Infrastructure: 10 Predictions for 2022

February 2022

As for the past several years, we start the new year (a bit behind schedule) by looking into our crystal ball and seeing what these twelve months are likely to bring for infrastructure operators, investors and policy-makers (see Infrastructure Ideas2018, 2019, 2020 and 2021 predictions, and here for how well the predictions tracked for 2018, 2019, 2020 and 2021).  Here are our ten infrastructure predictions for 2022.

  1. Solar and wind economics stay volatile, but remain cheap.  The well-publicized supply chain disruptions of much of 2021 caused prices for solar panels, and in some cases wind turbines, to rise for the time after over a decade of sharp declines.  The supply-chain disruptions are far from over, and developers can expect prices to remain at best uncertain and at worst above 2020 prices.  Yet the costs of solar and wind generation will continue to remain far below those of alternatives.
  2. The natural gas price rally ends.  In the last quarter of 2021, prices of natural gas reached levels unseen in decades.  In Europe, spot prices for natural gas increased six-fold from June to December, exceeding $10/mmbtu.  Gas producers have been hopeful that the economics for new gas development would remain favorable enough for investments to move forward.  Don’t plan on it: expect prices back down at the $4/mmbtu levels by the second quarter at the latest.
  3. Coal take-out picks up steam.  As predicted a year ago (see our “cash for clunkers” 2021 prediction), proposals for funding the early closure of coal-fired generation plants began to appear in 2021.  A heavyweight consortium of Citibank, Prudential, HSBC and the Asian Development Bank floated a proposal in November for an “Energy Transition Mechanism,” to raise funds in order to begin acquiring coal-fired generating plants in Asia, in order to shut them down ahead of their technical end-of-life dates.  With older coal plants closing for both technical and environmental reasons across the US and Europe, Asia now accounts for 75% of all coal generation globally, according to the IEA.  While the 2021 consortium proposal has a number of issues, we expect the topic to continue to gain urgency in 2022, more proposals to emerge, and the first announcements of successful fund raising.
  4. EV charging networks become a big investment target.  The global EV charging infrastructure reached $18 billion in 2021, according to Fortune, and will continue to be one of the fastest growing infrastructure segments.  Though China is by far and away the largest market and continues to invest, expect the US market to grow faster with $7.5 billion in funding just from the Biden infrastructure bill, continued technology advances, and the push to create “fuel corridors” to reduce drivers’ range anxiety.  Look for 2022 investment to reach between $22-25 billion and keep growing.
  5. Hydrogen investment becomes more than hot air.  Climate mitigation efforts and investments have focused to date mostly on electricity and transport.  Heavy industry also generates large amounts of GHG emissions, and many industrial processes require energy unlikely to come from electrification.  The use of hydrogen to replace fossil fuels in industry has long sounded like a well “over-the-horizon” idea, but this is rapidly changing.  Look for some of the first major announcements of investments in hydrogen-based energy in the US and Europe in 2022.
  6. “Net Zero” targets face a battle over transparency.  With corporate pronouncements of “Net Zero” targets for some future point proliferating – and yet GHG emissions continuing to grow – expect considerable pressure from observers for announcing businesses to be transparent about what they mean by “Net Zero.”  Definitions and methodologies appear to vary greatly, along with substantive action accompanying announcements.  Look for the same kind of movement that pushed for transparency on “sustainability” practices do the same on climate.
  7. First infrastructure cyber risks, now drones.  Technology is driving major improvements in infrastructure services and costs, but not all technology brings positives.  Cyber-attacks have become a major concern for utilities.  In 2021 drones, a technology which is beginning to play an interesting role in logistics (see “The Drones are Here”), have also been used in a handful of conflict and crime situations.  Look for concerns to grow in 2022 around the risk of drone attacks on infrastructure facilities.
  8. Emerging markets infrastructure remains in the doldrums.  This is a repeat of our (unfortunately correct) 2021 prediction.  The potential for emerging markets to outgrow developed markets as a destination for infrastructure investments will again remain potential.  The continued effects of COVID, supply chain disruptions, and a drive to “near-shoring” in several industries will continue to make infrastructure demand and investment very uncertain in 2022.
  9. Sea barriers continue to attract more investment.  New projections about sea level rises seem to appear every few weeks.  A new study released this past week pointed to a foot of sea level rise along the US East Coast by 2050.  Look in 2022 for announcements of large (and publicly visible) investments in marine infrastructure to become popular with politicians in many jurisdictions.  As noted by Infrastructure Ideas (“Seawalls and Emerging Markets”) a few months ago, these will not come cheaply.
  10. Water recycling in the news.  Droughts in the US West and many other places continue to drive pressure on water supplies in large markets.  Climate change and the exhaustion of aquifers point to this pressure continuing.  Look for water recycling infrastructure to begin drawing more serious attention in 2022 as part of the solution.

Infrastructure: 2021 in Review

2021 in Review

January 2022

In January 2021, Infrastructure Ideas made our annual 10 predictions for 2021.  With the year closed, it’s time to take a look at how things unfolded.  2021 was a banner year for our forecasts: nine out of ten predictions proved accurate.  By comparison, 6 of our ten predictions for 2020 were on the mark, after 7 in each of 2018 and 2019.

Let’s take a look at all the predictions that unfolded as expected:

A post-COVID boom for new renewable capacity.  As expected, investment in new renewable capacity showed a big jump in 2021, after several relatively flat years.  Final numbers are expected to come in at between $330 to $350 million, up from $304m in 2020.  Renewables accounted for 70% of all new generation investment worldwide.  Solar installations recorded record growth of nearly 160 GW, a jump of over 15% from 2020. For the first time, solar made up more than half of all the renewable energy capacity added in the year — solar installations recorded record growth of nearly 160 GW, a jump of over 15% from 2020.

The energy storage market gets back on trackAccording to Wood Mackenzie, global energy storage deployments will have nearly tripled in 2021 compared to 2020, reaching 12 Gigawatts.

Cyber risks grow for Utilities.  Regrettably, this has become a “safe” annual prediction.  The attack which shut down the Colonial Pipeline in the US in May 2021 was only the most publicized incident.  Concerns in the US were high enough for the Biden administration to issue a “100-day plan” to protect security in the utility and energy sector. 

Joint Action on Climate.  With a new administration in place in the United States, multilateral progress on climate change resumed in 2021.  While the Glasgow COP26 meeting had a glass half-empty, glass half-full character, over 150 countries did submit strengthened Nationally Determined Contribution (NDC) plans, and on the sidelines, the US and China – the world’s two biggest emitters of GHGs, agreed to wide-ranging cooperation going forward.

Cash for clunkers makes headway.  We predicted that 2021 would see the first proposals to buy-down coal-fired generation plants before the end of their technical life, and retire them early – similar to the “cash for clunkers” model which various governments have implemented at times to get old polluting automobiles off the roads.  In the Fall of 2021 we got exactly that, with a proposal from the Asian Development Bank at its annual meeting to raise a fund to buy and retire coal plants in Asia.  Heavyweights HSBC, Prudential and Citigroup are part of the group working with ADB on its “Energy Transition Mechanism.”

More airline bankruptcies.  The continued travel disruptions from COVID-19 that saw several carriers fold early in the epidemic (see “the Airline Shake-out Starts Up”) continued to hit the industry hard in 2021.  Seventeen more carriers ceased operating last year: the long list of bankruptcies included Air Antwerp, Air Namibia, and Interjet (Mexico), among many others.

