“[…] No, no—WASA should not and cannot be privatised! There are some entities which are what you call in economics, natural monopolies. For an economy like Trinidad and Tobago, the production of water is a natural monopoly and the state should do it.
“[…] We are going to give WASA as a monopoly to a private entity? It doesn’t make any sense! Water is an essential commodity; it is the quintessential public good. But where the state produces the water and distributes the water does not mean that the state must be inefficient in doing what it is doing…”
The following is the second and final part of Wired868’s interview with respected economist Dr Terrence Farrell, a former deputy governor of the Central Bank of Trinidad and Tobago and ex-chairman of the government’s economic development advisory board, which discusses the fuel subsidy, WASA, VMCOTT, social development, and retrenchments:
Wired868: What fiscal options are available?
Dr Terrence Farrell: Well, very few really. Once you’ve ruled out certain things that you’re definitely not going to do, then the options you have left are going to be very few. Therefore, the option the minister is exercising now seems to be this: run down the HSF to keep things going pretty much as they are, while hoping that the energy sector bounces back and energy sector revenues begin to increase again.
That seems to be the game: to keep one’s nose above water. But, as I said, the outlook for the energy sector doesn’t look good at this point, and any kind of reversal of fortunes in that sector looks to be maybe two to three years out. But more important, keeping one’s nose above water doesn’t begin to address the other imperatives of diversification and transformation.
Wired868: If tough decisions were to be made, what would those decisions be?
Farrell: Well, you get to a point actually where the answers are really quite simple. They’re not hard; they’ve always been there actually.
What I said over five years ago should have been done. When oil prices and gas prices fell in 2014 into 2015, I suggested to the then government that they needed to take certain actions, given the fact that gas and oil prices were not going to rebound within any short period of time. But, of course, they took no advice and, in fact, they made the situation worse by increasing expenditure in 2015, which was an election year.
But the advice remains the same, which is to say, you’ve got to adjust; you’ve got to diversify, and you’ve got to transform. But you’ve got to adjust.
What does adjustment mean? It means that if I have $10 of revenue that I can count on, then I will have to bring my expenditure down in line with that $10. It’s as simple as that! You don’t need to have a PhD to do that. It’s like any householder whose income is $1,000 and who then brings her expenditure down in line with that $1,000.
As a government, you have a capacity to borrow but you know that the capacity to borrow is not infinite. You’re not like the United States government; the US government’s capacity to borrow is huge. But as a small country, dependent on foreign exchange, we don’t have that capacity—so our capacity to borrow is limited. The rating agencies are well aware of that, and that’s what they signal with their rating decisions.
And you should be borrowing not to finance your recurrent expenditure. You should only be borrowing to finance your development programme expenditure, not to be paying public servants’ salaries or to be subsidising WASA’s recurrent expenditure, or those kinds of things.
Wired868: So do you think they will try to cut expenditure by cutting the number of public servants?
Farrell: Our spending on the so-called safety net has been very inefficient spending. The amount of money we are spending on the so-called social safety net, in my view, is probably disproportionate to the real need. People who don’t need it are getting money from this social safety net. And maybe people who do need it are not getting any!
From a policy point of view, what you want to do is have a system in which people do not become permanently dependent on the state. There are always going to be people in your society who need support from taxpayers. We know, or we ought to know, who they are: people who are disabled, children, etc. That has always been my point to the folks in the Ministry of Social Development.
We are supposed to know who the needy are, we’re supposed to know them by name, we’re supposed to know where they live, we’re supposed to know what their circumstances are, and what their real needs and circumstances are. And we should enlist NGOs and local government to actually deliver the services to those in need.
Anybody else, we should be saying to them: No, not you.
The fuel subsidy, for example, is a complete waste of time. What are you really subsidising? We are subsidising diesel, which is a polluting fuel and is adding to the problems of climate change. We are subsidising transportation and subsidising PH cars and so on. And there is no clean, decent, timely mass public transportation to be had!
In fact, there’s a study done by a young economist at The UWI (Marissa Chester) which points out that the fuel subsidy is regressive. People who benefit from the fuel subsidy are people who are driving a Benz or a BMW and using unleaded fuel. This is ridiculous.
My advice long ago was to remove the fuel subsidy and remove it entirely. All of it! Immediately! The fuel subsidy costs hundreds of millions of dollars every year.
And not to mention the problems at WASA, which has been a business which we have been subsidising for decades and which we have done nothing about.
The problems at TTEC, the problems at the state enterprises. Those cost a couple of billion dollars every year. We are subsidising these state enterprises that are producing little; some are adding nothing of economic value.
So just to take a ridiculous example, you have a company like the Vehicle Management Company of Trinidad & Tobago, which is a state enterprise, advertising on TV to fix your car—in competition with the car repair shop down the road!
A state enterprise! And it is losing money on top of that!
But why does the state want to get involved in the repair of your car and mine when there are people outside there in the private sector who are quite capable of doing that? And so those are some of the things which you could take out of that budget. It is possible to cut the budget expenditure by one-third. It can be done!
