Perhaps not a sexy title for a blog post, but important, nonetheless. Because, as one Korean told us:
“We often prepare proposals to potential investors, but they are less interested after seeing them. More than subjective proposals, I understand that items with concrete numbers reflected in cash-flow models are very important.”
In July, a Choson Exchange team traveled to Pyongyang and Wonsan to deliver a workshop titled “Introduction to Cost-Benefit Analysis and Project Economics.” Workshop sessions in both cities focused on the policies and provisions necessary to make investments successful, especially in the context of Special Economic Zones. In the DPRK in 2013 a new SEZ policy was established, as well as a new organizations to oversee them, which have since been in flux. There is a palpable passion for investment and economic issues, but there are significant knowledge gaps and serious misunderstandings about what investors want to see in an SEZ.
Our workshop attempted to address some of these through some basic economics principles, before moving towards project and cash-flow modeling. The basics centered on trade-offs and opportunity cost: the notion that lose what you would have gained from other alternatives when one alternative is chosen. It included this tricky puzzle -
Please circle the best answer to the following question:
You won a free ticket to see a piano concert (which you cannot sell on to someone else). An orchestra is performing on the same night and is your next-best alternative. Tickets to see the orchestra cost $40. On any given day, you would be willing to pay up to $50 to see the orchestra. Assume there are no other costs of seeing either performance. Based on this information, what is the opportunity cost of seeing the piano concert?
(a)$0 (b) $10 (c) $40 (d) $50 (Source: Paul Ferraro and Laura Taylor)
Don't feel bad if you didn't pick the correct answer, which you'll find at the bottom of this page. Only 21.6% of surveyed participants at an Allied Social Sciences Association (ASSA) meeting got it right, and they were mostly economics Phds. We didn't track individual answers, but in our sessions, a low number got it right. (the author of this blogpost was sadly with the majority)
Once participants mastered the basic principles of economics, the workshop introduced tools private investors use to quantify the value of an investment and analyse decisions: time value of money, discounting, the link between risk and expected return, assessing uncertainty, cash flow modeling and cost estimating. A few keen participants even asked for a demonstration in Excel!
Ultimately, the more complicated content, including accounting for inflation, the time value of money and discounting, project valuation and cash flow modeling led to these key questions:
What makes a good investment?
Too often, the tools used to assess benefits and risks are not employed by the people tasked with doing trade, attracting investment or developing zones in the DPRK. Nor is there enough understanding of just how much planning based on hard numbers is generally put into investment. Some of the participants were familiar with some of the concepts, but for the vast majority, this was an eye-opening introduction to the thinking that should drive investment decisions.
On a positive note, there was very, very high interest in the topic. The participant numbers smashed CE records for participants in one week: 42 people took part in Wonsan and 86 in Pyongyang.
Ten bucks. Then answer is (b). For real. Check the internet.