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%.

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.


Silver Linings

Silver Linings: the COVID-19 crisis and infrastructure
May 2020

The COVID-19 epidemic has transformed pretty much all aspects of life over the past three months. Our previous Infrastructure Ideas column, written in the early days of the pandemic, outlined some of the possible effects of COVID-19 on the world of infrastructure. As is the case in so many areas, the implications were depressing. It is also apparent that positive news are in great need – and not based on distorted data and magical thinking, as can be seen coming from some quarters. Today’s column looks then at some silver linings for infrastructure in the pandemic era – and there are some!

We’ll start with the two most obvious “winners” from the crisis: logistics, and emissions reductions.

1) New and expanded logistics opportunities. As can be readily seen on any highway or city street, the amount of goods being delivered to homes through (generally) online orders has skyrocketed in 2020. The world’s biggest retailer, Walmart, has reported a 74% increase in e-commerce sales for the last quarter. Volumes have grown so sharply that even logistics giants are having difficulties keeping up: FedEx has asked several of its major store clients to slow or limit home delivery sales in order for FedEx to be able to manage shipping logistics. Amazon, possibly the biggest winner of all, announced back in March that it would be hiring for as many as 100,000 new positions, mainly in warehouse handling, and reported a 26% increase in quarterly sales – an impressive feat for a company with already over $200 billion annual revenue. And providers of logistics software and supporting services are also thriving.

The jump in demand for infrastructure logistics driven by e-commerce and home delivery services is broad-based and likely to remain with us. As Coronavirus infections continue to spread into new areas, demand is growing in virtually all geographies. An example is the three-year old Colombian company Liftit, recipient of an investment from the IFC. Liftit provides a technological platform that connects truck drivers with companies that need cargo delivered (similar to a ride-hailing app), and has already expanded beyond Colombia. The matching of large customers with truck fleets is a crucial link in the supply chains, especially in regions where the majority of drivers are independents (See more on Liftit here). In Pakistan, a similar app-based service connecting people and goods via motorbikes in major cities, Bykea, is getting a far-higher profile through the delivery of food parcels for thousands of people during the crisis. Bykea uses smartphones, a call center comprised mostly of women working from home, and a network of 30,000 motorbike driver-partners. In Africa, the use of drones for logistics has gotten a major COVID-related boost from the demand for transporting test samples to labs. US startup Zipline has launched operations for its pilotless flying vehicles in Ghana and Rwanda, also using them to ship protective equipment, vaccines, drugs and other supplies. These kind of advances, combined with changes in consumer demand (buyers who discover convenience which they had not tested previously, and/or those who remain wary of crowded retail shopping situations in the future for health reasons), will continue to fuel logistics growth well into the future. And an analysis by the Brookings Institute (Could COVID-19 help logistics?) shows some of the labor-related benefits of logistics jobs indicates that these jobs often carry good training opportunities with transferrable skillsets, and potentially higher pay relative to low formal educational barriers to entry.

2) Emissions reductions. An international study of global carbon emissions found that daily emissions declined 17% between January and early April, over 1,000 metric tons compared to average levels in 2019, and could decline anywhere between 4.4% to 8% by end 2020. That would mark the largest annual decrease in carbon emissions since WW II. Carbon reductions are primarily driven by fewer people driving — surface transport activity levels dropped 50% by the end of April. This was equal to (50%) the fall in the amount of gasoline supplied in the US—a close measurement of direct consumption— over the two-week period ending April 3.  With all those cars now sequestered in garages, air quality around the world has gone through the roof. As reported in Wired, researchers at Columbia University calculated that carbon monoxide emissions in New York City, mostly coming from vehicles, fell by 50% in March. Another positive side effect of this is on public health: research from the Harvard School of Public Health has shown that air pollution is associated with higher Covid-19 death rates, even small increases in long-term exposure to fine particulate matter leads to significantly higher mortality. Chances are not great that emissions will stay on this path post-crisis, but for now this piece of news is good for the climate.

