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The good oil - economic capacity in regional Australia

By Rod Brown*

The Commonwealth Government is due to announce a major package to respond to deep seated disenchantment in regional Australia. The dollar figures will be significant, and the Opposition is sure to make accusations about pork barrelling.

Whatever the case, let's hope that the Commonwealth recognises its role in building economic capacity in the regions. Without this, improving the delivery of social services will be a bandaid solution.

The role of infrastructure

Proximity to physical infrastructure and people still matters despite the Internet, instantaneous access to information, and global markets.

Sure, there are examples of smart, innovative companies operating successfully in strange places. But the overwhelming fact is that critical mass &endash; sufficient numbers of consumers that can be 'captured' in a market and/or geographical setting &endash; continues to be the single most important signal to investors.

This is not my view alone. It is shared by the Australian Council for Infrastructure Development (AusCID) and institutional investors such as the AMP, Commonwealth Bank, Macquarie Bank and the NAB.

They worked with my Consultancy Company during 1997/98 dissecting 68 regional investment proposals across Australia. We looked at water treatment plants, transport hubs, power stations, health resorts, airports, port developments, forestry plantations, marinas, gas and water pipelines.

We wanted to know the conditions under which institutional investors could play a greater role in the development of Australia's regions. This is crucial, given that the bulk of our national savings are now with the banks and super funds, and not governments.

Institutional investors' No. 1 interest is in securing, in investor jargon, robust revenue streams. If the proposed investment is in infrastructure, they look for sufficient users of that infrastructure. If the proposed investment is a business venture, the quality of hard and soft infrastructure will be a major consideration.

Robust revenue streams are hard to find in regions, because they lack critical mass and sufficient infrastructure. This is partly due to the tyranny of distance and sparse population. But there is another reason.

The agglomeration effect

There is ample evidence that investors tend to locate on the basis of previous decisions of others. What matters to the potential investor is that the right infrastructure is in place. Firms also tend to cluster around certain infrastructure, as well as other firms.

Agglomeration effects are now driving economic and political decisions &endash; and those locations with the quality infrastructure are benefiting from a series of reinforcing actions from consumers and investors. Let's explore this more with some generalised observations, which are valid in the majority of cases.

First, investors are attracted by the quantum of potential customers in the bigger cities &endash; this confers ongoing advantages for Melbourne and Sydney over Adelaide, Brisbane, Perth and so forth.

Second, investors are attracted by quality public infrastructure &endash; this reinforces the relative attractiveness of the capital cities vis a vis regional locations.

Third, politicians are attracted to invest in public infrastructure that favours the maximum number of voters &endash; hence the massive expenditure in transport, tourism and sports infrastructure underway in Sydney and Melbourne.

This combination of events feeds confidence in the areas so 'bestowed', and they grow like ice crystals. Unless we recognise the above, the declining regions will never catch up.

Government policy

The agglomeration phenomenon is well recognised by industrialised countries such as Italy, France, UK, Japan &endash; and even the US makes a concerted effort to counter the drift of resources to the cities.

However, in Australia we have an assortment of well meaning programs, but they lack vision and consistency. They are also very modest in world terms. The punters rarely know about them, and dealing with Canberra is a mystery to most.

The national imperative is to think outside the cities. It is not a handout agenda. It is commonsense politics and good social and economic practice.

*Rod Brown is a Canberra based Consultant specialising in industry and regional development. For further information phone/fax (02) 6231 7261 or email apd@orac.net.au

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