Yesterday, March 19, the first known pedestrian fatality involving an autonomous vehicle was registered in Tempe, Arizona. A woman, 49-year old Elaine Herzberg, crossing a busy street around 10 PM was struck by a driverless vehicle, and died of her injuries. The vehicle was an AV pilot car, A Volvo sports utility vehicle owned by Uber, and there was an emergency human driver in the car at the time of the accident. The accident in Tempe was terrible, and has led to an understandable outcry of concern in news media across the country. Uber announced this morning an immediate suspension of its autonomous vehicle pilots across the US.

Yet AVs are coming. Waymo and Uber, the industry leaders, say their AVs have covered over 8 million miles between them. As with many technologies, relative costs will be central to their adoption: Bloomberg New Energy Finance and McKinsey estimate that the cost of a driverless, shared-use car will be less than 10% of the average cost of taxi services. It is not as though everyone has to make an individual decision to buy an AV: people will just switch from owning cars to using an app on their phone to order transportation, as is already happening with Uber and similar services. Corporate vehicle fleets are likely to adopt AVs earlier than retail users. Convenience, much as with the cell phone, can be expected to be another big driver (pun intended). Greater efficiency may translate into much shorter urban driving times (as AVs can move much more efficiently through intersections and maintain shorter following distances – unless of course there are so many of them that no one can move anyway…), and climate benefits (less idling and fewer jack-rabbit starts). So we can expect a collision (pun again intended) between the attractions of this new technology, and its risks – including, as we tragically saw yesterday, loss of life.

What lessons can we draw from the accident in Arizona?

1. Autonomous vehicles are not perfect, and never will be. This is hardly a revelation, and is true of essentially all technologies. AV technology is in fact still at an early stage, and surely has a long way to go in further reducing the risks of injuries and fatalities. Ye the strain of thought, understandably part of today’s reactions, that somehow AVs are inherently more dangerous than vehicles with human drivers and always will be, does not make sense. With 37,000 road deaths in 2016 just in the US, human drivers are no model of safety themselves. That’s 100 road deaths per day. David Leonhart’s Op-Ed column in the New York Times on the topic points out that, as underlined by research, we as humans tend to mistrust technology and its ability to learn from mistakes when something has gone wrong, but then to assume we ourselves will instead correct our mistakes. That AV technology can be developed to the point that AVs cause proportionately lower deaths than human drivers seems to me highly likely, notwithstanding yesterday’s fatality. The potential for greater safety is certainly being touted by AV manufacturers, and human error accounts for 94% of vehicle crashes. Whether the technology is such that they are safer today is hard to tell, but what is obvious is that the technology will get better, much better, while human driver risk is unlikely to improve much. Assuming, of course, that AVs don’t learn to consume alcohol before they get on the road.
2. Regulation matters. Again, this sounds self-evident. But it matters – a lot. The quality of regulation will take on far greater importance as new infrastructure technologies emerge and get deployed. This point is already becoming clear with new power generation technologies – wind and solar generation, and especially Distributed Generation. How jurisdictions set regulations is having a very large effect on the speed of deployment of new technologies. And in power generation, as the costs of buying wind and solar power continue to plunge, how jurisdictions set regulations is having a real impact on the cost of electricity. With lower cost energy storage technologies on the horizon, this will be more and more the case. With new mobility technologies – Electric Vehicles and Autonomous Vehicles (not to mention drones) – the same dynamic will hold true. Good regulation will help cities, states and countries achieve better outcomes. That yesterday’s accident happened in Arizona is not a surprise – the no-regulation or minimal-regulation stance of Arizona’s state government has made it an attractive place for early testing of AV technology. State officials declared Arizona “a regulation-free zone” in 2015 to attract technology companies with operations in neighboring California. Arizona is one of the first place Uber has gone to test its AV cars. Waymo is also active there, using AVs without humans in the driver’s seat to pick up and drop off passengers. Encouraging new technology is good, but doing so with no rules will invariably entail higher risk. To date 21 states have introduced legislation regulating AVs: you can bet many more will do so shortly.
3. Regulating infrastructure well is getting more difficult. While Arizona was chosen by Uber as a place to test its AVs presumably at least in part due to lack of regulatory obstacles, it’s not obvious yet how best to regulate AVs. Los Angeles and a number of other cities are struggling with the issue, and a set of regulatory principles are beginning to emerge, but still have a ways to go (like the technology itself). This does not make regulation less necessary, just more complex and challenging to design and execute (the current anti-regulatory mood in the US congress, which may produce a prohibition on states’ abilities to regulate AVs, is another challenge). Many cities believe they are paying the costs of failing to understand the implications of shared-services models, such as Uber and Lyft (which while technically a business model change rather than a technology itself, has similar effects to technology change and is facilitated by the advent of new communications and big-data technologies) – and failing to regulate these models well. Regulating badly is easy to define: either attempting to forbid TNCs (Transportation Network Companies) from operating, as New York did with Uber, or not having any rules whatsoever, which is the most general case. Attempting to block TNCs is a bit like trying to put a genie back in a bottle, and effectively prevents consumers from gaining the cost and convenience advantages that have been obvious with TNCs. Doing nothing means having absolutely no influence on how TNC models play out in a city, including potential negative effects on congestion (as London and other cities have visibly experienced), on the financial sustainability of mass transit (which appears to be an effect in Washington, DC, along with simultaneous poor performance of the metro system there), on municipal revenues from taxi services, among other effects. Regulating well is less easy to define. Yet like for many other things, planning and experiment are building a set of experiences and lessons that can create a body of effective regulatory practices. This dynamic, around mobility technologies, again mirrors the dynamic which is playing out around new energy technologies, and which played out previously around new communications technologies. For AVs, policy questions include whether to require AVs to be able to communicate with each other (which makes a big safety and efficiency difference), where they can or cannot drive, where they can be charged, where they are when not driving someone (parked, or driving around), and what to do with the data they generate.
4. Learning is critical for cities. Unlike energy and communications technologies, whose effects cover wide geographies, the impact of the new mobility technologies like AVs are heavily concentrated in cities. The need for regulating well, and the attendant challenges of learning how to regulate well, will fall disproportionately on cities. Networks of cities, and other forms of learning, will be increasingly valuable to mayors and city administrations around the world. Yesterday’s accident will not be helpful to Tempe Mayor Mark Mitchell’s political fortunes. No mayors will want to be blamed for doing nothing if and when the first AV fatality happens in their city.
Robots, in any case, will surely cause bigger problems in other ways than driving our cars.

Remember Stuxnet? It sounded like a one-off, back in 2010 when it was revealed to have damaged centrifuges in Iran, a computer virus or “worm” apparently developed by the US and Israel. An oddity that only the most sophisticated intelligence agencies could have come up with.

Think again.

