Infrastructure

Paving the road to 2020, Congress will need to steer the course and avoid potholes in 2019.

Sub-Saharan Africa is urbanizing at the fastest rate in the world. Western commentators, notably McKinsey in its 2016 report “Lions on the Move II,” see rapid urbanization as increasing the continent’s p roductivity. McKinsey states, “urbanization has a strong correlation with the rate of real GDP growth,” and that “productivity in cities is more than double that in the countryside.” Other observers, however, question whether urban infrastructure—especially water and education—can meet the needs of an exploding population. The Financial Times recently published a balanced report on the pros and cons of rapid African urbanization. It focuses on Bamako, Mali, as an example of the continent-wide phenomenon. It cites a World Bank estimate that Bamako’s population today, at 3.5 million, is 10 times larger than it was at independence in 1960. A professor at the University of Bamako comments that that the city’s growth is a “catastrophe foretold,” that “Bamako is a time-bomb.” Among other shortcomings, the professor notes that the city lacks a land registry even as real estate booms. The exploding population growth translates into high land prices that encourage corruption. Peppered through the Financial Times piece are arresting statistical notes. For example, a World Bank economist observes that Africa is now 40 percent urban with a per capita GDP of $1,100. By the time Asia reached that level of urbanization, its per capita GDP was $3,500. Statistics about Africa are generally weak, but for frequent travelers to Africa, the explosion of the urban population is obvious. So, too, are the slums, the lack of schools, water shortages, and unpaved roads. Unemployed male youth are ubiquitous and do, indeed, constitute a potential time bomb with respect to political instability. Experience shows that urbanization cannot be reversed, as few residents are willing to return to the countryside unless compelled to do so, as occurred in Chairman Mao’s China or Pol Pot’s Cambodia. But no African state has comparable means of repression should it wish to reduce its urban population. African urbanization will continue and public authorities having few tools with which to manage it.   

Through an initiative known as the Asia Super Grid, or ASG, the countries made plans to build an ocean-floor power network to connect their electricity grids and enable a cleaner and more efficient pan-Asian electric power system.

