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

Blue Ocean Strategy Tools, Frameworks and Methodologies - does it work?

"What blue ocean strategy seeks to do is to make the creation and capturing of blue oceans as systematic and actionable as competing in the red waters of known market space. For although blue ocean strategists have always existed, for the most part their strategies have been largely unconscious. Blue ocean strategy seeks to remedy this by not only decoding the pattern and principles behind the successful creation of blue oceans, but also providing the analytical frameworks and tools to act on this insight."

The above statement is the definition given by the practitioners of BOS. However, I disagree.

You can be guided by your subconscious mind. However, leading a group of people forces one to consciously present the idea for a complete buy-in. Unless you are in the army, a tyrant or a cult leader, your followers would want to know the strategy behind each action which they are asked to performed. 

What is Blue Ocean Strategy?

Ten Key Points:

• BOS is the result of a decade-long study of 150 strategic moves spanning more than 30 industries over 100 years (1880-2000).
• BOS is the simultaneous pursuit of differentiation and low cost.
• The aim of BOS is not to out-perform the competition in the existing industry, but to create new market space or a blue ocean, thereby making the competition irrelevant.
• While innovation has been seen as a random/experimental process where entrepreneurs and spin-offs are the primary drivers – as argued by Schumpeter and his followers – BOS offers systematic and reproducible methodologies and processes in pursuit of blue oceans by both new and existing firms.
• BOS frameworks and tools include: strategy canvas, value curve, four actions framework, six paths, buyer experience cycle, buyer utility map, and blue ocean idea index.
• These frameworks and tools are designed to be visual in order to not only effectively build the collective wisdom of the company but also allow for effective strategy execution through easy communication.
• BOS covers both strategy formulation and strategy execution.
• The three key conceptual building blocks of BOS are: value innovation, tipping point leadership, and fair process.
• While competitive strategy is a structuralist theory of strategy where structure shapes strategy, BOS is a reconstructionist theory of strategy where strategy shapes structure.
• As an integrated approach to strategy at the system level, BOS requires organizations to develop and align the three strategy propositions: value proposition, profit proposition and people proposition.

 

Promoting anything without the necessary information is a recipe for disaster.

Yesterday, I participated in a panel discussion about the Malaysian Bond Market and derivatives organised by ASLI. Below is the agenda of the conference.

The 15th Malaysian Capital Market Summit - ASLI - Agenda

It was interesting to hear the ideas from the other panelists about what can be done to increase the bond and derivatives market further.

For my part, I highlighted the need of getting the information infrastructure in place first before pushing ahead with new derivative products. Promoting such a market without the necessary information is a recipe for disaster.

Below was the scene taken from the stage. This event was held at the Prince Hotel.

Bond Index Report - November 2010 - BPA Malaysia

This is the monthly Malaysian bond market performance report published by Bond Pricing Agency Malaysia.

The level of volatility that was seen in October did not continue into November. Throughout November, the reduced volatility enabled returns of all tenure buckets under review to be in positive territory.  The sukuk universe continues to out perform the conventional bond space although not at the levels as reported last month. This difference in more obvious for the corporate segment compared to the government segment.




Bond Index Report - November 2010 - BPA Malaysia