Two straights days now, cyberattacks on infrastructure have been in the headlines. On March 15, the US Department of Homeland Security (DHS) reported that Russia had penetrated control systems at a number of power plants, along with water and electric systems. The objective, assumed by DHS, was to be able to shut off critical infrastructure systems at long distance in a situation of conflict. Implicitly, also to be able to threaten, and possibly act, in situations short of overt conflict. “Scores” of infrastructure assets and companies were reported to have been accessed. Homeland Security issued an updated warning – yesterday — to utilities that access to critical controls had been breached widely across the country. The security technology director at Symantec said “We now have evidence they’re sitting on the machines, connected to industrial control infrastructure, that allow them to effectively turn the power off or effect sabotage. From what we can see, they were there. They have the ability to shut the power off. All that’s missing is some political motivation.” Leaving aside the politics, a detail in the report gives some pause – the group accused in these infrastructure attacks seems to be different from two other Russian groups previously accused of cyberattacks. Or the North Korean group accused of attacking the UK’s health infrastructure in 2017. With the important implication being that now multiple groups have acquired the ability to conduct cyberattacks across borders. Or put in business terms, the barriers to entry into the “business” (of cyberattacks) are eroding.

On March 14, a different but equally ominous headline appeared. This one about yet-to-be-identified hackers attacking a facility of Sadara Petrochemical in Saudi Arabia. Apparently, as reports noted, it was the latest in what has been a string of cyberattacks against Saudi petrochemical plants. What made this latest attack different, and more alarming, was the apparent objective. Most reported attacks, like that of Stuxnet, disable. They shut down systems, so that computers cease working. Or, as in the case of Ukraine in 2015, so that a power grid ceases to work, and lights go off. The attack on Sadara was of a completely different order: it was clearly intended to trigger an explosion of the petrochemical facility. The computer code inserted maliciously into Sadara’s systems had an error which prevented it from actually causing the explosion, though it seems the attackers sent instructions to trigger it. An error which, presumably, like most coding errors, could be easily fixable now that it was known. The New York Times called it “a dangerous escalation in international hacking,” and cited concern that “culprits could replicate it in other countries, since thousands of industrial plants all over the world rely on the same American-engineered computer systems that were compromised.”

This is very bad news. Bad news for infrastructure, among others. It means that essentially any infrastructure system, in any country, can be attacked. All it takes is motivation, and a high level of technological sophistication. A high level which, unfortunately, is becoming accessible to more and more groups. Cyberdefenses, such as they are, are way behind. The threat of attack can come cross-border, or it can come potentially from disgruntled domestic groups. It unfortunately does not take a lot of imagination to see such attacks, say, spreading across the Middle East, or showing up in some future period of tension between India and Pakistan, or being adopted by narco-traffickers. It means catastrophic risks to critical infrastructure will rise, and come from a new source, other than once-in-hundred-years storms.
Better check those insurance policies.

2017 was, again, a record-setting year in renewable energy. Nowhere more so than on prices, with bids for new solar generation capacity in some places dropping below three cents a kilowatt/hour. For those who don’t walk around with electricity cost numbers at your fingertips, a price $0.03/KwH is a third of what the cheapest solar power could be bought for only six years ago, half of what it would cost to source power from a new-build coal-fired plant, or about what the cost of getting hydropower from what has for decades been touted as the cheapest potential power source in Africa, the famous Inga dam in the DRC.

What are we likely to see in 2018? More change. More widespread and cheap availability of wind and solar power (even in the USA, in spite of the “best” efforts of the current administration). That much is straightforward. We’ll also see change accelerating in areas affected by, or related to, wind and solar – energy storage, and transmission and distribution. This is increasingly where the big story will be.

The costs of wind and solar generation has been coming down for years, as well-chronicled, at a rate of 15-20% a year. You do that long enough, and it’s now been a decade-plus, and the cost numbers start getting very low. The last three years have each seen successive record-breaking price announcements, from the South African auctions of 2015 to the auctions in Mexico, Dubai and Saudi Arabia in the latter part of 2017. At conferences, one now hears the question “is the bottom here?” It’s a good question. It is getting increasingly difficult to see how providers make money at some of the rates being offered. And it is clear that fewer and fewer players can effectively compete at the lowest price points, and that both large scale, industrial-type processes and squeezing the last drops out of financing costs are required to make it work. At the same time, one can see the continued progress of technology itself, with larger and more efficient turbines, more efficient solar panels, and the application of big data to site selection and panel or turbine positioning, still pushing costs downwards. Auctions for delivery sufficiently in the future, such as the 2017 Chilean auctions, have seen bidders bet on being able to make those cost reductions before having to deliver the power they’re now committing to. Let’s guess that there will be a bit more cost reduction, but more slowly than the one to two cent a kilowatt hour reductions a year we’ve been seeing. A bigger part of the story will be the geographical broadening of these low-price points, from a small handful of headline-grabbing auctions, to much more the routine in more and more countries and across more and more capacity. Maybe less attention-grabbing, but continuing to shift capacity from thermal to renewables.

One challenge for power buyers will come more and more to the fore in 2018, and in the coming years. That challenge will be how to take better advantage of the low cost of renewable energy. For many jurisdictions, the initial issue has been creating a means to procure wind or solar, generally developing demand auctions for the first time. Everywhere those auctions have been rewarded by unexpectedly low prices. So far so good, assuming the projects which have been bid at auction are implemented – and so far the track record on execution of bids is excellent across geographies. Then from a policy or strategy standpoint, what buyers now face is the question of how to get more of what is cheaper. The first part of this involves being able to use wind and solar during more of the day, or during more days, when the sun is not shining or the wind is not blowing. It’s the obvious issue. Energy storage is beginning to make a material impact on this issue, as battery prices continue to follow similar cost curves to what turbines and solar panels have been following, dropping 15-20% a year. In the US, 2018 will for the first time see over one gigawatt, 1 000 MW, of new capacity deployment, according to Greentech media projections, and incremental costs – while varying widely depending on application and other factors – are in some cases coming below $0.05/KwH. Continued price declines and deployment milestones will be in the headlines in 2018 and for the coming years.

The second part of this same challenge, how to take better advantage of the low cost of renewable energy – so as to offer consumers and the economy the benefit of lower power costs – has been less discussed, but will be equally important: modernizing transmission and distribution networks. The intermittency of wind and solar power generation creates technical challenges for a transmission grid. While the principle is well-known, and many utilities have now extensive experience with the short-term aspects of this, the planning and wider aspects of this have received much less attention.

