The analysis by Oxford Economics for PwC’s capital projects and infrastructure team examines projected spending across seven regions and six key infrastructure sectors. Given the recent volatility in the market, the report also examines two scenarios against the baseline projection - a high growth recovery and a hard landing in the Chinese economy (given China is the world’s largest CP&I market).
On the baseline outlook, using current economic projections for economic growth, while current spending is showing signs of CP&I growth, it will remain low - around 2% - for the coming year. It will make a slow but sustained recovery to 2020, when spending will be at 5% or $5.3tn per annum. The largest percentage increases in global CP&I investment between now and 2020 will be in social infrastructure (for example schools and hospitals) and in manufacturing related infrastructure.
Recent slowdowns are a result of the decline in oil and commodity prices, availability of public and private finance, a slowdown in China’s growth rate and currency volatility which have all weighed heavily on the sector. Slow growth was felt hardest in the utilities sector, buffeted by a combination of subsidy cuts in Europe for renewable energy projects; sluggish global economic and trade growth, which reduces demand for electricity; and diminished private sector thirst for capital projects in the face of a negative commodities price environment.
The UK's recent decision to exit the European Union came after the research for this report was finalised. It is too early to comment on the specific UK and global impact of Brexit in 2020, however, in the short term the additional uncertainty and volatility is likely to directly impact the UK capital projects and infrastructure market and indirectly impact the global CP&I market, although the latter is unlikely to be severe.
Richard Abadie, PwC Capital Projects and Infrastructure team, comments: “Even in these volatile times, there are still opportunities. But sponsors and investors are being very selective on which projects to proceed with, for example ensuring mining and oil and gas projects are profitable at today’s depressed commodity prices. Companies will want to remain invested because the long-term demand for infrastructure remains strong – particularly given its fundamental link to economic growth prospects.”
The research underlines the contagion effect of oil and commodity prices, and China’s economic conditions on the sector’s prospects as a whole. The extraction sector is in for a difficult time under the upside or downside forecasts. Even in the global upturn story line, the slower rate of increase in oil prices holds back infrastructure investment.
Outlook: In the China hard landing scenario, spending does not actually fall between 2015 and 2020 but rather it is lower in 2020 versus the baseline level.
Sector impacts: Compared to the baseline, industry infrastructure spending would drop about 4% with extraction taking the worst hit because weakness in Chinese infrastructure and manufacturing development would significantly slash demand for oil, gas, steel and other minerals. Transport and utilities account for about half of infrastructure spending in Asia Pacific, and these sectors would also fare poorly if conditions in China worsen.
Regional impacts: Over 60% of the decline in infrastructure spending would occur in Asia Pacific. Latin America, the Middle East and countries like Russia, which depend on oil production and other extraction industries to propel their infrastructure-related exports and public or private development projects would also be affected. Western Europe would be least harmed since commodities trades are a relatively small part of the region’s global economic activities.
Dr Andrew Shaw, Transport & Logistics leader for PwC South Africa, says: “Any slowdown in China is likely to have a ripple effect on SSA economies that rely on Chinese demand for their exports to stimulate their markets.”
Economic activity in sub-Saharan Africa (SSA) has weakened substantially. Overall, growth for the region fell to 3.5% in 2015, the lowest level in 15 years and is set to decelerate further to 3% this year – well below the 5-7%range experienced over the past decade, according to the IMF’s Regional Economic Outlook: Sub-Saharan Africa, 2016 survey. This is largely due to the marked decline in commodity prices, which has put substantial strain on many of the largest SSA economies. In addition, many oil exporters continue to face difficult economic conditions, particularly in West Africa, and several southern and eastern African countries, including Ethiopia, Malawi and Zimbabwe are suffering from a severe drought. Despite, the markedly weaker picture, the IMF predicts that medium-term growth prospects for the region remain favourable.
Outlook: In this analysis, global infrastructure investment between 2015 and 2020 would hit $28.8tn, about $1.7tn more than the outcome of a Chinese hard landing and a full $600bn more than the baseline.
Regional impacts: Western Europe and Asia Pacific would gain the most, with over $350bn increased spending in Asia Pacific alone, due to enhanced demands for the region’s exports from Western economies and greater capital influx as the appetite for investing in emerging markets grows. Commodity-dependent regions, particularly the Middle East, would benefit the least.
Sector impacts: Increased spending by both the private and public sectors would engineer broad-based improvements in CP&I expenditures. Utilities and transport would lead the way, reflecting greater industrial activity and renewed interest in building highways, airports and bridges.
Although the smallest overall spend on infrastructure, sub-Saharan Africa is the fastest growing regional infrastructure market, with a projected average increase in transport spending of over 11% per year from 2015 to 2025. Most of this growth is expected in roads and ports. Roads will likely remain the biggest area of investment, especially for growth such as in Africa. This is partly due to the rise in prosperity and, hence, car ownership and also the large volumes of freight now moving on Africa’s roads. SSA’s infrastructure market is dominated by two major regional economies – South Africa and Nigeria. These two economies account for over two thirds of infrastructure investment. Growth in these two economies has slowed markedly. The IMF (2016) measures real GDP growth in South Africa to have dropped from 3% per annum in 2010 to 0.6% in 2016, and in Nigeria dropping from 10% per annum in 2010 to 2.3% in 2016. Per capita GDP growth in both countries is now negative. Growth in Kenya was also seen at 6% in 2016 from the 6.8% predicted last December.
Infrastructure is generally a long-term investment and there is a significant backlog in infrastructure investment in Africa that needs to be addressed irrespective of what the next few years of GDP growth looks like. Infrastructure in these times can act as a significant stimulus to growth. In addition, it can improve country competitiveness and also act to ready countries for increased commodity demand when the global economy begins to pick up.
Shaw comments: “Regardless of which of the two scenarios – upside or downside – pans out, the overall need for infrastructure will not diminish. In addition, certain megatrends will continue to drive growth in infrastructure spend over the medium term. These include continuing global urbanisation, the growth of emerging economies, and the rising middle class, technological innovation and resource scarcity.
“Even in these volatile times, there are still opportunities for projects and investors. While levels of investment and infrastructure will always be sensitive to factors such as macro-economic conditions, commodity prices, and the cost of finance, the need for essential services are constant.”
