Bligh’s bad arguments for privatisation

The Bligh’s government’s original case for the asset sales announced in the June budget was that the state’s finances had deteriorated drastically since the previous assessment at the time of the March election, as part of the generally declining outlook for the world economy. That argument has collapsed as the Australian and global economies have strengthened with the result that the Queensland state budget managed a surplus for 2008-09, as opposed to the projected $500 million deficit.

It would be possible to argue for some (though not all) of the proposed privatisations on the grounds of economic efficiency, but of course arguments of this kind are no more (and, given the epic failure of financial markets seen over the past two years) arguably less valid than they were before the crisis, at which time Labor rejected them.

That leaves the argument that the asset sales will improve the state’s finances. Such arguments depend on showing that the value derived from selling the assets exceeds the value realised by keeping them in public ownership. In this opinion piece, Bligh attempts to make such a case, but the arguments involve hopelessly invalid apples-and-oranges comparisons. When a policy is defended by such obviously shoddy arguments, the only reasonable inference is that the correct assessment comes out the wrong way.

Bligh’s first claim is that

Keeping these commercial businesses going over the next five years would cost Queenslanders $12 billion on new coal trains and wharves, money that could otherwise be spent on roads, schools and hospitals.

I’ve been refuting this kind of claim for at least 15 years now, and it’s depressing to see it wheeled out again. Even if Bligh doesn’t understand the fallacy here, I’m sure the Treasury officials who prepared this line know that it is utterly bogus. The coal trains and wharves are income generating assets. Taking money intended for income generating investments and using it to fund investments that return no additional revenue to government (although they do provide services to the public) is the fiscal equivalent of selling your share portfolio to buy a new car. The car is, in a sense, an investment, but it’s not one that returns a flow of income.

As NSW State Treasury Secretary John Pearce and Victorian Treasury Secretary Ian Little pointed out some years back ‘PPPs do not provide governments with an additional bucket of money for use on infrastructure projects‘. Replace “PPPs” with asset sales, and the validity of the point is unchanged.

The second argument is even worse. Bligh writes

these businesses are not, as some claim, a cash cow from which government can endlessly draw money. In 2008-09 they generated $320 million, or less than 1 per cent of the Government’s revenue. On the other hand, the Government will save $1.8 billion every year in interest payments on the borrowings needed to sustain them as viable businesses.

I found these numbers hard to believe and did some checking. It turns out, as best I can tell, that the $320 million is the dividend paid by the enterprise to the government as owners. The $1.8 billion is the total amount of interest that would be saved by selling the assets (for the projected price of $15 billion, and avoiding further investment of $12 billion. Comparing the two is utterly invalid.

The $320 million paid to the government is made after servicing the debt of the enterprises concerned (which would be a deduction from the sale value), making tax equivalent payments (which go to the state government) and retaining some earnings. Assuming the $12 billion investment in coal is commercially justified, it would have to generate enough cash flow to cover its interest costs along with a premium based on a commercial weighted average cost of capital. The relevant comparison for interest costs is not dividend payouts but earnings before interest and tax (EBIT). For QR alone, this figure is around $700 million, and it would obviously be increased greatly by the planned new investments, assuming they are commercially justified.

I haven’t done a full-scale assessment of the fiscal implications of the proposed asset sales. But I don’t really need to. The fact that the government and Treasury have relied on such a poor analysis tells us all we need to know. If the figures came out the right way, they wouldn’t need to fudge them. To quote my CT colleague Daniel Davies Good ideas do not need lots of lies told about them in order to gain public acceptance.

33 thoughts on “Bligh’s bad arguments for privatisation

  1. Barry, if the French unionists can stop their government from privatising the French Postal Service then there is still hope that Australian unionists could deny the Bligh government the opportunity from privatising Qld public assets. Remember it is not over till the fat lady sings.

  2. The French unionists would strike if anyone touched their extraordinary benefits. They’d strike over anything. It is quite amazing to see the number of secondary strikes that can hit France.

    It is not a model I would expect Aussie unions to follow.

  3. @Alice

    Politicians are from a political class. That is their profession and they get paid very well for it. What is happening is that because they have no transferrable skill set, they are reliant on re-elections in order to keep them employed. That means that they are more reliant on donors and using their arbitrary decision-making power which breeds corruption.

