Getting a Broad View of Constructing the Built Environment

A Satellite Account for Built Environment Industries

 

 

How the built environment is created and maintained through project initiation, design, fabrication and construction to operation, repair and maintenance is an ongoing process. The network of firms involved includes construction contractors and subcontractors, property management and real estate services, manufacturers of fittings, finishings, plant and equipment, suppliers of building materials, and professional services. All these firms belong to industries that are part of the process of producing and maintaining the built environment. 

 

National agencies collect data and present it in tables following the format given in the System of National Accounts (SNA) published by the UN. The national accounts present highly aggregated estimates of expenditure, output and income based on the detailed data collected on the economic activities of households, firms, non-profits and government. That data is collected using the methods, definitions and categories provided in the SNA, ISIC and other publications. Firms and other organizations are assigned ISIC codes on the basis of common characteristics in products, services, production processes and logistics, and collects companies and other organizations into groups with similar characteristics.

 

Industries as defined by SIC classifications cannot capture all their associated economic activities, and when economic activities involve a range of different industries the contribution of a sector is not obvious, despite its importance. Because the ISIC system puts strict boundaries around an industry, what is included or left out of the definition of an industry determines its extent. However, inclusions and exclusions vary greatly between industries and there are many anomalies. Examples are:

·      Health insurance is included in Insurance not in health expenditure

·      Retail sales by chemists is included in Pharmaceutical expenditure as well as manufacturing and R&D

·      Research is classified to industries not by purpose, and often done by institutions

·      Automobile manufacture includes design, Construction does not 

 

The solution to the issues raised by narrow SIC industry definitions is a satellite account that reclassifies expenditures from different industry groupings into a single sector. Satellite accounts have been produced for many sectors that are made up of several industries, such as health, the digital economy, the environment, R&D, the space industry, and infrastructure. They have also been produced for non-profit institutions, volunteering, education and training, and unpaid household activities. They are used to provide more detail on sectors that are not visible in current statistics, following guidelines provided by the SNA for their preparation. The most widely found satellite account is for tourism, so far produced at various times for over 50 countries. This brings together the contributions of industries like travel, accommodation, hospitality, tour operators and entertainment to estimate their total output and employment.

 

The primary purpose of satellite accounts is to improve policy-making by providing better, more granular data, and demand for satellite accounts has increased as their usefulness has been shown. A 2019 survey by the UN found 80 countries had produced 241 satellite accounts covering over 20 different topics, with 148 of those done since 2000, mainly on health, tourism and the environment. The number produced by country varied from one to 15, the median number of satellite accounts in production was 2 and the average was 4. As a result, there are many guidelines for producing a satellite account available, usually produced through international collaboration, and the methodology has been adapted to a wide variety of sectors. 

 

 

Figure 1. Number of satellite accounts by sector

Source: Conference of European Statisticians, 2019: 11. In-depth review of satellite accounting, Paris: UNECE.

 

 

Preparation of a satellite account requires significant research and development. Different data sources have to be harmonized and measurement challenges met. The OECD published A System of Health Accounts in 2000 (updated 2011) after 15 years of development of the concepts and methods needed for a health satellite account, and the US Bureau of Economic Analysis (BEA) worked on their R&D satellite account for over a decade. However, the research is being done and more satellite accounts are being produced, such as the 2020 estimates for The Small Business Economy, and the Space Economy. In 2021 the OECD published the first Working Paper on a Transport satellite account.

 

A built environment sector satellite account would restrict its scope to relevant activities, and would therefore remain within the production, consumption and asset boundaries of the SNA framework, a type of satellite account known as a thematic account. Some examples of thematic accounts are agriculture, tourism, culture, and sport and recreation. Developing a sector based thematic account involves regrouping, re-arranging and re-packaging existing national accounts data by creating definitions of the economic activities, products, suppliers and users involved.[i] In some cases the national accounts data is supplemented by other sources, such as surveys of household activities or expenditure, that collect data on the use of products and supply of services not otherwise available. 

 

Despite issues of data quality and availability, bringing together the range of industries that contribute to the production, maintenance and management of cities, infrastructure and buildings in a satellite account would improve our understanding of both the sector and the wider economy. For example, urban development and city policies involve significant infrastructure spending, which is often their main focus. However, it is the associated induced industrial, commercial and residential development around the new infrastructure that drives longer-term growth. A satellite account captures that activity. 

