Home > Boneheaded stupidity > The magic pudding, yet again

The magic pudding, yet again

October 27th, 2016

I’ve just done an interview with Channel 10, about cost blowouts on the infrastructure projects supposedly funded by Mike Baird’s asset sales program. I made the point that such blowouts are more likely when projects are funded from special pots of money rather that avoid normal processes of budget assessment.

More tiresomely, I repeated a point that I have been making for 20 years, and that (as far as I know) every economist in Australia agrees with. Selling income generating assets does not provide any additional capacity to invest in non-income earning assets such as (untolled) roads, schools and hospitals Exactly this point was made by the Secretary of the NSW Treasury in relation to PPPs back in the 1990s (I’ll dig out a link).

Despite this nonsense idea being refuted over and over again, it continues to be believed by politicians of both parties and to get a free ride from our economically illiterate press, most notably (since it ought to do better) the Financial Review.

I’ve given up hoping that this will change. Fortunately, privatisation is so politically toxic that justice is usually served in the end.

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  1. October 27th, 2016 at 12:29 | #1

    Here is a way to keep income generating assets in public hands and use them to find the funds for more infrastructure. The new infrastructure is paid for from the future income generated by the new income generating assets. The funds come from customers of infrastructure – not from debt.

    This approach will stop the nonsense if only we can persuade the economic advisers to governments that it is a good idea. I find the barrier to acceptance is not with the politicians but comes from the economic, cost accountants and treasury officials. https://youtu.be/w37pjSWOFQw

  2. may
    October 27th, 2016 at 13:05 | #2

    please?

    privatisation?

    it’s corporatisation.

    i know it’s a tiny niggle but it’s like calling a customer a consumer.

    if i buy a car ,am i going to chew on the tyres?

    mixed up meaning, seems sometimes to be used to confuse.

  3. derrida derider
    October 27th, 2016 at 13:31 | #3

    And as we’ve all been pointing out for 20 years, John, the pollies don’t care about your point when there are lucrative favours to be done for mates. They’re liars, not fools.

  4. tony lynch
    October 27th, 2016 at 14:27 | #4

    “Fortunately, privatisation is so politically toxic that justice is usually served in the end.”

    Looking around and looking back, I must be on a different planet.

  5. John Quiggin
    October 27th, 2016 at 15:33 | #5

    @tony lynch

    Perhaps you should check your planet and see if it has former premiers named Jeff Kennett, Anna Bligh, Campbell Newman, Kristina Kenneally, and Tony Rundle. If so, they may have something to say on the topic.

  6. John Quiggin
    October 27th, 2016 at 15:34 | #6

    @derrida derider

    Agreed. It’s the pundit class (with a handful of noble exceptions) that I blame

  7. BilB
    October 27th, 2016 at 16:07 | #7

    The fact is that both left and right are hooked on spending as it gives them some sense of, and the appearance of, achievement. Left (generally) does it from debt, the right because they claim to not create debt sell assets to have money to spend. The left spends for social objectives, the right spends for financial gain of favoured and influential friends with the double impact that asset sales are a form of handout to the favoured few.

  8. dedalus
    October 27th, 2016 at 19:15 | #8

    If you buy assets using debt, the assets increase in value while the debt decreases through inflation. So win-win.

    Conversely, if you sell assets, the money from the sales decrease in value through inflation while the sold assets increase in value and become ever more expensive to buy back. So lose-lose. A worse-case variation of this is where the seller of the assets uses the money to spend on frivolous stuff which has little or no value: eg royal commissions on union corruption.

    If you buy new assets with the money gained by selling old assets, the new assets increase in value at the same rate as the old assets, so no real change. Which begs the question: what is the point? It would be just a swap of assets.

    In the win-win case, you only buy assets with depreciating debt, and this has the great virtue of increasing the total asset base. We’re assuming public-good assets, obviously: hospitals and schools etc.

  9. totaram
    October 27th, 2016 at 20:56 | #9

    @John Quiggin

    So?? They are all doing very well thank you, and are rolled out from time to time to give us their esteemed wisdom on various issues of the day, especially Kennett and more so Keneally, who writes regularly in the Guardian if you please.

    They did what they had to and skipped so to speak. The damage has been done! Can we undo it? I don’t think so.

