Home > Economic policy, Economics - General, Oz Politics > Stutchbury on QR (and Quiggin)

Stutchbury on QR (and Quiggin)

October 17th, 2010

Michael Stutchbury in the Oz offers a case for the Bligh government’s asset sales, and that of QR in particular. Mostly, he wants to argue that the sales will put an end to the oppression of the bosses by the workers[1], or as he puts it, would allow business to “clean up its anti-management culture”. But he also tries a half-hearted defence of the official case for privatisation, that selling assets will finance non-commercial investments.

The anti-union line is par for the course at the Oz (though, as Stutchbury notes, the AWU is as eager as it has always been to sell rival unions down the river). There are, however, a couple of problems. First, to the extent that Stutchbury’s anecdotal evidence is valid at all, it only applies to QR. The other assets being sold are almost pure capital, with hardly any potential for improvements in labour efficiency or pro-management culture.

Second, and more importantly, if this is such a big problem, why hasn’t the Bligh government tackled it directly, or at least made the case for a private owner doing so. In fact, the terms of the public float ensure that the government will be the controlling shareholder for some years to come, and preclude any job cuts for three years. Stutchbury cites political imperatives, saying,

Of course, Bligh and Fraser could make the pitch that a private operator will more ruthlessly clean out a century-plus of inefficiencies and union control. But that would be asking for a Labor train wreck.

As opposed, I guess, to the marvellous political success apparent with the government’s current approach, which has already garnered the support of 26 per cent of the population.

Still, at least in this part of his article, Stutchbury is making arguments that would appeal to at least some serious economists. More striking is his pronouncement that Australia’s leading economists, including Warwick McKibbin and Henry Ergas got it wrong when they signed a statement I draft criticising the government’s case for privatisation. Stutchbury’s reasoning at this point requires an old-fashioned fisking.

More than 20 leading economists, including Henry Ergas and current and former Reserve Bank board members Warwick McKibbin and Adrian Pagan, inadvisedly signed a Quiggin-organised statement highly critical of Labor’s QNR policy pitch.

Quiggin’s statement attacked Labor’s claim that the privatisation proceeds plus savings on rail capital spending would free up funds for roads, schools and hospitals. Instead, the upfront privatisation money would be offset by the loss of ongoing dividends that would come from a government business. Asset sales should not be used to fund recurrent spending.

So far, so good

While that’s true, it’s also not that simple. A private QRN surely will run the business more efficiently than a government hostage to political pressures. That should boost the sale value compared to the expected stream of government dividends.

“Should?”. Presumably, if this claim were true, it could be backed up by some actual numbers, relating the sale price of $2.50-$3.00 a share (capped lower for individual investors), implying interest savings of maybe 15-20 cents a share each year, to plausible projections of dividends. The government offered some numbers but, as the economists’ statement pointed out they were totally bogus. The numbers were quietly removed, and nothing new has been offered in their place. I had a go at calculating better estimates, but the accounts of the enterprises for sale include a lot of abnormal profits from land sales and the like, which made an outside estimate very difficult. But, presumably the government must have more accurate estimates it could offer if they backed up the original claims.

Governments have enough to do without freighting coal. As well, governments do not have unlimited borrowing capacity, at least if they want to keep their finances and credit rating on the rails.

Before the 2009 election, the government had announced that it would proceed with a large-scale infrastructure, at the cost of a one-step credit rating downgrading from AAA to AA+. That amounts to an additional cost of around 20 basis points (0.2 percentage points) on new or rolled-over debt. Against this, the government gets a much higher rate of return on commercial investments like QR. Regulated assets like the QR network and the Port of Brisbane get a return about 4 percentage points over the bond rate, which leaves the government well ahead.

Using the QRN proceeds to pay down debt surely will give Bligh and Fraser more room to finance infrastructure that the private sector may not be keen on funding.

“Surely” is, in my experience, a sure sign of desperation. Stutchbury is now asserting the same point he admitted was false a couple of paras earlier.

The danger remains that Labor will use the windfall to splurge on winning a sixth successive election by 2012.

Indeed, and the difference between “splurging” and “financing infrastructure that the private sector may not be keen on funding” is very much in the eye of the beholder.

And regulating a privately owned and vertically integrated QRN is tricky.

Finally, something I can endorse without qualification. Assuming privatisation was justified, it should have been preceded by separation of the track and freight businesses. Instead, the government kept them together to maximise the sale price, much to the horror of the customers, who made an unsuccessful counter-offer.

But the overwhelming point, reading Stutchbury’s piece is that virtually every argument he puts is one that has been dodged or explicitly disavowed by the Bligh government at some point. Does he really believe that a proposal sold so dishonestly will be implemented in an efficient and equitable fashion?

fn1. This reminds me of George Orwell’s description of a student, forced to memorise and recapitulate the causes of the French Revolution, and desperately trying to decide between “the oppression of the peasants by the nobles” and “the oppression of the nobles by the peasants”

  1. paul walter
    October 17th, 2010 at 21:30 | #1

    As usual with these creatures, you go straight to the last para to expose the real objective.
    And what’s really bugging them?
    Workers and unions.
    Control.
    always the first priority of psychopathological control freaks like Stutchbury and his corrupt employer, fresh from revelations about US election funding of warmongers during the neo con era.
    Somewhere in the entire country there remains a residue of union involvement and worker resistance to the sort of nonsenses Stutchbury would impose on them, were they even more defenceless.
    When NSW tried its version of the antic, the scab Costa was happy to acknowledge it was more about doing the bosses dirty work for them, smashing worker resistance, than for any genuine economic reason.
    Now we get a better idea of why Qld and its rightwing government is really attempting, this after a couple of years battling to discover any sane economic idea as why this policy bunkum is being inplemented by these custard-gutted shades.

