By Richard Gibbs | 3 Sep 2015

Western Australia is facing its most challenging economic and fiscal environment in over three decades.

The unprecedented growth that WA has experienced as a result of the mining investment boom has come to an abrupt halt, placing complex economic and fiscal challenges before the local Government.

Furthermore, the state’s population is expected to grow to 3.5 million by 2050 – a 75% increase over the next 35 years.

Insights - Infrastructure - Nicki Hutley - WA Economy

These economic and demographic changes now facing WA demand a significant response. Planning for the next generation of sustainable growth and employment opportunities needs to commence now.

As WA’s second largest industry, contributing in excess of $31 billion to the State economy, the property industry is perfectly positioned to provide a catalyst for growth in the face of on-going decline in resources sector investment. The industry can work closely with the Government to utilise targeted investment in infrastructure and deliver the greatest return on investment.

Although the State currently faces significant budget deficits, it will actually be more counterproductive to delay investment in growth-enhancing infrastructure investments. Rather it is essential to identify where the best infrastructure opportunities lie in order to enable job creation, facilitate continued growth in WA and optimise factors such as liveability, access to affordable housing, reduced congestion and pollution, and better commuting times. Identifying these benefits will assist in finding the best ways to fund the investments – potentially through Public-Private Partnerships, asset recycling, user charges or debt-funding – or indeed a combination of options.

Comprehensive analysis demonstrates that large investments in infrastructure is not fiscally irresponsible, rather they can deliver better outcomes – for economies and budgets – over time. In fact, if the WA Government were to turn its back on new investment in key infrastructure initiatives, the opportunity cost of lost economic growth and employment, social and environmental amenity, as well as fiscal repair, would be enormous.

Insights - Infrastructure - Nicki Hutley - Western Trade Coast
The Western Coast Expansion – one of the three infrastructure projects identified to provide the most significant economic and social benefit for WA.

We identified strategic infrastructure initiatives that can unlock property investment and broader economic opportunities, which will then support growth and diversification of the local economy as it transitions from the mining investment boom.

Research by the International Monetary Fund reveals that, for advanced economies with spare capacity, increasing infrastructure investment on quality projects tends to raise output in both the short and long term, without increasing the debt-to-GDP ratio. During periods of low growth, an increase in investment spending equivalent to one percentage point of GDP increases the level of output by about 1.5% in the same year and by 3% in the medium term.

The key here is ‘quality projects’. Now, more than ever, it is crucial that the decisions made by all Governments regarding potential investment in infrastructure be based on the most comprehensive possible framework; one that looks beyond the short-term and embraces the full economic and social value that can be unlocked.

So how will this work?

Urbis recently developed an analytical framework that independently prioritises major infrastructure projects in WA according to economic and community benefits. The framework was applied to a long list of projects provided as a result of industry consultation facilitated by the Property Council of Australia.

In particular, we identified strategic infrastructure initiatives that can unlock property investment and broader economic opportunities, which will then support growth and diversification of the local economy as it transitions from the mining investment boom.

The framework we developed followed a multi-stage process, as shown below.

Insights - Infrastructure - Nicki Hutley - Framework

Utilising the framework and assessment criteria, three major projects demonstrated strong credentials for further analysis. Publicly available information and a realistic, but accelerated, timeline for infrastructure investment enabled Urbis to model the potential of each project. The model unlocked property development and the resulting economic and social gains that could be delivered, strengthening the outlook for the WA economy over both the short and longer terms.

Insights - Infrastructure - Nicki Hutley - MLR and PEEL

Key estimated outcomes for each are shown below:

  MAX LIGHT RAIL (inc. Knowledge Arc) PEEL ECONOMIC AND ENVIRONMENTAL INITIATIVE WESTERN TRADE COAST EXPANSION
Estimate Capital Cost $2.1 Billion $112 Million $2.3 Billion
Unlocked Development Potential $960 Million $700 Million $740 Million
Economic activity to be enabled $5.5 Billion $8 Billion $13.7 Billion
New Employment opportunities Peak of 13,000 Peak of 9,500 Peak of 6,500 per annum at 2025

 

In addition to establishing the significant benefits of each of the three projects, the framework also proved useful in removing some of the difficulty associated with political factors that sometimes affect economic decisions. We were able to clearly demonstrate the value of each investment through a truly transparent framework for assessment.

The process we have undertaken can be easily applied and implemented by other government agencies who wish to understand the opportunity costs, as well as short and long term benefits, of various types of infrastructure projects. We have demonstrated how by correctly prioritising projects, there are significant gains to be made that will support jobs, economic prosperity and communities.

Creating true opportunities for growth through infrastructure is more than just building roads and bridges.

For further details on the report’s findings and recommendations, download The Keep WA Growing Summary Report or read the full Keep WA Growing Technical Report.

This article first appeared in  Urbis Insights – Infrastructure edition on 1 September 2015.

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