12 April 2012 – What makes a city a thriving hub of jobs and competitive advantage? SGS Economics and Planning held a forum in Sydney in late March that suggested agglomeration was the key. But if so, this raises important questions, the  speakers said.

For instance, should the city centres be prioritised over the suburbs? Is density for agglomeration compatible with liveability?  Which transport connections should be the priority?  Is Infrastructure NSW the answer to the integrated transport and land use planning challenge?

An “effective jobs density” indicator help unlock the dynamics of cities’ prosperity, the firm said.

Speakers at the forum were

  • Marcus Spiller, director of SGS, adjunct professor at the University of Canberra and a former national president of the Planning Institute of Australia.
  • Patrick Fensham is a principal in Sydney and was lead consultant for the City of Sydney’s Sustainable Sydney 2030 Vision plan.
  • Camy Kinloch is a senior consultant and director in the Sydney office.
  • Rob Lee is a principal in the Sydney office of SGS and the NSW practice leader.

Following are three of the four presentations.

Marcus Spiller

Marcus Spiller

Agglomeration and productivity

It has been known since time immemorial that cities make people smarter.

In Pompeii, Ephesus, Troy and Barcino (the foundation Roman settlement to Barcelona) (where he recently visited), there was a role in military domination of a productive hinterland, but it was also evident that these cities fostered the specialised skills – engineering, law, trade and transport, which enabled the hinterland to elevate its productivity.

Here is trade theory at work in front of your eyes – cities were able to specialise in brainpower and export this to grow the aggregate income cake.

It took humanity a couple of thousand years to crystallise this dynamic into a theory of agglomeration and productivity.  Alfred Marshall was probably the prime mover around a century ago, followed by a non-economist in Jane Jacobs who instinctively knew about the productivity power of density and diversity.  She in turn inspired the new growth theorists, including Paul Lucas.  And the tradition rolls on today in the feted works of celebrity academics like Richard Florida and Ed Glaeser.

The latest stanza in this unfolding enlightenment regarding urban agglomeration and its impact on productivity is the step change we have witnessed in global economic integration over the past three decades due to technology, political liberalisation and trade law innovation.

A growing, albeit minority grouping of cities are now no longer primarily in the service of their immediate hinterlands.  They have developed such advanced service offerings that these are being exported to an inter-regional and global clientele.  So much so, that these cities have become primary economic drivers in their own right, as well as enhancing the value of exports from their host regions and countries.

Regional composition of contributors to GDP growth in 20 years

The contributions of regional WA and Queensland are clear enough; these are well in excess of these regions’ shares of population.

But, in absolute terms, the heavy lifting in growing Australia’s income cake has fallen to Sydney and Melbourne.  Together, these cities accounted for a third of Australia’s growth during the noughties, notwithstanding that Sydney’s economy was in the doldrums.

The explanation for these figures is twofold; firstly, these two cities are direct partners in Australia’s mining boom.  More than a third of the inputs in the mining value chain rests in professional and technical services – engineers, IT specialists, human resource brokers and managers, strategic planners and designers, commercial lawyers and financial brokers of all sorts.  That’s a trade of about $46 billion per year.

Many of these services are sourced in Sydney and Melbourne for all manner of exporters beyond the mining sector, whether you’re dealing with Toyota in Altona, a gourmet food exporter in the Barossa Valley or a UTS chasing overseas students.

Secondly, these specialised urban services are increasingly being directly exported to clients overseas.  The value of finance, insurance and other business service exports from Australia is around $5.5 billion. Throw in education exports, and the figure is around $12 billion.

Of course, trade can go both ways.  Australia can readily import these thinking services if needs be, and is therefore exposed to international competition.  For example, many of the engineering and related technical services required for coal seam gas exploration and exploitation are being imported from Houston.

The capacity of Australia’s cities to remain competitive in these vital services goes back to the principles first enunciated by Alfred Marshall – it’s about economies of scale and scope, diverse skilled labour, availability of several supply sources and knowledge spillovers.

These advances in our ability to quantify the links between urban structure, density and productivity strengthen our ability to frame national urban policy which is properly focused on the Commonwealth’s interest – namely sustainable prosperity for all Australians.

One trend that we see across all advanced economies is that one or two metropolitan areas assume a senior role in the inter-regional export of key services.  In services, there would appear to be forever increasing returns to scale, providing the metropolitan fabric maintains its functionality – most particularly in terms of transport.

