The future of
global trade and
Innovation creates change
Trade is critical to the global economy and the wellbeing of billions of people worldwide. How it is conducted and financed looks set to be transformed in the coming years.
Trade was in the doldrums for many years following the financial crisis. Its failure to recover significantly in the years after 2008, despite the gradual healing of the global economy, alarmed many economists – there were even concerns that globalisation had come to a halt. Now, however, it has returned to rude health, driven by the growing strength of the US economy, the surprising recovery of many European countries, and the dynamism of emerging Asia.
“Trade growth is now more synchronised across regions than it has been for many years [and] could make the current expansion self-reinforcing,” said Roberto Azevêdo, Director-General of the World Trade Organization (WTO), when he unveiled its sharply upgraded estimates for 2017. The WTO calculates that world merchandise trade volume grew 3.6% in 2017, accompanied by global GDP growth of 2.8%. The WTO predicts trade growth of around 3.2% for 2018(1).
While the ratio of trade growth to GDP growth – often used as a proxy for globalisation – bounced back to 1.3 times in 2017 compared to 0.6 in 2016, global trade still faces myriad risks, including potentially existential crises such as climate change and geopolitical instability, according to Azevêdo at the World Bank. However, chief among the more immediate headwinds is an upsurge in protectionist rhetoric and actions in some countries.
“There has been a 7,000 net increase in protectionist measures since the financial crisis – most of these in the West,” says Natalie Blyth, Global Head of Trade and Receivables Finance at HSBC (2). Tensions have escalated this year with the announcement of tariffs on washing machines, solar panels, steel and aluminium by the US, and plans for retaliatory measures by the European Union, China and other countries.
It behoves governments worldwide to continue to resist the temptations of protectionism and work to bolster the multilateral global system. To misquote Winston Churchill, global trade is the worst economic system except for all those other forms that have been tried: it causes temporary dislocations and job losses to be sure. But, by prompting countries to specialise according to their natural advantages, trade ultimately enriches the entire world immeasurably.
According to the World Bank, an astounding one billion people have lifted themselves out of extreme poverty over the past 25 years, largely as a result of trade and globalisation (3). By lowering the price of food, clothes, electronics and many other goods and services, trade has improved the lives of many hundreds of millions more. And for companies, global trade has created enormous opportunities to lower costs and increase margins by building vast inter-connected supply chains.
Fortunately, there remain plenty of cool heads around the world that recognise the value of free trade. The UK, for example, is open for business, according to Louis Taylor, Chief Executive of UK Export Finance (UKEF).
“Brexit won’t make us inward looking but is in fact creating an opportunity to become more outward looking and promote free trade,” he notes.
And Blyth at HSBC is confident that free trade will prosper: “It’s possible that many of the threats we are now hearing will not be followed through.” She cautions, however, that the next 12 months are likely to determine the trade outlook for the following five years.
Trade constantly evolves as demand and supply in the global economy changes and countries make strategic decisions to exploit potential opportunities. Perhaps the most obvious example of this is the dramatic ascent of China up the value chain in recent decades. When China opened up its economy in the 1980s and 1990s, its main exports were relatively low tech items and its primary advantage was low labour costs(4).
In the past decade, China’s growing technological sophistication and prosperity has changed its model. Already, China has established a number of high tech brand name companies – think Alibaba, Tencent, Baidu and Huawei – that compete globally. The Made in China 2025 strategy seeks to further upgrade the country’s manufacturing sector by focusing on innovations such as the Internet of Things, smart appliances and high-end consumer electronics, while improving product quality and branding.
At the same time, investment-led growth is gathering pace due to infrastructure projects – most notably China’s One Belt, One Road (OBOR) initiative, according to Farooq Siddiqi, Global Head of Trade at Standard Chartered. “These will have a considerable multiplier effect that will accelerate trade.”
Similarly, trade associated with consumption-based sectors is picking up as emerging market populations become more affluent. Almost three billion people – more than 40% of today's population – will join the middle classes by 2050(5) and these people are almost exclusively in emerging markets, notes Blyth at HSBC. “By 2030, Asia will account for nearly 60% of the world’s middle-class consumption – with more than two-thirds coming from India and China,” she adds(6).
Technology powers two of the greatest embodiments of global trade – the smartphones in our pockets and the cars we drive, both of which have parts sourced from dozens of countries. Now it looks set to transform trade itself in the coming years.
Innovations will make trade easier by improving transparency and efficiency, which should lower logistics costs and reinforce the benefits of global trade.
“Sensor technology will have major implications by enabling containers to be tracked with high levels of accuracy,” says Blyth. "They can show whether a container has been lifted, bumped or opened, and if its temperature has changed during transit."
However, other innovations have the potential to undermine the rationale for many current trading and business practices.
For example, the increased use of robotics could potentially halt the offshoring of factories to low cost locations – one of the main drivers of globalisation in recent decades. “How people decide where to locate factories will change as a result of diminishing cost arbitrage due to automation,” says Standard Chartered’s Siddiqi. In 2016, more than 20 years after Adidas ceased production in Germany and moved to Asia, the company announced that it would set up a shoe factory in Germany using robots.
Additive manufacturing, or 3D printing as it is more commonly known, could have similar consequences for trade volumes. A recent report by the Dutch bank ING points out that 3D printing will lead to slower trade growth because 3D printers use far less labour, reducing the need to import intermediate and final goods from low wage countries(7). While it is tricky to define the exact potential of 3D printing, some experts expect a monumental shift in manufacturing over the next two decades.
ING’s tentative calculations, for example, show that if the current growth of investment in 3D printers continues, 50% of manufactured goods will be 3D printed by 2060; this could be achieved as early as 2040 if investment in 3D printers doubles every five years. These outcomes would wipe out almost one quarter of world trade by 2060 in the first scenario (or two-fifths by 2040 in the second scenario).
Financing for trade covers a broad swathe of products and markets, many of which have undergone considerable change in the past decade. Large scale long-term projects, which are common in the energy and infrastructure sectors, rely on longer-term financing (usually over three years) that aligns with the characteristics of the project. In contrast, trade finance relates to working capital lines of credit that are usually paid back within six months.
Despite these differences, there are considerable overlaps between project and trade finance: insurance or other guarantees are often used for both types of finance, for example, while export credit agencies (ECAs), such as UKEF, have become increasingly prominent in both markets in recent years.
“Before the crisis, there was surplus liquidity and therefore ECAs were required to intervene less frequently,” explains Taylor at UKEF. “Subsequently, bank liquidity dried up and there were also changes in banking regulations which made a significant and lasting difference in terms of liquidity. Our role is to fill gaps in private sector provision – as the market changes, that role will inevitably evolve.”
The gap, most recently estimated by the Asian Development Bank at $1.5 trillion, mainly affects small and medium-sized enterprises (SMEs) in emerging markets(8). “Banking this segment is important, both for financial inclusion and to ensure sustainable supply chains” explains Siddiqi at Standard Chartered.
For corporates, it is imperative that they think about their supply chain in the broadest sense: its smallest part has the greatest difficulty in gaining access to finance. “To create a sustainable supply chain, corporates need to improve visibility and unclog the flow of finance to SMEs,” says Siddiqi. “Ultimately, these efforts will deliver benefits in terms of sourcing stability and costs.”
