Economists statement on Queensland asset sales

I’m one of a group of more than 20 academic and business economists who have put together a statement criticising the Queensland government’s case for asset sales and arguing that we need a proper public debate. The group includes some of Australia’s leading economists, including Joshua Gans, Stephen King, Warwick McKibbin and Adrian Pagan, as well as ten professors of economics from UQ, and more from other Queensland universities. But maybe the most surprising, and heartening, signature is that of Henry Ergas who has been one of my sparring partners on many occasions, most recently a debate on whether government should be the ultimate risk manager, held by the UQ Alumni Association (Henry won, by popular vote). Although Henry has been a strong supporter of privatisation in many instances where I have opposed it, we agree that these issues should be decided on the basis of costs and benefits, and not by spurious claims that privatisation provides governments with money they can invest in schools and hospitals.

Update I just did an interview on Madonna King’s ABC Radio program, and have promised to debate the issue with Andrew Fraser. I will also probably do a TV interview.

Press Release & Statement (corrected)

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Press Release: Queensland Government Case For Asset Sales ‘Economically Unsound’; Informed Public Debate Needed

A group of prominent Australian academic and business economists has issued a statement describing the case presented by the Queensland government in support of its proposed asset sales as ‘economically unsound’ and ‘based on spurious claims’ The statement concludes that ‘The people of Queensland deserve a robust and well-informed public debate over the costs and benefits of privatisation. So far they have not received it.’

The group encompasses a broad range of views on the merits of privatisation  —some might favour it in particular cases whilst others would be less likely to. However, all are agreed that such important decisions should be made on the basis of well-informed discussion. Important issues include whether the private or public sector would be the most efficient managers, which would be the best bearers of the business risk and the best ways for the enterprise to meet social as well as financial objectives.

The group includes twelve professors of economics from four leading Queensland universities and nationally prominent academic and business economists including current and former members of the Board of the Reserve Bank of Australia.

Statement by academic and business economists on the Queensland government’s case for asset sales

Decisions on the sale or retention of public assets have important implications for competition and public policy, as well as for the fiscal position of governments. These decisions cannot  be resolved on the basis of general ideological arguments for or against public ownership, and require informed public debate in each case. The normal lines of economic debate include whether a given business is more efficiently operated in the private or public sector, the appropriate allocation of risk and the extent to which the enterprise is required to pursue social as well as financial objectives.

The signatories of this statement have a range of views on the appropriate balance between the public and private sectors and on the merits of privatisation in particular cases. However, we share the view that these questions should be resolved on the basis of well-informed discussion of the economic and social costs and benefits of privatisation, and not on the basis of spurious claims that asset sales represent a costless source of income to governments.

The arguments put forward by the Queensland government in its booklet ‘Facts and Myths on Asset Sales’ do nothing to promote a well-informed debate. Two central claims are particularly, and sadly, noteworthy. In relation to five public assets proposed for sale, the “Facts and Myths”  booklet states

 Keeping these businesses would cost the Government $12 billion over the next five years. That’s $12 billion spent on new coal trains and new wharves that can’t be spent on roads, schools or hospitals.

This claim is economically unsound. Forgoing income generating investments, and borrowing an equal amount to fund investments that return no additional revenue, leaves the government with no flow of income to service the associated debt. The necessary income must be raised by increasing taxes or cutting expenditure.

Selling public assets will improve the public sector’s fiscal position only if the price realised for the assets exceeds the value of the income stream that the asset would otherwise generate for the public sector. In this respect, the ‘Facts and Myths’ booklet states

The total return from all five businesses in 2008-09 was approximately $320 million
 When the sale process is completed, it is anticipated the Government will save $1.8 billion every year in interest payments.

This is an invalid, apples-and-oranges comparison. The $320 million figure consists solely of dividend payouts, excluding retained earnings, tax-equivalent payments and the interest paid by the government business enterprises to service their debts.

The $1.8 billion represent the interests that would be saved, at a rate of about 6 per cent, if the state realised $15 billion from the asset sale and avoided $12 billion in new investment.  Most of this interest would be serviced out of the revenues of the GBEs, and can therefore not be compared with dividends derived from earnings after the payment of interest and tax.

