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Podcast June 10, 2022

Season Recap Part 2 – The Climate Crisis, Transport Connectivity for Development and Public-Private Partnerships

View all episodes on our Tell Me How: The Infrastructure Podcast Series homepage

In the second part of our final episode, our host Roumeen Islam, revisits some of our guests' key insights, focusing on three topics: the climate crisis, transport connectivity for development and public-private partnerships.

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Roumeen Islam: Welcome again to Tell Me How. I'm your host Roumeen Islam. This is the second part of our two-part final episode. In the first part, we addressed topics relating to digital technology and infrastructure, and the energy transition. In this part, I focus on three topics, the climate crisis, transport connectivity for development, and public-private partnerships. Let me start with the climate crisis. There are a number of models predicting global warming caused by human activity. And there are just as many models estimating associated losses, economic, or other. The estimates from these models differ widely and are subject to much uncertainty for a number of reasons. For example, policy responses and the impacts of policy, adaptation (including behavioral ones to changes in habitat), uncertainty regarding population growth, as well as temperature increase are just some of the reasons professor Charles Colston says in this regard. 

Charles Colston: For instance, we don't have a good understanding of how economies might respond to, let's say, a carbon charge, $50 a ton carbon charge, just as an example. Will the extra burdens significantly disrupt societies and economies? Something like we've experienced with COVID would sort of hit us all on unexpectedly, or will creativity, innovation, and adaptation kick in as people, individuals, and companies adapt, reducing the size of the burden and moving away from carbon emissions to save on climate change charges. 

Roumeen Islam: Despite all these uncertainties, there is recognition that something must be done. For example, carbon must be taxed. Economies need to be restructured with some faster than others. And there are proposals for global measures as well as national ones, let's hear Professor Robert Pindyck on this point.  

Robert Pindyck: Well, look, you know, you could have a harmonized tax and still have side payments. In other words, let's suppose you have a country that for whatever reason, it would be very difficult for them to impose the tax (and in a moment, I can tell you why there are advantages to make a harmonized tax politically attractive), but you might have a country that would find it very difficult. You could have side payments. You could have an international agreement where part of the harmonized tax involves the transfer of money from rich countries to poor countries. That can still happen. So, it doesn't mean that we are forcing every country to follow the same path. We can use these side payments to make it easier for less well-to-do countries. 

Roumeen Islam: In the race to slow global warming, recently, increasing attention has been placed on methane, a potent greenhouse gas. Methane comes from many sources, wetlands, agricultural activity, oil and gas fields, and coal mines. Methane emissions from many of these sources such as oil and gas fields and coal mines can be mitigated today at no net cost. This is because me thing can be captured and sold, but the precise solution will have to be customized to the country context. Let's have a listen to expert Ilissa Ocko. 

Ilissa Ocko: Yeah, there's a lot of evidence that directly addressing methane emissions from oil and gas, even if we were to aggressively wean ourselves off of oil and gas, we would get a lot more climate benefits faster and more efficiently by plugging these leaks, even if we aggressively decarbonized the energy grid. One particular example is that there's a much greater potential to reduce methane from landfills and wastewater in developing countries than countries like the U S because in the U S we're already deploying a lot of this technology. There is a large diversity in systems and practices across world regions, so it's hard to just apply one solution across the board. There are cultural differences, information gaps, different costs, and other barriers that will make implementation of all these solutions difficult on a global scale. 

Roumeen Islam: But there's more. Have you thought about all those abandoned coal mines? Not active ones that provide power, but closed ones. Well, many of them continue to emit methane for years. These emissions should be mitigated. Policy and regulation can support this move, research scholar Meredydd Evans says. 

Meredydd Evans: We studied global policies to promote the capture and use of abandoned mine methane, or AMM as it's known, and we found five key actions that can really help. If you can't own the gas, it's very hard to mitigate it, to install equipment that would utilize that gas if you don't own it. We have the ownership rights as the first, the transfer of methane rights as the second. Then, having a abandoned mine methane as a renewable energy source in legislation or regulations can be very helpful as an incentive. 

Another one is royalties. So, many countries will charge royalties on the companies that produce natural gas, and they may charge royalties for producing abandoned mine methane or methane from an operating line. If those royalties are very high, it's a big disincentive to a project. 

Roumeen Islam: With the climate changing, building resilience into infrastructure investments becomes more important. Not only policymakers are seeking greener investments, but they're also seeking, and must pay for, more resilient infrastructure, or build resilience in existing infrastructure. In making investment decisions, human behavior must be accounted for. In particular, migration which changes the infrastructure map. Should that be investment where people live or where governments think people will live in the future? Should governments try to influence these decisions? These are things that each country will need to decide based on the particular social and economic circumstances of its people. Let's hear Professor Michael Oppenheimer on this issue. 

Michael Oppenheimer: When you get to the question of how humans will respond to those climate changes, you're talking about quite a different kettle of fish. You're talking about laws of human behavior and our understanding of human behavior, our ability to sight particular laws is nowhere near the way it is in physics. So, trying to project what could happen twenty, thirty, forty years from today, under much different socioeconomic conditions in many cases is not easy, and we can't do it to any degree of accuracy now. What we can do is start to understand the sensitivities of human beings to the need or possibility of migrating under particular situations. So, I think at this point governments need to think ahead about how to make conditions in the likely destination places for migrants better, how to make conditions in the origin places, where people are living, better, so maybe so many of them won't leave. 

