This week's big idea for wasting public money comes from Professor Edward Chen Kwan-yiu (Dr Dial-A-Quote) of Lingnan University, who wants Government support for something he calls logistics. Your correspondent was always of the impression that logistics referred to the business of moving and quartering troops but Mr Chen apparently takes it to mean the business of moving goods and he is worried that Singapore is better at it than we are. It is a shallow argument for anything - let's do it because Singapore is doing it. However, there are some crucial misunderstandings in the report from Lingnan University (it seems any school can call itself a university these days) recommending government support for logistics education. It concedes that the industry's internal rate of return (IRR) of 6.8 per cent is lower than the opportunity cost of 7.3 per cent but then pulls out of the hat something it calls the 'social IRR' which it claims is 19 per cent. Let's deal with that 6.8 per cent figure first. IRR is a financial calculation that equates your future discounted cash flow from an investment to the cost of that investment. If this sounds more complicated than the simple price earnings (PE) ratio that you may use for investment value just remember that financial planners always use it in preference to a PE ratio. But it does not stand on its own. You have to take into account your cost of capital. In simple terms if your annual rate of return is $6.8 on a $100 investment but you borrowed that $100 and paying an interest charge of $8.5 a year on it you will go bust unless you can improve your rate of return. And your real cost of capital these days is more like 8.5 per cent than the 7.3 per cent the Lingnan study cites as 'opportunity cost', which we must assume means cost of capital because otherwise it means nothing. So let's get it straight right away that Mr Chen can only make his pitch to Government. Any private sector financial officer would throw his proposal in the wastebin immediately as a proven loser by its own calculations. Even the Government would have troubles. The Transport Department wants its projects to have a 15 per cent rate of return. Mr Chen's proposal is transport related and its 6.8 per cent return is so wide of the goal post that no-one would even know he was trying to score. So out comes his 19 per cent 'social IRR' which is meant to take into account such things as higher cargo throughput, cost savings for smaller enterprises (a warm-hearted politically correct concern) and reduction in traffic congestion and pollution. Now first of all, it would be easier to convert the Pope to Islam than to get an accurate figure for rate of return on such abstract benefits, which may lead you to suspect is one reason that the number is pitched so high. Who can refute it? Put one number into the equation and another pops out and nobody can prove it is all RIRO - rubbish in rubbish out. Let's play the game, however. Let's say we could truly calculate that the reduction in airborne nitrous oxides that we would get from organising courses on how to move freight were valued by the public at precisely 19 per cent of the cost of those courses. Silly, yes, but if Lingnan University can pretend so can we. Would it not strike you, in that case, that passing legislation requiring cleaner fuels would cost less than those courses and give us a greater reduction in nitrous oxides, in other words give us a much higher social rate of return? And have you asked yourself whether the people teaching the courses could do something else that may also have a higher social rate of return and thus create even more jobs elsewhere, the true measure of opportunity cost rather than Mr Chen's? Beware the mixture of academia and finance. It is invariably far from the real world.