Tuesday, July 15, 2008

A Bit of Mathematics

Okay, this shouldn't be nearly as bad as my old post on Baire Category. The Globe is running a story about how Saskatchewan is "making hay" with a $1.6bn sale of a fertilizer plant.

Now, a fair bit of money in the bank, right? But the plant cost $453m in the late 1980's. Let's say 1988, since it's not specified. Now, adjusting for inflation, that's about $753m in today's dollars. That's still a substantial profit, right?

Now, 753(1.04)^20 =~ 1600. Or, in real terms, the rate of return on the investment was 4%. Which isn't great.

But, even worse! Over the 1981-2000 period, the average interest rate the Government of Saskatchewan paid on provincial debt was 9.12% (page 25).

And 9.12 > 4. Admittedly, 9.12% is an overestimate of the interest rate over the 1988-2008 period, but it's still a safe bet that the government could've saved a considerable amount of cash by not buying this fertilizer plant and issuing fewer bonds instead.

2 comments:

Gerard said...

would there be much value in the taxes from salaries and any multiplier effects? (assuming the only options were gov't buyout or closing the plant)

Andrew said...

In the short run, yes, you would see some increased economic activity from taking the debt and running the fertilizer plant as opposed to letting it close.

In the long run, you'd be crowding out private investment, suffering deadweight effects from the extra taxation required in the future, plus you'd be out the difference in money.

I have no idea quantatively how much value the increase in taxes and multiplier effects would be, but personally I don't place a lot of faith in them.