As the polling day looms, life becomes absolutely hectic.
This is Tony Pua prepping the crowd on Thursday’s night in Kuching, for the mother of all rallies on Friday. Party workers are calling it the Superfriday.
Meanwhile, somewhere else, behind the scene…
Ubah!
Here, Member of Parliament Tony Pua was speaking to Penang Chief Minister Lim Guan Eng before the latter took the stage to address the crowd in Kuching. The CM is a crowd-puller while the MP is one of the minds behind the DAP machinery here.
How big was the crowd?
The opposition is definitely on the offensive here in Sarawak.
MP Tony Pua made a statement that expropriating the LDP highway is cheaper than maintaining status quo.[1] This is not necessarily true. As typical in the realm of economics, the answer is it depends.
What exactly does it depend on?
The biggest assumption lies in the discount rate. The discount rate is required to incorporate the time value of money in any calculation. In a calculation that spans for a very long time, the slightest change in the discount rate could imply a very different solution to a particular fork. In our case, the time length is 20 years because the contract between the government and the operator of LDP only ends in 2028.
Before we inspect Mr. Pua’s comparison which leads him to call for expropriation, a brief introduction to theory of time value of money is most appropriate.
Time value of money says that rational individuals prefer to have money now rather than later. An ice-cream, for instance, is worth more today than tomorrow with all else being equal. The discount rate acts, as the name suggests, to discount the value of the ice-cream as we progress along a certain timeline.
Next, two crucial variables will need clarification.
The first is the cost of expropriation which is RM1.327 billion. This is the cost the government will have to pay if it ever plans to exercise its rights in eminent domain. The cost in my calculation is assumed to be paid in one lump sum as soon as possible.
The second cost is the cost of compensation which the cost at 0.00% discount rate is RM1.929 billion. The compensation is presumably, as it should, paid in the year that the compensation is required. After all, the compensation is really a subsidy of RM0.50 the government gives to the operator in order for the operator to reduce the toll from RM2.10 to RM1.60. While I have not read the agreement relating to the Highway, it seems that the arrangement is more or less a pay-as-you-go.
For expropriation to be desirable, the expropriation cost must be cheaper than the compensation cost.
With that out of our way, let us get down to business.
If the discount rate is 0.00%, Mr. Pua would be right. At 0.00% discount rate, the cost of expropriation does not exceed the cost of compensation. Under this scenario, it makes sense to expropriate the highway from an economic point of view.
As the rate goes higher, however, the narrative veers to the direction of the other side as the differential between the two costs shrinks; the time value of money reduces the cost of compensation. This is so because all future compensations are redefined in present terms.
At approximately 3.89%, the difference becomes zero. This is where the philosophically agnostics celebrate their existence on this fair planet of ours.
Anything above 3.89%, with all else being equal, empirically leads to the logical conclusion to oppose expropriation. This is where libertarians hold wild party with contrabands filling the cocktail table.
For Mr. Pua to be right, he needs to pray that the government’s discount rate is less than 3.89%.
The following table illustrates how various discount rate affects the compensation rate and the case for expropriation.
Finally, caveat.
Mr. Pua places total compensation as RM2.2 billion with 0.00% as the discount rate while I estimate it to be only RM2.0 billion at the same rate. Why is the difference?
First of all, Pua includes a 2008 sunk cost of RM0.6 billion. Sunk cost however is irrelevant in this comparison. We are interested at projecting the future and our decisions cannot change the past, unless we decide to cook the books. To include the extra RM0.6 billion is to commit logical fallacy. A fair comparison must align the stream of payments together and only then an apple to apple comparison is possible. Regardless, Mr. Pua has been careful with that and has added the necessary qualification with respect to the RM0.6 billion. Therefore, this is hardly an issue.
Secondly, Mr. Pua mentioned that the toll is scheduled to increase to RM3.10 from RM2.10 in 2016. Yet, he did not include that in his calculation. In effort to paint a more accurate picture, I incorporate that increase into the compensation calculation while holding the fraction of subsidy (approximately 23.81% with a RM0.50 subsidy over total toll of RM2.10) constant from 2009 to 2028.
The effect of the exclusion and the inclusion of the two factors lead to the difference of RM0.2 billion.
There are several other assumptions made but I think those caveats are insignificant unless the wonks come out of their caves with their arrows and spears. In any case, the calculation is available here for public consumption.
Finally, the consideration for the time value of money is not the only indicator we should concern ourselves with if we want to expropriate the LDP. Even if the time value of money proves that it is cheaper to expropriate it, several questions remain. One of them is: can the government operate the highway more cheaply than the current operator?
It is possible that even if the expropriation cost is lower than status quo, the operation of the highway by the government may actually impose greater overall cost on the government where everybody, including those who do not use the highway. All taxpayers of which a majority do not use the highway would have to support a small group of taxpayers who use the highway.
That is not fair.
[1] — I have blogged earlier that after reviewing the agreement of several toll concessions, including Lebuhraya Damansara-Puchong (LDP), Cheras Grand Saga Highway, KESAS and Butterworth Outer Ring Road (BORR), the Government is able to ‘expropriate’ these highways by giving between 3 to 6 months’ notice at ‘reasonable’ prices. [Cheaper to expropriate LDP. Philosophy Politics Economics. January 7 2009]
A version of this article was first published in The Malaysian Insider on January 9 2009.
