a servitized (service-based) full asset lifecycle offer. Companies need real-time financial control of infrastructure projects to minimize lifetime risk and manage both construction and maintenance profitably. Contractors ignoring modern methods of construction and digital processes will simply not have a seat at the table.
IFS continues to recognize the importance of evolving industry trends and how businesses will need to react quickly to changing demands with markets. IFS Cloud provides an enterprise business system that enables users to operate smarter, meeting market requirements and remaining ahead of the industry curve, competitive and profitable.
To discover more, download our latest executive summary for Linear Asset Management where we discuss further how the construction and engineering industry can operate more efficiently in a tech-centric world.