The people of Queensland deserve a robust and well-informed public debate over the costs and benefits of privatisation. So far they have not received it.

Signatories

Harry Campbell, Professor of Economics, University of Queensland

Tim Coelli, Adjunct Professor of Economics, University of Queensland

Henry Ergas, Economic Consultant, Canberra

John Foster, Professor of Economics, and former Head of School, University of Queensland

Paul Frijters, Professor of Economics, QUT

Joshua Gans, Professor of Economics, Melbourne Business School

Ross Guest.Professor of Economics, Griffith University,

Nicholas Gruen, CEO, Lateral Economics

Christopher Joye, Managing Director, Rismark International

Stephen King., Dean, Faculty of Business and Economics, Monash University, former Commissioner ACCC

Andrew McLennan, Australian Professorial Fellow in Economics, University of Queensland

Flavio Menezes, Professor and Head of School of Economics, University of Queensland

Christopher O’Donnell, Professor and Deputy Head of School of Economics, University of Queensland

Andrew Leigh, Professor of Economics, ANU

Adrian Pagan, Professor of Economics, QUT, former member RBA Board

Rohan Pitchford, Australian Professorial Fellow in Economics, University of Queensland

John Quiggin, Federation Fellow in Economics, University of Queensland

John Rolfe,  Professor of Economics, Central Queensland University

Prasada Rao, Australian Professorial Fellow in Economics, University of Queensland

Rabee Tourky, Professor of Economics, University of Queensland

Warwick McKibbin,  Professor of Economics, ANU, current member RBA Board

92 thoughts on “Economists statement on Queensland asset sales

  1. Mark – build some more interconnectors between NSW and Victoria so that the Victorians can make more use of our fine black coal. 😉

    Whether you build an AC system or a DC system to the Cooper Basin is quite separate to whether it is subsidised or not. The subsidy should not alter the design considerations one way or the other. It will only effect whether or not it gets built and when.

  2. I agree with that.

    The fact is I was saying that mitigation can be done better, and the revenue can be better spent than being put in consolidated revenue, in as far as it could reduce the rate of tax required if Government power corporations were to fund a switch to renewables though the tax.

    I was also saying that this would be money better spent than on poorly installed pink batts etc.

    Geothermal is one important part of renewable base load. HVDC seems the best way to get the most geothermal from remote areas (a good idea as you want to get as much base load as possible) and Tripole seems to integrate the old and the new with little investment or disruption.

    I was wrong about plain old DC – and in effect was talking about the benefits of HVDC.

  3. Mark – Pink Batts (even if poorly installed) is actually a quite good use of subsidies. On the McKinsey cost curve for carbon abatement it is a much better use of funds than renewable energy, including geothermal. Improved residential heating / cooling efficiency is in the no regret arena (ie there is a social pay off even if AGW doesn’t exist). Axing solar subsidies and switching to insulation subsidies instead is something this government has got right.

  4. I’d be interested to know how poorly installed batts do anything. The Govenrment also has no credible way of measuring the success of this. A State power corporation would. Power companies, public and private also charge market rates whereas the batts are a subsidy which isn’t mean tested.

    Geothermal is the lowest cost renewable and has base load capacity. I have figures to justify this (not mine, not publicly available). Does this alter the cost differentials then?

    How do batts deal with adaptation as opposed to switching our power sources?

    Would making the grid tripole have any benefits other than integration with any DC generator sources?

    PS Did you have a look at the Claverton study or the Holistic Management view of carbon sequestration?

  5. Perhaps the problem is with the batts- they fly away , or cr-p in the wrong place if they are “poorly installed”.
    If they are pink batts, the others reject them on gender discrimination grounds.
    Perhaps they should use fruit batts? baseball batts?
    Reiterate Alice above, this is becoming as boring as Battsh-t

  6. @paul walter
    LOL Paul exactly – we were on the QLD privatisations but now we are debating the relative merits ?mating ?habitats? of bats and why exactly do they have to be pink anyway? ZZZZzzzz. I suspect the thread derail is deliberate. We often get bats in here doing that.

