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Lytton Advisory

Season’s Greetings

“Start by doing what’s necessary; then do what’s possible; and suddenly you are doing the impossible.” St Francis of Assisi

This year has been extraordinarily challenging for all of us. Australia was ablaze with bush fires before the world succumbed to a global pandemic.

Lytton Advisory has been extremely fortunate to work with a committed group of clients and be well supported by a talented array of professionals. Thank you to one and all.

With blessings and best wishes to you and yours at Christmas and for the coming year.

Craig

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Lytton Advisory

Behavioural Economics in Action

Economic analysis starts from an assumption that people act in a rational way. Over the past few years economists have been exploring why people seemingly break this assumption on a regular basis. Understanding how people react to information, incentives and the way in which choices are presented is becoming increasingly key to developing effective approaches to designing and delivering public policy. It was one of the reasons I recently completed a short course on behavioural economics.

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Lytton Advisory

Stress Testing Infastructure Pricing During Coronavirus

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Coronavirus is forcing utilities to rapidly reappraise their pricing, to assist communities. I have been looking how to stress test utilities in response to Coronavirus. This follows observing the deferral of a recent regulatory pricing review and extension of the regulatory pricing period by a year for a water utility here in Australia. That action in and of itself will not address the impacts of Coronavirus.

I had some thoughts about a possible review approach. Specifically:

i) the financial capacity of the water and waste units to respond to requests by the governments to support their communities; and

ii) the ability of water and waste activities to defer some capital expenditures beyond the governments’ current budget horizons.

My initial thoughts are that this might be in the form of a series of financial stress tests that consider:

i) the implications of extending the current path for rates based on governments’ current asset management approaches;

ii) reducing charges by dropping any surplus generated to assist households over a period nominated by governments;

iii) deeper reductions in charges based on deferring capital and operating expenditures through the current period of budgets and perhaps beyond;

iv) implications for the path for charges beyond the current budget outlook, including taking into account the impact of deferring of capital expenditures designed to drive greater efficiency of service delivery; and

v) commercial implications of significantly lower volumes of services to businesses on utilities’ operations and margins, which might be significant in terms of trade waste issues.

A high-level review of engineering costs, capex and opex, could feed this financial analysis based on available information. Although not a full cost pricing determination, the review would help a government and utility business managers quickly figure out what level of relief can be given by the water and waste activities to households and businesses while minimising future rises in charges.

From an economic perspective, it may be simpler for governments to subsidise water and waste activities through temporary community service obligations (CSOs) directly. If that were a viable policy option, this could be a key piece of analysis to help set the level of the CSO, lay out KPIs for that CSO and establish the criteria for unwinding the CSO when measurable impacts from Coronavirus have passed.

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Lytton Advisory

Response to COVID-19

Our response to COVID-19 shows the actions we are taking to keep clients and associates safe and continue to provide services during this time.

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Lytton Advisory

Value for Money

Lytton Advisory was in the Middle East last year for an assignment. It got us thinking about comparisons of urban transport systems and what constitutes value for money.

Here is one to consider. A few simplifications have been made to bring capital cost, new route length and population into perspective. These projects are at the core of these cities’ transport systems.

Brisbane’s Cross River Rail is building 10.4 km of new rail line and four new stations. A further eight existing stations will be upgraded. The cost is stated to be A$5.4 billion or around US$3.5 billion.

Cross River Rail – US$336 million per kilometre. The population of Brisbane is 2.5 million. Cross River Rail costs about $134 per person per kilometre.
Riyadh is installing a complete metro system for US$22 billion. This will build six metro lines totalling 176km with 85 stations.

Riyadh metro – US$125 million per kilometre. The population of Riyadh is 6.9 million. Riyadh metro costs US$18 per person per kilometre.

Station densities on the new routes are one every 2.6 km for Cross River Rail and one every 2.1 km for the Riyadh metro.

It appears that Cross River Rail is more expensive on a per new kilometre per resident basis by a factor of 7.4 times. There are plenty of reasons why Cross River Rail might be more costly, but surely more is going on than just tunnelling and labour costs.

So is Cross River Rail better value for money than Riyadh metro?

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Lytton Advisory

City Infrastructure

Thanks, Gene (Adept Economics) for hosting me on an episode of your podcast series Economics Explained. It was great we were able to unpack a few things about city infrastructure for your listeners, particularly regarding Brisbane’s Green Bridges program and Cross River Rail.

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Lytton Advisory

Capital Flexibility in Municipal Waste to Energy Projects

waste-to-energy
Source: arena.gov.au

Municipal waste-to-energy (WTE) systems incorporate significant uncertainty and risk. However, they provide ways to achieve significant environmental and economic sustainability for communities. With growing uncertainty, there are significant challenges around when and how to exercise flexibility.

Flexibility is important because as a mechanism it helps ensure better sustainability for WTE systems with long-term lifecycles. Flexibility of capacity expansion, in particular, is an important consideration given the expenditures that are typically required. Multi-stage stochastic modelling can help develop an optimal decision rule to guide decision making on capacity expansion using a real options approach.

Research on the expected net present value (ENPV) arising from flexible design suggests significant improvements are possible over the fixed rigid design in terms of economic lifecycle performance. The ability to make multi-stage decisions in any time period based on available information as uncertainties are resolved is an advantage over lifetime capital investment decisions that are typically set in the first year of WTE projects.

Through work with UTL Utilities, we bring strong cost benefit analysis and real asset option approaches to this kind of infrastructure investment.

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Lytton Advisory

Seasons Greetings

For it is in giving that we receive. (St Francis of Assisi)

A big thank you to our clients for the opportunity to work on very interesting projects during 2019. In a sentence, it has been a year of electrification, explosives, timber, leases, water, telecommunications, free zones, customs and trade across Papua New Guinea, Saudi Arabia and Australia.

Personally, I have been blessed to work some very smart people who have generously shared their experience, skills, talents and good humour in these projects.

Wishing everyone all the very best over the holiday season.

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Lytton Advisory

Lytton Advisory in Saudi Arabia

Kingdom Centre, KSA

Work with Maxwell Stamp colleagues continues in Saudi Arabia. Gene Tunny and I got a great view of the significant changes occurring right now in downtown Riyadh, including the construction of the city’s USD22.5 billion metro (176km of track and 85 stations). We are on the Sky Bridge at the Kingdom Center, one hundred floors above the city.

L-R: Gene Tunny, Craig Lawrence
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Economics Lytton Advisory Policy

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.