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“The good, the bad, the ugly and the deceptive: the 2015 Budget” (edited version in Fiji Times, 29 Nov. 2014)

29/11/2014

The 2015 Budget: the Good, the Bad, the Ugly, and the Deceptive
Professor Wadan Narsey (edited version appeared in Fiji Times, 29 Nov. 2014)

This is the second year in eight years, that the annual budget illustrates the power of democracy, with a government reminding voters that it is keeping the good promises made by the ruling party, in the previous elections campaign.

For seven years the Bainimarama Government ruled and presented budgets with impunity as there were no voters to be accountable to.

But in last year’s budget, in anticipation of the September 2014 elections, the Bainimarama Government came up with a sure-fire vote getter which was good policy as well, by extending  the fee-free education policies of previous governments right up to the end of secondary school, and then further to tertiary education, with students accepted at tertiary institutions, being guaranteed scholarships or loans.

This year’s budget is indeed giving many “goodies” promised to voters in the last elections.

The 2015 Budget also continues what I consider a “bad” questionable policy of excessive allocation for infrastructure in a short time period which may result in wastage.

There are also “ugly” aspects to this budget which reeks of concessions to “special interests”, repeating the mistakes of previous governments.

As with last year’s budget, there continues the deceptive presentation of key statistics such as the “low Net Deficit or Public Debt as a proportion of GDP”, which the ordinary public cannot be expected to understand, but economists do.

This 2015 Budget can appropriately be describes as the “Good, the Bad, the Ugly and the Deceptive”.

The Good

There are many positives in this budget, which the speech by the Minister of Finance amply elaborated.

The fee-free education has been extended downwards to pre-schools and early childhood, as I have frequently advocated before (as for example here (https://narseyonfiji.wordpress.com/2012/03/19/free-pre-schools-for-the-poor-the-fiji-times-30-july-2010/

As I have shown previously, it is the poor parents who cannot afford the current high fees for pre-schools (which are higher than for primary tuition), and it is mostly the poorest children who benefit academically from attending preschools because their home learning environments are not as good as those of well-off parents.

The amounts allocated, however, are far too little (a mere $5 million), given that currently roughly half of Fiji’s five year olds do not attend pre-schools and there would need to be around 700 additional new class-rooms built and teachers hired.

Moreover, the current pre-school teachers’ salaries are far too low.  This is in fact at odds with the recent speech by the Minister for Education who apparently advocates that the lowest classes must be taught by the more experienced teachers, who presumably must cost more.  But the increased allocations to pre-school is a move in the right direction.

More important in this budget are the large allocations made to the Ministry of Health whose hospitals and health centers are extremely run-down and suffering from scarcities in skilled staff: doctors, nurse, and all kinds of technologists needed to provide quality health services.

Then there are the other positives, which while difficult to implement, will be of great assistance to poor families with income below specified thresholds ($20,000 to $30,000 per year):  such as free prescribed medicines, basic supply of water and electricity, first home grants, grants to develop Fijian lands, etc.

The Bad

There is no doubt that Fiji has been in urgent need of more investments in roads infrastructure.

But the question is, how much more should Fiji invest annually in roads, with what timing over the next ten years, and what organization should implement these investments?

The Bainimarama Government over the last two years has allocated a massive one billion dollars to the Fiji Roads Authority, or roughly 500 million annually, when PWD in the pre-2012 days used to get only about $80 million.

This year, the 2015 Budget has allocated even more, or about $635 million to the FRA, which the media has largely ignored.

There is a “Parkinson’s Law of Triviality” which argues that ordinary people will spend far more time examining trivial sums of money (such as a Prime Minister’s salary or perks) than some large sum which they cannot comprehend because it is so large.

But people in Fiji would understand the argument that one could get every five year old in Fiji into preschool, by reallocating $30 million from FRA’s $630 million, and they would not even notice that it was gone?

This massive allocation to this newly established  public enterprise raises many questions on public policy that ought to be studied closely by the Auditor General’s Office, and indeed by economists or PhD students who want a good case study with which to examine the pros and cons of corporatiszation and privatization.

Questions that the Auditor General could ask the PS Finance, PS Planning and PS Infrastructure (and try your luck with the Minister of Finance) are

1.  Were there proper cost:benefit analyses done for each of the major projects (excluding the bridges over Nabukulau creek and Vatuwaqa creek) being implemented by the FRA?

