A heated holiday case study

Few today would disagree that decisions should be evidence based. But how can this be when decisions on infrastructure are decisions about the future – about future demand and future supply. Consider the following decision about the wisdom of expanding waste incineration capacity in the UK. The facts were not in dispute, but the disagreement was heated.

The facts were these. In Europe incineration had been widely adopted by member states with eight large incinerators burning more than one third of municipal waste. However, re-use and recycling are more profitable as well as sounder environmentally, so countries were doing their best to first, reduce the total amount of waste generated, and then to re-use and re-cycle as much of the rest as possible. The more successful they were in this environmental move, the less the feedstock that became available for the incinerators. Concern then started to grow over excess capacity in the expensive incinerators.

Compounding this problem was the European Commission’s green paper on “A European Strategy on Plastics” that reported that just over 20% of plastics used in Europe were recycled, half going to landfill and the rest going to energy recovery, i.e incineration. The Commission called for 100% collection rate for plastics alongside efforts by manufacturers to use plastics more sustainably and to make re-use and re-cycling easier.

Now this is where the story gets interesting. At the time, the UK had about 18m metric tons per year of incineration capacity (either existing or under construction) and about 27m tons of residual waste – or a gap of about 9m tons, material for landfill. If the EU targets were met, increasing recycling from less than 42% to over 78% it would take out all 9m tons, This was before considering reductions in commercial and industrial waste which were also subject to waste reduction programs.

Development consents had already been given for between 2m to 4m tons of further incinerator development and were continuing to be given.

Over – or under Capacity? This gave rise to a very public, and very fiery, debate between two major environmental consultants. One argued that the UK was headed for over-capacity in incineration, the other said not. Both had access to the same information given above and did not dispute it. So why were they in such disagreement?

1. They were in dispute not over the current situation but the likely future. One argued that heavy oversupply of incineration capacity in Europe would attract feedstock from the UK at more favourable prices than could be offered by local incineration. The other argued that, although there was excess supply in Europe, the export markets were volatile, unpredictable and prices unreliable and this would encourage UK facilities to regain self sufficiency and treat waste at home.
2. They also disagreed on future trends in waste generation (essentially how successful the waste reduction programs would be and how quickly they would achieve their targets).
3. But the most important source of disagreement – and one that can affect any market – was how effective the market will be in sorting out any potential oversupply. Both consultants agreed that market oversupply would have a dampening effect on new development – investors in the early stages of their development would choose not to go ahead when they saw that the market was already full. The difficulty here is how efficient and effective is the market? A perfect market would handle this with ease, but we do not have perfect markets. The consultant arguing for overcapacity said “There is a juggernaut effect as projects reach financial close which means that there will not be an immediate response to reaching capacity. Yes, new project development will eventually tail off- but there will still be a capacity overshoot due to the time lag between changing market conditions and the response to this.”

This dilemma is really about when it becomes obvious to the players that the market is already full. When can they ‘see’ it? Those who can remember when fried chicken shops were first introduced in Australia will recognise this juggernaut effect – for a period we were swamped with fried chicken shops. Over half of them were subsequently closed. However, it wasn’t until this oversupply was visible that new construction tapered off. Perhaps not so important with chicken shops, but with large and expensive public infrastructure it is a different matter.)

What are the important lessons from this story?

Analysing demand side data, unlike supply side asset data, is a matter of opinion rather than fact, because we are not looking at what is, but what might be. This is not so much a matter of evidence, but a matter of inference. It requires trend analysis and understanding markets.

In July, I went to Bali on holiday.  I took my laptop, my iPhone and my iPad, admittedly, a  trifle excessive, especially for a holiday.  The airline then lost my luggage containing the charger cables for these devices and I was effectively ‘offline’  – for 3 days.  Did I just kick back and enjoy the beautiful surroundings, the water, the massages and the respite from my inbox?  After all, I was on holiday.  Or did I fret?

Does the thought of being ‘unconnected’ fill you with dread?  I thought of this experience whilst catching up with an article in the Guardian (from August 11, 2015) by one of my favourite authors, Brett Frischmann (“Infrastructure: the social value of shared resources”) He was suggesting that with the ‘internet of things’ it may soon become physically impossible for us to go ‘offline’. For many of us, I reflected, it may already be emotionally impossible. I was intrigued by the term ‘digital gerrymandering’ to reflect the way that Facebook, Google and others ‘influence’ us.  But I was especially taken with the following proposition by Frischmann and his co-author, Evan Selinger:

“The internet of things is envisioned to be a “programmable world” where the scale, scope, and power of these tools is amplified as we become increasingly predictable: more data about us, more data about our neighbours, and thus more ways to shape our collective beliefs, preferences, attitudes and outlooks. Alan Turing wondered if machines could be human-like, and recently that topic’s been getting a lot of attention. But perhaps a more important question is a reverse Turing test: can humans become machine-like and pervasively programmable.”