Bringing in new sources of funding to the world of trade is imperative in the long term if trade is to continue to grow.
Trade finance has attractive characteristics as an asset: it is self-liquidating (meaning the instrument is used to generate proceeds that are in turn used to repay the finance), has a low probability of default (the International Chamber of Commerce estimates a rate of between 0.03% and 0.24%, depending on the instrument(9)) and offers a short tenor.
Nevertheless, despite years of discussions within the industry trade finance is not currently an investible asset class for non-bank investors. “There is interest from investors but the gap between the language used in trade finance and that used by investors is currently too great,” says HSBC’s Blyth. “There is a need for education and investment in skill sets. Banks also need to find ways to package these assets in a way that makes them tradable between investors.”
At the longer end of the market, there has been more success in attracting new sources of finance. “Emerging financial products such as Islamic finance offer additional flexibility to structure transactions,” says UKEF’s Taylor. “Our transaction with Emirates proved a great success in getting new investors involved in this market.”
Murat Demirel, Co-Head of Trade for Europe, Middle East and Africa (EMEA) at Citi notes that even if Islamic finance is not used for a deal, it creates a useful competitive tension in terms of pricing.
One possible solution to the financing challenges of companies involved in trade is the application of new technology. Part of the $1.5 trillion shortfall of trade finance is attributable to tougher capital treatment for banks as a result of new regulation such as Basel III. However, a large part can be blamed on the need to comply with new laws addressing financial crimes, such as money laundering.
The cost of complying with these measures – and of getting it wrong – is extremely high. HSBC manages around 100 million pieces of unstructured paper – each must be scrutinised by four separate individuals, according to Blyth.
Banks are addressing the cost of transaction processing by implementing new technologies such as optical character recognition, artificial intelligence, and machine processing, according to Peadar Mac Canna, Co-Head of Trade for EMEA at Citi. These technologies will create efficiencies and lower costs, which will enable international banks to do more to support correspondent banking relationships, which play an important role in facilitating trade. “Efforts by banks to improve transaction processes need to be flexible and dynamic in order to connect to the multiple platforms which are emerging across the trade world,” says Mac Canna.
Of course, the greatest challenge facing trade finance is not the internal machinations of banks but how to bring together the vast array of stakeholders – importers, exporters, ports, customs authorities and many others – in a more efficient way.
The hope is that blockchain technology – a distributed ledger technology that combines the openness of the internet with the security of cryptography – will come to the rescue. While there is plenty of hyperbole about blockchain's potential, its characteristics seem to make it a perfect fit for trade.
“Blockchain is a suitable technology for trade finance because there are multiple parties that need to manipulate information while maintaining a common record and consistent data in order to create trust,” says Beat Bannwart, Head of Strategic Innovation and Market Development at UBS, which is building a new global system for trade finance with IBM.
To be sure, the application of blockchain in global trade is only now in an experimental phase. But its development is moving fast and it is this specific type of technological innovation that can create real change. Indeed some believe blockchain could even revolutionise global trade.
Companies in the energy and infrastructure sectors are embracing technological innovation to create new opportunities and improve their competitiveness.
The energy and infrastructure sectors represent the locus of global trade. These highly capital intensive industries reflect the dramatic developmental changes occurring in emerging markets and are often pivotal in spurring economic growth. At the same time, energy and infrastructure companies are charged by many developed world governments with driving an export boom that will bolster economies that remain delicate after years of post-crisis austerity.
The outlook for both energy and infrastructure is broadly positive. In oil and gas there has been a gradual recovery in the oil price (although it is still well below its $115 per barrel peak), the renaissance of the US shale oil sector following remarkable cost reductions, and growing natural and liquefied natural gas demand. Moreover, the broad-based global economic recovery should increase demand for energy in the coming years.
Meanwhile, professional services firm PwC estimates that $4.5 trillion a year will be spent on infrastructure between 2017 and 2020. Unlisted infrastructure assets under management reached a record $418 billion in June 2017, according to data provider Preqin, and money is pouring into the sector from sovereign wealth funds and pension funds. Infrastructure is prioritised as a route to economic development: China’s One Belt, One Road initiative could transform the prospects of 60% of the world’s population(10). And it is seen as supporting an economic renaissance in developed countries: US President Trump plans to use $200 billion of Federal money to spur $1.5 trillion in private investment “to give Americans the working, modern infrastructure they deserve”.
At the same time, both energy and infrastructure are experiencing upheaval as a result of technology change and other macro trends, which are creating both risks and opportunities. For example, a recent report by US investment bank Morgan Stanley notes that the use of distributed ledger technology will drive behavioural changes within the energy sector, reimagining how energy is distributed and transacted. Possible applications could be decentralised storage of transaction data, digitalisation of contracts, and verification of transactions.
Indeed, a consortium including energy majors BP, Royal Dutch Shell and Statoil are already underway developing a blockchain-based digital platform for energy commodities trading. On the other side, a PwC report identifies the risks to electricity transmission companies’ investments if smart batteries and rooftop solar panels cut usage.
What is notable about the technological revolution currently underway in energy and infrastructure is how often it applies external technological innovation – such as artificial intelligence, energy storage, the Internet of Things and 3D printing – to a variety of new contexts.
This so-called fourth industrial revolution – the first being driven by water and steam power, the second by electricity and the third by electronics and information technology – will be “game changing” in the energy services sector, according to Bob MacDonald, CEO, Specialist Technical Solutions at project, engineering and technical services company Wood . “It means we can help our customers operate their assets more efficiently, safely and reliably,” he explains.
Even in sectors with highly sophisticated proprietary technology such as nuclear power, external technologies are having a major impact on operational processes. GE Hitachi Nuclear Energy’s innovative PRISM technology uses high-energy neutrons to make nuclear energy much more efficient and, by enabling the use of spent fuel, more sustainable. However, it is leveraging GE’s experience in aircraft part additive manufacturing design to minimise the number of parts used, increasing resilience and efficiency, according to Eric Loewen, Chief Consulting Engineer at GE Hitachi Nuclear Energy. “And using our big data approach, we can prevent events such as shutdowns,” he adds.
The energy and infrastructure sectors are not alone in being impacted by the technological revolution, but they are at the forefront, which is why the following research and analysis in this report is focused exclusively on them.
and key findings
In seeking to understand the current state of global trade, finance and investment and the innovations defining the future, we conducted a global survey of senior executives in the energy and infrastructure sectors, as well as senior figures from ministries and government institutions. In total we received 512 responses, the majority being C-suite level executives (Chairmen, CEOs, CFOs, CIOs, CTOs) together with managing directors and directors of finance, procurement and operations functions in energy and infrastructure companies. A fifth of respondents came from ministries and government institutions. Participants were drawn equally from Asia, Europe, Latin America, the Middle East and Africa, and the United States.
