McKinsey experts argue that the world will see a once-in-a-lifetime wave of capital spending on physical assets between 2022 and 2027. This surge of investment—amounting to roughly $130 trillion —will flood into projects to decarbonize and renew critical infrastructure.
Capital investment will vary by asset class, but on average, an advanced industries company in North America can expect a spending increase of 65 percent over the previous period.
An energy and materials company in Asia will see an increase of 57 percent. Across asset classes in Europe, McKinsey projects a 59 percent increase in capital spending, driven by an increase of 120 percent in European energy and materials spending. In the future, prosperity will be driven by sustainability, inclusion, and growth—an agenda that nurtures innovation while reducing environmental impact and improving people’s quality of life worldwide. Fulfilling these ambitions involves major private- and public-sector capital investments in climate transition infrastructure and in supporting economic recovery and growth. Nothing less than the commitment of top government and business leaders can accomplish a mission of this magnitude.
Problems ahead But few organizations are prepared to deliver on this capital influx with the speed and efficiency it demands. Many are burdened with inefficient supply chains and outdated project delivery systems. For one thing, constructing and justifying the cost of a physical asset such as a manufacturing plant is much more difficult than it was decades ago, given inflation, rigorous sustainability requirements, and rapid changes in technology and regulations. Adding to the complexity, the next generation of assets needs to be “set and forget”: the high cost of building them must be offset by lower operating costs.
For decades, capital project leaders have relied on practices that attempt to optimize individual investments, such as a nuclear power plant, an oil refinery, or a pipeline. McKinsey estimates that cost overruns approach $1.2 billion on the average project—79 percent of the initial budget—and delays run six months to two years. However, this approach will not work for new decarbonization and sustainability investments, where groups of similar projects (such as wind farms and solar parks) are delivered repeatedly over a long period of time and require much better performance than in the past.
A project-centric approach also will not work for decarbonizing existing assets, which is a capital-intensive effort that requires long-term planning. Low-carbon projects involve different considerations from traditional capital projects: for example, building a renewable-energy facility may also require building energy-storage capacity to supply backup power if needed. The growing threat of climate risks such as storms and floods means that companies may need to be careful about how they design assets and where they locate them. That may rule out siting a chemical plant near a coastline so it has easy access to a shipping terminal.
Another obstacle is the availability of labor, raw materials, equipment and regulatory constrains. Skilled-labor shortages and rising costs have become a major issue in several markets. In industries such as metals and mining, sustainability challenges will impose additional pressure to produce raw materials to accelerate decarbonization. Severe capacity constraints are preventing many assets from being built on schedule. For instance, to meet its requirements for an additional 600 gigawatts of onshore windmill power by 2030, Germany would need to build an estimated 200,000 assets.
Addressing these issues will be a daunting task, requiring foresight and collaboration among governments, company boards, asset owners, contractors, suppliers, and service providers. The way out: capital investment priorities A more reliable approach is a portfolio-synergistic strategy in which planning is top-down, with the goal being to develop and deliver each project so that the overall results of the capital spending portfolio are optimized. Modern capital investment priorities include sustainability and decarbonization efforts, semiconductors production and public infrastructure modernization. Sustainability and decarbonization According to McKinsey questionnaire, 93 percent of CEOs say that sustainability issues are important for the future success of their business, and 54 percent expect sustainability to be embedded within the core business strategies of most companies in the next decade. Reaching net-zero emissions by 2050 requires $9.2 trillion in annual average spending on physical assets, $3.5 trillion more than today.
Three sector groups—mobility, power, and buildings—would account for approximately 75 percent of the total spending on physical assets in this net-zero scenario. Mobility would account for about 40 percent of the spending, including investments in electric vehicles (EVs) and charging infrastructure. Energy would account for 20 percent and would include developing renewable-energy capacities (for example, solar plants and wind farms), upgrading transmission and distribution networks, and investments in carbon capture, utilization, and storage (CCUS) technologies.
Semiconductors industry The COVID-19 pandemic exposed many supply chain vulnerabilities, particularly those in the booming semiconductor industry. As a result, organizations around the world are investing heavily in projects that would help them become more self-sufficient in chip production. In the United States, the Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America COMPETES Act includes $52 billion for domestic semiconductor production. Public infrastructure Globally, governments are investing in public infrastructure and services to drive economic recovery. High-priority sectors and those hit by COVID-19 receive major recovery stimulus including Tourism, travel and transportation, Construction and infrastructure, High tech services, Food and agriculture, Education, Healthcare.
For instance, in Europe and the United States, significant funding has been allocated to infrastructure projects across numerous asset classes. In November 2021, the US Congress passed the Bipartisan Infrastructure Law, which appropriates $1.2 trillion (including $550 billion in new funding) to rebuild the country’s road and rail infrastructure, deliver high-speed internet access to all Americans, provide greater access to clean water, invest in new clean-power technologies, and improve the nation’s overall resilience to the effects of climate change. In Europe, to deliver on the Green Deal’s goal of climate neutrality by 2050 and emerge stronger from the pandemic, the European Union has launched the largest stimulus package ever: €807 billion labeled as NextGenerationEU. As of March 2022, the Recovery and Resilience Facility, which funds NextGenerationEU initiatives, has accepted 22 proposals from member states, about 40 percent of which support climate objectives. Ukraine will compete with other countries for capital investment, including in areas such as mobility, electricity and construction. Therefore, it is important to improve the investment climate and simplify the conditions for doing business, so that after the end of hostilities to have the appropriate level of investment attractiveness for foreign companies.
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