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Lytton Advisory

Quarterly Newsletter – June 2015

Now available at:

https://lyttonadvisory.com.au/media/

Categories
Cost Benefit Analysis

Reducing Red Tape

Red tape reduction remains on the Government’s agenda in Queensland. Significant work has been done on a social and human services blueprint by the Department of Communities, Child Safety and Disability Services. See:

https://www.communities.qld.gov.au/gateway/reform-and-renewal/social-investment/social-and-human-services-investment-blueprint

I am pleased to have played a small part in this. See:

Click to access red-tape-reduction-cost-estimate-final-report.pdf

Categories
Infrastructure

A Bridge to Sell

Unknown Recently at the Warren Centre (http://thewarrencentre.org.au/ip30-panel-investigates-the-infrastructure-governance-opportunity/) there was some commentary around the cost of duplicating Brisbane’s Gateway Motorway Bridge.  Namely, between the original and the duplicate, costs increased fivefold.  On the surface that would be a stunning thing.  However, when we consider 24 intervening years (1986-2010) between the costings for the two projects, we are looking at an annualised increase in costs of 6.9%.  This is still significant when inflation only increased 3.4%p.a. over the same period.  I know there are construction price indices around as well.  However, I wonder whether design and materials were significantly different, and the connecting road infrastructure was more challenging. That might explain some of the residual increase.  Also, the duplicate would have been constructed in a much tighter market for engineering and construction services.  Should we have bought the extra lanes way back in 1986 or would the opportunity cost have been too large?

Categories
Cost Benefit Analysis

Introducing Cost Benefit Analysis

How do you find out what an economic cost benefit analysis should contain?

Reference materials run to hundreds of pages, with detailed explanations depending on the nature and purpose of the investigation and the field under consideration.

I thought a simple introduction would help explain what is involved and prepared Intro to CBA for my clients.

Categories
Infrastructure

NSW Northern Beaches Hospital Deal

One of the largest public health projects in NSW has been slowly releasing more and more information about the total cost of the project. Like some other public private partnership arrangements this project is a combination of capital investment and operating service payments.

The Northern Beaches Hospital project was belatedly revealed to the public to cost $2.14 billion cost, up from “over $1 billion” in December 2014. See: http://www.brisbanetimes.com.au/nsw/revealed-the-real-2-billion-cost-of-privatised-northern-beaches-hospital-20150501-1mxgqd.html

A lot of information was shrouded in commercial secrecy and the Health Minister has indicated she did not get involved in the financing.

So let’s have a look at what the good taxpayers of NSW may be getting.

From public information, the hospital development itself will cost $600 million. The NSW government plans to chip in some $400 million in adjacent transport improvements. A big assumption is that this is actually delivered on schedule and budget.

That basically handles the capital investment side of the equation and may leave $1.14 billion for the hospital services NSW is purchasing up to 2038 from the consortium.

Let’s say the hospital is operational in 2018, so there is a 20 year service period. According to some reports, 488 public beds will be provided.

This means the average daily cost per bed – occupied or not – is around $320 over this period.

Across the NSW health system the average cost per occupied bed was around $1,400 per night in 2012-13, based on information given to the NSW Auditor General.

See: http://www.audit.nsw.gov.au/ArticleDocuments/358/10_Managing_Length_of_Stay_Hospital_Readmission_Appendix_Three.pdf.aspx?Embed=Y

So this looks like it might actually be a good deal even at low occupancy rates. But since we do not know the basis of the service payments we simply cannot be sure.  The consortium get to make some extra cash on the side by selling private services through the site.

At about this point I can hear a lot of health economists scream.

So let’s recognise there is a lot of detailed, good work being done by the Independent Hospital Pricing Authority (see: http://www.ihpa.gov.au/internet/ihpa/publishing.nsf) that is putting evidence-based price signals into the hospital funding system, allowing funding arrangements to move from block grants to activity-based funding payments.

Over time this should help improve the efficiency of our hospital systems.

Categories
Infrastructure

What Price Data?

When we look at infrastructure services we should also consider the context in which they are provided.

Currently I am on assignment in PNG.  Telekom here in the past week has slashed mobile broadband top up prices by 50% to around A$25 per gigabyte (GB).  It sounds impressive and may have a meaningful impact.  However even that level it is still eyewateringly expensive compared to Australia.  But stop and think about it in the context of purchasing power.

Some data I looked at recently suggested GDP per person in PNG was probably A$2,500.  In Australia GDP per person is around $45,000, some eighteen times the level in PNG. Depending on the definition the actual figures can vary but consider that as a rough context for income.

If Australian’s faced the same share of GDP spent on broadband top ups as in PNG that would look iike a cost of $450 per GB.  How fast a rate of uptake would you expect if Australia faced that price?  Mind you it was not that long ago we were paying those prices for dial-up.

This also supports earlier analysis by the International Telecommunications Union:

“By early 2013, the price of an entry-level mobile-broadband plan represents between 1.2-2.2% of monthly GNI p.c. in developed countries and between 11.3- 24.7% in developing countries, depending on the type of service.”

See: http://www.itu.int/en/ITU-D/Statistics/Documents/facts/ICTFactsFigures2013-e.pdf

Clearly further, lower prices are needed in PNG along with relative increases in GDP per person.  The digital divide remains huge and the context remains relevant whether you are looking at PNG or Australia.

Image source: comparebroadband.com.au

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