Most systems can absorb relatively small amounts of intermittent power without facing major disruptions, as we have seen in most geographies that begun to bring initial wind and solar sources onto a grid. It is also well known that this “easier” phase has limits, and that beyond those significant changes are needed if more intermittent resources are to be absorbed. It is much less well-understood that these limits vary significantly, and that modernized, highly efficient grids – like, say, the grid in Denmark, can absorb three to five times the amount of intermittent generation as older, less efficient and less well-managed grids. In a Denmark, or a UK or a Germany, it has to date been “green” constituencies that have advocated for increasing the amount of renewables, and created pressure on utilities to make the changes needed to absorb these. In Emerging Markets, what we can expect instead is that cost pressures, not “green constituencies” will be the drivers. With electricity from wind and solar available at a fraction of that from other sources, economics will create pressure for governments and utilities to use more and more of it. This pressure will be on a collision course with the technical and managerial limits of the transmission networks in many countries. So expect, in 2018 and beyond, much more widespread concern around “why isn’t our grid better? Why can’t we have more cheap power like other countries?”

Not many emerging markets are ready for this new phase.

One aspect of this growing issue surfaced this past week in the state of Virginia. The Virginia state legislature passed a new bill on March 8 concerning the power sector. Unlike the discussion on similar bills in recent years, which focused on the potential to rebate costs from utilities to consumers as generation costs declined, this new bill instead focuses on how larger margins should be used by utilities (mainly Dominion Power in Virginia) to invest in new technologies to modernize the transmission grid. The past week also saw the release of an “alternative infrastructure plan” from democrats in the US congress, with funding to modernize the power grid.

So looking for opportunities for medium-term infrastructure investment, beyond wind and solar generation? Look to transmission and distribution grids.

One thing not to look for, as a post-script, is common sense from the current Department of Energy leadership in the US. Early March saw a completely useless proposal from the DoE – widespread deployment of modular coal plants. Sounds like it might be appealing on the surface, as a way to fight unemployment in coal country? Forget it. Small modular coal plants are unheard of, inflexible (meaning they cannot easily be used to complement intermittent generation sources, like low-cost solar and wind, which modular gas-fired plants can do), and highly unlikely to be cost competitive. This is why you don’t want ideologues involved in infrastructure – you get stupid ideas instead of solutions.

 

Five Lessons for Emerging Markets from the Trump Infrastructure Plan

Last week the US administration unveiled its long awaited and much-discussed infrastructure plan. Headlined in the 2016 electoral campaign as a “trillion dollar” fix for the United States’ infrastructure woes, its vision grew into a “$1.5 trillion plan” as announced by the President – the largest ever seen, at least as headlined. What can Emerging Country governments learn from this “world’s largest infrastructure plan”?

Let’s start with the immediate reactions to the plan. One might expect, with all the attention on US infrastructure needs, the show-stopping figures beyond what we’ve ever seen (after all, the entire world spends roughly a trillion dollars a year on infrastructure), excitement and delight all around. Finally, action!

Not exactly. “A big nothing burger” (Greentech media), “Trumpastructure is a scam” (Paul Krugman). “Trump Infrastructure Plan: You Pay for It” (Slate), “Trump’s Infrastructure Con” (US News & World Report); “A Scam” (BBC), are among the more characteristic reactions. Outside of the Des Moines Register or the White House, it’s pretty hard to find anyone excited about this plan. Indeed, one notable difference between this and several other initiatives of the current administration: reactions to other policies have broken strictly down party lines; here, in spite of the expectation that infrastructure might be the only area where bipartisan support might be forthcoming, it’s hard to find any defenders on the political right.  Sounds like a big missed opportunity.

There are lessons here for the rest of the world. Practically every Emerging Market government faces the same issue that the current US Administration does: insufficient investment in infrastructure. The topic increasingly finds its way into electoral campaigns, as we’ve seen in the past few years in Mexico, India, Indonesia and Argentina. What should Emerging Market governments take away from this last week?

Here are five lessons from the experience of the Trump Infrastructure plan.

1. Communications matter. As with many policy initiatives across different areas, expectations play a huge role in how people react. Promising something far beyond what is delivered is never a good recipe. Of course substance helps, but hardly amount of substance in this plan could have compared to the expectations that were created. Even more important, however, was the nature of the talking. Finding solutions to how to pay for large increases in infrastructure investment is difficult, and any solution is going to play out over many years – read, over more than one administration. Talking about common ground, and building support across the political spectrum, is the only option for any government wanting to implement a large-scale infrastructure plan. Without broad political support, public sector funding will hard to assemble, and private capital will see the risks as too high to play. For an emerging market government, the lesson is: talk less, do more, and talk differently.
2. Sub-sovereigns are more and more central to infrastructure. This piece the US administration got “right.” The concept of a sovereign focusing on supporting investment at the state or local level makes plenty of sense. In the US, according to the Hamilton Project’s analysis of Bureau of Economic Affairs data, infrastructure spending in 2010-2015 was ten times larger at the sub-sovereign than at the Federal level. The substance of the approach may not be so great (see lesson 3 below), but the focus makes sense. Even in Emerging Markets, where sub-sovereigns may seem like much smaller actors, the trend is clear. Driven by the long-term dynamic of urbanization and fiscal devolution, and the newly emerging dynamic of new mobility technologies and business models, sub-sovereigns are emerging as the “Kings of the Hill” for infrastructure. At the IFC, the largest cross-border financier of infrastructure in Emerging Markets, sub-sovereign financing is shaping up as the hot growth area. As an Emerging Market government, understanding how actors at other government levels will help deliver is key to your future.

3. Leverage is good — even better when it is thought through. Another area the US plan gets “right” is the focus on leverage, as in leveraging central government funds. When you’ve got less money than you want to have, making it go farther makes all the sense in the world. Governments throughout the world, and the multilateral institutions which play a big role in supporting infrastructure, have known this for a while. Schemes like the European Investment Bank or the World Bank’s guarantee programs are great at “crowding in” commercial finance, while the municipal bond market in the US is another great example of how enhancement can unlock large amounts of capital, when well designed. But it’s along way from a good concept to large-scale implementation. The design of the current US plan will leave most sub-sovereigns unable to meet the needed terms to unlock the “new” federal money, and the “new” money seems to be coming from cuts in what would otherwise have been spent on infrastructure anyway. As Brookings’ Ryan Nunn put it, there is “still no free lunch.” The consensus view is high marks for the idea, bottom of the class marks for the details. In fairness, it takes a lot of design work – which was not a feature of this plan – to get guarantees to work as intended: even the World Bank’s long-standing guarantee program is regularly criticized for not doing more. So as an Emerging Market government, focus on leverage, but get lost of help on the details.
4. The days of all-government solutions are gone. Leverage is also critical in another sense, namely getting private capital to supplement government spending on infrastructure. In the US, as in most of the world, government spending capacities are further and further away from needs. Aspirations are growing everywhere, while budgets are not. This has been recognized by every group that has looked at the issue of infrastructure in developing countries, including now several G-20 plans. Interestingly, the US is a bit behind the curve on this recognition, with a lower proportion of private to public investment in infrastructure than many other countries. Here, the rhetoric behind the new US plan seems to have gone nowhere. Rather than a detailed and well-thought through plan to mobilize long-term private capital, and to put the bulk of America’s infrastructure spending tab on a private bill, the new plan seems more about public sector grants with little planning behind them for private parties, with a high risk of special interest capture. For an Emerging Market government, the lesson to draw is that no government – OK, with the possible exception of China – can find the money it needs for infrastructure by itself. But, how you go about it makes all the difference in the world.