Brett speaks to this idea in a  short interview on YouTube

The question that this raises for me is:  in this programmable world, how valid are our ‘community consultations’? Is there any role left for us, as  citizens, as community, to impact infrastructure decisions?

Talking Infrastructure has recently been working in the Pacific Islands, assisting Auditors-General to design and implement infrastructure management audits. The infrastructure problems experienced in the Islands are those that we, in developed countries, also experience – but magnified a hundred-fold, making them valuable learning for all.

With the exception of Papua New Guinea, the Pacific Islands (21 of them) are small, both geographically and in terms of population. Their ability to provide infrastructure to their people is extremely limited and they rely on international donors such as Australia.  How effective is this donor ‘help’?  Questionable, at best, especially when donors choose their own designs, fly in their own workers, provide their own materials, and – in some cases – even to provide their own food for their workers.  When this happens, the local community not only gets little or no benefit from the actual construction but, by not being involved in the construction, they are limited in  their abilities to  maintain.  The structures then degrade more rapidly and the use of  imported materials means that repair and renewal is often prohibitively expensive. Whilst, in principle, donors are required to co-ordinate decisions with the local communities, this rarely happens in sufficient depth to avoid the worst of impacts – such as the design of the fully air-conditioned building that required operating and maintenance costs seven times the budget of the agency to which it was ‘gifted’. (To say nothing of its draw on limited power facilities).  It is hardly surprising that the Islands have developed what is called a ‘build-neglect-rebuild’ approach to infrastructure. (See ‘Infrastructure Maintenance in the Pacific, challenging the build-neglect-rebuild paradigm, by the Pacific Region Infrastructure Facility (PRIF))  Under the circumstances, this may indeed be considered to be a very sensible (even necessary) infrastructure management strategy.

This is a problem that needs urgent addressing in the Islands.  But when we think about it, the same practices are occurring here in Australia and in other developed countries where one level of government provides capital funds (and also many of the decisions on what is to be funded) and a lower level of government, with far fewer resources, is left to pick up the ongoing costs.

Question for consideration:  What can we do, in our everyday decision-making, to at least moderate the worst impacts of capital decisions made at one level with O&M at another?

I have hesitated to write this on the grounds that I do not know enough.  But, on reflection, that is now precisely why I am writing it.

Trying to get clarity on the issues surrounding the decision to (a) support and (b) finance the Adani coal mining venture in Queensland has shown me how little clear and rigorous debate has been reported.  I am not saying it has not taken place, and maybe there is a detailed explanation somewhere, but it is not easily to be found.

In public pronouncements on the issue, the Premier of Queensland has publicly justified the decision based on employment figures that are grossly in excess of even the optimistic figures of the company itself. Opposing arguments on economic, social and environmental grounds have been  ignored or dismissed rather than addressed. (Although, admittedly, these arguments themselves have often not been clearly articulated or rationally presented.)

It is testament to this lack of clarity that the cleanest account of the issues that I have seen comes from a landowner – Bruce Currie of Jericho – as reported in the Queensland Country Life, 7 December.

Bruce asks:

• Why is the Federal Government lending $1B to the Adani Group so that it can build a single (private) use 310km railway line from the proposed coal mine to the port.
• Why is the Northern Australian Infrastructure Facility supporting an operation that could threaten permanent destruction of water resources on which the agricultural industry depends, rather than supporting the viabllity of the region by opening up road and rail links for agricultural freight.

To my mind his most telling point is

“This is a project that will not last – within the life time of my children, the coal will be depleted, reliant businesses stripped of supply, the venture closed, miners unemployed, and groundwater supplies especially to the Great Artesian Basin in this area, destroyed forever.”  (cf our post of 6 December on the life cycle of benefits)

His points may be right or wrong but surely we should be insisting that our governments, in the interest of accountability and transparency, should address them all – with clarity!

And if they don’t, perhaps we should emulate the French and take to the barricades?

In the last post I looked at the notion of taking the benefit life cycle into account in infrastructure planning.  Today I want to raise an equally important issue for infrastructure planners, and that is ‘what do we mean, and measure, by “benefits”?

When the Adelaide Casino was first mooted, many years ago now, the benefit-cost analysis vaunted the new employment opportunities that would be created.  The analysis failed to mention how many existing jobs would be lost.  The losses included a nearby coffee shop with great ambiance that provided chess sets for customers to enjoy and was well patronised. However, it was unable to compete with the allure of the new casino and closed. Many other small eateries also closed. Later, when the excitement factor of the new casino died down, and customers wished to return, many of these small businesses were financially unable to afford to start up again. They were lost for good. The casino also laid off staff as demand declined.  The employment ‘benefits’ were gross, not net, and thus were considerably overstated.

