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“Baap ke paisa nahin hai”: a PhD from FRA (edited version in Fiji Times, 18 Nov. 2015)

18/11/2015

“Baap ke paisa nahin hai”: a PhD from FRA (edited version in Fiji Times, 18 Nov. 2015)

Qualification

This article is not directed at Fiji Roads Authority (FRA) or any of the private companies contracting with the FRA, who I assume are law abiding companies.

This article is directed at those in the Bainimarama Government who have made the decisions to allocate the massive amounts to FRA for the last four years, totaling more than $2,000 million.

This article is directed at the FFP parliamentarians some of whom were jeering at Opposition parliamentarians who were legitimately calling for greater accountability and transparency, during the budget session on 16 November 2015.

This article is also directed at Fiji voters and taxpayers who in the 2014 elections, authorized the Fiji First Party Government to tax, to borrow, and to spend these revenues today for public welfare.

“Baap ke paisa nahin hai”

This down-to-earth Indian saying (“it is not his father’s money”), is often used when a public servant is seen to be wasting taxpayers money.

The equivalent technical term in economics is the “principal/agent problem” or what I prefer, the “owner/agent problem”.

Owners of assets entrust “agents” or “employees” to manage the assets for the benefit of the owners, and this usually happens.

But sometimes, the agents or employees begin to manage the assets in their own personal interest, by increasing their own incomes or carelessly wasting resources, because “it is not their  father’s property”.

Often they also fiddle the accounts to make sure that the owner does not pick up the wastage.

This can happen with large corporations with thousands of shareholders, none of whom are big enough to control the organization properly.

Governments and voters/taxpayers (owners)

Government are elected by voters (taxpayers)to tax the country, to borrow on behalf of the taxpayers and future generations, and to spend the money, as approved by Parliament.

The Auditor General’s Office then audits the Government expenditure and reports to Parliament and taxpayers, helped by Public Accounts Committee.

From 2006 to 2014, the Bainimarama Government was not accountable to taxpayers, and even refused to release the Auditor General’s Reports until after the 2014 elections and are still refusing to release important information to the Public Accounts Committee.

The annual budget

The annual budget is a zero sum game: the more is given to FRA, the less is available for health or education.

Theoretically, the “optimal” or best mix is where the last tax dollar on different items, gives the taxpayers equal value for money.

Few would be concerned at the headline in the Fiji Times (14 Nov. 2015) “Health busts budget” especially when they read that a mere $6 million was overspent, and that on medical personnel and extra opening hours of health centres.

But how would you justify the Bainimarama Government’s massive allocations to the FRA of around $600 millions per year for the last four years?

I emphasize that there is no question that if an essential bridge is totally unsafe and a risk to lives and vital communication, it must be replaced.

But choices can be made between a road here and a road there, between tar-sealing road and leaving it graveled, between urban development and rural development, between agriculture and tourism, between hospitals and converting a two line road between Nadi and Denerau into a four lane highway.

There are choices between doing a project this year and the same project five years down the line.

Economics, “Public Finance” and Cost-Benefit Analysis helps answer such tough question

Cost Benefit Analysis

Such analysis uses various criteria to prioritize projects- like “rates of return” or Benefit: Cost Ratio, or Net Present Value.

But there can be fundamental disagreements on methodology between the more commercially oriented organizations (like the World Bank and Asian Development Bank) and organizations like United Nations.

WB/ADB generally focus more  on economic benefits, while UN tries to include all social benefits.

But to what extent should social benefits be valued by “shadow prices”?

What if the project is not justifiable on economic grounds alone?

What discount rate should one use, given that the higher the discount rate (preferred by WB/ADB) the lower is the value given to future benefits (UN tends to use lower discount rates).

What if the rate of return on a project is lower than the interest rates on government borrowing?

Should the capital expenditure be spread out over twenty years, knowing that high expenditure all at the beginning will seriously reduce the rate of return to the project?

The PhD research questions

Once upon a time, Fiji Government had a Public Works Department (PWD) which was not particularly efficient, partly because it was terribly under-funded, perhaps given around $60 million per year.

