The role of transport in regional economies

The role of transport in regional economies

By Robert N. Schwartz

SINGAPORE: A prevalent school of thought argues that in order
for the countries of Southeast Asia to attract foreign direct
investment, transportation and transport infrastructure must play
a vital and leading role. Not only is this an inaccurate
assessment, but it could also lead to excessive spending on
unnecessary projects.

Transport does not play a central role in determining whether
a multinational corporation (MNC) invests outside its domicile,
or even where its manufacturing facility is actually located.
Most often, transport is at best a secondary factor. All that
MNCs demand of a country's transportation system is that it
simply allows their goods to come and go from their plant within
a reasonable time. Congestion or the lack of it, the absence or
presence of a transportation hub, the age of the infrastructure
or the level of mechanization, are not issues that MNCs include
in their investment decisions.

The general manager of a large American MNC said the company
"... did not study logistics to any great detail", before
deciding to invest in East Java. The final decision came down to
a choice between Indonesia and Thailand and the company "expected
the transportation system would be a `wash', and both were
regionally competitive". Moreover, Packard Bell recently
announced it would build a new manufacturing facility in Penang
instead of Singapore, even though, according to a company vice
president, "Malaysia's logistics are not as good as Singapore's".

In the late 1970s, the Australian government commissioned a
report to investigate the motives for Australian foreign direct
investment. Of the seven main categories listed, avoidance of
transport charges was the least mentioned. More recently, a study
done in the early 1990s on Japanese companies which had built
plants in Britain and South Korea, showed accessibility did not
significantly influence locational decisions.

Accountability for this low weighting given to transport is
transport expenditure forms a very small percentage of overall
costs. An MNC making components for personal computers, which
airfreight its goods from Singapore and Malaysia to destinations
around Asia, estimates that transport amounts to only 4 percent
of retail price. Manufacturers who send their goods by
containership to points around the globe find this figure drops
to between 1 percent and 2 percent. Moreover, two studies have
independently found that shipping costs for U.S. companies
sourcing components overseas were insignificant.

Given this role that transportation plays in the MNCs
calculus, there are significant implications for future
government policy decisions. The first concerns the timing and
the type of major infrastructure projects that are to be built.

In order for infrastructure to cater adequately to the needs
of the economy, and be a productive use of scarce funds, there
has to be a clear and significant demand for any extra capacity.
Any constraints on the flow of goods are the best measure of
where the transport infrastructure is the weakest, and where
attention needs to be focused. Furthermore, there are many ways
of alleviating any bottlenecks without having to resort to new
construction -- road-user charges, increased use of information
technology, extended operating hours, privatizing ports and
airports, improved traffic management schemes, and streamlined
customs procedures are just a few of these measures.

Secondly, building transport infrastructure ahead of demand is
simply not a prudent use of funds. Not only does this detract
from foreign investor interest, but it is also very easy to get
it wrong. Indonesia's Batam Island, just south of Singapore, has
a new airport that can handle the latest and largest 747s, but it
handles only a few flights a day. Because of the absence of any
traffic demand, and despite the best efforts of the Indonesian
flag carrier, Garuda, this airport will remain considerably
underutilized for years to come.

Another example is the proposed Trans-Asia rail line. The
Singapore to Kunming route will cost an estimated US$900 million
to construct. So far, there have been no serious financing
proposals put forward because there is no clear economic value to
it being built. The goods that are best moved by rail, large
consignments generally of heavy and/or bulky goods going long
distances, are not the types of products that will be produced in
the areas that would be served.

What is needed, is a system of well-built and well-maintained
trunk and feeder roads which would be able to accommodate the
smaller and varied loads the area would generate.

The idea that building world-class transport infrastructure is
the best method to unlock an area and foster development is also
a fallacy. The efforts by the Asian Development Bank to promote
the Northern Growth Triangle of Indonesia, Malaysia and Thailand,
as well as the Mekong subregion, have focused on improving
transport infrastructure. The bank has proposed building
expensive rail and port projects as ways to develop those
regions. This type of top-down initiative, however, will not
work.

The history of Southeast Asia has shown that over the last
five centuries, if there was a demand for goods from a certain
area, a way would be found to transport them. The
Singapore-Johor-Riau and the Southern China growth triangles were
successful precisely because they were driven from the bottom-up.
The respective governments became involved and improved the
transport systems only after the private sector had pushed the
existing infrastructure to its limits.

The key to maintaining the proper amount of transport
infrastructure, therefore, is to remain flexible and adapt the
planning process so it is able to react to changes in the
economy. Given that transport projects have to compete for funds
not only with other internal priorities, but also increasingly
against potential investments worldwide, it is important that new
infrastructure projects accurately address the services that are
demanded. It is in this supportive role that transport projects
will be the most cost-effective, while still providing MNCs with
the basic transport services required.

Robert N. Schwartz is a visiting associate at the Institute of
Southeast Asian Studies, Singapore.