Construction lacks innovation and productivity, but blockchain could be a driver of positive change, write Aimilios Athanasiadis and Leslie T. Szamosi
In an era of austerity that has no end in sight, one of the most challenging issues facing countries and cities today is when and how to undertake key infrastructure projects. Within the developed world, gone are the days of large projects created by governments to spur employment and garner local votes; today, funds available for investment in infrastructure are minimal as is the public appetite for being saddled with additional debt burdens when they are being squeezed through taxes.
Public-private partnerships have provided a solution of sorts, but much more needs to be done. So how can we undertake necessary infrastructure improvements and start to consider new projects under this scenario? In this article, we consider whether blockchain technology could be an enabler, boosting the productivity of the infrastructure sector, while attracting and retaining the human talent required to work within it.
The current infrastructure dilemma
Global demand for infrastructure delivery has been growing exponentially at a compounded growth rate over the past 15 years. Major capital delivery programmes have become a tricky area in which to operate, due to low margins and reactive government policies on procurement, collaboration[ with the delivery bodies, the productivity and the success of major capital programmes of any financing scheme (public-private, private funding, publicly funded).
Research suggests that more than 80% of infrastructure globally is delivered over budget and outside of the scheduled timeframe. Adding insult to injury, the millennial generation is questioning whether the benefits, or scope, of major infrastructure projects and programmes are actually delivering on their promises.
Many of the issues raised are related to the productivity problem of construction. According to The Economist: ‘The construction industry has been afflicted by such problems for decades,’ while, in the words of McKinsey in its 2015 report The Construction Productivity Imperative: ‘Since 1995, the global average value-added per hour has grown at around a quarter of the rate in manufacturing.’
This suggests an important ‘gap’ in the infrastructure sector that needs to be addressed.
While digital disruption means that, every six months, forecast rates are outdated across different sectors, infrastructure construction seems to be much less affected, proceeding at its own glacial pace of change. In August 2017, KPMG reported that a lack of innovation is the main factor in this.
What can be done in this trillion-dollar, distressed sector, to reinvent the basic economics of demand and supply? Could new technologies and digitisation help reinvent the sector in order to innovate and aid in resolving its productivity problem? Could a digitisation strategy lead to better margins and a dramatic rise in innovation and productivity? Would a total sector rethink help it to attract and retain top talent globally and make it a lucrative area, with innovation as a core value?
Drawing on high-level discussions with industry leaders and professional experience, in the remainder of this article, we will seek to explore and understand how blockchain could be an enabler, causing a domino effect towards solving the sector’s productivity and talent puzzle.
Blockchain is NOT Bitcoin
While blockchain technology is not ‘simple’, its core idea is premised on the fact that it is effectively a ‘database’ that is validated by a wider community, rather than a central authority. It is a collection of records that a crowd oversees and maintains, rather than relying on a single entity, like a bank or government, which most likely hosts data on a particular server. Of course, a physical database kept on paper could never be managed by tens of thousands of peers and this is where computers, and more specifically the internet, come in.
Each ‘block’ represents a number of transactional records, and the ‘chain’ component links them together through a hash function. As records are created, they are confirmed by a distributed network of computers and paired up with the previous entry in the chain, thereby creating a chain of blocks, or what we now know as a blockchain.
This is then retained on this large network of computers, meaning that no one individual has control over its history, an important component, because it certifies everything that has happened previously in the chain and it means that no one person can go back and change things. Thus, it makes the blockchain a public ledger that cannot be easily tampered with, giving it a built-in layer of protection that is not possible with a standard, centralised, database of information.
But what are the applications of this?
Current blockchain technology applications
Many sectors have realised potential efficiencies, developing new operational concepts through the use of blockchain technology which can be translated into future financial savings. Blockchain technology is also supported by shareholders, due to the transparency it can offer to different business areas. Transparency benefits are sector-differentiated but business operational transparency is near the top of the agenda in many boardrooms, and shareholders are pressuring directors to understand the underlying business operations and what stands behind the annual report and the financial statements.
