Economics of infrastructure interview with Craig Lawrence of Lytton Advisory

I spend much of my spare time listening to podcasts, including EconTalk, Planet Money, and the Tim Ferriss Show among others, and I’ve often thought it’s about time I start my own podcast. Over the last month or so, I’ve taken the Podcasting Fellowship course delivered by Alex DiPalma, a prominent US podcast producer, notably of Seth Godin’s Akimbo podcast. As part of the course, you need to interview people and edit the audio. I am very grateful to my colleague Craig Lawrence, Managing Director of Lytton Advisory, for agreeing to be my first interviewee. Craig has had a lot of experience advising on infrastructure projects in Australia and overseas, including in PNG, the Solomon Islands, and in the Middle East. I’ve been fortunate to work with Craig on a few projects over the last couple of years. You can listen to our discussion on the economics of infrastructure below.

Thanks to the BBC for providing the supermarket scanner sounds which I obtained via the BBC Sound Effects Archive.

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Retail apocalypse maybe, but no apocalypse in health & education

The so-called Retail Apocalypse is prompting a lot of people to think about how shopping malls and high streets can adjust to the shift toward e-commerce and away from bricks-and-mortar stores. The global head of property for AMP Capital Carmel Hourigan made some interesting comments, reported in the Australian last week, on the future of shopping centres, which my research assistant Ben Scott and I have quoted in our latest post on the Adept Economics website, Retail apocalypse in Australia? :

Not everyone is pessimistic about the retail sector. The Australian has reported that Carmel Hourigan, global head of property for AMP Capital, has highlighted the need for retail hubs to “keep evolving”. They can do this by becoming “social infrastructure-style businesses” and “community hubs rather than traditional shopping points”. While acknowledging high vacancy rates in many malls worldwide, Hourigan is convinced that shopping centres can endure the current downturn and take on new tenants such as health and education providers, which can expect growing consumer demand over the long-term.

Health and education are certainly growing sectors, and have been performing much better than retail trade, as revealed by ABS National Accounts data (see chart below). Health care and social assistance grew 7.2% in real terms through-the-year to June quarter, no doubt due in large part to the roll out of the NDIS. Education and training grew 2.0% while retail trade grew only 0.3%. Hourigan is right to identify the health and social assistance and education and training sectors as containing many potential tenants for shopping centres with rising vacancy rates.

gva_growth

For more on the Retail Apocalypse, see my post from last week:

Retail therapy – recommended reading

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Does Qld need a few large firefighting planes? Guest post by Stephen Thornton

Thanks to my good friend and colleague Dr Stephen Thornton for his latest guest post. Views expressed are Stephen’s and should not necessarily be attributed to me. GT

Does Queensland need a few large firefighting planes?

The terrible bushfires in south east Queensland in the last few weeks and the efforts to control and extinguish them have piqued my interest in aerial firefighting aircraft. With the caveat that I’m not an aviation nor firefighting expert, I am struck by how little water/fire retardant volume even the large firefighting aircraft are capable of holding as they dump their liquid cargo on the fires to save lives and property, and how few we have available to do so.

The largest firefighting aircraft we have in Australia is the converted passenger jet Boeing 737 with a 15,000L carrying capacity and the modified military transport plane C130Q with an equivalent capacity. To put that in some context, a typical backyard swimming pool holds more than twice that amount. The largest carrying capacity rotary-blade aircraft (helicopter), the Erickson S64E – Aircrane, holds around half of that, but can refill quickly from dams and other surface water sources.

We only have a handful of each for the entire country. As at November 2018, there was only one 737, two C130Qs and six S64Es in the National Aerial Firefighting Centre (NAFC) arsenal with some state governments also owning aircraft. For example, the NSW government this year purchased a 737 Large Air Tanker (LAT), the ‘Marie Bashir’, named after the former Governor of NSW and which is currently water bombing areas in northern NSW.

It seems this aircraft was also used to assist in quelling the Peregian Beach bushfire on the Sunshine Coast earlier this week. No doubt the local residents were very grateful to see it cross the border.

In the US is the Global SuperTanker, a Boeing 747-400 dubbed the Spirit of John Muir based in Colorado Springs. With a carrying capacity of 70,000L it can drop almost five times the water of our current largest planes. Most recently it was contracted by Bolivia to assist with the bushfires in Brazil that have destroyed large parts of the Amazon. The SuperTanker can operate from any airport with a 2,400m long runway and required facilities. The 737 needs only 1,950m, so it has a slight advantage in where it can take off and land.

N744ST_30.11_Micha

A Global SuperTanker in Israel. Attribution: LLHZ2805 [CC BY-SA 4.0 (https://creativecommons.org/licenses/by-sa/4.0)%5D

Queensland’s new Toowoomba Wellcamp Airport has a 2,870m runway and has confirmed it can easily accommodate aircraft the size and weight of the SuperTanker with its 70 tonnes of on-board fire suppressant.