  7. Alice,

    The thread naturally digressed from when SJ told me that I didn’t know what I was talking about. He was half right (I was mentioning the benefits of HVDC whilst only referring to DC). The lack of investment in power generally and especially renewables which we are asked to adapt to is in part caused by a lack of public sector fiscal discipline. There are plenty of things Governments have decided to spend scarce tax revenue on which are far less utilitarian than such infrastructure.

    It was “derailed” when I noted the lack of infrastructure investment was a choice of successive Governments (who also have made private construction of infrastructure difficult), not because of the private sector as you inferred. Actually I don’t see how this derailed at all given the basis of the discussion was infrastructure and the benefits of an open discussion of rational policy.

    The type of discussion Terje and I are having is what Bligh should have facilitated in Queensland. We are talking in terms of economic rationalism, relative rates of return etc. This is what Bligh refused to do and made some fast and loose justification for privatisation.

    Perhaps Quiggin, Ergas etc should have been more broad in their criticism of Bligh, noting a lack of investment but Governments in general having record levels of revenue. Fiscal discipline is still a core issue here.

  8. SJ,

    Please tell me why if the Government is to encourage renewables, why investing in HVDC that has very low transmission losses is a bad idea since we would need to rely on remote geothermal for base load. Please also tell me if a tripole power grid would result in a negative rate on investment – the conversion rates can be impressive and integration is a lot cheaper than DC conversion [which you and Terje correctly pointed out doesn’t really have a benefit]. Please also tell me why linking the WA AC grid to the East Coast AC grid by HVDC is “clueless”.

    I’m not an engineer so if I make a mistake, it is because I’m a non-specialist. The idea is to have more efficiency and enable renewables to be viable. This is more important than sticking to one concept. If you told me HVAC, FACTS or WAMS was better and would get those results, and you assured me you knew what you were talking about, I’d believe you then try to be more informed.

    Please explain why I’m also a con artist. I’m advocating the Government always have a rational and fully costed policy.

    My suggestion is that we better spend the revenue on infrastructure the Government wishes us to adapt, rather than say, the electricity subsidies for alumina smelters and so on.

  9. I haven’t seen any indication at all that the pro-privatisation side of this argument has comprehended that the issue is not about selling, its about establishing a functioning industry. The ‘aha moment’ that would lead them to make this realisation, and change their thinking, is simply not forthcoming.

    Until this coterie are replaced by a new generation of technocrats, or alternatively until they see the wrongness of their thinking, there is simply no choice for the rest of us, to “just say no.” Just halt all asset sales until we have the people with the mindset to get these things right.

    We see they are unrepentant about the Telstra disaster. The disaster of having a market so fundamentally unsound, and incompatible with free enterprise, that Telstra has to be arm-twisted to lease out its transmission capacity. This is gross incompetence. And no lessons have been learned. No lessons have been learned by the Russian fiasco either. Wherein a few black market operators took over most of Russian industry by the very methods that the neoclassicals advocate and approve of.

    Most of all I want to convey that these people do not represent the pro-Capitalist point of view. They represent pigheadedness, cronyism and flat learning curves alone. They are not the leaders on my side of the moat. They cannot be reached through reason. They just have to be stopped point blank on this issue.

  10. Consider just as an intellectual exercise, the foolishness of privatising New Zealand rail, when and how it was done.

    1. There are no clear rules for private-eminent-domain in NewZealand. How does a potential competitor realistically produce a new rail?

    2. There is no advanced way to know for sure that you can take over the government land, and if so, what price can you do it at.

    3. The above goes for the hypothetical prospect of setting up competition, not only as competing rail, but also as competing road and sea transport.

    4. New Zealand is a long skinny country. Not exactly suitable for multiple competing rail.

    5. It appears to me that a minimum requirement prior to privatising the rail would have been for the Wellington bigshots, to travel around the country and to get local governments to agree on a motherload of coastal areas, to being approved for the potential-but-not-the-necessity, for the investment of wharf facilities. So that any wharf developer would face a sellers market for the required land.

    As everyone knows, nothing beats sea transport for cost-effectiveness when it comes to slow heavy cargo. And without sea transport, the privatised rail, therefore lacks an inherently effective competitor.