3) Acceleration of the energy transition. Aside from the two obvious winners above, there are other interesting trends flowing more under the radar. One is on energy transition. While it is likely that energy use will rebound sharply after the pandemic, its carbon intensity should be lower. Of particular interest is that while the coronavirus lockdown will cause the biggest drop in energy demand in history, it looks like renewables will manage to increase output through the crisis. The International Energy Agency (IEA) says that demand is likely to fall 6% in 2020, with rich countries showing a steeper decline, the U.S. falling 9% and the European Union losing 11%. Global oil demand is poised to slump by about 9%, coal demand is falling about 8%, and natural gas about 5%. Yet the IEA expects production of wind and solar to grow in 2020. In the first week of April, it was widely reported that wind and solar had produced more electricity in the US than coal did for two months in a row, for the first time on record. A Wood Mackenzie analyst, Matthew Preston, notes that coal is now more expensive in most of the US than natural gas, wind or solar energy: “Just about everything that can go wrong, has gone wrong for the coal industry.” More banks, including HSBC in April, have announced the cessation of coal financing; HSBC’s announcement closed previous loopholes for coal plants in Bangladesh, Indonesia and Vietnam, and included a Vietnamese project for which it was the global coordinator. HSBC had reportedly financed $8 billion of new coal plants over the past three years. While oil and gas prices have fallen sharply in 2020 to date, there are signs of supply reductions and cost increases on the post-crisis horizon. Moody’s had announced already in late 2019 that 91% of all US third-quarter defaulted corporate debt was due to oil and gas companies. As wind and solar prices continue to fall (see below), coal’s lack of competitiveness will grow, while gas will also have an increasingly harder time competing on costs against renewables. Expect that projections for renewables’ share of the energy mix in future years begin to tick up.

4) Technology continues to move forward. The single brightest development in infrastructure for the past decade has been that energy has been getting cheaper around the world, driven initially by the increased supply of natural gas enabled by new imaging and drilling technology, and in more recent years by the continued technology-led plunge in wind and solar costs. While these gains have fallen out of the headlines during the COVID-19 pandemic, they have been continuing.

In late April, yet another global record-low solar price was achieved. And it was achieved for the world’s largest solar project. Abu Dhabi announced that the winning bid for its Al Dhafra project – which at 2 Gigawatts will be the largest single-site solar energy project in the world – came in at a stunning 1.35 US cents per kilowatt-hour. A consortium of EDF and JinkoSolar was the winner. This breaks the previous record of 1.6 cents/Kwh from January in Qatar, and 1.7 cents/Kwh from November 2019 in Dubai. An even larger project, on multiple sites within one solar park, Bhadla solar power park in Rajasthan, India, became fully operational in March. The park has 2.25 GW of now operating solar capacity. The solar park saw multiple record-low tariffs (down to US 3.8 cents/Kwh) during some highly competitive auctions. More and more wind and solar capacity is also being developed in “hybrid” projects including battery storage. According to the US Energy Information Administration there are already 4.6 GW of wind, gas, oil and photovoltaic power plants co-located with batteries in the U.S., with another 14.7 GW in the immediate development pipeline and 69 GW in the longer-term interconnection queues of regional power markets. In the interconnection queues, a quarter of all proposed solar projects are combined with batteries, and in bellwether California, almost two-thirds of solar projects are proposed as hybrids. Power-purchase agreement prices for hybrid power plants are continuing to plummet, with declining costs for wind, solar and batteries as these technologies mature. And on the newer-technology end, in early May Minnesota utility Great River Energy confirmed it will deploy a one MW battery with 150 hours capacity – completed unprecedented for the energy industry. The battery, an “aqueous air” battery system from Form Energy, is due online late 2023, and increases contracted battery storage records by more than 20 times. This is the first announced deal that will take the technology out of the lab and deploy it in a full-scale power plant context. In conjunction with this, Great River Energy, the second-largest power supplier in Minnesota, announced plans to phase out coal power. The arrival of long-duration storage will be another major turning point for energy systems worldwide.

