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Interesting arithmetic

October 10th, 2010

Presumably relying on his Queensland government sources to get their sums right, ABC business reporter Peter Ryan writes

The biggest public share offer in more than a decade is expected to raise more than $5 billion for the Queensland Government … The Government will retain between 25 and 40 per cent of QR and will sell up to 1.68 million shares at between $2.50 and $3.00 a share. Individual investors will pay no more than $2.80 a share.

It’s a good thing all that money will be used to build new schools [1], since some arithmetic lessons are clearly in order. Unless all the shares are sold to institutions at the maximum price, there is no way the revenue can reach $5 billion.

fn1. I’m joking of course. As I and other economists have explained at tiresome length in the past, the sale of income-earning assets cannot, in any meaningful sense, finance social investments like schools and hospitals. The taxes that would (in the absence of asset sales) be required to finance debt for additional investments must be used instead to replace the income lost from the assets that have been sold.

  1. Charlie
    October 10th, 2010 at 22:11 | #1

    JQ: you said – “As I and other economists have explained at tiresome length in the past, the sale of income-earning assets cannot, in any meaningful sense, finance social investments like schools and hospitals”.

    Rot! Social investments do yield income, from taxes on the higher earnings facilitated by those social investments. I can prove to you the social return on such investments will generally exceed that on railways.

  2. trout
    October 11th, 2010 at 00:35 | #2

    “Social investments do yield income, from taxes on the higher earnings facilitated by those social investments.”

    That’s a very general statement for something that is in fact highly dependent upon circumstances. With that said, I assume the income earning effects you’re talking about for the examples given (i.e. schools and hospitals) would arise from a healthier, smarter workforce. Which is all well and good, except for the fact it would take a long (long) time before the state government reaped any rewards in the form of higher taxes.

    Second, assuming you could prove “the social return on such investments will generally exceed that on railways”, it still says nothing about income earned by the State government. A social return does not equate to increased revenues.

  3. jquiggin
    October 11th, 2010 at 07:49 | #3

    @Charlie – what trout said, with the additional observation that income tax is collected by the Federal government, not the State

  4. Charlie
    October 11th, 2010 at 09:48 | #4

    JQ: what of federal grants to states? what of GST on higher consumption out of higher earnings – where does that go?

  5. wilful
    October 11th, 2010 at 10:56 | #5

    I can’t really see what the objection is JQ (apart from what I understand is a terribly flawed process) – this is a strategic divestment of a highly carbon exposed industry isn’t it? When it becomes a stranded asset, wont that be strategic thinking by the Qld Govt?

    When Kennett sold off the brown coal generators I thought “great, we’ll be able to shut them down far more easily”. Though now I’m not so sure…

  6. October 11th, 2010 at 13:34 | #6

    Pr Q said:

    It’s a good thing all that money will be used to build new schools [1], since some arithmetic lessons are clearly in order. Unless all the shares are sold to institutions at the maximum price, there is no way the revenue can reach $5 billion.

    Even if all the shares are sold at the maximum price ($3.00) the float could not raise more than five million dollars. Obviously the journalist has got his quantities badly off, substituting 1.68 billion shares with 1.68 million. Par for the course for journalists who are economic innumerates almost to a man.

    Bloomberg gets his numbers right, as you would expect, being a billionaire:

    The state will sell between 1.46 billion and 1.68 billion shares, or as much as 69 percent of QR National, for A$2.50 to A$3 each, according to yesterday’s offer document. Individual investors will pay no more than A$2.80 a share.

    I am just wondering who will buy all those shares at that price, which is pricey according to Bloomberg. The Big Miners put up a consortium to buy it earlier in the year but got knocked back. Obviously there would by anti-trust issues with a few firms owning both production and distribution facilities.

    Privatisation is the easiest way to make money since robbing children of their candy. The worlds most cited economist is Andrei Shleiffer whose special field of expertise is – you guessed it – privatisation. This is the guy who cooked up the Leveraged Buy Out of Russia’s industries at fire sale prices to a bunch of mobbed-up oligarchs.

    Somehow I don’t think this contributed to the consolidation of the Russian states revenue base. I dont say that the QR float is in the same league as Russia Inc but its heading down that road.

    Oh yes folks, its a beautiful world we live in.

  7. Alice
    October 11th, 2010 at 18:33 | #7

    Whats even worse is its the taxpayers who are stumping up for the massive advertising of the upcoming float seen on our tv stations nightly. Now how many genuinely private floats do you see splashing that sort of advertising money on a float?. Cant recall any except Telstra privatisation – another massive bungle. Guess you know already which way the shares will head after the float – a couple of years down the track ??(pardon pun) – south.

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