The survey results, analysed in the following chapters, paint a picture of an international trade environment that has undergone dramatic changes in the past decade as the global economy has evolved, the finance sector has been reordered and technology – both within the energy and infrastructure sectors and in our everyday lives – has been revolutionised. All the indications are that the pace of change is set to accelerate further…
Respondents believe overwhelmingly (94%) that global trade is in a stable, healthy, growing or improving state, with developed market based respondents more optimistic in their assessment than their emerging markets peers. On the state of trade finance specifically, most respondents overall believe financing is widely or generally available but 53% believe it is un-competitively priced. When thinking about risks, most respondents overall see rising US interest rates, commodity market volatility and a slowdown in global economic growth, as posing the greatest threats to their international trade and capital investment projects. By comparison, concerns over geopolitical uncertainty and rising economic protectionism seem limited (Note: the survey was completed before the US administration announced tariffs on steel and aluminium in March this year, escalating tensions with China, Europe and other countries).
Most respondents overall believe the megatrends of climate change and resource scarcity, demographics (population ageing, growth and decline) and digitalisation are having the greatest impact on global trade. By comparison, most respondents overall believe that urbanisation (The United Nations estimates by 2050 two-thirds of the world’s population will live in cities(11)), shifts in global economic power, climate change and resource scarcity are having the greatest impact on their institutions’ investment strategy. Demographic shifts and digitalisation are seen as important to investment plans too. But clearly, for the energy and infrastructure sectors, the increasing flow of people from rural areas to cities – especially in emerging economies – has major implications for investment in national energy and infrastructure networks.
Respondents overwhelmingly (95%) agree that trade and trade finance are ripe for digital disruption. They also believe digitalisation will reduce the cost and increase the availability of trade finance, enabling growth in global trade and financial inclusion. Digitalisation in the trade ecosystem is accelerating; most respondents believe complete digitalisation will happen in the next decade. To achieve that, respondents are placing great hope in blockchain technology – 89% of respondents believe it critical or important in transforming how organisations interact, transact and share trade data. What’s more, respondents also believe blockchain has the greatest potential to revolutionise global trade. The application of the technology in trade is therefore a question of ‘when’, rather than ‘if’. But the ‘when’ is still far from being answered. There are multiple projects underway from banks, technology and energy companies to bring blockchain to trade processes. But there is little clarity yet on when blockchain will be rolled out commercially or how critical mass will be achieved.
Of all the advanced technologies offering the greatest potential for investment and use in the next decade, respondents overall are most excited by the application of Internet of Things, smart sensors, blockchain technology, robotics and artificial intelligence. Indeed, such is their potential, most respondents say their institutions have already significantly invested in these technologies, including 29% that have specifically invested in blockchain technology. But it’s not just these advances that are of interest. Significant investment is also flowing into augmented and virtual reality, energy storage, cloud computing, electric and autonomous vehicles, 3D printing and quantum computing. These technologies are not only transforming energy and infrastructure sectors, enhancing safety, productivity, efficiencies, accessibility and sustainability. They are also changing markets, business models and the workforce.
Commercial banks remain the primary source of financing for trade and capital investment projects, but energy and infrastructure companies are increasingly drawing on the financing support of development finance institutions, multilateral lenders and ECAs. Indeed, 26% of respondents plan to seek support from ECAs to finance their current capital investment projects. There are a variety of non-bank alternative financing options open to and being used by companies and governments. But banks will remain crucial and especially in enabling areas of trade finance where future growth is expected and desired. These areas include greater participation by institutional investors in trade finance – a development that 93% of respondents agree would benefit the market – to supporting the rise of Islamic trade finance and the renminbi as an international payments currency. Banks will also play an important role in the digitalisation of trade finance, and in making blockchain the revolutionary technology people hope it can be. One area, however, where the role of banks remains unclear is in the use of cryptocurrencies as a form of payment in global trade. Strikingly, most respondents do believe that this could happen.
Navigating macro risks
and disruptive forces
Energy and infrastructure firms are exposed to both daily volatility and long-term trends that are reshaping the world. What issues currently influence their decision making?
Energy and infrastructure are among the most cyclical of industries, buffeted by changes in monetary policy, sensitive to any slowdown in economic growth, and vulnerable to volatile commodity prices. And yet they are also exposed to long-term macro trends such as urbanisation, climate change and shifts in global power; planning for the future is critical. Managing such a confluence of short-term risks and long-term challenges (while identifying which of the latter offer opportunities) is complex and difficult.
These challenges are compounded by the long-lead times of many projects in the energy and infrastructure sectors and the relatively high geopolitical and financial risks of operating in many emerging market countries (where many of the greatest project opportunities exist).
Shaun Kenny, General Manager, Infrastructure Business, for Europe, Africa and the Middle East at US civil engineering company Bechtel, gives an illustration of the breadth of issues his company currently considers in relation to the global economy.
The first is China’s rebalancing of its economy from manufacturing to services, which will have a significant impact on what gets built and where, he notes.
“China’s Belt and Road initiative and its willingness to fund overseas infrastructure projects are good examples of this,” he explains. This initiative is monumental. China is planning to spend some $900 billion as part of the investment programme that will include infrastructure projects across 65 countries – accounting for two-thirds of the world’s population and 30% of global GDP – from China to the UK and Scandinavia(12). To finance it, the continued strength of China’s economic growth is critical.
The second is the high level of debt globally and the spectre of interest rate rises in the US (as well as the potential phasing out of quantitative easing by the European Central Bank and the reining-in of easy credit in China). “Higher rates and potentially lower economic growth will influence decision-making in the project community – and has the potential to stall future projects,” says Kenny. The long duration (and significant debt requirements) of many energy and infrastructure assets also make them susceptible to any increase in rates.
The third issue is commodity prices. “When resource prices are high there tends to be high levels of investment, as well as infrastructure investment in commodity-producing countries,” says Kenny. With the possibility that commodity prices will remain lower for longer, royalty-driven infrastructure projects may simply run out of steam, he believes.
The downturn in commodity prices is also prompting change in the operational scope of some companies. It was a significant part of the rationale for the creation of Wood (formerly Wood Group) following the acquisition of Amec Foster Wheeler, according to Bob MacDonald, CEO, Specialist Technical Solutions at project, engineering and technical services company Wood.
“It gives us opportunities for synergies across a wide range of markets including mining and minerals, nuclear, downstream oil and gas, chemicals and pharmaceuticals,” he says. “We can bring technologies from oil and gas to the mining and minerals sector, which is historically less advanced, for example.”
Aside of these key risks, there are significant challenges too. Finance is one such hurdle. Going it alone, especially in emerging markets, is not always an option when developing infrastructure exports, explains Carl Fergusson, Director of Strategic Projects at civil engineering company Colas UK. “Even with a strong pedigree and a competitive and high quality product, it is tough to compete against other international companies, such as those from China, Turkey or Korea, many of which have strong financial support from their governments.”
Another potential challenge is the way in which large projects are procured, says Kenny at Bechtel. “Increasingly, decisions – especially in relation to public spending – are made with a parochial mindset, with the proponent seeking evidence of local project performance rather than an international track record,” he notes.
On the global stage parochial mindsets can be problematic too. Incidences of trade protectionism are rising. But while this can present a risk and challenge to companies’ trade and investment plans, just 2% of respondents overall cite rising trade protectionism as the greatest threat to their trade plans and capital investment projects.
What’s more, most respondents overall do not see rising populism and economic protectionism as a top three disruptive force profoundly impacting global trade nor their institution’s investment strategy. Such phlegmatism is striking given rising tensions around trade, but then company executives seem to be seeing through the political posturing and uncertainty it creates.
