The problem of nationalizing the Toll Roads – who actually pays for it

The talk about the Government buying up the toll roads to enable users to use the roads for free is a very interesting topic which has many hidden problems. It is true that only the Government will have the necessary resources to buy such an asset but it is also true that such resources must come from somewhere.

The first problem is of asset allocation.

The suggested asset to be purchased is specific with specific contribution to the national economy as well as to a specific section of the population. One important question that should be asked: will it benefit the general population? Definitely NOT. Ask the people from Sabah, Sarawak, Kelantan, Terengganu, and Pahang. Do they get any direct benefit from it?

If you get the Government to allocate a substantial amount of asset for the purchase of the toll roads, some other parts of the national service machinery will have to suffer. Education? Medical? Security? Can we actually afford to give this subsidy when it will impact the general living standards of all Malaysians?

The second problem is maximization.

Free market economy dictates that resources should go to activities that can maximize its potential. Governments do not operate under the same mindset. If Governments have the same thinking, we would not have schools in the rural areas nor will we have security in the vast majority of towns in Malaysia as all will be concentrated in Kuala Lumpur. Let free market operate under the maximization axiom and let Government focuses on providing basis services. This two should not mix.

The final problem is cost.

It is not cheap to buy a major asset such as the toll roads. The Government will have to borrow and this will affect our economy. For the benefit of a few, the whole country will have to take the burden.

THIS IS NOT FAIR!

Economy Efficiency: definitions

Before I start my argument against nationalization, it would be best to look at the definitions of the key points that would be the basis of my argument. Let us start with the term: Economy Efficiency. This is defined as:

In economics, the term economic efficiency refers to the use of resources so as to maximize the production of goods and services. An economic system is said to be more efficient than another (in relative terms) if it can provide more goods and services for society without using more resources. In absolute terms, a situation can be called economically efficient if:

• No one can be made better off without making someone else worse off.
• No additional output can be obtained without increasing the amount of inputs.
• Production proceeds at the lowest possible per-unit cost.

These definitions of efficiency are not exactly equivalent, but they are all encompassed by the idea that a system is efficient if nothing more can be achieved given the resources available.

There are two main strains in economic thought on economic efficiency, which respectively emphasize the distortions created by governments (and reduced by decreasing government involvement) and the distortions created by markets (and reduced by increasing government involvement). These are at times competing, at times complementary – either debating the overall level of government involvement, or the effects of specific government involvement. Broadly speaking, this dialog is referred to as Economic liberalism or neoliberalism, though these terms are also used more narrowly to refer to particular views, especially advocating laissez faire.

Further, there are differences in views on microeconomic versus macroeconomic efficiency, some advocating a greater role for government in one sphere or the other.

Common views

The mainstream view is that market economies are generally believed to be more efficient than other known alternatives and that government involvement is necessary at the macroeconomic level (via fiscal policy and monetary policy) to counteract the economic cycle – following Keynesian economics. At the microeconomic level there is debate about how to maximize efficiency, with some advocating laissez faire, to remove government distortions, while others advocate regulation, to reduce market failures and imperfections, particularly via internalizing externalities.

The first fundamental welfare theorem provides some basis for the belief in efficiency of market economies, as it states that any perfectly competitive market equilibrium is Pareto efficient. Strictly speaking, however, this result is only valid in the absence of market imperfections, which are significant in real markets. Furthermore, Pareto efficiency is a minimal notion of optimality and does not necessarily result in a socially desirable distribution of resources, as it makes no statement about equality or the overall well-being of a society. 

Schools of thought

Advocates of limited government, in the form laissez faire (little or no government role in the economy) follow from the 19th century philosophical tradition classical liberalism, and are particularly associated with the mainstream economic schools of classical economics (through the 1870s) and neoclassical economics (from the 1870s onwards), and with the heterodox Austrian school.

Advocates of an expanded government role follow instead in alternative streams of liberalism; in the Anglosphere (English-speaking countries, notably the United States, United Kingdom, Canada, Australia and New Zealand) this is associated with Institutional economics and, at the macroeconomic level, with Keynesian economics. In Germany the guiding philosophy is Ordoliberalism, in the Freiburg School of economics.

Economics of Nationalisation: Misdirected allocation of national resources

I read with interest a number of comments being made in the newspapers regarding plans to nationalise the PLUS toll road. On a purely economic argument, such plans will do more harm than good.

