Capital project and infrastructure spending outlook Agile strategies

Capital project and infrastructure spending outlook

Agile strategies for changing marketsSeptember 2016

www.pwc.com

PwC in collaboration with


1. About the report

2. Methodology

3. Outlook to 2025

4. Alternative scenarios

5. Infrastructure investment and economic growth

6. Infrastructure as an alternative investment class

2


About Oxford Economics

• Oxford Economics was founded in 1981

• Commercial venture with Oxford University’s business college

• One of the world’s foremost independent global advisory firms

• Providing reports, forecasts and analytical tools on 200 countries, 100 industrial sectors and over 3,000 cities

• Oxford Economics produces global economic and industry models and analytical tools

• Provides the ability to forecast external market trends and assess their economic, social and business impact

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About the report

• This PwC report Capital project and infrastructure spending outlook: Agile strategies for changing markets was created in collaboration with Oxford Economics, which provided research support and model analysis

• The report looks at two macroeconomic scenarios: a potential China hard landing and a global economic upturn–and how they would affect the mid-term outlook for capital projects and infrastructure spending to 2020

• The data set for this study cover 88% of global GDP and 87% of total world fixed investment spending

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The report covers six key infrastructure sectors

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1.Extraction

- Oil and gas

- Other

extraction(Coal,

metals, minerals)

2. Utilities

- Power generation

- Electricity

transmission and

distribution

- Gas distribution

- Water

3. Manufacturing

- Petroleum refining

- Chemical

- Heavy metals

4. Transport

- Rail

- Roads

- Airports

- Ports

5. Telecommunica-tions

- Physical infrastructure

and hardware

6. Social

- Education

- Health


… and assesses the prospects for CP&I spending across seven regional groupings

Western Europe, North America, Latin America, Asia Pacific, Middle East, Africa, Former Soviet Union/Central and Eastern Europe

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1. About the report

2.Methodology

3. Outlook to 2025




7


Oxford Economics’ work with PwC is unique in forecasting actual infrastructure spending

• Infrastructure defined as gross public and private spending on infrastructure-related assets which enhance the supply-side capacity of economies, underpinning long-term economic growth

• Focus is on total spending per year, not deal size

• Other studies have looked at the need or demand for future investment in infrastructure

• OE’s work with PwC is unique at a global level by estimating and forecasting the actual annual spending that is likely to take place around the world through 2025

• This year’s update builds on original work undertaken in 2013 and 2014

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Methodology for Outlook (2016 edition)

• In developing this year’s analysis, Oxford Economics used data sets to provide consistent, reliable, and repeatable measures of projected capital project and infrastructure spending globally

• Historical spending data is drawn from government and multinational organization statistical sources

• Projections are based on proprietary economic models developed by Oxford Economics at the region and sector levels

• The analysis was originally completed over the first half of 2015 incorporating all infrastructure spending and macroeconomic data available at that time, then partially updated in Q1 2016 to reflect the latest macroeconomic data and outlooks of the seven regions covered in the research (but no new actual infrastructure spending data was collected and incorporated)*

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Methodology for Outlook (2016 edition) (continued)

• The analysis also provides upside and downside scenarios for the infrastructure spending outlook based on Oxford Economics’ Q1 2016 Global Scenario Service

*As such, this Outlook is sufficient to draw high-level conclusions at the level of broad sectors and regions; however, it is not suitable for detailed analysis of individual countries and detailed sectors.

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1. About the report

2. Methodology

3.Outlook to 2025




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Despite the downturn in the last 12 months, the global economy is expected to pick up in 2017…

World real GDP growth

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0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

2016 baseline 2015 baseline


…and infrastructure growth is likely to follow

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Global infrastructure spending growth

-2%

0%

2%

4%

6%

8%

10%

12%

14%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

% annual growth

Total infrastructure spending

Source: Oxford Economics


Long-term infrastructure growth remains strong despite medium-term setbacks

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Global infrastructure spending growth

4,000

4,500

5,000

5,500

6,000

6,500

7,000

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

$bn at 2014 exchange rates

2016 BaselineSource: Oxford Economics


Infrastructure spending by region

15

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2006 2016 2025

US & Canada western Europe Latin America FSU/CEE Asia Pacific Middle East Africa




Infrastructure spending by broad sector

16

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2006 2016 2025

Extractions Utilities Manufacturing Transport Social Telecommunications





1. About the report

2. Methodology

3. Outlook to 2025

4.Alternative scenarios



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In light of the uncertain global outlook over the medium term, we explore the potential impact of alternative economic scenarios on CP&I spending