The energy market is currently one of the sectors leading the way in the use of blockchain technology in different aspects of service provisioning, from energy grid owners to energy providers and traders, each of whom is developing different applications with a focus on customer service and new benefits for stakeholders.
In 2018, the World Economic Forum (WEF) focused on three key benefits that blockchain technology can offer: delivering security, low cost energy, and automation, stating: ‘We believe the unique features of blockchain – when employed using alternative approaches for validating transactions that avoid mining – can stimulate an Internet of Energy that meets our needs more sustainably.’
In addition, the WEF’s research suggests that the fusion of the three blockchain characteristics (cyber security, low-cost transactions, and automation) can allow for the integration of a grid of centralised power plants alongside distributed renewables, batteries, and flexible load, at minimal expense and without sacrificing reliability. A blockchain-based platform enables the user to simply and securely balance the grid from both ends at the same time, dramatically increasing asset utilisation in a capital-intensive network that frequently runs at a mere 50% of actual capacity.
In shipping, a heavily distressed sector where over capacity is the critical problem, Maersk, the global leader in containership, and IBM, are developing a new blockchain technology concept that could revolutionise the industry. They have developed an end-to-end shipping solution that would give all parties involved in global trade a single view of where cargo is, and allow authorities to give electronic approval for its movement.
This platform could save the industry billions of dollars a year by replacing the current electronic data interchange and paper-based system which can leave containers idle for weeks at a time. Blockchain will enable a single view, via a virtual dashboard, of all goods and shipping information for all parties involved (manufacturers and shippers to port authorities and government agencies).
As an ‘immutable’ distributed ledger, blockchain technology can also improve security, according to Michael White, former president of Maersk Line in North America, and CEO of the new company. Blockchain’s native immutability as a distributed ledger will create an automatic audit trail for regulators, something with which the industry has struggled.
Blockchain technology can employ smart contracts or self-executing workflows determined by the goods being shipped and the authorisation they require while in transport. The key issue is how to eliminate or minimise delays and shorten the length of time people are waiting for information or documentation for cargo to move efficiently.
One example is an avocado shipment that involved 30 port and government officials and 200 pieces of communication, among 100 people. One can only imagine the impact if any one of these documents were delayed; if there were any questions around validity, the shipment could be held up and potentially ‘rot in transit.
In financial services, one of the leading sectors in digital disruption, KPMG, recently developed an application called FundsDLT, a brand new blockchain-powered platform allowing fund managers to sell directly to the investor (or via advisors) while also digitising the entire distribution value chain. This allows asset managers to mutualise a significant number of fund processes, dramatically reduce the cost of transactions, and radically cut down the time taken for process transactions. For the first time in the fund industry, investors are able to use a blockchain-based platform to purchase real fund shares with real cash, a revolutionary distribution chain for this industry.
Can blockchain can help revitalise the infrastructure sector?
Having already briefly examined some of the key problem areas for infrastructure, we have concluded that the sector currently has three focal ‘pain points’. Both the private and public sectors need to address these, in order to revamp the sector and realise economic benefits at a global scale. These include:
- a funding gap based on global infrastructure demand
- a lack of innovation and productivity in engineering and construction compared with other sectors (and mainly compared with manufacturing, due to the commonalities between the two sectors)
- a talent gap; combining the two areas above, infrastructure is yet not a ‘magnet’ sector for creative top talent and does not yet appeal to the ‘digital generation’.
In other words, we need to upgrade and update the way we:
- finance infrastructure
- process capital projects (design, delivery, maintenance and/or disposal)
- attract new talent but also (and equally importantly), upgrade the skill set of current employees.
Each of the above, arguably, needs to be addressed equally, and a co-ordinated effort involving both the private and public sector is required in order for them to progress at the same pace and for the change to have a meaningful long-term impact on society.
So how can blockchain be a key driver in this change? We will briefly describe the strategic drivers and motivators for how blockchain can spark the much-needed change anticipated by the infrastructure sector. There is a co-ordinated sequence of events that, with the right framework, can formulate solutions regarding the new era of capital projects.
What we are seeking to demonstrate is how blockchain can address the aforementioned three focal pain points within a typical infrastructure asset’s lifecycle.