So the question is: what is going to happen to the people who are displaced by that—and they will be displaced by it. Petrotrin was shut down and I understand 5,000 people went home.
What we have to do is to incentivise the activities and the behaviours we want and disincentivise the activities and behaviours that we don’t want. Once of the things we don’t want is people to be dependent on the state when they could be doing other more productive things. You want to disincentivise that.
We shouldn’t make it easy for someone to get a job in government or to get a job in WASA or to get a job in TTEC, doing little and producing less. So one could reduce the workforce in WASA by 50% or whatever the benchmark for efficient water producing agencies requires. I can increase the water production and give everybody water in their taps 24/7 with half the labour force that is there.
Now with the set of people who are displaced, I have to incentivise them to get jobs where they can be productive, where they can add value hopefully, and preferably in jobs that can generate foreign exchange earnings for the country. And if we have to spend money to be able to do training, to do upskilling and re-skilling of those people, to create incentives, to be able to create new businesses, then we must do that.
That’s where the government expenditure should be going. This dead-end situation of the endless subsidies produces absolutely nothing for the economy and fosters a dependent society.
So it’s not hard; the economics is not hard—it’s the politics that is hard.
Wired868: So left to you, the fuel subsidy’s going?
Farrell: There will be an outcry, of course, there will be an outcry. What you want to do is find yourself in a situation when the prices go up, the price mechanism to allow people to adjust their behaviours. At that point in time, when they have to, people will make decisions.
Do I jump into my car and drive up to Maracas? Driving up to Maracas or driving down to Icacos costs me little or nothing in terms of fuel cost. So now the consumer has to ask himself: Do I need to spend that money? Do I need to make that trip?
If I walk into the supermarket or I go into the market and the price of the food item is too high, then I don’t buy; I buy something else.
So you use the price mechanism to encourage people to make decisions about what they consume and when to consume certain things. When they’re going to jump on a plane to say they’re going to Miami or to wherever it is, they have a decision to make.
And then on the other side of it, you then want to be using the price mechanism because you see, if prices go up for certain things, would that encourage some people to start saying for example: if I can produce more cassava, more yam, and more of these things and more locally produced food, the prices are going to be better if I can get them to the market. We stimulate entrepreneurship and business.
Isn’t that what we want?
Instead of bleating all the time about ‘food security’ and the food supply chain and so on, use the price mechanism to encourage increased production and to discourage wasteful consumption. That’s how I’ve been trained in over 40 years of being an economist. And we all say, those of us who believe in the sensible use of the price mechanism, that that’s the way to do it. That’s what the price mechanism does; that’s what it does.
And then, whenever the price mechanism doesn’t work or produces perverse outcomes, that’s when governments can step in and try to use certain kinds of instruments to be able to achieve the objective for the society.
Wired868: Any thoughts you want to share on restructuring or privatising WASA before we call it a day?
Farrell: No, no—WASA should not and cannot be privatised!
There are some entities which are what you call in economics, natural monopolies. For an economy like Trinidad and Tobago, the production of water is a natural monopoly and the state should do it.
Now although the state should do it, doesn’t mean it should be done inefficiently. It can and should be done very efficiently, as it is done in other places. Very efficiently. So, in my view, it is wrong to suggest privatising WASA.
I’ve heard it floating around and I don’t know who’s making those suggestions. I don’t know any reputable economist who’s making a suggestion like that; it doesn’t make any sense.
We are going to give WASA as a monopoly to a private entity? It doesn’t make any sense!
Water is an essential commodity; it is the quintessential public good. But where the state produces the water and distributes the water does not mean that the state must be inefficient in doing what it is doing.
Singapore Airlines is owned by the Government of Singapore; it’s the best airline in the world.
Wired868: So why do you think we’ve come to sort of associate state enterprises with inefficiency?
Farrell: Because the state enterprises and the state bodies have been used for political patronage; they’ve been used to foster dependency. The economics has been set aside and the politics has been given primacy in decision making.
‘Let’s see how we can employ more people, let’s put more people on the payroll’: and you create dependency, and dependency hardens into entitlement.
So you now can’t tell these people that they must do something different. Or you can’t tell these people they must be productive. Or you can’t tell these people, most importantly, that what they are doing must add value; it must add value.
That’s what a job is, a job is something that must add value to somebody and that’s why you are paid a salary. They are not paying you a salary so that you can go to the supermarket, or so that you can pay your mortgage.
You have a job because you are adding value to somebody for something they are willing to pay you for. And we need to get our population to understand that, to get our trade unions to understand that.
Wired868: Thank you very much for taking the time.
Farrell: You are most welcome.
Editor’s Note: Click HERE for Part One of our interview with Dr Terrence Farrell, as he discusses the economic impact of Trinidad and Tobago’s Covid-19 restrictions, the problem with our budget and why government lay-offs are an inevitability.
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