The following is a guest post from Tamar Gutner, associate professor of international relations at American University’s School of International Service, who is writing a book about the birth and design of the Asian Infrastructure Investment Bank. With the Trump administration openly disdainful of multilateralism and many of the international organizations the United States helped create, China is attempting to step into the leadership void by promoting global cooperation and supporting international organizations. The best showcase of China’s leadership aspirations is its regional development bank, the Asian Infrastructure Investment Bank (AIIB), which is holding its third annual meeting on June 25 and 26. When Chinese President Xi Jinping first proposed creating a new Chinese-led development bank to focus on infrastructure development in the fall of 2013, many were suspicious about China’s intentions. After all, the World Bank, Asian Development Bank (ADB), and other regional development banks already operated in Asia, with most lending plenty of money to China. The Obama administration actively lobbied other countries not to join the bank amid concerns it could undermine the others, while unfairly benefitting Chinese companies. The argument was that China’s authoritarian government would be hard pressed to head a user-friendly development bank that followed standards and norms on issues like environment, transparency, and accountability. Now that the AIIB is up and running, we see that it is broadly cut from the same cloth as other development banks, but competition is still likely to be an issue in the future, and suspicions will not quickly disappear.  The AIIB Today Despite U.S. efforts to convince other major donor countries to shy away from the AIIB, none did, except for Japan. Today, the AIIB has the second largest global membership behind the World Bank, with approved membership now standing at eight-six. That compares with 189 at the World Bank’s International Bank for Reconstruction and Development (IBRD), and sixty-seven at the ADB. With $100 billion in capital, the AIIB is a medium-sized regional development bank with total lending to date at around $4 billion. The U.S. concern that the AIIB would deliberately undermine other multilateral development banks (MDB) was overblown. AIIB President Jin Liqun, who was tasked with creating the bank, wanted an institution that would “rest upon multilateralism and international cooperation.” He even brought in recently-retired American World Bank experts to design key parts of the new bank, including Natalie Lichtenstein, the Chief Counsel for establishing the bank, who drafted its charter, and Stephen F. Lintner, the expert who led the design of the new bank’s environmental and social framework. Jin himself also had extensive MDB experience, as a former vice minister at China’s Ministry of Finance who was in charge of the World Bank office, vice president of the ADB, and an alternative executive director at the World Bank. The fact that the AIIB received AAA ratings from top credit rating agencies underscored that it is clearly recognizable as a member of the MDB community, despite its relative youth. The bank’s governance structure is also similar to the other MDBs. It has a board of governors with one representative from each member, a smaller board of directors, and a president. China has the single largest voting share at 26.6 percent, which gives it veto power over major decisions. Jin has said China would not use that power, although there is nothing in the bank’s charter that precludes it from doing so. An important difference between the AIIB and most other major development banks is that the AIIB’s board is nonresident. The AIIB will soon announce another notable difference, an Accountability Framework Regulation, which includes a provision to shift project approval from the board (as it is done at other MDBs) to the president, beginning January 1, 2019, and phased in over several years. The new provision will no doubt increase concerns about how much oversight the AIIB’s board has over the bank’s work. AIIB officials counter that the board will have a stronger oversight function, and that any board member can call for board involvement if there are concerns about a project.   The AIIB has been highly cooperative with other development banks—to date, two-thirds of the bank’s projects are cofinanced. This percentage is likely to decline over time as the young bank gathers momentum, but will likely plateau around 50 percent, according to a senior AIIB official. The bank’s motto is to be “lean, green, and clean,” and the “lean” part reflects its goal to have a small, nimble bureaucracy, while being efficient and cost-effective. The AIIB currently has under a hundred and fifty full-time employees, which is one-tenth the size of the World Bank. While other banks have deeper wells of finance and development expertise to draw from, AIIB is more narrowly focused on infrastructure development in Asia. What About the Future? Clearly, the worst fears about the AIIB crowding out financing from its competitors have not been borne out. More competition between the AIIB and other MDBs is to be expected in the medium term, especially if the AIIB develops a set of specialized expertise. However, it is not uncommon for development banks to vie with one another for projects. The AIIB is not limited to lending in Asia, and its new Strategy on Financing Operations in Non-Regional Members specifies such financing must benefit Asia by supporting cross-country connectivity or renewable energy generation, and in members that are “geographically proximate to and closely economically integrated” with Asia. The bank is currently looking to work in Latin America. Right now, there is a cap of 15 percent on nonregional lending, but that can be revisited by the AIIB’s board in the future. Where it won’t likely be expanding lending for now is China, which has decided to seek few projects from the AIIB. Ultimately, the proof of AIIB’s legitimacy will be reflected in its performance and how it fits with China’s other initiatives and actions. Will the bank follow its state-of-the-art policies? Its projects are still in early stages of implementation. Some international and regional nongovernmental organizations (NGO) are already concerned about how policies are being implemented in specific projects. NGOs are also asking the bank for more clarity in its draft information policy on how it will achieve a culture of transparency. It will also take time to see how AIIB fits in with China’s much larger, amorphous, and less transparent Belt and Road Initiative, originally aimed at building infrastructure from Asia to Europe, but with an ever-expanding geographical scope. AIIB has said numerous times that it is separate from BRI, but the two can intersect in the future, especially if BRI projects meet international standards. India, which does not participate in BRI, is the AIIB’s second largest shareholder and largest borrower to date, and is hosting this year’s annual meeting. One thing is evident: the AIIB gives China increased stature as a leader of an international organization with global membership. China has powerful incentives to keep a close eye on the bank’s performance. But a clear or growing contradiction between China’s actions outside the AIIB and the bank’s policies and goals could still risk turning the AIIB into the Potemkin village of international organizations—a showcase of good intentions in a larger sea of hypocrisy. Other major Western donors decided it is better to be inside rather than outside the AIIB, to ensure their influence. Perhaps it’s time for the U.S. to reconsider its membership, as unlikely as that seems in today’s climate. As Jin has said in the past: “We have a standing invitation [to the United States.] Anytime you think you are ready, pick up the phone, give me a ring.”

