Success Diagnosed

png-roads

Very pleased to see PNG and Australia have signed an Agency Support Arrangement for the PNG Department of Transport this month.  I led an earlier Agency Capacity Diagnostic of the Department for the PNG Transport Sector Support Program.

“These diagnostics are undertaken by independent consultants and provide the agency management with objective assessments of capacity, including through the identification of existing strengths and skills gaps. The diagnostics also provide recommendations for addressing agency needs.  TSSP then works closely with the Australian High Commission and agency heads to develop programs of structured capacity support to improve performance and address identified priority capacity gaps.  This is formalised through  Agency Support Arrangements (ASAs) which detail the multi-year frameworks for funded activities to bridge some of the gaps highlighted by the diagnostics.” (Source: TSSP website)

A great outcome which also included a lot of hard work from senior officers in the Department, the Transport Sector Support Program and at the Australian High Commission.

[Link to article]

 

Transport Planning Award

aitpm-2017-winning-presentation

A great collaboration with the Department of Transport and Main Roads and Aurecon.

Lytton Advisory prepared cost benefit analysis modelling of this active transport infrastructure program for TMR, drawing on great research and analysis undertaken by the project team.

Queenslanders will continue to benefit from TMR’s engagement in developing further active transport infrastructure.

Many thanks to all who contributed to this.

While getting the one thing right, do more than one thing

focus

Economics is a field where there is a wide range of specialties, and economists are often called on to look at specific issues. Don’t get distracted by all the other possibilities to the extent that you forget to do the one thing that you must do. But don’t become so focused on the one thing that you don’t do as much as you can.

Economic Benefits of Cycling Infrastructure

cycling-brisbane

Very pleased to see that my colleagues at Queensland Department of Transport and Main Roads and Aurecon will be presenting our analysis on the economic benefits of cycling infrastructure at the National Traffic and Transport Conference of AITPM in mid-August.  The abstract is available here:

https://www.aitpm.com.au/economic-benefits-of-cycling-infrastructure/

 

Image: Southbank, Brisbane. Source: Brisbane Tourism.

Anatomy of an Economic Decision

touch-decisions

Clear thinking is a prerequisite for good economics.  This leads to improved decision making, and that creates better outcomes.

The next time someone claims to be making an economic decision or proposes an economic course of action; dissect their claim or assertion.  You do not need to be an economist to do that.  There are five simple signs for good economic decision making:

  1. Decision to be made is articulated
  2. Available choices are considered
  3. Measurable objectives are described
  4. Input variables are identified
  5. Relationship between variables is determined

Without these famous five, the risk is the economic decision may be dead on arrival.

Significance of O&M in Infrastructure

maintenance

Installation of new infrastructure assets creates streams of services and improvements to existing services for users. Benefits accrue to these uses as well as a wider set of stakeholders. Maintaining the service potential is a critical element in ensuring that value for money is achieved from the initial capital investment.

However, many governments and asset managers are under significant pressure to trim maintenance budgets and scrimp on operating costs. In some contexts, this emerges as an extreme build-neglect-build scenario. Many Pacific Island nations experience this, as do a number of smaller Australian local government authorities. The full lifecycle cost of infrastructure assets is not factored into the budget planning processes of these organisations. Similarly, many private sector operators of infrastructure have commercial and financial incentives to focus on next quarter financial performance rather than long-term service provision from these assets.

The back end of infrastructure is seen as much less interesting, but it is where all the benefits are generated. So approaches to operating and maintaining these infrastructure assets is as equally critical as the planning and investment decisions to deliver them.

Two broad maintenance strategies are predictive maintenance and condition based maintenance. Predictive maintenance is like regular scheduled servicing based on the design performance of an infrastructure asset. It is less costly to implement but also less likely to match the actual performance of the asset. Condition based maintenance requires the collection of data and information about the actual performance of the asset and provision of a tailored asset maintenance response.

The approaches set up an economic challenge. Should an infrastructure manager simply maintain its assets according to schedule and only collect data and information on condition at the times of regularly scheduled servicing? Or should some initial data costs be incurred to change and adapt design-based, predictive maintenance? Decisions to underfund reasonable maintenance activities need to be made with good information and in an appropriate strategic context.

So it depends. In one sector, for example, the response is clear but not clear-cut. Analysis of wind turbine maintenance to address gearbox, generator and blade failure scenarios shows that for small wind turbines, predictive maintenance is more cost effective than condition based maintenance. Condition based strategies were based on an array of sensor data (optical, oil, vibration and temperature). However, for larger turbines, condition based maintenance where there is a high expected gearbox failure rate is a much better approach. In that instance, the cost of collecting additional data and information enables timelier and more appropriate servicing of the turbines.