The US gets its Trillion-dollar infrastructure plan.  Implementation has a long way to go, but the Biden administration did manage to get congressional approval for the Infrastructure Investments and Jobs Act.  Biden signed the $1.2 trillion bill into law on November 15, 2021.

The BRI gets a facelift.  We predicted that President Xi Ping’s desire to show China as a leader in the global fight against climate change would lead to changes in another of his flagship foreign priorities, the Belt and Road Initiative.  The penny dropped in September, with the announcement that China would no longer finance coal-fired generation plants internationally.  This will make a significant difference in many countries, as China was the last remaining major funder of such facilities, and make a big difference in the BRI.

This is (not) the time for the Emerging Markets infrastructure boom.  According to the Global Infrastructure Hub, private infrastructure investment in Emerging Markets fell 14% in 2021, on top of a 10% fall in 2020.  Soon?

The only prediction we had which was off the mark was a rethinking of mass transit.  We still believe this is coming, but 2021 was more about salvaging what there was and limping along with low ridership in most countries. 

Our 10 Infrastructure Predictions for 2022 are coming out in parallel.

German Floods and Performance Bonds

August 2021

In mid-July, some 250 people were killed in Germany and Belgium as rain-swollen rivers flooded towns over a wide area.  More than 10 inches of rain fell in 48 hours in some spots; Cologne received 6 inches in 24 hours.  It was the deadliest natural disaster to hit Germany in over 50 years.  Economic losses are estimated at over $3 billion, with the total likely to rise much higher.  Germany was not alone in experiencing extreme rainfall in July.  One Sunday, Londoners were hit with a month’s worth of rain within a few hours.  In Central China, rain amount records were set, over a million people were affected, and the subway in Zhengzhou – a city of 5 million – flooded while passengers were trapped in trains.  This a year after several million were displaced by flooding in the Yangtze River Basin.  And in the Berkshires of Massachusetts, July 2021 became the rainiest year since records were first kept – in 1891.

Floods in Germany (Reuters)

In our previous column, Infrastructure Ideas wrote about rising water levels along coasts, and the infrastructure implications of plans to build seawalls to defend many cities.  As last month has shown, once again, weather-related flood events are increasing far from the seas as well.  Floods are both damaging existing infrastructure, creating repair and restoration needs, and triggering plans for new infrastructure investments to help cities adapt to rising flood risks.

Too much water in many places, and not enough in others.  July’s extreme weather events were not limited to flooding: in the Western US, in Turkey, in Greece and in Sardinia, wildfires also set records and damaged widespread areas.  Some of these wildfires are expected to burn on into the Fall.  Much of the Western US also saw unprecedented heat waves in July, setting the stage for the fires – as did Moscow, among other places.  Last year it was Australia.  In an era of climate change, extreme weather events are becoming more common, and the IPCC — the Intergovernmental Panel on Climate Change – tells us that the frequency of these extreme events will increase as global temperatures rise.  As a headline from the New York Times says “No One is Safe.” 

From the standpoint of infrastructure, these floods, and the wildfires, share one important thing in common.  They result from extreme weather events which are unpredictable.

General trends are clear: more floods in some places, and more heat and fires in others.  Sea level rises are increasingly observable, and “predictable” in the short term.  But the timing and scale of downpours is – generally speaking – not predictable, and neither are the location or breadth of wildfires.  With Climate Change, we already observe that extreme events occur on shorter notice, with both more intensity and severity than before – and, as July has demonstrated, outside of any forecast range.

This lack of predictability, in an age of adaptation to climate change, has significant implications for infrastructure.  The big implication is that related infrastructure investments — being made with a short (or no) planning period, and subject to a large range of uncertainties as to how soon they are needed, how frequently they’ll be used, and the magnitude of the problem they seek to solve — will tend to have some of the least desirable characteristics of infrastructure projects.  Notably, these investments can expect to be characterized by (a) frequent design changes, (b) significant delay risks, and (c) large cost overruns.  Frequent design changes will almost inevitably stem from the uncertainties involved, and from the politics surrounding how best to respond.  Risks of delays and overruns go hand-in-hand with frequent design changes in all construction projects.

In normal times, public authorities asking for infrastructure projects, and lenders supporting the projects, always look to lay this kind of risk off to sponsors and construction companies.  Completion guarantees from sponsors and performance bonds from construction companies are the primary instruments to shift these risks.  A consequence of climate change, and the rapid rise in adaptation-related infrastructure investments, is that it will become more difficult for these risks to be shifted in the way public authorities and lenders typically require.  The culprit will be unpredictability.  With the higher risks of delays and overruns coming from that unpredictability, the size of adaptation-related infrastructure performance bonds will strain the balance sheets of many construction companies.  Where sponsors themselves are also construction companies, required completion guarantees will make the problem worse.  And the construction companies will note, often correctly, that weather-related sources of cost overruns – as well as overruns stemming from political disagreements on how best to respond to extreme weather events – are outside of their control, making them even more unwilling to take on these risks.  We can therefore expect to see that many infrastructure investments intended to help cities and other areas adapt to more extreme weather events – urgent investments when the need for them becomes clear – will get at best delayed and at worse stuck due to the unwillingness of parties to bear the risks stemming from higher unpredictability.

Keeping infrastructure investments flowing as the need to adapt to extreme weather events grows may therefore require something new.  For developing countries, funding for these higher risk investments may simply get swept up into their general need for additional finance related to climate change: yet one more problem to solve.  For wealthier and middle-income countries, the solution may wind up in the domain of insurance.  The likely best way to manage the risks from unpredictability will be diversification of that risk across a very large pool of geographies and projects.   One model may be the World Bank’s Disaster Risk Financing and Insurance program, developed in the mid-2010s, which was created to pool weather-related risks for low-income countries. 

Floods in Germany, fires in the Mediterranean, these are disasters whose occurrence, timing and scope are increasingly unpredictable.  Yet that such events will occur more frequently is itself predictable.  Infrastructure investments may in at least some cases mitigate the damages and deaths from further extreme weather events, and will in many cases be needed to repair damages.  These adaptation-related investments will present different problems than traditional infrastructure, due to the unpredictability of specific severe weather events.  The biggest problem is likely to revolve around Performance Bonds, and the ability of construction companies to absorb unpredictability risk.  Let’s hope insurance can provide a solution.

Index to Previous Columns on Climate Adaptation and Infrastructure

Seawalls and Emerging Markets

July 2021

Built on beautiful Biscayne Bay, money has flowed from the sea to Miami – especially to its real estate developers — for centuries.  It is starting to flow back to the sea.

Miami flooding — from the Miami Herald

Last month, the US Corps of Engineers released a draft study for how best to protect the city of Miami from rising seas and recurring flooding.  The Engineers’ recommendation: a $6 billion, 6-mile long, and up to 20-foot-high seawall.  City and state politics are now mired in a high-profile back-and-forth on whether to proceed (see “A 20-Foot Sea Wall? Miami Faces the Hard Choices of Climate Change”).  Similar plans to build large and expensive seawalls are being debated in other American cities: Houston, San Francisco, Charleston, and Honolulu for a few, with New York City looking at the most grandiose plans of all, costing well over $100 billion.  A 2019 report noted that the cost of building the seawalls under debate in the US could run to $416 billion – the same cost as the build-out of the entire national interstate highway system.  Across the Atlantic Europe already has seawalls in a number of places: Venice, London, St Petersburg, the Netherlands.  A gargantuan project – nearly 400 miles long – is under discussion to protect European coastlines along the North Sea – at a preliminary cost estimate of half a trillion dollars.  Along the Pacific Singapore and Shanghai are among (the few and wealthy) Asian cities with seawalls.

