Category Archives: Economics

A Damming Idea

Tinaroo Dam Spillway (Source: ABC News)

Constrained water supplies in Far North Queensland are hindering economic development and can threaten water security of a number of towns. Inaction on supply has been driven by feasibility, concerns, funding gaps and worries about environmental sustainability. (1) In addition, politics focussing narrowly on dams as the supply solution runs the risk of missing other smart infrastructure and demand management opportunities to improve supply apart from just bulk storage. (2) Project proponents are also challenged often challenged by a user pay model required by the National Water Initiative. (3)

A strong evidence base of economically viable, financially feasible and prudently sustainable investments is needed to unlock these constraints. The balance between the public purse, private irrigator interests and environmental sustainability needs to be reset.

If considering just dams, what is an appropriate period of cost recovery? If an appraisal period is less than the economic life of the dam, usually an estimate of residual value would be included in the final year of the analysis. For example, a 25-year appraisal period for a 50-year asset, may include an asset value offset of up to 50% in the final appraisal year to ensure cost recovery over the appraisal period approximates around half of the expected use of the asset.

Similarly, where a dam is considered by policy makers to be a catalytic piece of infrastructure that supports and enables economic growth opportunities, an argument that there are economic externalities needs to be established. In effect, this means that not all the economic benefits are being captured by the users – providing a basis for partial public funding alongside expected user revenues. This externality argument is the logical basis for identifying the level of offset to user revenues. It presupposes both other uses for water as well as downstream benefits captured by non-users.

As a starting point, getting the evidence together to make the preliminary case for the residual value argument and a market failure argument around significant externalities is critical.

References:

  1. Parliamentary Library (Australia) Water Management https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook45p/WaterManagement
  2. For example, the Sustainable Rural Water Use and Infrastructure Program https://www.agriculture.gov.au/water/mdb/programs/basin-wide/srwuip
  3. National Water Initiative pricing principles (https://www.agriculture.gov.au/water/policy/nwi/pricing-principles)

A $7 Crossing

Kangaroo Point Pedestrian Bridge artist impression
Kangaroo Point Crossing, Artist Impression
Source: Brisbane City Council

Brisbane City Council has announced a program to construct five ‘green’ bridges across the Brisbane River. [See https://www.brisbane.qld.gov.au/traffic-and-transport/roads-infrastructure-and-bikeways/five-new-green-bridges-across-brisbane] Analysis of the crossing at Kangaroo Point appears most advanced.

There is a handy infographic on Council’s website. Unfortunately, details of how the benefits have been calculated are not publicly available.

What we do know is that Council intends to spend $190 million to build the bridge. Council believes trips per day will rise from 5,300 in 2021 to 6,100 in 2036.

Making a couple of assumptions, we can work out the level of benefit per trip required for this to cover the capital costs. First we assume a 25 year evaluation period (2020-2044) and a 7% real discount rate. We also assume the asset has a 50 year life and include an offset residual value on the capital cost. The capital cost attributable to the evaluation period is a present value of $172.5 million.

Then we extrapolate the average crossings, which rise on an annualised basis from 1.9 million trips in 2021 to 2.4 million trips in 2044. This implies some 54 million trips will take place (2021-2044). However, using trips as a stand in for benefits, a trip today has a stronger present value than a trip tomorrow. The present value of all the trips had they occurred today is 24.5 million.

The capital cost per trip is $3.18 undercounted. In discounted terms, this is $7.03.

Given ratepayers are paying for it, one would hope Council is confident benefits are at least $7.03 per trip in benefits.

Do you think that is the case?

Mission to the Kingdom

L-R: Nick Behrens, Craig Lawrence, Gene Tunny, Hamish Bain.

Intra regional trade and the effectiveness of 147 active zones (economic, industrial and free) in the Middle East will be under consideration by Lytton Advisory. The firm has been given a mandate to develop advice for the Gulf Cooperative Council Secretariat on the next phase of closer economic cooperation between member states. This will involve a baseline review of existing economic zones, careful analysis of customs arrangements between Gulf states, an examination of World Trade Organisation implications and economic modelling of preferred solutions. Lytton Advisory is looking forward to working with colleagues from Maxwell Stamp in the Middle East, building on engagements in the region over the past three years.

Towards a Circular Economy

Linear economic systems are inherently unsustainable, creating intergenerational equity where markets for this are not readily available. Understanding waste management approaches and the role of critical raw materials is key to developing effective approaches that move us towards the circular economy. It was one of the reasons I recently completed a short course in these issues.

Economics of Infrastructure Podcast

Image result for podcast

Thanks to Gene Tunny, Principal at Adept Economics, for inviting me onto his new podcast series – Economics Explained. We discussed the nature of infrastructure, the services these assets supply and how good economic analysis helps select better infrastructure projects. Gene and I have collaborated on a number of projects over the last two years. He is a leading independent economist who blogs regularly at queenslandeconomywatch.com.

You can listen to the podcast here: https://queenslandeconomywatch.com/2019/09/16/economics-of-infrastructure-interview-with-craig-lawrence-of-lytton-advisory/

State of Play for Infrastructure in Queensland

In this guest post, Queensland Economic Advisory Services Director, Nick Behrens, shares his thoughts about the State Infrastructure Plan. Nick was part of part of an expert panel commenting on the 2019 State Infrastructure Plan at the recent Infrastructure Association of Queensland special breakfast. Nick is a Senior Associate with Lytton Advisory.

