State privatisation schemes a dumb idea, regardless of the spin
Queensland and NSW have some seemingly well-crafted spin to try to sell their privatisation schemes. But Economist and University of Queensland academic John Quiggin says any way you cut it, privatisation will not make the states any money.
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Both the Queensland and New South Wales governments are attempting to embark on a large-scale program of asset sales. But convincing the public will be tricky, as people are opposed to privatisation — as they should be.
Presumably both governments are calculating that their massive majorities and the weakness of the Labor opposition will protect them from the electoral disaster that has befallen so many previous advocates of privatisation, particularly at the state level. It’s a long list, including Anna Bligh in Queensland, Kerry Chikarovski, Nathan Rees and Kristina Keneally in NSW, John Olsen and Rob Kerin in South Australia, and Tony Rundle in Tasmania.
Given the clear unpopularity of privatisation, why are governments still pursuing it? The simplest explanation, and clearly the most important one, is that they believe that privatisation gives them access to a large pot of money that can be used to fund desirable, and politically popular, investments in projects that cannot be justified by the financial returns they generate.
This belief is almost universal among the political class, including political journalists. Yet it is unanimously rejected by economists (including both supporters and opponents of privatisation) and is not shared by the vast majority of the general public. The economic reasoning is simple: in general, selling an income-generating asset and using the proceeds to repay debt makes no difference to the net financial position of a household, corporation or government.
Both the NSW and Queensland governments have found new spin, which they hope will enable them to sell privatisation in the face of overwhelming public scepticism.
In NSW, it’s the idea of “capital recycling”, in which the proceeds of asset sales will be reinvested in a manner that is supposed to be sustainable in the long run. This can work, in theory. But the proposals actually on the table involve selling income-generating assets and notionally allocating the proceeds to projects that generate no income. For example, according to Deputy Prime Minister Warren Truss, the NSW government “have sold the Port of Botany, and they have raised a lot of money from that which is now being put into road systems. They’re interested in selling the Port of Newcastle, and that is be used to revitalise the central city of Newcastle.”
It seems highly unlikely that the road systems can be recycled to fund new investment, let alone a revitalised central city. This is melting down your tools for scrap and using the money to pay the rent.
In Queensland, the new spin is the idea that new investments can be financed with private equity but remain under public ownership. It’s called a “non-share equity interest” (NSEI), and the Treasury web page explains its appeal to the government:
“The state retains 100% ownership of the ordinary shares in the network businesses and assets.
“The private sector contribution will equate to the net funding for the capital expenditure and therefore represent new capital injections.
“The NSEI security is debt in its legal form but classified as equity for tax and accounting purposes, and these characteristics give the security it’s [sic] ‘hybrid’ form.” (emphasis added)
In other words, the government is replacing debt raised by the Queensland Treasury Corporation from the private sector with an instrument that’s almost identical, but is classified as equity, and can therefore be presented as a reduction in debt. Whatever the accounting treatment, my reaction as an economist is simple. If it looks like a debt, walks like a debt and quacks like a debt, it is a debt.
In both cases, the spin being offered is transparent nonsense. Why then do governments persist with these policies? The first answer is ideological. Privatisation is a core part of the free-market ideology shared by the elite of both parties (though the Labor party is gradually weaning itself to a limited extent). The same ideology has driven the “reform” of the electricity sector. Confronted with the obvious failure of that reform, its advocates, such as the Productivity Commission, have doubled down, saying that it is the remaining elements of public ownership that are to blame.
The second answer is much simpler. If you are a premier (or treasurer), privatising assets is a great post-politics career move. You need only to look at the lucrative positions currently held by former politicians including Nick Greiner, Alan Stockdale, Peter Costello and Paul Keating to see why others would want to follow in their footsteps (to be fair, John Howard, a strong and successful advocate of privatisation, has maintained the tradition of a dignified retirement, but he is almost unique in this respect).
It remains to be seen whether, even given their exceptionally strong starting positions, the NSW and Queensland governments can overcome entrenched, and justified, public hostility to privatisation. In the circumstances, defeat for either ought to kill the policy once and for all.