Rotterdam’s Seawall

There is still novelty around the idea.  Until the last decade, one would have been hard pressed to find “seawall” in anyone’s definition of infrastructure.  Ports have built jetties in many places to protect harbors, but these have been much smaller endeavors.  Yet the future where one can plausibly project seawalls becoming one of the 3 or 4 largest categories of infrastructure spending around the world, capturing hundreds of billions of dollars, has come quickly.  A future where seawalls will be the single largest ticket item in the budget of many coastal cities, at times dwarfing their combined spending on all other infrastructure combined.  This is another example of how disruptions have upended the once stable and fairly predictable world of infrastructure, whether disruptions from technology – such as wind turbines or batteries – or from other sources, like climate change.

Fear of rising sea levels from the melting of glaciers is galvanizing the newfound interest in seawall building.  Hundreds of millions of people live in coastal cities with low elevations and many, like those in Miami, are already seeing the increased flooding that will worsen in coming years.  As the World Economic Forum states, “Even if we collectively manage to keep global temperatures from rising to 2°C, by 2050 at least 570 million cities and some 800 million people will be exposed to rising seas and storm surges. And it is not just people and real estate that are at risk, but roads, railways, ports, underwater internet cables, farmland, sanitation and drinking water pipelines and reservoirs, and even mass transit systems.”  Estimates of the sea level rise itself, which may sound small or slow, tend to understate the problem.  Only about 1/3 of future coastal flooding risk is from rising sea levels that would permanently submerge low-lying areas, while 2/3 of the risk comes rather from the likely increase in extreme high tides, storm surges and breaking waves.  Cities are looking at a variety of ways to protect themselves, looking to better absorb and drain water faster, but attempting to keep water away is on nearly every wish list. 

New research (see “A Space Laser Shows How Catastrophic Sea Level Rise Will Be”) shows that for several of these coastal cities, the issues of rising seas and more severe storms will be made worse by yet another problem: sinking.  As populations in many of these urban areas have grown rapidly, over-extraction of ground water is causing the ground to subside.  Cities built on river deltas usually sit on several layers of clay, deposited over time as sediments by the river, with underlying aquifers.  When the aquifers get drained to provide water to the city’s population, the clay collapses into the space which had held water.  The more an urban center grows, the more people it needs to hydrate, which increases the rate and severity of subsidence.  Djakarta is the prime example of this effect, with subsidence having been a key factor in last year’s decision by the Indonesian government to move the capital to a different location (see Capital Punishment (or So Long, Djakarta ?)), but it is far from the only one.

The surge in interest in seawalls as the centerpiece of the solution for many cities will keep engineers occupied and planners preoccupied.  It is still very early days in the growth of what will likely be one of future infrastructure’s largest areas.  Today we’ll look at just a couple implications of this coming boom, especially as regards developing countries.

We’ll start with one safe assumption about this new type of infrastructure: if the seawalls get built, they’ll cost a lot more than the amounts now projected – even the $400+ billion estimated for the US.  Seawalls will fit squarely into the type of infrastructure prone to frequent and large cost overruns (think of tunneling projects, like Boston’s infamous “Big Dig,” or of large hydroelectric dams, with average overruns approaching 50%).  They will be highly politicized investments, with continued debate about every detail (whose property is disturbed, whose views are affected, which houses are outside the protection zone, what is the timeline – and especially, who pays), and debate about just how high the tidal or storm surges they’re built to prevent will be and how soon.  This means the construction of these barriers will be subject to frequent change orders, the perfect recipe for more cost overruns.  And they may become obsolete fairly quickly, depending on the pace of climate change and glacier melt in the coming decades.  It would not be a big stretch to see the US spend over $1 trillion on seawalls in the coming 20 years, nor would it be a big stretch to see global spending on such projects well over $5 trillion.  That’s a lot of infrastructure spending

A second safe assumption about seawalls?  You won’t find many in Emerging Markets any time soon. 

And that will become a big deal.

Cities in lower-income countries stand to be disproportionately affected by rising seas.  While all coastal cities will be affected by sea-level rises, some will be hit much harder than others. Asian cities will be particularly badly affected. About 4 out of every 5 people impacted by sea-level rise by 2050 will live in East or South East Asia – several hundreds of millions of people.  Africa is also highly threatened, due to rapid urbanization in coastal cities and the crowding of poor populations in informal settlements along the coast.  The list of most affected cities includes Mumbai, Kolkata, Dhaka, Guangzhou, Rangoon, Ho Chi Minh City, Manila, Dakar, Alexandria, Lagos, Abidjan, among many others.  Leaving aside China, most of these Emerging Markets cities and their national governments have one thing in common when looking at seawalls as part of their adaptation plans: a lack of capital. 

The list of Emerging Markets countries with cities affected by rising seas looks an awful lot like the list of Emerging Markets countries with large infrastructure deficits – already.  The capital requirements for building seawalls to protect their coastal cities from increased flooding will absorb a large share of their capital that is already needed for deficient infrastructure: for some smaller countries, the cost of seawalls may approach the size of their entire current infrastructure budgets.  It is no surprise, therefore, that a list of cities actively considering seawalls is 90%+ in developed markets (including China).  Djakarta – banking on financial support from the Netherlands – is the only city in a lower-income country with an advanced plan. 

While it is not surprising that attention to seawalls is almost entirely concentrated in more developed countries, the absence of such attention in Emerging Markets has some important implications worth noting.

1.         Flooding increases in coastal cities and the inability of those in low-income countries to engineer solutions (or at least what may appear to be solutions) to offset sea-level rise will lead to much larger-scale relocation of populations in the Emerging Markets than what we will see in the US, Europe and the richer Asian countries.  Some of that relocation may be organized, at least to an extent, along the model of Indonesia’s announced move of the country’s capital, and much of it is likely to be dis-organized, in the form of migration – in country where inland options may be available, and cross-border where those options are not available.  As the World Economic Forum states it, “The coming decades will be marked by the rise of ex-cities and climate migrants.”  To date much of this climate migration has been relatively “invisible,” contained within countries.  Don’t expect this to continue.  The cry we have seen in early 2021 for better equity in the distribution of COVID-19 vaccines may presage a louder cry in years to come for better equity in the building of seawalls.

2.         Given that the wealthy countries that dominate the Boards of International Financial Institutions will want to see as little large-scale cross-border migration as possible, and will have to devote plenty of capital to their own climate adaptation plans, we will undoubtedly see a big push for the IFIs to engage in helping Emerging Markets fund seawalls.  With the scale of the financing challenge, this will be the domain of the large global and regional multilateral development banks, and will stretch their balance sheets. Should a large-scale Climate Adaptation Fund emerge, as has been discussed for many years, and could safely assume that a large share of its capital would wind up going into this area.