At a population conference in New York, Chairman of the National Population Commission (NPC) Eze Duruiheoma estimated that the current population of Nigeria is 198 million, and that the population living in urban areas has been growing 6.5 percent annually over the past fifty years. He cites that World Population Prospects prediction that by 2050, Nigeria will displace the United States as the third most populous country in the world after China and India. He also noted the 2014 World Urbanization Prospects prediction that by 2050, 77 percent of Nigeria’s population will be urban. The NPC chairman also looked at the number of internally displaced Nigerians. With respect to the Boko Haram insurrection in the northeast, Duruiheoma estimated that the number of internally displaced is 1.76 million, which is lower than other estimates, some of which can be as high as 2.5 million. Nigerians know they are by far the most populous country in Africa, and they are proud of it. Estimates of the size of the country’s population range from the World Bank’s 186 million to 205 million by UN agencies. An accurate census is difficult in Nigeria in part because of infrastructure shortcomings. In the past, too, census results have also fueled ethnic and religious conflicts exploited by political figures. Nevertheless, in 2017 the director general of the NPC raised the possibility of a census in 2018. Given the practical and political difficulties and with the prospect of national elections in 2019, that timeframe seems overly optimistic. In the meantime, it is necessary to fall back on careful estimates.  Duruiheoma pointed out in New York that Nigeria’s urban population growth has not been accompanied by a “commensurate increase in social amenities and infrastructure.” More generally, economic growth has not kept up with population growth. Hence, the enormous slums outside city centers. In effect, Nigeria has no population policy that would limit births, and Nigerians have traditionally valued large families. Yet the country’s rapid population growth, especially in urban areas, poses difficult economic, social, and public health challenges. A huge, rapidly growing population is not necessarily a source of national strength.  

This week: CFIUS strikes again; the U.K. considers going on the cyber offensive; U.S. officials call out Russia for targeting energy grid; Facebook is implicated in Myanmar's Rohingya crisis. 

Digital and cyber policy issues played an important part in last year's German election. Here's what to expect over the next four years. 

A historic dry spell has severely affected Cape Town's water supply, and global climate patterns suggest that other cities may face the same fate.

