Using other peoples money to finance projects of grandeur

 

I am happy so say that after a week of absence (summer vacation), I can resume writing my blog and continue to comment on everyday economic events.

There hasn’t been word of the late “Peljesac” bridge project for some time, so I have decided to touch on this subject for a bit. Browsing through todays online business news, I stumbled upon an article concerning this government project. It was the idea of the previous administration to solve the problem of Croatia’s territorial discontinuity by building a massive bridge that would connect Croatia’s mainland with the Peljesac peninsula, thus enabling Croatians and others to get to Dubrovnik and the rest of the south of the country, and not having to go trough the city of Neum, Bosnia and Hercegovina.

As, the article reads: “HSP Ante Starcevic against the construction of the Peljesac Bridge - The solution for the Peninsula is immersed tunnel”. The HSP Ante Starcevic political party wrote an open letter to the government requesting a tunnel, rather than a bridge, be built to connect the Croatian territory.

Now, I am sure that the political party has good intensions in mind, and they even give the plan a technical feel to it by elaborating that the same practice has been implemented by other nations as well. It would also benefit the domestic construction industry.

Now, not once (at least in the news article) is it mentioned the source of financing for such a venture. How will the government open the bidding for the construction companies is also a mystery, coupled with the fact that, are there sufficient funds in the government coffers to spend on a wasteful project and subsidize the construction industry as well.

I am not going to go into the technical aspects of such a project, since I am not a construction engineer, nor geologist, nor by the look of things (as this political party advocates) a maritime engineer, I am an economist and the economics just don’t work out. Usually, governments build bridges, roads, social infrastructure as a necessity. These projects are placed into the “natural monopoly” category, are deemed as such, because conventional wisdom states that such projects are too large for the private sector to complete.

What is really meant, is that the government can easily and with no trouble expropriate by force (taxation) the funds necessary to build such a project. Why the government doesn’t think that a private contractor and later owner can manage to bridge at a profit, is beyond me.

I do know is that if a study is done on the feasibility of the project, and this usually includes discounting cash flows, finding similar projects that carry proportional risk to arrive at the desired discount rate (delevering asset beta of similar project and relevering project equity), payback periods, WACC estimates and project duration, it will be excepted or rejected. The component leg would include checking for viable materials, natural geological movements which include geological shifts, sea level changes, wind resistance, corrosive elements, and so on.

If massive companies can finance massive constructional endeavors such as the Burj Khalifa, Tokyo International Airport, Wal-Mart, Apple and so on, why such clearly political motivated economic prevail? The largest boondoggle in history must be the interstate highway system built in The US under the auspice of boosting aggregate demand. This system hasn’t been maintained in over forty years. Just in moments of economic recession, the government calls for more public works. It didn’t occur to them that maybe a level of savings had to be generated to maintain such a vast system?

Running a perpetual budget deficit doesn’t really help in such a situation.