Categories
Infrastructure

Accuracy and precision are different things, especially for infrastructure

The effort invested in ‘getting it right’ should be commensurate with the importance of the decision – Daniel Kahneman

Accuracy is the absence of error; precision is the level of detail. Often in infrastructure planning and analysis we see an unnecessary need for precision in the early stages with not much emphasis on accuracy.

Effective problem solving requires always being accurate but only being as precise as is helpful at any given stage of problem solving. This is about delivering analysis that is sufficient to proceed to the next stage in developing an infrastructure project. Many project approval gateway processes recognize this, but it is often poorly implemented.

Early in the problem solving process, accurate but imprecise methods, rather than very exact methods, will allow consideration of all reasonable approaches and minimize the tracking of needlessly detailed data. In this way, less apparent but potentially higher value options and scenarios can be considered and compared with the standard approaches.

Categories
Cost Benefit Analysis

Cheat Sheet for Reviewing a Cost Benefit Analysis Report

Suppose you are given a cost benefit analysis.  Without an economics degree, how do you know it has been properly completed?

Economic CBAs are a decision support tool used to determine the net benefit to an economy of a proposed course of action, a policy or a project.  A ‘do something’ case is typically compared to a ‘business as usual’ case to identify incremental changes in benefits and costs, explicitly recognising that not doing a project has implications as well.  Costs and benefits occur in different time periods and values are brought to the present to enable comparison of net economic benefits.

If you are wading through one of these reports here is a cheat sheet with questions you can ask the analyst to pierce the veil of certainty these reports often convey.  It is based on longstanding advice the Commonwealth Government has given its own agencies when confronted with this kind of economic analysis.

Ask the following questions:

  1. What questions does the study attempt to answer?
  2. What alternative strategies are considered?
    1. Do you have any comments on the way the choices could have been set out?
    2. Are there other choices that could/should have been considered at the same time?
  3. Are you happy with the cost estimates made?
    1. Are the methods of evaluation satisfactory?
    2. Are any relevant costs omitted?
  4. Is the study based on reliable evidence?
    1. What further information would you require?
    2. Is such information available and, if so, where and from whom?
  5. Are you happy with the methods of benefit measurement employed in the study?
    1. If not, what method or approach would you propose?
    2. If yes, are you content with the values derived?
  6. Does the study allow for:
    1. Uncertainty (or errors) in the expected costs and benefits?
    2. The differential timing of costs and benefits?
  7. Finally, assuming you were advising the decision makers, what would be your recommendation?

Any analyst should have no problems or hesitancy answering these.  If they do, the report probably needs more work.

Categories
Infrastructure

Better Infrastructure Planning

Better infrastructure planning avoids presuming a solution.

Often we get locked into assumptions about the nature of the problem, its causes and desirable solutions. Wise infrastructure planners step back – examine what caused the problem, what caused the causes, and what caused those causes. This reveals possibilities very different from what end users envisage, but meet the true need most effectively.

A proper needs analysis is critical. If overlooked, huge value is often lost – for society, for the economy and for business.

Categories
Cost Benefit Analysis Transport

How Would We Know?

The absence of a publicly available cost benefit analysis for the proposed Bus and Train (BAT) Tunnel project in Brisbane raises a couple of obvious questions.  The first is the simplest.

The previous Cross River Rail (CRR) proposal was expected to cost around $6.4 billion to construct.  At this stage the BAT Tunnel is expected to cost around $5 billion.  Queenslanders save $1.4 billion right?

Financially they do.  But without a full CBA we cannot know what benefits are being left on the table.  If more than $1.4 billion in benefits under CRR are not realised in the BAT Tunnel we are actually reducing the net economic benefit of getting a decent public transport solution.

How would we know?

Categories
Transport

Valuing Toowoomba’s Second Range Crossing

What value can we put on the capital cost per vehicle using the $1.6 billion Toowoomba Second Range Crossing?

Let’s assume: in a 25 year appraisal period traffic volumes grow 3.5% p.a.; some 75% of some 23,000 vehicles per day divert to the crossing; and a 4% real discount rate. How does just under $12 a vehicle sound?

Bump traffic growth to 6% p.a., raise diversion to 85% diversion, and trim the discount rate to 3%, and you get just over $6.

