Infrastructure top risks forecast

The outline of tomorrow’s international order will, in large part, be shaped by infrastructure. Yet the world of infrastructure is often shaped by geopolitical forces. And, as the Eurasia Group argues, we are in the middle of a geopolitical recession marred by weaknesses in global governance, rise of conflict, and challenges to multilateralism and free trade.¹ The implications for infrastructure players will be significant.

In KPMG’s Top risks forecast, leaders shine the spotlight on key geopolitical trends and their impact on global business. In this article, we reveal the four risks the authors identified as ‘high impact’ for the infrastructure sector and share our insights on why they matter and what you can do to prepare and respond.

Geopolitics can be a double-edged sword for infrastructure owners, operators and investors. The opportunities can be immense — consider, for example, the massive public commitments and incentive programs attached to the US’s Inflation Reduction Act (and multiple subsequent acts) that have poured investment into a wide range of infrastructure projects and sectors.

However, worsening geopolitical tensions could also create big challenges for infrastructure players and markets by restricting data transfers across borders, limiting access to next generation technology from certain suppliers and impeding global standards for things like autonomous vehicles. Now, more than ever, where you do business and who you do it with matters greatly.

KPMG’s report reveals four high impact geopolitical risks for the infrastructure sector:

AI systems require robust ICT infrastructure to function effectively. And infrastructure will likely come to depend on robust AI to function efficiently.

However, the potential impact of misuse or abuse is significant — not because infrastructure is inherently more vulnerable, but rather because the consequences could be severe. The impacts could range from biased systems disenfranchising segments of society through to serious asset malfunctions that lead to death or injury.

In a world characterized by geopolitical recession, it is increasingly likely that companies will have to take the initiative themselves, rather than assume a reliance on global governance structures for safeguards. Indeed, the speed and generative nature of AI’s progress means that any attempts at regulation will be outdated as soon as they are passed. For now, infrastructure players will be responsible for ensuring the right controls and strategies are in place to embrace AI in a responsible, human-focused way. 

China’s ambitions for the Belt and Road initiative are being rebooted after the Covid-19 hiatus.² The recent property crisis is putting massive scrutiny on the construction sector. Manufacturing indexes are trending down. And domestic demand is faltering. China’s long period of unprecedented growth may be slowing.

That could spell trouble for infrastructure players globally. China is the key supplier of a range of key inputs and technologies — everything from steel to solar panels. Economic instability in China could lead to supply chain disruptions, increased costs and delays in infrastructure projects worldwide.

Until recently, China was also an enthusiastic provider of infrastructure debt and equity to projects in the developing and emerging markets. A recent report by the World Bank Group suggests the world still faces a projected US$15 trillion gap in global infrastructure spending through to 2030.³ With geopolitical competition and domestic economic challenges potentially impacting China’s ability to provide the same level of investment in global infrastructure that it sustained for the last 10 years, there is a risk that the global funding gap might widen further.

Directly and indirectly, the fight for critical minerals and resources poses a significant geopolitical risk for infrastructure players. On the one hand, the rise of resource protectionism in some markets (either through sticks or carrots) is creating supply chain and investment distortions which, in turn, is increasing the potential for resource price volatility and supply delays (the global competition over lithium offers a great current example). That is one of the direct impacts that the sector is experiencing today. 

Less obvious, however, is the growing cost that geopolitical risk could be adding to infrastructure projects, particularly in emerging markets. Investors are starting to price these risks into their equations, raising the cost of capital for some and making projects economically unviable for others. The more trade wars and resource protectionism impacts global supply chains today, the dearer the cost for future generations. In the last few years, geopolitical conflicts have led to shortages, delays and price hikes for essential commodities and supplies. For instance, the war in Ukraine has impacted steel and lumber supplies globally and has obviously stalled a number of infrastructure projects in the country. As investors perceive higher risk, they demand a higher rate of return for their investment. This could raise the cost of borrowing for infrastructure, making projects in affected jurisdictions more difficult to finance.

That being said, shortages can also lead to innovation. Last year, for example, more than US$6 billion was invested into the fusion industry globally⁴ as energy price volatility and rising demand for clean power encouraged investors to explore alternatives. Billions more have been invested into discovering new battery minerals.

The current state of the global economy has created massive challenges for governments around the world. High US dollar interest rates are raising financing costs. Uncertainty is adding risk. Inflation is impacting the affordability of new assets. Slow growth is undermining governments’ ability to fund new projects. With the pandemic leaving little to no buffer in their coffers, governments are struggling to deliver (and, in some cases, maintain) their infrastructure requirements.

With many signs now suggesting the US Fed will maintain their monetary stance until later in the year, this trend will likely have long-term repercussions, particularly for heavily indebted governments and infrastructure owners and operators who collect rates in local currencies but pay the bills in US dollars. Expect real estate to come under particular pressure, with knock-on impacts on urban infrastructure as projects get delayed and developers scale back their ambitions.

The impact on sector performance

At KPMG, we track the financial health of nearly 40,000 public companies worldwide with KPMG’s Financial Performance Index. It generates a score (out of 100) that reflects financial performance of markets, industry sectors and individual companies. It also serves as a useful proxy for the impact of geopolitical events on the infrastructure and real estate sectors.

When China’s property crisis began, for example, the market’s Real Estate Development and Diversified Activities sub-sector FPI score plummeted. The sub-sector’s FPI scores acted similarly when investor confidence collapsed in Vietnam in late 2022 and in Germany in late 2023. Now the focus is on Real Estate Operating and Management companies in key markets — versus the quarter prior to the pandemic, scores for this sub-sector have fallen by 39 percent in the US and 9 percent in Hong Kong SAR, China, but strengthened by 8 percent in Canada and 2 percent in India.

KPMG’s Global Infrastructure network helps public and private sector organizations involved in infrastructure to deliver the outcomes they are seeking, whether for society or for their business, or both, as efficiently as effectively as possible. We thrive on working with clients to work through their largest challenges.

Contact us to explore how we can work together to help you successfully navigate the current geopolitical environment.