BUNNY RACE OR FREE-RIDING

A ‘Bunny Race’ organised by students in Kaunas, the second largest city in Lithuania, took place last Easter. The only entrance requirement was that participants had to wear bunny costumes, or at least bunny ears, a tail or some other paraphernalia related to rabbits. In aid of charity, the students’ strived to raise as many donations to children’s foster homes as possible, while both spectators and participants enjoyed a concert. The distance of the racetrack was a mere 900 metres, therefore, it was easily achievable for most runners. However, this race would not have been possible if those registered for it had all been free-riders. Why?

Once upon a time in the Bulgarian city of Gabrova, renowned as being the capital of humour, the nonchalant Gabrovians each agreed to bring a bucketful of good wine, pour it in one large barrel, and present it as a gift at their city festival. When the first ladle of the festive wine was tasted, it became apparent that the barrel held nothing but pure water. Every Gabrovian secretly hoped that their bucket of water would not ruin the wine in the vast barrel. Like the Gabrovians, some of us do not contribute with our energy, time, or other resources to addressing common issues; we avoid contributing to the production of the public good. Consequently, the problem arises as to how to cover the production costs of the public good. This acute problem related to the creation of the public good in the State is called FREE-RIDING.

In Lithuania, free-riding is often associated with using public transport without a ticket. We actually do not use the term “free-riders”, but refer to such people as hares or rabbits. Economics textbooks associate free-riding with evasion and freeloading, while in Lithuania, it is rare to come across these terms. In the global press and international arena, however, free-riding is far more widespread and deeply analysed. Free-riding may manifest itself in different forms: by avoiding military service, not voting in elections, or by evading taxes. States themselves may also be guilty of free-riding when they do not pay proportional contributions to solving international problems but still reap the benefits of positive outcomes. There is an entire hierarchy of free-riding: politicians, civil servants, and businesspeople are all guilty of doing it.  

However, is free-riding really detrimental to anyone? There can be no doubt that it is. The higher the level of free-riding, the greater its destructive power. In a State of free-riders, maintaining the social contract between citizens and the State is nigh on impossible as mistrust forms a breeding ground for free-riding. It is easy to discern deliberate free-riding; however, life is full of circumstances where free-riding behaviour occurs due to complete or partial information, leading to uninformed choices. Ignorance is also caused by free-riders, who reduce the amount of reliable information, thus turning the information age into the age of disinformation.

For example, civil servants are able to access the information they require in order to make an appropriate decision; however, they themselves fail to submit full information. The reports issued by the Lithuanian government sometimes omit as much as 60% of information regarding results that have not been achieved. A further example concerns decisions concerning the State budget that are made based solely on the information related to the cash flow indicators of revenue and expenditure and without any analysis of the net asset indicator that is usually applied in business circles and OECD countries. What are the isolated positive balances of the State really worth when the net asset indicator shows that Lithuanian public finances have been deteriorating for several years in a row? Are the right decisions being made? Do decision makers take into account all the possible commitments of the State? Are we not forgetting the granted State guarantees, judicial proceedings or the future expenses related to the closure of Ignalina Nuclear Power Plant when planning and executing the budget? In 2016, such commitments amounted to over €6 billion, which made up 16% of GDP in Lithuania. Are we taking into consideration the development costs of the critical projects for the State, such as Rail Baltica? Therefore, the question arises. Are we really familiar with and do we know our state?

If we regularly shape a negative preliminary opinion about the State, a self-fulfilling prophecy process will come into force. If an increasing part of society starts thinking that the State is evil, it is highly unlikely to improve. We asked Lithuanian people if they felt that they contribute to State-building as much as they can? A representative survey commissioned by the National Audit Office of Lithuania (‘NAOL') and conducted by the market research company ‘Vilmorus’ revealed that almost 60% of respondents felt that they contribute. Would we like to see more people who share this feeling?

Let us recall the fable about the grasshopper and the ant. It was a very lovely and warm summer. The ant toiled away preparing the food stocks for the winter, while the grasshopper was sneering, chirping, and singing along with the butterflies and beetles. The summer came to an end. A harsh winter fell. The grasshopper hid under a leaf, but cold and hunger forced him to ask the ant for help. “Go away and keep on having fun!” said the ant and closed the window. The grasshopper froze to death. Nowadays, the grasshopper would organise a press conference and rant on Facebook in order to put the blame not only on the ant but the entire ant State.

