#shinkansen

We pray the Gov’t makes more $60bn mistakes!

Can the media and shadow politicians get a grip? Since when should taxpayers complain when the government makes a huge error in our favour? We can pretty much stake our lives on the fact that 99% of government programs end up way more expensive than initially budgeted for. French Submarines anyone? NBN? We should be looking at the JobKeeper revision as a massive positive.

The federal government estimated that the JobKeeper program would initially cost $130 billion. Now it appears they overestimated it by $60 billion. That was driven by the idiosyncrasies of who would be eligible at the employer end – from the self-employed to big business and everything in between.

Given the limited time window, forgive the Treasury and Tax Office for not landing estimates on target. It is ridiculous to expect they could estimate such a fluid piece of legislation.

The unwelcome arrival of COVID19 and the sudden stay-at-home orders that ensued hardly gave a generous window of opportunity to apply Japanese level precision engineering to the process.

Our only criticism lies with the drip feed approach to restarting the hibernating economy. As we mentioned yesterday with respect to the 50 US states, so many appear to be copying each other rather than making bold data driven decisions based on facts not consensus.

The reality is that the Treasury will need to make many more multi billion dollar mistakes in the spirit of JobKeeper to help mitigate the damage caused by the looking trillion dollar deficits.

Perhaps the $60 billion saving can be redeployed to building a bullet train from Sydney to Melbourne. A 20-yr project that is just the type of infrastructure spending which ticks so many boxes – relieving pressure on the state capitol cities, housing, assist a growing population and provide lots of jobs.

Get ready to buy Boral & ABC rather than watch a market swim in concrete shoes

Governments rarely have imagination during crises. Usually, it involves chucking uncosted cash around. How many projects have we seen run way over the promised budget? Submarines anyone? NBN?

Handing out $750 cheques to 6 million struggling Aussies in the hopes they’ll spend it is a bit of a wing and a prayer strategy. Maybe those struggling will just use it to pay down debts of previous consumption rather than ignite a new spending splurge.

At some stage, large-scale infrastructure spending will return to the headlines to stem the economic slowdown. Look at the state of national infra spending forecasts in the chart above.

Bridges to nowhere. Tunnels, highways, schools and hospitals. New projects to get people back to work. It happens pretty much every downturn. So why should we expect anything different?

A read of the latest infrastructure report states quite clearly there are 4 areas to address:

  1. Population growth has become a major point of contention in infrastructure debates. In our largest cities, ageing assets have been put under growing strain, with rising road congestion, crowding on public transport and growing demands on social infrastructure, such as health, education and green space.
  2. Energy affordability has also deteriorated over recent years. A steep rise in network costs has driven energy bills 35% higher over the past decade, and up by 56% per unit of electricity consumed in real terms.
  3. In telecommunications, the nbn rollout continues to face challenges. In the 4.8 million households in which it has activated, services have not met the expectations of many users.
  4. In the water sector, the past four years have seen mixed results. Many metropolitan utilities are increasing the sustainability and quality of their services through innovation, supporting the liveability of our cities. But many regional areas are suffering from growing water security fears as large parts of the country are in drought.  

Cement companies play straight at the heart of three of these four distinct areas. Roads, rail, hospitals, schools, dams and so on. In the energy space, whatever direction we take (solar, wind, coal, gas or nuke), cement, asphalt and aggregates will be required to achieve it.

Bellwether Boral (BLD) is perhaps best positioned to benefit as it makes railway ballast, asphalt, cement, concrete. Boral shares have yet to be kicked as hard as others. Boral hit a GFC low around the $1.64 mark. It stands at $3.00, 33% above that level.

BLDAX

50% of Boral’s Aussie revenue comes from NSW, the state with by far the healthiest balance sheet and the biggest infrastructure projects. 50% of revenue is Australian based with another 38% coming from the US which has huge infrastructure needs. 25% of group revenue comes from roads, highways, subdivisions and bridges. Good leverage.

Adelaide Brighton (ABC) has been bludgeoned in this market meltdown and $1.35 is the level it hit at the pits of the GFC in 2008. If it starts to sink below that level, it will start to look interesting again. If you look at the chart you can see it has slid from almost $7 in 2018 to its current price of $2.24.

Adelaide

A read through ABC’s last set of results points to the difficulties in the market for its cement and aggregates business. It has also embarked on a rationalisation program before all of this coronavirus hysteria.

We hold no positions in ABC or BLD as yet but will look to accumulate should the market continue its sell-off towards these 2008/9 lows.

