Education Infrastructure

Recently I was up in Papua New Guinea for work. The PNG government has an ambitious policy of free primary school education. This requires more education infrastructure right across the country.  I had an opportunity to look at how education infrastructure is being improved through an Australian government project with PNG. The following photos show how classroom conditions have changed through some simple design measures.  Use of the old classrooms only stopped a couple of months ago.

 

The new school buildings were erected to Australian construction standards. The design featured higher ceilings to improve air flow, fans, and electrical lighting. Blocks of four classrooms and teachers prep rooms were constructed using Besser block. This made better use of the site.  Also, ablution blocks at some schools were upgraded, which has a significant positive impact on female participation in education.

These clean, functional classrooms provide a much better learning environment for students. This is infrastructure that should last a long time in a very challenging environment.

Infrastructure Complexity

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Why does delivering infrastructure have to be so complex on so many different levels? It seems hard to correctly identify infrastructure, assess the need for services from those assets, discern which infrastructure to maintain, rehabilitate, replace or build new. Further, there are strong disagreements at the political level, between infrastructure agencies and, within infrastructure agencies, between different asset managers.

Complexity arises from the involvement of a broad array of participants in the provision of infrastructure assets, as well as the managers of the services provided from those assets.

It also arises from complex streams of benefits. In addition to benefits accruing to consumers of infrastructure services, there are often significant streams of benefits that are positive externalities. Wider benefits to society from improved health services, better access to education, cleaner water supplies, stable supply of electricity, and improvements to travel time and quality of the trip. A healthier workforce improves productivity. A more educated populace can generate higher disposable incomes. Purer water supplies enhance public health. Stable electricity supplies reduce business interruptions. Improved transport systems make labour markets function better and increase intra and inter city productivity. The benefits are multifaceted and often hard to quantify on cost-benefit analyses.

On the supply side, it is often too easy to overlook the range of solutions that are on offer. After a need has been identified, solutions could well include non-built options. This may involve active demand management, improving utilization and output of existing assets, repairing and rehabilitating existing infrastructure, changing the infrastructure asset operating environment to foster demand for alternatives.

The options analysis needs to be undertaken at the output/outcome level, rather than at the input/resource level. That is where actual economic value can be identified. To do otherwise creates the risk of estimating the cost of sub-optimal options.

Complexity also arises in terms of finding the financial resources to commission and operate infrastructure assets. Also, implementation through procurement and construction may have complexity.

Large, nationally significant infrastructure contains a lot of first pass risks. Getting the right scale and scope of infrastructure to match the most likely demand profile requires a lot of analysis.

Many infrastructure assets contain hiding optionality benefits. The ability to set the ultimate scale and scope, as well as the possible staging to achieve that is a significant real asset option. At the outset, a lot of choices can be made that close off options later on. Least cost solutions are not necessarily the best solutions where service quality between options can vary.

So what gets bought and how it gets built becomes critical.

Ultimately financial resources are committed. This is because small annual benefits are often realized over long periods. This is in contrast to large initial construction costs. Construction costs and some measure of operating expenses have to be funded. User charges do not always cover these costs. Finance addresses the imbalance of cash flows inherent in infrastructure. Ultimately, infrastructure must be paid for either by users or taxpayers. There is a significant range of public and private financing mechanisms. Financing choices are complex and can carry different risk profiles. This can affect asset valuation, as well as commercial risks around viability.

These are all significant touch points highlighting infrastructure complexity. They warrant detailed consideration and investigation in each infrastructure project.

Profit

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In economic analysis, the term ‘profit’ is perhaps the easiest to define, but the least understood.

An economic profit or loss is the difference between the revenue received from the sale of an output and the opportunity cost of the inputs used. In calculating economic profit, opportunity costs are deducted from revenues earned.

Economic profit is the difference between total monetary revenue and total costs, but total costs include both explicit financial and implicit opportunity costs. An accounting profit only considers financial costs associated with production and is therefore higher than economic profit.

Economic profit accrues to producers as a return for marshaling and using the resources of the economy to create goods and services.

However it does not occur in perfect competition in the long run equilibrium; if it did, there would be an incentive for new firms to enter the industry, aided by a lack of barriers to entry until there was no longer any economic profit.

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This Micro Brief is part of an ongoing series provided as a general public information service.  These concepts underpin modern economic analysis.  Find out more about smarter capital investment decisions using economics at www.lyttonadvisory.com.au.

Investing in Infrastructure

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It is easy to think of investing in infrastructure as something that needs to be done on a routine basis – repairing power stations that supply our electricity or maintaining rail lines that carry our commuters and freight. This real foundation of our economy and society should be prudently addressed in a routine and methodical way, free from political and ideological agendas. Close to the operational level, asset management strategies address this.

At the same time, investing in infrastructure is anything but routine. It is a platform in which we determine the future competitiveness of our country, much the same as any other state. It also determines the extent to which we can maintain and enhance an open and inclusive society, one that also shapes long-term responses to climate change.

Infrastructure investment is a long-term investment to secure that future capacity and productivity in our economy. It provides a demand for highly skilled jobs in the professional service sectors, driving future employment growth.

While it can provide short-term stimulus through the installation and commissioning of capital assets, the long-term benefits are far more significant. The Depression-era stimulus from constructing the Sydney Harbour Bridge has been far outweighed by the benefits from the annual flood of traffic traversing the bridge over decades. Emphasis on the short-term stimulus from consuming resources to construct infrastructure misses the point.  These projects are justified only on the basis of the long-term streams of benefits they can generate.

