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Planes, trains and automobiles: the importance of infrastructure

Infrastructure is one of those unusual words that have many meanings. For example, we hear people talking of “hard” and “soft” infrastructure, with the first being a reference to roads and bridges. By contrast the latter term refers to organisations such as the education or financial systems.

During a recent overseas trip I came face to face with the realities of just how important infrastructure is to a national economy. The road traffic to the airport was heavily congested and there was anxiety over whether the flight would be missed due to delays. The taxi driver commented that the traffic was getting worse each year, too many cars and not enough roads. He suggested that more public transport would solve the problem.

Once at the airport there was congested parking, a crowded entry hall and then flight delays as the aircraft were forced to circle until landing spots or gate access was available. When trying to use the internet at the air terminal there was both high cost and a patchy wireless coverage.

So where was this place? Well it could have been New Delhi, Manila or any number of other developing countries where infrastructure is inadequate. Yet it was actually Perth, at the heart of the booming WA economy. For many years now the WA economy has been caught in a game of catch up as each successive resources boom sees significant increases in population and pressure on road, rail, air and sea port networks.

Such congestion and delay serves as a ball and chain around an economy’s ankles. It frustrates business travellers and deters all but the most intrepid tourists. Infrastructure generally takes a long time to build and failing to get such infrastructure projects planned well in advance ultimately impacts in a negative way on the overall economic growth rate.

Infrastructure bottlenecks

In a recent article by Geoffrey Thomas published in Australian Aviation (June Edition) the nature of our infrastructure bottleneck problem was highlighted. According to Thomas Perth Airport’s annual passenger growth is likely to quadruple over the next 17 years. The overall growth in passenger numbers transiting through Perth Airport in the past five years has increased by 9.2%, with an outlook of around 40 million passengers by 2030. Much of this rapid growth is attributed to the expansion of the Fly-In-Fly-Out (FIFO) workforce operations used by the mining and energy sector in WA.

However, the overall level of planning for future growth being undertaken by the Perth Airport management was questioned. For example, Perth Airport CEO Brad Geatches was reported as having denied this forecast growth in passenger numbers. Apparently the Perth Airport is adhering to a plan developed in 2009 that predicted much less demand. However, senior airline officials were quoted in the article suggesting that the past history of resource-booms in WA as far back as the 1970s had seen the airport infrastructure constantly playing catch up.

The article also reported that the Perth Airport had originally promised a major upgrade of facilities to make it one of the best airports in Asia within the next 5 to 7 years. This vision would have seen the airport have a terminal with around 40 gates and aerobridges able to accommodate the new A380 Airbus fleet. However, this is now not taking place and the new terminal will have only 25 gates and aerobridges. This would make Perth Airport little better than Adelaide’s new terminal, despite WA being the fastest growing economy in the country.

By contrast Singapore’s new Terminal 3 has 28 aerobridges and was built at a labour cost estimated to be 30% lower than for an equivalent Australian project. Singapore Airport is truly world class because that country knows that if it does not maintain its infrastructure it will eventually lose its international competitiveness.

Other countries recognise similar challenges to invest in infrastructure to ensure that their economies are internationally competitive. Even the oil & gas rich states of the UAE know this. For example, over in Dubai they have constructed a 5 runway Aero-City that aims to be a major air transport hub for much of world’s air traffic linking Europe to Asia and the Pacific. Meanwhile, Perth Airport will only be a “Class C” facility even after its new upgrades. This is only of “minimum standard” and may not be enough to cope with future demands.

Similar patterns of investment to the UAE can be found in other parts of the Middle East. Saudi Arabia has invested significantly in the development of two large industrial cities of Jubail and Yanbu. The first is located on the east coast adjacent the main oil fields, while Yanbu is on the Red Sea adjacent the Suez Canal. Both are being connected to major water supply, transportation links, and high speed telecommunications, as well as provided with housing, schools and hospitals in order attract both foreign investment and foreign skilled labour.

