In the news: Urbanization, Resource Scarcity, Cities, and Political Stalemates

(Updated March 35)

By John Macomber

Once you start tying phenomena together, the topics of our course are in the news everywhere. As we head into the last days of the Q3 term, here are a smattering just from the last week or two. It would be plausible to spring from these into an original post that applies some analysis or frameworks or segmentation to add the “so what” utility. Continue reading

Advertisements

Time to Rethink the Urban Freeway

By Kevin McDonald

The limited-access highway has deemed by planners, environmentalists and much of the public at-large to be an unsustainable urban form of transportation. The unsustainability is driven by three elements of this facility: 1) non-renewable gasoline to power automobiles that use the highway, 2) the noise, disruption and pollution created by the automobile’s engine and operations, 3) energy-intensive forms of the built environment.  These key issues are juxtaposed against the indelible strength of the limited-access highway: point-to-point transportation that efficiently and quickly delivers goods and people.  In the US, those arguing against the sustainability of the urban freeway appear to have the day- the country has only added 2% to its 1980 levels of urban mileage. Recent technology innovations have mitigated the negative externalities of the urban freeway. This begs the question: is it time to rethink opposition to new investments in urban highway lane miles? Continue reading

Dynamic Tolling: Good for Most

By Jane Silfen

Variable toll pricing is used to regulate demand and, therefore, capture the value of motorists’ time savings.[1] Dynamic toll pricing is popular in Europe and limited U.S. evidence seems positive. However, faced with environmental, budgetary, and socioeconomic challenges, how should transportation authorities consider the benefits and complications of variable pricing?

Dynamic tolling does seem effective in reducing congestion and capturing perceived time savings.  A study of SR-91 in California concluded that most drivers use the express lane some, but not all, of the time dependent largely on the hour-by-hour price differentiation. The study also found that drivers overestimated—and thus were willing to overpay for—the amount of time they saved.[2] Increased interested in managed lanes is evident from Texas to Colorado to Virginia, among others, suggesting perceived environmental benefits from reduced emissions and economic benefits from reduced congestion and incremental revenues.

This narrative makes sense in theory, but I would add a practical concern about the economics of variable pricing. It seems harder to forecast, particularly for greenfield projects. Toll authorities (and potential investors) must speculate on both demand for a route and willingness to pay for that route. Amid tight public budgets and spooked markets, does variable pricing provide net incremental value or risk?

Equity is also a matter of theory versus practice. Dynamic tolling is theoretically fair. Those who ascribe a higher value to their time should use express lanes more frequently and at a higher cost. This argument seems to hold up with both motorists and the public, with the U.S. Department of Transportation concluding that, “the perception that congestion pricing is an inequitable way of responding to the problem of traffic congestion does not appear to be borne out.”[3] Practically, though, this means that rich people—whose time is worth more because they make more—take the express lanes, almost always, and poor people—whose time is worth less because they make less—take the free lanes, mostly. Might this give rich people more time to make more money, and poor people less time to make more money? In  a country marked by widening income dispersion, is good transportation policy good public policy?

On balance variable tolling seems good for most: drivers have more choice, roads make more money, air and noise pollution from congestion goes down. However, there are some additional questions that toll authorities should consider before continuing the rollout of managed lanes across the U.S.


[1] “Managed Lanes: A Cross-Cutting Study,” U.S. Department of Transportation, Federal Highway Administration Office of Operations, November 16, 2006 accessed via http://ops.fhwa.dot.gov/freewaymgmt/publications/managed_lanes/crosscuttingstudy/chapter3.htm on February 10, 2013

 

[2] “Continuation Study to Evaluate the Impacts of the SR 91 Value-Priced Express Lanes Final Report,” U.S. Department of Transportation, Federal Highway Administration Tolling and Pricing Program, April 20, 2011, accessed via http://ops.fhwa.dot.gov/tolling_pricing/value_pricing/pubs_reports/projectreports/sr91_expresslanes.htm on February 10, 2013

[3] “Income-Based Equity Impacts on Congestion Pricing – A Primer,” Federal Highway Administration Tolling and Pricing Program, May 8, 2009, accessed via http://ops.fhwa.dot.gov/publications/fhwahop08040/cp_prim5_04.htm on February 10, 2013

Roads – Simple, Mundane and Absolutely Vital

By Saravana Sivasankaran

Fresh into my first semester in HBS, I took time with a professor to discuss my post-MBA plans in West Africa. The area was developing fast and looked to reap the benefits of political stability. When I finally finishing ranting on about my ideas, the professor looked up and asked, “Can you build roads instead?”

As simple as it may sound, roads are the backbone of a country. The A2 motorway case highlighted the difficulties of financing a project in a developed country like Poland as well as the numerous benefits that the country would derive from the project. Shift to Africa and a well-constructed road could make the difference between a thriving trading town and desolate place with large, unsold, undervalued produce.

