Ten Infrastructure Predictions for 2021

January 2021

As for the past several years, we start the new year by looking into our crystal ball and seeing what these twelve months are likely to bring for infrastructure operators, investors and policy-makers (see here for Infrastructure Ideas2018, 2019 and 2020 predictions, and here for how well the predictions tracked for 2018, 2019 and 2020).  Here are ten infrastructure predictions for 2021.

  1. A post-COVID boom for new renewable capacity.  The ongoing COVID pandemic and its ensuing disruptions was the obvious big infrastructure story for 2020, but there were a few segments of outperformance.  Renewable energy managed to hold its own, and now after a few years of generally flat levels of activity globally, is poised to return to significant growth.  Global investment in new renewable energy capacity inched up 2% in 2020 to $304B, according to Bloomberg New Energy Finance, but this level has been essentially flat since 2015.  Underneath the aggregate numbers, patterns are more positive than they’ve been in some time for growth: 2020 was underpinned by new renewables investments in Europe, which is likely to continue to be the case under the EC’s “green recovery” plans; meanwhile investment fell in the two largest individual markets, China and the US, to $84B and $49B respectively.  In both China and the US, we can expect the combination of a return of demand growth (China’s economic growth rate is forecast to be the highest in years), the cost advantages of renewables, and the return of pro-renewable policy under the Biden administration, to underpin a jump in new wind and solar investments in both these markets.  In China in particular, we expect prices of new solar capacity to drop significantly, as the country continues its transition away from its older Feed-in-Tariff procurement mechanism for domestic solar generation towards competitive auctions.  Look for a record-breaking year in total investment and in Gigawatts of new solar capacity added worldwide, and another record for renewables as a share of net new generating capacity added worldwide, at over 70%.
  2. The energy storage market gets back on track.  Prices of energy storage have been tumbling, while the size of utility-installed batteries has been soaring.  The cost of a four-hour storage addition to new generation capacity has fallen from over $80/megawatt-hour in 2010 to less than $10 today.  Nonetheless new installed energy storage capacity has fallen by 15-20% each of the last two years, down to $3.6 billion in 2020, largely due to regulatory uncertainties.  2021 will see a completely different story.  With solar-plus-storage costs for new generation capacity beginning to match the costs of new gas-fired plants, more and more utilities are switching new projects from gas to renewables plus storage.  And with the Biden administration in the US focused on getting a favorable regulatory environment in place, we can expect a surge in new capacity additions in the US.  The last few months have already seen this emerging: according to the Energy Storage Association, fourth-quarter 2020 deployments of energy storage in the US more than doubled those of any previous quarter on record.  The EIA expects a record 4.3 GW of new battery power to be added worldwide in 2021, and we agree – that should imply about $5 billion in investment — and we also expect grid-scale capacity to exceed not only 2 GW for the first time, but to reach between 2.5 and 3 GW.
  3. More airline bankruptcies.  The Fallout of COVID for all sorts of transport infrastructure for moving people has already been horrendous – whether airlines, mass transit, or taxis.  The flow of red ink is far from over.  Infrastructure Ideas reviewed the situation of airlines back in mid-2020 (The Airline Shakeout Starts Up), and by year-end over 40 carriers had declared bankruptcy.  Today many others have fragile Balance Sheets from hemorrhaging cash all year, and there is little sign of any turn around in air traffic demand in the next few months.  IATA says airlines lost over $80 billion in 2020, and projects the industry to lose $5-6 billion a month in the coming year.  Watch for more carriers to fall by the wayside in 2021 (for more see Over 40 airlines have failed in 2020 so far and more are set to come).