This guest post is co-authored by Joshua Busby, associate professor of public affairs at the Robert S. Strauss Center for International Security and Law at the LBJ School at the University of Texas at Austin, and Sarang Shidore, a visiting scholar at the LBJ School at the University of Texas at Austin. This is the third post in a series on the topic of scaling up solar power in India, following posts in December 2015 and February 2017. The authors would like to acknowledge the support of the IC² Institute at the University of Texas. In late 2014, in the lead up to the Paris negotiations, the Indian government established an ambitious solar target of 100GW of installed solar generation capacity by 2022. At the time, India had about 2.5GW of installed solar capacity. Since then, India has made significant progress towards the goal and has installed 20 GW, perhaps as much as 9.6 GW in 2017 alone (for a slightly lower estimate, see here). However, while the 100 GW target was always going to be difficult to achieve, we are less optimistic than we were last year in the future prospects of India’s solar scale-up. The overall target might not be met by 2022, and the solar scale-up seems likely to slow down. Bridge to India, an energy consultancy, has estimated that India will not meet its 100GW target by 2022. Its current estimate is that India will install only about 55GW of solar by 2022, including about 44GW of utility-scale solar and 10.8 GW of distributed solar. Here are the reasons for our increased pessimism. Solar projects are threatened by rising costs. Solar developers have built projects at very low cost, and these projects are threatened by rising costs of Chinese solar panels and likely increases in taxes. Nearly all of the installed capacity (18.4 GW of the 20GW) has been large, utility-scale solar parks rather than distributed solar power on residential, commercial, and industrial rooftops. India has deployed large-scale solar power through competitive auctions, whereby would-be solar developers compete to offer the lowest cost of electricity to the grid and in return earn the right to build solar projects. As prices for Chinese solar panels have plummeted, there has been a steep decline in the electricity prices offered by solar developers. Bid prices have come down from more than 8 rupees, or 12 cents, per kilowatt-hour (kWh) in 2011 to as low as 2.44 rupees, or 4 cents, per kWh in 2017 for some projects. As we warned in our February 2017 piece, the price declines have been so steep that there is some concern that solar developers have not built in enough of a profit margin to ensure business viability if their costs increase. Since we wrote our last piece, the Financial Times warned of a bubble in solar auctions as the number of projects has ballooned. With Chinese solar panel prices increasing for the first time in years and with the imposition of a new goods and services tax (GST) of 5 percent on solar equipment, costs have increased, threatening the economics underpinning many of the low-cost project bids. One Indian solar developer of ACME Solar lamented his bid: “When we made our bid, we factored in a price for every solar panel of 30 cents per watt of power, but since then it has risen to around 35 cents. Our bid works at 30 cents.” Moreover, other costs associated with solar, namely financing costs, remain high in India, though they have come down somewhat over the past years. As panel prices have declined significantly, other costs, particularly finance, have become more important in determining the total costs of solar. In 2016, the Council on Energy, Environment and Water (CEEW), a think tank that works closely with the Indian government, evaluated the costs of a solar bid in the Indian state of Telangana. They found that 70 percent of the bid cost was composed of financing costs, compared to only 20 percent for a comparable project in Dubai that had a much lower price per kilowatt-hour. CEEW noted that while cost of debt is around 5 to 7 percent in the United States, it exceeds 10 percent in India. The quality of many imported panels is unclear. As we signaled last year, there are concerns about the quality of imported solar panels, and it is unclear if these panels will hold up over 25 years as intended. A lack of quality controls means that it is difficult to tell what caliber of solar panels are being purchased by Indian firms, and there may be diminished generating capacity over time because panel quality is poor, particularly in rooftop installations. There has been some effort to roll out guidance on panel quality and inspections for panels, with standards to be enforced beginning in April 2018. Rooftop solar has taken off but has limited room to grow. The government had an initial goal of expanding rooftop solar to 40GW as part of its 100GW plan. This aim has largely been shelved. Though rooftop installation has tripled over the past year and is now up to over 1.5GW, most analysts think that this growth will slow, and India will have at most 10-12GW of rooftop installed by 2022. Developers have found that rooftop solar on commercial and industrial properties makes for good business and have quickly implemented a lot of projects with customers who can reliably pay them. As developers are financing most of the capacity, it is getting harder for them to find customers who they think are low risks for non-payment. Some assessments see the rooftop sector’s growth having occurred despite of, not because, of policy decisions by the Indian government. Few policy instruments have supported the sector’s growth, save for $625 million in subsidized credit from the World Bank and $500 million from the Asian Development Bank that were approved in 2016. Efforts to support net metering, which allows solar system owners to get credit for electricity they produce, have been met with considerable resistance. There is excess power generating capacity in many states. Economic growth and industrial demand have not increased by as much as anticipated, meaning that expected demand shortfalls have not materialized. As a consequence, new solar projects are coming online at a time when there is excess generation capacity in many states. In November 