Take the case of Sierra Leone – a country that has seen numerous civil wars in the last decade. It has finally shown signs of political stability and relative calm. As the new leaders look to rebuild the country, the number one priority is attracting foreign investment into the country to invest in its transport infrastructure. Sierra Leone is flush with greenery, and agriculture is a major source of employment and a huge contributor to its GDP. For the farmers in Sierra Leone to capture the full value of their produce, they will need transportation infrastructure to be in place.  A good transportation network also means less inventory leading to less working capital needs for small businesses. Investors are also willing to pay more for a country’s resource when it has existing good transportation networks.

The idea of successfully raising financing for a project in an underdeveloped country like Sierra Leone has been discussed for ages. The challenge is finding the middle ground between what the country can afford to pay and investors return expectations for the perceived risk. I will highlight two very different approaches that have emanated through this road-building task that poor African countries have before them.

While the discovery of mining resources have often resulted in what economists like to call the “Resource Curse,” the arrival of mining companies in a country usually leads to better infrastructure, especially in roads. The new companies have a vested interest in ensuring that their output gets transported to their final markets for delivery. Take the case of Olam in Gabon. Olam is on the largest agriculture trader in the world. Olam not only owns plantations in Gabon but is also building roads and ports with cooperation with the Gabonese government. (The counter argument is that the roads are only purpose built for the mines and do not help other industries. This is true but when you are starting with very little road infrastructure, even small marginal improvements have huge visible impact on trade and development).

On the other hand, Zambia provides a completely new framework. China has been busy buying up resources in Africa. Zambia is today a major source of copper in the world and Chinese state owned enterprises have numerous investments in the country. But in order to solidify the relationship further, Chinese companies have opted to build infrastructure, especially roads, in the country. The Chinese companies have been immensely successful in bagging contracts due to their price competitiveness and also willingness to take risks. This new found relationship has not been free of controversy with both sides suffering – contractors not being paid or roads falling apart due to shoddy constructions. But it highlights the importance and urgency with which countries like Zambia are treating the development of roads.

Eradicating poverty in Africa might well be the biggest challenge we face in our lifetime and that would only be possible if African countries become self-sustainable and produce goods that the rest of the world needs. And this boils down to building roads so that the Ethiopian coffee farmer captures a fair share of your Starbucks Latte, so that Sierra Leone palm oil producers can compete with the military efficiency of Malaysian palm oil producers and so that landlocked African countries can count on trade and, not charity to run their countries.

The construction industry has not seen any “Disruptive Innovation” as HBS professor Christenson calls it.  More effort needs to go towards finding innovative ways to construct and finance these critical road projects in Africa.

While mobile banking and Internet start-ups in Africa may appear “uber cool” for the budding Africa-bound entrepreneur, it’s the dull, low margin, high-risk business of building roads in frontier African markets that will inevitably unlock Africa’s full potential.

###

 

Urbanization in Africa

By Anonymous

There is nowhere else in the world where the trend of urbanization appears it will be more pronounced than in Africa. By one estimate African cities will grow 267% by 2050, while global cities will grow by 94%. It’s possible to read these statics and assume that urbanization in Africa will mean a mass of people moving in to the traditional economic centers and burdening these cities that are already struggling under the weight of poverty, scarce resources and inadequate and inefficient infrastructure. While this will undoubtedly continue to be the case, there are factors at work that suggest the picture of urbanized Africa is more nuanced.

Interestingly, the most rapid growth is expected to be in cities in the middle of the continent, such as Lagos and Kinshasa instead of in North African countries or South Africa, which were traditionally the destinations for job-seeking migrants. Much of the economic growth in these regions will be driven by the development of natural resources.

It is no secret that many African countries are rich in natural resources, and minerals in particular, but political instability and a lack of critical infrastructure have historically restricted foreign investment and development. Investors have often been content to limit their large-scale mining ventures to South Africa. However after widespread strikes at mines in South Africa in 2012, many companies have reduced their exposure to that country and investing in other locations such as Ghana, Guinea, Mali and even Ethiopia, which suddenly appear comparatively stable.

As mines are finally developed, and concentrated settlements emerge, roads also must be built to transport the minerals to ports. This in turn creates further economic activities in these centers and drives urbanization. The development of roads alone has important implications for economic development. Calestous Juma, a Harvard professor, points out that people who do not live within close proximity to all-weather roads are not capable of participating in any meaningful entrepreneurial activities. In Kenya, for example, only about 32% of the rural people live within two kilometers of an all-weather road. For Ethiopia that figure is only 10.5%.

With additional investment and economic development comes a growing middle class desiring better living conditions, which are often in the form of more sustainable urban developments. Such developments are becoming more common. One prominent example that has received attention is Tatu City in Greater Nairobi, a planned work-live-play community by a development group planning similar such projects throughout Africa. At the other end of the spectrum, and receiving significant acclaim, the renewal of derelict spaces in Johannesburg is creating instances of more sustainable urban housing.

For much of the continent, urbanization will continue to mean massive slums amidst the same places much of the world expects to hear of. The limited examples of economic development, urban renewal and green-field smart cities presented here, however, show that the story behind the numbers will be more complex and that the future of African cities may look markedly different than many people anticipate.