Peoples’ attitudes to the State differ. Some tend to see it as an unavoidable evil; for them, the State is a problem and not a tool for addressing problems. As Ronald Reagan once said: “The most terrifying words in the English language are: I’m from the government, and I’m here to help”. Conversely, others do not idealise the market and recognise the potential positive role of the State in the economy. Yet another group stresses the importance of State institutions in economic life since their purpose is to meet both general and business needs. The NAOL survey demonstrates that we do indeed need the Lithuanian State: 90% of respondents stated that they ‘needed’ or 'partially needed’ it.

It is also worth mentioning that perfect conditions for the occurrence and spread of the free-riding phenomenon occur when there is a prevailing attitude of “others will do it: my contribution won’t count, so why should I bother?”. In general, human beings tend not to deviate from the collective thinking and generally-accepted norms of behaviour. The same applies to free-riding: it may begin as an isolated problem, but it is highly contagious. Free-riding is exercised by only some or by everyone. If other members of society are doing it, then the attitude of “why shouldn’t I be as smart?” can soon become the prevailing stance in society. Essentially people do not mind contributing to the “common cause of the State” if they have been convinced that their contribution is fair and honest, provided that they know that everybody else is doing the same.

During the annual conference SIGNALS organised by the NAOL, all the public expenditure was divided into four relative groups: public welfare, economy, governance, as well as security and defence. The ‘Vilmorus’ survey commissioned by the NAOL showed that about half of the Lithuanian residents surveyed thought that the most significant share of public funds is in general has been allocated to security and defence, while they believed that 15% has been spent on maintaining the bureaucratic State apparatus. However, in reality, the reverse is true; security and defence receive the smallest allocations, while the highest amounts — approximately 70% are set aside for public welfare: education, health, and culture. Regrettably, only 7% of the respondents were aware of this. Thus, the majority of Lithuania’s residents misunderstood what the State spends their taxes on. What kind of encouragement to contribute and pay taxes is there when the public perception persists that most taxes are spent on defence or are filling the bellies of bureaucrats? Stereotypes, disinformation, and household discussions about the State create a favourable environment for the justification of free-riding. Therefore, it would be prudent to examine several examples from public audits about what else we know, as well as what we do not know about our State.

Until 2017, none of the national authorities had analysed the financial indicators of the municipality-owned enterprises; there was no information about their exact number in the country. In the meantime, the total equity value of the portfolio of 271 enterprises amounted to approx €1.3 billion. The real amount of the public land owned by the State still remains unclear, despite the fact that we have been attempting to assess this since 1991. It gives us the feeling that this task will have to be handed down from one generation of civil servants to the historians of another generation.

In our State, hundreds of new projects are launched annually without an assessment of how many have already been started, although even first-year Economics students have already been taught that the evaluation of project results is an integral stage of the project management cycle. Every year tens and sometimes even hundreds of projects are brought to a standstill, thus postponing the implementation deadlines and freezing the used millions. In 2015, almost €230 million “froze” in this way. “Defreezing” projects usually pushes up their final price, sometimes by as much as twice the original cost and occasionally even more. A third of the projects have dragged on for over a decade. The approximate value of the projects launched but not completed is approaching almost €10 billion. Therefore, the budget now is like a black box where only the current investment amounts are shown, while we are kept in the dark about the actual accrued liabilities.

