Impact of Next Generation Infrastructure on Australian Cities

Transcription

1 Impact of Next Generation Infrastructure on Australian Cities ISNGI 2017 Institution of Civil Engineers, London 13 September 2017 Dr. Fariba Ramezani Associate Research Fellow SMART Infrastructure Facility University of Wollongong Australia 1

2 Presentation outline Introduction Microeconomic impacts of infrastructure investment Case study: South West Illawarra Rail Link (SWIRL) Conclusion 2

3 Introduction Infrastructure investment and economic growth The relationship between additional infrastructure investment and additional economic growth is not straightforward. For instance, any infrastructure investment will, in the immediate, raise growth Y = C + I + G + (X M). That is, if we increase I then we increase Y. This is simply a National Accounting identity. What is more interesting is the long-run impact of infrastructure investment on the economy. This is more difficult to measure, not only because we are trying to pick up an enduring effect of the initial infrastructure investment, but also because the causality (between investment and growth) could go the other way. For instance, increased growth can be a signal (and an impetus) to invest more in infrastructure, such as happened in Australia during the mining boom when both private and public infrastructure investment increased significantly. 3

4 Introduction Infrastructure investment and economic growth The macroeconomic impacts of infrastructure are generally assessed in the context of how infrastructure facilitates market activity and therefore supports economic growth. The more recent overall estimates of the impact of infrastructure investment on domestic output (the so-called infrastructure elasticity) are in the range of around 0.1. Putting that in the Australian context, an AUD$51 billion increase infrastructure investment (i.e. a 1% addition to Australia s net capital stock of $5.1 trillion) would permanently increase output by $1.6 billion per year, (i.e. a 0.1% addition to Australia s GDP of $1.6 trillion). The return on the infrastructure investment then is around 3.1% (i.e. $1.6 b / $51 b), close to Australia s long-run GDP growth rate 4

5 Introduction Infrastructure investment and economic growth Estimates of the output elasticity of infrastructure are generally higher in circumstances where: infrastructure investment is related to public capital installed by regional or local governments; infrastructure investment is related to core services provided by roads, railways, airports, and utilities; and the benefits of infrastructure investment are measured over a longer-term time horizon, reflecting the fact that infrastructure outputs (benefits) occur over many years. Public infrastructure investment can potentially contribute significantly to the growth of an economy, provided it is productive. 5

6 Microeconomic impacts of infrastructure investment The literature demonstrates that efficient infrastructure investment is determined on a case-by-case basis (rather than at a macro level). There are a number of best-practice principles that make it more likely that the investment will be efficient: rigorous ex ante cost benefit appraisal and business case analysis is undertaken independently of the project proponent, where alternative options are carefully considered; there is at least some significant private sector involvement in terms of funding, financing and ownership of public infrastructure; there is at least some amount of cost reflective pricing of the services provided by the infrastructure and the stronger the price signal on demand/consumption the better A problem arises where there is no price signal (i.e. infrastructure services are provided free by governments; it is therefore difficult to tell how people value these services). The complete absence of a price signal could mean that infrastructure is not being used effectively. For instance, the free use of the road system has been identified by many scholars and commentators as contributing to congestion and additional, inefficient, investment requirements. decisions about infrastructure priorities are made at a local level and prioritised because the local government faces a binding fiscal constraint that forces it to consider many options and pick the best option. 6

7 Microeconomic impacts of infrastructure investment Infrastructure investment is considered to be efficient, in the sense that a given project represents the best use of scarce resources and community welfare is unambiguously improved by undertaking the project, if: the project is expected to yield benefits that exceed its (risk-adjusted) costs; and the project s net benefits exceed those of other investment alternatives (including doing nothing). Public sector investment criteria consider the broader ( social ) costs and benefits of an investment decision, including positive and negative spillovers that are not captured in market prices. 7

