I was recently invited to speak to students on careers in Infrastructure in a panel organised by Advisory Singapore. I must really applaud the efforts of this student-led initiative to help others know more about careers, jobs and life in the working world. There’s a fair bit of demystification necessary when it comes to what real work (or real world, for that matter) really involves.
In any case, I was asked a very simple question which I think most of us will fail to be able to answer; what is the difference between the economics and business? Of course, having been invited to be talking about infrastructure sector, I used a context-specific example to answer the question.
In the context of Infrastructure, the evaluation of whether to proceed with a project would be based on whether the social benefit exceeds the social costs. At a society level, as long as the benefits, from the economic growth, the job creation, the uplift of people above poverty lines, the improved standards of living (all of which, economists would need to somehow put a dollar figure to quantify), exceeds the costs, which in the case of social costs, would include not just the monetary costs of construction but the inconvenience it brings to people during the time of construction, the recurring costs in terms of operations, and the pollution it might potentially create (say, in the case of a coal-fired power plant), then the project should go ahead. That is the economics of infrastructure, pure and simple, aggregated and unencumbered by issues of distribution.
Business case, however, is a relatively new issue that is brought out by the existence of Public-Private Partnerships and trying to account for government budget constraints. It is one thing that the social benefits exceeds the social costs; but it is another issue for the benefits to an investor to exceed his costs (including the construction, cost of capital, risk compensation, etc.). This investment would be from the public sector or private sector but the idea remains the same; and it relates to a big topic of value-capture, or in essence, distribution of value created:
- If the infrastructure is invested by the government, it must make sure that it is able to recover from the social benefits an amount of tax revenue (or whatever other forms of revenue from government services) that is able to cover the capital expenditure and operating expenses of the infrastructure.
- If the infrastructure is invested by the private sector, it must be given concessions, or guarantees from the government that allows it to ensure it is able to recover from the beneficiaries of the infrastructure, an amount in revenue that is able to cover the capital expenditure, cost of capital and operating expenses of the infrastructure.
Notice that if the government is technically as efficient as the private sector and have lower cost of capital (due to its ability to generate tax revenue de jure), then it is actually more effective for the government to undertake all manner of infrastructure investments. It is when the innovation, technical efficiency and capital discipline brought about by the private sector exceeds the reduced cost of capital of the government, that the infrastructure should be passed on to the private sector.
Therefore, the business case goes down one level from the economic case for infrastructure, focusing instead on the distribution of value in order to enable the infrastructure. This is assuming that the economic case has been established – too often, due to vested interests and private benefits exceeding private costs (despite social benefits being less than social costs), infrastructure projects are conceived, even executed, only to become white elephants.
Of course, in the real world, we are confronted with limited and imperfect information; that is where we must be able to learn to work within the confines of what we can know, and proceed with a decision. Added to that, something we often miss out in Economics, is the need to also uphold a degree of morality and integrity in the environment so that vested interests do not creep into the picture. Alignment of incentives can only go so far and no more if economic players are morally corrupt. That is when EQ and adult sensibilities matter much more than IQ and pure intellectual prowess.
Comments are closed.