Recently I have been thinking about inland freight and logistics to see how this affects Australia’s seaports. Volumes may be constrained by production factors – you can only grow what you can grow when the environment allows you to grow it – but where these volumes go can be determined by these inland costs.
Policy can have consequences as NSW’s freight and logistics strategy shows. Improvements in freight handling and inland cargo aggregation can reduce costs. Some of these improvements reduce the cost of multi modal handling, as well as reduce the cost of line haul by mode – whether that is by rail or road.
For an economist like me it is a relative comparison game. Relatively lower costs will shift the movement of commodities from one mode to another, as well as shift the direction of commodities. Subject, of course, to existing commercial agreements.
However this is not the only story. The other story is around the development of vertically and horizontally integrated businesses that develop their own end-to-end freight and logistics systems. This means they are able to profit maximize by using less profitable parts of their networks to feed the more profitable parts. These firms are also taking equity stakes in their clients.
This is different to geographically and modally constrained freight and logistics operators – they have to maximize efficiency of throughput at a single point or along the linear operation of a particular mode. They certainly do not own parts of their client’s operations. Also, singular operations cannot transfer price because the other parts of the network or system are owned by other parties, and often singular operations cannot aggregate the volumes of goods required to develop leverage over prices.
This article also provides a gratuitous opportunity to show some of the canola fields near my home town in the South West Slopes region of NSW. I took this picture last week on a visit there. Primary production remains an important part of the freight task, albeit a volatile one that is hostage to world demand, weather and yields.
In helping people and organisations figure out the odds and make smarter infrastructure decisions, sometimes the right course of action may actually seem counterintuitive.
An example of this is the Monty Hall Paradox.
Suppose you are participating in a game show where the prize – say a luxury car – is behind one of three closed doors. Can you improve your odds of winning the car by switching doors after the host shows you what is behind one of the other doors?
Of course you can.
I have attached a little PowerPoint that explains why and in what context. See:
It can be hard to recognise when additional, relevant information should prompt us to change course.
Recently at the Warren Centre (http://thewarrencentre.org.au/ip30-panel-investigates-the-infrastructure-governance-opportunity/) there was some commentary around the cost of duplicating Brisbane’s Gateway Motorway Bridge. Namely, between the original and the duplicate, costs increased fivefold. On the surface that would be a stunning thing. However, when we consider 24 intervening years (1986-2010) between the costings for the two projects, we are looking at an annualised increase in costs of 6.9%. This is still significant when inflation only increased 3.4%p.a. over the same period. I know there are construction price indices around as well. However, I wonder whether design and materials were significantly different, and the connecting road infrastructure was more challenging. That might explain some of the residual increase. Also, the duplicate would have been constructed in a much tighter market for engineering and construction services. Should we have bought the extra lanes way back in 1986 or would the opportunity cost have been too large?
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.
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?
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.