Photo by Tembela Bohle from Pexels
As we head into another hot January weekend in Australia, here is something to ponder while you drink that cold beer! (or something warmer if you are in the Northern Hemisphere!) Does Infrastructure HAVE value? Does it CREATE value?
What is value?
In 1981, at the height of the Michael Field’s Labor Government’s attempt to bring Tasmania back from the brink of financial catastrophe caused by excessive over borrowing, I was approached by a Minister with a request. He expressed it most diffidently. ‘If you are not too busy, could you tell me what is value?’ I gave him a mini economics tutorial on the subject which he clearly understood, but equally clearly, it did not get at his real problem. For the rest of the week I pondered on this question for it was particularly intriguing that he had prefaced his question by the statement ‘A number of us in the house have been wondering’. Now, one minister asking about value is interesting, but a whole group doing so struck me as quite unusual.
The Source of value?
After a few days, I figured the stimulus for the discussion of value at a time when major cuts were being made to all portfolios, could be that each Minister was simply trying to establish that his department was ‘too valuable’ to have its budget cut. So I wrote a small, humorous, playscript in which various Ministers (of invented portfolios to avoid angst) argued for being the major ‘source of value’ – calling on economic, historic and social support for their case. My Minister was delighted and distributed it to his cabinet colleagues. I had concluded that script by observing that ‘fragrance free soap’ could fetch a higher price than that with fragrance and looked at ways in which each minister could increase value without imposing a cost to the budget simply by removing elements that had ‘negative value’.
Relevant Again
I had not given more thought to this question in the almost 20 years that followed until recently reading Mariana Mazzucato’s work on ‘The Value of Everything’. Just as an understanding of value was critical to that financially strapped Tasmanian Cabinet, so it is also critical to those of us involved in deciding on the shape of future infrastructure and we will look at Mariana’s ideas from this viewpoint in future posts. But, just to get the ‘little grey cells’ working, here are some basic questions to consider.
- What do you understand by value? How do we measure value when considering infrastructure projects?
- Can something that has no price be ‘of value’? For example can private education (with a price) be valuable, yet public education (free) not be? (Some years ago the Head of a major accounting association declared that private schools were assets yet public schools liabilities – purely on the ability to make a cash return. What do you think of this?)
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Maurizio Cattelan’s Comedian
Can something that has a high price not be ‘of value?’ E.g. recently a banana stuck to a wall with a piece of ducktape at Art Basel in Miami Beach was sold at a price of $120K -and not once but three times. It has created a firestorm of comment and brings to the forefront the idea of ‘value’.
- Can cost be a good proxy for value? And if we substitute a more costly (although not necessarily more effective) component, does this really represent an increase in value – as distinct from simply an increase in cost?
- Pharmaceutical companies like to price their products in terms of outcomes -such as the value of better health? Should they be allowed to appropriate all of the beneficial outcomes. Why or Why not?
The value of a good or resource is in the eye of the beholder. protest, legislation, debate, etc. are all measures introduced by different groups to address their perceived difference between cost and value. As for bananas, one of the great things about humanity is our ability to value the intangible – like Duchamp’s “Fountain”, concepts that cleverly ask us to consider “What has artistic value?” are rewarded. It’s great to see this debate in the area of economics, I’m hopeful for a similar outcome – an expanding of the boundaries and a change in the definition and perception of value.
More comments and interesting discussion can be found on LinkedIn at
http://talkinginfrastructure.com/2020/01/17/does-infrastructure-have-value-does-it-increase-value/
The education example sums up what’s seriously amiss about conventional definitions of ‘value’, doesn’t it? So happy to be introduced to Mariana Mazzucato’s work!
I think the answer to the pharmaceutical industry claim to all the benefits of better health has to be NO. Apart from the fact that they make full use of public education, publicly funded research, and all our public infrastructure, isn’t it true that improvements in health and rises in life expectancy have depended on clean water, proper sewerage, food regulations, and public research into things like smoking, lead and asbestos… much of which private industries actually fought? I am not arguing against the drugs we take to keep us going, though I have to say I am very happy to be shielded from the direct impact of drug pricing by the NHS…
“What is value?” seems to be a question in the same vein as “What is the meaning of life?” – they both seem to get at “Why do we do what we do?”. Obviously this is a hard and maybe unanswerable question (As evidenced by at least 7000 years of debate). In some ways this question is a bit embarrassing, because when I’m asked what motivates me to advise clients on asset management I always answer “to add value”, never elaborating even to myself what “value” actually means. This blog post gives me an opportunity to elaborate on what I mean.
Adding value to me means providing clients with more information, enabling them to better navigate the complex regulatory, economic, social and physical environments they have to contend with so they can better achieve their own goals.
Although I believe what I say, this response avoids the central question of what value strategic asset management actually offers. Consulting generating value by enabling a client to better achieve their goals implicitly defines value to be “whatever the client thinks is valuable”, so if they think strategic asset management is valuable, then it is. But this is an unsatisfying position. Can we define the value that strategic asset management delivers in a less morally relative way?
One of the difficulties an answer to this question will have to address is the fact that it’s likely that there are different dimensions of value, or at least different methods of measurement of what is valuable. It is vanishingly unlikely that each of these measurements is just as easy to quantify as any other, so it stands to reason that there are some metrics of value that are easy to calculate, and some that are hard or impossible. An easy metric of value might be revenue, while a hard metric might be trust. Any elaboration of what value means cannot fall into the trap of biasing towards metrics that are more easily quantifiable; that is we should uncouple value from the measurement of value.
To this end I think value is best captured ultimately by purpose: things that are valuable are things that allow an entity to better achieve its purpose. Consideration of purposes of infrastructure is exactly what is done in Strategic Asset Management Plans! In this way (and truthfully when I began writing, this was by no means where I expected to end up), could strategic asset management, at least within the domain of asset management, be the very vehicle by which an organisation realises the value of its assets?