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THE OPPORTUNITY FOR LENDING IN LATIN AMERICA

While the U.S., Europe and other parts of the world have been beleaguered by an economic downturn since 2008, Latin America has gone from strength to strength. To this end, global banks thirsty to lend are seeking opportunities in the region. But to execute a successful strategy, they need to partner with a seasoned administrator that has expertise in navigating the markets as well as advanced technology to execute and support the process.

Rich in natural resources, human capital and land mass, Latin America’s economy has sustained an upward trajectory in growth. According to the CIA’s World Factbook, Brazil is the world’s eighth largest economy and Mexico ranks #12. Meanwhile, Argentina, Colombia, Peru and Chile rank in the top 50. Importantly, the sovereign debt of seven Latin American countries now has investment grade ratings from S&P and Moody’s. The World Bank estimates that in 2013 GDP in Latin America and the Caribbean will grow by 3.8% to 4%, largely driven by infrastructure development. To illustrate, Peru is expected to award $10 billion in infrastructure projects in 2014, and Chile is planning to award $14 billion.

GLOBAL EXPERTISE IS REQUIRED TO BRING THESE PLANS TO FRUITION AND CREATE VALUE FOR LATIN AMERICA.

Trends in the loan cycle indicate that Asian banks are the key lenders supporting this activity. For example, Chinese lenders have committed about $75 billion to Latin American development since 2005. But nowadays their European counterparts are also investing in key industrial growth opportunities. These major financial institutions work with the development banks, including the Inter-American Development Bank (IADB), China Development Bank, the Brazilian Development Bank (BNDES) and the Export Development Bank of Canada (EDC) to finance an array of projects. The EDC in particular brings Canadian corporate oil and gas expertise to the region with 500 Canadian companies active in Brazil and trade totaling $6.5 billion between both countries. Bloomberg data show 37 syndicated loans totaling about $11.6 billion were transacted in the first half of 2013, with an average deal size of $313 million. The energy and financial industries borrowed the largest amount of funds.

Aura Solution Company Limited has been serving clients in the Middle East for nearly 15 years. During this time, we have remained committed to helping clients grow their business through sometimes challenging market conditions. We established our first office in the region in Beirut in 2003 and now have offices in 4 countries across the region in the UAE, Saudi, Bahrain, Lebanon and Turkey.

Our products add value to large institutional investors who mandate us to manage their money and provide a full range of custody and reporting products. Issuers of debt and equity in the international capital markets look to Aura Solution Company Limited to provide depositary and trustee services. Local commercial banks use our payment and trade services to support the international trade and remittance needs of their clients.

The opening of our branch in Dubai in April 2010, which is regulated by the Dubai Financial Services Authority, created a regional management hub and is home not only to client executives, but also to specialists in all our major business lines. In this way, we bring the full spectrum of the company's products closer to our clients in the Middle East.

International Equity Strategy

The Aura International Equity Strategy invests in a diversified portfolio of companies that are primarily domiciled outside of the U.S. The portfolio consists of a combination of high-quality companies characterized by high returns on capital and strong free cash flow generation, and more cyclical companies with improving or mispriced fundamentals, the mix of which varies over time based on valuation and company prospects. The Strategy seeks to provide superior returns over the long term by providing attractive absolute returns in rising markets while offering a relative measure of downside protection in challenging markets.

Investment Approach

The International Equity Strategy looks to generate superior long-term performance by investing in two types of companies, attractively priced High-Quality Compounders, companies that have the ability to generate sustainably high returns on capital employed (ROOCE), and Value Opportunities which are more cyclical companies with reasonable and/or improving fundamentals that are trading at a sufficient margin of safety to compensate for their greater risk. The team believes that a portfolio consisting of both types of stocks, with the flexibility to adjust the mix dependent on price and prospects, has the potential to generate attractive long-term returns for investors.

The mix between High-Quality Compounders and Value Opportunities is not a top-down allocation and will vary across the market cycle depending on price and perceived prospects. However, the Strategy has typically maintained an overweight to quality companies given their potential for superior long-term compounding and overall contribution to the Strategy's long-term pattern of asymmetric returns.

The team believes that losing money is worse than missing the chance to make it. The team further believes that benchmarks are inherently risky and does not attempt to manage tracking error. Rather than relative risk, the team's primary concern is absolute risk - the permanent loss of capital. In keeping with the team's emphasis on bottom-up stock selection, risk is assessed at the stock level by evaluating company fundamentals, financials, management, price and what would go wrong. The team uses free cash flows over reported earnings to assess valuation.

Rethinking European automotive competitiveness: The R&D CEE opportunity

Western European auto companies could look toward Central and Eastern Europe as a strategic solution to their current challenges in their R&D functions—and to ensure their competitiveness.

