“The major reason for new cities is that there is so much migration,” says John Macomber, a senior lecturer at Harvard Business School who has studied new city development in depth. “People are moving to cities all over the world to seek opportunity.”
According to the UN, 68% of the world’s population will be living in cities by 2050. This means 2.5 billion more city dwellers, with 90% of the uptake happening in Asia and Africa. Half of the urban area that will be needed hasn’t been built yet. We would need scores more Delhis, Shanghais and Lagoses.
“The sad thing is that we’re going to develop more urban area in the next 100 years than currently exists on Earth,” says the Nobel prize-winning economist Paul Romer of New York University. “If we stick to business as usual most of it is going to be disorderly and less functional than the stuff we already have.”
If you build a new city you don’t have to relocate or work around existing roads, rivers, factories or houses — John Macomber
It doesn’t take a Nobel winner to see that many of the existing cities of Asia and Africa are simply not able to handle this onslaught of urbanisation. Cairo was built to house 1 million people, not the 20 million who live there today. Cities such as Mumbai, Kolkata, Lagos, Nairobi and Rio de Janeiro are crowded by rings of informal developments. Retrofitting these cities with modern infrastructure and utilities is more complicated and expensive than clearing out a swathe of land and starting all over again.
As Macomber says: “If you build a new city you don’t have to relocate or work around existing roads or rivers or factories or houses. You also don’t have to work around existing political processes, community groups, civic organisations … or even existing regulations and rules.”
‘A wild west atmosphere’
As well as being less complicated and cheaper than retrofitting old cities, building new cities is seen by many leaders as more profitable – and sexier. At the height of China’s new city building boom in 2011, land sales accounted for roughly 74% of the revenue stream for the country’s municipal governments and plots of urban construction land were selling at a 40-fold profit. Emerging markets that are actively reconstructing themselves – both physically and in terms of their global image – tend to have economies that are driven by the real estate and construction sectors. For them, building an entirely new city is the pinnacle of projects.
“Neoliberalism and deregulation have created a wild west atmosphere that facilitates the circulation of footloose capital globally,” says Sarah Moser, a geography professor at McGill University and the author of the upcoming Atlas of New Cities. “It is easier now than in previous decades to acquire vast tracts of land and to then use that land for any purpose, including urban and commercial.
“Technology companies, construction companies, and the real estate industry are leveraging the many challenges facing cities in the global south to convince people that new cities are an important solution rather than fixing existing cities, which is not as profitable.”
Development firms such as New York’s Gale International and South Korea’s Posco are peddling copies of Songdo LINK around the world. Architects such as KPF and Arup are drawing up attention-grabbing masterplans lined with skyscrapers, parks and shopping malls reminiscent of New York, London and Dubai. And big tech firms such as Cisco, Alibaba and Tencent are keen to provision these new cities with cutting edge IT networks and public surveillance gizmos.
The developer’s goal is to maximise profits … There is not much money to be made in affordable family housing. – Sarah Moser
The money being thrown at new cities is staggering. Saudi Arabia’s King Abdullah Economic City comes at a price tag of $100bn (£78bn), while the country’s Neom megalopolis is slated to cost five times that. Malaysia’s Forest City had its price initially pegged at $100bn, while Ordos Kangbashi cost a hulking $161bn. Adding up the costs of more than 120 new cities around the world means a mountain of investment that can be measured in the trillions of dollars – but the returns are far from given.
“Too often a best-case scenario of potential economic rewards is presented and the project is rushed through when decision makers are on a utopian high,” says Moser. “The reality is that new city projects can only move forward with massive loans, often from foreign banks, with no guarantee that the city will be profitable enough to repay the loans.”
New cities that work
“Cities have to have a purpose,” Macomber says. “It’s a common mistake that has been made for centuries where a ruler will say ‘Let’s build some buildings and palaces and some things will happen’ or ‘Let’s put up a couple big office buildings and now we’re going to have a Dubai on the Indian Ocean’. Not necessarily. The new cities that struggle are the ones that are pushing against what market forces want to do.”
New cities that work have built-in economic drivers that give them their impetus and reason for being. Khorgos on the China-Kazakhstan border was sparked to life by a transportation hub along the New Silk Road; Cyberjaya in Malaysia was built as a concentrated hub of hi-tech firms, startups and educational facilities; South Korea’s Songdo is one of the best examples of an “aerotropolis” – a city built around an airport.
