POTSDAM SUMMER ACADEMY JULY 2006 Program : Banking, Insurance and - - PowerPoint PPT Presentation

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POTSDAM SUMMER ACADEMY JULY 2006

Program : Banking, Insurance and the Public Sector: Empirical Evidence and Policy Advice Course: Financing the Welfare State: Economical Social Protection Lecturer: Professor Glenn Withers, ANU

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Sessions:

2.00-3.30, Monday 10 July 4.00-5.30, Monday 10 July 6.00-7.30, Monday 10 July 2.00-3.30, Tuesday 11 July 4.00-5.30, Tuesday 11 July 2.00-3.30, Wednesday 12 July

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Course Sequence

Theory of Welfare Intervention Evolution of the Australian Welfare State Providing and Financing Infrastructure- especially Private Finance Initiatives Providing and Financing Education- especially Income Contingent Loans Providing and Financing Retirement Incomes-especially Compulsory Superannuation The Demographic Future-especially labour participation and immigration

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Session 3: The Economical Welfare State

PHYSICAL CAPITAL: INFRASTRUCTURE PROVISION AND FINANCING

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Traditional Thinking

Historically we have generally related infrastructure to long-lived, fixed assets The traditional approach to infrastructure typically included a focus on

the type of network or service provision by government departments or agencies reasonable access and cost (probably involving some subsidy)

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A Changing World

However perceptions have broadened Nowadays, infrastructure policies can also involve, eg

relatively short-lived assets (eg communications) a combination of various networks some competition and choice in usage

• provision and/ or operation by the private

sector

• some sizeable, direct costs of access

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Infrastructure and Public Policy

Infrastructure recognised as touching

• n a wide range of policy interests,

for example

trade and industry policies economic management national security the environment urban and regional development “social justice”

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Underlying Policy Rationales

Allocative inefficiency: monopoly pricing sheltered by economies of scale and scope Technical and dynamic inefficency: due to shelter offered by economies

• f scale and scope

Externality and Essential service implications of network characteristics

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Types of Infrastructure

• Often, two types are distinguished
• Hard infrastructure, including roads, rail

track, ports, electricity grids, telephone networks, airports, gas pipelines, dams

• Soft infrastructure, such as schools,

universities, hospitals, cultural facilities

• Both are critical to national economic health

and community well-being

– the distinction is not all that useful these days

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The Cost of Underperformance

Can be due to inadequacy or inefficiency Reduced national/ regional competitiveness

• higher costs to industry (time, reliability)
• lost market opportunities
• burden on consumers (prices, availability)

Congestion (time, costs, emissions) Safety (loss of life, injury, health) Loss of amenity (eg poor design, noise)

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Two Distinct Policy Issues

Creating new infrastructure Managing existing infrastructure In a policy sense, both are critical to economic and community outcomes New infrastructure investment should not usually be considered without a thorough examination of the potential

• f existing infrastructure to meet

needs

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Managing Existing Infrastructure

Access issues, eg mass and dimensions of trucks, hours of operation Maintenance requirements Use of technology to manage/ monitor usage, eg intelligent transport systems Use of pricing to influence usage/ provision Networking with related providers – and linkages with new projects Choice of manager and service providers – private or public?

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New Issues in Management

New public management structures

commercialisation and corporatisation

Privatisation programs of public assets

what should stay public? need for new regulatory regimes

A more sophisticated approach to regulation National competition policy More active pricing regimes (eg congestion)

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Creating New Infrastructure

Important considerations “up front” concern the respective public/ private sector roles in

• verall infrastructure strategy

planning and decision-making processes financing and funding construction

• peration

access accountability

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Strategy and Planning

A “one-off’ project, or part of a broader network or plan? Link with land-use planning and environment authorities (externalities) Coordination within and across levels of government Choice of decision-making authorities Information gathering and analytical methods to be used

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Financing

Relates to life of project, ownership and viability Public financing cheaper, but out of favour Private ownership and financing has grown

• also “cocktails” mixing public and private

Complexities in taxation treatment

• eg Australia's ill-fated history of tax subsidy

schemes (Infrastructure Bonds, IBTOS)

Important issues of who bears risks

• relates to funding issues (who pays, and when?)

