Paul Fletcher MP

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Speech: International Symposium for Next Generation Infrastructure

Portfolio Speeches Friday, 02 September 2016

Policy Settings to Encourage Innovation in Infrastructure.

Introduction

I am very pleased to join you for this important symposium discussing next generation infrastructure.

You are considering a topic of great interest to the Australian Government - and to governments around the world I am sure.

I congratulate the organisers - Wollongong University’s SMART Infrastructure Facility and their host partners University College London (UK), University of Oxford (UK), Virginia Tech (US) and Delft University of Technology (NLD).



Let me particularly acknowledge the valuable policy contribution which the SMART Infrastructure Facility is making to the advancement of infrastructure policy and practice in Australia.

Today I want to speak about two areas which are priorities for the Turnbull Government - innovation and infrastructure – and specifically to ask the question: what are the policy settings that will encourage innovation in infrastructure?

I will argue firstly that we are seeing profound changes in technology – which in turn is transforming the way infrastructure services are delivered to end users, or customers. Concrete still matters – but software matters more and more.

Next I want to talk about the importance of customer-led innovation.

In the last section of my remarks I want to discuss bosting customer-led innovation in infrastructure – particularly through stimulating competition and market forces in the provision of infrastructure services – be they transport, electricity, water, telecommunications or other services.

Profound changes in technology

Let me turn firstly then to a point which is so commonplace as to be trite: across all kinds of infrastructure, we are seeing profound changes in technology which make vastly better services possible for customers.

Consider for example the way that the driving task is being steadily made safer and easier, as vehicles come onto the market with parking assist capabilities using sensors and software, or adaptive cruise control, or technology to keep the vehicle within lane markings.

While it is prudent to treat claims about new software with a certain scepticism, the drumbeat of promises about truly driverless vehicles is certainly getting louder and louder.

At the same time, we see software changing our lives by allowing us effortlessly to summon a car and driver with a smartphone, through services like Uber and Lyft and many others. The take up rate has been extraordinary; in Australia more than six in ten people under the age of 35 have the Uber app on their smartphones and more than 1.5 million people have used the service.

Software is increasing the capability of infrastructure and giving us choices we did not have five or ten years ago. We take it for granted that we can hold conference calls on our phones, merging in multiple parties. As energy consumers, we are becoming used to smart meters, keeping us informed in real time about our energy usage – and giving us choices about when to operate the dishwasher or the hot water heater.

Software is also making road networks work better. Traffic flows better on motorways because of managed motorway technology: algorithms which control when cars get a green light to come down an on ramp so as to minimise disruption to existing traffic flows, or which reduce maximum speeds as the motorway approaches capacity, thus keeping traffic flowing when it would otherwise seize up.

That is why I say that concrete still matters, but software matters more and more. It lets us get better use of the physical network – the concrete – by better managing the traffic over the network. The payback on a managed motorway investment can often be many times the payback on building extra lanes.

The transport and logistics sector is being transformed by software.

Another example which struck me recently was visiting the Patricks stevedoring facility at Port Botany.

Automated straddle carriers or ‘Autostrads’ do the work of moving containers around the yard.

Standing around four storeys high and weighing about the same as seven B-doubles, they are enormous and impressive pieces of machinery.

Most impressive perhaps is that they have no human operators.

They operate using a radar-based navigation system and a computerised control system which allows the machine to execute commands. The machine relies on ultra-sonic, infra-red and laser equipment to see and interpret its environment. The software which controls them was developed with the help of the Australian Centre for Field Robotics at Sydney University.

Another example of software optimising infrastructure can be found in the field of water management. For example, a new app developed by the Department of Agriculture and Food Western Australia is helping farmers in that state to manage their water usage.

The app utilises real-time data from more than 130 weather stations across Western Australia and provides tailored information for individual farms, assisting farmers to schedule the time, volume and duration of their irrigation practices.

The app provides appropriate irrigation rates and schedules by considering such factors as the production area, soil type, crop type, irrigation system, daily rainfall and evaporation rates.

It also provides a field diary for growers to track water meter readings and to record harvest details, which they can use to develop benchmarks for water use efficiency.

Yet another example is in aviation: Qantas will next year start using a flight planning system to improve the airline's operational efficiencies and reduce fuel consumption.

The system was developed by the University of Sydney’s Australian Centre for Field Robotics (ACFR), the same centre I mentioned in the earlier Patricks stevedoring example. Data from the Bureau of Meteorology, aircraft traffic control and fleet schedules will be collected by Qantas and fed into a flight path optimisation algorithm.