The national government is out of options but to build out locally. They have already used the bushfires excuse to ditch the budget surplus plans so might as well push a bold infrastructure plan to save us all!  The best plan would be a high-speed rail project which addresses real long term needs of Australians.

The link between laundry and high speed rail

Having lived in Japan for two decades, it was so easy to take things such as this dry-cleaning message for granted. The way it was put in a plastic zip-lock bag with the item stuck to the docket. Complete attention to detail.

I didn’t realise how much I missed this part of the culture. Yet it transcends across every facet of life.

Take the bullet train. JR Central, the owner of the main Tokaido Line reported the following in its latest annual report.

In over 50 years there have been zero accidents. The railway has spent JPY3.5 trillion with a “t” ($35bn) in safety and maintenance alone. Safety and reliability are paramount to growing ridership.

The train runs 368 services a day servicing 466,000 passengers. It had an average delay of 0.7 minutes per train service. For the environmentalists, the Tokaido Line emits 1/12th the CO2 per passenger of a commercial aircraft. So there is a green lining too.

When attending the Australia vs NZ cricket on a hot day earlier in the month, “The Light Rail Service has stopped working. Buses will operate in their place” popped up on the big screen. The entire 30,000 crowd burst out into spontaneous laughter. How much bigger joke could this project get? How can it take 50 minutes to get to Randwick from Circular Quay?

In short, a French designed train built in India couldn’t operate because the temperature expanded the track causing it to become jammed. If being delayed for over one year wasn’t embarrassing enough, who knew Australia had hot days from time to time?

Our Sydney Metro has also been plagued by setbacks. Same situation. French designed trains made in India. Breaking down in tunnels and so forth. Driverless they may be but rudderless too.

Yet the Japanese are about to take the bullet train to a new level. The MAGLEV will allow passengers to get to Nagoya from Tokyo (300km) in 40 minutes! Imagine a trip to Canberra in that time? Tokyo to Osaka (500km) will only take 67 minutes.

If we think that Australia has grown its population by 2.2m (+10%) since 2013, our airports won’t be able to handle the extra expansion. At the moment, there are 54,500 flights annually between Sydney and Melbourne. On a daily basis around 27,000 people make this pilgrimage.

By comparison, the Tokaido Line runs around 78,000 passenger per day bettwen Tokyo and Nagoya. 145,000 between Tokyo and Osaka.

High speed rail is a no brainer for Australia. As a former ANU student some 30 years ago, I often made the journey from Sydney to Canberra. The distance between Liverpool and Campbelltown is around 20km. 30 years ago they were separated. Now housing has expanded from either direction along the Hume Highway such that the two towns are more or less connected by numerous new suburbs. The population is putting pressure on new housing.

Many public servants who work in the nation’s capitol, Canberra, now live in Goulburn, a country town some 45 minutes out. Shuttle buses now run between the two towns such has been the trend.

If the population keeps expanding at a 10% clip every 6 years, the infrastructure just won’t keep up. If Australia isn’t thinking about high speed rail for much longer, it will be too late. To think such rail infrastructure will take 20 years to execute.

The record tells us that the Japanese are the best partners to develop the HSR in Australia. Surely we have had enough bad experiences with the French to date to want to have them run another project. Trains or submarines. The Chinese have hardly ingratiated themselves by canceling visas of our politicians. They don’t have the safety record of the Japanese, either.

The Japanese build things to last. Is it any wonder the Japanese ensure the sleepers have higher volcanic ash content to ensure their long-life? Not in China. Hence why one of China’s high speed trains derailed in 2011 because of a cracked sleeper with lower ash content. Even worse the authorities ended up just digging a hole and pushing the crashed rolling stock in and burying it.

The Taiwanese have probably made the most sensible recent HSR investment. Ridership has grown from 15.5 million in 2007 to around 67.4 million today. Punctuality is also 99.8%. Sound familiar? It should do.

The Japanese-led Taiwan Shinkansen Consortium won the contract by a combination of soft loans and flexible structures. The Taiwanese government also introduced flexible depreciation, refinanced the debt terms and bought a majority of the publicly listed railway. It has now made capital gains on its investment! They bought Japanese rolling stock made by Kawasaki Heavy Industries which has been bulletproof.

So it is high time the Australian and state governments started to think about getting their act together on HSR. Japanese technology is the only sensible option. It is competitive, reliable and if you have had any friends attended the Rugby World Cup last year, they’ll all tell you how amazing the bullet train was.

Oh and the airlines should love the high speed rail as it will free up slots to use on better routes. Even better they could be partners to running the rail operating system.