Infrastructure

Cadence Economics has considerable experience undertaking economic analysis and assessment of infrastructure related policies and investments based on computable general equilibrium (CGE) modelling. CGE modelling offers several key advantages in relation to infrastructure investment and is often the framework prescribed by central agencies to assess the economic impacts of large scale investments.

This is because CGE models are based on a detailed representation of the economy, including the complex interactions between different sectors of the economy that facilitate multifaceted analysis of infrastructure investment ranging from first round direct impacts of additional (short term) construction activity, to the consideration of flow on benefits such as productivity improvements as well as the broader aspects in relation to infrastructure funding.

Strategic planning

We have been responsible for providing modelling support for a number of major infrastructure strategic planning processes. Most recently, we undertook an assessment of the Federal Government's housing affordability strategy (discussed below). In addition, these processes have included broad-based strategies such as the State Infrastructure Strategy in New South Wales and the Victorian Freight and Logistics Plan that considered a wide range of investment across, for example, road, rail, energy and port projects. We have also been involved in sector specific strategies such as the South Australian Regional Mining Investment Program, the North West Minerals province and a port reconfiguration strategy for the New Zealand Ministry of Transport.

We have also undertaken a wide range of infrastructure assessments in the context of forward-looking or 'foresighting' studies. This modelling draws on our CGE models capacity to undertake forecasting and scenario analysis, considering infrastructure developments in the context of prevailing economic trends and developments as well as megatrends. This analysis generally has had a regional focus, either at the State level or for sub-state regions such as the Hunter Valley and Sydney City.

Specific infrastructure developments

Apart from these broader strategic planning processes, we have previously been engaged to undertake CGE modelling of specific infrastructure investments. Our experience in this kind of analysis covers a wide range of infrastructure such as airports, ports, rail, telecommunications, road and energy.

These assessments have considered greenfield investments, such as the Western Sydney Airport, as well as a raft of expansion or upgrade projects. Often, these assessments have formed input into an Environmental Impact Assessment (EIA), cost benefits analysis (CBA) or an accompanying business case. In addition, we have undertaken a number of policy assessments with an infrastructure focus such as assessing the impacts of a curfew on Brisbane airport.

The following is a list of case studies in relation to recent economic assessments of large scale infrastructure investments.

Cruise ship terminal facilities

Cadence Economics recently completed an economic impact assessment of developing additional cruise ship capacity east of the Sydney Harbour Bridge for the NSW Department of Industry. This formed the basis of a cost benefit analysis considering six different investment options, the largest of which was around $1 billion. This analysis formed a major component of a Cabinet Submission made by the Department that was recently considered by the NSW Government.

The modelling was based on a detailed assessment of the future growth of cruise tourism in Sydney which is facing constraints as the industry moves to larger vessels that cannot access port facilities on the eastern side of the Sydney Harbour Bridge due to physical constraints.

To estimate the economic impacts of the proposed developments, the economic modelling considered both the infrastructure investment required, as well as the estimated increase in tourism expenditure as a result of removing these infrastructure constraints.

The model was used to estimated the net economic welfare effects of proposed developments which were subsequently assessed in a cost benefit framework to rank each proposal.

Vision Illawarra

Cadence Economics was engaged by the SMART Infrastructure Facility UOW to assist with an analysis of the economic impacts of completing the Maldon-Dombarton freight line, a $2 billion investment, as both a passenger and freight service connecting the Illawarra to the Sydney Train Network via south-west Sydney.

We provided advice to SMART on framing the modelling parameters and the LGA regions that make up the Illawarra and Greater Sydney. Our bespoke model is user friendly with an Excel 'front-end' and SMART were able to run their own simulations with our technical support. We assisted with the development of the input assumptions related to capital investment (the cost of the rail line), and the economic and wider benefits that might accrue from the line's completion as both a passenger and freight service.

In particular, we assisted in framing the likely capital and labour productivity benefits that might accrue from better connecting the Illawarra region to Sydney with an additional rail link. The long-run average rate of unemployment in the Illawarra is around 2% higher than in Sydney, despite the regions proximity to Australia's largest and deepest labour market. We used the example of the improvement in transport connectivity between Brisbane and the Gold Coast in the 1990s and 2000s that has, in large part, led to an equalisation of the long-run average unemployment rates between these two cities.

Our advice to SMART was guided by the latest developments in Australia and the United Kingdom in relation to providing decision-makers with broader analysis than a narrowly specified CBA. For example, governments often identify multiple policy objectives in relation to public infrastructure investment, such as alleviating congestion, reducing pollution, improving freight productivity, promoting regional development and reducing local pockets of high unemployment. Economic impact analysis, in conjunction with CBA and a detailed economic narrative can assist decision-makers prioritise the most worthwhile projects based on the economic and social policy objectives of government.

Federal Government's housing affordability strategy

The Government's housing affordability strategy, announced in the 2017 Budget, endeavours to directly address the factors which are preventing a more efficient supply of housing and which push up house prices.

At its centre is a $75 billion transport infrastructure package, complimented by an additional $1 billion for investment into infrastructure bottlenecks in residential developments areas.

We have recently undertaken an innovative study on the impacts of infrastructure investments on the housing market. To undertake this analysis, we developed a new modelling framework based on a model previously adapted from the Reserve Bank of Australia. This model is combined with our in-house Computable General Equilibrium (CGE) model, and we have used this model to assess the economic impacts of infrastructure investment on house prices, construction activity and the broader flow on effects to the economy.

The analysis showed that investment funding over the Budget forward estimates was projected to support the construction of 93,000 new homes by 2021, boosting supply by 41 per cent. Housing supply was expected to receive an additional boost from the Government's City Deals programme, with local councils in Western Sydney first to receive financial incentive payments to support housing sector reform.

This additional housing activity was estimated to increase building activity by $5.6 billion and create an additional 4,200 permanent building and construction jobs on average over each year. This translates to an increase in gross domestic product of close to $2 billion over the period to 2021.

ACT Freight Infrastructure Study

Cadence Economics undertook a major CGE modelling exercise to assess the economic impacts of developing an international airfreight facility at Canberra Airport. The report, commissioned by the ACT Government Chief Minister, Treasury and Economic Development Directorate demonstrated the benefits of developing an international freight hub at Canberra airport on the ACT and NSW economies as a result of improved access to international markets for domestic producers, and also by the reduction in the cost of imported products.

The report was done in collaboration with Auxium Management Consultants, who provide strategic advice to freight and logistics firms in relation to both domestic and international markets (notably operating in Singapore). In addition, the analysis required significant stakeholder engagements across different areas of the ACT government, the Canberra Airport as well as regional economic development officers (at Council level).

In delivering the report, we were able to combine the trade and freight information held by the ACT Government with the detailed analysis undertaken by Auxium Management Consultants. This was combined with information from stakeholders, augmented by a significant industry consultation exercise, to provide the relevant inputs into the modelling process.

Based on this information, we were able to formulate a range of specific scenarios considering a number of potential outcomes from a potential investment in this infrastructure, and produce a report covering the high level insights from the analysis as well as documenting the technical elements of the work.