Roumeen Islam: We had a number of podcasts on infrastructure that connects us physically to other places such as ships, trucks, or cars because of their importance for the development of markets and economic progress. In these episodes, we examined how disruptive technology creates opportunities when none existed before, incentives for the adoption of technology, the impact of macroeconomic shocks, including climate shocks on transport, as well as the importance of policy in affecting the adoption of technology, and also the distribution of gains. The nature of transport has changed and is changing still for people and for the goods we use. There are disrupters using digital technology, and these disruptors have spread across the globe, changing passenger mobility. Access to some finance, whether from global or domestic sources, has been an integral factor supporting the growth of disruptors in developing countries. But another important factor has been adaptation and customization to specific country circumstances. Let us hear from expert Ed Hsu on this. 

Edward Hsu: And when I met with the management team, they were telling me a story of how their founders personally went on the streets and recruited drivers away from Uber and signed them onto our platform on the spot. And what they also did was they developed new features that Uber didn't have, they accepted cash payments, and they also integrated motorbikes onto their platform. Uber, you know, did not, I mean, they had the advantage of where they had their app that they were able to move into this new country, but that's also a disadvantage because their app didn't accept cash or have motorbikes. 

Roumeen Islam: Infrastructure, investment building roads and cities, and villages is an essential ingredient to transport services, whether for passengers or freight, but policy and regulations matter a lot too. Road logistics, trucking services, for example, need a regulatory framework that supports competition and efficiency allowing entry, reducing red tape. Well-functioning services will support economic activity as well as expert Matias Dappe tells us. 

Matias Dappe: What we look at when we assess the connectivity, and the role of transport and connectivity is the availability of adequate transport infrastructure and competitive transport services. And when I say competitive, I'm referring to the price of the service and the quality of the service. We also look at any other constraints to seamless movement of goods such as some regulations and policies. It's not just about building to provide the capacity or the traffic that you are estimating will be there in the future, but the infrastructure that you put in place will influence the economic activity and therefore the demand for that infrastructure. 

Roumeen Islam: An important session revealed what electric cars can do for the energy transition under different sources of energy used for electrification. In most places around the world, even if energy does not decarbonize and even after accounting for the emissions related to electric vehicle production, switching to EVs is good for global warming and policies to encourage this transition can reduce emissions. This is what researcher Florian Knobloch says in this regard. 

Florian Knobloch: Driving and heating are two major sources of direct carbon emissions by households. And across the world, passenger road vehicles and household heating generate around a quarter of all emissions from the burning of fossil fuels. So, to put it into perspective, passenger cars account for emissions of around five gigatons of CO2 per year. This is similar to the entire CO2 emissions of the United States of America which is the second largest polluter on the globe. 

Roumeen Islam: On the transition path to electrification, public transport systems are important. They reduce costs associated with congestion. Studying public transport bus systems in Latin America, expert Bianca Alves reminds us.  

Bianca Alves: So, bus services are usually provided through a private-public-partnership, right? PPP. In the majority of cases, there's very little accountability and transparency in the selection process for private contractors. Too often, contracts are set for too long and in some cases they're basically perpetual. Incumbents tend to own premium parts of land, so new entrants are blocked, they cannot find affordable land available. Incumbents already have their own fleets and they're normally diesel. They don't want to invest to change. They also resell their old vehicles, diesel vehicles down the line, and make good money from it. So, to increase efficiency, the biggest issue is resolving some of this lack of competition.  

Roumeen Islam: Some of our guests spoke about the importance of ships and supply chain logistics. Whether it be containerships containing all manner of manufactured items, or bulk trade ships, carrying cereals, minerals, and other essential products, how the market for shipbuilding, the market for fuels, efficiency of ports, and the rise and fall of demand for shipping services, the type of market competition that exists. All these factors affect the price of shipping and how fast goods get to us. Climate change also affects these roots and profits. Have a listen to professor Myrto Kalouptsidi. 

Myrto Kalouptsidi: We explore the impact of a permanent closure of three important passages, Sues, Panama, and Gibraltar. Now, these passages essentially reduce nautical distances and thus the duration of specific trips. And we find that all of these passages have a substantial impact on world trade and welfare. So, for example, closing the Sues canal permanently would reduce trade by about 3.5% and in some regions substantially more, so, in the Middle East, it would reduce rate by almost 25%. So, the Northwest passage is the sea routes between the Atlantic and the Pacific oceans through the Arctic Ocean. So, we run an experiment where we study what would happen if the ice melts and the Northwest passage is opened up. So, this would mean in practice a reduction in the travel distance between the Northeast America and the far east, as well as Northern Europe and the far east. 

