So why is all of this infrastructure good for us?

  • So why is all of this infrastructure good for us?

    So why is all of this infrastructure good for us?

    What you will learn:

     

    As the “once in a generation” investment in Transport infrastructure in NSW and Victoria continues to gather pace, let’s explore the assumption that infrastructure investment is good for the State and therefore beneficial for our community. Through exploring the what, why and how of productivity, it becomes apparent that productivity is the link between investment in the right infrastructure and enhanced community benefit.

     

    New Sam Wilko Advisory Blog by Peter Wilkinson

     

    As the “once in a generation” investment in Transport infrastructure in NSW and Victoria continues to gather pace, let’s explore the assumption that infrastructure investment is good for the State and therefore beneficial for our community. With the help of an Information Sheet published by the Australian Commonwealth Bureau of Infrastructure, Transport and Regional Economic titled “Infrastructure, Transport and Productivity” (let me know if you would like a copy) we can explore the what, why and how of productivity. It becomes apparent that productivity is the link between investment in the right infrastructure and enhanced community benefit.

     

    So why is productivity important?

     

    Productivity matters not for its own sake, but because the growth it can generate results in the higher incomes and government revenues needed to raise living standards. Or stated another way, productivity improves community welfare and rectifies disadvantage as well as maintaining global competitiveness.

     

    Productivity is a key determinant of the welfare of Australians because it is an important source of income growth. Other traditional sources of income growth include improvements in terms of trade and better utilisation of labour. As illustrated in the graph below, recent decline in Australia’s terms of trade (which in turn is linked with the wind down of Australia’s “mining boom”) and general ageing of the population have worked against growth in incomes. Increasingly, expectations are that improving productivity will provide the “heavy lifting” in maintaining and enhancing living standards.

     

    Source: ITRE Information Sheet 55

    Source: ITRE Information Sheet 55

     

    So what specifically is productivity?

     

    Productivity is the efficiency of transforming inputs (capital and labour) into outputs (goods and services). The two main measures employed by statisticians are labour productivity and multi-factor productivity:

     

    Labour productivity is a partial measure calculated as real Gross Domestic Product (GDP) or gross value added per hour of labour worked.

     

    Multi-factor productivity is a more complete measure calculated as real GDP or gross value added per unit of combined labour and capital inputs.

     

    When interpreting productivity trends, it is important to distinguish these productivity concepts from the measured productivity indices (eg. reported changes in Gross Domestic Product (GDP)). While productivity statistics aim to measure technical progress or changes in the efficiency of production, in practice they measure the volume of outputs versus inputs. The limitations of this measurement include being affected – at least in the short term – by external factors such as weather, changes in capacity utilisation and population growth due to immigration.

     

    What is Australia’s productivity trend?

     

    As illustrated below, multi-factor productivity growth grew rapidly in the 1990s up until 2003-04 and has declined since 2007-08. The strong growth in incomes in the 2000s was fundamentally driven by rising terms of trade. From March 2004, the mining boom boosted terms of trade by almost 50% up to and beyond the Global Financial Crises. Continuing decline in Australia’s terms of trade will exert negative pressure on average income growth.

     

    Source: ITRE Information Sheet 55

    Source: ITRE Information Sheet 55

     

    So how does Transport Investment relate to Productivity?

     

    As illustrated by the charts below, declining overall productivity has coincided with a significant increase in capital investment in the Transport, Postal and Warehousing sector. More specifically and over this period, significant public and private sector investment has occurred in public road and rail assets.

     

    Source: ITRE Information Sheet 55

    Source: ITRE Information Sheet 55

     

    Source: ITRE Information Sheet 55

    Source: ITRE Information Sheet 55

     

    So, Specifically how does this Happen?