2. What were the estimate rates of return on each of these projects.

3. Might the rates of return be higher if the investment projects in new roads were spread out over a longer time frame

4. What are the salary structures of the FRA and private companies hired to do all the work which PWD used to do before and were the expatriates hired by open advertisements to which locals had access.

5. What are the profit components of all the projects and how much are being repatriated

6. What are the costs per kilometer of the different projects

7. to explain whether the FRA has a program of localisation in place, to replace the highly paid expatriates currently employed.

8. Who exactly have been auditing all the public enterprises which have recently been corporatized, made virtually autonomous, and out of reach of the normal public service supervision.

 Students of public finance might like to examine what happened when the SVT Minister of Finance doubled the government allocation for the Fiji Visitors Bureau in 1999.  Of course the tourism arrivals did not double or even increase significantly (go and look at the data), because sales agents in our source markets could not suddenly switch their clients from Bali etc to Fiji.

Far more sensible would have been for Fiji to increase the FVB budget gradually so that they could productively and more efficiently use the increases.

Similarly, cost:benefit economists and financial analysts who know how rates of return on investments are significantly lowered if too much is spent in the earlier years when the benefits are going to come way in the future, would know that it would have been far more sensible for the Fiji Roads Authority to be granted gradual increases with which to prioritize the more profitable investments first (of course the currently closed bridges would be a priority) and low return investments later down the line.

 The Ugly

For decades, Ministers of Finance have been approached by vested business interests to give them some subsidy or preference or duty concession or other. Often they have given in, possibly encouraged by “incentives” from the business interest.

This Bainimarama Government is no exception, and interestingly, is repeating the same mistake made by the SDL Government, with respect to exercise books, just as it did with milk products.

During the SDL era, in one of the budgets presented by the then Minister of Finance Ratu Jone Kubuabola, the duty on imported exercise books was reduced in order to make them cheaper for students.  This was a correct policy, in keeping with WTO principle of reducing protectionism globally.

https://narseyonfiji.wordpress.com/2012/03/28/the-costs-and-hidden-hand-outs-of-protectionism-the-fiji-times-14-august-2002/

But the firm which produced (or rather assembled all the imported inputs into) the exercise books mounted a massive publicity campaign against the reduction, the SDL Government reversed its policy, and the benefiting company took out advertisements thanking God that “common sense” (or some other universal lubricant) had prevailed .

In the 2015 Budget, the Bainimarama Government has also increased duty on imported exercise books to 32% or $1 whichever is the higher.

When a commercial retailer pointed out the ridiculousness of this measure in significantly increasing the prices that will be paid by school children, the Minister of Finance claimed that the measure was designed “to protect local manufacturers”.

The Minister of Finance, who is a lawyer, ought to take advice from the economists at his Ministry of Planning as to what constitutes “local manufacturing” and the concept of “effective rate of protection” which looks at the local value added content of a product.

Exercise books, with the paper, ink, staples, machines all imported, have very little local value added except the minimal labour starting and stopping the machines, and the fingers counting the money.  Some think that there might even be “negative value added” if all analysis is done in international market prices.

In the case of exercise books, I have no doubt that Ministry of Planning economists will find that the real “effective rate of protection” will not be 32% but in the hundreds if not the thousands, and can not be justified by any sensible economists.  But of course, lawyers who become Ministers of Finance can be driven by other considerations and will not be keen to listen to the economists in their ministries.

Nevertheless, the Opposition MPs can ask in parliament if any of the benefiting “manufacturers” of exercise books are active supporters of the Fiji First Party in anyway whatsoever.

Similar questions can be asked, as did the Leader of the National Federation Party (Professor Biman Prasad) about tariff changes which have significantly raised milk prices for consumers, while benefiting Rewa Dairy Company owned by CJ Patel, also owner of the pro-Government Fiji  Sun newspaper.

Banning foreigners from buying freehold land

One strange policy in the 2015 Budget has been the ban against foreigners buying freehold residential land in Fiji.

This has serious implications for many schemes which have been geared towards selling residential retirement villas to foreigners and also likely to discourage, at some cost to Fiji, foreigners who wish to retire in Fiji.

Most people who are afraid of the cost of annual leases being arbitrarily changed in the future, prefer freehold land.

Even indigenous Fijians, who theoretically have access to communally owned land, prefer to buy freehold land which they can develop with no fear of outside interference.