  4. Rethinking mass transit.  COVID has also been a disaster for mass transit infrastructure everywhere.  Ridership across US metropolitan systems fell by 65-90%.  Revenue shortfalls have forced transit authorities to cut routes and frequencies, and delay expansion and maintenance.  These measures will unfortunately create a negative feedback loop: transit systems which run fewer, slower routes, less reliably, will attract fewer riders, even when pandemic concerns eventually recede.  The $20 billion for mass transit in the Biden Administration’s “Rescue America” plan will reduce the damage to an extent, but we can expect the financial wreckage to last several years.  Infrastructure Ideas expects several consequences: (a) further reductions and delays in planned expansions of mass transit systems worldwide; (b) a sharp falloff in interest in new subway plans, including across Emerging Markets, and their replacement by cheaper Bus Rapid-Transit plan; (c) new partnerships between municipal mass transit systems and “shared mobility” players (bicycle, scooter, and car-sharing companies). 
  5. Cyber risks grow for Utilities.  Regrettably, this has become a “safe” annual prediction.  2020 saw a worldwide increase in the frequency and scope of cyberattacks on a wide range of targets, including infrastructure.  Aside from the much-publicized Solar Winds hack which, along with breaching several parts of the US government, exposed several infrastructure systems in the US, 2020 also saw several other known, and no doubt more unknown, attacks.  In February, a US natural gas compressor unit was closed for two days after dealing with one incident.  In April, a pair of cyberattacks were reported on electric utilities in Brazil.  In June, Ethiopia reported it had thwarted a cyberattack from an Egyptian group aimed at creating pressure against the filling of the Grand Ethiopian Renaissance Dam on the Nile.  Concerns run across geographies, including Africa.  A recent McKinsey analysis found three characteristics that make the energy sector especially vulnerable to contemporary cyberthreats:  an increased number of threats and actors targeting utilities, including nation-state actors and cybercriminals; utilities’ expansive and increasing attack surface; the electric-power and gas sector’s unique interdependencies between physical and cyber infrastructure.  Look for the headlines to get worse in 2021.
  6. Joint action on climate… finally.  With the exit of the Trump administration, the stage is reset for multilateral progress on climate change.  2020 was either tied or in second place for the hottest year on record, and that’s with the pandemic-induced slowdown in economic activity and emissions.  Most analysis now show the world on track for at least 3 degrees if not significantly more of warming (see McKinsey’s analysis of the world being on a 3.5 degree track), and the damage from heat waves, storms and flooding continues to increase.  Joe Biden already on his first day in office committed the US to return to the Paris Climate Accords, and China has become more aggressive in its emission reduction undertakings.  Look for new substance at the November climate summit in Glasgow, COP26.  In particular, look for (a) announcements of further reductions beyond those undertaken by countries in the Paris Accords, and (b) the emergence of a clearer tracking system to “grade” countries on how their actions are matching their commitments – a key missing element in the global frameworks to date.  The first baby steps beyond “voluntary” action.
  7. Cash for clunkers makes headway.  Coal-fired plant closures have brought constant positive emissions-related headlines over the past few years.  Last week came the announcement of the upcoming closure of a large Florida coal plant – 18 years early.  As a good piece by Justin Guay in Green Tech Media put it “Nearly every day, articles appear announcing new record lows in coal generationcoal retirements and the generalized economic train wreck that is the coal industry.”  Yet these headlines are not yet enough to bring the world back to a 2-degree warming scenario – and probably not enough to keep it even to a 3-degree scenario.  To be on track to meet the Paris Agreement goals, every coal fired-plant in the OECD would have to be offline by 2030, and every coal-fired plant in the rest of the world would have to be by 2040.  In OECD countries, almost half the existing coal-fired generation plants are not earmarked for retirement before 2030, so a lot of work will be needed there.  The biggest rich-country coal users – Japan, the US, Germany and Australia – are in the best of cases a decade off schedule.  Yet this dwarfs the complications of the rest of the world, especially Asia.  China has 1,000 gigawatts of young coal plants – almost half the world’s total coal-generation capacity, and is still building new ones.  India and the rest of Asia have about 400 gigawatts of coal-fired generation, need much more electricity, and are still locked in internal debates as to how much of their future energy needs are to be with coal (see Infrastructure Ideas’ series on Asia’s Energy Transformation: Pakistan, Bangladesh, India, and Indonesia).  