Bligh’s bad arguments for privatisation
The Bligh’s government’s original case for the asset sales announced in the June budget was that the state’s finances had deteriorated drastically since the previous assessment at the time of the March election, as part of the generally declining outlook for the world economy. That argument has collapsed as the Australian and global economies have strengthened with the result that the Queensland state budget managed a surplus for 2008-09, as opposed to the projected $500 million deficit.
It would be possible to argue for some (though not all) of the proposed privatisations on the grounds of economic efficiency, but of course arguments of this kind are no more (and, given the epic failure of financial markets seen over the past two years) arguably less valid than they were before the crisis, at which time Labor rejected them.
That leaves the argument that the asset sales will improve the state’s finances. Such arguments depend on showing that the value derived from selling the assets exceeds the value realised by keeping them in public ownership. In this opinion piece, Bligh attempts to make such a case, but the arguments involve hopelessly invalid apples-and-oranges comparisons. When a policy is defended by such obviously shoddy arguments, the only reasonable inference is that the correct assessment comes out the wrong way.
Bligh’s first claim is that
Keeping these commercial businesses going over the next five years would cost Queenslanders $12 billion on new coal trains and wharves, money that could otherwise be spent on roads, schools and hospitals.
I’ve been refuting this kind of claim for at least 15 years now, and it’s depressing to see it wheeled out again. Even if Bligh doesn’t understand the fallacy here, I’m sure the Treasury officials who prepared this line know that it is utterly bogus. The coal trains and wharves are income generating assets. Taking money intended for income generating investments and using it to fund investments that return no additional revenue to government (although they do provide services to the public) is the fiscal equivalent of selling your share portfolio to buy a new car. The car is, in a sense, an investment, but it’s not one that returns a flow of income.
As NSW State Treasury Secretary John Pearce and Victorian Treasury Secretary Ian Little pointed out some years back ‘PPPs do not provide governments with an additional bucket of money for use on infrastructure projects‘. Replace “PPPs” with asset sales, and the validity of the point is unchanged.
The second argument is even worse. Bligh writes
these businesses are not, as some claim, a cash cow from which government can endlessly draw money. In 2008-09 they generated $320 million, or less than 1 per cent of the Government’s revenue. On the other hand, the Government will save $1.8 billion every year in interest payments on the borrowings needed to sustain them as viable businesses.
I found these numbers hard to believe and did some checking. It turns out, as best I can tell, that the $320 million is the dividend paid by the enterprise to the government as owners. The $1.8 billion is the total amount of interest that would be saved by selling the assets (for the projected price of $15 billion, and avoiding further investment of $12 billion. Comparing the two is utterly invalid.
The $320 million paid to the government is made after servicing the debt of the enterprises concerned (which would be a deduction from the sale value), making tax equivalent payments (which go to the state government) and retaining some earnings. Assuming the $12 billion investment in coal is commercially justified, it would have to generate enough cash flow to cover its interest costs along with a premium based on a commercial weighted average cost of capital. The relevant comparison for interest costs is not dividend payouts but earnings before interest and tax (EBIT). For QR alone, this figure is around $700 million, and it would obviously be increased greatly by the planned new investments, assuming they are commercially justified.
I haven’t done a full-scale assessment of the fiscal implications of the proposed asset sales. But I don’t really need to. The fact that the government and Treasury have relied on such a poor analysis tells us all we need to know. If the figures came out the right way, they wouldn’t need to fudge them. To quote my CT colleague Daniel Davies Good ideas do not need lots of lies told about them in order to gain public acceptance.