Ahli Parlimen Tony Pua berjaya menanyakan soalan yang dekat dengan hati seorang libertarian beraliran minarkisme:
Ekonomi Malaysia sekarang amat bergantung kepada penggunaan kerajaan ataupun “public sector spending”, berbanding dengan negara-negara di Asia. Mengikut perangkaan daripada Merrill Lynch, sumbangan penggunaan keraajaan di Malaysia adalah sebanyak 24 peratus, berbanding dengan Taiwan 15%, Singapura 14%, Thailand 12% dan Hong Kong 10%. Pergantungan ekonomi Malaysia kepada sumbangan kerajaan adalah tidak sihat dan apakah langkah-langkah yang akan diambil oleh kerajaan supaya sumbangan penggunaan yang lain dapat ditingkatkan? [My First Supplementary Question! Philosophy Politics Economics. May 13 2008]
Beliau berjanji untuk menerangkan lebih lanjut tentang jawapan yang diterima beliau dari Timbalan Menteri Kewangan esok setelah Hansard dikeluarkan oleh pihak Parlimen.
p/s — Tony Pua berkongsi dengan para pembaca tentang jawapan yang diberi oleh Timbalan Menteri:
Apabila kita melihat dari segi GNP, kita melihat dari 2 sudut. Satu dari sudut output ataupun pengeluaran yang ini sumbangan dari sektor-sektor industri dan sektor-sekto industri sebagaimana kita maklum sektor perkhidmatan telah meningkat tinggi. Ini bermakna faktor key yang utama dalam pembangunan negara kita. Dari segi rancangan Malaysia, sektor perkhidmatan sekarang yang menymbang lebih kurang 53% kepada KDNK telah meningkat 59% pada tahun 2020 itu target negara kita.
Kemudian kita melihat dari sudut GNP dari sudut perbelanjaan. Perbelanjaan seperti mana yang saya nyatakan tadi, perbelanjaan swasta dari segi konsumer begitu tinggi iaitu pembelian dan pelaburan. Buat masa ini kita masih bergantung kepada kerajaan kerana kita sebuah negara ekonomi yang sedang membangun jadi kita perlu input-input kerajaan sebagaimana yang saya nyatakan tadi dalam RMK ke-9, kita belanja lebih kurang dalam RM40 bilion pada tahun 2007 dan seterusnya dalam koridor raya nanti kita akan laksanakan perbelanjaan lagi. Ini kita nampak perbelanjaan oleh pihak swasta lebih banyak dan tinggi berbanding dengan pihak kerajaan.
Di samping itu, kos ke 3 iaitu dari segi ekspot dan impot negara kita. Pada tahun ini, net ekspot negara kita hanya 0.7% dan ini dijangka akan level pada tahun hadapan kerana sepertimana kita tahu terjadinya re-section di dunia dan ia jadi leveling. [My First Supplementary Question! Philosophy Politics Economics. May 13 2008]
Yang pastinya, soalan tentang apa yang kerajaan akan lakukan untuk mengurangkan perbelanjaan awam tidak terjawab.
Saya tertarik dengan ayat berikut: “Buat masa ini kita masih bergantung kepada kerajaan kerana kita sebuah negara ekonomi yang sedang membangun jadi kita perlu input-input kerajaan…”
Saya tidak bersetuju dengan pendapat itu tetapi saya tidak berhasrat untuk membincangkan mengapa saya berpendapat sedemikian kerana saya kesuntukan masa untuk membincangkan perkara yang berat.
Walau bagaimanapun, nampaknya, pemikiran Keynesianisme masih lagi kuat di dalam kerajaan kita. Saya telah menyangkakan bahawa para Keynesian sedang ditendang keluar dari kerajaan tetapi malangnya, kesimpulan itu dibuat secara terburu-buru. Pembatalan perbelanjaan awam itu mungkin hanya satu permainan politik dan bukannya pengeseran dasar yang jujur.
Are you voting for another May 13? Vote for Chew “May 13” Mei Fun!
If you are voting for a better future, vote for Tony Pua.
Remember, we must learn from history but history should not fully dictate the future. In front of us a path of boundless possibilities. Tony Pua is able to walk together with us to a better future. Mrs. Chew only brings us to a miserable past.
Indeed, for Islamic state, vote for MCA! MCA does not have the courage to speak up against UMNO. If you are a fan of Islamic state, vote for Chew Mei Fun!
This blog endorses Tony Pua for Petaling Jaya Utara Parliamentary seat whole-heartedly (although at a forum, he side-stepped my question on power of the state. And skillfully at that!)
In fact, tomorrow, both Nik Nazmi and Tony Pua, two candidates which this blog explicitly endorses, will be giving speeches together tomorrow at Kelana Jaya. In fact, they are speaking at a function together, tonight. Well, what can I say?
This blog endorses the working relationship Nik Nazmi and Tony Pua maintain with each other!
For tomorrow, both will appear at:
Venue: C-G-05, Dataran Glomac, Jalan SS6/5B, Kelana Jaya (Map)
Time: 21:30
Date: March 2, Sunday
For more information, visit Nik Nazmi’s blog.
If you are wondering why a libertarian like me actively supports Nik Nazmi and Tony Pua, whom are probably social democrats, despite some policy disagreement, come to the event and talk to me!
Remember, vote for change. Vote for Nik Nazmi for Seri Setia state seat! Vote for Tony Pua for Petaling Jaya Utara Parliamentary seat!