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How to appraise the true value of public expenditure

October 17, 2018
Economics
  A new methodology measures social and commercial returns


​The history of public infrastructure in Australia is littered with budget blowouts and white elephants but if there was a prize for one of the most controversial and poorly handled of recent times, the National Broadband Network (NBN) would have to be a contender.

Former prime minister Malcolm Turnbull has described setting up a new company to build the NBN as a "big mistake" and blames the Labor Party for leaving the Coalition with a "calamitous train wreck" of a policy that was supposed to give Australians access to faster internet services.

The Coalition's decision to build a service that only takes fibre-optic cables to street corners, not into homes as Labor had planned, hasn't quarantined it from criticism or cost blowouts: the budget now stands at $51 billion, up from the Coalition's 2016 pre-election promise of $29.5 billion.

The federal government spends billions every year on major investments but there are few formal requirements for such funding decisions. Even if such requirements existed, the full extent of the costs and benefits – be they financial, social or environmental – associated with public expenditure is notoriously difficult to measure.

A new report from UNSW seeks to address that by creating a common language to appraise public expenditure and a common unit of measure to compare different types of projects, and to help determine their social value.

Social Return Accounting: Using social science to calculate rates of return for government expenditures, by co-leads of UNSW's Grand Challenge on Inequality, professors Rosalind Dixon and Richard Holden, with Alex Rosenberg of Georgetown University, puts forward a mechanism for considering commercial and social returns together.

The authors hope it will encourage politicians to apply more discipline to decisions about significant government investments, and provide more transparency to the public about those decisions, says Holden, a professor of economics at UNSW Business School.

Best social science

Social Return Accounting (SRA) creates a level playing field for evaluating different types of investments – for example, a new hospital versus a new art gallery – "rather than the arm wrestling that currently takes place between ministers and departments about who gets government resources", says Holden.

"We tend to privilege physical infrastructure over social infrastructure. For example, if you compare the narrative around Badgerys Creek airport (in Western Sydney) or a new toll road, it is mostly about the commercial return. When you look at the narrative around the National Disability Insurance Scheme (NDIS) it tends to be the language of moral obligation.

"The further we get away from something very tangible and commercial, the closer we get to a moral case [for an investment] and that could disadvantage that kind of investment."

Measuring a social return on investment isn't a new principle but Holden and his co-authors have expanded it by using social sciences – such as randomised controlled trials and observational studies – to assess benefits. Human and social capital are considered, along with the more traditional financial and physical capital expenditure that governments assess.

"What is at the core of this method is that we are starting with the best social science to track the benefits and that gives you a much broader picture of the social benefits that would accrue from an investment," says Holden.

This kind of analysis is already being done overseas, says Dixon.

"In the UK, social returns are by law part of the debate," she says. "Leaders are required to interrogate the social value of any project over one million dollars before they contract public services."

'The further we get away from something very tangible and commercial, the closer we get to a moral case [for an investment]' 

– RICHARD HOLDEN

Difficult to measure

The report's authors have used SRA to evaluate the NBN and the NDIS.

In the case of the NBN, they evaluated connecting all premises in Australia directly to the network, the so-called 'fibre-to-the-premises' (FTTP) model, versus connecting the network to central spots, or 'fibre-to-the-node' (FTTN). FTTP would cost much more to build but would deliver faster connection, upload and download speeds.

By calculating the NBN's shared benefits – in wages, information and communication technology skills, tele-medical help, patient transfers, social connections and mental health – SRA found that delivering broadband to the home had a rate of return of 21% compared with the cheaper to build 'fibre-to-the-node' option at 15.1%.

The NDIS was more difficult to measure because the scheme is tightly linked to issues of morality and fairness. At the core of the scheme is a radical change in the way people with disabilities are serviced by government.

Instead of being passive receivers of disability services, NDIS allows clients and their carers to design their own package of care around a block of funding determined by the Physical Abilities Requirement Evaluation. That has reduced carers' anxiety, stress and fatigue, which, in turn, has increased their ability to provide assistance to the people they are looking after.

The authors turned to social science research done in other areas of medical care to put a dollar figure on the resulting reductions in the incidence of serious errors in patient care.

The report estimates the economic valuation of lives saved through transition to NDIS would be close to $20.8 billion.

"We don't mean to reduce the value of rights to dollars, but if we fail to quantify in some way, we often fail adequately to invest in public and social infrastructure necessary to sustain and realise these rights effectively," the report says.

'Politicians often don’t think about these things … they have not had the intellectual and structural frameworks to do it'

– JOHN HEWSON

More transparency

Honorary professorial fellow at the Australian National University and former Opposition leader, John Hewson, thinks government is looking for the kind of sophisticated analysis offered by SRA.

"There is significant concern that government programs get started and then don't get assessed again," says Hewson, who is on the external advisory board for UNSW's Grand Challenge on Inequality. He launched the report in September.

"What are the benefits and costs? Has the program done something we didn't expect? Politicians often don't think about these things … they have not had the intellectual and structural frameworks to do it.

"So I think this [new method] is a significant step. In simple terms, it puts all sorts of government spending on a level playing field and it has not been possible to do that before now."

SRA may even constrain pork-barrelling, says Hewson.

"It will make the process more transparent. One thing the electorate wants is more transparency. I am a great believer in people having access to as much information as possible."

Holden is hopeful but realistic about SRA being widely adopted by government in Australia.

"There is something in it that should appeal to both sides of politics. The more conservative side might appreciate the rigour of the assessment. For the, shall we say, more progressive side, SRA provides a language that justifies an investment in social infrastructure."

At the very least, he says, it will make politicians and the public focus on the assumptions behind any investment. That could lead to a debate about those assumptions, a much more valuable exercise than the current "food fight" between ministers about who gets money for which portfolio.

He warns, however, that there is no magical formula for assessing government expenditure.

"There is a judgment and an art in this at every level and that is not going to be taken away. But SRA does provide a degree of rigour to the assessment."

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