Instead climate change and resource scarcity, demographics and digitalisation are seen as the top three megatrends impacting global trade. While at the company level, urbanisation, shifts in global economic power and climate change are shaping companies’ investment decisions the most.
Ultimately all of these forces are having considerable impact on the world, on trade and on company investment. But if there is one that at least companies have greater power to harness and control, and could help address some the challenges these forces cause, it is digitalisation.
In its Technology Outlook 2018 report, BP estimates, for instance, that the application of digital technologies in the energy sector, including sensors, supercomputing, data analytics, automation and artificial intelligence, all supported by the networked computers of the cloud, could reduce primary energy demand and costs in the energy system by 20-30% by 2050(13).
That would be a huge and important step in energy efficiency, particularly as the world’s population is projected to rise to 9.8 billion by 2050 from 7.5 billion today(13).
Technology innovation drives transformation
The energy and infrastructure sectors are being shaken up by the smart application of external technologies.
The fourth industrial revolution – encompassing new technologies such as the Internet of Things (IoT), smart sensors, robotics, artificial intelligence (AI) and energy storage technologies – is well underway. Products such as drones, which were almost unknown a decade ago, are now routine in the energy and infrastructure sectors; cloud computing and big data analysis have become valuable tools in industries where – at least in the common imagination – brawn has been prized over brain.
Such digital technologies are not only transforming the energy and infrastructure sectors, enhancing safety, productivity, efficiencies, accessibility and sustainability. They are also changing markets, businesses and employment. New business models are emerging, while some century-old models may be on their way out.
Innovation arms race
To stay ahead, both energy and infrastructure companies have dramatically increased investment in digital technologies in recent years. Global investment in digital electricity infrastructure and software, for example, has grown by over 20% annually since 2014 to reach $47bn in 2016, almost 40% higher than investment in gas-fired power generation worldwide, according to the International Energy Agency(14). On the other side, PwC research estimates that engineering and construction companies are currently investing 5% of their annual revenue each year in digital technologies(15).
According to respondents overall, much of this investment is being allocated to smart sensors, IoT, AI and machine learning, virtual reality and energy storage technologies. What is striking is the extent to which blockchain technology is a significant investment for both industries too.
Certainly the ability to create, validate, authenticate and audit contracts and agreements in real-time, across borders, without third-party intervention, makes blockchain technology attractive. It could open up completely new ways to track the flow of materials, contracts and payments in supply chains. Knowing in real-time which materials have arrived at a construction site, who handled them and where they originate from, makes the application of blockchain technology potentially valuable.
What’s more, as more technologies become interconnected across transportation, infrastructure, energy, waste and water, among other areas, blockchain could play a central role in creating a trusted system for transactions between autonomously provided services and information sources.
Bringing the outside in
What is notable about technological innovation within both industries is their growing interest in working together with and investing in technology companies and start-ups.
Indeed consultant CB Insights says that corporate venture capital investment in technology start-ups by oil majors such as Chevron, BP, Royal Dutch Shell, Saudi Aramco and Total has hit record highs in the past couple of years. Much of this investment has flowed into clean-tech technologies, but investments in advanced technologies to improve current operations has also been significant.
Last year Chevron, Saudi Aramco and Shell led a $28m investment in Maana, a start-up using AI to harness and analyse the vast swathes of performance data companies generate. Similarly, BP invested $20m in California AI start-up Beyond Limits, which is adapting software from NASA, the US space agency, for commercial use in the energy sector.
"Artificial intelligence will be one of the most critical digital technologies to drive new levels of performance across the industry,” says Morag Watson, Chief Digital Innovation Officer at BP.
Similar levels of collaboration are happening in the infrastructure sector too, says David Wilson, Chief Innovation Officer at Bechtel. “We collaborate with hardware and software companies to deploy high impact solutions to our projects.”
For example, Bechtel co-developed a solution with US technology company Atlas RFID that identifies the location of equipment and materials across construction sites by combining drone surveillance with radio-frequency identification. It is this type of smart sensor technology that respondents see the greatest potential for investment and use in the next decade, and that many have already invested in significantly.
Similarly, for virtual reality (VR), Bechtel partnered with US firm Industrial Training International, which runs VR training simulations, to develop simulations for equipment operators, which are used to pre-screen and train potential operators. “We wanted ITI to expand their catalogue of simulations to better reflect our job sites; so we supported the development of new equipment operation scenarios,” says Wilson. Depending on the project, co-funding either reduces Bechtel’s costs or gives it exclusive use of the product for a set time.
In other circumstances, it makes better sense to develop capabilities internally – for example in relation to big data. “With 120 years of project experience, we have a vast amount of data and experience at our disposal: it’s our legacy,” says Wilson. “Data is the new fuel of industry and we want to use ours to drive the best results, securely and effectively, across our business; hence the creation of our big data and analytics centre.”
Seeking synergies and new business models
As well as borrowing new technology from other industries, the energy and infrastructure worlds are also adopting other sectors’ business models.
“Increasingly we are seeking an ongoing relationship with our customers,” says MacDonald at Wood. Its process technology business allows customers to maximise the breakout of hydrocarbon production. But it sells a solution that incorporates software and ongoing support rather than just a product. “Our offerings rely on a combination of intellectual property, data analytics and blue-collar experience,” he says. “By bringing these forces together we are able to help clients predict when equipment will fail.”
More dramatically, Elon Musk’s Hyperloop transport concept, which has yet to be proven on a large scale, is essentially an open source project – a concept borrowed from the software industry – with multiple parties and ideas competing for funding. Musk created the original idea but rather than develop it himself, he invited others to make vacuum-tube high speed travel a reality, and then ran a competition to develop a prototype. As a result, dozens of new companies, as well as existing infrastructure companies, have entered the market, accelerating the development of Hyperloop.
The broad reach of new technologies is also encouraging companies to seek additional applications for their solutions and synergies in other industries. For example, Wood uses light detection and ranging technology (also known as Lidar and used to guide autonomous cars) to analyse wind patterns for turbines. But Wood uses this same technology to enable Boston Airport to use its runways more efficiently and will shortly deploy it to aid helicopter logistics in the North Sea.
Likewise, Wood is now applying computational flow dynamics, originally developed to measure the movement of oil or gas through pipelines, to the movement of air through valleys so that operators can plant or remove trees to focus wind on their turbines.
Innovation will accelerate
The pace of change in the energy and infrastructure sectors has increased: “At any one moment, change is never as fast as we would hope, but on reflection it’s moving far faster than we might anticipate,” says Bechtel’s Wilson. However, everyone expects further acceleration as external technologies, such as autonomous and electric vehicles, mature and become part of everyday life. Energy and infrastructure firms are also aware of the enormous efficiency gains still to be realised.
The construction sector is one of the global economy’s largest, with about $10 trillion spent on construction-related goods and services every year(16). According to a McKinsey Global Institute report, the industry’s productivity has trailed that of other sectors for decades. It estimates there is a $1.6 trillion opportunity to close the gap; equivalent to half the amount spent on infrastructure every year(17).
