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“The economics of the PM’s new office” (ed. in FT 22/8/2020)

22/08/2020

The economics of the PM’s new office (FT 22/8/2020)

 In a rare show of unity, Leaders of all of Fiji’s Opposition Parties (Sitiveni Rabuka, Professor Biman Prasad,  Mahendra Chaudhry and Savenaca Narube) have strongly condemned the Fiji Government’s decision to go ahead with building a new Office Complex for the Prime Minister, costing supposedly $7 million (but probably $20 million by the time it is completed given the usual cost over-runs).

These political leaders have pointed to all the other far more urgent needs around the country such as housing for the poor, badly resourced health facilities, bad state of rural roads, massive unemployment and poverty, made worse by the COVID-19 crisis.

Of course, the cheer leaders on the government side can ridicule these criticisms as being “politically motivated”, a label usually derogatorily applied to everyone else but themselves.

But the public can see that the same criticisms are being made by prominent social leaders who are part of the Fiji CSO Alliance for COVID-19 Humanitarian Response, including Nalini Singh (Fiji Women’s Rights Movement), Shamima Ali (Fiji Women’s Crisis Centre), Sashi Kiran (FRIEND) and Chantelle Khan (SEEP Director). None of these totally principled social leaders, all women by the way, could be accused of trying to score political points.

Neither would you accuse Fiji Times journalist John Kamea of trying to score a political point in his well-balanced article “To build or not to” (Fiji Times 16 August 2020), drawing the same conclusions.

So with both the Prime Minister (Bainimarama) and his Minister for Economy (Khaiyum) digging their heels in and continuing to justify their original decision, five important questions can be asked by the taxpayers (and voters) of Fiji.

First, what would a private company do in the same situation?

Second, what does economic theory advise should be done?

Third, are the Minister for Economy and the Prime Minister following proper economic theory and if not, have they also failed to apply sensible economics to the far larger projects they have squandered billions of dollars on over the last eight years?

Fourth, are the real FFP economists (if any) not giving good professional advice or are they keeping their traps shut in case they get the boot from Cabinet?

And fifth, what does the Government’s insistence to go ahead with this relatively useless project say about their choice between the people’s welfare and their own selfish egotistical goals?

But first, recollect how the Bainimarama Government justified going ahead with the new office complex.

Government’s “logic” (or lack of it)

The eloquent Minister for Economy explained that despite the COVID crisis and collapse of government revenue, Government would go ahead with “shovel-ready” construction projects including the Prime Minister’s Office Complex, which had been “parked for a number of years [with] all the ground work done”.

The erudite Minister for Economy explained to Parliament, in case they did not know, that when a $7 million building was constructed: “This will literally, on the ground, create hundreds of jobs- people digging the foundation, laying the cement, plastering, tiling and painting.”

The Prime Minister, himself the beneficiary of the complex, verified to Parliament that not only would the construction of his new Office create jobs especially for poor people who deserved to be working but he himself “would not live forever and his new office complex would also benefit his successors”.

Those with political ambition must be hoping that the Prime Minister’s successors do not have to wait for the death of their predecessor before they can occupy the Prime Minister’s Office. Although of course, he might declare himself PM for Life, as  a few other individuals have done around the world.

But, more to the point, neither the Prime Minister nor his Minister for Economy bothered to explain why the same employment benefits of construction could not be derived from using the same taxpayers’ money to build more hospitals, or housing for the poor, or more homes for the elderly or rural roads, as the social leaders have been pleading for.

The Fiji Times reader might better understand boring secondary school economics I present down below, if they looked at the problem through the eyes of private businessmen, like a Tappoo or Punja.

What private business decision?

Imagine that a Ms Punja and a Ms Tappoo were the real owners of a company called Fiji Incorporated instead of taxpayers and voters (being gender neutral about entrepreneurs).

One day, they took a well-deserved five year overseas holiday to  a remote island without any Internet, leaving all the business decisions to the Chief Executive Officer (CEO) as Prime Minister and the Chief Operating Officer (COO) as the Minister for Economy.

How unrealistic and ridiculous you might well say. No business owner would ever do that?

But that is effectively what voters do: they put their pieces of paper in a ballot box, a government is appointed through fair means or foul, the voters go away for another five years getting their lollies (thousand dollar checks) now and then, and return to put more pieces of paper in the ballot box.

During their absence, the CEO and the COO used borrowed money to make massive capital investments year after year, continued making losses (deficits) year after year, getting and further into debt (Public Debt), but did not allow the company accountants (Auditor General’s Office) to inform Punja and Tappoo what was happening to their company.

Then came the massive and unexpected COVID-19 disaster which reduces company revenues by more than 50% although the decline had begun the year before (and also hidden from the owners).

While all other private companies (even with a name like Fiji Airways) immediately made equivalent cuts to their expenditure (making some staff redundant, reducing working hours and pay), the CEO and the COO of Fiji Incorporated continue their heavy expenditures.

They continued to splurge $300 million on the Fiji Roads Authority, $40 million grants to a virtually bankrupt enterprise like FSC and even provided a Sovereign Guarantees of $450 million to the doomed national airline (of $450 million) which will probably never be repaid.

