Nudge theory is currently in the news and the next few posts examine aspects of it that are relevant to infrastructure decision making. Have you had any experience with ‘nudging’? What are your thoughts on the subject?
Back in the day!
In 2010 Richard Thaler (the 2017 Nobel Economics Prize winner) and his co-author, Cass Sunstein, wrote “Nudge Theory”. The idea behind nudge theory is that the brain is lazy, or rather that we have so many decisions to make every day, that where there is an easy way out, we are likely to take it. Governments around the world have established ‘nudge’ units to figure out how to encourage (yet not force) people to take decisions that are in their, or the community, interest. The most popular of the approaches is to make the beneficial decision the ‘default’ option. For example, making organ donation the default standard but allowing people to opt out, generates significantly highly numbers of organ donors than where the default is out, but people are allowed to ‘opt in’. This relies on us defaulting to the ‘easy option’, the one that requires the least effort, the least thought.
When it comes to infrastructure decision making, this means that we are more likely to choose options with which we are familiar, rather than ones that require effort, exploration, thought, and time. In other words, although we know that the world is rapidly and radically changing with technology providing far more options than we have had in the past, we will (being human) have a tendency to default to the infrastructure that we have built in the past. This means that we have an inbuilt tendency to construct infrastructure better suited to the 20th, rather than the 21st, century.
Question: How can we use nudge theory to work in our favour, rather than against?
Hein Aucamp, Perth City Chapter, submitted this as a comment to the last post but I think it contains ideas that are important enough to warrant a post of its own. Hope you all agree. Penny
Silo! We use this word to indicate a situation in which efficiency and conclusions are impaired because cloistering prevents us from including all the required factors.
If you stand at the top of a silo and look down inside, you see a tiny horizon, much smaller than the surrounding landscape.
Our manner of talking – our language and choice of vocabulary – can be revealing about our perspective. It can show how much we can see and how many relevant factors we are taking into account.
I remember being at an AIFMG training course in 2012. There was a discussion about whether a road is really an asset. From a Local Government’s point of view, why isn’t a road considered a liability? After all, it requires effort and expenditure, it must be maintained, and it must be replaced. Should it really be called an asset?
But from a wider perspective a useful road is definitely an asset. We can easily see this, because when it is consumed, the community wants another one. Of course an asset has associated costs; that in itself does not make it a liability. What makes it an asset is that its benefits outweigh the costs.
Now look at the dangers of the silo effect in the discussion about the road. From the limited perspective of the asset custodian it would be much easier to entertain the notion that a road is a liability. The custodian bears the burden of the effort and records the expenditure. But when we extend our horizon to include all the relevant factors and actors, we see that it is an asset.
The comparison between road and rail in the last post is an interesting case study. May I venture to say that it is always possible, by drawing a small enough perimeter, to decide that any piece of infrastructure is a liability? The perspective just needs to be small enough to exclude the funding mechanism and the benefits to the end users.
In the road vs rail example mentioned, the economist unconsciously placed a circle of reasoning around both road and rail. In the road circle, he discovered a satisfactory funding mechanism; in the rail circle, he did not. So he reached his conclusion because he was looking for local net benefits. If on the other hand he had used a horizon instead of a silo, he would have been looking for system-wide benefits.
(Admittedly, it is much harder to comprehend funding mechanisms and benefits that are outside your silo even if inside your horizon.)
Hein Aucamp hein.aucamp@waiam.com.au
A senior economist in a State Treasury once claimed that Rail was a net cost since costs exceeded revenues. Roads, on the other hand, he said, were profit producing. I smiled and thought he was joking, but he wasn’t.
The motor vehicle licensing board was embedded within the highways department and the sum total of licence revenues, he said, exceeded road costs. Ergo, roads were profit producing. (I suspect that capital costs didn’t figure in his equation)
On this reasoning, he resisted extending the capacity of rail, despite the fact that the city roadways were excessively congested with little scope to increase road capacity and that road users benefitted when traffic was diverted to rail.
I was reminded of this when I read Milos’ comment on my earlier post “Infrastructure – damned by the language we use”. He referred to language supporting silos. And indeed it does. However, if our infrastructure decisions are to be used to support community wellbeing do we not need to move beyond silos, to take a wider, more holistic, viewpoint?
Thoughts?
