A shift in mindset: infrastructure disruption

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Faced with technological disruption, plan sponsors may benefit from taking a shorter-term approach to infrastructure investing and focusing on multiple, smaller-scale projects, says Andrew Claerhout, senior advisor at the Boston Consulting Group Inc.

Infrastructure projects of the past were often large, essential service-related assets linked to government. But with the rise of technology and tightening government belts, this is changing, he says.

“Government used to play a key role as the funder of first resorts in infrastructure projects. Government is now constrained fiscally, they can’t continue to afford to play that role, and so there needs to be a growing role for private capital in infrastructure procurement and management,” he says.

And infrastructure is no longer just comprised of large and centralized assets, he says. When looking at traditional infrastructure verticals, like electricity or water, there are smaller-scale, lower-cost, distributed options. Instead of large investments like a giant electricity generation facility or large water treatment facility, for example, there are smaller options like rooftop solar panels, says Claerhout.

New technology and changing consumer expectations

Technology can also disrupt traditional infrastructure, like transit or parking lots, he adds, highlighting that new innovations like ride shares could disrupt buses or automated cars could disrupt parking lots.

Another source of the change in infrastructure, notes Claerhout, is that consumers now expect a value-add to services, not just a bare minimum level, so asset owners can now play more of a management role in adding value to infrastructure investments.

“Infrastructure, historically, has been provided as a standard service to everyone, so there’s no way for you to get the gold-card treatment with the public utility,” says Claerhout. But the world is changing, he adds. “Consumers are more empowered, consumers want to be treated differently.”

Evaluating current investments

He suggests that pension plans look at their existing infrastructure portfolio and evaluate how to incorporate technology. “You’re either going to be a disruptor or be disrupted, so people that are owners of infrastructure should absolutely be looking at technology and trying to use it to advance their own infrastructure assets rather than waiting for someone else to do it.”

Many infrastructure funds are focused on smaller-scale, more distributed and more technology enabled infrastructure, says Claerhout, yet many infrastructure investors are continuing to focus on what they consider to be core infrastructure — or large monopolistic projects with a major price tag.

“Frankly, I think a lot of people are underestimating some of the risks that exist in those assets.”

One of the big risks is that technology moves very quickly and can change the value of infrastructure assets dramatically over time, Claerhout says.

“When people are making infrastructure investments and they’re planning on owning assets for 15 or 20 years it does require them to have a view of the future,” Claerhout says. “And in an environment where technology is changing so rapidly, it’s quite difficult to have that long-term view of the future.”

A shift in mindset

For this reason, Claerhout advocates for a shorter hold period in infrastructure assets so that plan sponsors’ view of the future only needs to be about five years.

He also says its important to be aware of other risks with traditional infrastructure- like climate risk, pointing to the recent Camp forest fire in California, which many have blamed on faulty electricity lines.

A lot of these traditional businesses were considered boring because there was little disruption, but these are going to be less boring going forward, he says. “They’re going to be more dynamic and there’s going to be more risks of disruption.”

Some larger institutions have not been shifting their mindset about infrastructure enough because a lot of organizations are set up to write very large cheques, making it harder for them to embrace smaller, more distributed infrastructure projects, Claerhout says. For this reason, he suggests these investors should change their mindset from wanting to invest in a one billion dollar project, to investing in 20 $50 million projects instead.

“Look at some smaller projects, commit to some infrastructure funds that are doing some different things, don’t have all your eggs in one basket.”

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