The technical lives of many of these plants will stretch long past when they would need to be shuttered to meet the Paris accords, and many of them are insulated from the declining economics of coal by quasi-monopolies and/or long-term contracts.  According to Carbon Tracker, the US and the EU will, by next year, be paying coal plants over $5 billion to stay in operation, through contracted capacity payments.  It would be much better to use these funds to buy the plants out and close them, in effect a “cash-for-clunkers” program as Justin Guay labels it.  As an earlier Infrastructure Ideas piece puts it, “Money is Coming for Coal.”  The funds would be needed to buy out legacy operators, and to support affected workers and communities.  This will be controversial, and complex to design and implement.  But with emissions likely rebounding again and a more favorable political environment, look for paying coal to go away to get on the table in 2021.
  8. The US gets its trillion-dollar infrastructure plan.  There were plenty of promises in 2016 about a trillion-dollar infrastructure plan for the US to fix many of its problems, but this never materialized.  Now with a new administration, and democratic control of both houses of Congress, there will surely be such a plan put in place in 2021, with roll-out getting underway.  The nomination of Pete Buttigieg as Secretary of Transport indicates that urban infrastructure will be a priority, and that municipal authorities will get much more say going forward on how funding helps address cities’ infrastructure needs.  Buttigieg had his own trillion-dollar plan as a candidate (see “Inside Buttigieg’s $1 Trillion Infrastructure Plan”) in the primaries, and stated “as a former mayor, I know that priority-based budgets made locally are better than budget-based priorities set in Washington.”  This will be in sharp contrast to the previous four years, when whatever federal funding trickled out was aimed almost entirely at the rural areas which were the base of Donald Trump’s support.  Climate adaptation and road rebuilding were high on both Buttigieg and Joe Biden’s campaign pronouncements, so look for major spending in these areas in 2021.  President Biden apparently also plans to re-create a version of the depression-era Civilian Conservation Corps to work on climate adaptation projects.
  9. The BRI gets a facelift.  In September, Chinese President Xi Jinping pledged to make China carbon neutral by 2060, and to “bring forward” an earlier pledge to start reducing GHG emissions by 2030.  The announcement was widely welcomed, but it will be a hard slog to turn into reality: with economic pressures, 2020 saw a sharp increase in the number of permits for new coal-fired plants issued in China.  China’s emissions progress will likely stay in the limelight as international climate discussions get more serious in 2021, thanks to the re-engagement of the US (see above).  At the same time, China’s flagship international initiative, the Belt and Road Initiative (BRI), is seeing increased criticism of its environmental and climate impacts.  Coal-fired generation plants have been big recipients of support under the BRI, particularly in South Asia.  Announcing some sort of “greening” of the BRI going forward would be low hanging fruit for Xi Jinping to avoid focus on the BRI’s environmental negatives at a time China wants to be seen as a leader of the international agenda.  Look for this to come to pass later in 2021.
  10. This is (not) the time for the Emerging Markets infrastructure boom.  There is one coming – really!  For years policy-makers, analysts and investors have looked at Emerging Markets as the great future of infrastructure.  Large infrastructure deficits, growing wealth and demand for services among the population, higher returns than in wealthy markets, coupled with a “wall of money” from institutional investors looking to get some yield on their excess liquidity.  In 2021 it … will not happen.  The demand pull will stay largely theoretical.  Of the ten or so larger economies that make up 80% of collective GDP of Emerging Markets, four of the biggest – Brazil, Mexico, South Africa and Turkey – will at best remain hamstrung from a combination of COVID and internal politics, and at worse turn their back on private investment.  The “push” from investors will be going elsewhere.  Between a big push for new infrastructure in the US, and the European “Green Recovery” plan, investors and infrastructure companies will be looking for their opportunities in developed markets.  And between the Trump tax cuts and forthcoming public spending increases, look for interest rates to start inching up, further reducing the push from institutional investors.  At some point continued internal pressures, and limited public spending options, will lead to a wave of Emerging Market reforms.  Just don’t look for it in 2021.