Between them, Sydney and Melbourne account for more than 80 per cent of Australia’s specialised service exports (compared with less than 40 per cent of all employment).

Canberra is also highly specialised in this regard.

These figures point to a range of critical planning issues.

  • Can Sydney maintain its competitive strength in the production of advanced services?  Are its vital agglomeration economies under threat from poor connectivity and inadequate planning for employment in accessible central locations?
  • How can the co-production of these key services between Sydney, Melbourne and Canberra be strengthened, to the nation’s benefit?
  • How can the federal government break free from the political dictates of federalism, where infrastructure resources need to be spread around relatively evenly regardless of returns to the nation, and invest in what is clearly a strategic corridor for Australia – the Sydney, Canberra and Melbourne trilogy?
Camy Kinloch

Camy Kinloch

Sydney’s contribution to national GDP growth has been high over the past 20 years, although it looks to be falling.

How does the picture look in terms of per capita growth in GDP? In the 90s – Sydney tracked national growth post Olympics – economy slowed down and there’s a decoupling of the growth rates

This is possibly due to the lack of large infrastructure projects over recent years constraining the capacity for growth.

In the GFC Sydney suffered more as it’s home to a high proportion of finance and insurance firms, and is still struggling. Real decline in people’s wealth raises equity issues.

How does this compare to Melbourne?

Melbourne tracks the national rates more closely – its economy is more diversified and there was less impact from the GFC. It has had a better performance than Sydney over the past 10 years due to major infrastructure investments  such as Docklands and  EastLink.

Click for larger view

How do the cities compare in terms of productivity?

Gross value-added per worker per hour relative to Australian base labour in Sydney is the most productive among the cities, largely due to high value add of financial services sector, but people in these jobs will move around industries to other high end jobs and bring productivity benefits.

Large companies have been shifting their workers to areas with cheaper rents and lower wages such as in Docklands, Melbourne. There has been a movement of

professionals (finance, engineering, consulting) to Perth and Brisbane to support the mining sector

So if cities are driving growth, what is it that’s driving the productivity of firms in urban locations?

Agglomeration refers to the density of economic activity. Firms are generally more productive in denser areas for the following reasons:

  • Ability to specialise, given the large numbers of potential customers
  • Diverse skilled labour force
  • Numerous supply sources – creates competitive environment
  • Knowledge spillovers, in that firms learn from each other when they’re close by through meetings, seminars, and employee turnover.

How do we measure agglomeration? The method must incorporate both local scale and accessibility to economic activity.

Effective job density

Effective job density is a method to measure the level of employment relative to the time taken to gain access to that employment and the mode split.

The effective job density of small areas in Sydney is based on jobs that are accessible within a half an hour travel times either by public or private transport.

If density leads to productivity advantages, then we should see variations in productivity of firms across the cities, for example, firms located in areas with a high EJD should be more productive.

For many industries, areas with higher effective job density, such as the CBD, have higher labour productivity.

Incidentally, we’ve also found that the same pattern exists for human capital – human capital is highest in city centres, and the higher your level of education, the more you benefit from increases in effective job density.

Overall, we’ve found that if you double an area’s EJD, firms become around eight per cent more productive. This fits with international literature.

Services centred industries tend to benefit more with changes in EJD, because they’re client/people driven industries. Manufacturing doesn’t do well, as competing land uses drive up rents in denser areas.

It’s worth noting how productivity in the knowledge industries benefits from increased density – doubling the EJD increases productivity by between eight and 16 per cent.

Increasing EJD in Sydney would benefit these firms and perhaps enable Sydney to regain some of the lost share in knowledge generating industries.

So how could we achieve these productivity gains?

Increases in the EJD can come from either increasing employment density in an area, or more realistically and, more quickly, by improving transport connections so that more people live within a half hour catchment area of jobs.

SGS panel, left to right: Marcus Spiller, Camy Kinloch, Rob Lee, Patrick Fensham

Rob Lee

Sydney’s economy has shifted dramatically away from dependence on manufacturing, driven by:

  • The way that value chains have become unbundled in the post industrial economy
  • Finance and insurance overtaking manufacturing midway through the last decade
  • Professional, scientific and  technical services overtaking  manufacturing in the last two years

Although broader forces have been at play in restructuring the Sydney economy, the capacity of the city to grow knowledge intensive sectors reflects agglomeration benefits

Price of agglomeration benefits – Melbourne versus Sydney

Comparing Sydney and Melbourne charts we know that productivity in knowledge intensive sectors is directly linked to economic mass or agglomeration.