2017, India had an installed capacity of about 330GW of electricity while its peak demand was much lower at 164 GW. This surplus could tempt electricity distribution companies to renege on their contracted payments for solar electricity if excess coal-fired electricity is on offer for a lower price. So far, coal has borne the brunt of the consequences of market oversupply, and some firms have had to shut down older, less efficient coal burning power plants and to run some coal plants below their typical plant load factors. That trend may soon run its course, however, because the remaining old coal plants are often the cheapest source of available power. In comparison with new coal power plants, though, solar remains a much more attractive proposition. Of the 50 GW of new coal plants slated to be built through 2022, it is not clear if many of them will ultimately be constructed. Distribution companies are still in trouble. We also warned that the electric distribution companies (DISCOMS) in India–which purchase electricity from solar projects and distribute it to end-customers–remained heavily indebted, despite aggressive efforts by the government to help them clear their balance sheets of debt. This increased the risk that distribution companies would fail to pay for solar electricity in the long run, which would make the solar projects unprofitable to build. Enacted in November 2015, UDAY is the acronym for the government’s effort to bail out the struggling distribution companies by transferring their debts to state government balance sheets and trying to help them become solvent by removing the factors that led to losses, such as reducing transmission losses and chronic underpayment. Even with the UDAY scheme, many of the same factors that led to unprofitability in the first place, like the need to offer low-cost power to farmers, have not gone away (except for undercollection of electricity bills, which is improving). Technical losses in the system, which are high at more than 20 percent of the generated power, are not being reduced fast enough. Most distribution companies are still not in good shape. In May 2017, about half of the distribution companies were graded as B or lower for below average operational and financial performance capability or worse. This was comparable to the previous year’s ratings.  The government is sending mixed signals about its commitment to its renewable energy goals. On the positive side, the Indian government has announced plans for solar mega-auctions of 20GW for 2018. We have seen fewer auctions than some anticipated, but there are efforts to keep the pipeline of projects going with a lot of capacity being bid out at once. The International Solar Alliance (ISA), an intergovernmental organization launched by Prime Minister Modi, headquartered in India, and signed onto by 121 countries, also entered into force in December 2017. The visibility of the ISA enhances the on-going political significance of solar to the Modi government as it prepares for elections in 2019. However, on other fronts, the government’s commitment to solar is wavering. Revenue collections from a tax on coal that went to the National Clean Energy Fund aimed to fund climate and renewables goals will now fund other programs, including compensating states for revenue lost through recent tax reform. Though solar panels were exempt from taxation under the old fiscal regime, the newly introduced tax reform, known as GST, taxes solar panels at 5 percent. The government is also considering applying two new tariffs on imported solar panels, which could have serious implications for the costs of new solar projects.  The Modi government may issue new solar tariffs. India tried to develop its own subsidized panel production industry, but this has largely failed. The U.S. successfully pursued a WTO case against India for unfair local content rules in support of solar. Without the local content rules, Indian firms have had trouble competing with the Chinese panel producers that now dominate the market. The Modi government is poised to rule whether Chinese solar firms are dumping their panels in India. Recent reports suggest India’s Commerce Ministry is considering a 7.5 percent tax on imported solar panels. The Modi government would like to boost domestic manufacturing capacity under its Make in India campaign, including domestic manufacturing of solar. More worryingly, a 70 percent additional safeguards tariff explicitly aimed to protect domestic manufacturers from “serious injury” is being considered by India’s Ministry of Finance. Although projects currently in the pipeline are expected to be exempted from this tariff, subsequent additions will almost certainly be dealt a heavy blow, as it may increase the sustainable price of bids by 20 percent to 40 percent, making solar more expensive than new coal power in most cases after extra costs of grid integration are taken into account. The United States just imposed tariffs of its own on imported panels, which will likely, as Varun Sivaram argues, lead to job losses in the U.S. solar sector and do little to make U.S. companies more competitive. These decisions could cause a sharp increase in the prices of Chinese solar panels at a time when both India and U.S. solar installations are heavily reliant on cheap Chinese panels to keep the costs of their projects low. Domestic demand in China for panels is also picking up, making Chinese panels more expensive. Restricted imports or pricier Chinese panels could damage the Indian solar sector’s ability to build out more capacity. Concluding Thoughts The solar space remains a lively area for growth and experimentation in India. Some of the obstacles, such as distribution company finance, endure. New tensions have emerged as the Indian government would like to revitalize and support domestic manufacturing, including for solar panel manufacturers, which may conflict with its own aggressive solar deployment targets. With energy demand rising slower than expected, India will be faced with more challenges of integrating solar polar as coal plants are run even further below optimal capacity. We look forward to filling you in on developments in 2018 a year from now.

