30 / 05 / 22 - 7 minute read
Graham Matthews: Over the past 250 years, the world has undergone a series of technological revolutions. The first was the steam engine, then mass industrialisation followed, typified by Henry Ford mastering the moving assembly line. The digital revolution began in the late 20th century and introduced sweeping changes through digital computing and communications technology.
Now people talk about us being in a Fourth Industrial Revolution, which is the trend toward automation and data exchange between technologies and processes. This is driven by IoT – the Internet of Things, which is based upon smart sensors and actuators. These sensors can be attached to physical structures and collect data on anything – amount, composition, frequency counts, images, movement, indeed, any measurable thing that can be imagined. The collected data is converted to structured datasets, stored in the cloud and machine learning applies artificial intelligence (AI) to the datasets to analyse and spot patterns. When the system uses this data and technology to communicate and act, it can be said to be ‘smart’.
Matthews: Let me first outline what a smart building is. Smart buildings integrate physical systems – Wi-Fi connections, lighting, electricity, heat, ventilation and air conditioning – to optimise their environment based on the number of people inside or expected inside. Buildings have had crude abilities to do this, for instance, turning the air conditioning off over the weekend. However, an intelligent building iteratively adjusts conditions in real time based on predictions made using reams of sensor data. Similarly, smart infrastructure uses data to adjust operations iteratively. The type of infrastructure I am referring to includes airports, electricity grids, railways, roads, ports and utilities, like sewerage and water. However, infrastructure is not a homogenous asset class. Different assets require different data, so it is difficult to generalise about infrastructure in the same way you can about buildings.
For instance, for a port, datasets could include information on ship trajectories, time spent docked, vacancy rates at docks and ship size and weight. A smart airport would be set up to collect data, including facial recognition for passenger identification, health monitoring systems and automated luggage information. What is common across all infrastructure is the potential of data-driven maintenance programs. For instance, image technology can accurately monitor the change in the physical state of assets in real time and detect structural weakness. That is a gamechanger for asset management for both operational efficiency and cost savings.
Matthews: Oxford Economics estimates that $94 trillion needs to be invested in infrastructure between 2016 and 2040 to fuel worldwide demand. This is an enormous figure to comprehend, but it illustrates the scope of the opportunity – especially as this figure is 19% higher than what will be delivered under current trends. So, there is a definite gap. While ‘smart’ can play into all sectors, not all needed infrastructure investment relates to smart infrastructure. According to one recent study, the global market of smart infrastructure was worth $78 billion in 2020 and is projected to rise to $434.16 billion by 2028. I think this latter study underestimates the size of the market, but both studies indicate the potential.
Matthews: Experience. We have successfully been involved in infrastructure for over 24 years, investing nearly €7 billion and delivered exceptional returns to our investors. We have made 110 direct investments, 74 realised investments and more than 35 current investments. Our key sectors include transport, utilities and energy transition, social infrastructure and digital infrastructure. With Smart City Infrastructure, we raised one of the first, maybe even the very first, smart city infrastructure funds globally. Our investee companies are delivering smart city-enabled fibre networks, reading smart water meters, putting sensors on rubbish bins to optimise collections and enabling smart transport networks – to name just a few of the use cases.
Matthews: There are exciting opportunities across infrastructure equity, infrastructure debt and listed infrastructure. We have made investments in some exciting projects, including district heating in northern Italy, a fibre developer and operator in the north of the UK, and an energy-from-waste platform business in Norway. Undoubtedly infrastructure that addresses sustainability and decarbonisation has great potential in the energy sector. Traditional wind and solar are part of this equation, although we see more exciting opportunities in biofuels, district heating, energy-from-waste and hydrogen storage.
Further opportunities abound in the digital infrastructure space. COVID-19 highlighted the need for significant investment in digital infrastructure, and not only is it critical to our post-COVID flexible work lives, but it also underpins smart cities strategies. The final area is social infrastructure – childcare, education, the health sector and other services important for communities and vital to daily life.
Matthews: Yes, in modern Western society, we just can’t do without these sorts of assets. Take daycare, for example: we are seeing increasing technical requirements to ensure that the needs of users are well taken care of. We also see it within the care sector, which will see rapidly growing demand because of population ageing. Technology is playing an even more critical role in improving wellbeing within the last stages of a person’s life. There’s an interconnectedness between smart technologies and social infrastructure. For example, the ability to provide healthcare services between locations and to make the existing use of hospital facilities more efficient. This includes supplementing on-the-ground resources with virtual resources using smart infrastructure.
There’s also the ability to diagnose conditions remotely. We can also use technology and smart infrastructure to deliver educational services remotely, to leverage the capacity of existing physical facilities. So, there’s an interrelationship. Social infrastructure forms the backbone of any sustainable community, yet investment opportunities in the sector have often been overlooked. But they will be increasingly in demand as governments don’t have the financial ability to deliver such assets as they had in the past. In an environment where budgets will be more constrained because of levels of debt built up during the COVID period, there will be a need for greater private investment in social infrastructure.
Matthews: In terms of society, each of the three waves of technological change I mentioned earlier profoundly changed the way humans lived, and this wave will as well. For the last decade, the world has been busy integrating sensors into everything possible. We are now at a point when we begin to tap the potential of these sensors fully. Smart technologies can optimise resource efficiency, inform capital expenditure programs, reduce costs and create healthy and comfortable spaces. Beyond that, the Fourth Industrial Revolution, like those that preceded it, has the potential to raise global income levels and improve the quality of life for people around the world.
Graham Matthews is Head of Infrastructure at PATRIZIA. He was formerly the founding shareholder and Chief Executive of Whitehelm Capital before the business merged with PATRIZIA in 2022.
Graham joined the Whitehelm team in 1998 and started the firm’s infrastructure business at the time when private ownership of public infrastructure originated globally. Graham previously held senior roles in the Australian Federal Treasury and represented Australia at the International Monetary Fund in Washington DC.