It is well known that foreigners retiring in Fiji not only bring in large amounts of their capital, but also employ large numbers of local people as cooks, cleaners, security guards, and drivers, etc.

Nearly always, the wages and salaries they pay are way above the minimum wages set by Wages Councils or the National Minimum Wage, and often the other benefits they offer are extremely valuable to the employees.

Why on earth would the Bainimarama Government try to “fix something which ain’t broke”?

It is also interesting that the development of non-residential land requires the permission of the Minister of Finance.  This unnecessarily reinforces the discretionary powers of the Minister and is surely open to abuse.

Good governance requires that the once the laws and rules are set, they must be applied to all, without the need for any discretionary approvals from any civil servant or minister.

The deceptions

 Can you imagine a son who has taken over his father’s loss-making business boasting “Dad, I am going to make a good profit this year: I am planning to sell the business”.  This is effectively what the Minister of Finance is doing.

 For the second year, the Bainimarama Government presents artificially low ratios for the Net Deficit as a proportion of GDP (2.5%) and a low ratio of Public Debt:GDP ratio of around 48% by including sales of public assets  as part of normal revenue.

Deception Number 1 is claiming as “Investing receipts” and part of normal revenue, some $510 million to be raised by selling public assets.

This then enables the Minister of Finance to claim Deception No, 2:  a low Net Deficit of $214 million, or a low 2.5% of GDP.

But take away the sale of public assets, and you suddenly have a Net Deficit of $724 million or an extremely record high 8.7% of GDP.

Readers might like to contemplate that this Government could equally plan to sell another $300 million of public assets and boast that the government was in “surplus”.

Similarly, if the Government were not to sell public assets but borrow additional money in order to spend what they are planning to spend, then the Public Debt would rise from the $4.1 billion the Minister of Finance is claiming to $4.6 billion which would also be a record high of 53.3% of GDP, and not the 48% they are claiming (Deception No.3).

Essentially, the normal revenues of Government cannot support the massive increases in expenditure that they have planned, without the sale of public assets.

All the pretty graphs in the supplements are equally deceptive and worthless.

Investment as Percentage of GDP

The Bainimarama Government is proclaiming that Investment as a percentage of GDP is now well over 25%  which on the surface can be a good indicator for any economy.

BUT the bulk of this investment is still public sector investment (especially in roads and water), whose actual rate of return is unknown, but I suggest is probably far less that the Rate of Return on the public assets that the Government is planning to sell.

Private sector investment is still far less than the public investment, and it is the former which will contribute to healthy economic growth, because private investors will not invest unless they are going to make money.

Ministers of Finance when they invest tax payers money, never ever exercise the due diligence that they would if they were investing “their father’s money”, and as Indo-Fijans like to point out when governments waste tax-payers’ money  (“baap ke paisa nahin hai”).

While there are many private sector investments taking place now, tax payers can hope that this becomes generalized enough to ensure that the Private Investment as a percentage of GDP gets about 20% or so.   That remains to be seen.

Sale of Good Public Assets

 Privatization of inefficient public assets can be justified if they are making unacceptable losses which are costing tax-payers large amounts in socially unjustifiable subsidies and government has no need to be involved in those activities when the private can do a better job.

But the Bainimarama Government is planning on selling off proportions of public assets which are profit making such as in FEA ($250 million), Airports Fiji Limited ($125 million), and Fiji Ports Corporation Limited ($80 million).

Will the public sector investments government is planning, generate the same amount of returns as these assets which are being sold to finance the public sector investment?

Some of these public enterprises (such as ports and airports) are also nationally strategic assets and monopolies which should not be in private hands.

Privatizing a government monopoly and effectively creating a private monopoly without setting up a regulatory environment (which will itself be costly) is a recipe for disaster, especially when the PE has already been corporatized, is operating relatively efficiently, and is totally within the control of government.

 A private unregulated monopoly is likely to be far more exploitative of consumers than a regulated public monopoly.

This topic is large enough to need a separate article.

Also needing a separate article by analytical political scientists (if there are any alive in Fiji) is the strange phenomenon of Fiji’s democracy, that a political party which gets elected by promising free education, medicines, water, electricity etc, can use their alleged “popular mandate from people” to sell off crucial public assets, or defend their immunity provisions, or the constitution they have imposed on the country, and many other contestable policies, which were never election issues.

 

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