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The Great 2.8% Debate

March 1, 2019

 

 

In December 2018, the Westport Taskforce delivered their interim report Westport: What we have found so far (WWHFSF). The report identified eight strategic options with different combinations of bulk, container and passenger movements across Fremantle, Kwinana and Bunbury ports. Stage 2 of the Westport process includes undertaking an in-depth investigation of these options and is scheduled to be delivered by the end of 2019.

 

It is fair to say that the Westport Taskforce is responsible for delivering the planning for one of Western Australia’s most important assets. However, to get the right answer to any problem, you must first start by asking the right questions.

 

 

The curious 2.8%

In the WWHFSF report, the growth rate used for all forecasts is 2.8% over 50 years and this raised a few eyebrows. No alternatives were presented, not even best, base and worst case scenarios. Deloitte Access Economics, who performed the analysis for the report, developed the 50-year forecasts of trade activity based on global and Australian macroeconomic drivers. The Deloitte forecasts are limited to trades which have been observed in history or have existing plans and related infrastructure in place (such as spodumene).

 

Does this mean microeconomic and industry drivers, future trade opportunities, the regional impact of a new port, additional port capacity, variable pricing, changes in infrastructure, current constrained infrastructure, location and industries or the development of future Indian Ocean trade were ignored from forecasts? Is there any explanation and reconciliation of why actual growth rates are more than double the Deloitte long term forecasts?

 

 

Where did the 2.8% come from?

Where did the Westport/Deloitte forecast growth rate of 2.8% come from? There has been no public justification of this 2.8% growth rate. As it turns out, 2.8% is exactly the same as the projected annual growth rate of real GDP through to 2055 given in Federal Treasury’s 2015 Intergenerational Report.[1] The Intergenerational Report number is a national average rather a number derived from specific analysis of WA trade and industry which is a cause for concern. There is no mention of future Indian Ocean Rim trade, improved trade with modern infrastructure and logistics, competitive international pricing, interviews with local companies or other local impacts.

 

The historical Compound Annual Growth Rate (CAGR) of twenty-foot equivalent units (TEUs) through Fremantle Port between 1997 and 2018 was 6.39%.[2] The Westport Taskforce is using a 2.8% CAGR over 50 years for its modelling. Was there a common sense check done on this 2.8% number, especially for short term planning? Even if there is some catastrophic event (such as a war or naval blockade) in the future that results in the CAGR only being 2.8% over 50 years, it is difficult to understand why Westport/Deloitte would use a CAGR that is less than half the twenty-year average for near term forecasts.

 

Using a 2.8% growth rate for near term forecasting comes with some serious inherent risks. On what basis should it be assumed that Fremantle Port will only grow at the same rate as the Eastern States? Eastern States growth models are often population based, however in WA they are export based. The only way an appropriate growth rate for WA can be determined is the old-fashioned way of undertaking an in-depth analysis of the local market by directly engaging with the relevant local stakeholders and building up a detailed trade flow forecast. It appears that future trade from the emerging Indian Ocean Rim market and the extent of the new energy materials industry have not been considered. To determine an appropriate growth rate with these markets and industries in mind takes time, effort, expertise and local insight.

 

Using a 2.8% growth rate is also problematic and risky because it appears to severely underestimate TEU growth. It is clearly understood that port planning is complex however the conservative approach is to include latent capacity to avoid  knee jerk reactions and expensive band aid solutions. Industry would usually build in additional capacity and expect sales to fill it.

 

 

Fremantle Port’s actual growth indicates problems in about 6 years

The recent Business News Ports and Transport Special Report stated that The Westport Taskforce considered that it will be 2030 until an outer harbour development is needed, which will be when a throughput of approximately 1.07 million TEUs is reached.[3] However, if a CAGR of 6.39% is used, in line with the twenty-year average, this throughput of 1.07 million TEUs is reached in early 2024, six years earlier. Over 60 face-to-face interviews conducted by InfraNomics with industry representatives in WA unanimously supported the development of a new port in Kwinana sooner rather than later and actual growth rates support this view.

 

If the maximum capacity at Fremantle Port is reached six years earlier than the Westport Taskforce is forecasting, what do we do? Even if the design and approvals process commenced tomorrow it is unrealistic to expect that a new port would be fully operational in less than five years – coincidentally, not before 2024. It seems WA has a serious port infrastructure problem that won’t be solved by the band-aid infrastructure solutions that are currently being discussed.

 

It is worth noting that there are three opportunities for a change of WA State Government between now and 2030. The Liberal party has already announced their plans to sell Fremantle Port. The Nationals had the courage to say no to the Fremantle Port sale last time, what will happen next time?

 

It should also be remembered that sales of ports typically come with exclusivity clauses preventing the building of a new port in close proximity. If Fremantle Port is sold but then it reaches physical capacity and there is an exclusivity agreement preventing the construction of another port in a logistically convenient location – such as Kwinana - what do we do?

 

 

Ports are not short-term projects

In Deloitte’s defence, we have heard that the Trade Forecasts engagement Scope of Work was so restricted that a preconceived answer was presented which is consistent with the past, even though the facts may have changed. Was sufficient local work completed to adequately underpin the findings? In who’s interest is it to delay the development of a new port in Kwinana by using a 2.8% CAGR?