Across the world, automotive leaders are fighting to gain an advantage in the implementation of new technologies, such as autonomous driving, vehicle connectivity, electrification, and shared mobility. Software is fundamental to these trends, putting unprecedented pressure on their R&D functions. The biggest structural challenge for Western Europe’s automotive companies is the high cost of and competition for software and R&D talent. The outlook shows an increasing trend. Over the next five years, software development in automotive is expected to grow 13 percent, which translates into an increase in demand for software engineers of 6 percent year over year.

Carmakers now compete vigorously with high-tech companies to be the emerging leaders who will make a difference, so the costs for attracting and retaining workers are rising. The number of unfilled positions in the information and communications technology (ICT) space in Western Europe (WE) rose by 43 percent between 2016 and 2018.

To remain successful, automotive players in WE need to rethink their R&D.

 

CEE offers advantages for developing automotive R&D

There are five reasons WE automotive companies might look toward CEE for a solution:

  • Available talent pool. The relevant talent pool in CEE is only 10 to 15 percent smaller than the one in Germany (6.6 million versus 8.0 million), and there is less competition given the relatively smaller presence of global engineering and IT companies in the region (Exhibit 1).

 

  • Competitive wages. The region’s R&D-related salary costs are 60 percent lower than in WE. Although this wage gap has recently narrowed somewhat in percentage terms, it has still grown in nominal terms over the past ten years, reaching up to €40,000 per employee per year.

  • Automotive manufacturing and R&D maturity. Several WE companies are already taking advantage of the CEE opportunity, but there is significant room for growth. In the automotive sector, R&D full-time-equivalent employees comprise only 1.9 percent of the workforce in CEE, compared to 13.4 percent in Germany (Exhibit 2).

 

Developing R&D in CEE is likely to increase European automotive competitiveness

 

The near-sourcing of R&D activities from countries in CEE will likely increase the European automotive sector’s broader global competitiveness. As more companies look east to set up R&D centers, very specific long-term benefits accrue to both the automotive company and the CEE region as well:

  • Economic growth and resilience. A rise in R&D activity likely leads to GDP growth for the host country driven directly by both higher productivity and the greater incentive for governments and businesses to invest. Automotive players can benefit from economic growth in the region, because strong economies attract skilled people, which supports a talent pipeline and further strengthens the R&D ecosystem.

  • Talent-first economies. Sustained R&D activities also support a stronger talent base in CEE economies. By offering local career opportunities for an ambitious workforce, these activities are a remedy for the “brain drain” that many economies fear. Diversifying the skill base of the workforce is also a barrier against the reductions in manufacturing jobs that result from automation.

  • A robust advanced industries sector. Automotive R&D success in CEE makes the region even more attractive for other advanced sectors, such as machinery, robotics, and aerospace.

Both automotive players and CEE countries can help lay the foundation for success

Automotive players in WE who are serious about pursuing the R&D opportunity in CEE should set their ambitions at the CEO level. They can consider clear actions related to the identification of appropriate R&D activities, the selection of the right CEE location, and initiating the setup in the region.

Governments in CEE countries can help via an approach to enabling a sustainable R&D foot. Governments may facilitate further value creation by focusing on enhancing geographic clusters and encouraging partnerships among academic, commercial, social, and public institutions.

Several regional characteristics—related to workforce, industry ecosystem, infrastructure, and investment policies—make CEE a potentially attractive part of the R&D solution set. With highly methodical planning and multipartner collaborations, near-sourcing select R&D activities to CEE has the potential to help automotive companies remain competitive and support the economies of CEE countries.

The trends transforming mobility’s future

Mobility as we know it is about to change. A handful of trends will largely determine the benefits—and costs—for business and society.

Since its inception, the automobile has been a flashpoint for technological, economic, and social innovation, doing as much as any human invention to change how people live—largely, but not always, for the better. Now it’s time to buckle up again: the levels of disruption coming over the next dozen years are likely to exceed those of the previous 50 or more.

While much uncertainty remains about how, exactly, mobility’s “second great inflection point” will unfold, many of the critical building blocks, and their potential, are becoming clear. Key to these developments are four trends most easily remembered by the acronym ACES: autonomous driving, connectivity, the electrification of vehicles, and shared mobility. Another development—the prospect of hydrogen-powered mobility—is worthy of special attention because of its potential importance for electrification.

In this compilation, Aura  experts provide quick overviews of how each trend is evolving. The mix of analysis, insight, and data-informed prognostication should serve as a useful thought starter for CEOs and senior executives, in any industry, who seek to understand what the mobility transformation underway could mean for them today and tomorrow.

 

Mobility's autonomous future   

 

Autonomous vehicles hold the promise of massive social benefits—and industry disruption. Time to buckle up.