    Ask yourself this question – what transferrable skill does Rees have?

    Compare the pollies today to those of twenty years ago and see the quality fade.

  4. Thanks Barry. Glad to know I have struck a chord with you.

    Interesting that some here are aware of how French Unionists have stopped the privatation of their postal system. As it happens, there is an article about that (not wrtitten by me) on my blog site. It is “French organise national resistance to Privatisation of Post Office” of 5 Oct 09. It was written by Sheila Newman, based on a French Language news story she watched on the Internet.

    Had anyone read that appalling article ” Queensland asset sell off the only choice” in the Courier Mail of Monday 26 October by Anna Bligh in defence of the fire sale? She wrote:

    I didn’t take on the premiership to squib on the tough choices. I’m prepared to stare down the critics … in order to do what’s right.

    As I responded on an anti-privatisation mailing list:

    ‘Staring down’ also happens to be a favourite catch-phrase of News Limited journalists. I know it has already been used at least once by a Courier Mail journalist to depict the way she got the Labor Party state conference to rubber stamp her fire sale plans.

    It has also been used on at least one occasion by Imre Saluzinsky, the chief pro-electricity-privatisation propagandist for the Australian newspaper. Please see “Media contempt for facts in NSW electricity privatisation debate” of 18 Sep 08. (Unfortunately, at the time I wrote the article, I could not find the article in which Saluzinsky lauded Iemma and Costa for having ‘stared down’ the Labor Party following the state Labor Party’s roughly 7 to 1 repudiation of privatisation at the state conference of May 08.)

    I somehow doubt if 84%+ of Queenslanders, opposed to privatisation, would have taken too kindly to them having been “stared down” by Bligh over her privatisation plans during the March elections.

  5. @SeanG
    Sean -what Id like to do is see where their salaries were twenty, thirty, forty and fifty years ago on average. I would be surprised if they fell into the top income earners bracket and as a matter of principle, so that they dont align their objectives with this class, they shouldnt earn so much. Backbenchers dont and are likely fine (yet when you add their outrageously generous superannuation benefits they would as well). Its just an insult to the overwhelming majority of Australians. To even think that Rees or Bligh with their continued privatisation firesales and their utterly contemptuous neglect of infrastructure needs is worth that is absurd.

    I didnt hear you say they were worth it did I Sean?

    Forget the pat hackneyed jargon like “transferrable skills” Sean. It makes you sound like a twenty something recruitment agent. They cant judge a candidate properly so they ask people to list their “transferrable skills” and basically it means little.

  6. They aren’t worth enough to me to lick my shoe after I walked through a cow paddock.

    When I mean “transferrable skills” I mean that they have enough life experience that they can go back into a previous profession. A professional politician can’t do much but a person who has had some real life experience means that they will not feel needed to have to win because they know they couldn’t get a job elsewhere.

  7. @SeanG
    Sean – every few years we get another pat expression – now a few years ago it was “hit the ground running”, and of course “transferrable skills”

    and then there is the fabulous overuse of the word “platforms” to launch everything from a “strategic vision” to a “moon landing” and then there was “global combined with strategic” ie the worst I ever heard was “we are a regional global university with a strategic vision”. I wont dob in the uni by telling you who it was.

    How about “our global platform matrix of objectives helps us to achieve a strategically aligned visonary approach to our clients”….

    blather, blather blather….

    I just detest these intangible meaningless unpackable for all occasions “takeaway” expressions.

    Can any body think of any more?.

  8. The difference is that a transferrable skill is something like being a doctor in real life before being a pollie. Not like managerial-speech like some sort of MBA professor on steroids and cocaine at the same time. Most pollies talk like that because it sounds good rather than being honest.

    I can bring up a lot of Rudd-speak.

    One of the best lines I heard was from a British politician Lord Peter Mandelson and watch how he handle the question about his title:

    BTW, his title is Baron Mandelson, of Foy in the County of Herefordshire and of Hartlepool in the County of Durham, First Secretary of State, Secretary of State for Business, Innovation and Skills, President of the Board of Trade and Lord President of the Council.

    But hear his response about his title because it is a title with a purpose.

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