Saturday, 31 August 2013

What would you pay for the port to go away?

Cost-benefit analysis (CBA) is the best way to make public decisions because it is focused on the right question and is flexible enough to allow all of the relevant factors to be included. Some consultants seem to disagree(pdf) with this view, but I have yet to see a convincing argument against using a CBA framework.

The main difficulty with CBA is not the framework. Its the lack of information on non-market values such as the value motorists place on their own time - a critical parameter on the benefits side of CBAs for transport infrastructure projects.

I wonder whether some kind of demand-revealing referendum process would be helpful, perhaps not universally but in some cases. This is a clever game devised by Ed Clarke and nicely explained by Chris Dillow in the context of the decision to build a trident submarine.

The basic idea is that everyone gets to vote a $ amount for clearly stated outcomes. The game is arranged so that
  • voting your actual valuation is the only sensible thing to do;
  • mostly you won't have to pay your vote valuation; and
  • you only pay if you are in a small minority that gets its desired outcome by voting more $
This might work, provided the affected group and the possible options are well defined. For example, Len Brown wants "all Aucklanders" to have a say on the future of the port.

Why not give this a go? I think the biggest barrier might be legal: how do you credibly commit to getting the ca$h out of people if necessary? Unless this is a credible threat, the truth-revealing mechanism falls to pieces.

Friday, 30 August 2013

Spending public funds - badly

Politicians are often lobbied by firms seeking public money to build stuff. As we all know, the costs and benefits of these schemes should be analysed carefully.

This doesn't always happen of course. In fact, sometimes it seems as though the larger the stakes, the smaller the influence of objective analysis. Election promises are a big contributor to this sad state of affairs. For example, the billions going into a new fibre-optic broadband network (UFB) started life as an election promise, as does the NZPower proposal. Both are huge upheavals without any cost-benefit analysis, so we just don't know whether they make sense.

Which brings me to the dreaded Roads of National Significance (RoNS) and to the recent paper by Michael Pickford analysing how wasteful road investment has become. Here is a summary chart from Michael's data, showing the fraction of road investment going to projects with high, medium & low benefit-cost ratios:
In 2005/06 none of the ca$h was spent on low value projects, though almost half went to medium value stuff. That has been getting worse and in 2009/10 almost 70% of the spend went on low value stuff. Michael picks 2003 as the year this madness began, when the criteria for investment changed from "pick the high benefit-cost ratios" to include two other, more subjective criteria. Then, once the RoNS arrived on the scene, "being a RoNS" was added to the criteria list, even though that status is a decision made entirely by politicians.

Oh and in case you're wondering, there is just over $1bn of public cash buried in those green bars on the chart. 

Thursday, 29 August 2013

Who would pay 7% real interest rates?

Superannuation policy is a political mess in NZ and many would agree that something needs to be done. In steps Peter Dunne with a something: choose your own retirement age.

Economists often argue that more choice is better than less. Discarding unwanted options is costless, so what could be wrong with having more of them? Well, choosing does take effort which is a cost that some prefer to avoid. Also, foregoing good options could make you less happy.

But rather than quibble, lets check out Mr Dunne's idea. Basically he'd require you to choose between a smaller annual superannuation payment starting earlier, or nothing for a few years and then a larger annual sum. Here is the example he presents...
“...on current superannuation levels, a couple who get $522 a week today when they turn 65 could choose to wait to 70 and get $840 a week. Equally if they instead chose to wait just two years and get super at 67, they would get $630 a week.
Here's how it works out. If you expect to live to age 85, taking the money early is effectively borrowing at around 7%. Superannuation is inflation indexed, so that's a real borrowing rate. Add another 2% or so for inflation and compare the result with mortgage rates of around 5%.

Conclusion 1: picking the early option would only make sense if you are cash constrained (i.e. poor) or don't expect to live to 85.

Conclusion 2: this would effectively raise the superannuation age while arguably sticking to the letter of one's election promise.

Wednesday, 28 August 2013

Good timing & poor logic

Interesting story in the RNZH today. It seems that Anonymous shut down the GCSB website last Friday as "a distraction for an attack which secured secret data", and it plans to release personal secrets of the main players in getting the GCSB bill passed (Key, English, Finlayson, Dunne and Banks).

If this had been done before the bill was passed, it'd have been used as an argument in favour. But with this timing, it is pretty clear that the new law is the cause of this particular cyber outrage.

Dunne doesn't get it though. He said
"it was likely hacking and release of private information would lead to calls for the Government to get tougher on security".
This reminds me of the guy about to be stoned to death in the Life of Brian who is told he's "only making it worse" by repeating his crime (uttering the name of Jehovah). "Making it worse", he cries, "how could it be worse? Jehovah! Jehovah! Jehovah!"

Sunday, 25 August 2013

Countries to envy: Estonia

A question has been haunting me lately: what would it take for NZ to close the gap with Estonia?

It's the Economist's fault, with their recent 2 pieces on Estonia's technological prowess, including this ripper:
“In the 80s every boy in high-school wanted to be a rock star....Now everybody in high-school wants to be an entrepreneur.”
Isn't that a fantastic turnaround? I wonder what the dream jobs of NZ high school students looks like these days. Sports professional would have to be up there somewhere.

Entrepreneurs are different: they see stuff that isn't there yet and try to make it happen. What would it take for entrepreneurship to be a popular goal for young kiwis?

I like this question because it assumes a culture change I'd like to see, and because it puts young people front and centre, where they should be.

No answers yet, just a random collection of clues.

Saturday, 24 August 2013

Trousering the regulatory dividend

Sometimes we get a clear reading on the intensity of competition, and Simon McKenzie pointed to one yesterday. He runs an electricity lines company which was forced by regulation to cut its prices, so he's understandably grumpy to see most of the benefit of the price cut resting in the accounts of electricity retailers. As the English would say, its been trousered.