The figures concerning State-owned real estate are equally as controversial. We know that there are more than 10 million square metres of State-owned real estate in Lithuania. Unfortunately, rarely do we have objective figures at our disposal. Sometimes we divide the amount of real estate by the total number of public sector staff, whereas on other occasions it is divided by the number of civil servants, a figure eight times smaller. In this way, every public sector workplace may seem like an apartment of several rooms. The business world is surprised, and the public is outraged. Everyone is curious as to how the officials can find each other, let alone their clients, in such a space! However, what is the real situation? Almost 80% of State-owned real estate bears no direct relation to the working conditions in the public sector, and most of it is low-value structures, small storerooms, etc. It is time to bid farewell to the Soviet management spirit under which an excellent manager is one who fights to get square metres and units of inventory into the balance of the institution under his management. I read your thoughts, dear reader. One staff member at the NAOL now gets some 9 square metres. According to the hygiene standards in force in Lithuania, one employee must have at least 6 square metres, while a prisoner is entitled to 4 square metres. So how much workspace assigned to a public sector employee should we consider as fair? Under EU legislation, one pig, depending on the objectives assigned to it, must have up to 3 square metres of available space, bunny rabbits have no standards assigned yet! Therefore, all that remains is to agree on a specific objective to be achieved. Frankly, we should spend more time and resources analysing the space in our brains and not the real estate that we have in the public sector.

In Australia, having grazed down pastures, bunny rabbits took on bushes and young trees thus damaging the topsoil layer and causing erosion. An extended “period of free-riding” in the public sector means that there is more than one fallow “grassland” in Lithuania. Let us have a look at education. It is only natural if parents want their children to succeed at school that they would consider paying for extra help, and probably there is nothing wrong in essence with hiring a private tutor for some children. Are you aware, however, of the prevalence of this in Lithuania? A NAOL audit on general education published last year revealed that 34% of parents who have school-aged children use the services of private tutors. In larger cities, this phenomenon is even more frequent – more than 40% of pupils have private tutors. A quarter of parents who hire private tutors do so for primary schoolchildren. Why should people entrust their taxes to the public education system if they ensure the quality of their children’s knowledge in parallel shadow schools?

In recent years, 42 sectoral practical training centres have opened in Lithuania. They are important, and no one has any doubts about their relevance. The centres were equipped with the latest state-of-the-art equipment. As much as €120 million was invested. So far, the extent of training in most centres has not reached even a half of the planned number of hours, while no training at all was conducted for over a year in one centre. Public auditors posed a question about the plans to allocate an additional €50 million to the infrastructural development of such under-used resources. It seems that free-riding is often rightly associated with a nonchalant lifestyle. Who will think further than one move ahead? Calculating only one move forward will not lead to victory in a chess match or even a game of draughts.

Now, let’s turn to the health sector. Let me ask you: what is the average life expectancy in your country? What are the methods of increasing it? Do they work? Life expectancy in Lithuania is the shortest in all of the EU. Actually, we are 6 years behind the EU average. What does this show? That we do not provide enough treatment? Or that the quality of treatment is poor? On the contrary, we are the ranked second in the EU according to the availability of hospital beds. We have more doctors than the EU average, but we do not have standard procedures for handling the treatment of 80% of diseases. Furthermore, we do not record 60% of adverse side-effects, therefore we cannot learn from our mistakes. We buy a lot of expensive medical equipment, but 59% of it is not fully utilised, and 7% of it is not used at all. However, 55% of Lithuanians say that the main problem in the health sector are the long queues and waiting lists. Who should be talking about these numbers? Who has to be dissatisfied and maintain constant pressure on these issues? Who is responsible for making the necessary changes?

A further example could be taken from the field of telecommunications. Electronic communication networks in Lithuania account for about 20,000 kilometres of physical electronic communications infrastructure. Over the last four years, some €40 million was invested in the development of this infrastructure, while an additional €30 million has been earmarked for its maintenance. There is not one single body responsible for the coordination of the network development on a national level, which is why close to 4000 kilometres of physical infrastructure has been allowed to be duplicated. This is the equivalent distance of the bunny racetrack from Lithuanian border to the Chinese border! How will we proceed in the future? We often hope that problems will resolve themselves without making decisions or maybe even without footing the bill for expenses. An approach “maybe somehow” increases the consequences of destructive processes. Until 2020, an additional €90 million has been planned for investment in the development of this infrastructure. Apparently, the public may be moved by an advertisement in which, for example, an elderly person visits a library and uses the outcome of this infrastructure – talks via Skype with a granddaughter in England. Meanwhile, Lithuania, which presents itself as an innovative State, intrepidly waits for the relocation of the surge of call centres of major global companies on its soil. On the other hand, Lithuanians find land digging work very attractive: dig out, bury, the Earth is round - all of which makes the money rivers flow!