5. Economics trumps politics (pun intended). Of course, politics are everywhere. A high visibility aspect of today’s US politics – and of many other OECD countries – is the constituencies that push back on change, for a whole variety of reasons. Groups wanting change in energy markets to “go away” were notably strong supporters of candidate Trump, whether they were voters looking to “end the war on coal” or utilities disliking the impact of new energy technologies. And though the “$1.5 trillion” US infrastructure plan manages the remarkable feat of mentioning neither climate nor renewable energy (which may now account for 1/3 of total infrastructure spending), energy markets have continued to move in the same direction they have been. According to a report from the Sierra Club, more US coal plants closed in the first 45 days of 2018 than in the entire first term of Barack Obama. Technology, which has made wind and solar cheaper than thermal alternatives in an ever-growing number of places, has changed energy markets irreversibly. The analogy for many Emerging Markets governments? Trying to protect the losers from technology change affecting infrastructure – as opposed to helping them adapt – is a waste of time and resources. Getting infrastructure done is hard enough without wasting your shots. In many Emerging Markets, this will mean watching out for attempts of incumbents, especially SOEs, to push change away. And with technology change spreading beyond energy markets, there will be plenty of losers.

 

Not Your Father’s Infrastructure (Part 4)
Implications for investors and lenders

This is the fourth and last in Infrastructure Ideas’ series on the impacts of technology on the infrastructure business (Not Your Father’s Infrastructure-overview, Implications for Policy-Makers, Implications for Infrastructure Companies). This post will explore some of major implications of this change for providers of capital.

The headline for lenders and investors is similar to the headline for infrastructure companies: more opportunities, and more risks.

Before deciding this is a completely boring message, let’s step back to where we’ve been for… decades. The starting point is that infrastructure has been a set of sectors where the big issue – for decades — has been opportunities. Infrastructure investors and lenders, more than anything, have been short of assets. All have looked these sectors as ones with attractive fundamentals: long-term stable returns for institutional investors, often taking quasi-sovereign risks for good yield spreads over sovereigns; relatively strong risk-adjusted returns, and as a bonus high societal impact — making this a priority for all IFIs.

The issue for investors and lenders has been never enough deal flow. Given the societal or developmental importance of most infrastructure, public groups have looked for years at how to increase infrastructure investment. G-20 and G-8 reviews of infrastructure in developing countries have consistently come to the same conclusion, pointing to the lengthy and complex process of bringing infrastructure assets to market as a target for policy interventions. One can add to this that much of greenfield infrastructure is historically funded by governments, and in some big economies – especially in Asia – dominated by State-Owned Enterprises.

With the advent of large-scale wind and solar generation, this picture is changing. From a tiny base, continued large cost declines for wind and solar power have driven growth to the point where these two sub-sectors may account for up to 1/3 of global infrastructure investment. In a space where investors and lenders have struggled to find opportunities, wind and solar have added on average some $20-30B in new infrastructure assets. Sure, to an extent, these are substituting for other types of generation investments – thermal generation, especially coal, has been cannibalized to a point by wind and solar. But there are two big elements of this picture that have made wind and solar additive, and not substitutive:

1. Faster growth rates. Governments, and other buyers, have been turning to wind and solar for a number of reasons. One is to meet electricity capacity requirements, as has been the case historically for other sources of power. But in other cases governments have done so for emissions-related policy reasons – whether for climate considerations, or in the case of China in particular, local health concerns – and now many are turning to wind and solar because of their cost advantages relative to alternative sources. Capacity additions for these reasons have not substituted for other options, and so have pushed the rate of new generation investments above what it would have been for simply meeting capacity requirements. Another way to observe this development is to note the advent of oversupply of electricity in several markets. Bottom line, this means more assets for investors and lenders to consider than would otherwise have been the case.
2. More private sector. A notable aspect of the rise of wind and solar (notable and insufficiently discussed) has been that it has been all private sector. Infrastructure generally is owned and operated more by the public sector than the private sector. Power generation has increasingly been more a private sector business, but SOEs still dominate many large markets in thermal or hydropower generation. With the exception of China, the public sector is out of the picture. Wind and solar have been exclusively a matter for private players – who have a much greater ability to understand rapid technology change and its implications, and take advantage of it. PLN in Indonesia is a great example of an SOE dominating generation – but essentially unable to capture the benefits of low cost wind and solar. This shifts assets from the public sector – where investors and lenders cannot finance them – to the private sector – where they can.

Through different dynamics, and to a lesser extent than with wind & solar, the application of technology to natural gas has had a similar effect. Assets for LNG transport and storage are now far more plentiful and available for private financing. Technology change promises to continue delivering new deal flow in other areas in the coming years: energy storage, distributed generation, smart grids, new mobility technologies. In some ways, these technology-driven opportunities represent the fastest increase in available infrastructure deal flow in decades. The big traditional problem for infrastructure investors and lenders is on its way to being solved! Great! Celebrate!

Now for a time-out from breathless enthusiasm.

At the outset of this post, we noted not one big impact from technology coming to infrastructure, but two. Yes, the historical BIG problem, deal flow, is getting unexpected solutions. But… the historically big advantage of these sectors, their long-term stability and low risk, is getting undermined. Let’s look at how this is happening.

The first thought of many risk managers, with new technology, is to worry about technology risk. Completely logical. But not the big problem. Yes, in the early days of wind and solar some turbine gearboxes were prone to problems, and some of the early solar panels delivered less than expected. But most technological problems were sorted out in fairly short order, and non-performing assets related to technology risk have been minimal. We should expect more of the same for the next set of technologies – some early teething issues, but which dissipate fairly quickly.

The two main sources of risk, and loss of stability, for lenders and investors, come instead from compression of returns, and from value obsolescence. Neither of these have been present previously in infrastructure.

The compression of returns on wind and solar generation is observable from the plummeting auction prices worldwide. As bids at solar auctions drop from $0.10 a kilowatt hour only 5-6 years ago to five cents three years ago, to three cents in multiple countries in 2017, to two cents now in Mexico, the news is increasingly good for governments and consumers – cheap clean power. Making money is another story: the total price of power now offered is less than the margins for solar or wind only five years ago. At 20% cost of capital, which characterized some of the early wind and solar transactions, capital charges would run about two cents a kilowatt hour. One therefore has to wonder, if the power is being paid for a two cents, and it costs something to deliver it, what’s left for covering financing costs? The answer: not much. Hence some of the very creative balance sheet and financing approaches being taken by a number of players. The bottom line here: not much left for return on capital, and not much buffer to cover fixed borrowing costs.