Here are the details, using data from MBIE's quarterly survey of retail electricity prices in United Networks region for the 3 months to February and May 2013:*

Between these two periods the line charge dropped by 0.77cents/kwh. Meridian passed virtually all of it on to customers - perhaps seeking market share (it only has 6% here).

Second prize goes to Mercury which passed on about 1/3 of the price cut and pocketed the rest. Mercury has a 30% market share.

The other big players Genesis (31%) and Contact (23%) apparently saw no need to cut prices, and nor did the minnows Energy Online (6%), Powershop (4%), Nova (<1%), Trustpower (<1%).

This is not a good look for an industry that would have us believe it is competitive.

*The vertical axis is cents/kwh for a standard household.

Monday, 19 August 2013


Kiwi farmers are making good progress in developing so-called biological farming ('BioAg') methods for our unique & wonderful land. As the name indicates, this involves a focus on biological life in the soil. The physical and chemical properties of the soil are of course also considered, indeed they are the starting point for soil fertility, but beneficial biological life can enhance their contribution to the plant.

As a mere social scientist, I have limited knowledge of how this works. Lynne and I are just enthusiastic amateurs trying to pick up the science as we go though we do have skin the the game. We are actively heading down this path, helped along by friends and acquaintances alike. 

Because it makes sense. You only need a nodding acquaintance with Mycorriza to want lots of them in your soil. So its not hard to imagine that there might be many other useful bacteria & fungi that aid soil fertility and plant growth. It seems that beneficial soil biology can give plants access to minerals (nutrients) that are otherwise locked up and unavailable. In effect, biological farmers are trying to recruit billions of tiny subterranean critters (worms, microbes, bacteria, fungi etc) to help plants get what they need.

What does all this mean in practice?
All farmers do it differently but there seem to be two common elements to BioAg.

First, do no harm: don’t apply stuff to the soil that will kill or weaken your biology. For example, heavy use of urea as a source of nitrogen is avoided because it interferes with proteins and can harm biological life. Biological farmers often use a bit of urea but get most of their N free from the atmosphere, 78% of which is N.

Second: regular foliar feeding with biologically friendly stuff. Liquid fertilisers get taken up rapidly by plants, whose roots then exude stuff that the microbes use. Many BioAg farmers spray finely-ground lime mixed with trace elements, and/or fish and seaweed brews, worm juice, compost tea, and liquefied humates. All other necessary minerals can be mixed in as required. Liquid sprays are a very practical way of correcting trace element deficiencies - these are hard to mix into bulk dry fertiliser, which is why the fert companies are less than keen to sell these essential elements.

The perceived benefits of this approach also vary across biological farmers. I think most would say they're aiming for better quality grass, from which better animal health and human health will flow. I suspect many would add that this is the main driver and the economic outcomes can lie where they fall. Improved profitability also seems possible depending on how farmers manage the middlemen.

Speaking of middlemen, all of this is very challenging for the big fertiliser companies. But lets discuss them some other time.

Sunday, 18 August 2013

Fonterra's Doublethink

I'm surprised to see that less than 3 years ago I was praising Fonterra (pdf) and wishing it well as a national champion. Since then I've learned more about the firm and my ardour has definitely cooled, to the point where Fonterra now seems infected with a bad case of doublethink.

Lets start with ownership. Fonterra is an extremely hierarchical farmer-owned agricultural processing co-operative. The previous chairman's mantra of "100% farmer ownership & control" was on high rotate last year even as he was selling $500m of the company's shares to non-farmers. He was pushing the same line in 2007 while trying to float Fonterra on the stock market. Simultaneous belief in two mutually exclusive things - that's doublethink!

Then there are the farmer meetings. Fonterra seems not to want to hear what all farmers think. Meetings with directors are stage-managed affairs where inconvenient questions are actively sidelined. There is no encouragement for farmers to chat online, just a moribund token forum on the Fencepost website. We farmers don't even have email lists for peer-to-peer discussions with neighbours. Fonterra says it wants to hear from us, while making it hard for us to even talk to each other.

Then there's the purity/crap nexus. Fonterra tells itself and the world that its products are pure, but at the same time its fighting a rearguard action against the environmental neglect of some farmers. That neglect is partly because the Clean Streams Accord was so light-handed that many farmers just didn't get the hint, or perhaps they suspected that Fonterra didn't really believe what it was saying. Things are much improved now though because Fonterra has mastered the doublethink problem. It now simultaneous believes that we are 100% pure and need to do a lot better.

I'll have more to say about soil & health issues later, but there is a massive contradiction between Fonterra's claims about good healthy products and the reality that it is importing dodgy PKE, selling genetically modified stock food without labelling it as such, and promoting herbicides for weed-control.

Maybe some of this is inevitable, at least while the industry is cleaning up its act. But until Fonterra starts being more open and truthful, it will look like they are using doublethink to ensure that awkward questions are "neither acknowledged as contradiction nor experienced as uncomfortable".


Here we go again: another new blog…

Having done this a few times before, I’m familiar with the blogging enthusiasm cycle, the perils of taking oneself too seriously and that horrible feeling when you haven’t posted for ages, can’t think how to get restarted and end up ending up.

To guard against that, I’m going to be very selfish about topic selection. There will be comment on current events but I don’t much care for all that “he said… she said…” bickering so I’ll try to stick to the substantive issues.

I also want to write about agriculture, food and water. This stuff will be partly reporting on the conversion of a western Marlborough dairy farm to what we call biological agriculture, but the economics and politics of industries connected to agriculture are also within scope.

That’s the main course menu, but topics from my day job might also pop up occasionally, plus motorcycling and music of course.

Welcome along for the ride!