Ho Say Peng
'Can I be privatized?'
Camp P is likely to be consist of free marketeers or capitalists, who argue that street lights are most efficiently managed by private companies. Although Camp P is capitalistic, it does not imply that Camp G is socialistic; but Camp G is no capitalist either. Camp G is not against privatization per se. The likelihood is that Camp G sees itself as being pragmatic. They cite the difficult technicalities of privately-managed street lights: How would people pay? If person A does not pay, does it mean person B, C, D, etc are deprived of street lights? They are unable to answer these questions; so they conclude that only government can provide street lights.
To the layperson with no specialized knowledge in the business of street lights, it is understandable that to conceive the idea of how a private company is to manage street lights is a daunting, and perhaps impossible, task. Yet no such specialized knowledge is necessary to see that it can be done. What is needed is a little imagination.
Let me offer a little of my imagination. A street lamp is a raised source of light on the edge of a road. Why should there be a private company just to exclusively manage street lights? Does it not stand to reason that if there is a private company managing the road, it will provide street lights as well?
On this point, Camp G would argue that the same problem concerning private street lights applies to private roads as well: namely, how would people pay? And if person A does not pay, does it mean person B, C, D, etc are deprived of roads?
What Camp G is thinking of is collective payment. They think that collective payment, through government taxation, is the only way to upkeep a road. Is individual payment impossible? No, it is not.
There is such a thing called toll road. Payments can now be made electronically and not manually. Further arguments against private roads such as overcharging and monopolies can be easily countered. (I could, for example, cite the electronics industry, which is completely privatized. But do you see the prices of electronics rising or declining every year? And isn’t the electronics industry the most competitive of all industries?)
The point is that private roads are possible. In Sweden and California, there exists roads which are privately managed (although they are not privately owned; the companies are operating the roads under governmental contract). In 2001, the Swedish government conducted an evaluation and found out that “private ownership can reduce the cost of maintaining roads to less than half the cost of government provided roads and significantly increase the kilometers which receive regular maintenance.” The Californian model of high volume roads and the Swedish model of low volume roads are microcosms of the vast improvement that can be achieved with the private ownership of roads.
There are two reasons why private roads will be better: (1) Private companies have an incentive–the profit motive–to benefit their consumers by being more efficient; whereas the government, which derives its funds from taxation, does not have an incentive to do so, or perhaps does not have as much incentive as the private companies do; (2) government has no accurate means to do the necessary economic calculation to determine the cost-benefit ratio of such projects, unlike private companies which can do so through the profit-and-loss mechanism. The same principle applies to everything privately- and publicly-run.
I hope I have provoked Camp G into re-thinking some of their assumptions. To paraphrase Bastiat, do not merely look at “that which is seen” and try to imagine “that which is not seen.” And you will come to realize that what you are missing out are the possibilities of better roads–with street lights of course.
I would like to point out: The Swedish government is subsidizing the road maintenance costs. So the privately-run roads are not as optimally efficient as they can be. Consumers (in their capacity as taxpayers) are paying more than they realize.
What the Swedish government should do is to remove the subsidies and eventually (hopefully) sell the roads to the private road associations. The government then can either distribute the money to their taxpayers (the money rightfully belongs to them anyway) or pay off its national debt. Either action will provide a much-needed stimulus for Sweden’s devastated economy (and this stimulus does not require getting into more debt).
“The government then can either distribute the money to their taxpayers (the money rightfully belongs to them anyway) or pay off its national debt. Either action will provide a much-needed stimulus for Sweden’s devastated economy (and this stimulus does not require getting into more debt).”
Erm, selling an asset and taking on more debt liability have the same effect on the balance sheet.
Why would selling an asset and taking on more debt have same effect? Selling an asset makes the balance sheet smaller, while taking on debt makes the balance sheet larger.
Selling your computer for $1000 and spending that $1000 has the same effect as spending $1000 on your credit card.
Selling your computer and using that money to pay back ah long sounds like a good idea if your computer isn’t going to make you more than what it is worth if you sell it now.
“Selling your computer for $1000 and spending that $1000 has the same effect as spending $1000 on your credit card.”
Assume your entire balance sheet consist of total assets 10k, 5k equity and 5k debt.
Selling your computer and spending the 1k brings your total assets down to 9k and brings your equity level to 4k.
Spending 1k using a credit card brings your debt to 6k and your equity to 4k.
What HSP was suggesting was to sell off the assets and repay their debt, which means selling a computer to repay 1k loan, effectively 9k assets, 5k equity, 4k debt. It is the obvious choice for improving your leverage. It works the same whether it is a government or company.
It improves your leverage but the balance stays the same. Also, what if you need that computer to run your business? In that case, if it generates more revenue than the interest payments, then it would make sense to keep the computer and use the credit card.
That’s why factories don’t sell off their equipment to just maintain cash.
In the position of a government, it’s only form of “revenue” is tax. It doesn’t generate revenue with the roads but only incur more costs maintaining them. The privatization of toll roads is also a way to let the free markets run the roads efficiently where toll businesses bid for leasing the roads and then set up toll booths, something similar to ERP in Singapore. If you need to use the road, you pay for it. And they use the revenue to maintain the roads. If the charges for using the road goes to ridiculous heights, then people will stop using vehicles, start cycling, taking public transport or even walking. In a free market, you decide on what is best for yourself both economically and physically.
Using a credit card doesn’t improve your leverage. Leverage is debt/equity. Having a higher leverage is not an improvement.
I do trust all of the concepts you’ve presented for your post. They’re really convincing and will definitely work. Still, the posts are very short for beginners. May you please prolong them a bit from next time? Thanks for the post.