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[i] In selecting a number of industries of special interest ‘It is common practice to refer to such groupings of industries as “sectors” even though they do not constitute institutional sectors as the term is used in the SNA. The SNA does not try to provide specific and precise criteria for the definition of what identifies a key sector or activity….. in some important cases, such as tourism and environmental protection activities, the process of identification of characteristic and connected products is complex because not all the relevant activities and products appear in the central framework classifications.’ OECD, 2000. A System of Health Accounts, OECD Publishing, Paris. 

     Characteristic products are those that are typical of the field, for construction characteristic products are buildings and structures, project management and other professional services. Connected goods and services includes expenditure on products that are not typical and are classified to other product categories.  In construction quarrying, manufactured products and transportation of materials and components may be considered connected.

Construction as a technological system of production: A life cycle approach

 Innovation and industry evolution

The stages in the life cycle of an industry typically start with first applications of a new invention by technology leaders, followed by development and refinement of products and services, before becoming a mature industry with well-understood products and practices. Mature industries are past the early growth phase, their culture of technology has stabilised and the shape of industrial structure and processes has emerged. In many cases these industries are oligopolistic, with a few specialised firms dominating market niches in the supply chain. Consolidation leads to concentration. 

The new technology that starts a cycle of industry development can be a general purpose technology (GPT) that becomes the basis of a new system of industrial production. The key feature of a GPT is ‘pervasiveness’, how it is used by other sectors in the economy and leads to ‘complementary investments and technical change in the user sections’ (Helpman and Trajtenberg 1998: 86).  The examples originally used by David (1990), and broadly followed since, were steam, electricity and information technology.  Lipsey, Carlaw and Bekar  (2005) include two organizational GPTs in their list of two dozen since 9000BCE: mass production and the factory system; and lean production and the Toyota system. It is widely believed AI is a new GPT.

Thinking about the construction industry and the production of the built environment as an evolving ‘system of production’ provides a new perspective on the context and direction of innovation and its evolution since the first industrial revolution. Hughes’ (1987) life cycle model had seven phases: invention, development, innovation, transfer, growth, competition, and consolidation. Within those seven phases of the life-cycle are two interior cycles that divide an industry’s evolution into two stages: Cycle 1 is invention, development, innovation, and transfer, Cycle 2 is growth, competition, and consolidation.

Cycle 2 focuses on innovation in production and organization, when mature technological systems emerge and construction materials like cement, concrete and glass, and components like building management systems, interior walls, plumbing fixtures, lifts and elevators have become oligopolistic industries in a mature supply chain. A mature industry produces a specific culture of technology, embodied in the firms and social institutions of the system of production, and creates the tendency for an industry to develop along defined technological trajectories unless or until deflected or disrupted by a powerful external force.

A diverse cluster of industries with deep layers of specialised firms in a dense network of producers, suppliers and materials is a ‘technological system’ (Hughes 1987: 47). Electricity grids and railways have networks, telecommunications and air traffic use interconnected nodes, postal systems use existing networks, some are geographically large, some are local, some are narrow, some broad.  

Construction innovation has been narrowly focused because construction is a mature technological system, but this is changing. With a technological trajectory based on AI and associated emerging production technologies, the commercial contracting part of the industry will adopt these technologies as they become viable. The organization and structure of the industry will then change in response to changes in relative costs as the economies of scale of digitized production technologies are realized.

AI as a new GPT may be the start of a new life cycle in building and construction technology, and may be as disruptive as steam power was in the nineteenth century to the master builders and craftsmen of the day. The organization of construction is currently centred on project managers and incremental innovation, but a transformed industry would be focused on integrators who combine site preparation with production and assembly of digitally designed and fabricated components and modules.

 

 

David, P. A. 1990, The Dynamo and the Computer: An Historical Perspective on the Modern Productivity Paradox‟, American Economic Review, Vol. 80, pp. 355 - 361.

Helpman. E. and Trajtenberg, J. 1998. Diffusion of General Purpose Technologies, in Helpman, E. (ed.), General Purpose Technologies and Economic Growth, Cambridge: MIT Press. 85-119.

Hughes, T. P. 1987. The evolution of large technological systems, in The Social Construction of Technological Systems: New Directions in the Sociology and History of Technology, W. E. Bijker, T. P. Hughes, and T. J. Pinch (eds.), Cambridge, Mass.: MIT Press.

Hughes, T. P. 1989. American Genesis: A Century of Invention and Technological Enthusiasm 1870-1970, Chicago: University of Chicago Press. 

Lipsey, R. G., Carlaw, K. I. and Bekar, C. T. 2005. Economic Transformations: General Purpose Technologies and Long-term Economic Growth, Oxford: Oxford University Press.