There is a joke that the saying “shoot two hares with one shot” (this is a direct translation of the Lithuanian equivalent of “to kill two birds with one stone”) was born in business oversight authorities. Naturally, it is desirable that there are limited numbers of such shooters. How many business oversight authorities there are in Lithuania? We should not be surprised by how little we know about them. Today there are 56 of them; however, not one government report includes any analysis of their activities, the extent to which and how efficiently these authorities operate, or what the price of this oversight may be. In this context, it is not surprising to hear dissatisfied rumblings about why we should contribute to the funding of such chaotic activities through our taxes. In ancient Athens, when people became disillusioned with the self-indulgence of civil servants, the then rulers would appease them with Aesop’s Fable about the fox and the mosquitoes.

A fox got bogged down in a puddle, and a number of mosquitoes settled on it. When the hedgehog took pity on the fox and wished to drive the mosquitoes away, the fox said: “Do not interfere! These mosquitoes have already had their fill of my blood, and if you drive them away, others will come with a new appetite and therefore greedier”. In the modern world full of general challenges, such an option does not satisfy anyone. Threats and dangers accumulate. Preliminary estimates show that business oversight annually receives about €230 million from the budget. These are not exact figures since when public auditors knocked on their door, some of the business oversight authorities got surprised and from the outset did not want to acknowledge being actors in business oversight.

Public audit reports contain a plethora of further observations, but they are beyond the scope of this article. What if no one agreed to pay taxes anymore? In that case, was it worth talking about free-riding at all? Of course It was. First, when too little time and attention is given to facts and the conceptual discussion of public problems, the threat of mistakes in strategic decision-making is increased. Second, mistakes will be followed by huge bills. Yes, facts are boring. They are difficult to understand and remember. They are unattractive and threatening: threatening, because they call for responsibility, and unattractive, because the implementation of many of the examples mentioned above involved both the public and private sectors. To be more precise, the public and private sectors were free-riding together. So, what do we have to do? To improve the quality of life, we have to unite the public and private sectors in balancing the needs of “me” and “us”.

The aim of this article was far from merely showing how poorly funds or assets are managed. I hope that everyone will answer the following question: are we really familiar with and do we know our state? This article wishes to point out that free-riding is caused not only by egoistic incentives but also because objective information about the State is not available. Incidentally, almost 100% of pupils and students responded in a questionnaire to voice their views that they needed the Lithuanian State. So, young people will pose uncomfortable questions for us. Mahatma Gandhi said: “Be the change you wish to see in the world”. So, our young generation may ask “What have you changed for your country?”. A difficult question. And silence is useful for free-riders. Inaction will allow them to turn the State into a desert. Will we leave prohibitively unmanageable bills from the free-rider State to our children? Or maybe to our grandchildren? It seems that our behaviour demonstrates even less love for our great-great-grandchildren. Many of us will not live to see them. We will not have to look them in the eye.

I invite you to look at the figures and openly speak about them. Only awareness and trust can unite us in our shared responsibility. Therefore, when I ask are we really familiar with and do we know our state? I’m not asking whether we know the figures. It is more crucial to ask: when we know these figures, what do we do with them, do we do enough, and are we, in fact, willing to do anything at all? At the beginning of the 20th century, the American politician and diplomat Dwight Morrow wrote to his son: “The world is divided into people who do things and people who get the credit. Try if you can to belong to the first class, there is far less competition.”

I can pre-empt what may well be on your mind, dear reader: who, after all, is to blame and who is responsible for free-riding in the State? There is a saying that when a family falls apart, the ultimate blame lies with the wisest one in it. The ultimate responsibility, whereas, lies with the most powerful ones.

For those who have not had the patience to read through the article, its summary would be: 100% FREE-RIDERS = 0% or NO STATE LEFT.

EBIT: https://bit.ly/2pz1LY4

IQ: https://bit.ly/2GVG4Lu

The International Journal of Government Auditing: https://bit.ly/2VG4VuR INTOSAI Journal ? 2019