3.         There will even greater interest in “innovative financial solutions” than there is for traditional forms of infrastructure.  Don’t be surprised to see mechanisms through which the local private sector in coastal cities (especially companies serving consumers in these cities, such as retail, telecommunications, and producers of consumer goods) “help finance” some kind of Public-Private Partnerships (it will sound better than to say they are being taxed) in order to preserve their own revenues.  And don’t be surprised to see some mechanism emerge whereby wealthy countries contribute to some kind of “Fund” to help finance seawalls in lower-income countries.  It would be the same kind of general principle which has been discussed now for decades for Climate Change adjustment funds, but would have the clear advantage, relative to current discussion, of going to concrete (pun intended) objectives.  In the US, we have seen the building of a wall to limit immigration generate considerable political momentum: one can imagine building of walls further away, with the same idea of limiting immigration in mind, will also generate plenty of political momentum in the future.

Seawalls: coming soon for infrastructure budgets – ready or not.

Index to previous Infrastructure Ideas columns about Climate Adaptation

Ransomware and the Pipeline

May 2021

In the last week, one of the largest fuel pipelines in the United States has been shut down as it deals with a ransomware attack.  This is the highest-profile infrastructure cyber-attack on the energy system in the US, and a reminder that this “new” problem is getting much worse – and will continue to do so.  Today we’ll take a look at some implications of this latest attack, and of cyber-risk trends for infrastructure.

The Colonial Pipeline System

Infrastructure Ideas has been writing about infrastructure cyber-risks for some time, and one of our Ten Infrastructure Predictions for 2021 was that these risks would grow for utilities.  Unfortunately, we were right.  The attack on the Colonial Pipeline, which operates the largest fuel pipeline between Texas and New York, has disrupted availability of gasoline and jet fuel for a week – with long lines at gas stations in some areas, and a state of emergency declared by the Governor of Virginia.  The 5,500 mile pipeline carries nearly one-half of the motor and aviation fuels consumed in the Northeast and much of the South (see “What We Know about the Colonial Pipeline Attack,” from the New York Times).  Colonial, the pipeline operator, reported that hackers had infiltrated corporate data, not control of the pipeline itself, but that Colonial had shut down operation of the pipeline to prevent further damage and contain risks.  The FBI has attributed the hack to a Russia-based criminal group known as “Darkside,” which specializes in ransomware attacks against English-language targets.  As of this writing pipeline operations have yet to return to normal.

A customer help pumping gas at Costco, as other wait in line, on Tuesday, May 11, 2021, in Charlotte, N.C. Colonial Pipeline, which delivers about 45% of the fuel consumed on the East Coast, halted operations last week after revealing a cyberattack that it said had affected some of its systems. (AP Photo/Chris Carlson)

The Colonial Pipeline ransomware attack is far from the only headline regarding cyber-attacks on infrastructure in the first months of 2021.  A report in February from the industrial cybersecurity firm Dragos named four separate hacker groups with ties to Russian intelligence services as having targeted industrial control systems in the United States.  One group, named “Kamacite,” reportedly works in cooperation with the GRU, Russia’s largest foreign intelligence agency and has targeted US electricity and oil and gas firms, and is said to have gained network access to firms on several occasions.  Another February report, this one from IBM, found the energy sector to be the third most frequently targeted in 2020 (after finance and manufacturing), up six places from 2019.  Aside from energy, other attacks have targeted the water sector.  An as-yet-unknown hacker gained access to the controls of a water treatment facility in Oldmar, Florida, and attempted (unsuccessfully) to introduce large amounts of lye into the city’s water.  In February, an ex-employee of a water company near Little Rock, Arkansas, was indicted for accessing and attempting to disrupt the company’s systems after being let go.  In 2020, a likely Iranian hacker was found offering to sell network access to a water treatment plant in Florida over the messaging app Telegram.  A recent study profiled in Wired (Water Supply Hacks Are a Serious Threat – and Only Getting Worse) found dozens of hacking incidents at US water installations, with a continued rise over the last decade.  Water utilities turn out to be far more vulnerable to cyber-risks, in spite of the focus of most headlines on electric utilities, as so many water utilities are small and lack the administrative capacity and resources to protect themselves against rapidly evolving attack risks.

The underlying dynamics indicate that infrastructure cyber-risks are, unfortunately, getting much worse.  For one, the growing use of digital controls to manage electricity and other energy installations opens new entry points for hackers to exploit.  Second,  the sheer number of actors involved or with the potential to be involved cyber-attacks is growing rapidly: barriers to entry are low, and the trend towards ransomware attracts criminal groups across the  board.  As one cyber-expert cited in the Dragos report puts it, “A lot of groups are appearing, and there are not a lot going away.”  One element of this week’s Colonial Pipeline attack highlights the issue: the group apparently responsible, dubbed “Darkside”, operates on a business model whereby it develops hacking tools and then sells, rents or leases them to other parties.  It does not require much imagination to see how this will accelerate the availability of hacking tools.  Third, with the multiplication of actors comes a multiplication of targets.  One group Dragos has dubbed “Stibnite” has targeted Azerbaijani electric utilities and wind farms using phishing websites and malicious email attachments: if firms in Azerbaijan are becoming targets, firms in places such as Jordan, Indonesia, Mexico and elsewhere cannot be far behind.  Utilities in lower-income countries, lacking in managerial and financial resources to adequately defend themselves, utilities in areas of internal or external conflict, attractive targets for political or ideological reasons, and utilities in high-crime countries with already diversified and sophisticated criminal groups, are all going to be at particularly high risk in coming years.  Fourth, the types of infrastructure cyber-risks are also expanding.  Ransomware attacks are the flavor of the day, and with the proliferation of hacking tools among criminal networks will doubtlessly expand.  These are expensive and disruptive, but the damage to date from these attacks has been limited in scope and in time.  Yet more aggressive and destructive attacks are unlikely to be far away.  As an alarming new book by Nicole Perloth, This is How They Tell Me the World Ends: the Cyberweapons Arms Race (for a short version, see the excellent review by Sue Halpern in the New York Review of Books, “Weaponizing the Web”) points out, an important feature of cyber-weapons is that they are very cheap compared to traditional “hard” weaponry.  Perloth tells the story of seeing a young Iranian at a hacking conference in Miami demonstrate how to break into the power grid in five seconds: “With his access to the grid, he told us, he could do just about anything he wanted: sabotage data, turn off the lights, blow up a pipeline or chemical plant by manipulating its pressure and temperature gauges.  He casually described each step as if he were telling us how to install a spare tire, instead of a world-ending cyberkinetic attack that officials feared imminent.”  Hacking tools can give intruders access to even critical infrastructure such as nuclear facilities, the power grid, and air traffic control.  But they are relatively cheap compared with other weapons of mass destruction, and for sale in a market that is robust, largely out of sight, and welcoming to anyone with piles of cash at their disposal, whatever their motivation. 

Disruptive technologies continue to change the face of infrastructure.  In many cases, this is bringing lower costs, better services, more convenience and reduced emissions.  Technology, though, is agnostic: the Colonial Pipeline cyberattack is a reminder that disruption can be negative as well as positive.  For infrastructure operators and investors today, there is a clear message from these attacks.  Cyber-risks are not going away, and are going to get worse.  Investments in cyber-security (the FBI, after the Colonial Pipeline breach, has issued a useful “tip sheet” to key US infrastructure providers), insurance, and the ability to re-launch systems after an attack are all going to be increasingly important.  The worst situation will be to be unprepared. 

Previous Infrastructure Ideas columns on Disruptive technologies

Where did all the Chinese money go?