New technology will be critical to achieving this goal and the results could be dramatic. A recent report by Balfour Beatty, the UK infrastructure group, imagines a human-free construction site. “Robots will work in teams to build complex structures using dynamic new materials. Elements of the build will self-assemble. Drones flying overhead will scan the site constantly, inspecting the work and using the data collected to predict and solve problems before they arise, sending instructions to robotic cranes and diggers and automated builders with no need for human involvement.”
Clearly, robots have much to offer energy and infrastructure – 28% of survey respondents overall believe robotics will be critical in the next decade. However, they are more likely to augment people in the design, buy, and build processes, rather than replace them, according to Bechtel’s Wilson. “In the future, sites will be a symphony of robots conducted by people; to deliver projects safer, better, faster, and leaner,” he says. “Robots will lower risks to humans and act as an enabler; an example today is the use of autonomous vehicles to deliver tools and materials directly to the workforce. Robots won’t replace humans – in fact they’ll create opportunities for years to come.”
Can blockchain revolutionise trade?
Over $4 trillion of goods are shipped each year, with hundreds of thousands of counterparties, authorities and routes involved in shipment(18). A project by IBM and Maersk aims to tackle this complexity.
Global trade is extremely complicated and inefficient – one defining feature is millions of items of disconnected digital and paper-based documentation, according to Marvin Erdly, Global Trade Digitisation Leader at IBM. It has formed a joint venture with shipping giant Maersk to address the problem. They estimate global trade costs $1.8 trillion a year and think savings of 10% are possible.
“Blockchain has the right characteristics to overcome these historic challenges,” says Erdly.
IBM and Maersk are planning to launch a separate joint venture entity, subject to regulatory approvals, to facilitate the involvement of various major players in global trade. “The backing of two leading players in technology and shipping gives us the global reach, relationships and technology to bring blockchain to the trade ecosystem,” says Erdly. “But we also recognise the importance of independence: this is an open platform, available to all.”
To this end, IBM and Maersk are establishing an advisory board of industry and government experts to shape the platform, provide guidance and feedback, and drive open standards. “This process has already started and we are beginning to onboard ocean carriers, ports and terminals, and customs and other authorities,” says Erdly.
A broader group of multinationals, including General Motors and Procter & Gamble, have also expressed interest using the platform. Clearly there could be huge benefits for all multinationals, not least energy and infrastructure companies given the size and complexity of their global supply chains.
Multiple parties have already piloted the platform, including Port Houston, Port of Rotterdam, the Customs Administration of the Netherlands and US Customs and Border Protection. Feedback from these pilots is informing new iterations of the platform. The expectation is that onboarding of the network will have sufficient momentum in 2018 to enable the platform to attract leading global shippers.
Although the business model is still being discussed, barriers to entry for ports, customs and other authorities will be low, with most of the costs borne by shippers, financial institutions, and other platform beneficiaries.
At launch the main capabilities of IBM and Maersk’s platform – built on an open technology stack underpinned by blockchain technology – will focus on addressing two key industry challenges.
The first is a shipping information pipeline, which will provide end-to-end supply chain visibility, enabling all actors involved in a global shipping transaction to securely and seamlessly exchange information about shipment events in real time. The solution is cloud-based and easy to scale. Access to information will be seamless using application programme interfaces (APIs) that avoid the need to exchange information on a point-to-point basis.
The second area is supporting paperless trade. The platform digitises and automates paperwork filings for the import and export of goods, such as import declarations, by enabling end users to securely submit, stamp and approve documents in real-time across national and organisational boundaries.
“Apart from the efficiency savings that blockchain generates, there are clear benefits in terms of visibility,” says Erdly. “Dispute resolution is currently a problem in trade because it’s hard to know what happens when. This solution stores key milestones so that individual containers can be easily monitored. Ultimately, the Internet of Things will simplify this process further.”
Exploring new frontiers
in trade finance
An open-minded approach to new markets and opportunities could help overcome companies’ challenges in accessing trade finance.
Trade finance, which originated to mitigate risks associated with commerce millennia ago, has had a tough time of late. Regulatory changes such as Basel III, which increases capital costs, and anti-money laundering rules have increased demands on bank infrastructure. That, in turn, has prompted tactical retreats by some banks and a decline in correspondent banking relationships, which, by reaching companies that international banks cannot, facilitate global trade.
Consequently, there is a trade finance gap, estimated by the Asian Development Bank at $1.5 trillion, which harms small and medium-sized enterprises (SMEs) and emerging market corporates in particular. In the best outcome, their trading costs are ramped up by the cost of finance, lowering margins and reducing their competitiveness; in the worst case, these companies simply don’t sell internationally, damaging economic growth.
The availability of a wide range of trade finance products has been affected by these changes, according to Bob MacDonald at Wood. “The last few years can be characterised by a scarcity of public equity financing, combined with tight corporate credit conditions,” he says. “Caution around risk management and pressure to deliver an appropriate return has led banks to tighten lending standards.”
Given these hurdles, energy and infrastructure companies have been increasingly accessing alternative sources of finance, such as the bond market, project partners, private equity and export credit agencies (ECAs), says MacDonald. “There is now more competition for funding and a wider range of debt and equity providers serving the market”.
Some of these providers also include hedge funds and fintech firms such as peer-to-peer lenders and crowdfunding platforms, which compose a growing piece of the alternative finance mix. Even large, cash-rich companies are increasingly using their excess cash to finance their supply chains directly.
But one of the big questions on the future of trade finance is when will institutional investors such as pension funds and insurers become a powerful force too?
These investors are already a force in longer-term financing. For instance infrastructure funds are flush with pension fund and insurers’ money. They are also increasingly lending directly to large energy and infrastructure projects and supporting the growing project and infrastructure bond market. But it is at the shorter-end of financing where it is hoped their involvement will grow.
Clearly energy and infrastructure executives in our survey see the benefits of enabling greater participation by insurers, pension funds and other fund managers in trade finance. On the other side, the risk/return profile of trade finance investment aligns with investors’ current needs and investment strategies too.
However one problem holding back an institutionalised investment market for trade finance is that some banks are resisting opening it up because they fear it “will eat their lunch”, says Natalie Blyth at HSBC. She contends that bringing institutional investors into trade finance would increase the market size, benefiting everyone, and facilitate more dynamic portfolio management for banks.
Some banks are listening to their investor clients. HSBC has, for example, been building out a global trade finance investment network, with hubs in London, Singapore and New York to enable pension funds, asset managers and insurers to invest in cross-border trade finance. Fintech firm CCRManager, together with 16 banks, has launched a trade finance risk distribution platform too.
These may be small developments but they should help eventually open-up the trade finance market to greater institutional capital flows.
Tapping new markets and currencies
Another two areas of growth shaping the future of trade for energy and infrastructure companies are the internationalisation of China’s renminbi (RMB) and Islamic (Shari’ah law compliant) trade finance.
According to SWIFT, the bank messaging and payments network, RMB currently ranks seventh in international payments, some way behind the top three of the dollar, euro, and sterling(19). But in the next decade, some 63% of respondents overall believe the currency will become a top three payments currency, which would mark a watershed moment in China’s economic rise.
Capital controls and uncertainties over future regulations have held back growth of the RMB in international trade more recently, but there are reasons for optimism over the next few years, some related to the energy and infrastructure sectors. The impact of China’s One Belt, One Road initiative, for example, could have a positive impact on trade and payments using RMB.
