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‘Recycling’ publicly owned capital assets

April 9th, 2014

I tend to be a little bit behind on buzzwords, but suddenly I’m hearing this one all the time. The politically toxic idea of privatising public assets is being repackaged as ‘recycling’. The idea is that the public sells one asset, and uses it to buy another.

There is one version of this idea that is, at least arguably, sensible. Suppose the public sector has a greater capacity to bear the demand risk associated with some kinds of projects (for example, ports) and that this risk is greatest in the early years of operation, after which revenue streams become predictable. Suppose also that the public sector wants to keep its gearing ratio (debt to assets) low for one reason or another. Then it would make sense to undertake development in the following sequence. The government decides a new port is needed and contracts for its construction on a fixed price basis (with rewards and penalties for early or late completion). When the port is built, it is operated as a government business enterprise until the demand risk settles down. Then it is sold and the proceeds are used to build a new port, or some other piece of income-generating infrastructure. So, at any given time, construction companies are bearing construction risk, the government is bearing demand risk and the private sector owns and operates various ‘mature’ assets. This process of recycling can, in principle, be carried on indefinitely

There are arguments for and against this kind of recycling, but they are irrelevant to the proposals actually on the table, which involve selling income generating assets and notionally allocating the proceeds to projects that generate no income. For example, according to Warren Truss, the NSW government

have sold the Port of Botany and they have raised a lot of money from that which is now being put into road systems. They’re interested in selling the Port of Newcastle and that is be used to revitalise the central city of Newcastle.

It seems highly unlikely that the road systems can be recycled to fund new investment, let alone a revitalised central city. This isn’t recycling in the proper sense of a sustainable process – it’s melting down your tools for scrap, and using the money to pay the rent.

Recycling’ public assets is a one-way trip to the fiscal scrapyard

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  1. Pete Moran
    April 9th, 2014 at 18:14 | #1

    Topical as I posted this the Monday Message board Six Impossible Things About Privatisation by Ian McAuley

    Anything you’d disagree with JQ?

  2. hc
    April 9th, 2014 at 19:28 | #2

    Of course the roads can yield a very substantial non-monetary return because they are useful but often unpriced. The issue surely is whether they yield a superior return (however calibrated) than the income earning asset sold that is used to fund them.

  3. Jim
    April 9th, 2014 at 20:58 | #3

    Your premise might be right, but the problem is that the driver of “asset recycling” seems to be purely a fiscal bind (states unwilling to enter into more debt, even if the infrastructure projects provide net economic benefits). JC’s take on what “asset recycling” will more likely result in, is pretty much on the money.

    Also, I have not seen a good BCA done on a road project in about 20 years. Rather, governments prefer to do a “business case” or an “impact assessment”. I suspect that this is because very few augmentations to the road network would actually demonstrate a new economic benefit.@hc

  4. Ernestine Gross
    April 9th, 2014 at 22:54 | #4

    Prof Q, the argument for ‘recycling’ being sensible on the grounds of initial demand risk is akin to the corporate finance argument of using equity finance (not listed) during the development stage of a business (project) and sell it (listing) once profit records are available.

    Your argument about using revenue from the sales of an income producing asset, owned by the public and managed by a government, to finance public infrastructure, shows up yet another flaw in so-called modern public sector management, namely the idea that corporate sector management is relevant for public sector management. In short, it shows up the importance of the distinction between economics and commerce.

    Commerce and its measures of ‘success’ (financial accounting and GDP) operate as if the Arrow-Debreu model would be the relevant conceptual framework (complete commodity markets being approximated by NPVs, arrived at by making guesses about future market prices (sometimes supported by long term contracts), taxation and essentially an assumption about the cost of finance, and all activities are treated as being linearly separable – to fit into the accounting model – even though they are not – allocations of overheads are done by cost accountants by means of conventions and the pages of footnotes to corporate balance sheets tend to be longer than the financial reports, which contradicts the presumption that the balance sheet contains all relevant information).

    The methods used in commercial enterprises can’t even deal properly with merely commercial matters, as illustrated above. It is, IMHO, absurd to assume these methods work for ‘the economy as a whole’, ie the natural environment and society. For ‘the economy as a whole’, as defined here, positive and negative externalities dominate in the public sector domain, markets are incomplete and activities are not linearly separable.

    I read public sector economics is of renewed interest in academic circles. I wonder how long it will take until this renewed interest will become common knowledge.

  5. April 10th, 2014 at 00:00 | #5

    Privatise the assets/profits, socialise the costs/risks.

    Then once the public has absorbed the costs/risks it’s time to privatise the assets/profits.

    The ‘government’ should never be in the business of ‘selling’ anything to anyone except maybe citizens and even then only ever on an ‘at cost’ basis.

