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Queensland

Jun 6, 2014

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.

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.

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57 comments

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57 thoughts on “State privatisation schemes a dumb idea, regardless of the spin

  1. The Pav

    Could somebody please point out a privatisation that has ever worked as promised by the proponents or not failed as suggested by the opponents.

    I still don’t like Howard but there is some character and i honestly believe he wouldn’t have tolerated Bishop as speaker.

  2. Jaybuoy

    not to mention the slushy fees generated by the spiv end of town on the way through..

  3. Luke Hellboy

    The common results for so-called Public Private Partnerships that I’ve seen is that if the project turns a profit, the private gets a majority of it, if it turns a debt, the public get to eat it.

  4. David Hand

    Privatising the Commonwealth Bank, Qantas, Telstra and other entities have all worked very well.

    Those who take a different view tend to look at the profits most of these businesses make without acknowledging that they would never be a profitable under public ownership.

    The main argument for privatisation is that public servants are pretty useless at running businesses. The most compelling argument for retaining public ownership is in the case of natural monopolies. The distribution networks of electricity being a case in point.

  5. Nancy Wallace

    Sadly no. These enterprises were all profitable before they were sold, as you can easily check. In all the cases you mention, the sale price was less than the present value of the earnings foregone.

  6. Dogs breakfast

    “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.”

    Thank you Professor Quiggin. This concept was completely beyond the intellectual gifts of Peter Costello, the entire media pack at the time, and consequently the general public. The general public still thinks that the libs paid off great wads of public debt (at tiny interest rates) while selling off assets that were earning returns close to double the government interst rates, and it was bought hook line and sinke by the unthinking public as a good thing!!!!!!!!!!!!!!!!

    “This is melting down your tools for scrap and using the money to pay the rent.”

    Halle effing lujah!

    Now, I wonder what public project of great investment value which will be a natural monopoly and set Australia up for the future are we currently ignoring, or selling down.

    NBN anyone. The great ideologues of the free market don’t understand the most basic difference between an investment and dead money.

    Nongs

  7. Dogs breakfast

    “Those who take a different view tend to look at the profits most of these businesses make without acknowledging that they would never be a profitable under public ownership.”

    Ideological claptrap! Demonstrably false. Wrong.

    “The main argument for privatisation is that public servants are pretty useless at running businesses.”

    And clearly, the only way around that problem would be to sell the business. Imaginative!

    “The most compelling argument for retaining public ownership is in the case of natural monopolies”

    What, like building an NBN?

  8. David Hand

    Nancy,
    What you do not take into account is the dramatic improvement in the profitability that these privatised businesses have achieved and the resulting tax they pay. People who oppose such privatisations just assume that the performance is as good in public ownership when it is not.

    This is evident from our latest worked example, the NBN.

  9. AR

    One Hand – “the profitability that these privatised businesses have achieved and the resulting tax they pay.” demonstrates the Raygun/Laffer (which even the latter had the decency to recant)conjob, the trickle down effect, aka being pissed on from above and told that it’s raining.
    The main reason that electricity prices rose so steeply in the last couple of years was the gold plating of the distribution network (poles & wires) specifically to obviate the privatised enterprises needing to pay for it after being sold.
    The oldie mouldie, “social the costs, privatise the profit”

  10. AR

    Wanker – I was laughing so much at your previous idiocies that I missed this final gem – “This (?troothiness?) is evident from our latest worked example, the NBN
    As was said of il Duce, it is impossible to parody a buffoon.

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