  10. Kel
    October 27th, 2016 at 22:30 | #10

    What amazes me is that the LNP don’t even try to hide the fact that they are selling out to big donors. Tax concessions are sacrosanct, selling public assets is somehow recycling and now Morrison is doing to hard yards for big developers to get their hands on more land.

  11. Ikonoclast
    October 28th, 2016 at 04:58 | #11

    A system gives system-conditioned results. If you don’t change the system, don’t expect different results. The ownership system is at heart of these problems. Ownership of capital is too concentrated. And with r GT g in a slow growth environment (long-run stagnation) the problem is only getting worse and will do so until the system is changed. This is an unsustainable system so it will change sooner or later. The question is do we act preemptively and with foresight and change it while we still somewhat control it or do we wait until the system is completely unstable and begins to break down in uncontrollable ways? So far, it seems we are bent on the second course of (in)action.

  12. GrueBleen
    October 28th, 2016 at 10:07 | #12

    @Ikonoclast
    Your #11

    The question is do we act preemptively and with foresight and change it while we still somewhat control it or do we wait until the system is completely unstable and begins to break down in uncontrollable ways?

    Hmm, that’s a deep question I think. Let me see if we can get an answer from somewhere. Oh, here:

    A system gives system-conditioned results. If you don’t change the system, don’t expect different results.

    SO is our ;meta’ system one that leads to “act[ing] preemptively and with foresight” or does it
    lead to “wait[ing] until the system is completely unstable and begins to break down in uncontrollable ways?” Otherwise known as “muddling through”.

    Do you think that maybe we have the makings of an infinite regress here ?

  13. Jim Birch
    October 28th, 2016 at 11:05 | #13

    There seems to be a “rather” in para 1 that has wandered in from somewhere.

  14. J-D
    October 28th, 2016 at 13:19 | #14

    @Ikonoclast
    And it’s delenda Carthago once again.

  15. GrueBleen
    October 28th, 2016 at 15:19 | #15

    @J-D
    Your #14

    Ikono personified by Cato the Elder … yes, I see it ! I see it ! 🙂

  16. October 28th, 2016 at 19:14 | #16

    Well, if you are the government of Iraq and nobody will lend money to you at a rate short of usury, asset sales might increase your financing capacity for public investments. But that’s an exception that proves your rule.

  17. tony lynch
    October 29th, 2016 at 13:53 | #17

    @John Quiggin

    i thought you meant justice as more than some kind of personal bummer. I though you meant justice as a rectification or full compensation. I thought you meant it in the register of social justice rather than something lesser. My mistake.

  18. paul walter
    October 29th, 2016 at 14:48 | #18

    I observed your respectful tribute to the late Prof. Gruen and take heed of your summary concerning privatisations.

    I am honour-bound to thus acknowledge that rarest of creatures, an honest person, so rare as to draw the very breath.

  19. John Quiggin
    October 29th, 2016 at 15:58 | #19
  20. Greg McKenzie
    October 30th, 2016 at 07:02 | #20

    Market focussed economists would argue that the “user pays” principle applies to cars using any roads. Marginal cost pricing models are then advanced to calculate the road toll. This approach has many flaws but one glaring oversight. As we are witnessing with the West Connect road project and the Metro project, social costs are being ignored. Apart from people losing their homes, which is tragic enough, the air pollution and environment damage being done never gets mentioned by government spokespersons. Only the people I call the “nodders” (they are paid to stand behind a politician and nod when these paragons of power pronounce the most atrocious nonsense) seem oblivious to this error of omission. Income producing assets benefit the whole populace, roads and metros benefit only those who use them. It seems an obvious thing to point out, but, with politicians, you need a big stick to get them away from the carrot.

  21. Ikonoclast
    October 30th, 2016 at 08:25 | #21

    Tolls on roads appear to me to be a highly inefficient way to collect road funds related to road use. I would say place the toll on the fuel and thus toll everyone who drives for all roads. This guarantees a relationship between road use and the price paid, at least so far as fossil fuels go.