The Airline Shake-out Starts Up

The Airline Shake-Out Starts Up
May 2020

This month saw two of Latin America’s three largest airlines file for bankruptcy: LATAM and Avianca. They are the most visible casualties to date of the unprecedented fall in air traffic since the onset of the COVID-19 pandemic, though they certainly won’t be the last. Today’s Infrastructure Ideas looks at some of the emerging implications for airlines of the unfolding shake-out.

Airline travel was one of the areas first and most severely disrupted by the emergence of the coronavirus. With the combination of passenger health concerns, and uncoordinated government travel bans and/or carrier stops, anywhere from 75 to 90% of passenger volumes disappeared in less than one quarter. The level of passengers in the US dropped below 100,000 per day, last seen in the 1950s. Five months in, the financial impacts are starting to show in a big way. IATA has estimated lost industry revenues at over $300 billion, and not too many carriers have the Balance Sheet to withstand this.

Already in February, Air Italy – the old Meridiana Air partly owned both by the Aga Khan Fund and by Qatar Airways – went into liquidation, and Turkish Atlas Global filed for bankruptcy. In April Air Mauritius entered administration and Virgin Australia filed for bankruptcy, while in May LATAM and Avianca were kept company by TAME Ecuador, which entered liquidation. Other airlines whose positions were already difficult before COVID-19 are trying to stay afloat: South African Airways, the largest airline in sub-Saharan Africa, remains in bankruptcy, hoping for some kind of rescue, while SAA Express, its regional affiliate, has entered liquidation; Kenya Airways, another of Africa’s big three airlines, recorded its second major annual loss, close to US$100 million, before the pandemic even started (the Kenyan Parliament has voted to re-nationalize the carrier); and Philippine Air announced a revenue loss of over $1B. A rehabilitation plan for Thai Airways was approved on May 19, involving the Government of Thailand’s stake dropping below 50%.

Aside from the announced bankruptcies, airlines around the world have shed thousands of jobs, cut salaries and grounded planes. McKinsey estimates airline capacity has been reduced by 75%. This without mentioning the impact on airports and many associated services which have also been deeply affected.

For the most part, bankruptcies are arriving first for Emerging Market-based airlines. While some of these airlines have been recording the strongest growth in the industry, and have the potential for much higher growth in the future than their OECD-based counterparts, there have been two things going against them: thinner equity bases, and the lack of fiscal space in non-OECD countries for supplying financial assistance – as has been the case in the USA, and most recently with Lufthansa.

Avianca, which claims to be the world’s second-oldest continuously running airline, filed for Chapter 11 in New York on May 12, blaming its collapse on the “unforeseeable impact of the Covid-19 pandemic.” While the company stated it is neither in insolvency or liquidation, it did close its Peruvian affiliate, along with cutting its fleet. Avianca had had remarkable growth over the past two decades, but had already been showing signs of stress before the pandemic. Former controlling shareholder German Efromovich was removed in May 2019, after defaulting on a $450 million loan from United Airlines which had been secured by his 51.5% stake in Avianca. While United is now the largest shareholder, it ceded its voting rights to Salvadorean Roberto Kriete (a former chairman of TACA Airlines). Chile-based LATAM had also been growing strongly. It is South America’s largest carrier by passenger traffic, had more than 340 planes in its fleet and nearly 42,000 employees on its payroll, and reported a profit of $190 million in 2019. In December 2019 Delta Air Lines, agreed to purchase 20% of the company for $1.9 billion, and Qatar Airways already owns 10%. The company’s May 25 Chapter 11 filing focuses more on the downturn as an opportunity to reduce its debt. Its three main shareholders have agreed to provide up to $900 million in financing as LATAM makes its way through the bankruptcy process.

Investors, operators and governments are now all asking themselves — what comes next? Here the key uncertainty, as in so many sectors, is what course the pandemic takes. Case and death levels are still rising, though in aggregate significantly slower than a month ago. Many countries have begun at least the first phases of re-opening, and air traffic has shown its first uptick since mid-May. The Pakistan International Airlines crash in Karachi is one of several instances where the re-opening of flights has not started smoothly. So it remains unclear how protracted the decline will be, though it appears that demand is likely to have bottomed out, and unclear whether demand returns to pre-crisis levels and if so, how soon. On the one hand, the post-9/11 experience was one where growth in air traffic resumed strongly, in spite of structural changes in the air travel experience related to security. On the other hand, McKinsey notes that not only may health-related concerns keep passengers out of planes, but climate change concerns had also begun to have some impact.