8 Microeconomic impacts of infrastructure investment There are two other aspects of infrastructure efficiency that extend beyond the productive efficiency criterion described above, namely, how projects are initially financed and funded over time. Funding efficiency relates to how the ongoing provision of infrastructure services is paid for, in terms of the balance of user charges versus funding from general government revenues or borrowing. Although the price signal is vitally important to efficiently guide future investment, in some circumstances seeking 100% full cost recovery is not efficient. There are public (spillover) benefits from avoided: (i) congestion, (ii) accidents, and (iii) pollution, which means that consumers don t need to necessarily pay the full cost of a public transport service for example. Funding efficiency therefore requires a balance between charges that reflect the benefits that users derive from infrastructure, and the amount of funding costs imposed on taxpayers as a whole, noting that many taxpayers may not use a particular infrastructure service and that public funding decisions carry with them an opportunity cost and the deadweight loss of raising taxes. 8

9 Microeconomic impacts of infrastructure investment Channels via which transport infrastructure affects productivity at the microeconomic level: Employment accessibility: Gibbons et al. (2012) capture road improvements using an index of changing employment accessibility to measure the amount of employment reachable per unit of travel time along the major road network. Reduced inventory holdings: Li and Li (2013) highlight the improvement in productivity from reduced inventory holdings as a result of an improved transport network. 9

10 Case Study: South West Illawarra Rail Link (SWIRL) 10

11 SWIRL Objectives The New South Wales Government is balancing multiple policy objectives: Best use of scarce taxpayer funds (all governments face a budget constraint) Prioritising infrastructure investment across NSW (picking the best projects) Better transport connectivity for the Illawarra region (faster commute times to Sydney, improved freight efficiency) Regional development of the Illawarra region Lower unemployment in the Illawarra Better transport connectivity for the growth region of southwest Sydney 11

12 Assessing SWIRL objectives which tool? NSW Government is balancing multiple policy objectives: Best use of scarce taxpayer funds (all governments face a budget constraint) CBA Prioritising infrastructure investment across NSW (ie. Picking the best projects) CBA Better transport connectivity for the Illawarra (faster commute times, improved freight efficiency) CBA Better transport connectivity for the growth region of southwest Sydney CBA Regional development of Illawarra EIA Lower unemployment in the Illawarra EIA 12

13 SWIRL CBA potential benefits to passengers Rail user cost savings Reduced waiting time Reduced travel time Reduced modal shift Reduced accessibility costs, where accessibility is broadly defined as the variety of opportunities provided to people through efficient arrangement of land use and various modes of transport Rail user benefits Improvements in service reliability due to reaching the destination in a consistent journey time Improved passenger comfort due to improvements in amenities Benefits to the broader community Induced and generated rail trips: Reduced car use / road congestion by shifting some car trips to public transport Vehicle operating cost savings Accident (crash) cost savings Reduced environmental externalities 13

14 SWIRL CBA potential benefits to passengers (WEBs) Potential benefits of rail investments or upgrades- Passengers traffic- Indirect benefits: Community development benefits Transport investment improves the accessibility for new and existing transport users in catchment areas, which is often translated into enhanced land values. Low-income mobility benefits Availability of affordable transportation to low income people Budgetary savings arising from reduced social service outlays on home based health and welfare services such as home health care and unemployment benefits Wider Economic Benefits Agglomeration economies Increased competition as a result of better transport Increased output in imperfectly-competitive markets Economic welfare benefits arising from improved labour supply 14

15 SWIRL CBA potential freight benefits Improved productivity Lower costs Higher throughput Reduced waiting time penalties Reduced travel time penalties Reduced modal shift Improvements in service reliability Better coordination with attendant impact on inventories and spatial location with changing distribution network Benefits to the broader community Reduced car use / road congestion Vehicle operating cost savings Accident (crash) cost savings Reduced environmental externalities 15