18PwC in collaboration with

Global GDP growth assumptions


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2014 2015 2016 2017 2018 2019 2020

% change on previous year

Baseline China hard landing Global upturn


Upside scenario – Global upturn

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World CP&I spending growth, global upturn scenario

0%

1%

2%

3%

4%

5%

6%

7%

2014 2015 2016 2017 2018 2019 2020

Baseline Global upturnSource: Oxford Economics


Asia Pacific and Western Europe are the biggest winners under the global upturn scenario

2.5%

2.3%

2.0%

2.0%

1.9%

1.3%

1.1%

0.8%

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%

Asia Pacific

Western Europe

World

Latin America

FSU/CEE

Africa

US & Canada

Middle East

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Cumulative CP&I spending 2015-2020 – Percentage difference between 2016 baseline and global upturn scenario, by region



Downside scenario – A China hard landing

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0%

1%

2%

3%

4%

5%

6%

2014 2015 2016 2017 2018 2019 2020

Baseline China hard landing

Global CP&I spending growth, Chinese hard landing scenario



60% of decline in infra spending would occur in Asia;15 % in US and Canada; least impact on Western Europe

-4.9%

-4.0%

-3.7%

-3.6%

-3.4%

-3.3%

-2.7%

-2.4%

-6% -5% -4% -3% -2% -1% 0%

Asia Pacific

World

Latin America

Middle East

US & Canada

FSU/CEE

Africa

Western Europe

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$bn, 2014 exchange rates

Cumulative CP&I spending 2015-2020 – Percentage difference between 2016 baseline and China hard landing scenario, by region



Aside from extraction, transport and utilities would see the greatest impact from a China hard landing

-7.3%

-4.4%

-4.3%

-4.0%

-2.9%

-2.4%

-2.3%

-8% -7% -6% -5% -4% -3% -2% -1% 0%

Extraction

Utilities

Transport

Total

Manufacturing

Social

Telecommunications

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Cumulative global CP&I spending 2015-2020 – Percentage difference between 2016 baseline and China hard landing scenario, by sector



Scenarios analysis – Summary

28.2

27.1

28.8

0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0

2016 baseline

China hard landing

Global upturn

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Cumulative world CP&I spending 2015-2020 by scenario


$trn at 2014 exchange rates



1. About the report

2. Methodology

3. Outlook to 2025


5.Infrastructure investment and economic growth


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Infrastructure investment boosts short-term demand and long-term supply

• In the short-term, building or upgrading transport or energy networks can boost aggregate demand through increased construction activity and employment

(A useful reference here is a recent IMF study, which found that a dollar well invested in infrastructure yields $3 in GDP)

• In the long-term, infrastructure investment can jolt economic growth by increasing the potential supply capacity of an economy

For example, improving transport facilities could make workers more mobile, thus making labor markets more efficient and increasing productivity

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There is a strong correlation between the quality of infrastructure and labor productivity in the G7 and E7

27

US

France

Germany

Japan

Canada

UK

Turkey

Italy

China

Indonesia

India

MexicoRussia

Brazil

0

20

40

60

80

100

120

3 4 5 6 7

GD

P p

er

pers

on e

mplo

yed in 2

014 (

$000)

Quality of overall infrastructure in 2013-14 (1-7 score)

Line of best fit

Higher quality infrastructure

Sources: PwC analysis, OECD, WEF Global Competitiveness report 2014-15

The correlation coefficient between labour productivity and overall infrastructure quality is 0.81



1. About the report

2. Methodology

3. Outlook to 2025



6.Infrastructure as an alternative investment class

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Infrastructure as an alternative investment asset class

• Despite the economic uncertainties, interest in and accumulation of capital for investment in infrastructure projects continue to grow.

• With over US$100 billion in dry powder, and more institutional investors flocking to high-quality projects in a persistent high-dollar environment, infrastructure is becoming a recognized investment asset class globally.

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Contacts

Sashen GuneratnaInfrastructure & Project FinanceTel: 416 814 5748

Johanne MullenInfrastructure & Project FinanceTel: 514 205 5080

pwc.com/cpi-outlook

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Capital project and infrastructure spending outlook Agile strategies