The CEO and COO decide to borrow even more money from the retirement savings of the owners Tappoo and Punja, but also from foreign banks, event though they had no plan (and probably no idea) how the debt would be repaid by Tappoo or Punja or their children or their grand children.

By this time, one of the workers (possibly a grandchild who will have to pay for the debts) and who can see the writing on the wall, becomes a whistle blower and sends a carrier pigeon to Punja and Tappoo with the additional shocking news that during this incredible financial crisis, the CEO and the COO had decided to build a plush new office complex for themselves, at a great cost of $7 million (which we all know will escalate to $20 million, given government’s past record on all construction projects).

Punja and Tappoo rush back to Suva and belatedly demand: is this expenditure on new offices going to result in any extra profit for us? Or will it make our losses bigger and our debt even bigger?

The CEO and COO honestly (for once) reply: sorry, bigger losses and bigger debt.

The Fiji Times readers can guess what Punja and Tappoo will say and do, as might Fiji’s voters and taxpayers at the next election. But five years too late.

What does basic economics say

Most secondary school economics students know the most important lesson in economics: consumers (buy consumer goods) and producers (buy factors of production) to maximize benefit (utility or satisfaction for consumers, and profit for producers).

A beautiful technique (called marginalist theory) is that they just compare marginal or additional costs (in this case $7 million of taxpayers’ money) with marginal  or extra benefits that they expect to enjoy as a result (satisfaction or profits).

Take this theory a bit higher, and you get “Cost:Benefit” analysis where all available projects are compared and the ones with the best return are picked until your available investment funds are exhausted.

If funds are to be borrowed then the “rate of return” on the project MUST be higher than the cost of borrowing.

That is exactly what a government is supposed to do on behalf of taxpayers.

Given that  the current PM’s Offices have been refurbished over the years and have adequately served Prime Ministers for fifty years, how much extra productivity or output will the current PM Bainimarama deliver with brand new offices costing $7 million (or probably $20 million by the time they are completed)?

Most people would reply say “zilch”. Might even be less, if he goes to sleep more frequently in his more comfortable surroundings, even forgoing his frequent trips abroad.

But the public can already see some of the alternative uses which the $7 million could have been spent on in this last Budget but have been callously and rejected by the Bainimarama Government .

Very specifically in the last Budget Debate, the NFP moved a motion for an extra $3  million for desperately needed kidney dialysis machines.  This was defeated by the Bainimarama Government including its Minister of Health who apparently did not support the motion. Oh dear.

In this same Budget Debate, a call for the poorest of children to be given free lunches was rejected by the Minister for Education who declared that “without any actual study report… we do not have funding for that”. Oh dear.

[She no doubt would like to forget that a few years ago, the Bainimarama Government did not bother to do a study to justify why millions of Fiji’s taxpayers’ money should be spent on buying milk or imported Weetbix to be handed out to Fiji school children, with much being wasted.]

So this Bainimarama Government has already “revealed” (economics calls this “revealed preference” of consumers) during the last budget debate that building a new office with little additional value for the Prime Minister and his Cabinet was more important than savings lives of poor people through additional kidney dialysis machines or feeding hungry school children.

While this $7 million dollar new office for the Prime Minister may be a small project for Fiji’s Budget, but the lack of proper cost:benefit analysis was also at the heart of billions of dollars of capital expenditure that this Bainimarama Government has engaged in over the last fourteen years.

How else could Fiji’s Public Debt be increased from $2 billion to $8 billion today, without a solid economy being formed, and this was even before the COVID-19 struck.

I raised all these issues in a Fiji Times article of 18 November 2015 “Baap ke paisa nahin: a PhD from FRA” in which I asked the reader to 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”.

Given that the PWD used to do similar jobs for less than $80 million dollars a year, I asked whether these businessmen would they would have allocated more than $500 millions annually to a Fiji Roads Authority (more than $2 billion over a five year period) without solid cost:benefit analysis to justify borrowing all that money.

Of course, the answer in most cases would have been an emphatic “NO”.

Just as Punja and Tappoo would have thrown out the current proposal for a new Office Complex for the Prime Minister and probably thrown out the CEO and the COO as well. Just as voters at the next election might well think of doing.

There is no doubt whatsoever that the Prime Minister and Minister of Economy are not following sensible economic theory.

Where are the FFP economists?

The taxpayers of Fiji who must bear the full cost of the Public Debt, ought to be asking: are there any real economists in the Fiji First Government?

I know of at least two, with the names of Reddy and Usamate.

But did these two economists or indeed, any of the other sensible Members of Parliament in the Bainimarama Government (there are a few) offer any alternative advice to the Prime Minister or to the Minister for Economy?

If such advice was given, why was it not listened to?

A former speechwriter for the Bainimarama Government (Graham Davis) is once more active on his blog (Grubsheet Feejee) and giving some interesting information on who is really calling ALL the shots in the Bainimarama Government.

But I suggest that Fiji’s taxpayers should be seriously thinking about my fifth question at the beginning of this article.

What does the Bainimarama Government’s insistence on spending $7 million ($20 million?) on a new Office Complex for the Prime Minister rather than more socially valuable projects the public have called for, say about their choice between the people’s welfare and their own selfish egotistical goals?

 

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