If it looks like a debt, walks like a debt and quacks like a debt …
I’ve finally got around to checking out the big-ticket item (estimated value $28 billion) in the Queensland government’s privatisation program, involving the electricity distribution sector. It’s called a Non-Share Equity Interest, and the Treasury web page explains its appeal to the government.
Under this option the State retains 100 per cent ownership of the ordinary shares in the network businesses and assets. Private sector participation occurs through a hybrid security instrument, a Non–Share Equity Interest (NSEI).
The private sector contribution will equate to the net funding for the capital expenditure requirement and therefore represents new capital injections.
The NSEI security is debt in its legal form, but classified as equity for tax and accounting purposes and these characteristics give the security it’s (sic) “hybrid” form. (emphasis added)
The returns on the NSEI are sculpted to reflect the holders proportionate interest in dividends and tax equivalents paid by the network businesses separately.
In other words, the government is replacing debt raised by the Queensland Treasury Corporation from the private sector with an instrument that’s almost identical, but is classified as equity, and can therefore be presented as a reduction in debt
It’s not quite as simple as that. Rather than a fixed rate of return, the private investors will get the regulated return determined by the Australian Energy Regulator. This is a higher rate than the government bond rate, which makes the public worse off. On the other hand, it entails a limited transfer of risk to the private sector, which is needed to get the debt off the books.