Value obsolescence is new to infrastructure. It is a common concept in almost any business exposed to changing technologies – someone comes along who builds a better mousetrap, or a much cheaper one, and does so quickly. Entertainment, music, communications, are fields littered with examples of value which disappeared completely – think of cassette tapes, walkmans, palm pilots and more. This movie is coming to an infrastructure portfolio near you. Coal plants have been seeing this for years now – the number of coal plants being retired annually in the US and China eclipsing the number of new plants ever built annually. Increasingly, early 2000s vintage wind and solar plants are becoming obsolescent – it’s much cheaper and more efficient to replace them with new versions than to keep running them.

Note that this risk is – unfortunately — not limited to technology-intensive assets. While in some ways it is intuitive that technology-intensive assets, say a solar farm, would be exposed to the risk of how fast the technology keeps improving, it is less intuitive – but just as true – that non-technology intensive assets are as exposed to this risk. Technology change has major impacts on non-technology intensive segments through substitution effects – wind and solar displace thermal power, and in cases hydropower plants; new mobility models and technologies affect the use of toll roads, or public transit.

What this means is that portfolio managers for infrastructure assets are in for a lot more headaches than usual. An asset’s position on a merit order dispatching curve will deteriorate faster, and less predictably, over the life of a long maturity loan that before. Contractual protections, notably Power Purchasing Agreements (PPAs) in electricity, will come under much more stress. We have already seen in countries such as Spain, Bulgaria and others that governments will rethink subsidy schemes aimed at promoting adoption of early-stage wind and solar assets. In those cases, the governments were willing to bear the implicit costs of policy discontinuity, and its negative signals to markets, in exchange for stepping away from fiscal arrangements which were no longer comparatively economic. Expect in the future to see other offtakers, government or industrial, question the merits of staying in long-term PPAs when cheaper and cheaper alternatives emerge. Expect, in other words, contracts to become less stable as costs of new alternatives get lower and lower.

Will the same happen in other subsectors as technology begins to affect them, and offer cheaper and/or substitute ways of delivering infrastructure services? Too early to tell, but the dynamics are likely to be the same.

What to do? In the short-run, take advantage of the new asset opportunities. But with eyes wide open. Three elements of risk management may be useful:

1. Risk analysis. Most analysis of infrastructure risk concentrates on contracts. Paying attention to underlying fundamentals, especially market dynamics and the direction of technology, will become more important.
2. Diversification. In a world where there are more infrastructure assets in which to invest, on average smaller-sized individual assets, and assets carrying more risk, diversification becomes more important. An asset affected by a decision of a government to terminate a PPA early, for example has a much lower impact on a diversified portfolio. And diversification is easier through scale – so holding portfolios of few infrastructure assets, especially in sectors affected by technology, will not be the best strategy.
3. Exit options. Today’s infrastructure contracts are designed to last a long time, no matter what. When technology moves fast enough that value becomes obsolete, keeping contracts unchanged over a long period may not make sense. Orderly exits are always better than disorderly ones. So developing mechanisms to mutually reflect market realities may make sense. We’ll explore this idea further in future posts.

 

Not Your Father’s Infrastructure (Part 3)
Implications for infrastructure companies

We’ve discussed how the world of infrastructure is changing more rapidly than ever before, in Infrastructure Ideas’ two previous posts in this series (Not Your Father’s Infrastructure-overview, and Implications for Policy-Makers). Change is coming from technology, from which infrastructure (excluding telecoms infrastructure) had previously been insulated. This post will continue to explore some of major implications of this change, this time for the companies involved in infrastructure.

For infrastructure companies, as for policy-makers, the rapid and fundamental changes in how infrastructure works are both good news, and bad news. Let’s start with the good news. And there’s plenty of it. The best news is a surge in new investment opportunities. We’ve already seen it, and it is only going to get bigger.

A surge in new opportunities? Now, one might say, isn’t there an infrastructure crisis? An infrastructure crisis in the US? An infrastructure crisis in almost every high or low-income emerging market? Of course there is. But that long-running headline has obscured, for many people, the wave of new investment opportunities that have arisen in the past decade. To date, these have almost entirely arisen in the energy side of infrastructure, but still have been nothing short of phenomenal. Let’s look at a few numbers:
• Investment in wind and solar-based power generation now exceeds $330 billion p.a. worldwide, and since 2010 has accounted for about $2.5 trillion. For a technology that seemed to be interesting curiosity only a decade ago, with smallish investment levels all dependent on some form of government subsidy, this is an amazing development. Solar and wind generation now make up one of the largest business segments across any industries, let alone infrastructure. Putting this in perspective, with an estimated $1 trillion of annual global spending on infrastructure, wind and solar may now account for as much as 1/3 of annual global infrastructure spending.
• Natural gas has been an important part of energy in several countries for many decades. Now supply has expanded with new technology applications, and alongside this transport of gas has been revolutionized by smaller scale transport and import facilities. This has created a huge new area of investment. Over the last five years, investments in new LNG facilities have totaled an estimated $250 billion. The growth rate in LNG terminals alone has been in the neighborhood of 100% p.a. for the past five years – not bad for a highly capital intensive infrastructure segment.

Let’s take a minute to step back and understand what happened here. Technologies have appeared, and been refined, that have had a form of “Moore’s Law,” with costs plunging by double digits annually. As costs drop exponentially, delivery of a service or product now becomes possible at a fraction of what it traditionally cost to deliver that product or service through established technologies. Energy, now and in the future, becomes available at costs well below what it traditionally has. This spurs demand from consumers and governments, and that demand growth creates widespread, and very large, investment opportunities.

These two areas, non-hydro renewable generation, and natural gas midstream, have accounted for an enormous amount of the new infrastructure investment opportunities across the world in the last five years. Probably over half. Maybe three-quarters? So… lack of deal flow the problem for your company? Technology change has delivered deal flow. And this is a movie with more sequels than The Avengers or Star Wars. Energy storage and smart-grid technologies are on similar cost curves, and their markets are just beginning to develop, as part of the infrastructure of delivering energy services. Technology is beginning to have similar cost-dropping and substitution effects in transportation. And consumers and policy-makers will react similarly to these price signals.

Large new markets are the bright side of the new world of infrastructure. Let’s look at the not-so-bright side.

That would be… making money.

There are many more opportunities to place private capital in infrastructure, but these are generally higher risks, and carry no commensurate increase in returns. Why? Because consumers are capturing the benefits of changing technologies, and the lower and lower costs they offer for certain infrastructure services. Making money – even staying afloat – as a provider of capital or an operator of infrastructure services, is getting more complicated. We can see this dynamic increasingly at play in the solar and wind generation business. After almost every solar auction in the past two years, as new low price records get set, the near-ritual question is being asked – how is anyone going to make money at these prices? Well, someone will make some money – we’ll return to the “who” in later posts, but a great many players cannot make money at these prices, and those who do make far thinner margins than was the case even recently. The big winners are consumers (and governments who take credit for delivering lower prices).

