Public admin explainer: What is the investment approach to public policy?

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• What is public value?
• What is co-production?

Governments once focused their approach to public policy on system inputs and outputs. However, this has shifted in recent years to focusing on desired outcomes and how they can be achieved. This can be usefully thought of as the ‘investment approach’.

The investment approach to public policy

Consider the case of public education. Student participation and the provision of lessons represent two key inputs. Student graduations, marking the completion of a certain amount of learning, represent a key output. But society does not spend money on schools simply to see students graduate. The overarching interest is in promoting good outcomes. Governments fund education in the expectation that this will allow students to develop knowledge and skills, become successful members of society, and contribute through various forms of paid and unpaid work.

Governments operate with a finite amount of resources, so any spending must be carefully considered. The investment approach to public policy seeks to determine how much it costs to fund certain activities (such as public schooling) and the estimated financial benefits of those activities. By comparing the estimated benefits with the costs, it is possible to determine whether the activity being funded represents a good investment. The key measure becomes return on investment (ROI). This is the amount of gain in public value that society is estimated to receive from the initial expenditure.

Opportunity costs – services that must be given up when other services are funded – must be considered. The investment approach forces explicit consideration of the expected future consequences of funding specific services. Not only does an investment need to make a positive return, it needs to make a greater return than that expected from any alternatives.

The investment approach owes a strong conceptual debt to traditional cost-benefit analysis. Cost-benefit analysis requires that all current and future costs and benefits of an action are summed. If the net present value, calculated by subtracting all estimate costs from all estimated benefits, is positive, then taking the action is deemed appropriate.

Promoting public value through investment

Investment thinking is relevant to all areas of public policy development and public service provision. The fundamental point of the investment approach is to promote public value. For example:

• When governments create and maintain good systems of public infrastructure (such as roads and public transport systems), they add greatly to the smooth functioning of society. This, in turn, can improve the ability of people to participate in all kinds of activities generating good social and economic outcomes.
• When individuals receive high quality education from an early age, the odds are raised that they will go on to be well-adjusted, productively employed, tax paying citizens who make limited demands on government services.
• When individuals have access to good health care, preventative practices can reduce the risks that their health will decline and that they will require expensive, publicly-subsidised medical interventions later in life.
• Effective systems of criminal justice can reduce the risk that at-risk young people will fall into lives of crime punctuated by prison time. Keeping people out of prison saves taxpayers money.

Rationality versus compassion

The investment approach involves making powerful use of evidence. If a public policy is not generating positive returns to society, little reason exists to keep that policy in place. However, if we say that with reference to policies intended to support disadvantaged and vulnerable groups, we run the risk of appearing to lack compassion.

Suppose the goal of a public policy is to ease the final years of life of people with terminal diseases. A hard-headed rationalist might suggest that funding such a policy is a waste of money. Better to devote scarce resources to assisting young people to become effective, productive citizens rather than assisting people who have no ability to give anything back to society in terms of contributing to families, engaging in the community, and paying taxes. This example challenges the investment approach.

However, for proponents of the investment approach like ANZSOG’s Professor Michael Mintrom, there are good reasons for societies to be rational and compassionate. There will always be debates over when it makes sense to be compassionate and how governments might demonstrate compassion. The investment perspective cannot help us resolve those debates. However, it can reveal the costs of different policies and their likely results. Provision of such information allows for explicit discussion of social values and trade-offs. That is a valuable contribution to collective decision-making.

Further, greater application of the investment perspective opens the possibility of avoiding the use of scarce resources on wasteful programs. To the extent that savings occur through application of the investment perspective, society has the capacity to act out of compassion – and not rational calculation – to support those who cannot support themselves.

The New Zealand model

Since 2012, the New Zealand Government has applied an investment approach to managing social service programs. Successive governments have anticipated that if current policy settings were maintained, social service spending would increase significantly, while tax revenues would not.

Insurance companies and pension plans routinely use actuaries to calculate and manage future liabilities. The New Zealand Government commissioned an actuarial analysis of longitudinal data on welfare recipients and their costs to government over many years.

Social service managers in New Zealand can now use knowledge of key risk factors to estimate what individuals facing different life circumstances are likely to cost the government over a period of years. Specific services can be targeted to individuals to help them complete secondary school, gain employment, and maintain financial independence.

The Australian government has subsequently adopted a similar approach to social service provision, modelled on the New Zealand approach. Mintrom and Luetjens (2018) have reviewed the investment approach in Australia, as it has been applied to social services, criminal justice, and infrastructure.

A Policy Investment Checklist

Mintrom (2018b) has developed the Policy Investment Checklist, which sets out the steps in treating public policies as investments. He shows how this checklist can be broadly applied to areas such as infrastructure, defence, public schooling, healthcare, welfare spending, criminal justice, science funding, and environmental protection.

Want to learn more about the investment approach to public services?

Treating public policies as investments takes a central place in the content of Designing Public Policies and Programs, a core subject in ANZSOG’s Executive Master of Public Administration degree. Michael Mintrom also explores the approach in ANZSOG executive education offerings.

References

Boston, J. & Gill, D. (2017). Social investment: A New Zealand policy experiment. Wellington: Bridget Williams Books.

Mintrom, M. (2018a). ‘NZ budget 2018: government adopts investment approach to achieve valued outcomes’. The Conversation (May 18).

Mintrom, M. (2018b). Public Policy: Investing for a Better World. New York: Oxford University Press.

Mintrom, M. & Luetjens, J. (2018). ‘The Investment Approach to Public Service Provision’. Australian Journal of Public Administration, 77(1), 136-144.