5) And some miscellany. While not rising to the level of the previous four positives for infrastructure, there are a handful of other interesting developments for infrastructure investors and users to keep an eye on during the pandemic. One is around highly depressed air travel: while airlines seem to be doing a reasonably good job keeping flying as virus-free as possible, conditions at airports have potential travelers very concerned about returning to flying. This may well lead to a push for building new airport terminals of very different designs than current terminals; “Future-proofing” has become an “in” term for airport designers, with both health screening facilities and more spaces to enable social distancing than today’s terminals, which often seek to maximize density. This may entail terminals built with steel instead of concrete to increase flexibility, as well as very different uses of space. Investors may see an unexpected area to put capital into infrastructure here. A second area is expanded broadband access. As more schools across more jurisdictions try to implement distance learning, the importance of accessible internet where it is today not available has shot up the list of political priorities. Close to 200 countries have announced or implemented school closures in 2020, with the majority seeking to implement online courses, and quality of internet access has become a major issue. We can expect this area to draw on a far greater portion of public infrastructure spending – possibly as Public-Private Partnerships – as a result of the crisis. A third and related area stems from the exponential increase in online courses driven by the crisis and school closures. This, combined with improved rural broadband access, could become a major factor in expanded technical training in developing countries. Lack of trained staff is a significant bottleneck for rail, logistics, and other infrastructure services in many countries. Fourth, bicycle-sharing and e-bike programs look like they may gain from the crisis. While initially bike-sharing plunged from concerns over potential virus spread, they have strongly rebounded in many places. Bicycle ridership has soared generally, as public transit is viewed as a source of virus exposure risk and some cities close streets to cars to enable more socially-distanced walking (and biking), and sterilizing equipment has emerged as easier for shared bicycles than for shared cars. Miami is one place that has also launched expanded e-bike delivery services during the pandemic. And fifth, the virus may stimulate greater attention to urban sanitation generally, as urban areas have been disproportionately affected by COVID-19. Perhaps we may at long last see an uptick in public infrastructure spending in sanitation, or greater willingness to consider Public-Private-Partnerships in the area.

These are trying times for everyone, including in infrastructure. But at least there are silver linings. We all need positives some of the time. And at some stage, the crisis will be over!

Money for Coal

March 2020

At least in Germany.

In October 2019, Infrastructure Ideas flagged a coming decommissioning wave for coal plants, and projected a future where coal-fired power plants are paid not to generate electricity, but to stop doing so. In January, that future arrived. As reported by the New York Times and others (How Hard Is It to Quit Coal? For Germany, 18 Years and $44 Billion), Germany approved on January 29 a plan to pay coal workers, companies, and producing states $44 Billion to close producing plants before the end of their technical life. Producing companies will receive $4.8 billion over the course of the next 15 years in compensation for shuttering their coal-burning plants, some of which will be replaced by natural gas-burning generators. The plan foresees taking 19 coal-burning power plants offline in the coming decade, beginning with the dirtiest plants later this year.


This plan goes far beyond the one floated in Germany in the Fall of 2019 to use auctions to fix costs for early coal plant retirements. That plan had some attractive features, including the use of market mechanisms to reduce the cost of the program, but was judged to still leave too large a residual problem. In other words, Germany concluded that a voluntary program would leave too many coal-fired plants still operating, and they were willing to pay the cost of a mandatory one. That same dynamic is likely to play out at the larger global scale: market-based incentives, such as Germany’s reverse auctions, may well be a useful tool to begin the process of early coal-plant retirements; but mandatory, and negotiated, closures will be necessary – and probably on a much-larger scale than voluntary closures.

What can we learn from Germany’s experiment?

1. There is a lot of pressure from climate and environmental groups to take action against coal-fired electricity generation. Germany arguably has one of the largest concentrations of such groups, and it is not surprising that the first concrete plan should be found here. But that pressure can be expected to intensify and broaden geographically. German pressure was fueled in part by signs that the country was falling well short of its announced emission reduction targets (see McKinsey’s analysis on this topic). The same signs are apparent in much of the world.
2. Voluntary plans – the centerpiece of global climate negotiations to date, including the Paris Agreement – only take you so far. Mandatory plans for energy transition are needed to create impacts in line with climate objectives.
3. A forum that allows multiple voices to be heard – in this case the “German Coal Commission,” which worked for two years on crafting and negotiating an outcome that could be as widely supported as possible – plays a major role in crafting any “mandatory” agreement.
4. The technical costs involved with fast-tracking coal plant shutdowns are high, but not nearly as high as the costs of adjustment for workers and regions that have come to depend on coal for their livelihoods. In the case of Germany, a whopping 90% of the $44 billion plan is headed elsewhere than the generation companies who will be shuttering their plants.
5. The bill is high for putting in place a mandatory plan in a fair and consensual way. The German plan puts a price tag of around $1B per GW of coal-fired power retired.
6. For all its ambition and its hard-won consensus, the German plan may still wind up reopened. There are provisions for periodic domestic review of the plan and its execution. And there may well be international calls for speeding up the timetable, if global emission and warming projections worsen – which we believe they will. Either of these two could lead to higher costs than now contemplated for the plan.