Given that many of our new infrastructure projects are roads, how many of the proposed benefits are similarly ‘gross’ not ‘net’ benefits?   For example, how many existing roads now become under-utilised?   (And what else needs to be ‘netted out’?)

What examples do you know of where the ‘benefits’ in the ‘benefit-cost’ analysis took these factors into account?  Or didn’t?

Most now are familiar with life cycle costs. Infrastructure agencies build detailed and complex models for these costs and, given replacement costs and useful life of components, detailed prediction software is now available.  But benefits are a different matter.  We have yet to develop a software program for that.

Looking now to current infrastructure proposals, how much attention is paid to the life cycle of benefits?   For example, what are the long-term benefits of a new road?  Often justification is based on time savings, but how long do these time savings last?   Those who remember the early days of the ring route in Melbourne will know that it cut about 30 minutes off the peak travel time from the airport to the city – but only for about 2-3 months – and then it was back to pre ring route time of 60 minutes.    Was this ‘benefit decay’ factored in?

Manufacturers and retailers pay a great deal of attention to ‘product’ or ‘service’ life cycles. They seek to anticipate the decline or change in demand for what they are producing so as to be ready to produce a new product or service as the old one hits its peak and starts to decline.   They don’t assume that they are ‘building capacity for the future’, for they realise that the future will be very different, and require different products. They seek to maximise the present.

We have been brought up on notions of infrastructure longevity and service stability, but could it now be time to re-think and incorporate more benefit analysis into infrastructure planning?

On Tuesday last, under pressure from Senator Nick Xenophon, the Australian Government committed to overhaul rules about how it spends its annual $60 billion procurement bill to maximise local content.The new rules will take effect from March next year. Under the changes, bidders for government projects worth more than $4 million will need to show:

• How much locally-produced material they will source
• How they are contributing to local employment
• How they are growing local skills
• The whole-of-life cost of the project, not just the build cost
• That the materials they use comply with Australian product standards

The fact that these changes were needed, and that they were resisted for so long, throws doubt on the long held popular notion that infrastructure ‘creates jobs’ and, by implication, Australian jobs. Now there is more chance that they will.  The use of local labour and materials and increase in local skills will also improve our ability and reduce costs needed to maintain the new infrastructure.

But, perhaps the most interesting of the new requirements is the requirement for ‘whole-of-life’ cost of the project which will require assessment of the anticipated life of the project, and, hopefully, public discussion of what determines the useful life in a world of rapidly changing opportunities, demands and technologies.

I would like to see an additional requirement –  designers and planners should be expected to show how they are actively minimising whole-of-life, or lifecycle, costs.

Questions today:

What do you like – or dislike – about Xenophon’s proposals?

What other additions might improve our approach to infrastructure?

There used to be two economic policy tools – monetary policy and fiscal policy. With monetary policy, we would raise or lower the interest rate to decrease or increase the amount borrowed and spent.  It was argued that reducing the interest rate would decrease the readiness of consumers to save and so would lead to more consumer spending and simultaneously increase the willingness of firms to borrow and invest more.  But interest rates have hovered close to zero (and in the case of Japan, below zero) for close to a decade and the expected increase in spending – either consumption or investment has not arisen.  Despite calls that suggest governments should take advantage of low interest rates to spend on infrastructure, it is noticeable that investors (playing with their own money) are not doing so.  The point is that it is only when the economy is healthy that tinkering with the interest rates is likely to work. For a long period after the end of the second world war, that was the case. We simply assumed it would always be the case, but we were wrong.

So, now we are down to one policy tool – fiscal policy.  In the recent past governments have been trying to build up their surpluses while simultaneously encouraging the population to do the reverse!  Communities have been urged to spend, while governments have struggled to save. But government savings (mostly through reductions in the public service or by outsourcing) has resulted in loss of jobs and, as this has mounted, loss of confidence. So consumers are not spending, they are saving for that inevitable ‘rainy day’.  Again, when our economy was healthy, governments used capital spending as a tap that could be readily turned on or off.  Recurrent spending was not seen to be so amenable to manipulation. This has morphed into today’s focus on infrastructure with a simultaneous reluctance to spend on the upkeep and operations that are necessary to provide service from that infrastructure. But infrastructure spending during the global financial crisis of 2008, which was seen as so successful at the time, led to severe reductions in spending subsequently in order to pay the interest bills incurred.  So a short term gain at a slightly longer term cost.

Are we now down to zero economic policy tools?  Are we clinging to the belief that infrastructure spending will save us simply because we know of nothing else?  And is infrastructure spending better than nothing?