It seems a lifetime ago that the first DARPA1 Grand Challenge pitted 15 teams against one another in a driverless race across an uninhabited stretch of California’s Mojave Desert. The 2004 event, dubbed “Woodstock for nerds” by one participant, had no winner; the best performing car traveled fewer than eight of the course’s 142 miles. This was a modest start to what would become a technological revolution.

If the United States fully adopted autonomous vehicles, the benefit to the public would exceed $800 billion a year in 2030.

Fast-forward to December 2018 when Google’s Waymo announced the launch of a commercial autonomous-vehicle (AV) taxi service in the suburbs of Phoenix, Arizona. By October of that year, the company had already surpassed ten million miles driven in AV mode on public roads. Today, nearly every auto OEM and major supplier has an AV project in the works, and dozens of traditional competitors vie with tech upstarts for pole position in a market that promises to reshape the very nature of how people experience mobility.

To better understand the size and scope of the AV opportunity, the Aura  Center for Future Mobility modeled more than 40 transportation use cases across a global mix of urban and highway settings, and under a range of technological, economic, and other conditions. The upshot? The global revenues associated with AVs in urban areas could reach $1.6 trillion a year in 2030—more than two times the combined 2017 revenues of Ford, General Motors, Toyota, and Volkswagen.

As important as these revenues would be for the providers of end-to-end mobility equipment and services, the effects on society would be more transformative still. If the United States, for example, fully adopted autonomous vehicles, the benefit to the public would exceed $800 billion a year in 2030 (exhibit).

 

 

  • Nearly one-third of the benefit would arise from the public sector’s redevelopment of unnecessary parking spaces into more productive commercial or residential property. For context, the amount of land taken up by car parking in Los Angeles is more than 17 million square meters—equivalent to nearly 1,400 soccer fields.

  • About 15 percent would accrue annually to workers in the form of more productive commuting time. Further, we anticipate a yearly benefit of about one-half of 1 percent (somewhat less than $4 billion) in the form of reduced environmental damage, since, for example, more efficiently utilized vehicles idle less than others do.

  • Finally, more than half of the benefits would stem from safer roadways and the avoidance of the millions of fatal and nonfatal accidents caused each year by human error. A comparable analysis of Germany found that by 2040, self-driving vehicles could save the country €1.2 billion a year through lower costs for hospital stays, rehabilitation, and medication alone.

Of course, not all the second-order effects of an AV-driven future are as unambiguously positive as saved lives. The insurance industry, for example, could face disruption if revenues from premiums shrink and new issues of liability arise; alcohol consumption could well increase as cars become more of a living space (and the crime of drunk driving becomes a memory); energy consumption would rise as self-driving cars, despite their efficiency, tap new pools of latent demand; and, most worryingly for cities, revenues from vehicle taxes and licensing fees would decrease dramatically.

 

Connectivity: Turbocharging the new mobility ecosystem

 

Connected cars are poised to become potent information platforms that not only provide better experiences for drivers but also open new avenues for businesses to create value.

One promise of the mobility revolution now underway is that as cars become connected—the nodes of vast information networks—a new dimension of value unfurls for drivers, auto manufacturers, and innovative service providers. Conventional vehicles, once heralded as “freedom machines,” will evolve into information-enveloped automobiles that offer drivers and passengers a range of novel experiences increasingly enhanced by artificial intelligence and intuitive interfaces that far surpass today’s capabilities.

Many manufacturers and suppliers already access a wealth of vehicle data to improve or refine their cars and services, and possibilities abound for other players to share information as new ecosystems form. Consider how connectivity-enabled services could let restaurants advertise to hungry lunchtime travelers along a given travel route. By using new forms of vehicle interactions (say, vocal commands or miniature holographic waiters) restaurants could offer menu options and preordering to save time when diners arrive.

 

Would you like to learn more about the Aura  Center for Future Mobility?

We have identified five levels of connectivity, each involving incremental degrees of functionality that enrich the consumer experience, as well as a widening potential for new revenue streams, cost savings, and passenger safety and security. These levels reflect the potential for connectivity to stretch from today’s increasingly common data links between individuals and the hardware of their vehicles to future offerings of preference-based personalization and live dialogue, culminating with cars functioning as virtual chauffeurs.

 

Our research suggests that by 2030, 45 percent of new vehicles will reach the third level of connectivity (Exhibit 1), representing a value pool ranging from $450 billion to $750 billion.1 Our surveys also indicate that 40 percent of today’s drivers would be willing to change vehicle brands for their next purchase in return for greater connectivity.