Today Germany, tomorrow the world?

Aside from the German plan, there was related news in January that the European Union aims to create a €100 billion fund to aid the transition of Eastern European countries to cleaner fuels. This was a centerpiece of the much-discussed “European Green Deal.” The EU’s “Platform for Coal Regions in Transition” works similarly to the German Coal Commission, as a forum for working out details of transition and compensation for affected parties, to be embedded in a “Just Transition Mechanism”.

The details of the proposed EU plan illustrate an important additional lesson beyond that of Germany. Finding the money to finance this type of climate change-driven transition will be enormously complicated. While the overall envelope for funding envisaged is roughly in line with that of the German plan – about $1B per Gigawatt of generation capacity to be retired – the funding mechanics are very different. Whereas the $44B German plan simply call for payments from the state budget, the €100B EU plan calls for only €7.5 of direct EU funding, to be leveraged by loans (some from the EIB), national budgets, and funds from yet-to-be-found investors. The basic principle of leverage is generally a good one – an early US state plan for retiring coal capacity, in Colorado, aims to manage associated costs by de-facto borrowing from ratepayers — but in this case sounds highly aspirational, and conveys a sense of considerable fragility in the future implementation of the EU plan. Just yesterday, the EU admitted it would take a “herculean effort” to make the plan work.

South Africa has also floated a “green plan” to shut down coal-generating capacity – if other countries will pay it to do so, as previously flagged by Infrastructure Ideas. However, the Government backed away from this idea in the October 2019 release of its next electricity “integrated resource plan,” keeping earlier blueprints for continued adding of coal-fired generation capacity. The dropping – for now – of the idea to sell Eskom’s loss-making coal fleet to “climate investors” has been ascribed to the inability to find a domestic political consensus, with Eskom’s unions reportedly leading the opposition. The plan now on the table leaves unaddressed the issue of Eskom’s near-bankrupt financial state and some $30B in debts, and so shares a high degree of aspirational thinking with the EU’s plan for Eastern Europe.

The pressure underlying these first “pay for coal” plans is going to increase, and increase rapidly. Coal-fired power generation continues to be the single largest emitter of greenhouse gases, accounting for 30% of all energy-related carbon dioxide emissions. In all climate models, phasing out coal from the electricity sector is the single most important step to get in line with holding global warming to 1.5 or even 2 degrees, and as time passes it is increasingly clear that canceling potential new coal plants will not be enough. The late 2019 report from Climate Analytics shows a need to go from current global coal-fired generation of 9,200 Terrawatt-hours all the way down to 2,000 TWH by 2030 – equivalent to decommissioning about 1,600 GW of generation capacity. Applying the cost of the German plan, $1B/GW, would imply costs on the order of $1.6 trillion to shut down this much global capacity.

We would expect such plans for fast-tracking of coal plant retirements – now that at least Germany there is a tangible model — to become the centerpiece of climate change discussions at the next COP summit, and to rapidly rise to the top of the agenda for multilaterals such as the World Bank. The experience of Germany, the EU, and South Africa points to a number of things we can expect for these discussions:

1. Forums that include bottom-up elements, and not just top-down planning, will be essential to the crafting of workable plans.
2. The bulk of any financing associated with these plans will be not for technical closing costs, but for worker and regional adjustment plans.
3. The financing amounts involved will be enormous. The $44B price tag for Germany’s plan is roughly equal to 4-5 years total generation sector investment, while the broad global estimated $1.6T price tag would be around 3 times annual global power generation investment.
4. Financing mechanics will be very complicated and contentious to devise. Germany’s financing approach – we’ll pay for it out of our own budget – is likely to be rare, if not unique. We can expect many false starts, and far more dead-end ideas than ones that get a serious hearing. Cross-regional and cross-country aspects will increase complexities (who will want to pay to retire China’s coal plants?). It may be a very long time before a workable solution for most, if not all, of the targeted retirement amounts is found – if it is found. The passage of time in finding viable financing mechanisms will mean emissions staying well-above aspirational climate targets, and in turn lead to a feedback loop where political pressure continues to build.
5. Financing for this energy transition ultimately will involve massive amounts of public financing, and that will mean a lot less public money available to invest in other infrastructure. Decommissioning coal-fired plants will become a massive competitor for infrastructure-related financing in the coming two decades.

Money for coal. It’s coming, and it won’t be easy. Stay tuned.

Renewable PPAs and Political risk: Spain revisited

Renewable PPAs and Political Risk: Spain Revisited
February 2020

In 2014, Spain – then Europe’s second-largest market for wind and solar electricity — shocked renewable investors and developers by retroactively and unilaterally revising the prices it paid for recently installed solar electricity farms. From a generous FIT (Feed-in-Tariff) system, Spain went to a “reasonable rate of return” approach, with far lower compensation to owners. This was a new kind of political risk coming to life. The outraged renewables industry hoped that either Spain would quickly change its mind, or quickly become so isolated from foreign investment that it would be forced to change its mind at least before long. Neither of the hoped-for paths materialized. Yet somehow, a few years later, in 2019, Spain returned to the forefront, drawing in over $8 billion of investment into new wind and solar generating capacity – more than any other country in Europe. What happened? And what have we learned?

Spain and solar

Since Spain’s 2014 decision to unilaterally change solar PPAs, arbitrators and lawyers have been busy. Some 50 cases arguing breach of contract – seeking redress on the order of $7 billion — have been making their way along in courts and arbitration processes. In 3 of the past 6 years, Spain has topped the list of offenders in the proceedings of ICSID — the International Center for Settlement of Investment Disputes, part of the World Bank Group. Spanish courts, unsurprisingly, have tended to support the government’s actions, while arbitration results have been for the most part going against it. About a dozen decisions have been rendered against Spain, with the current sum of awards at around $800 million. But Spain has yet to pay any of these awards out. Some of the ICSID arbitration decisions have sided with Spain, and in many cases awards have fallen far short of amounts being sought by investors (for example, SolEs Badajoz, whose case was decided in July 2019, was awarded Eur 41 million compared to a request for Eur 98 million). During the 2014-2018 period, investment in the Spanish electricity sector fell off considerably.

Then came 2019, and both the tariff and legal situation for the Spanish renewables sector changed. In November, Spain approved a royal decree floated earlier in the year which offers investors economic incentives that can only be accessed if the pending cases are dropped. The new law will allow investors to either stick with existing renumeration or opt to maintain a 7.39% rate of return for the next two regulatory periods, which ends in 2031. For Spanish players, this is cause for celebration: guaranteed income for 12 years, in exchange for giving up court cases which have not been going anywhere. Prior to the change, the then in force framework would have likely lowered existing tariff returns by about 40% at the start of 2020. For foreign investors pushing arbitration, the trade-off is less attractive (see Investors Still Waging War with Spain Over Retroactive Cuts), and many seem ready to continue to fight for compensation, though decisions remain to be announced. What was clear was the market reaction: new generation investment in Spain’s renewables soared, with the country overtaking Germany and the UK as Europe’s biggest market for 2019.

Clear winners in all this? Lawyers. And risk managers urging caution on investors. The main protagonists? The original investors – at least international investors, not the Spanish investors who can only sue through Spanish courts — may get some compensation, but much later than they’d hoped, and less than they hoped. Or they may not. Definitely not clear winners. Possibly clear losers, probably partly losers. The Spanish government saved a lot of money and hasn’t had to pay any of it back – yet. They may have to pay a chunk of it back soon. Or not. The economy slowed down for a few years, but it was doing that anyway due to the fiscal imbalances which led to the unilateral revisions in the first place, and now investment is back. And of course the current government is not the one who adopted the belligerent policy towards the renewables industry. Neither clear winners or losers, possibly partly winners (if they wind up paying very little of the) arbitration awards and requests, possibly partly losers (if they’re eventually forced to pay out large amounts).