16 Cost Benefit Appraisal SWIRL costs and benefits DESCRIPTION LOW CASE CENTRAL CASE HIGH CASE ( DOLLARS) $ MILLIONS $ MILLIONS $ MILLIONS Freight travel time savings Freight operating cost savings Avoided externalities Option value of South Coast Line failure Passenger travel time savings and other benefits Total private and social benefits (NPV, 7%, 40 years) Total private and social costs (NPV 7%, 40 years) (Central estimate) , , , , , , , BCR (7%, 50 years) BCR (4%, 50 years)

17 Economic Impact Analysis input assumptions FOCUS OF THE ANALYSIS LOW CASE CENTRAL CASE HIGH CASE Infrastructure capital investment Additional capital expenditure on the SWIRL (full resource cost including new train sets) Transport Industry efficiency Improved freight productivity across NSW via a reduction in resource costs Population and Labour Force Additional population growth in the Illawarra over 20 years, from greater access to jobs, education and leisure opportunities Lower natural rate of unemployment in the Illawarra (additional people (FTEs) per year active in the Illawarra labour force) Income transfer to the Illawarra (from Sydney) Income repatriation in the Illawarra region (additional 2,500 people * $50,000, central case) $ million 1,520 1,689 1,858 $ million per year percentage point difference % 0.3 % 0.4% FTEs 750 1,000 1,250 ($ million per year

18 Economic Impact Analysis results (GRP) Central Case Gross Regional Product The NPV of the total economic impact = $2,579 million in the Illawarra region. The economic impact for Greater Sydney is $97 million in NPV terms. In terms of the impact on the Illawarra, 71% (or $1,833 million) occurs in Wollongong, while the share of Shellharbour and Kiama is approximately equal 15% and 14% respectively ($381 million in Shellharbour and $364 million in Kiama). Most of the enduring impacts in the Illawarra come from the income repatriation assumption. 18

19 Economic Impact Analysis results (employment) Central Case Employment The average annual additional employment over the construction and operating period ( ) is 1,119 FTE s in the Illawarra and 14 FTE s in Sydney. 19

20 Economic Impact Analysis overall result ECONOMIC IMPACT ON OVER THE PERIOD 2018 TO 2037 $ MILLIONS, REAL GRP DOLLARS (NPV, 7%) EMPLOYMENT (ANNUAL AVERAGE ) EMPLOYMENT (AT PEAK) Illawarra Region 2,579 1,119 1,367 Sydney Region NSW 2,635 1,135 1,387 20

21 Economic Impact Analysis sensitivity analysis, GRP 21

22 Economic Impact Analysis sensitivity analysis, employment ECONOMIC IMPACT ON OVER THE PERIOD 2018 TO 2037 $ MILLIONS, REAL GRP DOLLARS (NPV, 7%) LOW CASE CENTRAL CASE HIGH CASE Illawarra Region 2,135 2,579 3,021 Sydney Region NSW 2,174 2,635 $3,094 ECONOMIC IMPACT ON OVER THE PERIOD 2018 TO 2037 $ MILLIONS, REAL GRP DOLLARS (NPV, 4%) LOW CASE CENTRAL CASE HIGH CASE Illawarra Region 2,802 3,401 3,997 Sydney Region NSW 2,860 3,484 $4,105 22

23 Summing up Governments often have multiple policy objectives when considering public infrastructure investment. As a result, multiple evaluation techniques are often required. CBA should be used to prioritise (or rank) competing infrastructure projects EIA should be used to better inform regional impacts, such as on growth and employment Commissioning new public infrastructure solely to boost short-term economic growth could have long-term negative economic consequences if that infrastructure is not fit-for-purpose and provide taxpayers with value-for-money. Public infrastructure investment needs to be considered on a case-by-case basis. Each project should be considered on its merits relative to a do nothing and do incremental case. Government infrastructure policies and institutional frameworks matter. How governments prioritise projects, seek independent advice on the best projects, manage demand with pricing and deal with distributional impacts all matter in terms of making NGI improve the functioning of our cities and our lives. 23

24 Thanks! 24