The only way to get perspective is to stand back and see the big picture, to see individual problems in context, and our own problems in relation to others, as well as to history. Two states that chose to see the infrastructure challenges of their councils in such a context were Victoria and South Australia and they have led Australia in asset management activity and improvement.
Victoria
In 1997 the State department responsible for local government was faced with a problem. Three years earlier, rates had been cut by 20% and rate capping introduced. Many councils were petitioning to have the cap lifted to cope with growth and, especially, to renew ageing infrastructure. State Government officers were in a dilemma. Whilst they could recognise the need for renewal, they suspected some councils were ‘gaming’ the system – using the excuse of renewal to avoid reducing costs. They decided to go out to tender for a simple model that could tell them which councils really needed an increase, and if so, how much. Three of the largest consulting companies in Australia at the time said that they could produce such a model, but the State chose to go with a smaller concern that pointed out that the information needed for such a model to work – namely a knowledge of the age, economic life distribution, and estimated replacement cost of council asset portfolios – was simply not available. They proposed to fill this gap. Councils also needed this information to manage their assets more effectively. The result was the report ‘Facing the Renewal Challenge’ (1998, published 2000) which led and underpinned council asset management activities and State Government monitoring for over ten years.
South Australia
In the meantime, a group of large councils in South Australia who were trying to benchmark were frustrated by the lack of uniformity of data systems for asset information, accounting, valuation and condition assessment among the group. They chose to do a separate study under a common set of standards along the lines of the Victorian study and to widen their study to include all councils, small and large, urban and rural, and isolated. This study differed from the Victorian in two major ways – first, participation was voluntary (but, with a bit of persuasion, all took part!) and second, it used online information collection. With the information on the web, it then became possible for councils to do ‘what if’ analysis. (‘What if we extended the life of this set of assets, or increased the service levels of that set?’) The resulting report was ‘A Wealth of Opportunities’. The design and computer modelling undertaken then led to the development of IPWEA’s famous NAMS Plus asset management training, which is now a world wide program.
Last week in Perth, Neville Binning, WA Chapter Chair for Talking Infrastructure, and I hosted seven casual small group discussions, in which we discussed a number of infrastructure issues, the first being ‘what is the purpose of infrastructure?’ (More on this later.)
Hein Aucamp (to the right of Theodore the poodle) took part in the seventh of these sessions. Also present was Jaqueline Blenkinship, Adeyemo John Falade, Ashley McKinnon and, unfortunately obscured from view, Jacek Narozny. Curiously, Hein was the first to raise the question – what do we mean by infrastructure? Being a gentleman, he didn’t leave us guessing, but provided the following answer.
Hein Aucamp: “I used an idea from Alex Marshall’s “How Cities Work” to suggest an answer. I also realised that the answer allows us to identify whether something truly is infrastructure, or whether it merely looks like infrastructure.
This is the answer I suggested:
• Infrastructure enables transactions in the broadest sense by providing common facilities that we would not be able to afford individually.
• A transaction is where we exchange some resources for a result of greater value; infrastructure provides the framework that we don’t own to allow us to use what we do own to gain something we want.
• Infrastructure in this sense would include internet communications and even the currency in circulation in a country.
If we describe the purpose of infrastructure precisely, and we define true infrastructure as whatever serves the purpose of infrastructure, then we can know whether something actually deserves the name of infrastructure, or whether it is only apparent infrastructure created for a lesser purpose.
To adapt the words on Penny’s slide in the last post: Infrastructure… is not even infrastructure until it improves the world.”
Hein Aucamp is Director, WA Integrated Asset Management. You can reach him at hein.aucamp@waiam.com.au
OK, over to you – agree/disagree? Something to add?
We ‘invest’ in capital, but maintenance and operations are a ‘cost’.
We consider Investment to be ‘good’, so we try to increase it.
We consider Costs to be ‘bad’ so we try to reduce them.
The result is that we end up with infrastructure that we under-maintain and where operations are compromised by insufficient training and funding.
Because of the language we use!
Solutions?
In the last post Jim Kennedy, Asset Management Council, looked at what it took to construct a ‘defensible budget’. He argued that stakeholders (customers, community, government, employees) are everything but he wondered whether organisations really understood what they were promising. In other words were they really clear about the consequences of their decisions and promises made?
