Categories
Higher Education

ROI on degrees

As we head towards $100,000 university degrees, the investment decision becomes increasingly critical.  No longer is an undergraduate degree simply three or four years in a person’s life.  Large debts are going to be attached.  So will the expected increase in lifetime earnings offset this?

It is hard to say because there are a lot of factors at play.  However doing an economics degree still looks like a good return on investment for school leavers:

http://thenewdaily.com.au/money/2015/04/15/uni-degrees-best-roi/

Categories
Economics

Decide Early for Big Impacts

Decisions made just days or weeks into an infrastructure project – assumptions of end user needs, commitments to a schedule, the shape and size of the proposed infrastructure asset – have the most significant impacts on design, feasibility and cost. This is particularly true for large infrastructure projects with complex procurement and construction processes.

As decisions are made later and later in the planning process, their influence decreases. Options to change direction are either closed or become more problematic. Consider road congestion and a decision to proceed with an expensive built infrastructure solution. Not considering demand management opportunities misses valuable benefits in being able to avoid or delay that built cost.

Some minor cost savings can still be realized through value engineering in the latter stages of design, but the biggest cost factors are embedded at the outset in a project’s DNA. Once locked in the project becomes the monster you planned.

Categories
Infrastructure

Infrastructure and Human Development

I am currently in Port Moresby on an assignment.  It is a three hour flight from Brisbane but a world away in many other respects.  The UN releases reports on human development.  Some contrasts are quite stark.

PNG       Australia    Measure

0.411      0.933         Human Development Index

157th      2nd            Human Development Index rank

7.25        23.3           Population (million)

17.07       950.65      GDP (US$billion 2011)

2,381       42,278      GDP per capital (US$ 2011)

0.617       0.113        Gender inequality (lower is better)

62.42       82.5         Life expectancy at birth

When we look at infrastructure it makes you think vey hard about what is important.  It really is all about context.

Sources:
http://hdr.undp.org/en/countries/profiles/AUS
http://hdr.undp.org/en/countries/profiles/PNG

Categories
Economics

A Crash Course in Economic Principles

There are many different approaches to understanding economics. Here is one that sets out three broad fields:

  • How people make decisions
  • How the economy works as a whole
  • How people interact

Read for yourself about ten economic principles that support this and save yourself years of study. A lot of applied economics addresses the issues below.

How People Make Decisions 

  1. People Face Tradeoffs. To get one thing, you have to give up something else. Making decisions requires trading off one goal against another.
  2. The Cost of Something is What You Give Up to Get It.  Decision-makers have to consider both the obvious and implicit costs of their actions.
  3. Rational People Think at the Margin. A rational decision-maker takes action if and only if the marginal benefit of the action exceeds the marginal cost.
  4. People Respond to Incentives. Behavior changes when costs or benefits change.

How the Economy as a Whole Works

  1. Trade Can Make Everyone Better Off. Trade allows each person to specialize in the activities he or she does best. By trading with others, people can buy a greater variety of goods or services.
  2. Markets Are Usually a Good Way to Organize Economic Activity. Households and firms that interact in market economies act as if they are guided by an “invisible hand” that leads the market to allocate resources efficiently. The opposite of this is economic activity that is organized by a central planner within the government.
  3. Governments Can Sometimes Improve Market Outcomes. When a market fails to allocate resources efficiently, the government can change the outcome through public policy. Examples are regulations against monopolies and pollution.

How People Interact

  1. A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services. Countries whose workers produce a large quantity of goods and services per unit of time enjoy a high standard of living. Similarly, as a nation’s productivity grows, so does its average income.
  2. Prices Rise When the Government Prints Too Much Money. When a government creates large quantities of the nation’s money, the value of the money falls. As a result, prices increase, requiring more of the same money to buy goods and services.
  3. Society Faces a Short-Run Tradeoff Between Inflation and Unemployment. Reducing inflation often causes a temporary rise in unemployment. This tradeoff is crucial for understanding the short-run effects of changes in taxes, government spending and monetary policy.

Source: Mankiw, Principles of Economics, 2e

Categories
Infrastructure

Accuracy and precision are different things, especially for infrastructure

The effort invested in ‘getting it right’ should be commensurate with the importance of the decision – Daniel Kahneman

Accuracy is the absence of error; precision is the level of detail. Often in infrastructure planning and analysis we see an unnecessary need for precision in the early stages with not much emphasis on accuracy.

Effective problem solving requires always being accurate but only being as precise as is helpful at any given stage of problem solving. This is about delivering analysis that is sufficient to proceed to the next stage in developing an infrastructure project. Many project approval gateway processes recognize this, but it is often poorly implemented.

Early in the problem solving process, accurate but imprecise methods, rather than very exact methods, will allow consideration of all reasonable approaches and minimize the tracking of needlessly detailed data. In this way, less apparent but potentially higher value options and scenarios can be considered and compared with the standard approaches.

Categories
Cost Benefit Analysis

Cheat Sheet for Reviewing a Cost Benefit Analysis Report

Suppose you are given a cost benefit analysis.  Without an economics degree, how do you know it has been properly completed?

Economic CBAs are a decision support tool used to determine the net benefit to an economy of a proposed course of action, a policy or a project.  A ‘do something’ case is typically compared to a ‘business as usual’ case to identify incremental changes in benefits and costs, explicitly recognising that not doing a project has implications as well.  Costs and benefits occur in different time periods and values are brought to the present to enable comparison of net economic benefits.

If you are wading through one of these reports here is a cheat sheet with questions you can ask the analyst to pierce the veil of certainty these reports often convey.  It is based on longstanding advice the Commonwealth Government has given its own agencies when confronted with this kind of economic analysis.

Ask the following questions:

  1. What questions does the study attempt to answer?
  2. What alternative strategies are considered?
    1. Do you have any comments on the way the choices could have been set out?
    2. Are there other choices that could/should have been considered at the same time?
  3. Are you happy with the cost estimates made?
    1. Are the methods of evaluation satisfactory?
    2. Are any relevant costs omitted?
  4. Is the study based on reliable evidence?
    1. What further information would you require?
    2. Is such information available and, if so, where and from whom?
  5. Are you happy with the methods of benefit measurement employed in the study?
    1. If not, what method or approach would you propose?
    2. If yes, are you content with the values derived?
  6. Does the study allow for:
    1. Uncertainty (or errors) in the expected costs and benefits?
    2. The differential timing of costs and benefits?
  7. Finally, assuming you were advising the decision makers, what would be your recommendation?

Any analyst should have no problems or hesitancy answering these.  If they do, the report probably needs more work.

Categories
Infrastructure

Better Infrastructure Planning

Better infrastructure planning avoids presuming a solution.

Often we get locked into assumptions about the nature of the problem, its causes and desirable solutions. Wise infrastructure planners step back – examine what caused the problem, what caused the causes, and what caused those causes. This reveals possibilities very different from what end users envisage, but meet the true need most effectively.

A proper needs analysis is critical. If overlooked, huge value is often lost – for society, for the economy and for business.