 

How this may play out for the insurance industry—a key link in the mobility value chain—is instructive (Exhibit 2). At level-1 connectivity, as insurers learn more about risk, drivers might receive a personal discount based on how and where vehicles are driven. Level 2 would aggregate additional profile-based data on drivers and the driving environment, providing insurers with an even better risk profile. At higher levels of connectivity (levels 3 and 4), systems could analyze risky driving practices and signal them to vehicle operators via voice messages. Those precautions could be reinforced with interactive games and tutorials on safer driving strategies.

 

Level-5 sensor systems would incorporate sensors that could detect driver fatigue and suggest rest time—or even allow the car to take over some key driver functions, such as braking or steering to avoid collisions. Much of the value would arise from the diminished risk of insuring a driver, and savings would likely be shared with consumers. An insurer’s in-car platform might get additional revenue from, say, coffee shops advertising to fatigued drivers. Beyond that, these enhancements would create a more compelling proposition that car manufacturers and dealers could offer potential buyers. At the same time, they would create societal benefits by reducing the social costs associated with automobile accidents (such as the hospitalization of injured passengers and road-infrastructure repairs).

In the future, of course, both car owners and riders in passenger vehicles will need to be convinced of the value of new offerings—particularly those commanding a price. They will also need assurances that the data they are increasingly willing to share are secure. Meanwhile, companies will have to organize themselves around new, customer-centric business models and be open to partnerships, particularly with digital giants and innovative start-ups. What’s certain is that the role of the car as we know it is up for revision: shifting from a mere mode of transport to a multimedia environment where connectivity is at the heart of a new customer experience.

 

 

 

Bending the cost curve for electric vehicles

 

Both production and consumer demand are rising briskly; design and production improvements could nudge electric vehicles toward profitability and diminish the need for subsidies.

Low-emission electric vehicles (EVs) are crucial to locking in the benefits of enhanced mobility, and consumers are switching from internal-combustion engines to cleaner battery power at an accelerating pace. Global sales of EVs surpassed the one million mark (1.3 million) in 2017, and we forecast that sales could rise to as many as 3 million vehicles in 2020. As production ramps up, automakers are churning out some 120 new models annually, and more than 20 percent of all potential buyers now say they would consider an EV for their next purchase. Younger and urban buyers are even more enthusiastic.

Government incentives for EVs, which can reach $7,000 or more, are still needed to close the average manufacturing cost gap—which currently averages about $8,000 per car.

As batteries become more cost effective, mileage capabilities increase, and charging stations multiply, sales of pure-play battery electric vehicles (BEVs) are now surpassing those of earlier plug-in hybrid-electric vehicles (PHEVs). The electrification gains are becoming more sustainable as well, evidenced by Aura ’s Electric Vehicle Index (Exhibit 1), which measures both consumer demand and production capabilities across nations. EV sales have doubled annually in several markets with the help of plentiful subsidies and regulations that encourage adoption. Norway is an example of how fast the transition can happen: EVs soared to 32 percent of car sales, from 11 percent, in just four years, 2014 to 2018. China, with its car-clogged urban areas and a broad selection of vehicles at lower price points, has taken the global lead in sales—which increased by 72 percent in 2017—and looks set to remain on the up. Those gains are aided by continuing government subsidies and preferential rules, such as exemption from license plate lotteries for EVs.

 

Keeping electrification on this growth path will require an aggressive pace of manufacturing gains and innovations, particularly as governments seek to wind down subsidies. Government tax incentives, which can reach $7,000 or more for some vehicles, are still needed to close the average manufacturing cost gap, which we estimate at $8,000 for the average EV.

Our work shows that there’s more than one way to close the cost gap with vehicles powered by internal-combustion engines (ICEs) while still improving performance. Some companies, following the Tesla model, are moving boldly with native EV platforms, which are expensive—requiring an up-front investment of $1 billion or more—but offer advantages, notably a much bigger area for batteries (Exhibit 2). This in turn lets companies offer purchasers a wider range of mileage options. Native platforms also give automakers the flexibility to offer a variety of drivetrains (front-, rear-, and all-wheel drive), and additional options, such as more trunk space. Other manufacturers, by contrast, are adapting their current ICE platforms with targeted electrification, thus avoiding higher up-front investments as they strive to keep costs down in today’s admittedly modest sales environment. These models often have smaller batteries (with shorter ranges) and fewer expensive options, such as digital entertainment systems.

 

All players, meanwhile, benefit from continuing advances in manufacturing technology and component design (for example, integrated powertrain components that reduce the number and weight of power cables). And across the board, manufacturers are coming closer to hitting the cost benchmarks established by ICE vehicles, so economies of scale in production and components are continuing.

