Introduction
If, as I observed in last week’s column, removing the unrelenting glare of public scrutiny from government spending is a certain recipe for the entrenchment of waste and inefficiency, then one important corollary follows. That is, the need to make public scrutiny as effective as possible. Conscious readers therefore, have a responsibility to make a good faith effort to grasp the “basic tools” that are required to effectively appraise government investment management and decision-making in Guyana. Without this, the country runs a high risk of serious resource mis-allocation.
To appreciate this observation one only has to contemplate the billions of taxpayers’ dollars already committed to disputed investments such as: the Marriott Hotel, Amaila Falls Hydro Project, Cheddi Jagan International Airport renovation, and Hope Canal, not to mention the large subsidies paid to Guysuco and Guyana Power and Light (GPL).
To be sure, it is not my present intention to subject any or all of these “disputed” projects to close analysis. Rather, I shall utilize some of their features to illustrate the “basic tools”, an acquaintance with which, I am arguing, could substantially enrich the public’s ability to have an effective say when government borrowing and/or taxpayers’ money are spent.
In view of this circumstance, I trust that readers would have grasped by now two essential notions. One of these is that, the Government of Guyana like all other governments, has only limited (scarce) resources (or means), with which to satisfy the unlimited wants, desires, and expectations of Guyanese. Because of this basic reality, every purposeful act of government spending expresses a choice on the part of government from among alternate ways of spending. As I had previously explained this notion also holds true for private spending as well, whether by businesses or individuals.
Second, not only does every purposeful act of government spending (investment) express a choice (or preference) on behalf of the government, but in measuring the future flows of benefits and costs attendant to its spending, government needs to declare the objective, goal, or preference it is pursuing. This is needed to establish an objective standard, from which to proceed when identifying and valuing future benefits and costs of its spending. As I explained before this basic requirement does not provide a serious problem for private spending (investment). Why is this so? The answer is businesses, as a rule, identify obtaining the best possible profit as their objective standard.
Two notions
These two notions provide the rationale for applying cost-benefit (or benefit-cost) analysis to private business spending and social cost-benefit (or social benefit-cost) analysis to government spending. As indicated previously, private businesses use prices prevailing in markets for valuing their investment costs and expected future benefits. Unfortunately however, the government of Guyana cannot do this, for at least two reasons.
One is that anticipated benefits from government spending may not be traded in competitive private markets; in which case there are no reliable prices to determine their valuation. Several examples of these items spring to mind: noise abatement, a clean and pleasant environment, peace, empowerment, trust, national pride, cooperation, and so on. And, the other reason is that, from the perspective of the economy as a whole, certain major inputs to government investment have different valuations than those obtaining in private markets. I had previously illustrated this point with the treatment of labour and taxes (subsidies) in private cost-benefit analysis, as against social cost-benefit analysis.
Core observations
At this stage readers should be in a position to recognise that, at the core of this simple introduction to cost-benefit analysis are three ideas, namely 1) the importance of systematic thinking about government decision-making, in the context of scarce resources and unlimited ends 2) the intrinsic differences between the measurement of private costs/benefits and social costs/benefits, and 3) the crucial importance of capturing and measuring on a common scale all probable costs and expected benefits flowing from investment spending, whether private or government.
The flip-side of these requirements is that, 1) in the absence of systematic thinking about decision making 2) in the presence of confusing private and social cost-benefit (benefit-cost) and 3) in the face of deliberate or unintended omission of some flows of costs and benefits to an investment project, the likelihood is that mis-allocation of the country’s economic resources would not only occur, but rise exponentially.
Conclusion
The above brings us directly to an important consideration, which I shall deliberate on more fully in next week’s column. One is that normally the costs of investment are incurred upfront, while expected flows of benefits occur sometime into the future. Thus the Marriott Hotel is being constructed today and only after it is finished, will it be opened for business, and from then onwards most of its expected benefits will flow to the government (including a sale to private investors).
This pattern of investment behaviour means that 1) there is an inherent uncertainty to the outcome of all investment projects. Basically, this occurs because they are completed with the expectation of future returns. The future however, is never certain and without risk. This pattern also necessarily means that 2) when appraising an investment project over time, one has to be able reconcile the fact that flows of benefits in the future are worth less than similar benefits obtained today.
Next week I shall address two issues: 1) uncertainty and risk attached to government investment (projects) since as the saying goes: “a bird in the hand is worth two in the bush” 2) the impact of time on measuring present and future flows of costs and benefits, since as the saying goes: “time is money”.