March 2021

It seems like just yesterday that Chinese financing was the future of emerging market infrastructure.  Chinese banks, awash with liquidity, and state-owned companies were everywhere, buying assets and announcing new multi-million-dollar energy and transport projects.  By about 2011 Chinese infrastructure financing exceeded infrastructure financing from the World Bank and other multilateral institutions, and in 2013 new President Xi Jing, in two major policy speeches, announced the largest infrastructure financing ever – the Belt and Road Initiative.  The future appeared to be one of endlessly increasing financial flows from Beijing, and a Chinese-enabled jump in infrastructure investment across the developing world.

Instead, it turns out that the 2013 announcement of the Belt and Road Initiative (BRI) coincided with the high-water mark in Chinese infrastructure financing.  From some $40+ billion per year at its peak, Chinese financing to emerging markets has fallen to less than a quarter of this level.  According to data collected by Boston University, Chinese energy-related financing, accounting for roughly one-half of these flows over the past two decades, fell to below $5 billion in 2020 – and it was not just COVID: the trend has been steadily downwards:

Source: Boston University

In a report earlier this month, the Financial Times said that Chinese overseas energy finance collapsed to its lowest level since 2008 in 2020.  More than half of the low figure of overseas energy lending was accounted for by a single project (the Ajaokuta-Kaduna-Kano gas pipeline in Nigeria, funded by China Exim).  One widely-watched and reported area, Chinese bank lending to energy in Latin America, in 2020 was… zero. 

Where did it all go?

Before taking a stab at this question, let’s have a quick look at where the BRI has been.  Total funding has been on the order of $50-100 billion per year, 2/3 of which going to energy and transport.  Most of the loans have come on terms that are more generous than developing countries can get from private investors, but much more costly than funds from Western donors or the concessional windows of the multilateral development banks.  In energy along, according to the Boston University database, Chinese banks have provided some $245 billion since 2000 – roughly half of this for power generation.  $127 billion, slightly more than half, has gone to coal or oil-related projects.  Funds have been spread widely: some $76B to Europe and Central Asia, some $68B to Asia, some $46B to Latin America, and $53B to Africa.

The aggregate numbers have been very large – far larger than the capital flows coming to emerging market infrastructure from the international development community over this period.  All this during a period of recurrent calls for prioritizing funds to help developing countries improve their infrastructure, as a high-priority element of poverty reduction.  Yet in spite of bringing large numbers to an area of need, the BRI has come in for plenty of criticism, centered on a few areas:

  • Lack of attention to environmental and social effects
  • Financing of investment projects that are low priority and/or that won’t deliver
  • Driving up the debt burden of countries to unsustainable levels

1)         At a project level, Chinese funding’s lesser bureaucracy and requirements, relative to those of international donor financing, has been to some degree an attractive feature for recipient countries.  At a strategic level, Chinese appetite for financing coal-fired power generation has also been attractive to countries with big energy deficits and undeveloped indigenous coal reserves, like Pakistan.  Over $50 billion of Chinese overseas financing has gone to support coal.  Both these advantages have drawn criticism, and this criticism is increasingly in conflict with President Xi Jiping’s stated objective of China’s being seen as a leader on environment and climate issues (see Infrastructure Ideas’ previous comment on this conflict, as well as that from this month’s World Economic Forum). 

2)         There have been repeated headlines about “white elephants” being funded by the BRI, ahead of infrastructure projects with arguably higher development impact.  One poster child of this type has been the Hambatota Port project in Sri Lanka, held up as something that suits Chinese interests far more than those of the host country.  The Overseas Development Institute tracks BRI projects which run into trouble, and points to some 15 in difficulties, worth over $2 billion.  More recently, there have been headlines around the cancellation of several planned coal power investments in the BRI pipeline, including the $8-10 billion Hamrawein plant in Egypt (which would have been the second largest coal-fired plant in the world).  Both Bangladesh and Pakistan, traditionally short of electricity, are seeing growing concerns about potential overcapacity, which has analysts pointing to poor sector planning related to the BRI-backed projects.  And one major study of over 2,500 Chinese-backed projects, led by Aid Data, concluded that BRI “economic benefits accrue disproportionately to politically-privileged regions:” 164% more projects took place in a political leader’s home province when in power.  

3)         Concerns about a “debt trap” brewing for countries who borrow heavily from Chinese institutions have grown significantly with the COVID-19 induced recession across many developing countries.  These concerns dovetail with those about poor project selection.  In the case of Sri Lanka, Foreign Policy drew a link between the large borrowing for Hambantota and the fact that the port was in the then-President’s home district.

The impact of the BRI lies somewhere between the positives of large flows to infrastructure and the criticisms of the initiative.  Certainly from a climate perspective, extensive Chinese backing for coal-fired generation is a big problem, and it may increasingly be a problem at a sector level for some recipient countries.  The data on project-level environmental issues is more inconclusive.  The massive Aid Data study already cited found no clear links to poor environmental outcomes.  And the same study, comparing BRI and World Bank Group projects, concluded that the outcomes of the Chinese-backed projects are not inferior in terms of impact on growth; data from the OECD DAC produces similar results. The ODI numbers of 15 projects in trouble, worth about $2.4 billion, translates to around 1-3% of projects supported by China.  While difficulty knowing when projects underperform imply these numbers are likely understated, problem project rates of 1-3% would be warmly welcomed by any infrastructure investors or lenders.  Meanwhile another study, by the Center for Global Development, was muted in its views of the impact of the BRI on debt sustainability in recipient countries. 

It is also of interest to note that the bulk of the reduced Chinese capital for infrastructure in 2020 flowed, actually, to the region that needs help the most – Sub-Saharan Africa – even though the BRI geography is not obvious.  Aside from Nigeria, Chinese lending in 2020 also funded hydropower projects in Ivory Coast (US$286 million) and Rwanda (US$214 million), as well as a solar project in Lesotho (US$70 million). 

So why the big decline since 2015?

For the driving forces, look to macroeconomics, credit concerns, and a change of instruments.

1)         For the Chinese government, the past decade has been a favorable period for lending to developing countries globally, with low global interest rates and excess domestic reserves in China.  The combination of repeated calls by the donor community for more infrastructure financing and the failure of donors, the US, or international agencies to respond with substantial increases in financing also opened an important strategic door for the BRI.  As growth in emerging markets levelled off – well before the COVID recession – this led both to credit risks and to reputational issues.  From a policy perspective, large-scale flows to emerging market infrastructure is aimed at producing impressive economic results, for which China can then take credit.  The lack of emerging market growth, after two decades of ramped up lending and seven years of the BRI, dims the attraction of the strategy.

2)         As the Center for Global Development’s Scott Morris has pointed out, the massive scale up in lending by China always carried risks, and – concerns about debt repayments have grown.  China’s largest overseas exposure is to Venezuela, a country unlikely to make good on its debts.  Growing calls for debt relief surely are a significant factor in the major retrenchment in China’s overseas lending.  The same sovereign credit risks are likely to have an impact on the balance sheets of the Chinese government’s large external lenders. Large scale write offs may become inevitable, limiting the lending capacity of these institutions. 

