Lift the veil of corporate secrecy on public projects and save the taxpayer


The $1.4 billion cost blowout reported by the NBN Co last week has focused attention once again on the seemingly regular occurrence of large government infrastructure projects being delivered late and over budget.

Whether we look at the much touted Public Private Partnerships (PPP) frameworks championed by state and federal governments of all persuasions, or in the NBN Co. case, a government monopoly engaging with the private sector, the cost to the taxpayer invariably appears to be greater than first estimated.

Why might that be? Is it that we are systematically poor (in one direction) at estimating future costs? Or do political realities and parameters change? That there is a lot of risk and uncertainty in the world around us is certainly true, but why must it always be the case that the taxpayer is left with the “bill”?

Surely there must be something wrong with our government’s existing tendering and contracting processes that leads to this repeated occurrence. And there is. An alarmingly lack of both good governance and contract design, principles that we expect of the corporate sector, are only cursorily considered in the public sector.

Let’s deconstruct the problem a bit further. The most efficacious delivery of large infrastructure (and other government projects) will almost always involve some private sector engagement. The challenge is to garner that engagement on terms that create societal value.

The tendering guidelines that most public sector entities adopt recognise the value in harnessing competition. Recourse to elementary microeconomics suggests that competition amongst potential bidders “for the market” (that is, to win the right to have some monopoly power) will result in the same efficiency outcomes as competition “in the market”. The problem, in almost all real world contexts however, is what economists refer to as an “asymmetry of information”.  If one side of the market – in this case the bidders (or worse yet, only some bidders, so we don’t even get the real positive effects of competition) – have information about the likely outcomes (costs/benefits etc) and the other side (the government) doesn’t, then we would expect the informed party to appropriate more of the rents.

Which is exactly what we observe when cost blowouts occur.

So, how can we resolve this inherent and systemic problem? Firstly, competition for the market (that is the terms on which government tenders are constructed) needs to be much more transparent.

Potential bidders need to be able to have equal access to information and the “commercial in confidence” veil needs to be tempered for the public good. Simply having many bidders involved in a tender, if they are not privy to the requisite commercial information, will not yield competitive outcomes.

Too often, government tenders satisfy a very rudimentary definition of competition, without significant thought in the design of the tender to ensure real competition takes place. Efficient, well designed government tenders are about good governance.

Secondly, and more importantly, we need to be much better at contract design where there is a large deal of uncertainty about future outcomes. The way much of the government contracting currently takes place, despite the political rhetoric to the contrary, is that the residual or contingent risk always sits with the state.

This need not necessarily be the case. Getting the right balance of incentives that mitigate any cost over-runs, and ensure a viable commercial return to the private sector requires much more detailed tender and contract design than currently takes place. Payments for outcomes that capture risk and uncertainty are a staple of financial markets and business to business interactions.

Yet, government to business interactions seem to be devoid of the same detailed considerations. Not surprising, then, that time and time again, our political masters tell us that they have negotiated a great deal with the private sector, only to find that the realised costs are often way more!

The risky uncertain world in which governments attempt to deliver infrastructure and other social projects with private sector involvement necessitates a complete revamp of our tendering and contracting methods.

We need to design systems that harness competition by mitigating the risks of asymmetries of information, and contracts that allow for risk and uncertainty to be shared.

Unfortunately, to date, political expediency has trumped sound economic analysis and design. There is unlikely to be too much consternation from the private sector as a result of the latest cost blowout in a government tendering process, but an informed citizenry ought to be demanding much better from its political masters.

Because if we don’t we will continue to be left with the bill. And it will always be more than we were initially told it would be.

Now it is Co2Land org to have its say, if we look overseas we see that government (say UK) encourages business development and innovation is rewarded. So is the problem a fetish over branding?

markets can be reduced to form duopolies

The Reserve Bank measures against some hard facts and this set the mind thinking: Is it the producer, the retailer or the customers fault markets can be reduced to form duopolies?

Looking at recent RBA farm to middleman to consumer reports, over the last nine years conclude: Retail goods prices rose by only about 1% a year. Retailers managed rising costs of approximately 3% a year and did not suffer in their net profit margins?

How did the retailers do it?

  • The volume of sales increased and they used less workers by investing in labour-saving equipment.
  • They increasingly substitute cheaper imported goods for locally made goods.
  • They concentrate on being a service industry and tend to stock more profitable lines.
  • They must service their shareholders before concern for producers livelihoods.

Now, it seems it is not the retailers’ fault, it is the power of market forces – customers want to pay less not more!

Now, looking a little closer at behaviours of the market to give customers more for less a clearer picture evolves:

  • Starting with the manufactured cost of the goods. It is about half of the retail prices we pay. Simple maths in the breakdown of costs suggests the profit to the retailers is between 7 to 10 percent. So rapid turnover reins as king of retail and only the major players have the means to reach the consumer with the volumes, and those needing higher returns to survive just fade away. Easy to understand when explained like that is it not?
  • Now consider the cost of production and prices of locally manufactured goods rose strongly over the period, and the producer has the problem of competing against cheaper imports. The producers have now become ‘price takers’, and have very little say in what they get for their efforts. The luxury of rapid turnover margins is not the option for producers that retailers enjoy.

So who is at fault that two retailers dominate our retail space, and producers get screwed?

The opinion of CO2Land org is the reference below is strongly suggestive, but in the interest of balance you should –
Read more:–could-that-really-be-true-20120710-21tue.html#ixzz20Hg5YoDj


Measures – world economics from west to east.

The good news is that some major emerging countries are taking measures to stimulate growth. Innovation? But,

From the West:

As we know from many sources Europe’s major economies have been weak in 2012.

France – Despite President Hollande’s preference for a growth-based strategy. Several signals point to a contraction of private consumption, suggesting France cannot get away from fiscal austerity measures in the coming years. Therefore, the outlook for the French recovery remains weak.

Italy – The Italian GDP continues to fall. Consumer and producer confidence is described as ‘has deteriorated’.  Recession continues and is likely to do so into the third quarter of 2012. The problem for government in making deficit reduction very challenging.

United Kingdom –A technical recession the reality. However, assessing the entirely of the problem is complicated. “The contraction of GDP was largely thanks to the rapid pace of destocking by British firms” says Rabobank. Some bounce is expected from the Queen’s Diamond Jubilee and the Olympics in the later quarters. But manufacturing markers are showing further contraction.

The Netherlands – The Dutch economy is fragile and the Netherlands is still in recession. Consumption remains low, with low consumer confidence. The bright side is exports continue to be the engine of the Dutch economy. However, The outlook for the rest of the year for exports is moderate.

The rest of the west already gets enough coverage for you to know, or expect to know their economic pacts.

From East:

Incoming economic data indicates a few scattered bright spots, but our focus in that both growth and currencies appear to be on the slide in around the World.

In Brazil, China and India, governments are coming to the fore trying to keep growth at reasonable levels.

Brazil uses monetary policy, China fiscal policy, but in India the policy room seems limited given sticky inflation.

Co2Land org researched a little with the help of Rabobank on what to expect of the west to east world economics.  This snapshot is designed to be an indicator of factual information and is not to be taken as financial advice in anyway.