Capability to deliver
For example, had they turned these promises into the capability to deliver (technology, plans, people, facilities, information systems, logistics, support systems).
This has two aspects: there is an ‘enabling or inherent capability’ and an ‘organisational design, or organisational capability’. In other words, the equipment may be able to deliver, but has the organisation the right people in place?
Studies have shown that where someone was sent in to fix a problem who did not know what needed to be done, was not familiar with the asset or problem, or was not fully competent to do it, the level of competence was only 50% . This led to the job needing to be done 5 (!) times more often than if a competent knowledgeable person had done the job initially with 100% competence.
But what is the organisational implication of this? To ensure that you have the right level of competence ready when needed, you have to have highly competent (and thus well rewarded) people under-occupied so as to be available when needed. As we cut back on training because it is expensive, and aim to have everyone fully engaged all the time in order to ‘achieve efficiencies’ – what is the real cost? If we cannot demonstrate the benefits of organisational capability in a ‘defensible budget’, costs will increase and quality decline.
Comment?
We often take pride in our ability to ‘make do’ when the situation is not as we would have liked. This particularly applies to those occasions when we do not get the budget we requested. We grizzle – but we ‘make do’. But what message does this send? Jim Kennedy, speaking at an Asset Management Council Chapter Meeting in Adelaide warned of the dangers of this ‘make do – can do’ culture. When we ‘make do’ (usually by cutting corners, or deferring activity that results in larger costs later) we are telling the finance section that our budget request was overblown. When Finance subsequently provides less than requested (working on the basis that the initial request was ‘gold plated’) and the recipients subsequently ‘make do’, that does more than confirm the initial Finance suspicion, it creates a lack of trust on both sides. Budget proposals are now ‘boosted’ to allow for the inevitable cuts. Finance reduces the budget request and as it goes on, budgets lose their informational, decision-making, value.
Jim proposes that the value proposition for Asset Managers should be “How to protect your leader against political opposition” and his answer to this question is a ‘defensible budget’.
So what is a ‘defensible budget’? Jim describes it as follows:
- Fact and Risk Based
- Fully traceable to the asset’s output requirements.
He reckons these two are really sufficient but could be bolstered by showing that the budget is
- demonstrably good practice and in accord with national standards; *compliant with statutory and regulatory imperatives;
- implemented by competent (certified) staff;
- supported by verified technology (information decision systems);
- transparently and verifiably costed (which builds up trust between the technicians and finance; and
- deliverable in the agreed time frame (don’t promise what you cannot deliver).
Good stuff! – but, and here’s the rub – developing good practice, ensuring competent (certified) staff, establishing sound information decision systems, demonstrating transparency and ensuring deliverability does not happen overnight. It takes years of consistent management attention and good leadership.
Question this week: Do you know where your organisation stands on each of these facilitators of sound and defensible budgets? Is there a program to improve it? Comment?
Editor: You can find earlier posts on budgets, by using the search function, and all posts by Mark by selecting his name.
Further to my earlier posts about asset budgets, I couldn’t help but want to have another go at this by asking a slightly different set of questions. These relate to the principle of transparency.
By transparency I mean:
Is there a clear and documented basis for the estimates upon which the asset budget has been based?
- Are the estimates based on ‘simple’ or ‘averaged’ projections of expenditure rather than ‘modelled’ projections that emulate realistic timings and patterns of expenditure for the nature of the works involved and how they will be procured?
- Is it based on estimates for all assets over the full period that the budget is meant to address? By all I really mean a schedule that lists all of the assets, including those for which a $NIL expenditure is forecast for the relevant period. (I ask this as a check that all assets have been given consideration.)
- Are the underlying assumptions documented and made clear to those being asked to approve the budget – especially the reliability / sensitivity of rates used and associated finance costs?
- Are the priorities inherent and sequencing / pace of the proposed works also made clear and demonstrably aligned with corporate business and services priorities for the forecast period? How does this align with projected cashflow requirements and funding availability? (A projection showing a skewed acceleration of expenditure towards the final quarter must raise concerns – not only about reliability of delivery, but also in relation to business and services priorities being effectively supported, and in relation to getting value for money from what is going to be spent.)
- Are the risks that are inherent to the portfolio and the proposed program delivery made clear and ‘current’ for the immediate and forecast context of the program and its delivery?
Recent Comments