I contacted Queensland Fire and Emergency Services to enquire whether we owned any aerial firefighting aircraft. The answer is no. QFES engages its aircraft two ways.

  1. A Call-When-Needed Standing Offer Arrangement by a tender process whereby Commercial Aircraft Operators across the country are able to apply for their company, aircraft and pilots to be registered as approved suppliers of aviation services for QFES
  2. Through nationally procured contracted services arranged by the National Aerial Firefighting Centre (NAFC). QFES engages eight national contracts, which are determined for a five year period (established as three years, plus 2 x one year extensions). The length of each commitment period is 12 weeks (84 days) each year, with extensions incorporated and engaged as the fire seasons progress if required.

    The eight contracts are divided into the following:

    *  2 x Type 2 Rotary Wing Bombing platforms based at Toowoomba;
    *  1 x Type 3 Rotary Wing Air Attack Supervision (AAS) / Observation (Obs) platform based at Toowoomba;
    *  2 x Type 4 Single Engine Air Tanker (SEAT) Fixed Wing Bombing platforms based at Toowoomba;
    *  1 x Fixed Wing AAS/Obs platform based at Toowoomba;
    *  1 x Type 2 Rotary Wing Bomber at Bundaberg; and
    *  1 x Type 3 Rotary Wing AAS/Obs platform at Bundaberg.

These are all quite small water carrying capacity aircraft, probably nothing over 2,000L – 3,000L which is not surprising given Queensland historically does not have the huge bushfires of the southern states.

Greg Mullins, former Fire and Rescue NSW Commissioner, says the federal government is not putting enough money in for large firefighting aircraft which ‘give you an edge on a really bad day’ and more federal funding for these type of aircraft is needed.

This may be true, especially in high and extreme bushfires where aerial suppression can provide substantial support to ground crews and also where ground crews are unable to get to the fire quickly or it is hard to reach. However, expensive dedicated aircraft have high overheads meaning their cost efficiency is contingent on a high level of operational use (see Effectiveness and Efficiency of Aerial Fire Fighting in Australia). So, you don’t want too many or too few.

The question regarding aerial firefighting is whether it makes sense for governments to own assets that are likely to only be used periodically or whether it is better to contract these services from the private sector?

Usually, it makes sense for governments to directly provide goods and services only where the market cannot or can only do so inefficiently. In the case of these large aerial firefighting planes like the 737, I doubt if our existing private supplier companies would want to extend themselves that far which is why, in the case of the NSW government purchase of the 737, it owns the asset but reportedly comes with a 10-year operational contract with Coulson Aviation to provide all flight and maintenance personnel.

In past decades we have brought in aircraft from the northern hemisphere in their ‘off season’ but, as Greg Mullins explains, some overlap has begun to develop making this strategy increasingly unsustainable.

In its response to me, QFES also noted that future considerations will be made toward further expansion based upon the most effective response models being established. We need to factor in now the longer hot, dry periods we are likely to experience in the coming decades resulting in an increased risk of bushfires and the economic, social, and environmental costs associated with that. Purchasing a few large firefighting planes which can travel to anywhere in the state at a moment’s notice should be seriously considered by the Queensland government, if the economics stack up.

Dr. Stephen Thornton is principal economist at BG Economics.

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Destination Gold Coast CEO right the GC’s been missing out

I’m usually sceptical of pleas from regional leaders for greater government investment in their regions, but I think the Destination Gold Coast CEO has a legitimate grievance. The Gold Coast Bulletin reports:

THE Gold Coast’s tourism boss has blasted the “failures” of successive state and federal governments to invest [in] boosting visitor numbers and building infrastructure.

Destination Gold Coast chief executive Annaliese Battista used her keynote address at the Gold Coast Bulletin’s Future Gold Coast forum to deliver a stinging attack on what she called a “lack of investment”.

She’s right, at least according to state government capital expenditure data. The Gold Coast comes third last in terms of Queensland Government capital purchases per capita in 2019-20 (see chart below), as I demonstrated in my post from June Qld Gov’t CAPEX – Brisbane’s inner city the big winner.

capex_per_capita_1

Lower-than-average per capita state government capital expenditure on the Gold Coast is not a recent phenomenon, as shown in my 2017 post Is North Qld under funded by the state government relative to the south east. Once again, I suggest that the state government should offer greater analysis and justification for its capital spending by region than it currently does.

Maybe the Gold Coast doesn’t need additional state government CAPEX, although motorists stuck in traffic on the M1 would strongly disagree. I expect Gold Coast residents would eagerly welcome some of that $5 billion+ being spent on the arguably unnecessary Cross River Rail in Brisbane’s inner city being spent in their region instead.