According to Singapore-based DBS Bank, one area in particular could be greater use of the RMB in commodity trading. If Saudi Arabia follows in Russia’s footsteps with RMB settlement for oil transactions, for instance, the whole industry could go through a paradigm shift, notes Chris Leung, economist at DBS. He adds that RMB-denominated gold contracts traded in the Hong Kong and Dubai exchanges are already propelling the development and allowing oil exporters to invest their RMB proceeds.
“Alongside the recent Panda bond issuance plans for Saudi Arabia and the Emirate of Sharjah, this suggests that the ‘Petro-yuan’ story may not be too far-stretched,” said Leung.
Over the next decade, Islamic trade finance is expected to grow in use too.
While most respondents overall do not believe it will become the leading form of trade financing in the Middle East, Africa and Asia in the next 10 years, 32% of executives are more optimistic and agree or strongly agree that it could.
In total the value of Islamic trade finance assets represent a mere fraction of the $2 trillion Islamic finance market(20) – primarily composed of Islamic funds, sukuk, takaful and banking assets – but there is a huge opportunity and need for this market to grow.
Standardization in Islamic trade finance documentation should help. Indeed, the planned creation of a master risk participation agreement to support Islamic trade finance by the Bankers Association for Finance and Trade, an industry group, and International Islamic Financial Market, a standard- setting body, could prove pivotal in boosting volumes. Khalid Hamad, Chairman of IIFM, has no doubt the agreement will contribute to “increasing the trade finance business on a Shari’ah-compliant basis.”
More broadly, the powerful macro trends driving Islamic finance will drive Islamic trade finance too. The world’s Islamic population, for instance, is projected to grow by 35% by 2030(21). This in turn should further drive demand for Islamic finance and particularly in Africa and Asia, which by 2050 are expected to account for over 75% of the world's Islamic population(22).
Together with this, the $90 trillion of investment the world needs to make in infrastructure assets over the next 15 years cannot be financed through conventional financing channels alone(23). Islamic finance funded Infrastructure Public-Private Partnerships (PPP) in emerging economies could play an important role, according to a PPIAF, World Bank and Islamic Development Bank report.
“Ways for conventional finance and Islamic finance to coexist in the same infrastructure PPP projects have been tested widely, with great success, in a variety of countries, sectors, and contexts. These two streams of financing are complementing each other to meet the global infrastructure finance gap,” the report concludes.
ECAs are becoming more flexible
Side by side with the growth certain markets, has been the growth in scope, ambition and power of ECAs, many of which have become ever more important players in recent years, says Murat Demirel at Citi. “They are no longer seen as the lender of last resort. There has been increased direct lending and broader coverage in terms of guarantees or risk programmes. Also content policies are becoming more flexible and some ECAs are providing working capital support.”
What’s mainly driving this is the dramatic increase in the strategic importance of exports for national growth since the global financial crisis, which in turn is making ECAs take a markedly more proactive and innovative approach to support this. Most if not all of the world’s leading ECAs have evolved as Demirel explained. But there are some, such as the UK Export Finance (UKEF), which have, due to the country’s unique political situation, had to be more proactive in their approach than others.
Last year, for instance, UKEF provided £666 million in direct loans – from a total of £2.5 billion the government department deployed – to energy and infrastructure projects(24), including an upstream oil and gas project development in Ghana, a water treatment project in Kurdistan and construction project in Sharjah, UAE, powered entirely by renewable and recoverable energy.
Direct lending may be seen to be the bluntest tool in an ECA’s toolbox, but it is effective, and increasingly the structures used in the financings are highly innovative. And being able to provide innovative, flexible financing solutions to overseas buyers ultimately creates business for exporters.
“The ability to offer local currency financing, rather than long-dated hard-currency FX, opens up new opportunities for UK exporters,” says Louis Taylor at UKEF, which now offers local currency guarantees in 62 currencies.
The revolution in trade finance has begun
Trade financiers have been calling out for a digital solution to their markets manual processes for years. Can blockchain provide the answer?
There are some areas of trade finance that will surely remain untouched by digitalisation. No piece of digital technology can, for instance, strike trade deals or replicate the experience and ingenuity involved in structuring a complex project financing. But for everything else, the need for a digital solution to automate still labour-intensive and predominantly paper-based processes in trade finance could not be greater.
Energy and infrastructure executives in our survey clearly believe so – 95% of them overall strongly agree and agree that trade and trade finance is ripe for digital disruption.
The multi-trillion dollar question is how?
The zeitgeist technologies of optical character recognition, artificial intelligence and machine learning, offer great promise and are either being investigated or implemented at all the major trade banks. But if there is one technological advance that it is hoped could ultimately transform trade finance, it is blockchain technology.
An overwhelming 89% of executives overall believe blockchain is critical or important in transforming how organisations interact, transact and share trade data. What’s more, some 18% of respondents believe blockchain offers the greatest potential to revolutionise global trade.
Blockchain may still only be in an experimental phase. But its practical application is being proven, which means the revolution has already begun.
At its core, the technology enables greater transparency, efficiency and security in trade finance by digitising agreements entered into a permanent immutable ledger that all involved parties – buyers, sellers, their banks, transporters, inspectors, regulators – in a transaction can view.
This is important because everyone involved needs to see and approve the trade transaction yet traditionally each party has their own separate forms and records of it, which complicates and slows the trade process. Crucially, as these paper documents are exchanged, reviewed, verified and reconciled between parties, capital can get tied up, impacting a company’s access to financing.
It is this complexity that Blockchain can ultimately help simplify and solve, saving time and costs throughout the trade process and ultimately making trade finance much more efficient.
There are three main areas where the use of blockchain is being investigated by banks, technology companies, fintechs, energy majors and commodity traders.
The first two are in trade finance, specifically in open-account transactions, through which most trade today is done, and documentary trade, traditionally facilitated by letters of credit (LCs) issued by banks.
Two consortia – we.trade supported by nine banks and IBM, and the other led by enterprise software firm R3, technology platform TradeIX and another group of banks – are leading the way in trying to make open-account transactions more secure, transparent and efficient by using blockchain technology.
The aim is essentially the same for documentary trade, which is an older, more inefficient and relatively expensive payment settlement method mainly still used in emerging markets. Last year R3, together with IT services firm CGI and 11 banks, successfully developed a separate prototype application on R3’s Corda blockchain platform, which has the potential to significantly reduce inefficiencies and costs by streamlining the processing of LCs. In May this year, HSBC and ING made this prototype a commercial reality by executing the first live trade finance transaction over the platform for international food and agricultural conglomerate Cargill.
"What this means for businesses is that trade finance transactions have been made simpler, faster, more transparent and more secure,” says Vivek Ramachandran, HSBC’s head of growth and innovation.
Another consortium however is taking a different approach. An IBM and UBS-led blockchain project, called Batavia, for instance, aims to complement rather than replicate LCs, according to Beat Bannwart at UBS. He believes putting a LC on blockchain fails to address the problems associated with multiple documents, giving rise to inconsistencies and a need for manual intervention.
The third use for blockchain technology is in energy trading.