  2. silkworm
    October 17th, 2010 at 23:08 | #2

    I live in Sydney and I’m not familiar with the politics behind the QRN sale, but we’ve been getting ads on TV down here about it, and the main selling point is that it is a large hauler of coal. When I heard the Qld treasurer on one of the ABC business programmes telling the interviewer that coal haulage was a growing sector of the Qld economy, I immediately became skeptical. Perhaps the Qld govt fears that the Feds will be putting a price on carbon sooner rather than later, and is keen to flog QRN while there is profit in it. However, the Qld govt is deliberately witholding info from the public about the effects of a carbon price on QRN, and while it is not technically lying about the prospects of growth in the coal sector, it is still pretty dishonest.

  3. Ikonoclast
    October 18th, 2010 at 09:25 | #3

    The QR sale and the govt reasons for it are dishonest as our best economists have proven irrefutably. Why are Bligh and her treasurer being dishonest? Clearly they think there is some gain in it for them. Politically, I think they have miscalculated. Financially, perhaps Andrew Fraser is thinking about a nice job on the board after politics. I think politicians should be prevented from entering any business area where they had involvement as politicians and this ban should stand for 6 years after leaving office.

  4. James Haughton
    October 18th, 2010 at 12:32 | #4

    “A private QRN surely will run the business more efficiently than a government hostage to political pressures.”
    Yeah, just look at the fantastic jobs done on British Rail or the Melbourne tram system by private enterprise!
    I’d rather invest my savings in lemmings.

  5. may
    October 18th, 2010 at 12:51 | #5

    @James Haughton
    you forgot the wonderful job done by the corporate health industry in America.

  6. may
    October 18th, 2010 at 13:05 | #6

    is it possible to have a list of social services,that run properly will not make a profit, that are paid for by revenue raised from society?

    health and education are definites and motor bike manufacturing(for example) is not.

    for profit activities push innovation and public service run infrastructure is the underlying support for this activity.

    neither pure communism nor pure capitalism are viable as each denies essential activity in a healthy society.

    does this stand to reason JQ?

  7. John Quiggin
    October 18th, 2010 at 13:16 | #7

    @may
    I agree and I’ve written at length on this point, for example

    http://espace.library.uq.edu.au/eserv/UQ:10906/jq_ms_1999.pdf

  8. Sam
    October 18th, 2010 at 14:12 | #8

    I see some benefit in creating a private monopoly for coal freight. It would invite rent seeking behaviour, and stifle the growth of an industry which is hugely damaging to the global environment. I’m sure it’s not the best way of reducing Australia’s carbon emissions, but it will have that effect.

  9. James Haughton
    October 18th, 2010 at 14:36 | #9

    LOL @ Sam.

  10. Sam
    October 18th, 2010 at 14:43 | #10

    @James Haughton
    The sad thing is I’m only partly joking. This policy may end up being the most significant emissions reducing initiative undertaken by any Australian government.
    Doing a cost benefit analysis, and applying a pollution cost of $80/tonne of CO2, how good does this deal actually look?

  11. Adam Dufty
    October 20th, 2010 at 12:13 | #11

    Looks like the market doesnt like the QR offer either
    http://www.smh.com.au/money/investing/is-qr-worth-the-freight-20101019-16rkk.html

  12. Alice
    October 21st, 2010 at 10:18 | #12

    @Adam Dufty
    If only the analysts could derail the Bligh Government as well as they are derailing the privatisation that QLDers dont want from a government they dont like.
    When this sort of thing can be passed against the great wishes of the majority by a few bone headed politicians, there is something very wrong with our democracy, the state of the public service and its responsibility for checks and balances.

  13. October 21st, 2010 at 14:09 | #13

    may :
    is it possible to have a list of social services,that run properly will not make a profit, that are paid for by revenue raised from society?
    health and education are definites …
    for profit activities push innovation and public service run infrastructure is the underlying support for this activity.
    neither pure communism nor pure capitalism are viable as each denies essential activity in a healthy society…

    That happens not to be the case. In general, some systems are so primitive and unsophisticated that they don’t need or have anything along those lines at all, e.g. certain hunter-gatherer approaches. But even if we confine our attention more specifically to modern, advanced societies, much of that is unnecessary and even harmful, properly considered.

    To clarify that, consider Gibbon’s observations in Chapter XVII of The Decline And Fall Of The Roman Empire: “… the three principal objects of a regular police [i.e., polity] – safety, plenty, and cleanliness …”.

    If “plenty” is provided (which, granted, it currently is not for everybody), then neither most aspects of health services nor any of education need or should be provided that way, but only broad ranging preventive public health measures like sanitation should be – things with intrinsic rather than artificial externalities. The same goes for nearly all “public service run infrastructure”.

    To put it another way, the apparent need for nearly all of those things is an artefact of the failure to make things work properly in that other respect, the failure to provide “plenty”. If people cannot afford to make their own arrangements, which is indeed often the case here and now, the right and suitable remedy is not to do so for them but rather to fix that underlying problem – a remedy that I have elsewhere described as “promoting people out of poverty”. Addressing the apparent and immediate need, in any other way than as a temporary bridging measure working like a tourniquet, not only draws attention away from what is really needed but also imposes spread burdens that make it even harder to cure the underlying problem.

    Yes, we are currently in a mess that needs the tourniquet. No, neither the mess nor the tourniquet make things better, only making general improvements in people’s own resources would – and “own resources” is antithetical to social provision from competing for the same limited resources, not simply orthogonal to it. And for what it’s worth, where social provision is suitable and fitting, it is best handled by institutions much closer to individuals like endowed charities than by federal, state or municipal governments and bureaucracies; “social provision” should not be taken as a synonym for those.

Comments are closed.