Again, why? Much has been written about this, and there are multiple causes – some degree of overcapacity driven by public sector investment programs in upstream products like solar panels, some degree of irrational exuberance or loss-leader strategies. But the big answer is simpler. We tend towards underlying fundamentals as the main explanations for many things, and we’ll do so again here – the big drivers of compressed margins in power generation today being competition and efficiency.

First competition. The world of generating electricity today is dramatically different than a few years ago in terms of lower prices to users. It’s also dramatically different in terms of the number of players. Generally lower capital costs for wind and solar generation than for thermal generation, or than for hydropower, have meant that many more can play. Lower capital costs mean lower barriers to entry. The number of companies involved in renewable energy generation is dramatically higher than for thermal power generation. We can observe this in many ways, including in terms of the number of bidders for tenders for provision of renewable power compared to thermal generation. Even as tenders grow to larger scale – as in the world record size tender for solar generation in Egypt in 2017 – the dynamics have been maintained (in the case of Egypt, with the government splitting “the project” into multiple smaller units).

Second efficiency. As the effects of technology on costs have become more visible, governments have also become more efficient in capturing the benefits of those lower costs. They’ve done this, not surprisingly, by maximizing competition. The early solar and wind days of negotiated transactions have largely given way to procurement through competitive auctions. Bloomberg New Energy Finance and others have pointed out the importance of this shift, showing auctions by themselves accounting for as much if not more than technology cost changes to the drop experienced in power prices. And it is no surprise that those countries experiencing the highest prices for new solar and wind generation – or put it another way, those countries benefiting the least — are those that are still preferring non-competitive procurement: feed-in-tariffs, or old-fashioned bilateral negotiated transactions.

Competition and efficiency have meant compressed margins, and lower profits, for a large share of these new infrastructure investment opportunities created by changing technology. Will we see a similar dynamic for energy storage, for distributed generation, for smart grids, for electric vehicles, for autonomous vehicles, for new municipal infrastructure surrounding EV and AV deployment? Time will tell. In midstream natural gas, the other big opportunity growth area we’ve flagged above, the dynamics have been different – technology has not yet driven a dramatically higher level of competition, and margins remain very healthy. My bet would be these new technologies will have dynamics more comparable to renewables than midstream gas.

There is also a third way in which making money is becoming more complicated in the new world of infrastructure. Substitution. In the first of this series, we talked about how infrastructure has long been seen as synonymous with stability, and how this link is unraveling. In a business characterized by rapidly and continuously falling costs, investments become obsolete far faster: obsolescence ceases to be a question of functional degradation (does the plant still work?), and becomes instead one of loss of price-competitiveness. The issue will become how buyers (mainly but not only governments) react to obsolescence. Infrastructure companies depending for their revenues on long-term purchase contracts will increasingly find buyers questioning whether it makes sense to continue honoring those contracts, with lower cost alternatives increasingly available. As has been the case for subsidy programs in Spain and other countries. Long-term revenue risks will be fundamentally higher than they have been. And this is not to talk about companies who have assets locked up in segments that are becoming obsolescent: good luck finding backers for large-scale biomass investments, for example. Hydropower companies are likely to see dwindling opportunities. The coal business is already seeing widespread bankruptcies, for partially though not fully-related reasons. It’s a new world out there, not a kind one.

 

Wall Street? No, not exactly…

This Thursday’s New York Times business section carried a very interesting piece on Jim Kim, President of the World Bank, entitled “The World Bank is Remaking Itself as a Creature of Wall Street.” The subtitle is “Jim Yong Kim, the World Bank’s President, is trying to revitalize the hidebound institution. But his embrace of Wall Street is controversial.” The article goes on to link a World Bank “search for relevance” with the “embrace of Wall Street.” It picks up the long familiar theme of how small World Bank lending is compared to capital flows, and without using the term points to “crowding in” private capital as the solution – again a familiar theme from the last few years. President Kim is described as a newfound fan of finance language, notably “deals on the table,” putting forward a handful of Wall Street related big initiatives related to the IFC (including the infrastructure MCPP), while in the World Bank itself “traditionalists are squirming.” The article winds up with a discussion of World Bank incentives ( Read More… ).

It’s a good article, and I encourage everyone to read it. There are many accurate points – notably the big picture dynamic, and though the discussions for a WBG capital increase sit unvoiced in the background, the appeal of the headline to the current US Administration is implicitly well laid out. The internal tension within the Bank on the new strategic direction exists.

But what is also interesting, and a bit more distant from reality, is the central “Wall Street” image.

Sure, the gist of the World Bank’s strategy, notably for the most capital-intensive area of infrastructure, has turned to focus on attracting private capital. Yet it misleads to put that at the doorstep of President Kim or the World Bank, as an esoteric idea unshared by anyone else in the development community. Since the Addis Adaba 2015 Summit on the future of Development Finance, the consensus among a large part of the development community has been that the aspirations of the developing world – embodied, among other ways, in the widely shared Sustainable Development Goals – are growing while aid flows are shrinking, and that “crowding in” private capital is the only way to get there from here. So nothing new there. There is a mantra that the high capital needs of developing countries can be connected to the trillions of savings being managed by institutions such as pension funds and insurance companies, usually headlined as “Billions to Trillions.” Nothing new there either. International institutions, such as the WBG, have also long been seen as potential intermediaries for private capital. And yes, the WBG has been trying – correctly in my view – to realign internal objectives in order for the policy side of the Group to devote more attention to helping countries create the enabling environment for such capital to come in, and for the capital coming in to be increasingly aligned with high development payoff investments. But Wall Street?

Eventually, “Wall Street” will play a bigger role in development finance. Eventually, there will exist the type of conditions which will attract big institutional capital. Those conditions would clearly include scale – making small investments in the millions or tens of millions of dollars is completely inefficient for institutions trying to invest trillions, reasonable risk – generally at or close to “investment grade”, and enough similarity in the assets that some kind of secondary market can evolve – as it has in much of the OCED for infrastructure assets. None of these conditions exist today. At most what we are seeing – as in the IFC’s ground-breaking initiative to package greenfield infrastructure assets into a structure that meets the criteria of institutional investors, its MCPP program – are the first concrete steps in this direction. The first miles on a 100+ mile road. Good, but not yet at the forefront of Wall Street’s origination needs. Instead, what success will look like, along the next many miles of this road, is more governments devising approaches to bring private capital in to meet their needs, and an increase in private financing by international institutions like the WBG, and the growth of domestic capital markets in many countries to finance the growing asset pool. Eventually reaching a scale that attracts Wall Street more systematically.