Last year energy majors BP, Shell and Statoil, trading houses Gunvor, Koch Supply & Trading, and Mercuria, and banks ABN Amro, ING and Société Générale joined forces to develop a blockchain-based digital platform, which is expected to be operational by the end of this year.
The objective is it to create a secure, real-time digital platform to manage thousands of physical energy transactions a year from trade entry to final settlement using secure, smart contracts and authenticated transfers of electronic documents. It is hoped this will reduce administrative operational risks and costs of physical energy trading, and improve the reliability and efficiency of back-end trading operations across the supply chain, while also opening the door to innovative funding and financing solutions.
To be sure, energy commodities trading is just one of many potential applications of blockchain technology for energy companies, says Owen Williams, senior advisor in Statoil’s innovation unit. He sees potential use in areas such as logistics and distributed energy systems too.
For now though most of the focus is on energy trading and conducting financial settlements and reconciliation of trades internally and externally using traditional currencies, rather than cryptocurrencies, which are underpinned by blockchain technology. But the use of cryptocurrencies to pay for trade is certainly seen as a possibility.
Indeed, some 76% of respondents overall believe cryptocurrencies will rise to become a major form of payment in global trade and potentially in the next five years.
Sveinung Støhle, CEO of Höegh LNG, which owns and operates floating LNG import terminals, storage and regasification units, says there is a lot of uncertainty and risk around the values (of cryptocurrencies) and the way in which these systems should work, but that he feels “any new type of system like this is something that cannot be ignored.”
“It is something that we need to follow very closely because I am 100% certain that the way we transact or settle commitments will change dramatically over the next few years.”
ECAs' changing role
in trade finance
Export credit agencies are responding to the changing world of trade and trade finance by becoming more proactive and innovative.
Export credit agencies (ECAs) play a vital part in global trade, stepping in where help is most needed and when times are toughest. “The value to the market of ECAs is essentially determined by the availability of liquidity in the commercial banking market,” explains Louis Taylor at UKEF.
Before the crisis when markets were fairly accessible to many different types of issuers, ECAs were becoming a less important part of the trade world. In the past decade, however, banks have become more selective in taking on risky or long-term assets and ECAs have helped to fill the gap in supply, says Murat Demirel at Citi.
At the same time, there has been a drive to stimulate economies by investing in infrastructure, especially in emerging markets, increasing demand for long-term finance. The softening of commodity prices has impacted a number of commodity-exporting countries in the Middle East and Africa. Many of these governments are now running significant budget deficits and therefore need support to make the investments in infrastructure that their economies require.
Many developed market countries have prioritised exports in the past decade to help boost their economies, providing a further impetus for the growing prominence of ECAs.
A final factor determining the availability of trade finance is the easing of monetary policy, says Taylor: “It has resulted in a stretch for yield, prompting investors to look at asset classes, such as aircraft, that were not previously considered.”
That has opened up opportunities for landmark transactions such as the $913 million of trust certificates provided by UKEF in 2015 that enabled Emirates to use Islamic finance to fund its purchase of four new Airbus A380s for its fleet.
A more active role for ECAs
The convergence of the variety of supply and demand factors described above has prompted a transformation of ECA finance in the past decade. “Whilst we have seen ECAs come to the fore in previous economic downturns, they have historically become less relevant as economies picked up,” says Guto Davies at GE Capital. “This is not our assessment this time around – we see ECAs as here to stay.”
UKEF now takes a proactive approach to supporting UK exports. “We can use an expression of interest for a sponsor to attract companies to look to the UK for procurement and ensure that our businesses have the opportunity to become part of their supply chain,” says Taylor. The agency is also active in attracting investment into the UK, with the ability to benefit from UKEF support an important part of the draw.
In practical terms, UKEF now has greater flexibility in how and where it takes risk. Since 2014, it has been able to lend directly in order to support purchases of UK exports, for example, which has helped to facilitate the building of a major airport in Uganda.
“We were able to combine our product, which includes strong quality and sustainability components, with an attractive financing package from UKEF for the Kabaale Airport project in Uganda,” says Carl Fergusson at Colas UK. It is constructing the runway, taxiway, cargo terminal and other infrastructure for the project, which received a €270 million loan from UKEF – its largest to an African government.
While UKEF’s direct lending facility is currently finite, if its performance continues to be strong, UKEF could churn its existing investments.
UKEF has also developed an innovative export refinance facility that has yet to be used but could prove valuable given constraints on the banking market. It allows banks to offer 10-year finance but with a guarantee from UKEF to take them out at three years if capital markets conditions mean they cannot refinance; that guarantee ensure beneficial capital treatment for banks.
Supporting a wider range of companies and projects
Big ticket projects remain a crucial focus for ECAs – the size of total financing capability was seen as the most important attribute of an ECA by 45% of survey respondents. Davies at GE Capital would like to see ECAs work more closely together (in support of their respective exports) and collaborate with Development Financial Institutions and Multilateral Development Banks on a more systematic basis to ensure large infrastructure projects can succeed. “Strong co-operation between these institutions is a key factor to success,” he says.
However, ECAs have also increased their attention on the other end of the scale, by supporting SMEs. UKEF’s new products include a bank guarantees which offers up to 80% of export-related working capital required by an SME, and bond support products.
To make this process easier, UKEF has now delegated the provision of bond and working capital support to five banks; SMEs can access finance of up to £2 million direct from their banks, with UKEF simply informed it is guaranteeing a facility. “By gaining access to these banks’ relationship managers, we can effectively reach almost every SME in the UK and provide support that, by definition, the private sector is unable to offer,” says Taylor.
Powering Ghana’s energy transformation
Dynamic and flexible financing means that UK exporters will play a crucial role in an oil and gas project that will improve the quality of life for millions.
The Offshore Cape Three Points (OCTP) integrated oil and gas project is transformational for Ghana. The offshore fields hold approximately 1.5 trillion cubic feet of gas and approximately 500 million barrels of oil. They should continuously feed Ghana’s thermal power plants for more than 20 years: daily gas production will to generate an additional 1,100MW of power for Ghana.
Necessarily, financing for the project, which is being developed by Italian energy company Eni (a 47.22% interest), Vitol (37.78%) and Ghana National Petroleum Corporation (15%) is on a grand scale –overall project investment is estimated to reach $7 billion.
Vitol’s OCTP financing, which closed in March 2017, broke new ground. Among its four components was a $400 million UKEF tranche split into a $310 million direct lending facility (reflecting the high level of UK content) and a $90 million UKEF-covered facility; the International Finance Corporation also provided a loan while there was a Multilateral Investment Guarantee Agency facility that provided commercial lenders with cover.
“The willingness of UKEF to lend directly was helpful because it addressed some of the funding limits faced by the commercial banks,” explains John-Paul Stalder, Investment Director at Vitol. UKEF was able to come into the deal because much of the subsea equipment is manufactured in the UK by GE Oil & Gas, he adds.
GE has significant UK aviation, power, healthcare and subsea oil and gas operations. “As such, we have fostered a strategic relationship with UKEF to support our industrial footprint, which was cemented in a MoU signed in September 2015,” says Guto Davies, Global ECA Advisory and Execution Leader at GE Capital. UKEF was able to complement the commercial lending to the project and also spread risk between various institutions, he adds.