     

    Whilst it is true that the specific nature of the link between public infrastructure spending and productivity growth has been debated, it is widely accepted that transport investment with a positive Benefit Cost Ratio (BCR) – appropriately considering environmental effects – boosts multi-factor productivity. Much of the visible infrastructure investment in NSW and Victoria has been targeted at improving the workability and liveability of the urban areas of Sydney and Melbourne. However, not all investment needs to be in visible infrastructure such as roads and rail links.

     

    Ross Gittins argues in his Sydney Morning Herald article of 1 September 2014 “How Econocrats can lift their Game” (let me know if you would like a copy) that investment in technology is an effective enabler of improvement, particularly if “productivity” is better thought of as “technological progress” as a means for generating improvements in community welfare. In this sense, Government’s role is as micro-economic reformer, targeting the way that our cities are organised. As a consequence of Australia’s pursuit of the economies of agglomeration, congestion, compromised open spaces and the loss of amenity all risk detracting more and more from these benefits.

     

    Technological improvements can provide transformative benefits for cities. A flagship example of this is SCATS (Sydney Co-ordinated Adaptive Traffic System) which was originally developed over 40 years ago to control traffic light phasing and optimise traffic flow and was on-sold to 27 countries. Optical based monitoring and improved algorithms are coming which will further optimise the performance of the system. Technologies are also available in the more controversial demand management space including variable tolling of major urban roads and automated parking monitoring and infringement issuing systems.

     

    How might change be enabled by Industry?

     

    In considering the changes we might see within the industry to enable transformation in industry capability and performance, a recent McKinsey’s publication identifies the construction industry generally – and therefore the transport construction industry more specifically – as being ripe for innovation. It notes by way of context, historic construction industry investment in R&D being less than 1% of revenue in comparison with 3.5% for the automotive industry and 4.5% for the aerospace industry.

     

    5 relevant “industry disruptive ideas” are proposed:

     

     

    • Higher definition surveying and geo-location;
    • 5-D Building Information Management (BIM) – linking 3-Dimensional information models to scheduled time (4-D) and cost (5-D);
    • Digital collaboration and mobility – supported by widespread use of hand-held devices;
    • The internet of things and advanced analytics – enabled through adoption of “smart” design principles at the front end of developments; and
    • Future proof based design and construction.

     

    So why do things actually feel worse than they used to?

     

    As referred to in a recent ABC published article by Michael Janda “Population growth masking weak economy, making households worse off: CBA economist”, the Commonwealth GDP figures for the June quarter showed the economy growing at an annual pace of 3.3 per cent, a figure that puts Australia comfortably ahead of most advanced economies. Commonwealth Bank senior economist Gareth Aird is quoted as observing “Despite the fact that the economy’s growing at what looks like a healthy clip on the surface, the way that transfers to how households feel at the moment suggests that things aren’t too flash.”

     

    Aside from illustrating the limitations in directly equating “headline” GDP growth with improved population welfare, the foregoing analysis gives us an insight into what’s actually going on. The lack of average income growth after a long period of sustained rise (and in fact a reduction in net household disposable income over the last 5 years as argued in the article) has unsurprisingly resulted in widespread dissatisfaction. At the same time, the effects of increasing transport congestion are being experienced every day by drivers and commuters, driven by increasing population in Sydney and Melbourne in particular and exacerbated by the inconvenience associated with the raft of projects under construction at the same time, in an effort to keep pace with demand.

     

    Real productivity improvements will take time to kick in, and in the meantime uncertainty will remain as to how widely productivity benefits will be distributed across our community. Sounds like an important debate for Government to take the lead on, would you agree?

    Comments (1)

    • Peter,
      An interesting and idea ranging article. Somehow we should think about infrastructure investment as an enabler to more that just the improvement of the way things are done but also an enabler of fundamental change. For example, I believe a “fairly rapid and efficient” transport system (most probably rail) would enable the towns that are up to 200 kM from Sydney to be dormitory towns (an element of decentralising) as well as enabling companies to establish their HQ away from the capital city (a model used extensively elsewhere).
      cheers,
      Justin

      Reply

    Leave a comment

    Required fields are marked *