Other new cities could be described as superfluous – custom-built cities for the rich. “Some of these developments are imagined as the gated communities of privilege,” says Romer. “Like Brasília: ‘The place where we will be able to drive really fast in our cars. We’ll just not let any poor people come here.’ Those things are doomed to fail.
“They’re also an inappropriate response to the real need, which is not for the rich to have a place to retreat to but for people who want to get a first position on the kind of urban, modern escalator that can help lift them and their kids to a better life.”
Many new cities that are currently being built in Asia and Africa are clearly being designed for emerging middle classes. If provided with the right opportunities, this well-educated, big spending and highly mobile sector of society can be a boon for just about any country. If those opportunities are not provided they are especially prone to flight – emigrating to better jobs and lifestyles in the US, Canada and western Europe.
The new city building boom is nearly as much about maintaining and attracting high-value talent as it is about creating space for the droves of rural migrants searching for their first handholds in an urban environment. “Many new cities are scrambling to attract these global elites through creating luxury properties that they can buy, luxury retail and restaurants, and infrastructure for their lavish hobbies: particularly docking facilities for yachts,” says Moser.
“The developer’s goal is to maximise profits and this is done in large part by creating luxury condos and villas. There is not much money to be made in affordable family housing, so developers are not interested.”
Wade Shepard is the author of Ghost Cities of China, and On the New Silk Road
Fast Company, 07.11.19, WORLD CHANGING IDEAS
How GE invested in fossil fuels, and missed the opportunity to be a clean energy giant: A new report says the industrial giant misread the tea leaves on clean energy—and should serve as a warning to businesses worldwide.
BY MOLLY TAFT
In late June 2019, General Electric announced it would close a California gas plant 20 years ahead of schedule. The Inland Empire Energy Center in California, the company said, was “uneconomical to support further” in part because of outdated technology.
But California’s aggressive clean energy goals and commitment to using renewable energy was also a key determinant in GE’s decision to take the plant offline. What’s more, the closure is not just a hiccup in GE’s energy plans, but is just one small piece of the American giant’s substantial stumble on clean energy in recent years.
The company has lost hundreds of billions of dollars of investor money in just two years as its stock has plummeted. And a new report claims the downturn is in large part because the company failed to pay attention to the rise of clean energy.
“You don’t necessarily think of GE as an energy company,” says Kathy Hipple, a financial analyst at the Institute for Energy Economics and Financial Analysis (IEEFA), which produced the report. “But every company on the planet will be impacted by climate risk.”
Founded in the late 1880s by Thomas Edison, General Electric was part of the 12 companies offered on the Dow Jones industrial average at its formation in 1896. While the name GE might convey images of light bulbs and household appliances to most Americans, the massive multinational conglomerate is a key player in several different industries.
GE now owns 10 subsidiaries, including companies handling aviation technology, healthcare, and financial services. Its energy offerings are split into two units: GE Power, a gas-focused division, and GE Renewables, a much smaller company focused primarily on wind technology.
GE’s energy troubles began in 2014, when the company announced it would purchase French gas turbine company Alstom for $13 billion. The timing of the purchase happened to coincide with a seismic shift in climate policy. The acquisition was completed in November 2015, just one month before hundreds of people gathered in Paris to ratify the landmark climate agreement in December of 2015.
“It was kind of like Bayer buying Monsanto just as the bulk of the class-action suits were coming through,” says Ion Yadigaroglu, managing partner at Capricorn Investment Group, a clean-energy investment firm.
GE’s purchase of Alstom also coincided with a global downturn in the price of renewables, lessening demand for the gas turbines right after GE had made its costly pick. Between 2010 and 2016, the cost of solar dropped 69%—putting it “well into the cost range of fossil fuels,” according to the International Renewable Energy Agency—while the cost of onshore wind dropped 20% in the same time period. Since then, costs have only plummeted further. In November, financial advisory firm Lazard reported that building and operating new renewable energy plants had become, in some cases, cheaper than operating older conventional plants.
“You’re in a situation where the market for one of your main products—literally the bottom falls out of it,” says Hipple. She explains that utilities became wary of spending millions on gas turbines that would take years or decades to pay off.
“Utilities and power plants were saying, ‘We don’t need to do things now. We’ll just wait and see,’” she says. “The price of renewables is dropping—why lock in? Why lock in now? Let’s keep an eye on the natural gas prices. Let’s keep an eye on renewables prices. We don’t need to act quickly.”
