I came across a nice organisational chart just now for the Australian Energy Markets Operator (aka. AEMO). I like the way it has grouped organisational units into rows to distinguish between their strategic function. /managementspeak.
AEMO Org Chart
Category: Business
I was walking home this evening and spotted two mattresses and a metal rack of some sort lying on the nature strip. Looking at the mattresses in particular, I couldn’t help thinking that after all the rain, they were definitely not going to be of use to anybody and would likely end up in landfill. Now, all the wood, metal and fabrics that were harvested, mined and spun before being manufactured into a bed would end up lying in a hole in the ground decomposing over hundreds or thousands of years. “What a waste!”, was my immediate thought. Then I got to thinking about extended producer responsibility (EPR) and whether or not it makes economic sense. I haven’t done a comprehensive literature review, but I believe it makes sense for the following reasons:
- It reduces negative externalities arising from landfill.
- It increases resource use efficiency.
- It fosters innovation.
- It results in better products.
My reasoning is as follows.
Companies will by nature minimise the input costs to their business. Companies will only care about the transaction of the product that directly relates to them and results in revenue. That is, from manufacturer to consumer. They aren’t incentivised to concern themselves with transactions outside of this except where doing so may result in a higher initial transaction value or ongoing brand value. Take for example cars, they naturally lose value over time, but brands that are perceived to hold their value over time tend to also demand retail premiums. So given this, very few companies will design, manufacture and price taking into account externalities unless they are forced to. This is because there is no incentive for them to do so otherwise.
Carbon pricing is a clear example of this.
So, to really tackel problems with waste, pollution and design for obsolecsence, policy intervention is required. While many people are opposed to government intervention in markets, where intervention leads to long term productivity gains, it is justified and in-fact, imperitive that governments take action. In the case of externalities, the long term economic benefits area clear and include reduced waste, better quality products and better resource use efficiency. So, policy intervention actually results in driving up the long run production possibilities curve for an economy, exactly what governments should be concerned with.
The other element to this is innovation. Business, like life, works on a process of creation and destruction. Value is created through new things, new production or even just new transactions (of old goods). Innovation is by nature destructive, since it displaces existing technologies. And what’s more, the benefits of innovation are usually realised by the second or third owner of the innovation. This is why companies would resist change, because they are likely to spend the money innovating (by complying with regulation) but are not necessarily likely to benefit from the innovation. In-fact, it could even send them broke. It is for this reason that the lights will never go – as claimed by some fossil fuel dependent generators – out as a result of a carbon price. All that will happen is that certain shareholders will lose their money as a company becomes goes bankrupt. However, another group of owners will come in and purchase the assets, probably at a bargain price, and continue to manage the company. This company would then potentially be more profitable as all costs are sunk and debts written off by the old entity. Thus, creative destruction. This is what happened with Great Southern Plantations in Australia. I’m not saying people don’t lose out, because they do, and often it’s smaller investors who haven’t understood the risks of their investment. However, in the long run, the economy benefits.
To conclude, government should really be responsible for picking losers, not winners. And after all, the government is really just the biggest bully of them all, and bullies are excellent at picking on ‘losers’.
TK
A recent copy of New Scientist had a number of interesting articles on the current economic growth paradigm and how it is damaging to the earth which sustains us. A common theme is the issue of consumer demand and particularly, consumption of short-lived disposable goods. Disregarding the arguments for a service based economy, changing this paradigm would appear to present cash flow problems to businesses.
In essence, the perfect product for the consumer and/or for the environment is not necessarily the perfect product for the producer. Apple would be far less profitable if it didn’t have a new model iPod, iMac, iThing out every year to make the previous model a tech toy cum fashion accessory faux pax. This is the other side of the coin that needs to be addressed if talking about the dangers of the economic growth model driven by consumption.
For a real example, we need only look to forestry, where it is the lower revenue, high volume uses such as mulch, firewood or pulp for paper that drive significant native forest logging. These activities provide the cash flow that support any higher value added uses such as structural timbers and furniture. In the case of forestry, the negative environmental impacts can be addressed by sustainable, best-practice, plantations. But the aforemented forestry products are non-durable by nature, genuine consumables. Whereas, for white goods, electronics, apparel etc., they are – or are supposed to be – more long lived, durable products that have been manufactured for obsolescence. The solutions here then must be based around extended producer responsibility and ‘cradle to cradle’ principles. For an alternate revenue model, leasing is likely to fit the above scenarios more aptly than ‘buy-to-own’. So, we will lease cars, tvs, white goods and other semi-permanent durable goods which would provide cash flow to businesses. There are still issues though since innovation will be required and innovation usually requires significant investment in R&D, which often requires prompt repayment upon product launch from high purchase prices of goods (e.g. Sony Playstation 3). Under a leasing/cash flow model, this quick payback would be more difficult, but if the money for R&D was lent on a longer term basis, then the cash flow from operations would aim to cover the debt repayments.
