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.