New Onion

One of the big issues with the disaster that will be our construction industry and cement supply is that on a very basic level the politicians trying to shut it down or introduce competition don’t know very basic economic concepts - through no fault of their own. They, and others I have spoken to have taken the general economic statement “All else being equal, more competition leads to lower prices and higher consumer surplus” and have decided to get back at the landed white family that currently operates a business with no local competition.

There are two problems with this.

1. Bermuda Cement is currently selling cement at below what they could charge. They are NOT maximizing profit as a monopoly would were there one cement plant that was not faced with foreign competition.
What’s the evidence for this? In general in a market, a monopolist would (theoretically) be able to increase price until the point that another entrant would find it profitable to enter the market. The Royal Gazette article gives us a clue as to how expensive cement would be in order to justify building another cement plant – namely, on the order of double what they are today (ignoring the significant economies of scale that make cement in Bermuda a natural monopoly). The reason for this is that the required profit to justify spending the $12-$15 million necessary to build a new cement plant would be well over a million dollars a year – and that’s just capitalizing the physical plant over 30 years. To make that payment would, according to Jim Butterfield require doubling cement prices – which are currently around $10 per bag retail. So essentially, it would likely take somewhat more than double the current price to justify two cement plants (when you figure the additional overhead/land combined with the capitalization of the plant required).

Who would lose? – pretty much everyone.
Bermuda Cement – not greedy experienced operators lose their business.
Bermuda public – Pay double for cement what they used to, results in more expensive housing with no increase incentive to supply.
Bermuda construction firms – who cease to operate during the supply stoppages
Bermuda taxpayer – who would ultimately pay more for capital projects at WEDCO to replace the silos.

Who wins?
Minister Burgess’ ego.
The construction firm who gets the contract to build new silos (sound familiar?)
The consortium of rich businesspeople who get the new lease on new silos.

Which side are you on?

The basic principle here is social cost.

2. The fundamental principal of expropriating from old land-owners ignores that in a modern financial system the only barriers to entry into the wealthy classes are (a) ability to learn skills, and (b) knowledge of what’s possible and how to progress. In a modern system everyone has (or should have) access to the educational basics (university, CFA, CMA, or similar self-study), the capital (banks will loan, BSBDC will underwrite small loans, etc.), access to any social circle one wants, etc. So if one is serious about taking the future of business from the old guard then one can, and should wrench it from their hands the good old fashioned way – by beating them at their own game… and not by vindictive silly action against a natural monopoly.

2a) is of course the question: Who will be running the plant now? If it’s the usual suspects then that’s a huge scandal and is abject corruption.