Sorry, went off on a bit of a tangent near the end there and lost some focus… No time to tidy things up, paid work to do!
More info:
New Scientist, 2008, “The Folly of Growth: How to Stop The Economy Killing the Planet”, 18th October.
With countries around the world guaranteeing bank deposits, I wonder how many people are aware that, if we all decide to go and withdraw our money, there isn’t enough printed currency to go around. The cash economy works due to the velocity, or movement, of money throughout the economy, as people buy and sell goods and services. So, nobody (or very few people) ever holds all of their cash assets in currency. It usually sits in a bank somewhere, or does it? Well, actually, cash in a bank account is essentially an IOU (like all currency) which says that the bank owes you a certain amount of money. So, if we all decided to go and get our money out, there wouldn’t be enough. This has happened before in various countries where people line up to withdraw their savings only to discover that the cash has run out.
This is where guaranteeing deposits comes in. It is meant to restore confidence and avoid a run on bank deposits (that is, avoid people freaking out and rushing to withdraw all their cash!). What this means if it had to be acted upon is that, a government guaranteeing deposits would have two options.
1) Print and distribute currency to cover all deposits
2) Sell foreign currency in return for local currency to cover deposits.
Both options are inflationary if either (or both) of the following occurrs:
1) people take advantage of increased volumes of currency in the economy by raising prices (supply) or
2) people panic and trade their plastic notes for wine or jewelry (demand).
This is the risk of guaranteeing deposits and hopefully, this wouldn’t eventuate. Some people may withdraw their money and where necessary, the government would provide the currency so they can withdraw their money. Then, once things stabilise and confidence is restored, the government would have to begin the process of buying back the currency and removing it from circulation. Or, if they had sold forex, they would have to begin purchasing forex back and removing the local currency from the national economy.
I’m pretty sure how this works anyway. Let’s hope it doesn’t get to that point though. Coordinated efforts of all governments and central banks around the world will be important in avoiding this, but it’s good to know the strategies behind the buzz words which I’m sure most people don’t really understand.
See:
http://www.abc.net.au/news/stories/2008/10/10/2387244.htm
http://ap.google.com/article/ALeqM5jow3VAPRg_rNF9bT2XtUar0d9PeAD93L0EC01
http://news.sky.com/skynews/Home/Business/Ireland-Steps-In-To-Protect-Savings-By-Guaranteeing-Deposits-In-Six-Banks/Article/200810115110786
Ross Garnaut’s conclusions in the supplimentary report – targets and trajectories – are disappointing, and arguments about economic ‘costs’ misguided. The global climate issue (and wider environmental issues) is one which will require creativity and innovation to solve. Ross disappointingly concludes that global agreement on an international agreement is unlikely and so it is not economically justified for us to proceed alone in more seriously reducing emissions.
This can be likened to a driver of a car – in traffic – headed towards a cliff, resolving to not turn the wheel and change course, because nobody else is and because changing course may consume more fuel.
For policy makers out there, the following line from the supplementary draft (p.214) is important
The costs of climate change mitigation come earlier and are better
known than the costs of climate change. (p.214)
Continuing with the analogy above, this is telling us that we know what the potential extra fuel costs are, but we don’t know how far we will fall if go over the edge of the cliff. In this scenario, surely the rational choice is to choose a known risk, rather than an unknown one. Furthermore, in the same line of analysis, a very important distinction to make is that we are masters of our economy, but the scale of our economy depends on the health of the global ecosystem from which we obtain natural resources and benefit from ecosystem services. While our economic actions have an impact on the local and global ecosystems, we are not yet proven to have the skills in being the ‘masters’ of the global ecosystem. In-fact, we have – to date – thoroughly proven our incompetence in this regard. So, rather than risk damaging that which we can’t control – although can impact on -, the global ecosystem, we need to focus on changing was we can control, our economic system.