Infrastructure investment needs to expand a nation’s economic frontier – it lifts potential constraints on future economic growth. In the past Australia has benefited from the development of its road and rail networks, the creation of terminals (airports and seaports) and the development of a copper-based telecommunications system. Our future points to benefits accruing from fast fibre optic broadband, carbon reducing power investments and new high-speed rail technologies.

Australia has been facing a challenge to the core model for funding public infrastructure for a long time. The use of the taxation system to generate funds for public investment will not be sufficient to meet all of the infrastructure investments we require. We cannot do it out of our government budgets. It was not enough in the past either, and we imported foreign capital in the form of sovereign loans.

The Australian economy was simply not large enough in the past to fund the infrastructure investments that underpinned the economic growth we have achieved and the living standards we enjoy.

The nature of our infrastructure investments and what constitutes economic infrastructure have changed over time. Historically we have looked to the physical capital side of the economic growth equation, with less emphasis on the human capital side.

We need a new bipartisan consensus that effectively decouples infrastructure from political and budget cycles, to drive investment in the public interest. Emerging governance arrangements at the federal and state levels are showing promise but remain captured by legislative, budget and bureaucratic cycles.  They are still in their early stages of maturity in the Australian federal system of government.

A new commitment to investment is required that explicitly learns the lessons from past failures, avoids the ghosts of white elephants (the lonely tunnels, quiet dams, and bridges to nowhere) and addresses the pressing demands for the infrastructure services that support a modern 21st-century economy.  We need to be honest about past mistakes, in order to avoid them in the future.

We need investment in infrastructure that does the following:

  • repairs and rehabilitates our stock of existing infrastructure assets to continue producing existing streams of services that our citizens demand
  • expands the capacity of our economy by growing our infrastructure asset base with newer, smarter investments that are more productive in supplying services, lowering input costs
  • improves the productivity or our economy by investing in new types of infrastructure technology, enabling new kinds of infrastructure services enabling improvements to other sectors of the economy
  • enhances human capital with savvy health and education infrastructure investments that make our people smarter and healthier, improve the productivity of our economy and improve the quality of life for all.

These investments will position Australia to be at the front end of continuing global technological revolutions, set us on a lower carbon trajectory and expand the frontier of economic possibilities for the economy.

Rather than run down our current assets we must renew, reinvigorate and expand them as prudent custodians for future generations. These investments will be the backbone on which our future prosperity will stand.

Entrepreneurs

At the heart of economic progress are entrepreneurs. An entrepreneur is someone who starts up a business by creating a new product of service that someone else wants to buy.

Entrepreneurship involves high levels of creativity and innovation, and is not without considerable risk. Converting a great idea into a physical prototype or beta version of a service requires managerial skills, lots of time and lots of energy. It can also require a solid approach to patenting a product. Entrepreneurs have to interact with governments, potential investors and lenders, patent attorneys, as well as identifying, recruiting and driving high performing staff.

Joseph Schumpeter was amongst the first to conceptualise entrepreneurship. He drew a clear distinction between inventions and innovations, noting entrepreneurs not only invented but also included new means of production, new products and services as well as new forms of organisation.

Today we can see this in the business models of firms as different as Amazon, Google and Facebook. In the past, innovation in production led to mass production assembly lines, lean manufacturing, and, more recently, mass customisation of industrial and consumer products. Innovation in customer service is now increasingly blurring the boundaries between producer and consumer, as some information sevrices are crown sourced, and businesses operate platforms that simply facilitate social interaction on defined topics. The consumers develop and drive the content. Innovation in the service and knowledge economies is becoming increasingly important.

However, new ideas, methods and products/services are also accompanied by high levels of risk. So the rewards need to be significant. Not all innovators capture the rewards. Entrepreneurs have to address risk, ambiguity and uncertainty in order to be successful. They employ a wide range of strategies including: continuous improvement methods, application of technology; use of business analytics/intelligence; frugal/lean approaches; optimised talent management and development of leading edge/future oriented products and services.

Is the role of entrepreneurship critical to economic growth or does public policy in many countries overemphasis it at the extpense of improving the productivity and efficiency of existing industries? What do you think?

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This Micro Brief is part of an ongoing series provided as a general public information service.  These concepts underpin modern economic analysis.  Find out more about smarter capital investment decisions using economics at http://www.lyttonadvisory.com.au.

Human Capital

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Capital in economics usually refers to assets that yield income and other useful outputs over time.  People usually of bank accounts, shares in companies, assembly lines or steel plants.

However these are not the only forms of economic capital.  Education, expenditures on medical care and training in business skills are also capital.  That is because they raise earnings, improve health or add to a person’s good habits.  Economists regard these as investments in human capital.  This is because people cannot be separated from their knowledge, skills, health or values in the way they can be separated from their financial and physical assets.

Increasingly, skills such as creativity, empathy, contextual thinking and big picture thinking are becoming increasingly important.  These provide a critical response in maintaining high standards of living in the face of low wage competition.

It is an aggregate economic view of people acting within economies.  An attempt to capital social, biological, cultural and psychological complexity as they interact in economic transactions.

Unsurprisingly many economists explicitly connect investment in human capital development to education, productivity and innovation.

So should the sum of us be simply expressed in terms of our relative merit in an economic system?

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This Micro Brief is part of an ongoing series provided as a general public information service.  These concepts underpin modern economic analysis.  Find out more about smarter capital investment decisions using economics at www.lyttonadvisory.com.au.

Updated: 18/1/17.