 

Unfortunately, ports and supporting infrastructure are not short-term projects. Instead, one day, in the not too distant future, there is a high risk we will wake up to find that that the port is maxed out and industry growth will stop cold until a new port is planned, approved and developed – impacting businesses and industries worse than it does now. In the meantime, WA misses out on economic development, growth opportunities and jobs.

 

 

Asset sweating or new build?

The current strategy for increasing throughput for Fremantle Port appears to rely on a kaizen-style continuous improvement process. The objective of continuous improvement is to squeeze performance out of an existing asset in an attempt to defer capital deployment. Kaizen typically comes with some low hanging fruit which brings some early efficiency improvement wins. The risk with kaizen is sometimes the achievable efficiency gains are overestimated and maximum capacity is reached well before forecast, which would leave WA exposed and unable to grow until a new port is developed.

 

Asset sweating is when the efficiencies of an existing asset are increased in an effort to postpone building (and paying for) new infrastructure. When a strategy of sweating an asset is deployed the idea is to run with as little latent (unused) capacity as possible. When an asset such as a port has little latent capacity there is very limited room for the development of new industries and exploiting new trade and business opportunities, thereby restricting growth, jobs, and State development.

 

It is frequently promoted that Fremantle Port has additional capacity as we are still a long way off from reaching the theoretical maximum capacity of 1.2 million TEUs per annum. [4]  It is true that the number of TEUs through Fremantle Port can theoretically be increased, however this increased throughput will occur at an increasing marginal cost. Increasing marginal costs means the port has reached economic capacity. Kaizen follows the Pareto principle which means the last 20% of the efficiency gains are typically going to require 80% of the investment. The sheer cost of adding in new bridges, raising transmission lines, deepening the harbour, upgrading facilities, train subsidies, etc, clearly demonstrates the economic capacity for Fremantle Port has been reached.

 

Fremantle Ports is going to find that whilst they may technically be able to achieve a certain throughput the cost incurred to reach that capacity may very well be so high that the additional capacity is not economically viable, meaning this money will be better off being spent on a long term solution, not propping up a short term solution. Committing to squeezing every possible TEU out of Fremantle Port also means that by default we are back to considering a more expensive Roe 8 and Roe 9 Mark II solution.

 

 

What is so wrong with building a new modern port?

What if WA had a port that rivalled Singapore, a so-called 5th generation port? Even better, what if WA built one of the world’s first 6th generation ports, with an ability to serve 50,000 TEU vessels of 20 meters draught; a semi- or fully-automated container terminal; strong hinterland transport links that don’t run through the middle of residential developments and tourism destinations?[5] The Westport Taskforce recognises that in theory Fremantle Port could be upgraded to handle 13,000 TEU vessels. While 13,000 TEU ships were state of the art in 2006, modern container ships are over 20,000 TEU. The budget for this proposed 13,000 TEU upgrade is greater than $1 billion. Is this money better spent on extending the life of an outdated Fremantle Port or on new, state of the art port facilities? Why is there no mention in the WWHFSF report of how much these Fremantle port upgrades will cost and the on-costs to consumers and industry? Where is the business case?

 

What if WA was no longer limited to accepting ships with a draught less than 14.7m? Would it mean that ships no longer had to go via Singapore to have containers destined for WA decanted from bigger ships to smaller ships? Would it mean that the direct trade options available to WA would increase?

 

What would happen if WA aimed to be one of the best ports in the world, not just the best port in Australia? We’ve seen the recent advertisements comparing Fremantle Port to its Australian counterparts. Why aren’t there any performance comparisons of Fremantle Port to WA’s main international trading partners? What would happen if WA planned for a future of innovation and growth, not just a future of a mediocre status quo?

 

 

Conclusion

The Westport Taskforce is doing some very important work regarding the social and community impact of a new port but this is only part of the picture. The most important part of the port discussion should be the economic and social impact to the state as this has much wider ramifications. Isn’t sustainable economic development that creates high paying jobs now and for our children central to the Government’s strategy for the State? This can only happen if the supporting infrastructure is internationally competitive and modern.

 

The Westport Taskforce recently framed the issue of new port development as a logistics issue.[6] Ports are not solely about logistics but should be considered as tools for industrial growth, strategic industrial hubs and property development. The value is not in solving short term logistics issues but developing a region that competes globally. Fremantle is logistically restricted with a lack of industrial land and any improvements are expensive and commercially questionable. Fremantle Port is a stranded asset in metro suburbia created by questionable planning decisions of the past. Why do we want to continue making the same mistakes?

 

The curious 2.8% is not just a number tucked away in a report. This innocuous number could influence WA’s ability to be a global trade powerhouse for the next 50 years and the risk of getting this number wrong will have a huge impact on WA’s future. If WA’s economic growth continues to be stymied through poor planning decisions that could have so easily have been avoided, how will we explain this to ourselves and to our kids?

 

 

 

[1] https://treasury.gov.au/publication/2015-igr/

 

[2] As calculated by InfraNomics from Fremantle Ports annual reports TEU figures.

 

[3] Based on InfraNomics replication of TEU forecasts using a 2.8% CAGR.

 

[4] Fremantle Ports Annual Report 2011/12

 

[5] https://www.researchgate.net/publication/324497972_FIFTH_AND_SIXTH_GENERATION_PORTS_5GP_6GP_-_EVOLUTION_OF_ECONOMIC_AND_SOCIAL_ROLES_OF_PORTS

 

[6] Business News Ports and Transport Special Report, Feb 2019.

 

 

 

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