Economic development and wealth creation rely on creation, destruction and renewal (of human constructs/industries which impact on ecosystems). Innovation is the key here and if we look at the world in terms of opportunity and abundance, rather than risk and scarcity, we would see the enormous opportunity awaiting us once we get serious about tackling climate change and more broadly, embrace sustainable development. Both inaction and action will result in a vastly different global construct to that which we live in today. Inaction will result in unorganised chaos, action will result in organised chaos.
The current issues in the financial system highlight the need for us to remember that it is never wise to kill the goose that lays the golden eggs. All interest bearing assets are ultimately backed by an asset or transaction in the real world. This is being realised in the financial world at the moment. More broadly, this same principle applies to natural capital.
Recent developments in financial markets made me remember a post I wrote over a year ago while studying in Malaysia at Sunway College. I never finished the post but was fascinated by this issue after first learning about it in China then discovering that Malaysia had been through the same thing.
With the US Federal Reserve now stepping in to take on non performing loans of the industry, I thought it was a good time to post this. Perhaps the US should be talking to China and Malaysia for some tips on what to do with all this bad debt!
Originally written sometime between February and June 2007.
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Being that I am a student of economics, I thought I should write something related to economics for a change. So, today I want to write a bit about NPLs or Non-Performing Loans. There is no real theme to what I am going to write, just wanted to give people an introduction to them and highlight some cases from China and Malaysia.
Now, in a buoyant economy where confidence is high, the preponsity for banks and other lending agencies to make loans is usually greater. This means that credit is often easier and cheaper to come by. The flip side of this is that business and investment deals which may not be as viable are often lent money, which, when things go bad, is not repaid. Since banks always back their lending with security of some sort, they would usually make a claim on this. In residential scenarios, this means foreclosing on a property (see the current subprime issue in the US) and recovering the amount of the loan outstanding from the sale of the property (if property prices haven’t deflated too). In the commercial arena, this usually means taking ownership over a business or business/investment assets. These are often harder to dispose of because they can often require more ‘hands on’ management in terms of extracting some value. Needless to say, they can cause significant problems to lenders asset and cash flow position, which can compromise the entire organisation where NPLs are high.
Such is/was the case in many countries, but given my experience, we will look at China and Malaysia.
In China, with banks incurring huge amounts of NPLs due to lax lending policies./
China – Asset Management Companies (AMCs)
Malaysia – Danaharta
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It’s called profit!
I finally got around to contacting Dairy Bell about their obvious recipe changes in recent years (can you say cost down, margin up?).
I was going to put pen to paper but email is just so much easier! Anyway, I let them know what I thought and that their products are now crap. I’m sick of food manufacturers *cough especially Arnotts *cough pursing these cost down, margin up strategies in producing food products. They inevitably reduce the quality of the product which is ironic given Arnott’s slogan: “There is no substitute for quality” – see, clever title right… 
.
These moves clearly indicate that companies such as Arnotts think shareholders are more important than customers. Well, I know of companies with customers, but no shareholders, but I don’t know of many companies with shareholders, but no customers. /rant
As for dairy bell, they are clearly struggling in recent years due to ongoing pressures but really, I think they have missed a lot of opportunities in recent years. We all know how ubiquitious the gelati store is around Melbourne these days. Surely with Dairy Bell’s experience and brand recognition they could have tapped into this market early on. “Dairy Belle” anyone?
If you visit a Dairy Bell store these days you’ll see that they are confused and grasping at straws. They are selling mixed lollies and chocolates as well as ice cream. The chocolates I think is ok, but mixed lollies? Oh and while they are at these, why wouldn’t they pay more attention to their core product, Ice Cream. Right. The ice-cream is presented in a way unchanged in as long as I can remember. This is while funky gelati stores are laying whole snickers bars on top of ice-cream shaped into waves. And then there is the service, Sim knows what I mean.
Anyway, enough ranting… It’s a pity really because Dairy Bell used to be great. Great quality and reasonable prices, definitely formerly the best ice-creamery in Melbourne. Now, to be honest, I would only give them a few years and wouldn’t be surprised if they close up shop. As for Arnotts, I don’t want to get started on that. All I’ll say is this, if you don’t know what I’m going on about, buy some Saladas and pay close attention. “You’ve changed man, You’ve changed” – I say.
Over and out.
Caveat: Of course, without seeing figures, for all I know, Dairy Bell never been more profitable. But somehow I doubt it.