According to IEEFA’s report, GE lost investors a staggering $193 billion—74% of its market capitalization—between 2016 and 2018. GE Power was a huge driver of this loss as it began to bleed money, going from bringing in $4 billion in profits in 2016 to losing more than $800 million in 2018. The company’s other subsidiaries only experienced slight variations in profits during this time.
Last year, GE was kicked off the Dow Jones Industrial Average after 110 years on the index after its stock plunged. GE was the last remaining original member of the index and a remnant from a time when the U.S. economy was driven by industrial giants rather than Big Tech. “The company was often at the center of American capitalism” over the past century, the New York Times wrote last summer of the change in the Dow, noting the removal as a “fresh blow” to a company “reeling” from challenges to its power businesses. “As recently as the 1990s, GE was at times the most-valuable American company by market value,” the Times reported.
GE’s downfall, of course, can’t be entirely attributed to a lack of foresight on clean energy. The well-publicized leadership struggles within the company—its longtime CEO Jeff Immelt was forced into retirement in 2017, and his successor was removed by the board a year later—as well as myriad legal troubles have significantly eroded investor trust. And GE does have a substantial investment in renewables: Its wind turbine business is the third-largest in the world and has brought in hundreds of millions of dollars in profits over the past two years.
The Alstom acquisition was roundly praised by many investors when the purchase was completed in 2015, with the New York Times lauding the deal as helping to “strengthen GE’s footing in emerging markets like China and India, where air pollution from coal power is a menace to public health.” Analysts now say GE paid too much to acquire the company.
Experts agree that GE is, at best, suffering from bad timing, and at worst paying the price for a significant lack of foresight. The Alstom acquisition and the subsequent struggles of the Power division were key to bringing the rest of the company down. News reports on GE’s decline and the company’s grim future widely point to the Alstom acquisition as one of the main drivers of its plunging stock prices. A Fortune profile of Immelt painted the Alstom deal as a key example of the CEO’s often-ill advised tendency toward “paying top dollar to acquire the hot businesses of the moment.”
And in an interview last July with Bloomberg, JP Morgan analyst Stephen Tusa said GE’s power business was “in secular decline,” meaning that it is threatened by long-term market trends. Tusa predicted GE’s power business in the future “could be worse, not better, than today.”
Some investors say GE’s failures could have been prevented—and they’re worried that the company and its investors aren’t learning from its mistakes. Because GE isn’t exclusively invested in fossil fuels, like most oil and gas companies, the company could have become an energy visionary, Yadigaroglu says.
“I think it’s much tougher when you ask [companies like] Exxon to get out of oil and gas,” he says. “In a conglomerate you’re kind of in the ideal place to say, ‘Let’s look ahead of the curve here. Even if the [fossil fuel] business is strong today, it’s not going to be in 5 or 10 years. Let’s start investing elsewhere and maybe even sell that division.’ Clearly, GE did not do that.”
Last October, Yadigaroglu spearheaded an open letter from several asset managers urging GE’s incoming CEO, Larry Culp, to get out of the fossil fuel business and invest more in clean energy. “We thought it might be a good time to say, there’s a blue pill and a red pill. Pick the right one,” he says. “And not just for moral reasons, but because you won’t have a business in 5 or 10 years if you don’t.”
GE declined to comment on this story, but Culp, the company’s current CEO, has made several statements to investors on the company’s confidence in its renewable energy investments, saying at a conference last month that GE Renewable is set up to be GE’s “highest growth business in 2019.”
But both Hipple and Yadigaroglu are skeptical about the company’s commitment to clean energy. Hipple says that even in presentations on the company’s renewables business, GE still noted that gas would be “stable in the long-term” and “positioned to win in the short-term,” a view she calls a “flawed message.” The International Energy Agency’s 2018 World Energy Outlook does show demand for natural gas is “on the rise,” but also predicts renewables’ share of power markets will overtake both gas and coal globally by 2040.
Yadigaroglu is more concerned about the company’s culture, especially when it comes to GE’s presence in countries still evaluating the best ways to meet their energy needs. He decided to write the letter to Culp after attending a GE meeting in 2018 where he says a high-ranking executive at GE Power was dismissive of renewable energy, referring to the company’s fossil fuel investments in developing countries as “real energy.”
