Introduction
In detailing the government’s capital expenditure budget of $43 billion in 2008 the Budget Speech gave a troubling indication of how vast sums are expended year after year with scarce regard for basic principles of economic and financial investment decisions. Capital expenditure is distinguished from recurrent expenditure which includes the normal operating annual expenses such as wages and salaries and maintenance of roads, bridges and buildings while capital expenditure would include the cost of constructing those roads, bridges and buildings. By principle, convention and practice, capital expenditure is expenditure the benefit of which accrues to one or more future periods while recurrent or operating expenditure is consumed in and benefits one period only.
Of the budgeted expenditure of $119 billion dollars announced by the Minister of Finance in his 2008 Budget Speech, capital expenditure accounts for $40.9 billion, roughly US$205 million dollars. This compares with a budget of $37 billion in 2007 which was overspent by some $6 billion, in commenting on which the Minister indicated that this was a 21% increase in the public sector investment programme.
Individuals, companies and governments invest in capital expenditure for many reasons including enhancing their earning capacity by expanding the income potential or reducing expenditure.
Capital expenditure and growth
The table below shows the capital expenditure and growth in the economy for the past five years. During that period, the government spent close to G$160 billion or US$800M in capital expenditure while the economy has on a simple average grown by 1.54% per annum – a poor return on investment by any measure. Why with all the investment expenditure by government (and we must not ignore recurrent expenses like wages and salaries which by putting money into consumers’ hands should also stimulate economic growth) has growth been so anaemic? The explanation is not straightforward but with a rational approach by the decision-makers in selecting investments there would certainly be a better chance of higher economic growth.
Source: Budget Speeches
The drivers of government capital expenditure may be obvious in certain cases such as the expenditure on sea-defences or to mitigate the consequences of natural disaster. In other cases the decision may be made entirely on social considerations such as whether an area should have a supply of electricity or water. These still, however, leave a considerable amount of capital expenditure which do not fall in such categories and should therefore be subject to more careful analysis. And even with respect to social expenditure not generally considered susceptible to the economist’s or accountant’s return on investment criteria, and using electricity to a hinterland community as an example, the issue is not whether the community should have electricity but what is best of a range of options to provide that service. The decision-maker would have to consider whether it is better to build a generating plant and transmission and distribution system requiring on-going fuel, maintenance and technical support which would be difficult to deliver to those communities or to encourage the use of solar power by fiscal initiatives and financial support to householders to enable them to make their own arrangements?
A dollar is a dollar
Of recent investments, only the Berbice Bridge and to a lesser extent the Guysuco Skeldon Modernisation Project were subject to any independent analysis. We all recall the process that preceded the final decision on the Berbice Bridge, the studies and analyses that were conducted and the debate generated for and against the investment. It may be argued that this was because that is largely privately funded which is not entirely correct since the government had to invest heavily in related infrastructure necessary to support the Bridge investment.
Now if such a process was necessary for the Bridge how come it does not apply to fully publicly-funded expenditure or the decision, literally out of the blue, to spend over one hundred million dollars mainly to build two airstrips on the islands of Essequibo and Wakenaam? A dollar is a dollar and public investment in the final analysis comes from the people of the country. Taxpayers’ money is no less important than shareholders’ money and therefore warrants the same level of care in how it is spent.
I do not recall any Minister of Finance of the PPP-C Finance Ministers, including the incumbent ever giving an indication of any criteria for investment decisions undertaken let alone any rigorous analysis of specific investment. Indeed so often the nation is treated to expenditure decisions being taken literally on the road. This is dangerously improper from a governance perspective and irresponsible and unprofessional from a capital investment decision perspective. Under the Constitution only Parliament has the authority to approve expenditure and a responsible Finance Minister would surely want to justify any request he takes to Parliament for money for capital expenditure. Just think of the crisis we would be in if after the unbudgeted expenditure of substantial sums by the executive, the Parliament voted against any request for supplementary funds.
Cost-added rather than value-added expenditure
The decision to host the World Cup brought with it a commitment to provide hotel rooms which in one particular case were partly financed by a loan to the investor, the payback of which is now being financed by using the very rooms which may not have been chosen had we not made an irrational decision in the first place. The 2008 Budget includes $300 million for CARIFESTA-related expenditure, a decision that was largely made without any regard for cost implications. Given the tendency and history of overspending there is no guarantee that we will not repeat our questionable experience of instead of having value-added expenditure having cost-added expenditure.
The other side of VAT
VAT has been more than a fortuitous break for the government in 2007, not only allowing it to spend far more than Parliament had approved in the 2007 Budget but to absorb significant declines in the performance of public enterprises. From a surplus of $3.4 billion in 2006, those enterprises declined to a deficit of $415 million, mainly from Guysuco which had a decline of $2.7 billion and GPL, $802 million. Interestingly while both corporations had the same chairman, he was removed from the corporation which performed relatively better and from all appearances for reasons unrelated to financial performance.
In fact those very corporations received substantial capital injections in 2007 during which $3 billion dollars was put into GPL for improvement in the unserved and underserved areas while Guysuco received $863 million for its Skeldon Power Plant and $2.9 billion to accelerate completion of the factory, preparations of land to facilitate mechanical harvesting and infrastructure to support and promote private cane farming.
A new Justice Improvement Programme involving US$10.2 million began with the setting up of a Justice Sector Reform Steering Committee and the setting up of a Secretariat. But what about the truly fundamental changes that require not large sums but decisions such as the setting up of the Law Reform Commission to update the laws last done in 1973 or the introduction of new Rules of Court which have been in circulation for years now. New Rules were introduced for the Commercial Court with considerable success, and revised Rules for the other courts have been in circulation for several years. These new Rules embody what is called Case Management and introduce court-driven processes replacing the current system which in practice is largely directed by the lawyers, their time-wasting practices and endless demands for adjournments. As this column has pointed out before Guyana is the only Caricom country not to have adopted the n
ew Rules.
Next week we look at some of the other capital expenditure in 2007 and those proposed for 2008.