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QR sale plan off the rails

December 21st, 2009

My article from last Thursday’s Fin, over the fold

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Column for Thursday 17 December 2009

As Rod Sim observed in these pages recently (Time to broaden privatisation focus 30/11/09), the tendency of politicians to reduce complex arguments to simple ones can produce problems, and has done so in the case of the proposed sale of the Queensland Rail freight business and other public assets.

The purported case for privatisation, as presented in a booklet distributed at public expense to all Queensland households, is that the government needs to sell these assets to finance investment in schools and hospitals. Sim, like every other economist who has considered the issue, recognises that this is nonsense. The benefit of the asset sale is offset by the loss of future income, and there will be a net benefit only to the extent that new owners expect higher earnings.

This point has made repeatedly, first by Professor Bob Walker of UNSW, and then by a group of 21 leading Australian economists in a widely published statement. The governments initial response was to ridicule Professor Walker as ‘far out in the edges of the universe’ and to express relief that Queensland students were not exposed to such nonsense. 

This line fell rather flat when a dozen Queensland professors signed the statement dismissing the government’s case  as spurious. And with supporters of privatisation like Henry Ergas, not to mention such nationally prominent figures as Stephen King, Adrian Pagan and Warwick McKibbin among the signatories, the ad hominem approach had to be abandoned.

At this point, it might have been expected that the government would try to bring forward some serious arguments in place of the bogus talking points that had been so thoroughly refuted. Not a bit of it!  The government announced that it ‘stood by’ its arguments, then changed the subject.

Clearly, the government knows its arguments are bogus. But having claimed that the purpose of the sales is to boost the budget bottom line, it is doing its best to maximise the sale price, even if the result is damaging to competition and to the public interest.

In the case of QR freight, this has led the government to sell the operation as  a vertically integrated package, combining ownership of QR’s rail fleet with that of the track over which they run, and which any competitor would have to share. The privatised operation will have ample capacity to use strategic pricing to keep such competitors out, while earning fat profits in areas where competition is unlikely.

Sim appears to endorse the government’s reasoning here, saying, ‘If it makes commercial sense to vertically or horizontally integrate, or to do a different type of deal with one customer type who pays more than others, such decision making should not be subject to a political filter’.

This is a viewpoint that has always appealed to monopoly owners of infrastructure.  Users, potential competitors, and their customers, have, understandably taken a different view, as have the majority of economists. The fact that vertical integration and discriminatory pricing may make commercial sense to a monopolist does not mean that these practices are economically or socially beneficial.

The failure of Australian telecommunications policy over the last decade, and the role that Telstra has played as a privatised owner of monopoly assets illustrates the point. Telstra’s position as a dominant firm, pursuing its own short-term commercial interests regardless of the needs of the community, derailed every attempt at coherent policymaking under the Howard government. The Rudd government has found no alternative but for the government to re-enter the market through the National Broadband Network. 

The determination of governments, driven by budgetary cosmetics, to push through with asset sales once they have been announced, means that other considerations discussed by Sim, such as the need to be sure that ‘our infrastructure is in the hands of the right owners’ have also gone by the board. 

Having failed to attract a trade buyer willing to pay an adequate price, the government has now announced a public float, targeted at Queensland households, with the government itself maintaining an effective controlling stake of 25 to 40 per cent. It is hard to imagine an ownership structure less conducive to efficiency. 

The Queensland asset sales are a prime indication of the need for policy debate to be based on sound economic principles. A government that sells a policy based on lies will, sooner or later, be caught up in its own deception.

John Quiggin is an ARC Federation Fellow in Economics and Political Science at the University of Queensland. He was one of 21 economists who signed a statement critical of the Queensland government’s case for asset sales.

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  1. Doug
    December 21st, 2009 at 12:38 | #1

    Governments will get caught up in their own deception but it is the tax payers who will pay the financial cost.

  2. paul walter
    December 21st, 2009 at 14:17 | #2

    Goes to show that the Labor Right is as perverse as the previous generation of Bjelke-ite Nat pork barrellers and Howard “big end” crony capitalists.
    With one major difference.
    The ALP Right New Tories lack even the minimal wit and education of the old Tories.
    But like (other) true Conservatives, they forget nothing and learn nothing.
    Else why would they travelling down the long discredited NSW road?
    The QLD Treasurer appears at first glance to be amongst the very worst of these functionaries, including right across the entire nation.

  3. paul walter
    December 21st, 2009 at 14:23 | #3

    Doug, you are right as far as you go.
    Absolutely!
    But I’ll bet you suspect venality, same as most other people with above single-digit IQ’s.
    What other excuse, when they perversly persist in their oafish march into the teeth of the serried ranks of fact, logic and reasoning?