    Of course, it is a moot point what you call this toll, or rather tax, for I see the government levying it of course. The name does not matter. You can call it a levy, an excise, a sales tax, a toll, a carbon tax or anything you like. The point is to set the tax at a level such that the road users pay for all roads and all negative externalities. Indeed, I would add a surcharge calculation in, without naming it specifically or highlighting that is built into the price, and this surcharge would fund expansion of public transport. Simples, meercats.

  22. Collin Street
    October 30th, 2016 at 08:59 | #22

    Tolls on roads appear to me to be a highly inefficient way to collect road funds related to road use.

    In theory they aren’t; the pricing mechanism lets you capture benefits fairly well.

    But in practice it depends on the rest of your road infrastructure. In japan, say… the baseline roads are fairly ordinary; they were never intended for high-speed long-distance transport and plausibly-achievable speeds are fairly low. It’s how the towns are built; you’d have to rebuild cities entirely to change things. Some places they did: in Osaka, and I think Yokohama, most of the main roads are canals that were paved over post-war. Tokyo or Nagoya you can’t do that. In rural roads the original road network is… not capable of supporting high speeds.

    In australia, traffic loads are much less and urban roads were built much wider; in rural areas, the more-favourable terrain and lower land costs means, again, wider straighter roads. Speeds off the freeways are not that much lower than speeds on the freeways: the improvement the freeways represent and that they can be billed for is much smaller.

    [which reflects what we did do: the rural freeways are almost entirely piecemeal upgrades of the rural highways.]

    [and we see: in the US, as in australia, freeways are largely not billed; in europe, as in japan, they often are. Same economy same funding opportunities available and same opportunities taken]

  23. Collin Street
    October 30th, 2016 at 09:07 | #23

    …a fuel tax doesn’t capture all the externalities of transport; some ways of burning the same amount of fuel cause more costs than others.

    Basic urban distribution networks used at low speeds are a sunk cost. We need them, we have them [zero net construction cost], and they don’t cost a lot to maintain. Driving a delivery van around inner melbourne: not expensive.

    Using the same amount of fuel driving along the eastern freeway: significantly higher cost.

  24. Ikonoclast
    October 30th, 2016 at 10:09 | #24

    @Collin Street

    I think we need to define matters. I will have a stab at it. It does come back first to terminology which must be defined. What is a toll and what is a tax? A toll is a charge for use. As such it is a rent. A tax is any charge made by government. A charge to use a road with the charge being made by a private, for-profit entity is a toll or rent; pick your term, it does not matter. A charge to use a road with the charge being made by government, is a toll in nominal terms but is essentially a tax.

    When I said standard tolls are inefficient I was thinking of the collection mechanism. Before e-tags, great ruddy toll booth complexes were constructed and staffed. That’s a lot of cost to collect the tolls. It would have been cheaper all round, for society as a whole, to not have private toll roads but to simply have the government collect the necessary taxes though fuel sales (an already existent infrastructure) via the sales tax (GST) mechanism (even if you call it a carbon tax or whatever) which tax mechanism is also an already existent infracstructure and administrative/financial process. Even with e-tags, we build another tracking and colletion infrastructure when one was already in place (fuel stations and the GST mechanism).

    Even if private enterprise does the tolling, society as a whole is still duplicating a payment/collection infrastructure when one already existed. Ergo, private toll roads are inefficient on a whole of society social and economic calculation. The road network, including tunnels and bridges is a natural monopoly best run by government.

    Collin Street says “a fuel tax doesn’t capture all the externalities of transport; some ways of burning the same amount of fuel cause more costs than others.” This is true in principle. However, in practice what is to stop the government (other than standard political cowardice and big-picture blindness) from levying a fuel tax at rate such that the most costly fuel use in terms of all costs and negative externalities is the rate set? Thus these users pay the total cost and other users pay a surcharge or punitive cost. This extra revenue should then get put into mass public transport infrastructure. Our economy, our society and our energy use would thence all become more efficient. It actually takes considerable dirigist (state) action and management to create real macro efficiency. Markets appear able to create micro efficiencies and scattered sector efficiencies but then suffer from an “inefficiency of composition”. When all these micro and sectoral effciencies are put together they do not generate the obvious, logical and eminently possible macro efficiency of the whole system.