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Construction and Operation

The past history of Public Works departments and day-labour gangs Now benefit seen in competitive tendering for construction Thinking about operation is also changing

• agnostic views about “public versus private”

If it is to be public management, seeing creation of new public authorities

• ften with expectation of a “rate of return”

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Access and Accountability

Impact of competition policy

• “rights” of access
• who determines access and its cost?

Pricing to manage demand and usage patterns

• who should pay, and how?

Community service obligations? Possible need for enabling legislation Reporting arrangements and accountability

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Case Study: Urban Toll Roads

Considerations of demand and type of usage (eg commuters, local traffic, freight) Debate about the respective roles of

• the various levels of government
• the private sector

Linked to choice of freeway or tollway Recognition of broader economic and community impacts Increasing complexity of analysis

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Case Study: Residential Infrastructure

Costs of incremental urban expansion

and broader network services (eg water)

The respective roles of governments and private land developers The need for strategic, coordinated planning The financing of development Who should pay, and why?

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Innovative Financing for Infrastructure: PPP/ PFI

Definition: A relationship between a government party and a private party to deliver public infrastructure and related services

• a contract is used to allocate

responsibilites, rights, risks and rewards

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PPP advantages claimed

More focus on delivery rather than property, by government agencies Projects completed on time and without cost blow-outs Access to technical and management skills Accountability of operators Better outcomes in pricing, delivery and innovation Access to finance

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Key mechanisms to deliver advantages

Competitive bidding processes Contracts specifying output not input requirements Linkage of payments to performance-plus bonuses Allow mechanisms for government-initiated variations Public choice: the requirement for bureaucratic expertise and an absence of public debt fetishism

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Key Issues: Risk

Risks associated with establishment-design, construction, commissioning Risks associated with operations- unexpected costs increases, demand changes, changes in requirements Risks associated with the regulatory environment, including treatment of market power, price-setting, quality of service, time frames, multiple regulators

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Key issues: price setting

Regulators set prices to rise less than CPI by a factor X- as in CPI-X X is usually an efficiency parameter to share gains with consumers as well as reward producers Often estimated as total factor productivity (TFP), an index of

• utputs to factor inputs

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Options for Private Participation

Option Ownership Operations Finance Risk Duration Application Service Contract Public Public/Private Public Public 1-2yrs Chile Management Contract Public Private Public Public 3-5 yrs Gaza Lease Public Private Public Shared 5-15 yrs Poland BOT Public Private Private Private 20-30 yrs Australia Concession Public Private Private Private 25-30 yrs Argentina Divestiture Private Private Private Private indefinite England

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Proceeds from Privatisation, 1990-2000

Country Total ($USm) Per Capita ($US) Australia 69,628 3627 Sweden 17,295 1943 France 75,489 1273 Japan 37,670 298 Germany 22,450 271 United States 6,750 24

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Session 4: The Economical Welfare State

Education Provision and Financing

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Investment in Human Capital

Is a better educated workforce more productive? (does human capital raises the level of productivity?) Does a better educated workforce enhance the adaptation and implementation of new technologies? (does human capital raise the rate of growth of productivity?) How does education affect fertility and population structure? (does human capital raise participation and child productivity)

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Micro Studies of Individual Earnings

An additional year of education typically increases productivity and earnings of an individual by 8%. If schooling rises by one year, as long as the new cohorts are replacing less educated cohorts, annual growth of GDP is 0.2% above trend. After forty years, as the new cohorts start to leave the work force, growth reverts to trend – with GDP 8% higher. Investment in education raises the level of productivity, but not long-run growth, because it is embodied.

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Macro Studies

Krueger and Lindahl (2001) find that increases in the

stock of schooling do improve short-run economic growth.

Hanushek and Kimko (2000) confirm that direct

measures of labour-force quality, from international maths and science test scores, are strongly related to growth.

Temple (2001) finds that growth effects are positive, but

non-linear. These effects are missed by studies that impose linearity.

Results are not robust when industrialised economies

and developing economies are pooled.

