Economic Policy Review ISSN 1313 - 0544

The Erroneous Calculations of the Government

Author: Svetla Kostadinova / 28.05.2009
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A number of public projects, government programs and initiatives in our country significantly exceed the initial cost estimates. One should wonder why it happens and so often indeed?  There are several explanations.

The complexity and inability to forecast what is happening around us could be the normal explanation, but not for the large number of government initiatives, which regularly require additional financing. According to a study made by IME for the period 2000 - 2007 the total amount of additionally approved budget credits is a bit over 6 billion levs - part of these money is for additional financing of activities in progress, which require more money than planned.

Other explanation could be the fact that projects with reduced costs make the expected benefits to look greater and thus to prefer projects which under normal circumstances would loose in competition with others (NPP Belene, Highway Trakya, the purchase of the corvettes).

The logical reason for the erroneous calculations of the costs on a public project, financed with the money of the taxpayers is the highly optimistic forecast of the people who are preparing the project. In certain cases they assume that there are not going to be any delays, the situation on the international markets would not change significantly, there would not be changes of the regulations, the project management would rum smoothly, there would not be any elections and new priorities, etc. It is assumed that the ideal situation for implementing the project exists and for that reason the costs would be of certain size, which at a later date proves to be significantly under estimated (The Danube Bridge 2, for example). To put it briefly, the government analysts are frankly naïve and/or incompetent.

There is a political explanation for intentional under estimation of the costs of public investments - implementing projects which would insure that they would remain in power (BSR, Kremikovtzi, golf courses, parks, water fountains).

Whatever the explanation for the underestimation of the costs for the public projects, the fact remains that some of them costs significantly more than forecasted, and put us in a schema where once in we could not get out and at the end of the day abnormally large amounts of money are spend by the administration without strict bookkeeping and control for projects from which only a small group of people are benefiting.

And there are still defenders of public investments and projects which would say that there are initiatives which are worth financing. What does past experience show?

 

The state and the infrastructural projects

In an analysis made by Danish scientists of 258 public transport projects for over $90 billion, it is said that "the study reached to the striking and statistically significant conclusion that the costs forecasts which are used when making a decision for public transportation projects are systematically misleading. The underestimation could not be explained with errors, but the most accurate explanation is a lie .... The consequences are clear. The law makers, the administration, the investors, the media and the people, which expect honest and objective calculations, should not believe the forecasts about the costs and the analysis of those who represent and encourage the projects".

Actually, there is over 80% probability that the large public transportation projects are regularly underestimated by, on the average, 28%. In addition the authors had reviewed some one hundred (other than transportation) public projects for construction of electric power stations, reservoirs, water and sewerage, petroleum and natural gas production, etc., and it comes out that the underestimation of the costs was at least as much if not greater compared to the transport infrastructure projects.

But we could claim that even without reviewing the information about Bulgaria, not that such information is available.

 

The state and the aid for the business

The direct support of the state for the companies, particularly now under the conditions of a crisis, is the most frequently used argument for intervention. However, think about the effects, if the administration which could not calculate accurately, is not flexible, could not be easily held responsible and is not created to be an entrepreneur starts increasingly and purposefully implementing programs to aid the business.

The examples in Bulgaria of sectors, which are systematically aided by the state in different forms must serve as a lesson and cause that this should not be done on a national level.  The tobacco producers are the classic with millions of levs in subsidies, price controls in the past, protection of the market from international competition etc. The same applies for al agricultural producers, the Bulgarian railways and others alike.

 

The state and the bureaucracy

Everybody who supports the government intervention with the excuse of the crisis must understand the following:

  1. There would be more bureaucracy.
  2. There would be greater probability to start thinking about raising taxes, the tax base or introduction of new types of taxes.
  3. There would be new regulations, rules, restrictions, requirements, forms, reposting, etc.
  4. There would be a very small group of profitable companies, which would get a given amount of money ... and you most likely would not be among them ...

When you draw the line it becomes clear, that to insist for such development is not logical and any representative of the business, who continues to insist for such support is extremely short-sighted.

The continuously erroneous calculations of the government prove that the government intervention in the economic life must be restricted. It has not got the capacity, nor the knowledge, nor must be directly included in making business. Its role is to provide the conditions where the business could compete among them.

And if someone accuses us that we are against the state he would be mistaken, since it had and would have an important role.

That we are against is the concentration of compulsory force, the use of lies, fraud, incompetent analysis and erroneous forecasts in the management and spending of our money.

* The article was first published in "Dnevnik" newspaper on April 21st, 2009.