3)         The large numbers in flows from China over the past two decades have come almost entirely from loans.  Loans have the advantage of creating large, publicity-friendly headline numbers.  Loans have the disadvantage that at times they fail to adequately recognize and price risks.  Arguably this dynamic has become more visible for China with the BRI, and China’s state-owned banks have gone through a similar cycle with domestic lending.   One important development which has been not so visible in recent years has been the turn towards the use of Chinese-backed equity financing for overseas infrastructure.  In Latin America, for example, where 2020 Chinese lending fell to zero, Chinese-led equity funds had a busy year, highlighted by China Three Gorges’ acquisition of Peruvian utility Luz del Sur, backed by the Chinese-Latin America Industrial Cooperation Investment Fund (CLAI).  CLAI, along with the China-LAC Cooperation Fund, are examples of emerging new approaches to infrastructure by the Government of China.  They will generate fewer headlines, smaller numbers, but may yet achieve more strategic objectives going forward than large-scale BRI lending.  Time will tell.

Chinese financing has become one of the big stories in emerging markets infrastructure.  The eye-grabbing numbers of capital flows of 2010-2015 may become a thing of the past, and it may be that this financing does not take emerging markets infrastructure to a whole new level, as many thought and some hoped it would.  The BRI will not be the magic wand that solves this development problem once and for all.  But, Chinese financing is adapting, as the greater recognition of credit risks and turn to equity show.  More adaptations will likely follow. 

Undoubtedly, the Chinese National People’s Congress taking place this week, the vehicle for setting five-year national strategies in many areas, will have this on the agenda.  Look for the BRI to be reaffirmed, for headline capital flow number objectives to be tempered, for a “greening” of the BRI, and for China to continue to be a large factor in this area for years to come.

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.

A High-Profile PPP Comes Apart

October 2020

Earlier this month in Maryland, the state government took over the $5 billion-dollar Purple Line mass-transit project.  Running 2 ½ years behind schedule, close to $1 billion over budget, and still with some $1 billion of work to go, the takeover officially brands as a failure one of the most ambitious and largest Public-Private Partnerships under implementation across the world, let alone the United States.

The high-profile flop comes at an important time for Public-Private Partnerships (PPPs) across the United States.  A widely used method for building infrastructure in Europe, Canada, and increasingly in Emerging Markets, PPPs have never fully caught on in the US.  Some parts of the US see PPPs as central to state or municipal-level infrastructure development: Virginia, across the Potomac River and next-door from Maryland, is a notable example.  PPPs were also central in the (brief) discussions about a “trillion-dollar infrastructure initiative” in the first year of the current US administration.  Yet suspicion about the use of the private sector in infrastructure remains politically strong, especially though not only in democratic circles.  With the continued federal policy inaction and deterioration of infrastructure across the country, the likelihood of a major infrastructure plan coming forward in 2021 to finally address the situation is growing.  How much such a plan turns to the private sector and to PPPs may well be affected by the Purple Line saga.

Purple becomes Black and Blue

The Purple Line is the latest color-coded line addition for the Washington DC subway network.  The 16-mile East-West line is intended to use light-rail to connect a number of suburbs in the state of Maryland, from New Carrollton to Bethesda, complementing existing lines which mostly flow in and out of central Washington.  The project is designed as a 36-year build-finance-operate-maintain Public-Private Partnership, administered by the state of Maryland’s Transit Administration (MTA), with service originally slated to begin in 2022.  In 2016, Purple Line Transit Partners, a consortium headed by Fluor Enterprises, was announced as the winning bidder selected to partner with MTA on developing the project.  The consortium members also included Star America and Meridiam, a leading infrastructure investment fund which is the largest equity partner in the project.  The partners beat out three competing bidders led respectively by Vinci/Alstom, Macquarie/Skanska, and Edgemoor/RATP (the development arm of the Paris metro).  With a $5.6 billion contract, the project is believed to be Maryland’s most expensive government contract ever, and is one of the largest PPPs anywhere.

Problems began early for the Purple Line.  Construction began only in August 2017, delayed by a lawsuit over environmental impacts.  More disputes followed – over timing of right-of-way acquisitions and further environmental permits, and the contractors began filing major time extensions.  Relations between the MTA and the consortium deteriorated, and by the Spring of 2020 the project was over two years behind schedule and overruns had topped $750 million.  In parallel, consortium-leader and construction contractor Fluor began experiencing significant financial pressures, driven by cost overruns on multiple projects and an SEC investigation.  The MTA and the Purple Line Transit Partners spent several months arguing over the growing financial gap, without coming to agreement, and in August Fluor announced it would quit the project over the cost overruns.  The MTA this month took over hundreds of subcontracts to continue construction, and over $1 billion worth of project bonds have been downgraded to junk bond status. 

Purple Line Construction in Maryland

Whether the project ever reaches closure, or Maryland is left with a string of partially-completed stations and rail lines, is highly uncertain at present.  The state is now managing the project in the short-term while the MTA figures out a longer-term plan for finishing — and paying for — the remaining $1 billion worth of construction.  The contracts that the state has assumed include the manufacturing of the light-rail vehicles, the eventual operations and maintenance of the rail line, erosion and sediment control, relocating overhead electrical wires and underground utilities.  Officials say they will decide in the coming months whether they will continue managing the project, seek a new construction contractor or procure another public-private partnership.  It is unclear how much the various options would cost or how the state would pay for them at a difficult time for the state budget (see the Washington Post’s “Maryland likely to be on the hook for millions”).

Implications for PPPs

The troubles of the Purple Line are likely to have an impact on Public-Private Partnerships across the United States.  The Purple Line has received national attention as one of the first U.S. transit projects to be built via a public-private partnership, including private financing.  Public-private partnerships have begun to gain popularity with cash-strapped governments.  Now, from a rail project once touted as a national model of how governments could partner with the private sector to build expensive infrastructure, it is now receiving much less attractive national attention.  The risk of the Purple Line being abandoned mid-construction comes at a time when the likelihood of a major push soon on infrastructure investment in the US is growing more likely.  Leaders on infrastructure on both sides of the aisle in the US Senate, Tim Kaine and Rob Portman, have been signaling that they expect a major infrastructure bill to go forward in 2021, irrespective of the outcome of the November election.

PPPs as a whole generally have achieved positive results.  A World Bank study found some 2/3 of PPPs reviewed achieved intended development outcomes, as did over 80% of PPPs supported by the International Finance Corporation (IFC).  When well-designed and executed, PPPs can balance the public policy objectives of governments and the financial and construction capabilities of the private sector.  They can facilitate tapping private capital when government funds are scarce, and can improve and make more consistent delivery of key services.  Studies have shown that failures, cost overruns and delays tend to be more common in purely public-sector managed projects than in PPPs.  Yet PPPs are no guarantors of success – things do go wrong, and they tend to have one very large area of vulnerability: they are often highly visible, and easily politicized.  So individual project failures for PPPs gain far greater visibility than those of “normal” infrastructure projects, and are more easily turned into emblems of a particular administration’s “failure” than are problems with state-run infrastructure, or even the inability to deliver new infrastructure investment or improved services.  Virginia, for example, has many successful PPPs in operation, yet a lot of political attention focuses on the failure of a PPP tunnel in Norfolk.  Miami-Dade County officials only last week postponed consideration of a planned monorail project led by Meridiam Partners and also involving Fluor, citing among other things the experience of the DC area’s Purple Line project.

