Spare Capacity and Public Policy

"Thirty-three per cent of primary schools were seriously under-occupied"; Accounts Commission Annual Report 2004/05

"The optimist said her glass was half full, the pessimist said his glass was half empty, the Accounts Commission said both glasses were twice as big as necessary, they should sell one glass and share the remaining glass"; The Book of Accountants' Fables - draft version

Comments

One recurring issue in Scotish public policy is the undue weight given to accountants advice in public policy analysis. Accountancy can be essential for bookkeeping purposes and accountants can help in assessing and auditing performance of public bodies in limited respects, but policy-makers should steer clear of giving them a dominant role in giving public policy advice in valuation issues, especially those involving surplus or spare capacity.

There is a common delusion that accountants and economists are the same thing. They are not. If you want a justification to close just about anything down, bring in the accountants. If you want to at least have a sense of the economic and social values that can be associated with services in general and public services in particular, bring in an economist (even then you are not finished because there are lots of social, cultural and educational values that economists miss out and don't pretend to capture). The trouble is that many accountants have appropriated economic language and jargon, so what they are saying is often seen as the "economic" argument when it is not.

Consider the following three cases below. Two are real. One is not (at least as far as I know). The important thing is that each follows the same accounting logic to its same flawed end.


(1) How to close a ferry service - The Gourock-Dunoon ferry services

  • First, find your accountants, here Deloitte Touche.
  • Have your accountants count up how much the two ferry companies could carry if they were full all year round
  • Have your accountants count up how much they actually carried
  • Have your accountants conclude that one ferry company could carry all the traffic, most of the time.
  • Have your accounts conclude that "single operator solutions are economically more favourable than multi-operator solutions" (here have most economists choking into their coffee - that could have been old Joe Stalin speaking)
  • Publish their report.

You can read the resulting analyis Final Report: Options for the Ferry Services Between Gourock and Dunoon on the Scottish Executive website

(2) How to close a school - rural schools in Scotland
  • First, find your accountants, here the Accounts Commission (not difficult, they will find you since they have a statutory duty in these regards)
  • Have occupancy figures produced on a school by school basis (nothing to stop notional capacity figures being based on the good old days where pupils sat in sardine-packed rows).
  • Have the Accounts Commission publish reports noting with concern that there is still a "problem with spare capacity in schools in Scotland (see for example their latest report on Education Services)
  • Instruct councils to read the reports, and leave to simmer
  • Start closing down schools all over Scotland

You can read more in The Accounts Commission and School Closures

(3) How to close a public toilet

  • First, find your accountant(s)
  • Place him/her inside the public toilet you want to close, tell him/her to work out how many people (X) could use the facilities during normal opening hours if used to full capacity
  • Have them stay there during normal opening hours and tell him/her to count how many people (Y) actually used the facilities.
  • Disengage your accountant(s) from the hands of the local police after explaining the accountant(s) is/are providing a public service, resume the exercise, and finally calculate Y as a percentage of X.
  • You will almost certainly find that Y as a percentage of X is a very small number such that even if there are, say, ten public toilets in the local area, merging all ten would still leave some spare capacity.
  • Close all but one toilet.

Moral ...

Spare capacity is a fact of economic and social life, from waiting rooms to public toiliets, football grounds to pubs, trains to schools. The reasons for spare capacity may vary, some might be deliberate because of variable or peak demand, but in many cases it simply represents sunk costs which every good economics student knows should be ignored. Whether or not or not you should do anything about spare capacity depends on such considerations as the marginal costs of maintaining this spare capacity (eg any heating, lighting, repairs, maintenance costs), and the value of whatever alternative best use (if any) you could put this capacity to (in economic terms, its opportunity cost). Spare capacity is not necessarily wasteful in economic terms, a happy thought for those who want to encourage competition in ferry services Gourock-Dunoon and fight schools closure programmes across Scotland. Economics may be the dismal science, but it is not as dismal as some accountancy-based approaches to these issues.

Footnote ...

After I wrote up the "How to Close a Public Toilet" above as a riduculous example, I came across a wonderful study on the Web. Someone had actually done this! The report notes

The 12 selected toilets were surveyed over three observation periods (8:30-
10:30am, 11am-1pm and 2-4pm), between the periods 17 December 2003
and 14 January 2004. The full results of the survey can be found in the Public
Toilet Review 2004…"

(How did they survey these toilets? Was there someone with a clipboard standing inside? Hiding in the bushes?)

The report also notes

"The steady rise in population, combined with the current use of the toilets,
does not currently point to the capacity of the conveniences being exceeded
and customer demand was not being met. Future demand is therefore not
anticipated to rise significantly."

It looks good, it's got the right words, but when you try to make sense of it, it comes out as a load of ... well, this is getting too scatological. I read the above several times, I am sorry, I don't understand it. It's probably me, I clearly don't know enough about public toilets to speak with authority on this issue.

In fairness, this local authority did seem to be very progressive and has introduced high tech modular toilets (whatever these are). It's just that they seem to be spending too much time hanging around public toilets in the company of accountants for their own good.