Major projects need rigorous economic analyses

days of abundant, readily available resources may, perhaps be over. Thus resource husbandry becomes important. Given this, we need rigorous analysis of decision-making in policy matters.

Malaysia as a developing nation is becoming increasingly concerned with higher social needs, such as for cleaner environment and for better social governance.

We can expect the society to demand a more efficient allocation of resources to generate greater social returns. This being the case, a thorough economic analyses of public policies and programmes is necessary.

Analytical instruments like the cost benefit analysis (CBA) and cost effectiveness analysis as well as ex-post evaluations may need to be used by policymakers to ensure the most efficient allocation of resources for better returns and value for money.

Now that our economy is just expanding at between four and five per cent per annum, much lower than the rates achieved in the 70s and 80s, it has become vital us to economise our resource use to maximise their social impact and add extra mileage to the growth of the economy.

It is more needed now, given the weak public revenue and reduced export earnings from petroleum.

With the governments intention to concentrate on the domestic economy, and in particular to enhance local infrastructure, so as to create long term sources of growth, greater use of analytical instruments is called for, to enable us to gauge the real impact of these projects on society.

The CBA will help quantify real benefits to the economy, having regard for both financial and social costs and benefits.

Economists familiar with these techniques will try to estimate both negative and positive externalities of the programmes or projects being implemented.

The estimates of the real benefits divided by the real costs borne by society gives the ratio of benefit to the cost. A ratio higher than one means the project has positive social returns.

What does it involve to estimate real cost or benefit? The CBA will try to estimate prices reflecting the social cost and benefit to the society using border pricing or opportunity costs.

If costs of imports are cheap then the prices of goods produced must be based on global pricing.

If subsidies are provided to facilitate production, the subsidies must be treated as cost and not as income to the enterprise. If unemployment is very high, then the cost of labour may approach zero (using shadow pricing— the maximum price that management is willing to pay for an extra unit of a given limited resource), meaning it does not involve opportunity costs although the workers receive wages.

CBA also entails quantifying all the spill-over and spinoff activities, both upstream and downstream, brought about by a programme or project that is being implemented.

These can be costs or benefits too. Economists measure these by examining the Input-Output (I-O) Table undertaken by department or bureau of statistics. I-O Table is another powerful instrument used by economists.

Additionally, the CBA will try to estimate the externalities of the projects, negative in the case of pollution, or positive in cases of increases in land or rental values, when the project or programme results in better quality of life in the neighbourhood.

Totalling all these costs and comparing them with the benefits, we can arrive at the costbenefit ratio (CB Ratio). If the ratio exceeds the value of one, the benefits outweigh the costs.

The government should undertake the CBA for major projects, including the high speed railway,

Now that our economy is just expanding at between four and five per cent per annum, much lower than the rates achieved in the 1970s and 1980s, it has become vital for us to economise our resource use.

the Pan-Borneo highway, the MRT and the proposed East Coast Rail Link.

These projects will definitely have significant spinoff and spillover activities benefiting the regions and areas they are located in (or passed through), creating ample opportunities for new jobs and entrepreneurship.

We also need to examine and estimate their social costs. Knowing these two and their net costs and benefit will allow the authorities to know the implications of their decisions and to mount compensating measures if the costs appear to outweigh the benefits.

Finally, it is also good practice, once the projects are implemented, and are on an even keel, expost evaluation of them be undertaken to complete the cycle of planning, and that the feedback on the projects’ benefits and costs as well as related experiences are documented for the benefit of future planning of similar projects.

The understanding of these matters is a part of the tool-kit of economists and project planners. Let us re-emphasise them, lest we forget. They help our decision making processes.