Advocates for nationalisation usually will argue using the following theme:

1.       Weaknesses of the free market / private sector

a.       Free market price mechanism too volatile/uncertain;

b.      Efficiency gains in a private enterprise can come at expense of customer;

2.       Public ownership to meet economic & social targets

a.       Not for profit businesses – social aims / public interest;

b.      Natural monopoly arguments - in the interests of consumers;

c.       Quality of service: For example if medical service is private, rural households would lose out due to cost and location.

3.       Employment protection

a.       e.g. bank collapses – responding to the problems of systemic risk;

4.       Strategic justifications

a.       e.g. nuclear power, airlines

5.       Public sector can be a vehicle for macro-control

a.       Pay restraint

b.      Employment at different stages of the economic cycle

However, it is also worth mentioning that the world has become a global village with modern infrastructure in place/to be put in place. Markets are getting very efficient and there are ways and means to deliver the necessary services and products based on spending capacity. Due to the phenomenal changes in the market place, the following is the counter-argument.

a.       Cost to government/tax payer (opportunity cost)

b.      Inefficiencies arising from government ownership - inefficiency, weak productivity growth

c.       Overinvestment + Diseconomies of scale (overstaffing)

d.      Government has poor track record with efficient project management or budget control

e.      Public sector has poor record on industrial relations -often at direct cost to the consumer and to small businesses.

f.        Moral hazard if state owned industries cannot go bust in the usual way

g.       Poor record on customer service in some public enterprises

h.      Rate of Return regulation / Price Cap regulation could be used instead of full-blown nationalisation

i.         Promotes unfair playing fields

j.        Grey area on legislation on competition

k.       Political priorities can over-ride commercial issues on capital projects (regulatory capture?)

To argue convincingly, we need to apply some key concepts to the issue. For example:

• ·         Economic efficiency
• ·         Funding versus delivery of key public services
• ·         Public private partnerships
• ·         The role of regulatory agencies acting as surrogate competitor
• ·         State aid

My next posting will be on the argument why market would be the better judge of business instead of the Government.

Sometimes it makes sense to shop for your car insurance

It is now coming up a year since I got my new car. As usual, a new car insurance (or renewal) will have to be purchased before the authority issues a new road tax for the car. But which insurer should one go to?
As expected, the current insurer sent me a reminder. Interestingly, the end-financier for the car also sent me an introduction to another insurer.

In Malaysia, the rate for car insurance is standard. What makes the difference in the service as well as the other add-ons that comes with it. In this case, the difference between the incumbent insurer and the new one is a whopping RM600! This prompted me to do my investigation further.

The first thing that I noticed is that the original insurer did not reduce the sum assured for the car. It assumes the value of the car is the same as what it was a year ago while the second one did its homework and only quoted what they deemed as the current value of the car now. The second thing that I noticed is that the second insurer has a lot of add-ons that does not seem to be cost effective for the buyer. The third and final thing that I noticed is that these two insurers did not offer the expected 10% discount. This could only imply that the purchase still went through an agent.

To give myself some certainty, I approached the insurer that I have been using for the last 10 years for a quote. Surprisingly, I was given a smaller quote due to the actual market value of the car. Moreover, the windscreen cover was also cheaper, also using the actual market price. Finally, an additional discount of 10% was given as I was considered a “walk-in” customer. All-in-all, the insurer that I finally signed up with was RM1,000 cheaper from the first insurer.

Moral of the story: do shop around even for car insurance. It does pay!

The Bond Market League Tabled for 2010

The Bond Market League Tabled for 2010 by Bond Pricing Agency Malaysia.

The Bond Market League Tabled for 2010

Article: The Robust Bond Market - The Star - 01 Jan 2011

This was the article at the start of the new year that published my comments regarding the direction of the bond market for 2011.



Article: The Robust Bond Market - The Star - 01 Jan 2011

Missing dollar riddle: a famous problem that illustrates problems of confusion and misdirection in conversation

The missing dollar riddle is a famous problem that illustrates problems of confusion and misdirection in conversation. It illustrates how misdirection and irrelevant facts and questions can foil a person's clear understanding of a problem.

 

The problem

Three guests check into a hotel room. The clerk says the bill is $30, so each guest pays $10. Later the clerk realizes the bill should only be $25. To rectify this, he gives the bellhop $5 to return to the guests. On the way to the room, the bellhop realizes that he cannot divide the money equally. As the guests didn't know the total of the revised bill, the bellhop decides to just give each guest $1 and keep $2 for himself.