Financing: Infrastructure has been a longstanding choice for public-sector organisations, when it comes not only to fuelling economic growth and the regeneration of cities, but also for private investment when it comes to steady, long-term, returns. Issues around capital projects going over time and budget have always been the key problems when it comes to securing financing, undermining confidence in project delivery. A recent example is Europe’s largest infrastructure project (London’s Crossrail initiative) which has already cost an additional £600m and has a current delivery date Autumn 2019 (no final deadline is yet confirmed), instead of December 2018.
How blockchain can help us address this issue?
The internet of things, smart devices, virtual reality, building information modelling, robotics, big data tools and real-time analytics combining from the design stage, through delivery and operation can provide additional levels of confidence, providing real-time information backed by intelligence tools (for example, artificial intelligence and machine learning). This means that decision makers can make the best possible decisions by analysing all the information from a single source (fountain) of ‘truth’.
Processing capital projects: Linking the required technology to an infrastructure asset or any capital project requires not only an appropriate corporate strategy, organisational structure and an understanding the of technology requirements, but also the capabilities needed for an organisation to realize the benefits of the digital era to the infrastructure sector.
Setting up corporate strategy and project teams ready to embrace technology applications and process automation requires a deep understanding of technology requirements. Therefore, organisations need to empower and embed their technology office in the end-to-end of everyday procedures. For private-sector organisations in the infrastructure sector, empowering the Chief Technology Officer (CTO) towards corporate governance requires organisations to ‘step back’ and realise long-term strategy and organisational purpose in the digital era against their competition as well as traditional and non-traditional competitors and partners (e.g., sub-contracts, third-parties).
Once the organisation has a strategic business plan, supported by the relevant organisational structure and governance, the transition to the digital era can take be phased in. Each phase needs to support the enablement of capabilities and processes to adopt new technologies, but also achieve departmental synergies (for example, real-time project progress reporting) through an established project blockchain project which can provide sufficient information for the finance department to do forecasting and incorporate dynamic financial planning and analysis. In a sector where margins are low and project risks high (and have inherent financial impact), embracing the transition to the digital era can help organisations allocate their working capital more efficiently and, even more importantly, with greater confidence.
For all this to happen, organisations need the right people! Making infrastructure great again (MIGA) and attracting new ‘brains’ to fuel innovation in the sector will enable it to transition into a new era as well as realising a societal impact by creating and enabling a new digital workforce for infrastructure design and delivery.
This transition to the digital era, however, needs to be adopted by those at the frontline of capital projects delivery. Upskilling current workforces to embody this new day-to-day delivery culture and understand technologies (such as virtual reality – useful for health and safety – and mobile applications) that can capture critical data to the big data warehouse and be stored safely on the blockchain and provide critical insights for the project’s progress against building information modelling, is how blockchain can truly make a difference at both a corporate and societal level.
Next steps
Organisations must rethink their technology roadmap and understand that the digital transition is a change that needs to straddle both their operations and corporate strategy, supported by the appropriate capabilities and internal governance. We understand that this transition in the infrastructure sector will not happen overnight, but senior leaders should embrace this much-needed change as soon as possible.
A successful transition should begin by building an in-house core team, with the right partners that can help blend the organisation’s current capabilities and operations with this new strategic direction. Nevertheless, leadership ‘buy-in’ and the development of an organisational culture that can embrace the new strategic roadmap is the initial step that will underpin the foundations of a new direction and vision within this sector.
The global infrastructure sector is thirsty for change. The question is, are stakeholders willing to jump on board and learn how to control the waves of digital change to come or will they be simply swept under?
Aimilios Athanasiadis is an Assistant Manager for KPMG UK within their Infrastructure Advisory Group.
He advises public, private organisations and third parties on strategic and operational challenges and opportunities especially related to the impact of technology on day-to-day operations and for senior decision making that can impact organizational direction.
Leslie T. Szamosi is MBA Programme Director and Senior Lecturer at the International Faculty of the University of Sheffield, CITY College.
He is a highly sought after speaker in the areas of organizational change and human resource management and has published widely in top-rated academic journals. He is a member of the Faculty of Assessors at AMBA.