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Worried Master Builders Qld calls for new Building the Education Revolution

Paul Bidwell, Deputy CEO of Master Builders Queensland, has made some extraordinary comments to the Courier-Mail, calling for the federal government to stimulate the construction industry through a new Building the Education Revolution, which was a Rudd Government stimulus measure. The Courier-Mail reports:

Mr Bidwell argues a massive government spending program, similar to Kevin Rudd’s Building the Education Revolution scheme during the 2007-2010 Global Financial Crisis, was key to stimulating economic growth.

Under the scheme $16.2 billion was spent on infrastructure for schools.

Mr Bidwell [said] the scheme would help offset low residential building approvals and would again stimulate the economy.

BER was undoubtedly good for the building industry, although its benefits to taxpayers were less clear (see Lessons from the BER program), with inflated BER construction costs and a program duration which extended well past the period of risk for the Australian economy.

While I wouldn’t support Paul Bidwell’s call for a new BER, I understand where he’s coming from. As I reported last week, in my June quarter National Accounts post, dwelling, non-dwelling, and engineering capital expenditure have been declining. Regarding leading indicators, residential building approvals are well down on where they were 2-3 years ago (see chart below). Non-residential approvals have had a bit of a boost recently, but it remains to be seen whether the upward trend in non-residential approvals will continue. Overall, I think Bidwell is rightly concerned about the outlook for the building industry.

res_vs_nonres_Jul19

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Retail Therapy – recommended reading

I’ve recently discovered that what Nespresso does at its Queen St Mall Boutique, where it offers free cups of coffee to customers in a cafe-style setting, is “Brand Theatre”. I figured this out after reading Retail Therapy, a recently published book authored by Mark Pilkington, a UK-based consultant to the retail industry. The free coffee and relaxing experience Nespresso offers is excellent, but now I don’t buy capsules in the store because it takes too long. So I order them online. In the old Nespresso store on the other side of the Mall, it was much simpler and quicker. You’d queue up and order what coffee capsules you’d like. But now you need to wait for one of Nespresso’s roving employees to assist you, and they often hand you over to another staff member who will retrieve the capsules from out the back.

What I never appreciated fully is that Nespresso is deliberately pushing existing customers to online purchases. The stores are dedicated to creating new customers rather than servicing existing ones, who can be serviced much cheaper online. In his excellent book, Pilkington explains (on p. 208):

Retailers need to use the stores to do the things that the web cannot – namely, provide an immersive brand ‘experience’ – which pulls in customers, and then transfers them to the web for the actual transactions.  

Retail_Therapy

Pilkington’s book has the sub-title “Why the Retail Industry is Broken – And What Can Be Done to Fix it”. He is a believer in the so-called Retail Apocalypse being experienced across many advanced economies, with high rates of vacancies in many shopping malls and high streets. The Retail Apocalypse has been caused by e-commerce, other digital disruptions such as Uber Eats, and lower car ownership among Millennials, among other factors.

According to Pilkington, the bricks-and-mortar retail industry needs to adapt or die. It needs to develop more private label brands, to compete with manufacturers selling direct to the consumer via the internet. Pilkington notes (on p. 226) the internet is “collapsing supply chains” and “Multiple mark-ups no longer work.” Stores need to do more than simply being a means of bringing goods to consumers. The smart retailers, such as Nespresso (my example rather than Pilkington’s) are putting on “brand theatre”. Pilkington expects that retailers will need to embrace the “store as community” model, and he gives Apple and Starbucks stores as examples. He also suggests there needs to be more widespread analysis of data to target customers and A/B testing of products and concepts (on p. 244):

Rather than rely on large, slow-moving, monolithic projects aimed at producing complete solutions, retailers need to move towards encouraging lots of small experiments.  

Pilkington notes retail is struggling across a broad range of advanced economies, including in Australia. He refers to failed retailers such as Dick Smith Holdings, Herringbone, and Oroton, and notes the struggles David Jones and Myer have had in recent years. It is well known Australian retail has been facing difficult times. Indeed, over the last year retail turnover has only increased 0.2% in real terms (see chart below), despite Australia’s ever-growing population. Australian retailers would be well advised to read Pilkington’s book.

Turnover_real

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Huge opportunities for Australian businesses in India says Jim Varghese

My research assistant at Adept Economics Ben Scott and I have prepared a short article on a recent talk Jim Varghese AM gave to the Australian Institute of International Affairs (AIIA) on Getting down to the business of increasing trade and investment between India and Australia. The article is available at this link.

Huge opportunities for Australian businesses in India says Jim Varghese

The Chair of the Australia India Business Council (AIBC) Jim Varghese AM gave a great presentation in Brisbane Tuesday last week on the huge opportunities for Australian businesses in India. He noted some striking demographic facts and highlighted how India’s healthy and well-proportioned population growth, which stands in stark contrast to China’s, is a good omen for future economic prosperity.

Firstly, India’s population is projected to overtake China’s around the mid-2020s (See below).

Source: UN World Population Prospects

Please continue reading at:

Huge opportunities for Australian businesses in India says Jim Varghese

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