Roumeen Islam: What about ports? Well, as for road transport, investment in hard infrastructure is needed. But efficient service provision at ports requires a regulatory framework encouraging competition in logistics and delivery services, efficiency, such as through digitalization of ports, and good management. Let's hear expert Martin Humphreys on this  

Martin Humphreys: And now, potentially with a digital system that is appropriate, the customs officer wouldn't need to lead his office. He can log into the system. He knows in advance what's coming and what's going to be unloaded off that vessel. He can check that the agent has paid the duty and that he can push the button to say that consignment is cleared.  

Roumeen Islam: The shipping sector is an important one in the road to decarbonization of transport. Hydrogen promises, but alternative fuels need more development to be economically viable. And they're going to be substantial investments needed, including in physical infrastructure. As we've seen in other sectors, so it's true here, investors weigh the risks and opportunities associated with investing in new technologies and systems, and public policy will affect these choices. Some emerging nations have the potential to gain from these developments as expert Dominik Englert tells us about those countries he studied. 

Dominik Englert: These developing countries would benefit from producing zero carbon bunker fuels for the global shipping sector because it would allow them to take advantage of a unique investment opportunity, a unique investment opportunity that is huge. It is estimated to be more than $1 trillion. And this creates an opportunity for many of these countries to shift from currently being energy importers to becoming energy exporters and to reap business and development benefits on top of this. 

Roumeen Islam: Finally, during the series, we highlighted the role of private investment in supporting infrastructure investments and service delivery. At the same time, we discussed the enabling environment, the role of government in setting policies and regulation. A particular type of investment we considered were public private partnerships or PPPs. We heard about why they're sought after and what factors affect how they work. Firstly, they're attractive because of the efficiency gains and innovation that can accompany private investments. Such gains may enhance profitability of the enterprise, and when done well, service delivery is also enhanced. Let's hear expert Jeffrey Delmon on this. 

Jeffrey Delmon: Private sector brings a lot of capacities that government may not have. For example, duty free. You know, when you walk into an airport and some of them are sort of constrained and uncomfortable, some of them have these beautiful, massive shopping malls, and it's those shopping-mall-type airports that bring in a huge amount of additional revenues. And that's what the private sector can bring. 

Roumeen Islam: But there are a number of other factors, some relevant for the sector in which the investment occurs and others relating to host government. For example, the degree of sunk costs in the sector, how easy it is to verify the quality and quantity of service delivery, the form in which the private investor gets paid, whether they use visa taxes or direct transfers from government, and whether the private investor is required to fulfill social obligations for which it is not appropriately compensated. Continuing with Jeff Delmon. 

Jeffrey Delmon: And going back to my water project example, if I've built a dam and I'm treating water and I'm delivering it to a utility, so I'm just delivering it to the water utility, the water utility then takes it to the individual consumers. That's a pretty easy relationship. I have a contract with this one big company, they pay my bills, I'm done. More complicated is when you ask the private sector to treat the water and then deliver it to individual households. And you can imagine the difficulty of collecting money from individual households, making sure where the leaks are, figuring out what the services are. When it's government, the consumer relationship is very different than when a private company comes in. 

Roumeen Islam: Government capacities to set sector priorities and conduct solid economic and financial analyses of its projects are really important in ensuring project success. Projects will not be sustainable unless due diligence is done before they're undertaken. At the same time, given the long horizon of these investments, all parties involved must work together to deal with and adapt to unforeseen circumstances.  

Features of the institutional environment have a large impact on how well public private partnerships work. Professor Stéphane Straub mentioned some key features. Have a listen.  

Stéphane Straub: First, we're talking about the long-term contract. So, two things, if you have better, faster, more efficient contract enforcement, obviously it will be easier to do a PPP. That means rule of law matters and, you know, all these characteristics. On the other hand, uncertainty is bad for PPPs. So, political instability, macroeconomic instability, but also disaster risk. All these things are going to complicate the stability of these long-term contracts. And then, there are some things that are more ambiguous. So, let me group these into like public sector efficiency. So, bureaucratic efficiency or even corruption, because, on the one hand, you would think, well, if there is more bureaucratic efficiency or less corruption, probably you're more efficient at doing PPPs as a public sector, but then think also of the other side of the coin is like, well, if you have a better public sector, more efficient, less corruption, you're also better at running public projects. 

Roumeen Islam: Governments also turned to private investors when they lack resources to invest. That is, they do not wish to borrow directly on markets or to raise taxes immediately to fund the investment. What they're really doing is changing the time profile over which they or users must pay for the service. Let's hear Professor Stéphane Straub on this topic. 

Stéphane Straub: This is the main, main point that carries disagreement when we discuss PPPs. It is the fact that the government will save on resources by investing that. And I think there's a fundamental misunderstanding between the financing and the funding, because even though it might be financed and operated by the private sector, ultimately, defending is who is going to pay for that piece of infrastructure is going to be either the users through the fees or the taxpayers.  

Roumeen Islam: Well, that was a lot, I know. But I hope you learned as much as I did. So let me end today by thanking you for listening to the series. All the episodes will be there for you to listen to at your leisure- whether on Apple podcasts, Spotify, or just by clicking on our World Bank website. The site contains links to relevant background material for your perusal.  

It has been a fun journey; thank you for accompanying me and goodbye.