Keeping these uncertainties in mind, we can hazard some guesses on what kind of structural changes aviation is likely to undergo. Here are some views on what the post-pandemic future may hold:

1. Fewer carriers. Almost certainly we will see fewer carriers, either through the route of liquidation, or through the route of mergers. While EM-based carriers have seen more bankruptcies so far this year, it may be that advanced economy-based carriers see more liquidations. Factors pointing in this direction include growth potential, and there being more merger targets in Emerging Markets today. The post 9/11 crisis in air travel almost two decades ago led to major consolidation among US airlines, with USAIR, Northwest and Continental disappearing, but not much consolidation among Emerging Markets carriers. Granted national interests in flagship carriers will, as always, be a major impediment to such consolidation, yet mergers and acquisitions are likely. Already in Latin America, the path of both Avianca and LATAM over the past decade has shown consolidation to be accepted in the region, and the stakes taken recently by United, Qatar and Delta have shown non-regional ownership has become politically acceptable. In Africa, one of the more surprising developments of the last month has been the announcement by Ethiopian Airlines on May 5 that it is in talks to revive both Air Mauritius and South African Airways. Ethiopian operates Malawi Airlines, had bought 45% of Zambia Airways in 2018, partners with ASKY of Togo, and has previously been in talks to revive Ghana Airways.
2. Fewer passengers. In terms of demand, the COVID pandemic is likely to be a crisis with a very long tail. Most forecasts expect more waves of infection, whether in large re-opening markets such as the USA (or as Korea is currently experiencing), or in markets where the initial pandemic wave had more limited impact. This is likely to keep travel-related concerns high for some time.
3. Pressure to reconfigure aircraft. Proximity to infected people, including those who do not know they are infected or do not show signs of infection, is now understood to be the biggest vector for spreading of the coronavirus. Airlines’ business models have been driven by packing as many people as possible on planes, as tightly together as can be sold. There will be a clear conflict between these two drivers. This week has seen an interesting experiment by Air Canada, which is beginning to offer in effect “all business class” flights, leaving more space between passengers on the entire plane.
4. Higher airport fees and health-related costs. Airports are facing the same issues as airlines: plunging revenues, and pressure to make investments in reconfiguring assets (see note on this in our previous Infrastructure Ideas note). One of the very few directions airports will be able to go to increase their revenues and stay afloat will be to charge higher fees to airlines – all the more as the number of airlines decreases.
5. Higher fares, and a higher premium on efficiencies (including fuel efficiency). Fewer passengers and higher costs. At least in the near-to-medium term, airlines will have little choice but to raise fares. In the very short term some are offering minimal fares to try to re-spark travel, but this tactic will be completely unsustainable. Facing decreased demand and higher costs, as noted above, airlines will have to focus very hard on their P&Ls.
6. Unprecedented government support. Airlines will find it very difficult to square this circle without help. This we already see in many OECD countries. It seems unlikely, however, that the support provided to date will be enough for many carriers, barring an unexpectedly rapid decline in rates of infection and an unexpectedly rapid return of passenger demand. It is likely that politics becomes a big determinant in OECD countries of which carriers get further support, and survive, and which ones do not, and wind up liquidated or acquired. We have not seen as much of this in many Emerging Markets, which has been a factor in why the Aviancas and LATAMs have become early bankruptcy headliners. Many EM countries’ fiscal space is doubly constrained by the economic contraction and pre-crisis indebtedness. Yet airlines also play a role that is in some ways more essential in many EM countries, where road and rail alternatives for transport remain limited. We would therefore expect that, especially as the Multilateral Development Banks ramp up their crisis-related fiscal support, we will start to see a number of EM-based carriers get new government support.