There’s a price to pay for these benefits. These charts (not shown) confirm that the price of a unit of an agglomeration linked business advantage is much lower in central Melbourne compared to central Sydney. This probably reflects Melbourne’s large supply of strategically located business land.

Opportunities for growth in Melbourne

Melbourne has a huge advantage in terms of the sheer amount of land available for

knowledge intensive industries.

Docklands came on stream at a vital time, offering campus office land in areas with access to skills and services.

Since Victoria’s economy adjusted to the Hawke / Keating roll back of protectionist policies for manufacturing, these knowledge intensive sectors have grown strongly in the central city region.

There is scope to further develop this advantage in the development of Fisherman’s Bend; E Gate; Footscray and the corridor between Footscray and the traditional CBD.

Opportunities for growth in Sydney

Sydney’s knowledge intensive jobs are concentrated in the global economic corridor that stretches from Port Botany, through Randwick, Green Square and the CBD up through North Sydney, Chatswood, to Macquarie Park.

Adding up the numbers, a shortage of capacity to accommodate employment demand in the major centre’s over the next 25 years is likely, due to a critical long term shortage of commercial space in the Sydney city centre and continued demand at or above capacity in many of the major centres.

North Sydney is able to accommodate some surplus demand for commercial floor space in the City of Sydney. Major employment hubs in the south of Sydney are likely to meet or exceed current capacity fuelled by strong demand for space around Botany and the airport.

Green Square town centre and Randwick Health and Education Precinct are forecast to grow that will stretch capacity, while Macquarie Park, Chatswood and St Leonards will enjoy  more stable growth and capacity at current growth rates,

Melbourne has significant economic mass within a five kilometre radius of the core. Consistently high EDJ is evident 10km and beyond. It is higher in the south-east (towards Monash) and north-west (towards airport).

In Sydney, higher EJD is evident in the lower north shore and corridor between the airport and Paramatta (almost)

The existing polycentric structure; concentrations of employment outside of the core (Parramatta, Macquarie Park, Airport, Norwest) reduce economic mass

There are key differences between Sydney and Melbourne.

Land availability
Melbourne’s mono-centric structure creates a concentration of jobs in and around the centre and ease of access between these jobs is provided by road (and to a lesser extent rail). It has large stocks of land, strategically located –  a crucial advantage in a knowledge economy, which helps explain the revival of the metropolis’s fortunes over the past 15 years or so.

Sydney has higher EJD overall and lower economic mass at the core. It has less readily available land in the core. There appear to be difficulties in meeting forecast demand in the GEC as a whole.

Transport and EJD
Sydney: Congestion hampers EJD around Sydney’s core, whereas Melbourne has good travel times around the core.

Sydney has better public transport  to outlying areas, with a stronger bus network to suburban centres, compared to Melbourne although Sydney’s west is not as well serviced by transport as the east.

Melbourne’s inner area is serviced well but middle and outer areas are not and the city overall is very car based.

Sydney would also appear to have a better long term platform for sustaining an agglomeration advantage.

Structure and geographies

Sydney’s geography –  the harbour in particular – forms a natural barrier, a poly-centric structure.

The transport system supports the centres and the existing centres are much more established than Melbourne.

Sydney is just bigger. The inner 10 kilometre of Sydney has EJD over 216,000, in Melbourne, this figure is over 160,000.

Conclusion
Melbourne can offer agglomeration benefits at a highly competitive rate, and this has helped boost the knowledge economy

Sydney clearly has the greater economic mass in absolute terms but its prospects may be being strangled by geography and poor connectivity.

So while Sydney retains a productivity advantage this may be reflective of historic investments. Without investments, connectivity is likely to be eroding.

The challenge for Sydney is joining up this patchwork; seeking opportunities to raise EJD at critical nodes and to better connect nodes.

The range of issues here include provision of infrastructure between nodes; institution challenges and the integration of land use and transport planning

Factors beyond agglomeration will influence business performance and industry development.

Melbourne’s recent strong performance may have been boosted by good marketing, focused industry policy and general good governance.

Sydney may have been held back somewhat by poorly co-ordinated government policy and, perhaps, higher taxes.