A bipartisan deal on infrastructure seems doable—but with the devil in the details, it is much harder than it looks.

This post is co-authored by Karen Karniol-Tambour, Head of Investment Research at Bridgewater Associates. Several positive macroeconomic trends suggest that the global economy could finally be in a position to achieve sustained and inclusive growth. But whether that happens will depend on whether governments can muster a more forceful response to changing economic and technological conditions. MILAN/NEW YORK—Most of the global economy is now subject to positive economic trends: unemployment is falling, output gaps are closing, growth is picking up, and, for reasons that are not yet clear, inflation remains below the major central banks’ targets. On the other hand, productivity growth remains weak, income inequality is increasing, and less educated workers are struggling to find attractive employment opportunities. After eight years of aggressive stimulus, developed economies are emerging from an extended deleveraging phase that naturally suppressed growth from the demand side. As the level and composition of debt has been shifted, deleveraging pressures have been reduced, allowing for a synchronized global expansion. Still, in time, the primary determinant of GDP growth—and the inclusivity of growth patterns—will be gains in productivity. Yet, as things stand, there is ample reason to doubt that productivity will pick up on its own. There are several important items missing from the policy mix that cast a shadow over the realization of both full-scale productivity growth and a shift to more inclusive growth patterns. First, growth potential cannot be realized without sufficient human capital. This lesson is apparent in the experience of developing countries, but it applies to developed economies, too. Unfortunately, across most economies, skills and capabilities do not seem to be keeping pace with rapid structural shifts in labor markets. Governments have proved either unwilling or unable to act aggressively in terms of education and skills retraining or in redistributing income. And in countries like the United States, the distribution of income and wealth is so skewed that lower-income households cannot afford to invest in measures to adapt to rapidly changing employment conditions. Second, most job markets have a large information gap that will need to be closed. Workers know that change is coming, but they do not know how skills requirements are evolving, and thus cannot base their choices on concrete data. Governments, educational institutions, and businesses have not come anywhere close to providing adequate guidance on this front. Third, firms and individuals tend to go where opportunities are expanding, the costs of doing business are low, prospects for recruiting workers are good, and the quality of life is high. Environmental factors and infrastructure are critical for creating such dynamic, competitive conditions. Infrastructure, for example, lowers the cost and improves the quality of connectivity. Most arguments in favor of infrastructure investment focus on the negative: collapsing bridges, congested highways, second-rate air travel, and so forth. But policymakers should look beyond the need to catch up on deferred maintenance. The aspiration should be to invest in infrastructure that will create entirely new opportunities for private-sector investment and innovation. Fourth, publicly funded research in science, technology, and biomedicine is vital for driving innovation over the long-term. By contributing to public knowledge, basic research opens up new areas for private-sector innovation. And wherever research is conducted, it produces spillover effects within the surrounding local economy. Almost none of these four considerations is a significant feature of the policy framework that currently prevails in most developed countries. In the United States, for example, Congress has passed a tax-reform package that may produce an additional increment in private investment, but will do little to reduce inequality, restore and redeploy human capital, improve infrastructure, or expand scientific and technological knowledge. In other words, the package ignores the very ingredients needed to lay the groundwork for balanced and sustainable future growth patterns, characterized by high economic and social productivity trajectories supported by both the supply side and the demand side (including investment). Ray Dalio describes a path featuring investment in human capital, infrastructure, and the scientific base of the economy as path A. The alternative is path B, characterized by a lack of investment in areas that will directly boost productivity, such as infrastructure and education. Though economies are currently favoring path B, it is path A that would produce higher, more inclusive, and more sustainable growth, while also ameliorating the lingering debt overhangs associated with large sovereign debt and non-debt liabilities in areas like pensions, social security, and publicly funded health care. It may be wishful thinking, but our hope for the new year is that governments will make a more concerted effort to chart a new course from Dalio’s path B to path A. This article originally appeared on project-syndicate.org.

Utilities run on very thin margins, which poses a challenge when they seek to secure their networks from state-sponsored hackers. The Trump administration should step in and help.