For these reasons, infrastructure owners and managers need to ensure there are effective asset management and maintenance policies included in their strategic asset management frameworks. It is not enough to supply the assets, as only the services from them will be able to generate the full suite of expected benefits. This can only be achieved when the design potential of these assets is realised over time.

Infrastructure Asset Transactions

moneyshield

Economic infrastructure provides fundamental services to economies. Typically, this type of infrastructure provides electricity, water and gas to industry, businesses and large institutions, community organisations and households. It also assists in providing transport, freight and logistics services.  In the information age, access to low-cost, high-speed broadband facilitates a range of e-services.

The quality, cost, and access to these services affect the productivity of an economy, the efficiency with which goods and services are both produced and consumed, and the equity between different sections of society.

The physical aspects that underpin these services have a range of characteristics that separate these services from everyday goods and services delivered through competitive markets. Service provision can be characterized by a large, up-front capital investment. Installation of an asset can create a local demand response and establish a natural monopoly. Economic arguments for duplication of the asset to stimulate competition are usually weak.

Also, there is usually a long-term stream of benefits that are generally small relative to the capital investment. In some cases, user benefits alone are insufficient to justify the construction and operation of economic infrastructure. Wider benefits can accrue to society, and some societal costs can be avoided.

These assets contain a high level of optionality. Unlike purchasing a retail good, it is possible to develop the asset in phases or stages, with options to scale up or down or abandon operations. In other cases, once the decision to build has been made and construction started, it is tough to change the project scale or scope.

These factors contribute to determining how these assets can be funded as well as who should potentially own and control them.

The classic argument for government provision of infrastructure assets, and consequently related services, concerns market failure. That is, the operation of the private market leads to under or over provision of services from these assets. As a result, mismatch of supply and demand reduces economic value in the economy. In the case of under provision, supply is constrained and the level of inputs is less than required to meet the demand. As infrastructure services are critical inputs into other sectors of the economy, economic efficiency is impeded. The productive potential of the economy is not fully realized and potential economic growth is stymied.

Where there are significant externalities, these are not captured in the price mechanism, where price signals between buyers and sellers determine the optimal level of production and consumption.

This affects the funding and revenue models for infrastructure assets. Consequently, asset transactions can become very complicated.

Where benefits largely accrue to users, and use of infrastructure services can be individually identified, it is possible to develop cost reflective charging regimes. The funding model, without recourse to other sources than user charges, is only limited by extant economic regulation where this is imposed on assets with strong monopolistic characteristics. This river of user revenue forms the basis of the transaction value, and also the initial assessment of feasibility.

It is not without significant risk because of the long period evaluation, accompanied by the risk around maintaining fixed parameter assumptions over that timeframe. Construction cost blow outs, poor demand forecasts, changes in consumer preferences, shifts in relative related prices for products and services that are substitutes or complements can all combine to turn a positive investment into a financial fiasco.

This is before considering the situations where direct asset-related revenue streams cannot support the creation and operation of economic infrastructure.

An infrastructure asset that cannot be funded from its future stream of user revenues requires additional funding contributions. The private sector will not fund infrastructure without a financial return. It is important to distinguish from an economic return.

Economic infrastructure may produce a return to an economy but will not be provided by the private sector if the private sector cannot get a return on its investment. In other words, the return to the economy is contrasted with the return to the balance sheet of a private investor.

Given the extraordinary imbalance in costs and benefits in any particular period over the life of an infrastructure asset, some form of financial intermediation is necessary. It is important to see this as a financial service rather than a private sector investment. This ensures that the cash flows needed to build, operate and maintain the economic infrastructure asset are provided as and when they are required.

Similarly, change of economic control of an infrastructure asset occurs at a specific point in time – a transaction date. The control is exchanged for a specific valuation of the asset.

As an example, early stage infrastructure development is heavily exposed to construction risk and unproven demand. In contrasts, mid-life infrastructure assets have mature demand profiles and risks associated with construction are better known. Late life assets face potential increases in maintenance and rehabilitation costs, as well as changes in user demand and the impact of technology.

Having a very clear perspective on the inherent economic and financial values of an economic infrastructure asset is very important. These valuations are combinations of knowledge at a point in time. It is where a very strong risk assessment is needed as well as an understanding of the relevance of that point in time.