Monday, April 22, 2013

Monday Forum - how do we improve productivity?

Back in February, The first three Federal election issues - the economy, industrial relations and NSW Labor, nominated the first three key issues that I thought were going to be important in electoral terms.

In recent weeks, the question of budget deficits has come to the fore. While the mantra of immediate returns to surplus has dropped away, that's clearly not on, the need to address the structural deficit has become central to discussion. Phrases like "the need to share the pain" have become ritual. I think that a fair bit of the discussion misses the point.

I am not a supporter of productivity improvement for the sake of productivity improvement. Too often, it becomes another squeeze for short term gain. I am a supporter of productivity improvement as a means to longer term growth.

Our problem at the moment is that budget and associated policy discussions have become a zero sum game. If one benefits, another must lose. That leads to fights, fights that will get worse if Government budgets are all, as argued, in structural deficit. Of course, there will always be trade-offs, trade-offs made worse by current obsessions with "the big picture", the "big reform". There have been too many promises, too little focus on simplification and steady improvement. too many expectations. But we need to change focus. If the rules of the game are fixed, change the game!

So what do you think might improve long term productivity, increase growth, help us meet challenges like an aging population? I have my own ideas. I would be interested in yours. 


I suspect that I left this too general to attract responses. So focusing all this a little.

Here is a speech by the Chair of the Australian Productivity Commission setting out what the Commission perceives to be the to to do list required to increase productivity. I agree with some, but find there to be a fairly mechanical flavour. Now these views have been widely reflected in media and business commentary, so that they are not without influence.

To further focus discussion, I pose three questions:

  1. If Gonski is introduced exactly as proposed, will it increase productivity? That's a claim that's often made. How?
  2. Why has Australia been so slow to invest in new infrastructure when there appears to have been general agreement for at least a decade that this is necessary?
  3. COAG, the Council of Australian Governments appears somewhat broken, adding to rigidities and reporting load without achieving reform. Is this true? Does it matter? Obviously I think that it does.

Those are just three initial questions. I am sure that you have your own. 


Evan said...

1. I don't think Gonski will affect education. And I don't think a better general education will improve productivity.

2. Slowness to invest in infrastructure. Others who know business can speak for business. For governments it seems there is a ludicrous obsession with balanced budgets and no long-term spending. Carr, Swan et al seem to have bought into the neo-liberal tosh. If it has to do with pressure from financial markets I don't know.

3. The states and feds seem to be happy with the Feds paying and states administering so they can blame each other for any problems. This seems to be a relatively stable situation.

4. Improving productivity when used by employers is usually just code for sweating labour. I suspect the share market and other factors don't encourage the kind of long-term investment necessary for improving productivity through investment in plant and equipment.

Jim Belshaw said...

Hi Evan. Following up your comments.

I'm not convinced either that Gonski will improve productivity. I do think, though, that a better general education will.

I suspect that you are right when you suggest that views about the role of government and budget restraint have affected both the level and form of public capital spend.

I also suspect, I stand to be corrected, to plan and manage major public works or for that matter acquisitions has declined as a consequence of skills loss.

On 3, the situation has become increasingly unstable. I'm inclined to agree with those who say that the current approach to Federal/State relations has become a major impediment to effective government in large part because of the burden of Commonwealth controls.

Your last sentence I agree with. The one before. I actually think that we do need more labour market freedom. However, we also need to be aware of the implications of some of the structural changes that have taken place in the labour market that can, to my mind, impede improved performance.

Evan said...

Hi Jim, I'd love to know more about skill decline and whether that has affected major public works.

As to labour market freedom. Well the question is: Cui bono? With it generally being required to have two incomes to buy a house this is a very interesting area think. The implications of this are huge I think and I don't see much discussion of them - perhaps you see more than I do.

Jim Belshaw said...

On the skills decline one, to manage a major procurement, you need people with the combination of experience and the right technical skills. They are needed to draft the specs, to evaluate the tenders, to supervise the job.

For example, when I was contract authority for a short period on the embryo national space program, not the recent first ever one but the one before, I relied very heavily on my supporting engineering expertise and one person in particular who had years of experience. I was bright enough and knowledgeable enough to ask questions, but I couldn't answer them in developing specs and evaluating tenders.

Then, when you come to do or to supervise the doing of the job, you have to add technical support at the right level.

A little later than the example I gave before, my then consulting group was responsible for the development of the industry development program included in Telecom's successful bid for the Jindalee Operational Radar Network. As part of this, we had to develop the manpower and training plans. Although we did have some in-house engineering expertise, we lacked the expertise to specify skill requirements and numbers. However, given the specifications, we did have the expertise to develop recruitment and training strategies.

Given skills shortages, a critical constraint was the length of time it would take to first recruit and then train engineers, including overseas recruitment. In doing so, we built in advice on the length of time it would take to bring a person from an entry level engineering position up the learning curve. The Telecom Board decided that it was too risky to recruit at all in advance of contract award. When we factored that decision into the model we had developed, it was clear that the decision had created a project delivery risk. That indeed proved to be the case, although it was only one of the factors involved in subsequent problems. You can see similar examples of the lag problem in the recent case of the NBN.

The more you outsource, the greater your reliance on the presence of the necessary internal technical expertise to properly manage the contract. Even if you buy in technical support, you still have to manage that. At the same time, the more you outsource, the harder it is to manage or build up when you need too.

You can see an example of this in recent Defence procurement problems. One of the common conclusions of the various inquiries was that Defence and the services had lost so much technical expertise that they could no longer manage projects properly.

The maintenance of a certain level of expertise in any area involves costs that can be hard to justify at a time of budget constraints. It also involves a certain degree of people stability. Again, this can be hard to maintain.

The global Government responses to the Global Financial Crisis generally involved some measure of ramped up Government capital spending. Blind Freddy should have been able to see that this was unlikely to work in the stated time horizons. In most cases, the possible works pipelines that used to exit were empty, while the ramp up times starting from scratch were sufficiently long that delivery in the desired time horizons was simply impossible. We saw elements of this in Australia in the public housing initiatives and especially in the school build program.

On two incomes, you have zeroed in on a very particular element in reduced labour market flexibility, one that was first becoming clear in the very late seventies.

Evan said...

Thanks Jim. Lucid as ever.

Winton Bates said...

Somewhat belated, Jim, but I also have doubts about the ability of the Gonski reforms to raise productivity. I suspect that the additional funding will result in higher pay for teachers (not necessarily a bad thing) and little change in the incentive for kids to learn anything useful.

There is a lot that I like in the Gonski proposals, but substantial productivity improvement will probably require less government funding and more acceptance of markets rather than targets. That shouldn't be a problem in the Asian Century:)