    The “free market” doesn’t belong anywhere near government. The two should be diametrically opposed.

  6. April 10th, 2014 at 00:03 | #6

    @Ernestine Gross
    Ernestine,

    I find your comments about “the importance of the distinction between economics and commerce” really useful. I would like to republish them on candobetter.net as an article, minus the address to “Prof Q. Would you permit this?

  7. kevin1
    April 10th, 2014 at 02:05 | #7

    If your goal is to reduce the size of govt, then

    * squeeze the revenue side by selling Medibank Private ($400m annually), Aust Post etc.
    * apply the proceeds to non-income-earning projects or recurrent NDIS, social, health programs
    * which also reduces govt borrowing and, given the number of infrastructure disasters due to wrong demand projections, compensates for the likely withdrawal of private sector funds
    * while still expanding the private sector playground and paying off your constituency while grabbing some of Labor’s
    * and avoid a plan for econ growth because you know you really have no better ideas than the last mob about how to do it.

  8. Donald Oats
    April 10th, 2014 at 09:23 | #8

    Isn’t this the oft-cited case of “government trying to pick winners”, as the Liberals so happily remind us in other contexts. After all, selling one government asset and purchasing a different kind of asset implies a belief that the government knows when and what to sell and to buy, better than the free market itself does.

    Meanwhile, let’s flog off some good ol’ scientific “assets”. Should be a great time to, selling into a booming market for such stuff. Get your Antarctic research ice-breaker boat here, what am I offered? Pick up a couple of field scientists going cheap…buy a dozen, get one free…

  9. Ikonoclast
    April 10th, 2014 at 10:44 | #9

    What impresses itself strongly on me is the persistence and power of the privatisation push. The majority of Australians were and still are against the majority of important privatisations of government corporations, holdings and operations. Despite this popular opposition many important privatisations have been pushed through and the intent remains to push through many more. Both major parties push or attempt to push through these privatisations but the LNP have more successful at this destruction of the public sphere.

    It raises the question of whose wishes and requirements run the country. Clearly, the majority of voters do not run our country, at least not in the really important matters regarding production and distribution of wealth. Just as clearly it is minority moneyed interests that run our country. Democracy which does address the relations of ownership is failing as indeed it was predicted to fail. This democracy essentially is government that serves the interests of the rich; the capitalist and rentier class. The word “democratic” is attached to such a government, because all the adults in our society have certain freedoms and a vote. But such freedoms are constrained and curtailed by economic position. The rich have many more freedoms than the poor and far more access to opportunities, legal rights and political power.

    The proof is in the pudding. The majority want a healthy public sector. The rich want everything privatised. The rich are progressively getting what they want and society becomes ever more inequitable. This will not change while the excessively rich exist, dominate and control the operations of economic power and thence political power. Capitalism is in fact antithetical to true democracy.

  10. Ikonoclast
    April 10th, 2014 at 10:46 | #10

    Correction: “Democracy which does not address the relations of ownership is failing as indeed it was predicted to fail.”

  11. Nevil Kingston-Brown
    April 10th, 2014 at 11:16 | #11

    Wouldn’t there be a case if e.g. upgrading the road network, or revitalising the city of Newcastle, resulted in more economic activity (or less externality costs eg unemployment) and hence higher general revenue for government?

  12. Ernestine Gross
    April 10th, 2014 at 11:21 | #12

    @Sheila Newman

    Sheila,

    Thank you for your comment on my comment. As to your request:

    My comment presupposes a reading of Professor Quiggin’s post. Without Prof Q’s analysis of a concrete example, my comment may be meaningless for many people. Furthermore, Professor Quiggin is the owner of this bog-site. May I suggest you ask Prof Q for his advice.

  13. Ikonoclast
    April 10th, 2014 at 11:33 | #13

    Joe Hockey warning of impending austerity.

    http://www.abc.net.au/news/2014-04-10/hockey-warns-budget-cuts-will-be-widely-spread/5380136

    I predict recession for Australia under the Abbott government. Various recessionary forces are getting underway on the global scene. This trend will be reinforced in Australia with these pro-cyclical policies of Hockey and Abbott. We already have 6% unemployment and 13.5% underemployment and these are the understated figures of the ABS. (The ABS is required to measure these figures by government formulae biased to understatement.)

    So, starting austerity policies at a time when the economy is very flat and unemployment is already 6% on an understated measure. That can only end in recession and unemployment possibly pushing up to 8% or a bit more. Tough days ahead for the poor in Australia but the rich and super-rich will be fine so what do they care?

  14. Alphonse
    April 16th, 2014 at 22:13 | #14

    Of course if roads financed by privatisations – along with all pre-existing roads – were subject to user pays principles and congestion pricing …

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