    6. (a)Since setting up a competitor for the national rail carrier would take many years of investment before revenues, let along profits, would be reached….

    and (b). Since all that time the investors would have to be paying income taxes for their employees.

    then:

    7. It stands to reason that prior to flippantly selling off the rail we would need a 50 year tax exemption for the investments that made full spectrum competition with that rail doable.

    8. A patriotic and nationalistic consequence of 7, is that we must have the legal framework for a new type of company, wherein the shares can be only owned by citizens of that country, if the infrastructural goods are clearly “strategic”.

    That the end result of these reforms might be that the goods are competitive and not strategic, down the track, is neither here nor there.

    While an honest argument that the goods are strategic yet exists, there is a need for a category of shares, that are only valid, in the citizen of that countries, hands. The reclassification of those shares as non-strategic, can wait for another day, if a country wishes to stay free and sovereign.

    >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

    So you see, the privatisation of New Zealand rail, and pretty much every asset sale you can think of, was at best, way premature. Not in terms of the decade wherein the sale was made. But rather in terms of getting the reform together, to make it the case, that the sales would be made, in the context of a functioning industry.

    Now I personally, want it, that in the end, all things that can be private be private.

    Fans of the Professor might wish for a great deal of this stuff to stay public. Surely we can agree across ideological lines on this one matter. That the reform comes first. The asset sales come later. If at all.

    What happened to the socialist idea of the government fading away? Strategically I say lets keep the government assets, and reform things so that they will fade away in the relative sense, by us creating such a fair and dynamic environment, that the private stuff overwhelms the public stuff.

    In any case let us remember Nancy Reagan who was a good girl and one half of a formidable duo.

    just….. say …… no.

  11. E-petition: Call for immediate resignation of the Queensland government and new elections

    Queensland citizens draws to the attention of the House the Queensland public, the rightful owners of $15 billion worth of assets which are to be sold, were denied any say over this because of the failure of the Queensland government to reveal those plans during the course of the elections. We consider the stated intention of the government to proceed with the sale in the face of opinion polls, which show at least 80% public opposition, to be amongst the most serious breaches of public trust imaginable.

    Your petitioners, therefore, request the House to call upon the Queensland government to resign immediately to give the Queensland public a chance to elect a new Government which can gain its trust. Your petitioners also warn any private investors considering buying the assets, not to do so and call upon a future State government which does enjoy the trust and confidence of the Queensland people not to honour any such contracts for the sale of assets.

  12. It appears that Bligh has now become the QLD State’s most unpopular premier ever in a recent poll. We dont have to wonder why.The electorate is growing tired of the neo liberal clap trap arguments and the accompanying state asset stripping….its the issue of asset sales that has made her so unpopular. She emerged the most unpopular Qld premier in the past two decades. Labor’s primary support is 34% and Libs 43%.

    Just how we gow about cleaning out the rhetoric and policies of the now unpopular mad right at state and federal levels in this country is beyond me…

    I suggest the current electorate should get the award for the longest suffering group of people in Australia’s history – perhaps with the exception only of the convicts and aboriginals.

  13. Queensland today is absolute confirmation that our electoral system serves corporations and not ordinary citizens.

    The most recent elections were effectively rigged by the Governent, the corporate media and the ABC to ensure that candidates, with any will to serve ordinary people, stood no chance of gaining control of the state Parliament.

    One of the purposes of my petition is to eventually establish the right of ordinary citizens to remove Governments they bellieve are no longer governing in their interests. Whilst the Queensland Government is under no constitutional obligation to abide by the wishes expressed in that petition, I believe a large number of signatures, in the order of hundreds of thousands, would be a good start to achieving that and to fixing what is now rotten in the state of Queensland.

    So, please consider signing the petition, Alice and others if you are an Australian citizen and a resident of Queensland.

    James Sinnamon

    Anti-privatisation independent candidate
    Queensland state elections, March 2009

    Brisbane Independent for Truth, Democracy,
    the Environment and Economic Justice
    Australian Federal Elections, 2010
    http://candobetter.org/james
    Ph 0412 319669

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