The algorithm then conducts a series of calculations on the various routes and provides optimum flight path data for Qantas to then deploy its aircraft flying long-haul routes.

The program essentially determines the optimal route between two points that will save fuel while carrying the largest amount of payload. This technology will not only result in significant savings in Qantas’s fuel bill, but also a reduction in the airline’s CO2 emissions.

Of course it is not just software which is improving. There is plenty of innovation in the core technology as well (although often software plays a big part there too.)

Consider the increase in the efficiency of solar cells – The average cost of solar cells has gone from $76.67/watt in 1977 to just $0.26/watt in July 2016 .

The increase in the fuel efficiency of cars is another example - between 2005 and 2013, the average fuel consumption rates of new light vehicles in Australia decreased by around 17 per cent to about 7.2 litres per 100 kilometres .

When it comes to road freight, the tonnage which can be pulled by a single prime mover has substantially increased through the use of B-doubles and other advanced configurations. Between 1971 and 2007 productivity in the industry increased six-fold. During this time the average distance travelled by articulated trucks increased by almost 90 per cent and the average load they carried doubled.

Look at the improved technology in aircraft. A Boeing 787 is 20 per cent more fuel efficient than a previous generation aircraft such as a 767, which is due to advances in aerodynamics and the use of lightweight composite materials.

Customer-led Innovation

I have talked about the way that innovation is transforming infrastructure. But I want to make a point about the particular importance of innovation which makes infrastructure work better for end users – for customers.

Since assuming Ministerial responsibilities in the infrastructure space in the last twelve months, I have been struck by the fact that there is a very strong engineering culture – a culture of rigour, of technical excellence, of thorough and careful design.

Let me make it clear that I have the utmost respect for engineers. My late father was professor of engineering. As a telecommunications executive I worked with lots of engineers – you can’t run a telco without them.

But a key insight from the telecommunications industry is the distinction between the engineering-led culture which is typical of incumbents in telecommunications, and the customer-led culture which characterises new entrants or challengers in telecommunications.

We have over the years seen some remarkable innovation in transport and infrastructure - but it is not always innovation which meets the needs of customers.

One good example is Concorde, the supersonic passenger jet.

It was an extraordinary technological achievement when the Concorde undertook its first commercial flight in 1976; with a top speed of over twice the speed of sound it could reduce the travel time between London to New York from almost eight hours to about three and a half hours .

But it was prohibitively expensive to use – and demand failed to live up to expectations. The last of the 14 Concordes bought by British Airways and Air France were retired in 2003.

Another classic example is AT&T’s attempt – as long ago as 1964 – to introduce the Picturephone.

It cost far too much for regular households, and the picture quality was too poor for the businesses which could afford it.

Within six months of launching the service, only 71 customers used the picture booths. AT&T discontinued the Picturephone in 1978 after it fell massively short of its ambitious sales targets of one million by 1980 and 12 million by 2000.

Let me mention a couple of examples of customer-responsive innovation which I think we can contrast with technology-driven innovation.

The first is the way that the arrival of competition in telecommunications led to enormous innovation in the way that customers were billed. For decades, there had only been one model – you get a monthly bill, with a payment for line rental and payment for the calls you make.

But with the arrival of new entrants in Australia and around the world, we saw innovations like prepaid plans – where you pay up front and therefore can have certainty that you will never need to pay more than a certain amount – and bucket plans, where you pay a flat monthly amount and then can make as many calls as you like.

What is particularly interesting is the feedback loop between pricing and network use. In Australia, Optus introduced ‘Yes Time’ – free calls in the evening. This was a time of day when the network had lots of spare capacity – which was not very useful to business customers who made calls during business hours, but was very attractive to consumers. So it was a way to attract more customers and more revenue – but spread the load on the network.

I think another powerful example of customer-led innovation is what we have seen with IT in industries like banking and travel over the last twenty years. Today we take for granted that we can do our banking online, at a desktop or on a smartphone, move money between accounts, pay bills and do lots of other things that once would have required us to go to a branch and chew up a significant amount of time. We expect to be able to compare and book airfares online, almost instantly. The proof that these innovations are customer-responsive is seen in the enormous take-up and the phenomenal change in customer behaviour.

Reforming markets to drive customer-led innovation

So let me turn to the third question I want to touch on this morning – how can we get more customer-responsive innovation in infrastructure.