By contrast, what often separates successful from unsuccessful PPPs is neither glamorous, nor highly visible.  Attention to detail, both in design and administration of PPPs, is the single most important element of success.  Attention to detail can avoid mistakes in agreement on arcane provisions in risk-management, like the ones that bankrupted the city of Harrisburg years ago on a contract for a new incinerator.  The Purple Line’s PPP contract is over 800 pages long, and yet those 800 pages failed to clearly delineate the responsibilities now being argued over between the state and the consortium.  Indeed, the most common factor in PPP problems has tended to be a rush to get deals done on the part of government officials.  A rush tends to push toward simplification, which is in principle fine but often translated into making bidding by potential partners only an issue of lowest cost, without enough attention to contract provisions for delivery, quality and dispute resolution.  The Purple Line bidding process was done on a pure low-bid basis, and there were early rumblings that Maryland pushed the bid too fast, and left too many issues open – in spite of the 800-page contract.

We’ll see what the future holds for light-rail service in the Maryland suburbs, for Fluor and the project partners, and for lessons drawn from the government’s takeover of the Purple Line.  Two things for sure: you can expect plenty of discussion about infrastructure in the US in 2021, and every time PPPs come up as part of the solution, the Purple Line will be part of the discussion.

Revisiting Micromobility

August 2020

In June of 2018, Infrastructure Ideas ran a series on the Mobility Revolution (an overview, implications for investors, and implications for policy makers).  Two years on, let’s see how the world has changed.

The Mobility Revolution continued at high speed through the rest of 2018 and 2019, and micromobility had as bright a future as any industry at the end of 2019.  In 2018, the number of rides Americans took via dockless scooters, bikes, and traditional bikeshare systems more than doubled from 2017, to 84 million trips.

Micromobility Trips

McKinsey was predicting the industry would be a $300-500 billion market by 2030, and Barclays went even better, projecting micromobility as a nearly trillion-dollar business in a decade.  For investors struggling to find bright spots in the infrastructure world, this was a big piece of the future.  Ride-hailing giants were at the forefront of acquisitions: Uber acquired Jump Bikes in May 2018 for $200 million, and Lyft acquired Motivate, the country’s largest operator of traditional bikesharing systems.  Two Chinese bikeshare firms, Ofo and Mobike, arrived in the United States, and together raised over $2 billion in venture capital funding.  In fact, Venture Capital investment in urban technology, mostly mobility, surpassed that in pharmaceuticals from 2016 through 2018.

Mobility numbers looked good during 2019: Lime surpassed the 100 million ride mark, and three other providers passed 10 million rides for the first time.  There were some significant shifts across segments, and bad news for some – mainly in bikeshare.  The two Chinese giants crashed and burned, with Mobike being sold and retreating from foreign markets, and Ofo going bankrupt in June.  Uber’s acquisition of Jump Bikes went south, and it sold the small remnant of the company to Lime in early 2020.

Then came the pandemic.

In the first half of 2020, with concerns over COVID infections, macro and micro travel came to a grinding halt.  In the cities where micromobility had been booming, people now worked from home instead of commuting, and curtailed outings to see friends, go to the gym, and eat meals.  Ridership, revenue and investment in mobility all plummeted.  Based on an analysis of Apple iPhone data, the number of passenger-kilometers traveled by private and shared micromobility vehicles decreased by an estimated 60-70% in Europe and the United States since the onset of the COVID-19 crisis.  Several providers halted operations in different markets, and laid off large parts of their workforce.  An article in Wired Magazine asked: is Micromobility a bust?

It is impossible to know exactly what the future holds, for this “aspiring trillion-dollar business,” which lost half its market in six months.  But some optimism may be in order.

For those who survive, the future may not look so bad.  As reported by Bloomberg’s Laura Bliss in early August, micromobility is already showing signs of life.  In American and European cities that have made progress on reducing the incidence of COVID-19 and in reopening their economies, demand for electric scooter, bike, and moped rental services is growing again.  It appears that compared with “closed-space” transport alternatives such as car-share and mass transit, being exposed to the air on a bike or scooter – only needing to wipe down and disinfect handles – feels like a healthier and lower-risk transport option for clients.  Ford’s scooter subsidiary, Spin, has reported an increase in ridership in cities where lockdown restrictions have eased. Lime reported record growth in new user signups and in ridership in some cities.  Gotcha, which operates fleets of shared scooters and bikes, reported spikes in the number of rides, the number of unique riders, and average trip length in many of its markets.  So it seems that some of the people who stopped getting on shared bikes and scooters have decided to get back on them.

Beyond this short-term rebound, there are also a number of underlying developments which may bode well for micromobility companies in the longer term.  These include: average trip lengths increasing, dedicated lanes becoming more widely available, more commuters are getting into the act, and less competition.

Longer trips by riders should mean better revenues per trip, and better asset utilization.  Industry giant Lime reported a 34% increase in average trip durations during the second quarter, as well as a similar increase in average trip distances, to now over two kilometers. Shared moped operator Revel measured similar upticks. Data from Ford’s Spin subsidiary shows significant growth in trips of two kilometers or longer in several cities in May 2020, compared with a year earlier, and a 44% increase in average trip duration.

Worldwide, the lockdown has driven an increased focus on bicycle lanes. Better cycling space and less battling with automobile traffic should encourage more riders and more trips.  Milan has announced that 35 kilometers of streets previously used by cars will be transitioned to walking and cycling lanes after the lockdown is lifted.  Paris will convert 50 kilometers of lanes usually reserved for cars to bicycle lanes, and plans to invest $325 million to update its bicycle network.  Brussels is turning 40 kilometers of car lanes into cycle paths.  Seattle permanently closed 30 kilometers of streets to most vehicles, providing more space for people to walk and bike following the lockdown.  Montreal announced the creation of more than 320 kilometers of new pedestrian and bicycle paths across the city.

The penetration of the commuter segment, in addition to the leisure and impulse segment, would also hold the potential for significant revenue increases for micromobility providers.  Some of the first positive indications in this regard are coming out of Germany.  Here Spin reported from a customer survey that one third of Germans “believe there will be a reduction of car traffic around inner cities in a post-pandemic world and favor the use of micromobility vehicles such as e-scooters.”  “Spin scooters are being used now more than ever as a utility rather than for leisurely activities,” said Euwyn Poon, Spin’s President.   Location of scooter usage also illustrates this new trend.  Downtown areas were formerly the hub of activity for scooter companies, with white-collar workers using the vehicles to commute short distances to work or to grab lunch or coffee during the workday. But in the era of remote work, residential neighborhoods have become new micromobility hotspots, according to maps of Lime rentals in San Francisco and Berlin.   Demand for longer-term rentals is also materializing.  Spin now rents its scooters by the month in San Francisco; a similar option is available for e-bike rentals for delivery workers in Washington, DC. Unagi, a scooter maker that sells directly to customers, introduced a monthly subscription option for riders in L.A. and New York earlier this month. Bird and Lime have offered monthly rentals for their vehicles since spring 2019.

McKinsey believe (The Future of Mobility) that private- and shared-micromobility solutions will experience a complete recovery in the number of passenger-kilometers traveled, with no significant drop from pre-crisis levels.  With what we are seeing, this increasingly looks like a good bet.  But usage is only one part of the story.

Making money has been the big issue for micromobility providers during the pre-2020 growth period.  Now with a number of players exiting, through closure or acquisition, the financial picture should look better.  If forecasts of market size in the range half a trillion dollars materialize, even a few years later than originally forecast, we’re talking about a business on the order of 15-20% of total global infrastructure investment.  Hardly anything “micro” about that.


What Next for Natural Gas ?