  4. December 21st, 2009 at 15:27 | #4

    I learnt last weekend that the ‘Smart State’ has been running down its world class Leslie Research Center for years and throwing irreplacable scientists on the scrap heap. For some furthr information see http://www.grf.org.au.

    It’s remaining 40 staff are to be redeployed or encouraged to take voluntary redundancies.

    It was reported in a small article on page 20 of the Sunday Mail with the very nondescript title “Public service jobs culled”.

    See also Foundation cries foul over sale in the Toowoomba Chronicle of 1 Oct 09.

    All the more reason for people to sign my e-petition calling for the resignation of this Govermnent, for new elections and for a future government not to honour any sale contracts now being entered into against the clear wishes of the Queensland public.

  5. stockingrate
    December 21st, 2009 at 19:48 | #5

    PrQ, didn’t you and your academic colleagues know, that in relation to debt, The Treasurer Andrew Fraser had discovered a new economic principle?

    “Mr Fraser: A new economic principle that the costs should be shared by the generations that
    take the benefit of the infrastructure.” Hansard 5.6.08

    Please pass the belated but bracing news on to the world of economics!

  6. JJ
    December 22nd, 2009 at 09:15 | #6

    So many of their arguments are false. One of the other key arguments they presented was that by selling the assets the State would obviate itself of $12bn worth of infrastructure expansion in these businesses. This included the $3.6bn planned expansion of the Abbot Point Coal Terminal from 50mtpa to 110mtpa.

    It is interesting to then find out that this expansion is not included in the asset sale, but rather is being progressed seperately by the North Queensland Bulk Ports Corporation (a GOC). EOI was released last week. This same GOC has also recently called EOI for a coal facility on 1400ha at Dudgeon Point (max of 120mtpa).

    These potential expansions are reliant on the opening up of the Galillee basin, which is yet to have an EIS completed.

    Yet Fraser has advised us that we are selling the assets so that government debt wont have to be used to upgrade the infrastructure.

    So many simple flaws in their arguments.

  7. December 22nd, 2009 at 20:27 | #7

    Prof Q: Just saw the 7.30 report and wondered whether you were approached for your expert opinion on the asset sales story?

    Perhaps it would be better if all the money that is supposedly going to be spent on new Brisbane ABC headquarters at Southbank were directed to recruiting some real journalists.

  8. derrida derider
    December 23rd, 2009 at 14:12 | #8

    Of course this is the classic way that privatisation fails – entrenching monopoly to dress up the accounts with a high sales price. There is a long sordid history of this – you could have cited many, many more examples than Telstra – and the consequences experienced by the populace are the single biggest reason the whole idea is so unpopular.

    The incentives presented to politicians contemplating privatisation are such that even where privatisation is good in theory (which I think is quite often) it rarely proves to have been in practice after the pollies finish with it.

  9. derrida derider
    December 23rd, 2009 at 14:19 | #9

    stockingrate, what Fisher said is actually pure public finance orthodoxy. Governments are supposed to borrow to fund long lived assets for just that reason. Those in favour of privatisation are just saying that it is better that someone else other than govenrments borrow, often on the grounds that governments cannot be trusted but corporations can be.

    That this principle is beyond the ken of ratings agencies and other “savings good, debt bad” naifs doesn’t obscure the fact that it has been known to be true since at least Marshall.

  10. paul walter
    December 23rd, 2009 at 16:17 | #10

    DD hits it right on the head for me.
    “Accountability”.

  11. Alice
    December 23rd, 2009 at 16:59 | #11

    @paul walter
    You mean “accountability” – where has it gone at State govt level Paul? I wonder exactly the same myself. I say we get rid of them. They cost a motsa and do bugger all except damage.

  12. Alice
    December 23rd, 2009 at 17:01 | #12

    @Alice
    I notice Keneally has backed away from the privatisation of state ferries. Someone should tell this woman she might just be on the right track – now do the rest. Get a share of income taxes from the Commonwealth…Im sick to death of seeing Canberra so damn well resourced while Sydney grinds to a halt.

  13. Alice
    December 23rd, 2009 at 17:04 | #13

    Either that or resign in all our interests. Here I note, just in case anyone was thinking of voting libs in the next state election, that Barry Ofarrell who moans on about “why cant nsw labor get the trains running on time, the hopsitals working, and opposed privatisation of electricity is now in the papers saying he would privatise State ferries.

    Just in case you didnt notice the hypocrisy of NSW libs. It will be more of the same privatisation road.

    Vote for a baboon, vote for anyone but either major party.

  14. Alice
    December 23rd, 2009 at 17:07 | #14

    Eww – they – both major parties in NSW politics – make me feel completely sick!

  15. Alice
    December 23rd, 2009 at 18:02 | #15

    @Alice
    But actually whats the point of telling NSW labor to go fight for less vertical fiscal imbalance and more funds from our taxes (a broader base in the income tax spread to the states, not just GST allocations and ad hoc grants when theC’wealth feels predisposed to do so).