    If we were an efficient society and economy with an eye to efficient resource use and proper protection of the climate and environment, we would have invested much more heavily in public transport than we have done. The fact that we have not done so conclusively and irrefutably proves that laissez-faire capitalism, or at least a capitalism which is too unregulated, is inefficient and environmentally destructive at the macro or whole of system level.

  25. Ned Lukies
    October 30th, 2016 at 10:44 | #25

    I agree with the premise that selling income generating access does not give the government any more money to play with. However, is extra value in these deals for the government because they are creating an additional asset that would not exist if it were to remain in government hands?

    By this I mean, a monopoly on commercial air traffic in the case of Sydney Airport, extension of tollway concessions beyond initial road repayment time in the case of Queensland Motorways, and allowing the clapped out Hazelwood power station to continue operating well beyond its planned lifetime.

    How many of these positions would be politically possible were the assets still in government hands? Of course the actual situation on the ground could be that the government is so useless that they actually gave away these rights without extracting any extra value. Any thoughts?

    BTW. Long time reader, first time commenter. Love your work.

  26. Ivor
    October 30th, 2016 at 14:44 | #26

    @Collin Street

    the pricing mechanism lets you capture benefits fairly well.

    That is a capitalist view. It means that someone on unemployment benefits pays the same as a millionaire for the same service.

    This is obnoxious.

  27. John Quiggin
    October 30th, 2016 at 18:04 | #27

    @Ned Lukies

    Thanks for kind comments

  28. Geoff Edwards
    October 30th, 2016 at 21:27 | #28

    @Ned Lukies Ned Lukies:

    It is not possible to give a clinical answer to your question. First, what we’re seeing now is the toll road tail wagging the transport planning dog. The prospect of tolling new roads is creating pressure on governments around Australia to facilitate new roads. The cash flow the toll roads generate squeezes other forms of infrastructure out of contention for public or private investment. Strategic transport planning and growth management are left by the wayside.

    Second (saying the same thing in a different way), the sale of operating assets reduces the capacity of governments to make prudent policy decisions in the public interest at the system-wide level. The national electricity mess and the rebuilding of a monopoly telecommunications network after privatising Telstra are classic examples, but toll roads also offer a good example. With heavyweight corporations exercising the leverage that large businesses do, government loses its capacity to pursue the dispassionate public interest.

    Third, cost to government is not just what appears as outgoings in the budget ledger. It is difficult to disentangle central budget-funded government from its satellites including QSuper. The “government” sold Queensland Motorways for a very generous sum, but, with the net effect that motorists feed the shareholders of the tolling company and the banks, rather than paying tolls or taxes to their government to be used for public purposes.

    Fourth, governments can create value out of air. They do it all the time with town planning decisions. In that case, only a small proportion of the windfall is captured by the public (e.g through municipal rates).

    Tracing all of the flows is a challenge Budget inputs and outputs are not the appropriate metric on which to base these decisions: transport is a land use planning question.

  29. Ikonoclast
    November 3rd, 2016 at 10:53 | #29

    With respect to infrastructure projects, we can use these as an illustration of how incompetent the Rudd, Gillard, Abbott and Turnbull governments have been. They have all been incompetent and totally unable to achieve or implement any program or policy that actually worked.

    The Howard government by contrast was competent, however it was competence at implementing a morally bad and economically damaging program. Competence at bad stuff is perhaps even worse than incompetence at anything, good or bad.

    It’s been a long time since we had competent and good government. Australia languishes well short of where it could have been because of this poor government. The poor government is not about personaities, it is about the changes that neoliberalism and mangerialism enforced on the whole system. These changes weakened the institutions need for good government and good governance. Until we deal with this root cause we are in for more bad government.

    How do we overthrow neoliberalism and mangerialism? That will entail overthrowing (capitalist) corporatism which is the generating structure for neoliberalism and mangerialism as implemented ideologies. That still begs the question. How do we overthrow corporatism? Democracy is our only peaceful chance, but how exactly? A first step might be to avoid voting for parties which take corporate donations and advance the corporate agenda. This would certainly rule out voting for LNP or ALP. Would it rule out the Greens? I’m not sure. Do they take corporate donations?

  30. Ikonoclast
    November 3rd, 2016 at 10:55 | #30

    Correction above. “These changes weakened the institutions needed for good government and good governance.”

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