Second Efforts

Earlier this week, the Washington Post reported that Virginia was re-examining the pricing mechanics for Interstate 66 between Washington D.C. and the Capital Beltway, the main commuting corridor between Northern Virginia and the capital (Virginia to tweak 66 Express Lanes pricing to address tolls that crossed $47). In March, Infrastructure Ideas had written about the $40 tolls on this road and the complaints this was (legitimately) gathering, as an example of the challenges of getting infrastructure pricing right. While it remains unclear from the Post article whether any changes in the mechanics of the toll setting will substantively address the problem of excessive peak pricing, at least the Virginia Department of Transportation deserves credit for recognizing their first plan isn’t quite working out, and trying to get it right a second time. To be clear, the author is not an I-66 commuter, and rather a user of public transport. This note is about the capacity to step back, fix a problem, and make infrastructure programs work well. Even if it takes a second effort.

In sports, the value of second efforts is taken completely for granted. In football, whether the American or everywhere-else variety, tennis, skiing, and practically every sport, those who reach back, fix something that isn’t working, and pull out victory, are lionized by their fans and the press. Many companies use sports figures as motivational speakers and do so frequently on this theme. When it comes to infrastructure, and government policy and regulatory actions, we don’t hear so much about this. Rather, we tend to more often see policy-makers dig in and defend their first choices. Sure, sometimes those choices are locked into contracts with good reasons for not being changed – whether to maintain a level playing field after a competitive tender, for example, or to avoid collusion and corruption. These are good reasons. But too often we see a clearly flawed policy defended simply out of ideology, or worse, ego. Somehow many leaders take recommendations for changes as a personal affront, and shut down any chance of improving outcomes because they are personally vested in their own prior decisions. Strange but true…

This post is about cheering for policy-makers who recognize the first time around didn’t succeed, and making that second effort to better deliver infrastructure services. Those who put the good of their constituents, the users of infrastructure, over their own egos.

And the cheers will be for policy-makers in a part of the world that doesn’t always get loud cheers for dispassionate, effective policy and regulatory actions: Africa.

Three ground-breaking infrastructure programs in Africa, which are delivering or are soon to deliver outsized benefits to domestic users, and whose implementation have ramifications well beyond their borders, all required crucial second efforts. And all three involved renewable energy.

The most recent one of these examples made the news just this past month, in April 2018, in Senegal. As written about in Infrastructure Ideas’ previous column, the announcement of the award – to a pair of well-known international infrastructure players — of the right to sell solar generated electricity to the national utility at below 4 Euro cents a kilowatt hour (around 1/3 of average prevailing electricity prices in the United States…), is a landmark. For the first time, the mechanism of competitive auctions is delivering very low-cost electricity to a small economy, and the benefits of cheap solar will start being felt beyond the few larger and/or richer countries – Brazil, the UAE, Mexico, South Africa – which have blazed this path to date. A great outcome. And one which came close to never happening.

The path to 4 cent solar power for Senegal, supported by the International Finance Corporation’s “Scaling Solar” program, was a challenging one. In retrospect, predictably challenging. Technical complexities were substantial, of course, and raising investors’ and operators’ interest in this small economy (Senegal’s GDP is 1/20th the size of that of South Africa, the UAE, or Chile, and 1/50th that of Mexico – to compare to a few countries which have received offers for 3-4 cents solar) anything but a picnic. But the real challenges were political. Senegal had a power sector policy, and for years it involved only thermal generation. Still today, new coal-fired generation figures prominently in the country’s power strategy, notably the proposed Sendou coal plant associated with the African Development Bank. Coal-fired generation is highly unlikely to provide power at anything less than 200% of the cost of the newly awarded solar contracts, especially in a country where all the associated infrastructure (coal import terminals, etc..) remains to be built. The state-owned utility is still fighting even the previous war, and arguing the government should build any new power plants. Predictably, backers of the traditional policy for power in Senegal disparaged alternative proposals. An even more difficult policy challenge was related to those who accepted the value of solar power – but had their own ideas of how to obtain it. The new 4 cents solar plants, which will be the foundation of lower cost energy for Senegal, are not the first solar generation contracts in the country – far from it. Senegal is littered with existing solar generation contracts – all negotiated bilaterally between government or SOE officials and project sponsors – all of which are substantially more expensive than 4 cents. As in, 200% to over 300% of the price of the newly awarded plants. Solar, yes – what Senegal needed, no. It took a major second effort for the Government of Senegal to recognize that their policy of bilaterally negotiated solar contracts wasn’t a success, and that they needed to step back and try again – this time with a competitive auction. Three cheers for Senegal’s second effort. It could not have been easy. The Senegalese economy, the people of Senegal, and other small economies will be the beneficiaries of that second effort.

Elsewhere in Africa, 2017 saw another “second try” at a major infrastructure program pay off in a big way. Back in 2015, the Government of Egypt announced plans for the largest single-site solar auction in the world. The GoE was seeking over 1.5 Gigawatt of solar power. If this number doesn’t mean much to you – it’s more than the total installed solar power capacity from 1990 to 2000, worldwide… Egypt in 2015 was not exactly a priority destination for foreign investment. Still, the Government managed to attract a very large number of companies to its auction, enough to meet its goal. And then… the entire program ground to a halt. There were a handful of issues, among which the biggest show-stopper for investors was a provision for where arbitration of contract disputes would be held: the GoE wanted it to be in Egypt, investors wanted it to be in some place where such disputes were more normally adjudicated, like New York or London. While pretty technical, this was a politically sensitive issue, and everything stopped. It looked like Egypt’s flagship and precedent-setting solar program was going to be permanently rained out. Then something unusual happened: the Government took a deep breath, stepped back, and tried again. A number of provisions in the contracts were changed, the bids re-auctioned – with Egypt getting a price about 20% lower in the bargain – and the program took off again. In October 2017, financing of over $1 billion was closed to make the flagship program a reality. Without the second effort by GoE, and its rethinking of key policy elements, Egypt would be continuing to look at a future of relying entirely on expensive imported fuel for its power needs.

Even Africa’s first groundbreaking foray into large-scale renewable energy generation, South Africa’s now famous REIPP (Renewable Energy Independent Producers Program) almost did not happen. South Africa’s renewable energy auctions, launched in 2011, really heralded the onset of economically viable (now we say “cheap”, as prices keep dropping, only a few years ago we used the term “economically viable”) wind and solar power across the world. After the initial success of the Brazilian wind power auctions (before connectivity problems there became fully visible), it was the South African auctions which launched the wave of replication we are continuing to see – mostly across Emerging Markets – and which continue to drive solar power prices down and enable larger and larger scale. South Africa needed this, with repeated and growing electricity blackouts affecting industry and security, and no good other options on the short-term horizon. But in 2011, success was far from a foregone conclusion, and the closing of Round 1 of the auctions was repeatedly delayed, with a mix of unresolved issues and cold feet. By the Fall of 2011 many observers had concluded that the Government had given up. Thankfully, the South African proponents inside and outside of the government made a big second effort. In December 2011 that second effort reached a finish line, with an allocation of 1.4 Gigawatts of both wind and solar generating capacity. The rest is history, with multiple rounds of auctions achieving some of the lowest electricity prices in the world.

As covered in a previous post, politics subsequently intervened to derail South Africa’s landmark renewable auctions, though the tide seems to have re-turned more recently. But South Africa, and indeed the emerging world, not to mention our global climate, would all have been worse off had it not been for the government’s second effort.

Again, three cheers, and keep these examples in mind when important infrastructure programs hit, well, roadblocks.

 

 

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