So is this “Wall Street” headline just some kind of inaccuracy? Maybe. It is a simplification which gets attention. Catchy. But also exactly the kind of simplification which is likely to increase internal resistance within the World Bank. A red flag to a bull…

Why should this be? Not for the stereotyped reason touched on in the article, that World Bank staffers are intrinsically opposed to private investment. Sure, ideology exists, in the World Bank as in the US and everywhere in the world, but in my three decades interacting with ex-World Bank colleagues, ideological opposition to the private sector was always a minority. But, there is private sector, and there is private sector. In the US, and everywhere in the world, some private sector actors consciously seek to contribute positively to countries and communities where they operate, alongside the large-scale benefits in job creation and such they bring forth. And some actively seek to defeat the reasonable objectives of governments and communities, as getting “in the way.” Or worse operates through state capture, and corruption. This is a divide within the private sector, one that has been growing over the past 20 years – with the advent of sustainability-type programs in many corporations. And one side of that divide, the one that lends itself to the stereotypes of “the rapacious private sector,” clearly can bring out widespread antibodies throughout the staff of the World Bank. And of people in general, outside of the World Bank. “Wall Street,” for better or for worse, is a shorthand that tends to carry that negative imagery.

Let’s hope that World Bank staff, and other readers of the NYT article, get the substance, and don’t get stuck on the headline. President Kim, and all the WBG’s member countries, need all the help they can get – and not a bump-up in ideological resistance.

 

 

Not Your Father’s Infrastructure (Part 2)
Implications for Policy Makers

The world of infrastructure is changing more rapidly than ever before, as discussed in Infrastructure Ideas’ previous post (Not Your Father’s Infrastructure, Part 1). This is the result of the penetration of disruptive technology into sectors which had previously been insulated from it, and the changes observed so far – mainly in energy markets – are only the beginning. These changes have major implications, both positive and negative, for all infrastructure actors. This post will explore some of the implications for policy-makers; subsequent posts will explore the implications for companies, and for infrastructure investors and lenders.

For policy-makers, rapid change affecting infrastructure services carries a wide range of benefits and challenges.

The overarching big benefit for policy makers is that infrastructure services – at least those affected by new disruptive technologies – are getting cheaper. Much cheaper. It is difficult to understate how much this is worth. With the ability to add new electricity generation capacity at 3-4 cents per kilowatt hour (the end of result of the large majority of all renewable power auctions in the last year) with greenfield solar or wind, compared to 7-8 cents for greenfield coal plants, countries can dramatically reduce power costs. This quite new (and still growing) generation cost advantage comes on top of already known advantages: solar farms can be brought online in less than half the time of thermal or hydropower plants, they can be located more flexibly close to load centers, even small decentralized demand areas, and they pollute less. Cheaper and more accessible natural gas is also allowing countries to reduce cost volatility associated with oil-fired generation, and to reduce local pollution from coal-fired generation as seen in China.

Newly emerging energy technologies – battery storage, better distributed generation, smart grid or Internet of Things tools – have similar positive implications for policy makers: the ability to deliver energy cheaper, more flexibly, and with fewer negative externalities than before. The attendant benefits to users – whether retail consumers who get cheaper and more reliable energy, or industrial customers who become more cost-competitive – are the kind of benefits which get incumbents re-elected. And now newly emerging transport technologies stand to offer the same type of benefit to policy-makers in the coming years: better delivery on the demand of constituents for quality infrastructure services. The lack of good services – too high costs, insufficient accessibility and inconsistent quality — have played important roles in recent elections in Mexico, Indonesia, Nigeria and India, among other places. Along with fiscal advantages of reduced fuel imports, and political advantages from enhanced energy independence or reduced unrest from air quality problems.

There is no free lunch, however. All of these upsides are real. But for policy-makers, there are attendant downsides from the arrival of these disruptive technologies. A small catalogue would include:
• How to do this? By definition, disruptive technologies are new. Understanding options for a country, and how to implement chosen options, is all new. It requires significant learning for policy-makers. And the newly emerging technologies, while still promising enormous benefits, are progressively more complex than were wind and solar to properly assess. Energy storage, for example, adds value in multiple different applications, and deployment presents a much wider set of options than do solar panels.
• Getting it wrong. An obvious corollary of complexities in decision-making is that it is easier to make the wrong decisions. Paying too much and locking in the wrong costs can quickly open all sorts of new headaches, as several countries – Spain, Germany, Bulgaria among others – discovered with renewable energy.
• Getting left behind. With rapidly declining energy costs for successful adopters, failure to engage with the new technologies risks declines in cost competitiveness – and from there job creation. Opportunity costs get big quickly. This dynamic was already highly visible in the 2012 Mexican election, where reduced natural gas prices in the US – largely driven by technology improvements — had begun to affect Mexico’s cost competitiveness and employment levels. As more and more countries adopt cheap power sources, the risks of the laggards falling behind competitively increases.
• Getting stuck. Like all large-scale changes, declining infrastructure costs will create losers. Given the outsized importance of infrastructure and energy costs in all economies, the entrenched interests and beneficiaries from high-cost infrastructure are politically powerful actors everywhere. Their ability to block reforms, distort perceptions, and sidetrack deployment of new technologies, is a major execution risk for all policy-makers.
• Getting stuck at stage two. It is clear that the cheapest sources of new generation capacity in the future will be wind and solar. So there is, or will be soon, an incentive for all countries to have as great a share as possible of generation in these low cost technologies. Yet their intermittency poses obvious problems. Analysis varies as to how much intermittency a grid can support, and in turn this varies country by country, but at some point every country will face the issue of being unable to absorb more cheap intermittent power. Solutions seem to be growing – grid enhancements, and new energy storage technologies at the forefront. But this is a clear issue, whether present or future, for policy-makers.

What should policy-makers do, to win from the benefits of disruptive infrastructure technologies, and not lose to the obstacles they face? The situation will clearly differ from country to country, in many cases from city to city, and from technology to technology. But some elements will consistently matter, if policy-makers are to help countries get better access, faster access, and cheaper access to infrastructure through the new technologies. Here are a few recommendations:

1. Engage. Engagement with new technologies will be imperative for all countries, as argued above. The complexities may look overwhelming, the risks high, but the opportunity costs – and the risks of getting left behind – are higher.
2. Learn fast. There is a lot to learn – ever more so as new technologies emerge and mature – but political cycles are short. A new government which spends an entire term getting up to speed is a government that will have nothing to show at the next election. There are sources of expertise: consultants such as McKinsey and PWC, among others, and specialized firms; the Multilateral Banks, like the World Bank Group, are good neutral sources of advice. Workshop formats can help policy-makers gain understanding and key inputs into decision-making. Learning from others who have already engaged successfully is another time-honored approach – copying is generally far cheaper than inventing — and one we can see being used effectively in particular in a number of city networks. But engage quickly. When it works, as in the case of the Macri administration in Argentina with its rapidly designed and executed renewable auctions, the political benefits come quickly.
3. Procurement matters. It’s not just getting the new technologies that matters, it’s also how you get them. In the case of wind and solar, analysis by Bloomberg New Energy Finance and others indicates that the gains from competitive auctions have contributed as much to rapid cost declines of new deployment in the past few years as have technology advances. In some emerging markets, one can observe offers to deliver solar power, for example, at anywhere from 30% to 100% above the prices a country could expect to get the same power for through a well-designed competitive auction. Buying at high prices in negotiated transactions is a visible risk.
4. Communicate. There are important asymmetries between losers and winners here. The losers tend to be large, politically entrenched actors. In a number of countries these are State-Owned Enterprises, with strong political connections. The beneficiaries of lower costs and better access tend to be much more dispersed. While the case for deploying new technologies may be overwhelming in aggregate, those who gain from the status quo may have the political power to block change. Mobilizing decentralized actors – industries across many parts of the economy, retail consumers who vote – requires their understanding what a government is trying to do, and why they should support it. This is first of all about communications. Governments need to talk – frequently and loudly – about what voters and companies stand to gain from access to new technologies, and how a government is trying to help them get that access.
5. Go private. The discussion here has stressed the importance of time, and acting quickly. This stems from the effects of continuing rapid technological change – don’t act, and you fall behind; act slowly, and risk being out of office before the benefits show up. Acting quickly is not the culture of government departments or State-Owned Companies. Analysis has consistently shown what common sense indicates – infrastructure delivered through the public sector takes longer to deliver, with more frequent and extensive delays. This downside is magnified in sectors affected by new technologies. In the 1960s, governments delivered the bulk of telecommunications services; today, good luck finding more than a handful of state-owned phone companies. Same with renewable energy – excluding China, less than 5% of wind and solar generation globally is delivered by the public sector. Private companies have better incentives to learn fast, to master the complexity of new technologies, and develop the associated capacities to deliver; state-owned companies will take much longer to do so. And there is the small matter of financing.
6. Don’t worry about funding. Of course, capital is important. A lot of capital is being spent on deploying these new and emerging technologies. But focusing upfront on how to get the capital needed is putting the cart before the horse. Worse, focusing on capital sources distracts from the far more important issues of understanding policy options, and executing well on deployment, and heightens the risks of being left behind by competing countries who execute faster. In a decade of financing infrastructure projects at the IFC, I never encountered a well-designed project which failed to get financing. For government-executed projects, conversely, finding financing is generally a protracted exercise. Bringing in the private sector to deliver will eliminate this issue.

In coming posts, we’ll further explore implications of the new world of infrastructure, for the companies involved, and for those who provide capital to it. We’ll also subsequently expand on some of the issues for policy-makers.

 

 

 

The Dogs That Didn’t Bark

2017 saw many developments of great interest in the infrastructure space: ever-falling prices for solar energy, continued opening of new natural gas markets, electric vehicles beginning to achieve critical mass, new innovations in procurement scale and contract standardization, the first full-year of operation for the Asian Infrastructure Investment Bank, among others. But 2017 was also notable for things that didn’t happen. Let’s take a look at developments that did not materialize in 2017 – the dogs that didn’t bark.

1. The US did not launch a trillion-dollar infrastructure market. Back at the time of the 2017 World-Bank-IMF Spring Meetings, there were many expressions of either anticipation (a huge new market for private infrastructure!) or concern (will there be a giant sucking sound of capital leaving EM infrastructure for the US?) around the much-publicized plans of the new US Administration, for its “trillion-dollar infrastructure plan.” Conceivably, the US could have become the biggest market in the world for private infrastructure, with the expected emphasis on privatizations and PPPs. Fast-forward to 2018: no such market, no such plan, but still plenty of attention. Both the anticipation and the concern around the plan seem far more muted than a year ago. The US has a ways to go to becoming the #1 world market.

2. None of Indonesia, Nigeria, or Vietnam lived up to the hype. Back 12 months ago, each of these three countries looked like potential candidates to be a top-five Emerging Market for private infrastructure – and potential global hot spots for infrastructure. Indonesia’s relatively recently elected President Jokowi was thought to be gaining room to implement his $400 billion 5-year infrastructure plan, with an unprecedented role for the private sector and likely reforms for Indonesia’s SOEs. In Nigeria, with the election solidly behind and his health improving, it seemed like President Buhari might move on the $50B backlog in power – replicating the successful Azura IPP transaction – and transport. While in Vietnam, the shift from IDA borrowing status and accumulated infrastructure backlogs was also expected to trigger tens of billions in new opportunities. None of this materialized.

3. Maximizing Finance for Development, and the IDA-18 Private Sector Window, were not instant game-changers. The New Year in 2017 saw lots of hope around two big multilateral bank initiatives, both deriving from the 2015 Third Conference on Financing Development, held in 2015 in Addis Ababa. The first of these was the new Private Sector Window, established under the IDA-18 replenishment which was concluded in late 2016, while the second of these, “Maximizing Finance for Development” (MfD, and also known as “the Cascade”), called for much more crowding in of private capital for the financing of infrastructure. The objectives of both entailed much higher levels of private investment into infrastructure, the first in IDA countries, the second across Emerging Markets. Both, appropriately, targeted host government sector policies as the key to achieving their objectives. While the direction of these two appears “spot-on,” 2017 underscored that changing these policies, to open more space for private financing, is complex and not time-intensive. No overnight success yet.

4. The post-Paris Tidal Wave has not reached shore. The Paris Agreement on climate, reached in late 2015, was expected in many quarters to lead to major revisions in energy planning across the world. While multiple countries are moving forward with their Nationally Determined Contributions to lowering emissions, in many places it is hard to see the difference. New coal plants in East Asia and India, which together account for some 90% of the world’s planned new coal-fired generation for the next five years, remain on the drawing board. At the sector planning level in these countries, one rarely hears GHG emissions as a relevant planning parameter. So it is a pretty good bet to expect growing political pressure for further constraints on coal generation.

5. The planned world’s biggest Carbon Market remained a plan. Late 2016 brought a lot of excitement in the climate change and carbon trading communities, with announcements out of China on the country’s plans to create the world’s biggest carbon trading market. The plans still seem large, and on target, but launch was delayed and 2017 trading was minimal. With a raft of December 2017 announcements on details, hope looks strong in this quarter for 2018.

6. Cyber-attack costs on infrastructure did not rule the headlines. The cyber-attack on Ukraine’s power grid in December 2015 spawned wide-ranging concerns about similar attacks, with potentially far more costly, eye-catching, if not deadly consequences. 2016 and 2017 saw a rapid rise in cyber attacks on many targets, in many countries and in many sectors. But no large-scale repeat, or escalation, of the Ukraine grid attack in the infrastructure space. Seems hard to believe.