Cambridge Economists present problem to Government

The report into “Models of Public Sector Information Provision via Trading Funds” has been published, all 154 pages of it. Many people have already commented on it, here is my first view.

I expect that many different opinions will find something to support within the report.

Clearly the FOD proponents will be delighted by the main thrust of the report

it was found that, in most cases, a marginal cost regime would be welfare improving that is, the benefits to society of moving to a marginal cost regime outweighed the costs …..

For the other trading funds some direct assistance, beyond that already provided, would be required …. in the case of Ordnance Survey would be substantially larger
(though the benefits in this case would be commensurably bigger)

Whilst those concerned about the quality and currency of data may gain comfort from

A change in charging regime should not have a detrimental impact on the performance of trading funds in terms of efficiency or data quality, providing a suitable governance and regulatory regime is put in place (and this is desirable in any case). Trading fund performance is primarily determined by the governance/regulatory structure under which it operates and this structure should (and can) be chosen independently of charging policy. Chapter 6 considers these questions in detail and includes discussion of ways to strengthen the existing regulatory structure so as to minimize risk of adverse consequences from any changes.

It is important to emphasize that having an adequate governance/regulatory regime in place is absolutely central to realizing the potential benefits from change (and also for delivering value for money even under the present charging arrangements). Thus, getting this right should be one of the first items for consideration whether or not any restructuring does take place (and will be essential if additional subsidies are required under a move to marginal cost pricing). The substantial experience with regulation both in the UK and abroad in recent years should assist greatly in performing this task.

The overall economic benefits are summarised in the conclusion as follows

Given the data available the analysis has focused down on two main product categories: `Large Scale Topographic’ and `Transport Network Products’, both of which consisted solely of unrefined products. Together the products considered account for around £70m of the Ordnance Survey’s £114m of revenue in 2006/2007….For these two product categories, the analysis suggested that a change from an average cost to a marginal cost regime would increase welfare. Specifically, gross benefits would be around £168m a year while net costs to government would be around £12m. Overall this implies an overall net benefit to society of 156m.8

The actual increase in subsidy required would obviously be higher than the £12m net impact on government as this figure includes the benefits of increased tax revenues. Taking the simplest approach the increase in subsidy would be equal to the loss of revenue from non-government sources, which for these two categories combined would be around £30m. Adding this to existing payments from government would make a grand total of £85m.

Before getting too hung up about the level of the benefits I think it is important to recognise that these are estimates based on some fairly broad brush calculations of the key variables (elasticity of demand and the multiplier effect, both of which are deemed to be in the “high” range) being determined from limited examples in Australia and New Zealand which may overstate the potential. That said this is the best that we are ever likely to get and the analysis suggests that there is a strong likelihood that there will be a welfare benefit by providing unrefined data at zero cost. Put simply those of us who have been opposed to the Free Our Data campaign will have to concede the argument of economic benefit.

Now comes the difficult bit for government. To make this happen The treasury is going to have to fund OS directly with a potential outlay of £30m per year until the benefits start to be realised and the tax revenues flow in to offset. That assumes that the companies in the private sector who benefit from the rush of cash through government subsidy to OS do not move their profits to a more friendly tax domicile. In a digital world it is becoming easier to relocate the financial centre of operations than was the case for physical products manufacture.

Increasing public expenditure in the current economic environment may not be top of the Treasury’s agenda. Could this be one for the long grass?