Now that each of the guests has been given $1 back, each has paid $9, bringing the total paid to $27. The bellhop has $2. If the guests originally handed over $30, what happened to the remaining $1?

(I usually use the mamak stall as the reference!)

 

Solution

The initial payment of $30 is accounted for as the clerk takes $25, the bellhop takes $2, and the guests get a $3 refund. It adds up. After the refund has been applied, we only have to account for a payment of $27. Again, the clerk keeps $25 and the bellhop gets $2. This also adds up.

There is no reason to add the $2 and $27 – the $2 is contained within the $27 already. Thus the addition is meaningless. Instead the $2 should be subtracted from the $27 to get the revised bill of $25.
This becomes clearer when the initial and net payments are written as simple equations. The first equation shows what happened to the initial payment of $30:

$30 (initial payment) = $25 (to clerk) + $2 (to bellhop) +$3 (refund)

The second equation shows the net payment after the refund is applied (subtracted from both sides):

$27 (net payment) = $25 (to clerk) + $2 (to bellhop)

Both equations make sense, with equal totals on either side of the equal sign. The correct way to get the bellhop's $2 and the guests $27 on the same side of the equal sign ("The bellhop has $2, and the guests paid $27, how does that add up?") is to subtract, not add:

$27 (final payment) - $2 (to bellhop) = $25 (to clerk)

Misdirection

The "paradox" cleverly sets its room rates so that when we add the two terms $27 and $2, we nearly get $30. If not for this "near-miss", we would be more inclined to ask if those two terms have to add up to $30 when we break down the situation this way (and to realize that they do not).

With different prices, the illusion would vanish. Say the clerk initially accepted $30 but then learned that rooms are only $10 no matter how many people are in them, and sends back a refund of $20 via the bellhop. Again, the bellhop, seeing that $20 doesn't evenly divide, gives each guest $6 (for a total of $18) and keeps the leftover $2 for himself. Therefore each of the three guests paid $4, bringing the total paid to $12; add that to the bellhop's 2 dollars to get a total of $14. So where did the other $16 go?

With this setup it is more clear that the guests' new total amount paid ($12) is only the bellhop's $2 away from the actual room price of $10, not the original room price of $30. The target price to account for is the new $10 bill, not the old $30 one. In the original riddle it is only the "near-miss" with $30 that makes $30 seem like the correct target of the operation.

The riddle involves the phenomenon of 'suspension of disbelief' inherent in storytelling and its power over the human imagination. If one were to make the story a bit more complex and compelling the illusion is almost guaranteed to work in the moment of its telling and can be a good illustration for the explanation of the anomaly, although not a perfect one because there is an explanation. The more points added to the story cause the listener to pause and try to compute what each element may signify.

There are dozens of variations to the riddle.

Cash flow analysis

The following table demonstrates the movement of cash, stating (in successive rows) where cash has moved over time. Each row represents an instance in time. Additional rows could have been added; as one example: just after the bellhop takes the money, but before handing it over to the cashier.

Cash Flow Analysis

	Guest 1	Guest 2	Guest 3	Cashier	Bellhop	Total
Before Check In	$10	$10	$10	$0	$0	$30
After Check In	$0	$0	$0	$30	$0	$30
After the Bellhop	$1	$1	$1	$25	$2	$30

 

Follow-up

A follow-up is often mentioned as a mock resolution to the problem.

A few months later, two of the original three guests check into a hotel room in the same hotel. The clerk says the bill is $20, so each guest pays $10. Later the clerk realizes the bill should only be $15. To rectify this, he gives the bellhop $5 to return to the guests. On the way to the room, the bellhop realizes that he cannot divide the money equally. As the guests didn't know the total of the revised bill, the bellhop decides to just give each guest $1 and keep $3 for himself.

Now that each of the guests has been given $1 back, each has paid $9, bringing the total paid to $18. The bellhop has $3, so $18 + $3 = $21, and the guests originally handed over $20, so that's where the missing dollar from the original problem is!

Moral of this riddle is that you must analyse the words used in any conversation. You cannot take all at face value!

Bond Index Monthly Report for December 2010 by Bond Pricing Agency Malaysia

Bond Index Monthly Report - Extended Dec 2010