Around the world similar levels of investment are taking place, particularly in those countries that Australia sees as its key export markets. Yet the infrastructure bottleneck illustrated by the Perth Airport case is not just unique to boom-town Perth. In 2011 a report by Infrastructure Australia to the Council of Australian Governments (COAG) it was acknowledged that Australians are experiencing major problems caused by poor infrastructure planning. Road and port congestion, poor quality of water supplies and rising costs of power are all signals of this lack of investment in infrastructure. As noted in the report’s Executive Summary:

“In short, there is a sense that our infrastructure networks are barely adequate for current needs, and that they are beginning to impose significant, long-term costs. We need the courage to take difficult and decisive steps if our infrastructure networks are to continue to serve our needs and equip us to deal with significant economic, environmental and social challenges.”

Why does infrastructure matter?

The role played by infrastructure in the enhancement of a nation’s economic growth is significant, but often underestimated. Without efficient road, rail, sea and airport infrastructure it is more costly for trade exposed industries to operate. Even telecommunications can play a critical role.

This was highlighted in a study published in The Economic Journal in 2011 by Nina Czernich, Oliver Falck, Tobias Kretschmer and Ludger Woessmann at the University of Munich. Their analysis suggests that a 10% increase in broadband network access increases annual per capita growth by as much as 1.5%. Yet our politicians continue to argue over whether the National Broadband Network (NBN) is a worthwhile investment.

Infrastructure – whether hard or soft – matters to how efficiently business can operate and this is a critical factor in determining how internationally competitive the Australian economy is. The World Economic Forum’s Global Competitiveness Report 2011-2012 ranks Australia 20th out of a total of 142 nations. While this is not terrible, we are well behind Switzerland in first place, followed by the other top-5 countries, which in turn are Singapore, Sweden, Finland and the United States. Further, this was a fall of four places over the previous year’s ranking caused not by Australia backsliding, but by other countries moving rapidly forward with infrastructure investment while we remained stalled.

According to the World Economic Forum’s report while the Australian economy has much strength, particularly our banking and finance sector, our economic competitiveness is constrained by poor infrastructure. As the report noted:

“Finally, because of intensifying trade in commodities, the country’s transport infrastructure, particularly seaports, has been increasingly strained in recent years and it lags behind the world’s best.”

Other infrastructure areas of the Australian economy that were not highly ranked were roads, rail, electricity and telecommunications.

Australia in the global economy

The overall quality of our infrastructure matters because Australia is a trading nation that is positioned on the periphery of the world. Although our mining and energy sectors are major exporters, they are often located in remote areas and require substantial road, rail and port infrastructure to efficiently extract the minerals or oil and gas for shipment to overseas markets.

However, Australia is also a major food exporter and has an important services economy that is also dependent on good infrastructure. Tourism cannot operate effectively without well designed and efficient transport systems. Growth in our domestic air traffic is fuelled in large part by the FIFO work force of the mining and energy sector. Yet our tourism sector and much of its infrastructure has not enjoyed such growth.

When we look out beyond the short term to the middle of this century the forecast growth in our region will be significant. By 2020 the population of China is expected to grow by over 94 million and there will be similar growth in India. By 2020 the 10 largest cities in China and India will each have over 3 million people living in them. Shanghai is expected to have around 13 million while Beijing will have around 9 million and Guangzhou over 8 million inhabitants. Over in India Mumbai will be home to over 17.5 million people and New Delhi over 16 million.

These mega cities will be major hubs for trade and other commerce. They will influence the flow of goods, services and people into and out from these growing economies. Their infrastructure will be put under significant stress, but unless they are able to meet this challenge they will struggle to maintain economic growth.

The major corporations that dominate the world’s industries will seek to exploit these mega cities. They will need to develop their global supply chains to feed trade to and from these places and the shift in economic power from the west to the east will accelerate. For a country like Australia it will be very important for us to maintain our infrastructure, both hard and soft, if we are to avoid being bypassed by these economic trends.

According to the World Economic Forum, Australia’s international competitiveness is its banking sector, which ranked 4th at a global level. Our health and education sectors are also ranked favourably. However, we should not take it for granted that Australia will always be internationally competitive in these areas.

We must continue to invest in our hard and soft infrastructure. Whether it is our education system, water supply and power systems or our road, rail, sea and airports there must be a continuous investment. Failure to maintain international best practice will hobble our economic growth and lead to Australia becoming bypassed by the rapidly growing trade that will become a feature of the Asia-Pacific over the next decade.

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