Stutchbury on QR (and Quiggin)
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, 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”