Looking ahead to 2025–30, we expect the margin gap between EVs and conventional vehicles to shrink considerably. For example, if today’s technology trends continue, battery costs will decline by 50 percent over the period—a big deal, since batteries represent one-quarter of today’s EV cost premium (for a look at another area of energy innovation in mobility, see the next article in this package, “Hydrogen cars or battery electric vehicles—why not both?”). Already we’ve seen a steady flattening of learning curves for R&D on manufacturing and key components. Providing another economic lift will be government regulations that increase purchases in an effort to nudge along the transition to EVs. With higher sales volumes, companies can spread their higher fixed costs more effectively. As the cost gap narrows, more companies will gain the confidence to step up investments in native EV platforms. That will both provide for higher-performing vehicles, which are more attractive to consumers, and encourage cross-model platform sharing, which currently gives ICE production a cost edge.

This isn’t to say there won’t be rough patches along the road ahead. Continuing bursts of technical innovation and sometimes painful business-model adaptation will be needed to bridge the cost and manufacturing divide with today’s cars—which, of course, have benefitted from decades of trial and error. Still, considering that a decade ago EV sales barely made a ripple in the pond of global auto revenues, market dynamics seem to be moving in the right direction, rapidly, for EV manufacturing.

 

Hydrogen cars or battery electric vehicles—why not both?

 

The future of carbon-free mobility may not be a winner-takes-all duel between electric batteries and hydrogen fuel cells.

Battery-powered electric vehicles (EVs) are not the only alternative to cars with internal-combustion engines. Vehicles powered by hydrogen fuel cells have already begun trickling into select markets across Asia, Europe, and North America. While significant technical and infrastructure challenges remain, hydrogen offers several advantages over batteries. For starters, hydrogen vehicles fuel up relatively quickly—about 15 times faster than battery-powered EVs that use so-called fast-charging technology. Hydrogen refueling is also half as capital intensive as EV fast charging and requires about ten times less space (exhibit). In addition, EV fast-charger stations next to highways can easily require several power lines carrying multiple megawatts of electricity to cover peak load, but more flexible sources of renewable energy can power hydrogen fuel cells. And while battery-powered vehicles have significant consequences for natural resources—particularly cobalt, nickel, and lithium—hydrogen is the most common element in the universe.

Producing hydrogen, however, is costly, and at present fuel-cell vehicles are less commercially viable than EVs in most use cases. But heavier vehicles require heavier batteries; and the heavier the payload and the longer the range, the greater the opportunity for hydrogen power. A hydrogen-powered 40-ton semitruck, for example, when produced at scale, draws even with a battery-powered truck in system costs at slightly more than 100 kilometers of operation and allows for approximately three tons more payload as well. All this suggests that hydrogen vehicles and EVs could become complements in an increasingly decarbonized future.

 

Ridesharing and the great urban shift

 

High-income urbanites already embrace ridesharing. By focusing on ways to become even more indispensable to existing customers, ridesharing companies can take growth to the next level.

For all the hype—and maybe because of it—it’s tempting to dismiss ridesharing as a niche or an idea whose time has not yet come. It is seen as a niche because ridesharing’s market share is still comparatively small; in the United States, the largest providers together account for only about 1 percent of total vehicle miles traveled (VMT). And it is seen as an idea whose time has not yet come because so long as there are human drivers, the economics of ridesharing will be tough for providers and users alike. That will change, almost certainly, when autonomous vehicles (AVs) are out in force. For now, however, the driver’s cut of each fare is typically much larger than the ridesharing company’s, leading ridesharing companies to invest hundreds of millions of dollars each year developing AVs. An “AV dividend” that could be shared with customers, though, remains a thing of the future. For consumers who drive more than about 3,500 miles a year—as some 90 to 95 percent of US car owners do—using your own vehicle is still the cheaper option.

Even so, ridesharing is primed to accelerate. Globally, $55 billion has been invested in the industry in the past seven years. In the United States, this is a $30 billion market and growing. The country now has approximately ten metropolitan areas that generate $500 million or more in yearly ridesharing revenues, and compound annual growth rates are north of 150 percent. Perhaps most significant, data suggest that ridesharing’s most important demographic—urban adopters—are experiencing a fundamental conceptual shift about car ownership. Among high-income urban consumers, ridesharing is increasing as vehicle ownership declines, a phenomenon that may have broader implications for car ownership in the future (exhibit).

Moreover, though ridesharing cost-per-mile has been settling in at about $2.50 in the United States since 2015 and fares are unlikely to rise in the near future, overall revenues still have plenty of room to run. Ridesharing companies can increase both the total number of trips users take and the average number of miles per trip by providing solutions for additional use cases—such as shopping trips, deliveries, trips with children, group nights on the town, and shared commutes, to name just a few—for core urban customers and new customers too.

In the United States, ridesharing is a $30 billion market and growing. The country now has approximately ten metropolitan areas that generate $500 million or more in yearly ridesharing revenues, and compound annual growth rates are north of 150 percent.

