COVID-19: Operational Challenges & Opportunities in the Infrastructure Sector

COVID-19 has had significant negative impact on businesses across most sectors and pick up in activity for many is currently unclear.

According to a recent Deloitte CFO Survey, almost two-thirds of CFOs do not expect demand for their own businesses to reach pre-pandemic levels until after Q2 2021 and over 70 per cent believe corporate operating margins will decrease over the next 12 months. The infrastructure sector is traditionally perceived to be more resilient to macro changes, and the pandemic has proven this to be the case, particularly for the power, utilities, and digital sectors, however, other sub-sectors have been impacted:

  • GDP/ demand-based businesses, such as airports, toll roads, and ferry companies, are being hit hard by a significant fall in travel demand
  • Social infrastructure (e.g. PPP/ PFI projects) are exposed to the severe pressures on public services. Schools are mostly closed for staff and pupils and the strain on the health system is being felt from acute hospitals through to primary care centres
  • A combination of demand disruption and a supply glut has led to prices falling below cash costs for oil & gas operators, impacting their ability to invest

Given this, such infrastructure businesses have an immediate opportunity to set out practical, flexible and sustainable initiatives to improve profitability, cash generation, and operational efficiency. To this end, a number of our infrastructure clients have considered the following key areas and initiatives:

Simplifying the operating model

  • Simplify the operating model to be more agile to changes in the market as well as improving efficiency
  • Reduce complexity in operations by focusing on core capabilities and rationalising non-core activities
  • Organisation re-design, e.g. through optimising management layers and spans of control

Optimising cost base & prioritising investments

  • Reassess and optimise the cost base through robust baselining, benchmarking, and sustainable implementation
  • Reprioritise capex spend, ensuring that the investment appraisal process is robust and challenges return on investment assumptions
  • Evaluate property portfolio to determine whether it is appropriate for the new operating model and future ways of working - look to divest of surplus space or acquire new space which is more fit-for-purpose

Exploring M&A options & additional sources of liquidity

  • Consider M&A options - Are there attractive opportunistic acquisitions? Is this the time to focus on core and divest non-core? Consider potential carve-outs or divestment of assets to raise funds/ reduce debt
  • Reassess under-performing operations/ divisions - Can they be turned around, or need to be wound down/ sold?
  • Determine if/ when new funding is needed and whether the current stakeholders (e.g. shareholders, banks, etc.) can provide it and on what terms.

Planning for the post-COVID market

  • Consider and model the operational and financial impact of different future scenarios, including the potential impact of government support schemes coming to an end
  • Key Customers - how are their operations impacted and what are their plans? Consider flexible solutions that can be mutually beneficial (e.g. potential to extend contract terms if customers are requesting payment deferrals, etc.)
  • Key Suppliers - determine how suppliers are impacted, their plans, financial situation, and build contingency plans for potential failures in the supply chain
  • Determine IT systems changes required to support new ways of working and assess the capacity and resilience of existing systems and support mechanisms
  • Evaluate how channels to market will change and how well the transition to digital is being implemented.

By considering, evaluating, planning, and robustly driving the implementation of these key initiatives, infrastructure businesses can not only achieve improved operational efficiency and financial performance, but also pivot their operations to thrive in the “new normal” of a post-COVID market.

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