Sets a bar, doesn’t it?

This project will only show a net economic benefit if benefits that are eventually identified are multiples of this.

Categories
Climate Change

Climate Change Impacts on Transport

So how important is the impact of climate change on transport infrastructure?  Very important in developing countries it seems.  We have just completed a present cost analysis of this at a river crossing in the Solomon Islands. It looked out over a 25 year period.

In the absence of downscaled climate forecasts and detailed hydrological data a scenario analysis was developed.  Baseline asset performance in the absence of climate change was assessed against a range of climate change scenarios using actual flood event and cost data. This created estimates of days service lost as well as maintenance, repair and replacement costs.  Five different socio-economic impacts driven by service levels were also assessed identifying wider economic costs.

The upshot is that just at this one crossing the economic present cost of climate change is equivalent to around 5% of the current national transport budget. Any climate change adapation measure that fully mitigates that for less cost will increase economic welfare.  The analysis provides a rational basis for an adaptation budget when considering possible engineering design changes.

Categories
Economics

Q and A

At Lytton Advisory we say that providing commercially oriented economic solutions is all about ‘where infrastructure meets money’. In this Q and A, Lytton Advisory Principal Craig Lawrence explains what this means.

Q: So who are economists and what do they do?

A: Economists working with Lytton Advisory are typically postgraduate qualified professionals. We study, develop, and apply theories and concepts from applied microeconomics and write about economic policy. We study the firm and how its commercial operation affects its financial performance, as well as how groups of firms within an industry compete against one another, and how an industry meets the needs of a market.

Q: How does that relate to the development of infrastructure?

A: Because benefits are spread out over a long time and across a wide range of stakeholders. If all the benefits and costs were accrued in one year we could easily see whether the infrastructure was delivering and how risk was defined.

Q: Is it ever that simple?

A: No. Large capital costs of investing in economic infrastructure are recouped through small amounts of use by large numbers of stakeholders over a long period of time. Economic analysis helps identify where the risks are in building and operating infrastructure, ensuring risk is properly attributed to those best able to handle it. Invariably there are also significant social and environmental impacts that need to be considered.

So we help figure out:

  1. Why specific economic and social infrastructure is required and how users may benefit
  2. What infrastructure can cost to build, operate and maintain
  3. How external factors such as exchange rates, interest rates and technology impact on infrastructure project economics
  4. Whether infrastructure provides a sufficient rate of return to its owners, governing authorities and the wider community, as well as identifying in what form that return occurs – financial, economic, social, or environmental
  5. Who is best placed to bear the various risks around building and financing infrastructure

Q: When do you get involved in an infrastructure project?

A: We provide front-end advice and clarity before anybody even starts building; we do mid-project evaluation to ensure that the project remains commercially and economically valid; and we do post-project evaluation to ensure that infrastructure continues to deliver the right results.

Categories
Local Government

Waste Management in Local Government

Effective and efficient provision of waste management is a key municipal service. As elements of local government waste management systems are contracted out councils increasingly need to be able to assure rate payers they are achieving value for money.

Also, some councils are moving to separate charges for waste services. Complexities around collection, recycling and disposal tie together environmental issues, land planning, transport logistics and commercial arrangements with continuing governance oversight by councils.

A robust approach to full cost pricing enables councils to see where key costs lie, what drivers are involved and where community service obligations may be introduced. It also enables better investment planning and funding.

Lytton Advisory is currently developing a full cost pricing approach to waste service infrastructure for a local council in Queensland.

Categories
Climate Change

Climate Change Adaptation in the Pacific

Climate change is recognised as a serious risk to economic infrastructure.

In Australia a wide range of work has been underway. A lot of research is coordinated through the National Climate Change Adaptation Research Facility (http://www.nccarf.edu.au/). This is part of focus at the national level on climate change adaptation (http://http://www.climatechange.gov.au/climate-change/adapting-climate-change).

Lytton Advisory is currently working on climate change adaptation issues in the Pacific.

Categories
Lytton Advisory

Welcome

Welcome to Lytton Advisory. We help organisations make good infrastructure decisions using economic and financial analysis. Some of our thoughts on these issues are posted here.