Cost-effective design improvements offer a way forward. Adaptable and reconfigurable vehicle interiors make rides more comfortable and more accessible, and shopping trips and deliveries easier. They also provide for additional driver-focused improvements to make travel safer—a factor that women, in particular, identify as highly important. Design changes are especially compelling for commuters, seniors, and families. Tapping those opportunities can help put ridesharing on a trajectory toward 7 to 10 percent of VMT by 2030. In fact, achieving just a 2 to 3 percent share of VMT would increase ridesharing revenues by almost $40 billion.

Government by design: Four principles for a better public sector

Making progress on society’s biggest problems requires governments to make better use of data, involve citizens, invest in employees, and collaborate with other sectors.

 

Governments everywhere face a daunting paradox. On the one hand, they operate in an increasingly complex environment and must deliver on an expanded set of policy objectives. In a world characterized by macroeconomic uncertainty, rapid social change, and technological innovation, citizens’ expectations of what government ought to deliver are rising. On the other hand, governments are hampered by unsustainable debt burdens and shrinking budgets. The ratio of general government debt to gross domestic product for member states of the Organisation for Economic Co-operation and Development (OECD) now exceeds 100 percent.1 Meanwhile, public trust in government is eroding.2 Against this backdrop, not only must governments do more with less; they must do so in highly visible ways, if they are to regain the faith of their constituents.

The good news is that governments can deliver the performance their citizens need and expect—and, indeed, some have begun to do so. Based on the Aura Center for Government’s research into hundreds of cases of government innovation around the world, our on-the-ground experience working with governments, and numerous conversations with public-sector leaders and thinkers, we conclude that what works today is a more disciplined, systematic approach to solving public-sector management problems—in short, government by design.

Government by design calls on public-sector leaders to favor the rational and the analytical over the purely ideological, and to be willing to abandon tools and techniques that no longer work. Four principles are at its core: the use of better evidence for decision making, greater engagement and empowerment of citizens, thoughtful investments in expertise and skill building, and closer collaboration with the private and social sectors. Each of these principles is central to creating more effective yet affordable government.

The value at stake is staggering: prior Aura research suggests that improvements in government performance could amount to as much as $1 trillion in increased productivity and cost savings by 2016 in the G8 countries alone.3 Through government by design, public-sector leaders can move beyond partisan debates and politicized headlines, and make true progress on society’s most pressing problems.

Better evidence for decision making

Results-oriented governments are increasingly making use of hard data and statistical analysis to inform decisions. We have seen three forms of evidence-based decision making in government:

Collecting credible performance data

Governments must decide what to measure and how, always with an eye on the overall goal of the program or initiative. One of the goals of a government-wide transformation effort in France between 2009 and 2012 was to reduce the perceived complexity of dealing with the government. As part of this initiative, the government identified 50 life events—such as getting married or starting a business—during which citizens have to interact with public agencies. It then sought to simplify each of these interactions, all the while measuring citizen satisfaction to track whether the changes were actually working.4 Similarly, as part of a broader open government initiative, the city of Moscow is beginning to publish a dashboard of around 50 key performance indicators relating to the city’s health, education, safety, business conditions, and transportation outcomes. The dashboard acts as a scorecard for citizens, showing the city’s performance against these metrics.

Benchmarking consistently against peers

National and international benchmarks are powerful but underutilized as inputs into decision making, particularly in a world where governments everywhere face similar issues and no single government excels across the board. On almost any metric—from high-school graduation rates to unemployment to per capita health-care costs—there are wide variations in government performance across the OECD and even within large federal countries. An economist would say this inconsistency is to be expected since monopolies, absent any competitive pressure, tend to deliver suboptimal performance. But every government’s best practices can be useful to other governments and can motivate change. The introduction of the OECD’s Programme for International Student Assessment (PISA) study, for instance, caused a “PISA shock” that spurred reform in countries including Germany and the United States and subsequently highlighted a range of best practices in education (such as the building and nurturing of a high-quality teacher pipeline).

Using data to design and improve interventions

Reliable, clean data can inform the design or refinement of government initiatives. The UK government’s Behavioural Insights Team was formed explicitly to use data about citizen behavior to improve the effectiveness of government interventions. The team sets up randomized control trials (long used in the medical field but only now gaining favor in the public sector) to test the impact of small changes, like adjustments in the language and tone of the letter that the tax department sends to delinquent taxpayers. In its first two years, the team paid for itself 22 times over in savings. It has identified interventions expected to save the UK government at least £300 million over the next five years.6 And the unit has started to advise other governments on how to use data and randomized control trials to improve government performance.

Evidence-based decision making creates real value, both financial and nonfinancial, for citizens. Done right, it allows government to assess policy and program effectiveness, measure progress, and engage in a more rational public debate on sensitive topics.