But the PWD management, technical and professional staff were all Fiji citizens, and paid salaries according to the Fiji Civil Service structure, probably the equivalent of about $150,000 annually, today.

Perhaps the PWD could have been corporatized, and allowed to pay market rates for the best engineers, architects and managers on some kind of supplemented scale, something like FEA.

They would still have been thoroughly under the control of the Ministry of Public Works, and all expenditures would have been audited by the Auditor General’s Office.

But four years ago, the unelected Bainimarama Government  decided to form the Fiji Roads Authority, and gave them one line allocations in the annual budget of around $600 million per year.

FRA then sub-contracted to other companies, from NZ, Malaysia, and China.

They in turn also sub-contracted to other companies who did the actual road construction.

At each layer, consultancy fees have been charged, and company profits made and expatriated.

A PhD on the FRA would ask many questions:

What were the rates of return on the alternative projects?

What were the costs per kilo meter of all the roads being built?

Were all the projects justified?

What should have been the order of the projects?

Should Government have been making such massive expenditures all at the beginning or should they not be spreading it over a longer period which local contractors could cope with?

Were expatriates staff hired at excessive salaries to do work that locals could be doing?

Could a better funded PWD have built the same quality infrastructure at lower costs?

Can the total FRA expenditure generate enough economic benefits annually, given the principal and interest payments required?

How much in extra benefits annually are required over the next thirty years to give just a 6% return on the outlay of more than $2 billion on FRA?

Alternatively, what are the principal and interest repayments required on the increase in public debt of more than $2,000 million, at 6% per year?

Such research questions would require complex analysis.

But there is a much simpler approach that the intelligent Fiji public to think about.

Using your fathers’ money

Imagine that Fiji is owned and managed by the families of Punjas, FMF, Lees, Tappoos, Mark Halabe, Vinod Patel, Yee Wah Sing, RC Manubhai, YP Reddy, Jacks Handicraft, and our many other proven entrepreneurs.

Imagine that they are charged with looking after both the economic and social welfare of Fiji people.

Would they ever invest $600 million of their father’s money annually for four years on FRA?

Would they hire NZ companies which take out large consultancy fees amounting to more than 10% of the total expenditure?

Would they hire NZ staff at huge expatriate salaries when equivalent local staff or from India and Sri Lanka would do the same quality work at half the cost?

Would they be happy if the contractors expenditures could not be audited?

You know the answer.

Why does the Bainimarama Government spend so much on FRA, which we all know the private sector would never do?

For the same reason that World Bank and ADB prefer to see economic growth driven by private sector investment, not public sector investment decided by government ministers who spend other people’s money, not their own.

The government/voter problem

The principal/agent problem is a horror story when it comes to voters and governments.

In well-governed countries, parties are voted in for sound economic and social policies, and they are returned to power as long as they deliver on jobs, incomes, education, health, etc.

But governments can also be voted in because of excessive handouts like free education and medicine or even cash grants.

Many voters might even vote for someone because he promises them emotional security (“we are all Fijians now”) or assurance that there will be no more coups, if he formed government.

How the particular government manages the country’s taxation, expenditure, and public debt may not come into the voters’ minds AT ALL.

By the time that voters realize their mistake, it may be too late for them and their children, and the Prime Minister and Finance Minister may have moved on, without ever being accountable to taxpayers.

Remember the $200 million lost by the SVT Government on the National Bank of Fiji disaster, or the $300 hundred million write down of FNPF assets at Natadola by the Bainimarama Government?

When large proportions of national public savings are wasted, long term rates of growth of GDP will remain constrained.

Yet the Auditor General’s 2014 Report was concerned that the Health Budget was “busted” by a mere $6 million.

If just 10% of the FRA budget could have been sensibly diverted to other essentials, like health, we are talking about an additional $60 million available annually, or $240 million over four years, which would work miracles for hospitals, doctors, nurses, medical equipment and medicines, with  hundreds of lives saved.

FFP parliamentarians ought to be reminded that Opposition calls for greater efficiency and caution in the use of tax payers funds, is no laughing and jeering matter.

It is a matter of life and death for poor people.

 

 

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