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How public investments burden taxpayer

When I was young, we used to have debates about the role of the state.

We had seen states prime economic takeoffs, sponsoring national car manufacturing and bamboo production, even fish farming. We had seen other states drag economies into long-term standstills weighed down with a debt hangover of taxes with no returns. So what is the right balance of state activity?

There were many that concluded that the private sector always did better in securing commercial returns. Thus, if an investment was built to earn, everyone gained from leaving it private.

That saw a mass of activities move from the state to the commercial world, not least, for instance, most of the super highways in France. They weren’t funded by the taxpayer, but built by private commercial companies such as Vinci, which has run the toll booths ever since, collecting road ‘fares’ from drivers. The outcome is an amazing array of roads – each one its own business.

We have since watched some states go seemingly too far down this path, moving prisons into the private sector. In this, a natural dividing line seems to come around activities that just do not make money. There is no financial model to punishing offenders – the point is to protect society and to protect us all.

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Perhaps the private sector is more attentive in managing prison costs than public servants spending taxpayers’ funds. The difference in attitude between the private sector, where jobs tend to be performance-related, and the public sector, where they seem not to be, is hard to shift. But, for many, the one place where we all group around and contribute, our own nationwide harambee, is for services that don’t make money, whether they are executed by public servants, or outsourced to private contractors to gain efficiency.

For will victims pay to have their sister’s murderer imprisoned, as in literally, for his or her rent and board? There is no financial model for earning a profit from prisons without taxpayer spending. We spend this money collectively for our collective benefit in security.

Yet, last week, as MPs toured some of our water dams, they attacked the public sector for its poor financial models, observing that the dams had never made the returns to repay the debt incurred for building them.

And here is the big debt sink hole we have been throwing ourselves into for a long time.

For if projects are to gain returns, then they do need a financial model. Will water users pay for the water that comes from a new dam? And are there enough users and will they pay enough to cover the cost of running the dam and eventually pay back its building costs?

If we left that in the private sector and there weren’t enough buyers, some not very research-oriented private company might still borrow money and build the dam. It might then find it can’t sell enough water, and go bankrupt, which would mean the lenders would not get that loan back. So the lenders would crawl all over that dam building proposition to ensure it had a solid payback ahead.

But the problem with unwise public sector borrowers is that they are low risk. Lenders know that if a commercial operation borrows from them for a dud scheme that doesn’t pay for itself and doesn’t work, their lent funds are gone: written off. But lend to the public sector for a bad scheme and it pays back anyway, even if the dam, railway, road, terminal, or any other project is making losses. The taxpayer foots the bill.

So, if the water dam is for economic gain, let it stand as a private sector scheme or not run at all. And if it is for social gain, then payback isn’t on the cards – that’s what we pay our government for. It’s supposed to collect from all of us to provide the services we all believe our society should have that the private sector simply cannot finance.

Thus, trains and planes should stay private. And cancer treatment and education for those in poverty should be public. Because here lies the difference between consuming and creating a society.

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