Capital project & infrastructure spending outlook:Agile strategies for changing markets 2016 edition

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Monday, July 18, 2016 4:05 PM / PwC

How can stakeholders manage capital project investments in a challenging environment?

It’s going to be a bumpy ride for capital project and infrastructure (CP&I) spending, especially in the near term. Volatile economic forces are making decisions about capital spending difficult and inhibiting strategic planning.

A combination of unanticipated concerns – including the decline in oil and commodity prices, a slowdown in China’s growth rate, sluggish gains in the developed world, the strong US dollar and uncertain forecasts for multinationals – have for many companies and governments inevitably put CP&I expenditures on the back burner.

The UK's recent decision to exit the European Union came after the research for this report was finalised. It is too early to comment on the specific UK and global impact of Brexit in 2020, however, in the short-term the additional uncertainty and volatility is likely to directly impact the UK CP&I market and indirectly impact the global CP&I market, although the latter is unlikely to be severe.

Yet, unlike cost cutting or an M&A deal, increasing or trimming CP&I spending is not a quick fix. Because it involves long-term considerations – do you need a new factory in Asia; is that highway upgrade necessary; will the electric grid provide sufficient energy for demand in ten years? – and long-term projects, enterprises shouldn’t make capital project decisions based on immediate macro- and microeconomic conditions.

There is no simple way to do this. But to provide analytical insight that could help shape CP&I decisions, PwC asked Oxford Economics to examine the capital projects and infrastructure environment for the next five years through the lens of two opposite scenarios: a hard landing in China and a global upturn. We assessed the prospects for CP&I spending across seven regions (see Figure 1) and six key infrastructure sectors (see Figure 2) under both of these scenarios. And we offer a series of strategic and tactical recommendations for stakeholders to prepare for an unsettled landscape.

Our goal is to provide CP&I stakeholders with options for making the right decisions about capital expenditures. In our view, it is more important than ever for companies affected by CP&I volatility to understand the potential range of possibilities they could face and be sufficiently agile to respond to conditions as they change. Says Peter Raymond, PwC US and global and Americas and Asia CP&I leader, ‘... the challenge is how to manage through the short term so you can be positioned to grow effectively over the long term – after the uncertainty subsides’.

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