So what to make of Spain’s highly-publicized breaking of contracts? In some ways, it may be surprising that more countries have not sought to follow Spain’s path. Leaving aside the specifics of Spain’s 2013-2014 budget problems which triggered the contract revisions, the underlying issue with solar contracts facing Spain at the time is one that is widely shared: technology improvement. When the price of a product falls a long way – as has been the case for wind and solar electricity – those who commit to buying the product on a long-term, fixed-price contract early wind up paying a lot more for the product than they would have if they had waited, and more than others who signed contracts later are doing. Spain is 2014 was paying anywhere from 30 to 50% more for solar power, with contracts signed in 2009-2010, than it would have been doing if it had signed those contracts in 2014, or than other countries then signing those contracts would be paying. The temptation for a buyer – in this case Spain — to find a way to get the new price, rather than the old price, is high. When the buyer is a new government, happy to cast blame on its predecessors, that temptation gets even higher. This has been the big political risk for renewables generation. But a great many countries have faced this temptation, and almost all have chosen to honor their old higher-priced contracts. The only similar attempt in recent years has come in the last year in Andhra Pradesh, where the incoming state government is seeking to force the lowering of tariffs – or cancellation – for 2-7-year-old solar projects contracted by the previous State Government. The new government, through the state-owned distribution companies, is seeking cuts up to 60% in agreed tariffs, and to cut 15 years off PPA lengths. A special case is in the offing in California, where the strength of renewable PPA offtake contracts are being tested in bankruptcy court – with the wildfire-driven bankruptcy of utility PG&E leading to attempts to shed various liabilities, including offtake contracts, to get PG&E out of bankrupcy. To date, California courts have affirmed the validity of the PPAs. Many eyes are on South Africa, whose situation today looks like that of Spain in 2014 taken to an extreme: a new government, an essentially bankrupt state-owned utility, large budget deficits, and renewable offtake contracts up to nine years old – several for power at well over $0.10 a kilowatt-hour, more than triple what new PPAs would be likely to cost. The Government of South Africa would love to change its older renewable energy offtake contracts, but so far has taken a different tack than Spain: it has offered project owners the option of voluntarily reducing the payments they receive per kilowatt-hour of electricity generated in return for longer deals and upgraded projects boasting more generation capacity.

Spain’s walking away from contracts was feared by renewable energy investors in 2014 to be the prelude to an epidemic. That has not happened. Political risk, even in the face of continued falling prices and widespread potential temptation, has remained low. The counterweight to the temptation, it can be argued, has been the source of the temptation itself. As wind and solar prices continue to fall – joined now by battery prices — and continue to present more opportunities for countries to reduce energy costs, staying in the market for technology is more important to most governments. In infrastructure, politics often trumps common sense. In renewable energy, technology is trumping politics.

The Desal Boom

February 2020

Thirsty world must wake up to water crisis,” runs one of an increasing number of headlines in recent years. According to the New York Times, 17 countries around the world are currently under extremely high water stress, while according to the Rockefeller Foundation, 1/3 of humanity and is water-stressed every year or season. Whether countries and/or regions are arid to begin with, whether aquifers are being overdrawn due to growing populations or economies, whether fresh water sources are being polluted, or whether climate change is making extreme weather patterns – drought or excess rainfall – more common, it is clear that the issue of water availability is affecting more people and more areas than ever before. The problem is getting worse, and the consequences are getting worse: the World Bank has written that climate change will be the biggest factor increasing the pressure on water supplies in the future, while former Nigerian Finance Minister Ngozi Okonjo-Iweala states that in 2017 water played a major role in conflict in at least 45 countries, particularly in North Africa and the Middle East.


