Tag: economics

Categories
Economics

Productive Resources

factors_of_productionProductive resources are the requirements for producing goods and services in an economy.  Often economists call these ‘factors of production’.   Usually these are represented as capital, labour and land.  Entrepreneurship is increasingly included as a fourth factor.

Capital usually comprises fixed capital such as structures, buildings, physical plant, machinery and tools.  Circulating capital is often described in terms of components and raw materials.

Labour includes all aspects of human resources and may be unskilled, semi-skilled or skilled.

Land comprises naturally occurring resources where supply is inherently fixed.  These resources may be renewable or non renewable.  Examples are geographic locations, mineral deposits, forests, fisheries, air quality, geostationary orbits and parts of the electromagnetic spectrum.

Entrepreneurship is often described as the capacity and willingness to develop, organise and manage a business venture along with any of its risks in order to make a profit.  It is often closely associated with starting new businesses.

How we define what we use to supply goods and services is critical to our understanding of the economy.  How can we test if the traditional  capital-labour-land approach is still valid?  How strong or significant is entrepreneurship in the mix?

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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.

Categories
Cost Benefit Analysis Economics Lytton Advisory

Make the Casino Work for You

rouletteNothing is more hair raising than exposure to risk without a sense of the level of that exposure.  This is especially true in capital investment decisions.

Monte Carlo simulations perform risk analysis by building models of possible results by substituting a range of values—a probability distribution—for any factor that has inherent uncertainty and significant impact on the final result.

By using probability distributions, variables can have different probabilities of different outcomes occurring.  Probability distributions are a much more realistic way of describing uncertainty in variables of a risk analysis and improve the quality of sensitivity analysis.

During a Monte Carlo simulation, values are sampled at random from input probability distributions.  This is done hundreds or thousands of times, and results in a probability distribution of possible outcomes.  It provides a much more comprehensive view of what may happen.

Advantages over deterministic, or “single-point estimate” analysis include:

  • Probabilistic Results. Showing how likely each outcome is.
  • Clearer Graphical Results. Visual presentation of probabilities.
  • Improved Sensitivity Analysis. Sharper sensitivity analysis to show what counts.
  • Scenario Analysis: Model repeated variations in combinations of factors to show which scenarios need further investigation.
  • Correlation of Inputs. Represent how, in reality, when some factors goes up, others go up or down accordingly.

Done poorly or with low quality input data, the results can be potentially misleading – producing a level of certainty on the basis of some very uncertain assumptions.

Lytton Advisory holds an @Risk software licence which enable us to provide this type of probabilistic analysis to clients, helping them make better informed decisions. Examples of how we have applied this for clients include:

  • Estimating financial costs of schedule delay on a major metropolitan public transport project.
  • Assessing probability of breaching a cost contingency levels on a +$500 million infrastructure program.
  • Building probabilistic NPV profiles in cost benefit analyses given uncertainty about key economic inputs.

Contact us today to find out how we might be able to help you.

Categories
Economics Lytton Advisory Policy

A Civil Society

kuwaitidiwaniya

While working recently in Kuwait, I was privileged to be invited to a diwaniya (https://en.wikipedia.org/wiki/Dewaniya) along with colleagues from my project team.  This type of forum is fairly unique to Kuwait and it a key element of their civil society.

For around an hour we discussed industry policy with a number of leading lights from Kuwait’s business community.  I learned a lot from them.  The discussion took our project team beyond the numbers and statistics we were considering to just how the reforms might actually be implemented.  The exchanges were robust but expressed in good humour and with great politeness.

I think these kinds of gatherings are extremely important in shaping consensus.  Kuwait has hundreds of diwaniyas and candidates for public office often seek to turn up at as many as possible around election time.  In my view, it removes a lot of the adversarial nature that characterises public discourse in Western countries.  Where hard decisions are needed to effect significant change, a consensus based approach may deliver better outcomes than a crash or crash though approach.

Australia used to do evidence-based, consensus-driven public policy quite well.  It was grounded in clearly explaining the need for change.  I fear now that the people putting themselves forward for public office are increasingly driven more by populism and a startling touch of irrationality.

Categories
Local Government

Building our Regions

The Queensland Government has replaced the former government’s Royalties for Regions program with its own  200 million ‘Building our Regions’ Program and is calling for applications from local councils.  See:

http://www.statedevelopment.qld.gov.au/regional-development/building-our-regions.html

A commendable aspect is the requirement to provide a cost benefit analysis on applications for funding over $500,000.  Application for amounts below that will still be subject to a benefit analysis.

There are pros and cons with this type of handout – are projects genuinely additional, will co-contributions be effective, is effective, long term infrastructure planning distorted?

However, it can hardly be argued local councils are drowning in funds to invest in infrastructure.

Recognising the Government is looking for shovel-ready projects, applications close 11 September.

Categories
Lytton Advisory

Quarterly Newsletter – June 2015

Now available at:

Media

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
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

Q and A

At Lytton Advisory we say that providing commercially oriented economic solutions is all about ‘where infrastructure meets money’. In this Q and A, Lytton Advisory Principal Craig Lawrence explains what this means.

Q: So who are economists and what do they do?

A: Economists working with Lytton Advisory are typically postgraduate qualified professionals. We study, develop, and apply theories and concepts from applied microeconomics and write about economic policy. We study the firm and how its commercial operation affects its financial performance, as well as how groups of firms within an industry compete against one another, and how an industry meets the needs of a market.

Q: How does that relate to the development of infrastructure?

A: Because benefits are spread out over a long time and across a wide range of stakeholders. If all the benefits and costs were accrued in one year we could easily see whether the infrastructure was delivering and how risk was defined.

Q: Is it ever that simple?

A: No. Large capital costs of investing in economic infrastructure are recouped through small amounts of use by large numbers of stakeholders over a long period of time. Economic analysis helps identify where the risks are in building and operating infrastructure, ensuring risk is properly attributed to those best able to handle it. Invariably there are also significant social and environmental impacts that need to be considered.

So we help figure out:

  1. Why specific economic and social infrastructure is required and how users may benefit
  2. What infrastructure can cost to build, operate and maintain
  3. How external factors such as exchange rates, interest rates and technology impact on infrastructure project economics
  4. Whether infrastructure provides a sufficient rate of return to its owners, governing authorities and the wider community, as well as identifying in what form that return occurs – financial, economic, social, or environmental
  5. Who is best placed to bear the various risks around building and financing infrastructure

Q: When do you get involved in an infrastructure project?

A: We provide front-end advice and clarity before anybody even starts building; we do mid-project evaluation to ensure that the project remains commercially and economically valid; and we do post-project evaluation to ensure that infrastructure continues to deliver the right results.