State Infrastructure Plan plays to division between SEQ and Regional Queensland.

The recently released State Infrastructure Plan (SIP) provides a much needed framework for the planning and prioritising of infrastructure delivery in Queensland and should be widely supported.

However, it also reinforces subconsciously the division that exists between SEQ and Regional Queensland when it comes to limited infrastructure dollars being spread across a large and high needs state.

The SIP outlines a $49.5 billion infrastructure program over the next four years from the Queensland Government ($12.9 billion in 2019-20) that claims to be supporting an estimated 40,500 jobs. Based on these metrics alone it is delivering economic development at a time when overall economic growth in Queensland is below trend.

Since the original SIP was released in 2016, Queensland has experienced significant changes including our population growing to more than five million, changing regional economies, and advanced technologies altering both infrastructure and service delivery.

As a result the 2019 SIP details the infrastructure investment strategy and delivery program for the next four years, in order to provide the private sector and other levels of government with clear direction of what is in the pipeline.

The Queensland Government’s SIP mantra is ensuring the right infrastructure is delivered in the right place and at the right time to meet the demands of a growing state. This is a commendable goal of any government and one that directly aligns with community and industry expectation.

If the document has one regrettable feature it is the cementing of an ‘us’ and ‘them’ attitude when it comes to infrastructure rollout across Queensland. For example the SIP reads “Importantly, about 60 per cent of the capital program and 25,500 of the jobs supported are outside the Greater Brisbane area.”

Much of the narrative of a fair split between the two parts of the State is about a political necessity following the Federal Election result whereby Queensland Labor were wiped out north and west of Brisbane.

As an illustration of this point, the 2019 SIP is 207 pages long verses 159 pages back in 2018 and these extra 48 pages are directly up front and relate purposefully to what the Queensland Government is doing in infrastructure delivery in regional Queensland.

It is not wrong to support regional Queensland but constructing a zoning of spend is counter to the commendable objectives of SIP in supporting economic development, increased productivity and the creation of communities in which people want to live across all of Queensland.

The reality is, what benefits SEQ undoubtedly benefits Regional Queensland and vice-versa when it comes to infrastructure.

Glowing examples of this point are the Gateway North Upgrade and Toowoomba Second Range Crossing whereby freight is passaged through these assets that benefits Regional Queensland. On the other side of the coin is investment in rail and ports in regional Queensland is enabling royalties for frontline service delivery in SEQ. The right narrative is a symbiotic relationship between the South East Corner and all of Regional Queensland.

Putting aside the politics, what the SIP really does is highlight how incredibly difficult infrastructure delivery and prioritisation is in Queensland. Our State has the unfaltering complexity of higher economic and population growth in SEQ meaning we are continually behind the infrastructure roll out curve and yet we have the geographical size, decentralised population and low population densities of regional Queensland.

All of which mean the road, rail, electricity transmission and electricity distribution kilometres are higher than other states and we require more airports and seaports. Quite simply infrastructure delivery in Queensland is complex and difficult – with differing priorities benefiting differing areas at differing times.

In summary, the SIP represents a very good iteration or constant continuing roll out of enabling projects for Queensland. Looking past the politics of its presentation it is investing in critical infrastructure and is in fact investing in a positive future for the Sunshine State.

The schools and TAFE are delivering the skills our economy requires. The bridges, roads, ports and rail are enabling our exports to get to market and commerce to flow. The electricity and water assets are providing the vital inputs for our economy.

The overall spend as impressive as it sounds is still low by historical percentage of GSP standards but the SIP has been well received from many communities and industry sectors and rightly so.

The plan can be found here:
https://www.dsdmip.qld.gov.au/resources/plan/sip/sip-part-b-2019.pdf

6th Anniversary

Economic Effects of Infrastructure Investment and its Financing

Today marks the sixth anniversary of Lytton Advisory as an independent economic consulting practice. Over that time, we have worked on a wide range of economic issues. This has taken us to places as diverse as the Solomon Islands, Papua New Guinea, Kuwait and Saudi Arabia.

We have never lost our enthusiasm for helping clients make smarter capital investment decisions. Neither have we wavered in our passion for proper planning, prioritisation and funding of infrastructure. In more recent years, our work has been around leading project teams of committed, experienced economists and professionals to bring high conviction analyses to our clients. Good cost benefit analysis is at the heart of what we do.

In the first half 2019 founder, Craig Lawrence took, in effect, a sabbatical from the practice to lead the establishment of the Economic and Social Infrastructure Program in PNG. This $130 million 4+4 year Cardno-delivered, Australian Government funded program seeks to improve the quality of planning, prioritisation and funding of infrastructure to achieve economic outcomes and social development goals for Papua New Guineans.

Whether it is: developing an investment manual to incorporate climate change adaptation in infrastructure development decisions in the Solomons; a full cost pricing algorithm for food and drug regulatory services in Saudi Arabia; or generating savings from waste transfer station closures that fund a ten-year capital works program – Lytton Advisory is up for the challenge. At every stage, it is about driving value for the clients and communities affected by infrastructure.

We are excited about the future for infrastructure, its contribution to sustainable economic and social development, and how emerging economic incentives, new social paradigms and innovative technologies are shaking up these services.