In some places, desalination looks like the answer to this crisis. Desal is definitely booming: the number of plants around the world has quadrupled in the last three decades to over 20,000, and global desalination capacity in operation is up 500% since 2000. More than 300 million people around the world now get their water from desalination plants. As a recent review in Wired notes, for decades, the vague promise – since the first large-scale desal plants were built in the 1960s — that one day oceans of salt water would turn into fresh and quench the world’s thirst has not been matched by much reality. But now several factors have started to change the picture: on the supply side, the costs of desalination have been declining, dropping by more than 50% since 1990; on the demand side, with population booming in many water-stressed places, including big economies such as China, India, South Africa, and the American West, and droughts occurring more frequently, many more places need new solutions. Dry Saudi Arabia produces the most desalinated fresh water of anyone, a fifth of the world’s total, and desal makes up an estimated one-half of total water consumption in the Kingdom. Australia and Israel are also large producers. The industry has now seen somewhere over $300 billion in investments, with an estimated $15-20 billion in annual new capacity investment (author’s estimates).


Desalination plants have also become a favorite of many institutional investors. The large capital costs (California’s current wave of plants under construction run to around $750 million each, while Melbourne’s flagship plant was recently completed at a cost of over $3 billion). That level of capital plants makes water utilities more interested in finding private capital to help build projects, and in turn provides the large ticket size institutional investors look for in infrastructure assets – in this case along with stable revenues. In one example the Carlsbad, California, plant changed hands in 2019 from its private equity investors (Brookfield and Stonepeak) to Aberdeen Standard for over $1 billion.

What does the future look like?

In the near-term, current growth trends look likely to continue. California plans to double its capacity in the coming few years, and most of the places that are building new plants today will not see any improvement in their other sources of fresh water. For the industry, that’s good news. The longer term outlook is less clear. The market today is limited to where people are rich, and the cost of building desal plants, while it has come gradually down as producers move down the experience curve and plants get larger, remains prohibitive for low income countries – with no imminent technological breakthroughs on the horizon to produce the kind of plunging capital costs which telecommunications and renewable energy have experienced in the past few decades. Externalities are also significant – in terms of the high energy-intensity of the process and the toxicity of the brine produced, as noted in last October’s New York Times article on the topic — The World can make more water from desalination, but at what cost? And water, unlike electricity and data, remains difficult and expensive to transport over significant distances, limiting almost all consumption to relatively nearby to plants, and in turn sources of sea water. So while this has become a much larger and more attractive market than what is was at the end of last century, and water stresses will increase, we wouldn’t expect either a significant broadening of geographies turning to desalination, or double-digit annual growth rates in desalination going forward – maybe even a plateau in the level of new installations before long. Desalination infrastructure, while new to the party, will also face the same problem as much coastal infrastructure is beginning to face – sea level rise from climate change. As covered previously by Infrastructure Ideas, coastal cities are looking at big bills in the not-very-distant future for either protecting, or moving, infrastructure assets away from rising seas and increased flooding – and it is on these vulnerable coastlines that practically 100% of the world’s desalination plants sit.

The water crisis will continue to loom – and indeed to be present – for many parts of the globe in the coming decades. Desalination will help – expensively – in some places. The answers to the problem for many other places remain unclear, though there are examples of approaches worth following. An instructive example is Cape Town, which two years ago faced its widely-publicized “Day Zero” water crisis [infra ideas], but evaded disaster and got itself in a better position. Cape Town used a mix of water conservation and data management a(diverting some water from intensive agricultural users, a 30% reduction in municipal government use, and restricting car washing and the refilling of swimming pools), and some basic technology (a new water pressure system) – a set of tools in reach of many more water-stressed cities than desalination plants. Better water use and conservation – recycling wastewater, reservoirs, wetlands conservation – ultimately look like more economic and accessible solutions than desalination for much of the world. Inland desert cities – like Tucson and Pheonix in Arizona, pioneers in water conservation and management approaches – may be better models for the developing world than coastal California and Saudi Arabia. And one new technology may help more than desalination: a handful of utilities have begun to experiment with miniature submersible drones. Small underwater machines that are today mostly used as toys may not sound like a big deal – but equipped with GPS and cameras, these drones can help utilities locate water leaks at a tiny fraction of the cost, and in a tiny fraction of the time, of traditional methods – meaning less digging, faster repairs, and dramatically reduced water losses. That could be a very big deal.