    Do we really want the State Govts wasting the extra money if they did happen to get it from the C’wealth on pps consultants, engineers consultants, planning consultants, architectural consultants, heritage consultants, media consultants, transport plans, hospital plans, consultants consultants and no doubt hair and grooming media consultants?

    I say we get rid of State Labor and State Lib – all State Govts in fact. Utterly useless and incompetent. Im over them all.

  16. Alice
    December 23rd, 2009 at 18:09 | #16

    @Alice
    Had they not stripped the expertise of the public sector they would get their consulting for free and something might actually happen. Now State Govts seem to need a conulstant to tell them how to tie their shoelaces.

  17. Alice
    December 23rd, 2009 at 18:11 | #17

    One too many posts…but I am seriously angry about the neo liberal right wing agendas in both parties.

  18. paul walter
    December 23rd, 2009 at 18:25 | #18

    Alice, have enjoyed your intricate conversation with Alice but think you are “preaching to the converted”.
    As we all know, the concept of “accountability was first cab off the rank when privatisations began.
    Alice, (other), what do you think?

  19. Alice
    December 23rd, 2009 at 18:31 | #19

    @paul walter
    Yep. Nothing quite like corruption seeping in right under our noses (whether for individuals or for “the party”).

    I think accountability is lost. Just lost.

    Sorry for excess postings guys. I am preaching to the converted I know, but I do think its far superior to always externalise in preference to internalising. Its much healthier!. Id hate to go mad (like a few in here)!

  20. Alice
    December 23rd, 2009 at 18:35 | #20

    @Alice
    Well I did do something positive. I wrote Barry OFarrell and asked him where he got off whinging about trains and hospitals in a state of failure, objecting to electricity privatisation and he then says he will privatise ferries.

    I at least asked the b*** etc – do you realise that the electorate is over this agenda (check the polls – and your party comes in with more of what the electorate doesnt want??? How does that work)?

    Corruption. For what its worth.

  21. paul walter
    December 23rd, 2009 at 19:48 | #21

    Where is Alicia today?
    Perhaps one of you at leastm might get a contrary argument from Alicia?

  22. Alice
    December 23rd, 2009 at 20:05 | #22

    @paul walter
    Yes – Where is my sister when I need her? Barry’s reply on State Lib model for Sydney Ferries and my reply under. Maybe we can get kenneally in here to say why she changed her mind on Sydney Ferry privatisation (too close to the next election they are going to lose anyway?)

    Barry – below

    I suppose the point is: to improve services and reduce costs.

    We’re talking about contracting out or franchising not sale of an asset. State retains control of pricing, routes ect. Its not about handing an asset over and leaving commuters in the lurch.

    The model works well in Brisbane and on the Manly fast ferry route which, for the past year, has been privately operated, has had improved reliability and patronage and where the operators have also improved customer service ie you can get snacks and drinks on board.

    I don’t take ideological positions on these issues – I prefer to apply the solution that best suits the problem and the times. Ferries have lost 400K passengers over the past 14 yrs (at a time when Sydney’s population has grown) and that has resulted in more cars on the road.

    Have a great Xmas and new year.

    Barry

    Can you not see how unpopular the QLD privatisations are? Might Sydney Ferries have lost money because there has been no new investment? We are at the point where we need major investment in public transport – you know North side at congestion point already. Without it we reach gridlock. Do we wait for the private sector to solve all our problems? Surely you can see that the C’wealth holds most of the tax revenues. When is the state going to fight for a proper share?

    PPs are not solving our impending traffic crises Barry. Its no longer a question of efficiency gains but gains from new net investment. This isn’t and shouldn’t be the sole domain of thje private sector. I have no view one way or another, except that there is balance and a balanced view and that consideration not just be given to efficiency gains now but planning and constructing for future needs.

    That was me. Cranky at Xmas.

  23. Alice
    December 24th, 2009 at 06:02 | #23

    @Alice
    Poor Bazza. He is actually not a bad bloke…its just others in the party.

  24. Graeme Bird
    December 24th, 2009 at 09:41 | #24

    Guys. Can you drop most of your other causes and just stop this sale? The rail was downplayed in the twentieth century. But I thought the rail would be big in the 21st. This sale, in the way that it is planned, will be the death of that hope. No doubt about it at all. Yes cronyism usually has the edge on socialist business from some sort of static efficiency perspective. But if Queensland sells off their rail in this particular way that burns all our bridges. We can never then sort it that we have a powerful, expanding and dynamic rail system there for the 21st century.