The investor letter points to GE’s continued involvement in “outdated coal and gas technologies globally,” including projects in Vietnam, Egypt, and Kenya. Yadigaroglu is particularly concerned about the announcement last month that GE had won a bid to build a coal-fired plant in Kosovo—a project the World Bank publicly announced it would not fund last year because of the rising price of coal and the falling price of renewables.
For the rest of Wall Street, the time has come to wake up on climate. A survey by U.S. consulting firm Deloitte released earlier this month finds that 84% of business leaders in the United States were aware of recent reports that sounded grave alarms on climate change, and more than two-thirds of those leaders had subsequently changed their business strategies in response. Meanwhile, a recent analysis of corporate disclosures shows that more than 200 of the world’s corporate giants expect extreme weather and carbon pricing could cost their companies nearly an extra $1 trillion collectively.
Between press releases announcing renewable energy commitments and pledges to double down on climate action, experts say GE can serve as a cautionary tale for other businesses on what it looks like to miss out on the world’s shifting use of energy.
“If they were making tons of money, you might say, ‘Fine—they’re evil, but they’re realists,’” Yadigaroglu says. “But that’s not even the case, right? It’s not only evil, but it’s just not working. It’s a bad strategy that happens to also be highly, highly destructive.”
Africa is still facing a serious problem of energy access. Schneider Electric has taken the first step in creating an African mini-grid industry (involving decentralized electricity generation and distribution networks based on renewable energy), by signing a memorandum of understanding with EM-ONE Energy Solutions, a Nigerian sustainable energy engineering company. For more information see the IDTechEx report on Distributed Generation: Minigrid Microgrid Zero Emission 2018-2038. Africa: still lagging behind in electrificationOn this immense continent, many cities remain off-grid. With a population of more than 200 million, Nigeria is a country comprising 36 states, only one of which has an electricity network. According to the International Renewable Energy Agency (IRENA), West Africa’s energy consumption could quadruple by 2030 to reach 219 TWh a year, less than half of the 478 TWh already consumed in France in 2018. Part of the solution will come from mini-grids, decentralized networks powered by photovoltaic energy. Demand is high: an estimated 200,000 mini-grids are required to power the continent and reach the United NationsSustainable Development Goal 7 (“Ensure access to affordable, reliable, sustainable and modern energy for all”). Creating an African mini-grid industrySchneider Electric, which produces mini-grids at its factory in Kenya, has decided to take its efforts to the next level. “Rather than importing mini-grids produced in Europe, Asia or North America, we want to create an African mini-grid industry with operators, integrators, investors and local jobs,” commented Paul-François Cattier, Schneider Electric’s Vice President Business Development Africa & Middle East. In the past 10 years, the Group has already installed 700 mini-grids in Africa, mainly for rural electrification, through its Access to Energy programme. This has largely been achieved with donations to NGOs and equipment often produced in Europe. For 18 months, led by its sustainability department, the Group has been working to set up an industry based on mini-grids built or operated by local stakeholders. This has led to a first MoU with EM-ONE Energy Solutions, a Nigerian company that also operates in Canada. “EM-ONE Energy Solutions has already won a contract for 30 mini-grids in Nigeria to power hospitals in Kaduna State, and is also targeting the university and rural electrification market. The MoU concerns Schneider’s support with optimizing the architecture of these projects and developing an industrial platform to integrate these mini-grids into containers in Nigeria and manufacture Schneider Electric mini-grid solutions under licence,” explained Paul-François Cattier. With 12 sales representatives spread out over 12 countries (Chad, Senegal, Côte d’Ivoire, Tanzania and others), Schneider Electric is seeking engineering procurement construction (EPC) companies to locally produce its solutions (e.g. Villaya Community, a mini-grid designed for rural electrification, providing 7-63 kW of power). Schneider Electric will provide them with advice on setting up an industrial plant and testing. The Group is also working with public and private funding bodies. It intends to cover the full range of needs with capacities up to 500 kW (enough to power a city of 10,000 inhabitants in Africa) through its standardized solutions, and from 500 kW to 20 MW through specific architectures (for cities of several hundred thousand inhabitants that are without an electricity grid). Source: Schneider ElectricTop image: UmaiziLearn more at the next leading event on the topic: Business and Technology Insight Forums – Tokyo, September 2019 on 18 – 19 Sep 2019 at Tokyo, Japan hosted by IDTechEx.