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OECD RESULTS: return for an extra year of education

6% - 15% Mankiw et al. (1992) 6 % Bassanini and Scarpetta (2002)

STUDY

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Education and Fertility: Australia

20 40 60 80 100

1964 1969 1974 1979 1984 1989 1994 1999

% o f a g e -g ro u p 1.6 2.1 2.6 3.1 3.6 b irth s p e r w o m a n

fertility year 12 retention

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Education and Participation: Australia

30 35 40 45 50 55

1964 1969 1974 1979 1984 1989 1994 1999

% of population aged 15+ 1.6 2.1 2.6 3.1 3.6 births per wom an

fertility

participation rate

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Outcomes

A better educated workforce is more productive. Education raises earnings, raising the opportunity cost of child- rearing. Better educated parents choose less children – but better educated children. (dynamic feedback)

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Education and Technological Absorption

• Nelson and Phelps (1966) suggested that human capital may

influence the rate of introduction of new technologies, hence the rate of productivity growth.

• Abramovitz (1986) argued that social capability affects ability to

absorb international technology spillovers.

• This has led to econometric studies of the form:

TFP growth = aSi + b{Si PR* / PRi } where Si is average years of schooling; and PR* / PRi is the ratio of productivity levels between the technology leader and country i

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Predicted productivity acceleration due to an additional year of schooling

Benhabib and Spiegel (1994): 0.3 percentage points Frantzen (2000): 0.8 percentage points Dowrick & Rogers (2002): 0.2 – 0.5 percentage points

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Rationale for Public Policy

Externalities: Working with trained co-workers/ consumers benefits all workers/ consumers Public Goods: one engineer works

• n one bridge, the idea of a new arch

can be used in all new bridges Equity: asset deficiencies prevent adequate capital provision

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Returns to R&D

Private Returns Social Returns Lichtenberg and Siegel (1991) i) survey of fifteen studies of US firms and industries average 25% ii) 2000 US firms 30% Nadiri (1993) survey of fifty studies at firm and industry level 20% to 30% 50% Lichtenberg et al (1996) GDP growth across OECD countries 51-63% Frantzen (2000) Business sector TFP growth, OECD countries 59%

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Growth Prospects

The educational attainment of the workforce will continue to rise for the next three decades due to recent increases in school and tertiary enrolments. Hence we can expect continued strong productivity growth, which will substantially offset the fiscal problems attributed to an ageing population. A shrinking but increasingly well-educated workforce, operating in an economy that continues to be open to trade in goods and ideas, is well placed to identify, introduce and manage the new technologies that will emerge over the next few decades.

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Current Higher Education Outcomes

AUSTRALI A: FEMALES, 25-34: 38% MALES, 25-34: 29 % Public Share of enrolments: 100% Public funding: 51% GERMANY: FEMALES, 25-34: 20% MALES, 25-34: 23% Public Share of enrolments: 100% Public Funding: 92% NOTE: longer degrees in Germany

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Financing Higher Education: Income Contingent Loans

Loans provided for investment where repayment is contingent upon subsequent income Typically applied to loans for purposes with social benefits such as via externalities or equity Normally operates where asset backing is unavailable or inappropriate Public choice: need for bureaucratic co-

• peration

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Actual Operation

1989 implementation by Australia of a charge based on a share of education tuition costs, set at 30% of full cost at the time of introduction Paid when and if personal incomes exceed a specified level, set at average earnings at the time of introduction Since adopted in New Zealand (1991), South Africa (1994), Chile (1996) and UK (2004) and under development in various

• thers eg Malaysia, Mexico, Colombia,

Thailand, Ethiopia, Rwanda

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Issues

Collection Variable subsidy Living costs Eligible courses, students and institutions Interest charges Up-front options Use of revenues Debt/ equity bundling Migration

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Potential for Extension

Child support Drought relief Affordable housing Legal fines R&D start-ups Community development Business migration costs

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Common Principles for ICL

Presence of individual risk and uncertainty Increased life cycle progressivity Socially beneficial outcomes Reduced net unit public outlays Finance independent of current financial assets