I mentioned earlier Concorde and Picturephone as two innovations which were not customer driven. One was driven by the French and British Governments; the other by AT&T when it was effectively a monopoly.

These are market characteristics quite typical in infrastructure even today. Most roads and railways, in most countries, are owned by government. Electricity, water, sewers – are generally government owned and almost invariably monopoly providers.

A powerful driver of customer-led innovation in infrastructure is to evolve the structure of infrastructure markets – away from government ownership, away from monopoly, and towards competition.

Let me again point to the example of telecommunications and look at the outcomes of market liberalisation and privatisation in Australia.

In 1991 the government issued new licences to Telstra, Optus and Vodafone to operate mobile networks using the new GSM digital technology.

The result has been spectacular growth in the mobile market. In June 1996 there were 3.6 million mobile services, while today there are well over 30 million mobile services in operation. 



And in the 15 years from 1997 to 2012, the cost of mobile calls fell by half.

Competition in turn has driven the rapid introduction of new technology: GSM to CDMA to 3G to 4G in less than 20 years.

The aviation sector offers another case study of customer-led innovation.

Prior to deregulation, Government officials decided which airlines were permitted to operate – and even what type of aircraft they could own. The policy for many years was a domestic duopoly, made up of TAA and Ansett – and one flag carrier, Qantas.

Since deregulation in the nineties, there has been a remarkable degree of change.

Airfares are much cheaper. The Australian Government’s Bureau of Infrastructure, Transport and Regional Economics maintains an index of the ‘best discount fare’ on key routes across Australia. In August 2016, this index stood at less than half its level in 1992 in real terms.

In turn, the drop in prices has seen very sharp increases in the number of Australians travelling. In 1990 there were 14.6 million domestic trips taken by airline passengers in Australia. By 2015 it was 57.1 million – almost a fourfold increase in twenty-five years.

Part of the deregulation process in aviation resulted in the Commonwealth Government ceasing to own and operate airports. Instead, Australia’s big airports are now owned and operated privately (strictly, under long term leases).

One such private operator is Brisbane Airport Corporation which operates Brisbane airport. The company is in the process of developing a New Parallel Runway which will significantly improve the airport’s capacity. This vital new facility is being funded exclusively with private capital.

The automobile sector is another example of innovation driven by competition – including the fierce competition to deliver the next generation of driverless vehicle. 



I had an insight into some of this work earlier this year when I had the chance to ride in a Google driverless car in California, and to visit the Tesla factory.

Over time, automated vehicles look likely to transform the existing model of car ownership. Rather than a car being an asset we own, many of us will see car transport as a service – we will summon a driverless car with our smartphone, pay for its use, and then let it go on its way.

I encountered another example of innovation in the transport sector recently, when I visited a logistics company in Brisbane which operates a large fleet of trucks. Each of the vehicles in the fleet is fitted with a Navman GPS device.

The device collects and transmits data from the vehicle back to the firm’s head office in real time. Fleet managers are alerted when drivers are speeding, braking harshly or cornering aggressively.

In addition to safety, there are a range of productivity benefits provided by these devices. For example, fleet managers can monitor where their vehicles are, how often they stop and which routes are more congested.

This technology is used by many large operators in the transport sector. Clearly there is significant potential to improve the overall operation of our road network through the use of such data on a system-wide basis, for example to inform investment decisions.

I have spoken about liberalisation of markets in infrastructure sectors such as telecommunications and aviation. Roads is a sector which is still characterised by a relatively unsophisticated market structure, and less of a customer focus than other sectors.

The Harper Review into Australia’s Competition Policy last year recommended a move towards cost-reflective road pricing. In responding to the review, the Government has committed to accelerate work with states and territories on heavy vehicle road reform and to investigate the benefits, costs and potential next steps of options to introduce cost reflective road pricing for all vehicles.

Conclusion

Let me conclude, by thanking the various global universities for organising this important symposium.

These are indeed exciting times for infrastructure in which technology has the potential to deliver significant benefits for users.

During this time of rapid technological change, policymakers will inevitably grapple with their role in facilitating innovation in infrastructure.

I believe Government’s role should be guided by the principle that encouraging competition and the introduction of market structures is likely to be a powerful tool to encourage customer-led innovation.

Authorised by Paul Fletcher MP, Level 2, 280 Pacific Highway Lindfield NSW 2070.

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