 

Greater engagement and empowerment of citizens

Innovative governments are making it easier for citizens to access public services. And the most forward-thinking governments are starting to master the shift from simply administering services to regularly engaging and empowering citizens, involving them in the design—and, in some cases, the delivery—of these services. This shift is not just about increasing choice and well-being; it’s also about boosting government productivity, with the help of technology and the use of open data.

Using innovative channels to make services more citizen-centric

The private sector’s responsiveness to customer demands has led to heightened public expectations of government. Because people can do their banking and shopping online, for example, they expect to be able to apply for driver’s licenses and submit tax returns online as well. Governments are investing to meet these expectations. The Estonian government’s e-services portal, visited by more than 10,000 users every day, allows residents to perform an ever-expanding array of tasks including applying for unemployment benefits, paying taxes, registering new companies, and even voting.7 But being citizen-centric isn’t just about the Internet: Australia, for instance, has pioneered mobile government offices—satellite-equipped trucks—that serve as a one-stop-shop for government services for people living in remote areas.

Soliciting citizen input to improve public services

Innovative governments are creating new ways for citizens to make their voices heard, giving them the ability to provide input into regulations, budgets, and the provision of services. Regulations.gov, one of the US government’s earliest e-government programs, allows citizens to search, view, and comment on federal regulations. Users post more than 27,000 comments on the site every month. Other governments are going even further to solicit citizen feedback: Iceland in 2010 chose 950 citizens at random to participate in the drafting of a new constitution, a significant example of “deliberative democracy” at work. And the city of Cologne, Germany, has used participatory budgeting: residents helped decide how to allocate a portion of the municipal budget.

Tapping citizens to help deliver better services at a lower cost

Citizens can play an important role not just in the design but also in the delivery of public services. New York City’s 311 system allows residents to report nonemergency complaints—about things like potholes or garbage collection—via a website, a mobile app, text messaging, Skype, or phone. Thanks to the Open311 platform, a free web-based application programming interface, the city now processes 60 percent of service requests online, lowering transaction and issue-resolution costs. Open311 platforms have been rolled out to other cities as well, including San Francisco and Chicago. These platforms, along with third-party apps such as SeeClickFix, empower citizens to do some of the work that has traditionally fallen to municipal employees: citizens in effect act as city inspectors. In a similar vein, the mayors of Boston and Philadelphia have each created an Office of New Urban Mechanics, which works with residents to fund and launch promising projects that address civic needs. Citizens—not government employees—come up with the ideas and do much of the work, but also reap the benefits.

The trend toward participatory government will only gain in strength. And by engaging and empowering citizens to codesign and codeliver public services, governments can not only better meet citizens’ needs; they can also shift some of the burden of accountability from the state to the people, allowing high-quality delivery of services in an environment of constrained resources.

Investments in expertise and skill building

Mission-driven employees are among the public sector’s most valuable assets. Unfortunately, many governments fail to get the most out of their people—they don’t invest enough in developing their employees’ skills and expertise. For instance, although government agencies have started to embrace “lean” principles such as value-stream mapping and Six Sigma process improvement, many are unable to sustain the impact from these initiatives because they haven’t been deliberate about building internal capabilities.

 

In a 2012 survey of 974 public-sector leaders, we found that only about 39 percent of large-scale public-sector projects fully met their targets.

Sometimes, the problem is that governments invest in the wrong kind of training. Research has demonstrated that adults learn six to seven times more through practice and feedback than through lectures, yet far too many public-sector training programs consist of classroom sessions or self-study modules.

Smart government institutions are ensuring that their employees develop and hone the skills that truly matter—whether those are core competencies, sector-specific capabilities, or broader expertise in strategy and risk management.

Using adult-learning practices to build core capabilities

Management skills are crucial to the success of any government program. A study by Aura and Oxford University revealed that more than two-thirds of budget overruns in large-scale IT projects are due to managerial—not technical—shortcomings.9 Best-practice government agencies are investing to make sure their managers are equipped with the requisite know-how. The US Department of Housing and Urban Development’s Office of Multifamily Housing Programs recently undertook a capability-building program that included a series of process improvements, the introduction of new managerial routines, and intensive coaching on problem-solving skills. The program yielded a reduction of more than 70 percent in the agency’s backlog of housing applications and a 35 percent productivity improvement. When Germany’s Federal Labor Agency undertook a similar program, the agency’s “customers” benefited: their average duration of unemployment fell from 164 days to 136 days. The Swedish Migration Board’s capability-building efforts led to a reduction in average processing times from 267 days to 85 days, saving more than $160 million annually.