For UKEF, the OCTP deal was testament to its commitment to flexibility in terms of the types of transactions where it is willing to take risk. The transaction had an innovative structure, with a repayment schedule linked to underlying reserves in the field. “If the reserves are larger than anticipated, the risk is lowered and UKEF is prepared to be repaid more slowly,” explains Louis Taylor at UKEF. “If the reserves are proven to be smaller, we are paid more rapidly.”
While reserve-based lending, which imposes restrictions on lending facilities based on cash flows and technical requirements, is fairly common, this financing is unusual because it combines it with project finance, and covers both oil and gas, notes Stalder. “The structure was also notable because of the scale of World Bank guarantees – the largest to date and the longest duration letter of credit for any gas project so far.”
Perhaps most significant, is the impact of OCTP on Ghana itself. By providing low cost, reliable power, OCTP will stimulate economic growth and enhance the livelihoods of life for millions of people.
Global trade and investment has always been shaped and defined by powerful macro forces. But today such forces as climate change and resource scarcity, demographic shifts and digitalisation are arguably causing a greater change in global trade and investment than ever before.
Seen through the lens of energy and infrastructure companies, there are clear reasons why these forces are seen as so powerful. Resource scarcity and the need for sustainable energy sources is correlated to explosive population growth, which together are part defining the huge energy and infrastructure needs of nations. On the other hand, digitalisation is playing an increasingly important role in helping nations meet that challenge, and in helping companies grow and evolve more rapidly.
The impact of tectonic shifts in global economic power, rising protectionism and urbanisation, are important too. In fact all these forces are collectively and simultaneously shaping trade, investment and the global economy in new and unpredictable ways.
Innovation creates change, and the innovations to have emerged in recent years are beginning to define the future – innovations born in the main from the inexorable advance of technology.
Companies today are accessing and investing in some game-changing technologies. Smart sensors, Internet of Things, artificial intelligence and machine learning, 3D printing, energy storage, augmented and virtual reality, drones, robotics and blockchain technology, are just some of the technologies energy and infrastructure companies are already investing in significantly.
For sure these technologies will help enable these companies to operate safer, smarter, faster and leaner, but they will also bring upheaval to their industries and impact the global economy and trade ecosystem in ways few knew were possible less than a decade ago.
The increasing use of robotics, for instance, could potentially halt the offshoring of factories to low cost locations – one of the main drivers of globalisation in recent decades. And 3D printing could have similar consequences for trade volumes.
On the other side, digitalisation is expected to deliver greater efficiencies and security in global trade. The application of blockchain technology alone could cut the $1.8 trillion estimated annual cost of trade by up to 10%(25). Importantly it could also help close the $1.5 trillion trade finance gap(8).
Blockchain is still very far from being the digital solution many involved in trade want it to be. But it is, along with other technologies, sure to play an important, if not pivotal, role in defining the future of global trade, and potentially the future of the energy and infrastructure sectors too.
About this report
For this report, Euromoney Institutional Investor Thought Leadership surveyed 512 senior executives in the energy (including oil and gas, nuclear and renewables) and infrastructure (including construction and civil engineering) sectors, as well as senior figures from government ministries and institutions.
Overall, 51% of respondents are C-suite level company executives (Board members, CEOs, CFOs, CIOs, COOs, CTOs), government ministers and senior advisers to government ministers. The remainder of respondents comprise managing directors and directors of finance, operations and procurement functions (40%), and engineers (9%). Broken down by sector, 80% of respondents work for energy and infrastructure companies, and 20% work for government ministries and institutions. Geographically, respondents were drawn equally from the following regions and countries: Asia (20%), Europe (20%), Latin America (20%), the Middle East and Africa (20%, and the US (20%).
The survey was conducted during the period February 7 to March 9 2018. In addition to the survey, in-depth interviews with 15 executives were conducted during February and March 2018.
The future of global trade and investment in energy and infrastructure: Innovation creates change is a report that has been researched and produced by Euromoney Institutional Investor Thought Leadership for the UK's Department for International Trade.
Whereas every effort has been made to ensure that the information in this document is accurate the UK's Department for International Trade and Euromoney Institutional Investor Plc do not accept liability for any errors, omissions or misleading statements, and no warranty is given or responsibility accepted as to the standing of any individual, firm, company or other organisation mentioned.
To download a copy of this report, along with the full appendix of survey results, click here.
In-depth interviews were conducted with the following executives:
Louis Taylor, Chief Executive, UK Export Finance
Beat Bannwart, Head of Strategic Innovation and Market Development, UBS
Bob MacDonald, Chief Executive, Specialist Technical Solutions, Wood
Carl Fergusson, Director of Strategic Projects, Colas UK
David Wilson, Chief Innovation Officer, Bechtel
Eric Loewen, Chief Consulting Engineer, GE Hitachi Nuclear Energy
Farooq Siddiqi, Global Head of Trade, Standard Chartered
Guto Davies, Global ECA Advisory and Execution Leader, GE Capital
John-Paul Stalder, Investment Director, Vitol
Marvin Erdly, Global Trade Digitisation Leader, IBM
Murat Demirel, Co-Head of Trade for EMEA, Citi
Natalie Blyth, Global Head of Trade and Receivables Finance, HSBC
Peadar Mac Canna, Co-Head of Trade for Europe, Middle East and Africa, Citi
Shaun Kenny, General Manager, Infrastructure Business, for EMEA, Bechtel
Vinay Mendonca, Global Head, Product and Proposition, Trade and Receivables Finance, HSBC
Managing Editor – Duncan Kerr
Writer – Laurence Neville
Designer – Harpoon Productions
(1) World Trade Organization, Press Release, April 2018
(2) Gowling WLG, Global Protectionism report, November 2017
(3) Joint World Bank Group, WTO opinion article (Making international trade work for the world's poorest), July 2015
(4) Congressional Research Service, research paper China’s Economic Rise: History, Trends, Challenges, February 2018
(5 & 6) HSBC, research report Consumer in 2050: The rise of the EM middle class, October 2012
(7) ING Bank, research report 3D printing: a threat to global trade, September 2017
(8) Asian Development Bank, research briefing, September 2017
(9) International Chamber of Commerce, Trade Register Report, 2017
(10) World Bank Group, research briefing, March 2018
(11) United Nations, research brief World Urbanization Prospects: The 2018 Revision, May 2018
(12) Lowy Institute, research report Understanding China’s Belt and Road Initiative, March 2017
(13) BP, research report Technology Outlook 2018, March 2018
(14) International Energy Agency, research report Digitalization and Energy 2017, November 2017
(15) PwC, research report Industry 4.0: Building the digital enterprise, 2016
(16 & 17) McKinsey Global Institute, research report Reinventing construction through a productivity revolution, February 2017
(18) World Shipping Council statistics, 2018
(19) SWIFT, RMB Tracker, January 2018
(20) International Monetary Fund statistics, 2017
(21) Pew Research Center, research report The Future of the Global Muslim Population, January 2011
(22) Pew Research Center, research briefing, January 2017
(23) Global Commission on the Economy and Climate, research report The Sustainable Infrastructure Imperative, October 2016
(24) UK Export Finance, press release, July 2017
(25) IBM, research briefing, January 2018