June 2020

2019 was a record year for Liquified Natural Gas (LNG) producers and shippers. Global demand continued to grow strongly, 12.5% from 2018, to a record 359 million tons. Imports grew mostly to Europe, but also to South Asia. Relative newcomers to LNG imports, Bangladesh, India and Pakistan imported a collective 36 MT. Consumption in China, the third largest importer after the UK and France, grew 12%, continuing to outstrip domestic production growth. The year-to-year increase in trade, at 40 MT, was itself another record, and brought the increase for the last four years to 95MT, meaning the LNG market had increased by almost one-third in only three years. The spot LNG market, which facilitated flexibility in sales compared to standard long-term contracts, had grown from just over 10% of the market at the beginning of the decade to nearly 1/3 of all sales. The market had grown so attractive that the rush was on to jump in: 30 MT of new capacity came on stream in 2019 – on top of 100 MT from 2016 to 2018, and financing for 71 million tons of new capacity reached FID. Meanwhile on the domestic side in the US, natural gas continued to be attractive as a source of supply for new power plants as coal capacity is being phased out – with gas now being far cheaper than coal. Of the last 29 GW of coal power generation retired, 23 GW have been replaced with natural gas, especially in the large PJM interconnect market.

2020, after the record 2019, could have hardly have come as a bigger shock for the gas industry. Thanks to COVID-19, 2020 will see the largest annual drop in energy investment in history: 20%, according to the International Energy Association. The projected drop in investment in oil & gas is even larger, 33%, and after the record 2019 for new LNG FID decisions, the expectation for 2020 is… zero. Natural gas prices have been hovering around historical lows of $2/MMBTU. Oil prices have shown some recovery, after the Saudi Arabia-Russia deal to curb surpluses, but the global gas market remains extraordinarily oversupplied. With LNG storage nearing capacity, as happened in April for oil, the worst is likely still to come, and negative prices for LNG cargoes late this Summer cannot be ruled out. Unlike the oil market, there’s been no sign of a coordinated response to address the glut, meaning the fallout could be deeper and longer. For the fracking-focused companies in the US, the outlook was already grim, and it is only getting worse: in 2019 42 E&P companies filed for bankruptcy, involving over $25B in debt. Moody’s noted “We are seeing slowdowns and negative cash flows spill over into the oil services sector that relies on the E&P companies for their business, and heavy hitters such as Schlumberger and Halliburton recorded significant losses in 2019.”

Natural gas tanker

So what’s next?

Optimism has been ruling projections of the future of natural gas for several years. With the increased production from the development of new E&P technologies, and a vast increase in investment in transport capacity, natural gas became cheaper than all other fossil fuels – including coal – and far more widely available than before. With growing concerns over carbon emissions and climate change, gas also benefitted from being seen as better than coal on the environmental side. Forecasts at the end of 2019 projected a near-doubling of global LNG demand from 2018 to 2035 (McKinsey, Shell), outpaced by even faster growth in supply – excess supply was expected to keep prices low into the mid-to-late 2020s. In the US, a 20% growth in demand from the power sector was seen by 2025, and the industry announced plans for some $30B in new interstate pipelines over the next five years. Only the production end, as noted above, was seen as facing continued difficulties.

Optimism is now on hold, pretty much across the board. In one year, LNG prices in Asia – the highest in the world — plummeted from $12/MMBTU to $2/MMBTU. Courtesy of the IEEFA, here is a list of the LNG projects put on hold or cancelled in the last three months:

• March: Santos-Barossa/Darwin (Australia); Sempra-Costa Azul/Port Arthur (Mexico-USA); Woodfibre (Canada); Woodside Energy – Pluto Train 2 (Australia); Shell/ETP – Lake Charles (USA); Magnolia LNG and Bear Head (USA-Canada)
• April: Qatar Petroleum – North Field East (Qatar); Shell Crux (Australia); Exxon Rovuma (Mozambique); Golar/BP Grande Tortue (Mauritania and Senegal); Pieridae/ Goldboro (Canada)

McKinsey’s annual natural gas outlook for 2019 had noted that of the 100 projects potentially planned to add new LNG capacity, each would need a maximum full break-even price of $7 per million British thermal units (MMBTU) to stay competitive: more than three times current prices in Asia – the “strongest” LNG market, with prices possibly heading still lower.

For the US power market, probably the largest user gas user, forecasts from the EIA have now shifted significantly. In 2019 the EIA had estimated natural gas would be the largest segment of the US power market until well beyond 2050, with an 8% higher share than renewables even in 2050. The new 2020 EIA outlook instead sees renewables with a 2% higher share than gas by 2050. Interconnection queue requests across all the major North American markets show that over 90% of new requests now consist of solar, wind and storage. This is spite of gas prices not only being low being getting even lower. The problem? A combination of costs and policy. From a cost standpoint, the fall in natural gas prices is being paralleled by continued technology improvements and falling costs for wind, solar, and energy storage. The cost declines of wind and solar, being technology-driven, are unlikely to reverse themselves, whereas the cost of declines of natural gas, now being driven by supply-demand imbalances, have an unpredictable future. From a policy standpoint, the “climate honeymoon” of natural gas has waned, if not ended. Three converging environmental trends are working against natural gas: (1) growing concerns on the climate front, as this week’s news indicate that even lower emissions during the COVID epidemic do not seem to have reduced atmospheric carbon levels, and climate change projections continue to get worse; (2) new studies of methane leaks are increasingly raising estimated average emissions from natural gas related projects, making natural gas now seem only marginally better than coal on the emissions side, and far less preferable than renewables; (3) studies on fossil fuel pipeline environmental effects are also raising the level of concern of damage from natural gas transport (a study of the 2010-2018 period in the US documented more than 5,500 total pipeline incidents, more than $4 billion in damages, and evacuations of almost 30,000 people – with a strong and unexpected correlation between the number of problems and how new the pipelines were). A number of US cities (San Jose is the largest) and utilities have moved to impose bans on new natural-gas infrastructure. Even existing gas power plants are becoming policy conversation targets, for possible replacement by cheaper renewables: in mid-2018, already, GE closed a $1B natural gas plant in southern California only 10 years into a planned 30-year life. Even the more politically conservative Midwest has seen regulators decline to endorse new gas-fired plants. In Europe, the European Investment Bank (EIB) announced in November that it will stop backing fossil fuel energy investments, including natural gas, in 2021 unless they negate their emissions through carbon capture or offsets.

The answer to what’s next for gas is, well, not much fun. At least for gas exploration, production, and transport companies. On the one hand low prices are likely to persist, which will lead to an increased number of bankruptcies in the E&P sector, and keep investors in LNG liquefication, transport, and gasification on the sidelines for any new projects, possibly into the middle of the decade. In the short-run, existing importers using spot prices (and not locked into long-term contracts) will see a windfall of cheaper gas imports. Importers locked into long-term contracts at higher prices may well take the opportunity to push for downward price renegotiations from suppliers, and in some cases possibly even walking away from contracts: when the contracts were entered into, accessing natural gas supplies looked difficult, in the future this is unlikely to become the case again anytime soon. The decades-long seller’s market is now a buyer’s market, for the foreseeable future. Good for users, but making it even worse for producers. Policy concerns in Europe and the US on emissions will likely keep dampening demand in a way that previous projections had not captured. This will leave Asia as increasingly the only attractive market for sellers. For the power sector, “peak gas” may arrive very soon, at least outside of Asia. In turn, expect natural gas suppliers to become more dependent on non-power demand, where electrification will take longer to materialize. That 100% increase in global LNG demand over the next two decades forecast at the end of 2019? It may have a hard time reaching 50%.