    We don’t have to take a helluva lot of time to get this public-private deal right. But we need a moratorium for sure. We need a total rethink. Because there can be nothing worse then an outfit that is neither quite private nor public. Witness the American banking system by way of example. A business that is neither quite public or quite private is an immortal human cell that is neither quite dead or alive. And undead replicating cell. Its like a cancer cell. Its the living dead cancer cell, not just for that industry. But for the society at large.

    No public private partnership. If you can make it private without cronyism fine. If not keep that part of the business in public hands until such time as you are sure of what you are doing.

  25. Alice
    December 27th, 2009 at 19:35 | #25

    It also turns out I may be right on these ferries with the need for new capital investment. They are ageing and need replacement and if the NSW State govt thinks Transdev is or was going to plough that sort of money in I think the govt is sadly mistaken. Id hate to see one sink halfway between Manly and Circular Quay with a load of passengers on board but most of those ferries are pretty old now.

    The other major issue is parking. Local councils including Warringah and Manly have now put strict time parking limits in many suburbs south of Dee Why on route to the ferry itself as well as all around Manly….meaning people who could once park closer to the ferry or the bus to the ferry, now cannot. Those people are now more likely to park further North on the Northern Beaches (where they can still park) and go all the way to the city by bus directly over Spit bridge.

    If they want the ferries to work and to get more cars off the road, the State Govt needs to examine ferry accessibility and look at the interface with local council parking regulations.

  26. Alice
    December 28th, 2009 at 12:14 | #26

    @Graeme Bird
    Birdie gets a hole in one with this insightful comment

    “Because there can be nothing worse then an outfit that is neither quite private nor public.”

  27. Alice
    December 28th, 2009 at 12:28 | #27

    @Graeme Bird
    We now see China getting on the ball with the construction of very fast trains while we diddle around with our pathetic two buck dabbles with PPS businessman and government cronyism in Australia..

    China doesnt have any ideological problems with public investment…so what is our pathetic problem with it here?

    So far, the People’s Republic of China has built 185 km of track capable of handling 350 km/h trains, including the link between Beijing and Tianjin, which opened shortly before the 2008 Olympic Games. And there is more, much more, coming on line by 2012.

    Welcome to Australia where nothing happens fast…the wide brown land of hick ministers, tinpot bigwigs, media immoguls, bribes, back massages and BBQs!

  28. Alice
  29. January 2nd, 2010 at 21:43 | #29

    I have updated the story featuring that interview/debate between myself and Andrew Fraser I mentioned a few weeks ago. I have included the full transpcript (warts and all) or all threeYouTube Videos. I have also added a Table of Contents and other supprting documents as well as links to other articles. The story is Anti-privatisation candidate confronts Queensland Treasurer”.

    Comments there or here are welcome.

  30. Peter
    January 3rd, 2010 at 15:35 | #30

    John,

    Did Andrew Fraser take up your offer to debate this on Madonna King? If not it has to be the first agenda item for 2010.

    Peter

  31. January 3rd, 2010 at 16:40 | #31

    Peter, As I wrote here, the debate lasted all of 5 minutes and that was only within another regular feature “Party Games” on Friday Mornings in which Madonna King normally interviews both Andrew Fraser and Opposition Tresury spokesperson, Tim Nicholls.

    So, unless Madonna King has plans to stage a longer debate early this year, then she has reneged on her commtiment to hold a proper debate on the issue.

    There was not even an audio file of that debte made available.

    So, as far as I am aware, the most substantial recorded public debate on privatisation, that is, outside Parliament (which is not properly reported by the newsmedia) remains, for allof its shortcomings, my meeting with Andrew Fraser linked to above.

  32. paul walter
    January 3rd, 2010 at 16:57 | #32

    Keep on punchin’ Dagget!
    Even if not everyone replies, they are reading those post and making up their own minds, as a more complete picture emerges.

  33. Peter
    January 3rd, 2010 at 17:34 | #33

    Cheers,

    She committed to give “as much time as they wanted” to John and Fraser, so that needs to happen first up if any of this has any chance of being transparent. Sick of hearing 3am “do whops” as the justification for discrediting academics with plenty of street cred.

    Peter

  34. January 3rd, 2010 at 17:48 | #34

    Thanks for that paul walter. For my own part, I am often also remiss in not responding, or not responding adequately when thoughtful interesting and informative posts are made in response to my own. I mean at some later date to revisit a few past such posts on privatisation.

    Had you considered signing my e-petition calling for the resignation of the Queensland Government and for for new elections? I am in the proces of writing an article about why I believe it necessary even if it were to result in the election to Government the same Liberal National Party I have voted against at every election until now.

    Of course that would be not my own most preferred outcome, but I believe that even that would be vastly preferable to the continued rule of this ‘Labor’ Government, all but two of whom, when they voted in caucus for the fire sale in early June, completely disqualified themselves from being fit to sit as representatives in any democratic Parliament, let alone as representatives of the Labor Party.

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