Can governments encourage the private sector to drive greater innovation around ESG in infrastructure and construction? To find out, we sat down with John Kwong, Head of Project Strategy and Governance Office, Development Bureau, Government of the Hong Kong SAR, and Nicholas Brooke, Chairman of Professional Property Services Group and Former Chairman of the Hong Kong Science and Technology Parks Corporation, and Michael Camerlengo, Head of Infrastructure at KPMG China and Head of Government for KPMG Asia Pacific.
In a nutshell…
- Governments are trying to encourage greater innovation around ESG in infrastructure.
- Infrastructure capital projects can provide opportunities for government to support innovation.
- Maintaining innovation requires inflows of new capabilities, supportive investment frameworks and strong pipelines of opportunities.
Governments are starting to take a more active role in encouraging greater sustainability in infrastructure. Why is that?
John: In Hong Kong, we've been looking at the environmental sustainability of projects for a long time. Our approach is constantly evolving and now includes not just environmental aspects, but also the social sustainability benefits that can be gained through infrastructure. At the same time, a stronger construction and infrastructure sector can also help contribute to better economic sustainability. I believe many markets are now starting to work very hard to unlock the social and community benefits that can be delivered through infrastructure.
Nicholas: And I think what we are hearing is a broadening of what ESG actually means in the sector. Today, many people see ESG as an agenda with a broad range of benefits for society and the community. And those can't always be measured in financial terms or as specific commercial outcomes. So, what we are seeing is a shift in mindset from ESG being about improving returns and improving value to instead focusing on the value that ESG can bring to society as a whole.
Michael: Governments have long been the traditional drivers of social and economic development in our communities — particularly through infrastructure and construction - but they are now increasingly embracing innovation and environmental sustainability as new dimensions into this mix. Private sector infrastructure players are also connecting into this movement — there is an increasing awareness of the linkages between ESG-enhanced infrastructure assets and positive community impacts at scale - potentially generating stronger levels of stakeholder support and business opportunities as a result. We've seen rapid progress towards bringing these together in the Hong Kong market, through a series of large-scale social infrastructure projects in recent times, but there is a recognition that there is more work to be done.
Who should be driving innovation in ESG for infrastructure: the private or the public sector?
John: I believe government has a very strong role to play in encouraging ESG innovation in infrastructure and construction. Consider, for example, how the public sector can lead by example using our own capital works projects as exemplars. Or how we can provide funding to encourage more innovation in project delivery. Hong Kong's Construction 2.0 strategy that was launched in 2018 has proven that government can influence the performance of the construction and infrastructure industry.
Nicholas: I absolutely agree that government has a fundamental role to play through funding, regulation, investment into training and education and the creation of sandboxes and platforms, for example. But I think the public sector's influence is best put to work as a facilitator. At the end of the day, it's really the private sector that needs to drive the innovation. Government can create the right environment within which innovation can thrive. But it requires private sector players and investors to really move it forward.
Michael: I agree with John and Nicholas. Government needs to be the catalyst, and the private sector needs to be the long-term driver. At the outset, government can take a leadership role by working to remove barriers to innovation, providing seed investment to crowd-in the private sector and establishing business frameworks that are attractive to entrepreneurs, SMEs and big business. However, for any industry or sector to be sustainable, private sector businesses must play an ongoing role - providing capital, resources and people to capture the growth opportunity. In summary, it's a partnership.
Can governments use their procurement power to encourage innovation in ESG?
Nicholas: Absolutely. And we are seeing that here in Hong Kong with government and public procurement moving towards a much more value-driven approach that is linked to sustainability and technical competence. As an infrastructure provider, you can't just come in with the lowest bid. You need to offer a great deal more in terms of not only non-financial benefits but also commitments to ongoing innovation around ESG.
John: In the Development Bureau, we call it `procuring for value'. In the past, we were very focused on price and understanding the financial side of any procurement deal. Now we are looking at the wider value that these partners can bring to the table in terms of technical capabilities and value. And much of that is around their ability to deliver ESG outcomes. That requires a bit of a mindset shift. We want our procurement officers to prioritize the deals that deliver the most value, not the lowest overall budget costs.
Michael: This trend is also being driven by the shift in government procurement away from more direct, taxpayer forms of investment and towards other types of alternative contracts like BOTs, Alliancing and PPPs. These approaches encourage longer-term thinking at the outset of projects — helping to build stronger business cases and strategies — all linked to the desired ESG impacts a project can have on its communities. It's important to recognize that, by aligning these projects more closely with ESG outcomes and value, governments are also uplifting the levels of governance when it comes to public infrastructure investment and use of resources.
Can you share a few examples of recent innovations that deliver ESG benefits from infrastructure?
John: We have seen massive innovation around construction over the past decade. I think perhaps the most exciting in terms of ESG is modular integrated construction (MiC) which has really allowed construction companies to reduce the materials they use, improve site safety, speed up delivery and manage costs. We have also seen specific technologies emerge - like a super-strength steel that promises to reduce materials and improve performance - that are rapidly being commercialized.
Nicholas: Alongside offsite assembly approaches, we are also seeing much greater use of Building Information Modeling (BIM) systems that similarly help reduce waste and improve sustainability. More recently, we've also seen an uptick in organizations starting to work with digital twins, building virtual replicas of buildings and systems to find potential improvements and better manage the impact of our infrastructure assets.
Michael: Those are great examples. I would argue that we're also seeing great innovation in the way we plan infrastructure and its associated land use. Owing to its land constraints, Hong Kong is exploring a range of innovative land use models to drive efficiencies in infrastructure - for example, there is a program that involves carving out caverns or mountains and utilizing this space for real assets such as environmental and digital infrastructure. The objective being to deliver social value and economic impacts through innovative construction and unprecedented land use.
And then how do you keep the flywheel of innovation going?
Nicholas: In part, I think it comes down to the cluster effect. In the past, we would build special-purpose science parks to house innovation clusters. But now I feel we are really starting to see these clusters evolve into innovation communities where new initiatives show what can be achieved by introducing innovation at all stages of community development.
John: We are also seeing a nice evolution of skills and capabilities as a result of innovation. We have fewer workers on construction sites these days. But we are now training and developing many more professionals and workers with innovative skills who understand technologies like MiC, BIM, Digital Works Supervision Systems and IoT. I think this has allowed us to tap into a younger talent base who may not have considered a job in traditional construction.
Michael: I would argue that a strong pipeline of projects drives further investment into innovation. Hong Kong is planning a massive `Northern Metropolis' area for up to 2 million residents. A critical success factor will be how the vision and planning embraces innovation in the widest possible sense - design, construction, financing, operation and asset management - to develop a truly connected and smart city proposition. By encouraging and catalyzing these forms of innovation, it will attract new talent into the infrastructure space and Hong Kong, which in turn will create demand for more innovation in the sector - helping to strengthen and spin a faster cycle of innovation and growth for the benefit of future generations.