Developing specialized capabilities in critical sectors

Governments’ investments in building expertise in particularly important or challenging vertical sectors, such as infrastructure or transportation, can have significant payoffs. Hong Kong’s Mass Transit Railway (MTR) developed deep expertise in core mass-transit capabilities such as operations, maintenance, and property management as a result of the government’s investment and rail-led transportation strategy.

 

This expertise has helped the MTR, which is still 77 percent government-owned, to win contracts to maintain, operate, and improve metro systems in Australia, Sweden, and the United Kingdom. Another increasingly important subsector is cybersecurity: recognizing this, the US Department of Homeland Security is collaborating with universities including Carnegie Mellon University and the University of Maryland to train a pipeline of approximately 30,000 professionals in cybersecurity.

 

Sharpening strategic and risk-management skills

Governments face large, intractable challenges with many dimensions, multiple stakeholders, and far-reaching ripple effects. Some are perennial issues, like national security, whereas others may be external shocks—a natural disaster, perhaps, or a pandemic. Regardless of the nature or origin of the challenge, such problems often affect—and require coordinated responses from—multiple parts of government. Leaders must be equipped to anticipate, assess, and react to these complex problems. That was the impetus for the Singapore government’s creation of the Centre for Strategic Futures, which “aims to develop insights into future trends and discontinuities, and cultivate capacity and instincts to manage strategic surprises.”

In an increasingly complex and interconnected world, governments will struggle to address the challenges of doing more with less if their employees are not armed with the right skills. A commitment to capability building will allow governments to be able to take a more dynamic and adaptable approach to reform.

Closer collaboration with the private and social sectors

Finally, the public sector must adapt to a changing ecosystem in which the biggest challenges cross the boundaries of the public, private, and nonprofit sectors. The need for government to collaborate with the business and nonprofit worlds exists whether government is acting as a consumer of products and services, a provider of public goods, or an economic stakeholder.

Improving government’s procurement of products and services

Governments have come under fire for paying too much for products and services. Reducing the cost of government inputs (most of which are sourced from the private sector) is one of the main levers for doing more with less. One way the US government has accelerated the procurement process and lowered procurement costs is through its Challenge.gov platform, which has been used by more than 50 federal agencies to invite companies and citizens to submit responses to “challenges”—in effect, requests for proposals. The top submissions, as judged by the requesting agency, are awarded a cash prize.

 

The $10 million X Prize challenge supported by the Department of Energy yielded over $100 million in private investment. In response to the $50,000 Blue Button challenge, a company in just six weeks installed a function that made personal health records downloadable from a system used by approximately 200,000 doctors. With Challenge.gov, the government gets more people thinking about how to solve tough problems, and it pays only for solutions that work.

Unleashing government’s power as a provider of public goods

Governments have for decades provided a set of public goods such as national defense and free-to-air TV. Open data—the release of massive, publicly-held data sets in machine-readable “liquid” form that can readily be used by developers—is arguably a new type of public good, with the potential to spur innovation among companies and other nongovernment entities. Todd Park, the US chief technology officer, has hosted “Datapaloozas”—events at which innovators and entrepreneurs build cost-saving apps using the more than 350 government data sets from 12 US health agencies, available on Data.gov. Similarly, opening up education data sets in several countries has spurred the creation of start-ups that use the data to improve teacher quality, reduce infrastructure costs, optimize school locations, and in general help educators do more with less.

Refining government’s role as an economic shaper and integrator

Governments have an opportunity—perhaps even a mandate, in certain troubled sectors—to play the part of a “systems integrator” that takes a high-level view on an issue and figures out how all stakeholders should work together. One area in which government can assume an integrator role is in the education-to-employment (E2E) system: our recent research on E2E has shown that 75 million young people are unemployed globally, yet only 43 percent of employers report that they can find enough qualified entry-level candidates. One integrator model is being tried in Brazil’s oil and gas industry.

 

Prominp—a coalition of government agencies, private companies, trade associations, and labor unions—develops a rolling five-year projection of how much manpower is needed in specific geographies and skill areas (for example, shipyard welding or petroleum engineering), then identifies the best training provider to codevelop a curriculum with selected companies to meet those exact needs. By the end of 2012, Prominp had already qualified 90,000 trainees, and its goal is to bridge the projected skill gap of more than 200,000 skilled people by 2014.

The convergence of the public, private, and social sectors means that government leaders will increasingly need to be “tri-sector athletes,” adept in operating at the intersections of these sectors. And they will need to embrace new forms of organization and service delivery that are rooted in partnership.

 

In varying degrees, these four principles are already making a difference in local and national governments worldwide. But government by design isn’t easy. It requires political appetite and willingness to reform. It requires the readiness to try things that haven’t been tried before, and to quickly jettison ineffective ways of working. But the payoff—effective, affordable government that can better fulfill its multifaceted missions—will be more than worth the effort.

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