QR sale plan off the rails

My article from last Thursday’s Fin, over the fold

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Column for Thursday 17 December 2009

As Rod Sim observed in these pages recently (Time to broaden privatisation focus 30/11/09), the tendency of politicians to reduce complex arguments to simple ones can produce problems, and has done so in the case of the proposed sale of the Queensland Rail freight business and other public assets.

The purported case for privatisation, as presented in a booklet distributed at public expense to all Queensland households, is that the government needs to sell these assets to finance investment in schools and hospitals. Sim, like every other economist who has considered the issue, recognises that this is nonsense. The benefit of the asset sale is offset by the loss of future income, and there will be a net benefit only to the extent that new owners expect higher earnings.

This point has made repeatedly, first by Professor Bob Walker of UNSW, and then by a group of 21 leading Australian economists in a widely published statement. The governments initial response was to ridicule Professor Walker as ‘far out in the edges of the universe’ and to express relief that Queensland students were not exposed to such nonsense. 

This line fell rather flat when a dozen Queensland professors signed the statement dismissing the government’s case  as spurious. And with supporters of privatisation like Henry Ergas, not to mention such nationally prominent figures as Stephen King, Adrian Pagan and Warwick McKibbin among the signatories, the ad hominem approach had to be abandoned.

At this point, it might have been expected that the government would try to bring forward some serious arguments in place of the bogus talking points that had been so thoroughly refuted. Not a bit of it!  The government announced that it ‘stood by’ its arguments, then changed the subject.

Clearly, the government knows its arguments are bogus. But having claimed that the purpose of the sales is to boost the budget bottom line, it is doing its best to maximise the sale price, even if the result is damaging to competition and to the public interest.

In the case of QR freight, this has led the government to sell the operation as  a vertically integrated package, combining ownership of QR’s rail fleet with that of the track over which they run, and which any competitor would have to share. The privatised operation will have ample capacity to use strategic pricing to keep such competitors out, while earning fat profits in areas where competition is unlikely.

Sim appears to endorse the government’s reasoning here, saying, ‘If it makes commercial sense to vertically or horizontally integrate, or to do a different type of deal with one customer type who pays more than others, such decision making should not be subject to a political filter’.

This is a viewpoint that has always appealed to monopoly owners of infrastructure.  Users, potential competitors, and their customers, have, understandably taken a different view, as have the majority of economists. The fact that vertical integration and discriminatory pricing may make commercial sense to a monopolist does not mean that these practices are economically or socially beneficial.

The failure of Australian telecommunications policy over the last decade, and the role that Telstra has played as a privatised owner of monopoly assets illustrates the point. Telstra’s position as a dominant firm, pursuing its own short-term commercial interests regardless of the needs of the community, derailed every attempt at coherent policymaking under the Howard government. The Rudd government has found no alternative but for the government to re-enter the market through the National Broadband Network. 

The determination of governments, driven by budgetary cosmetics, to push through with asset sales once they have been announced, means that other considerations discussed by Sim, such as the need to be sure that ‘our infrastructure is in the hands of the right owners’ have also gone by the board. 

Having failed to attract a trade buyer willing to pay an adequate price, the government has now announced a public float, targeted at Queensland households, with the government itself maintaining an effective controlling stake of 25 to 40 per cent. It is hard to imagine an ownership structure less conducive to efficiency. 

The Queensland asset sales are a prime indication of the need for policy debate to be based on sound economic principles. A government that sells a policy based on lies will, sooner or later, be caught up in its own deception.

John Quiggin is an ARC Federation Fellow in Economics and Political Science at the University of Queensland. He was one of 21 economists who signed a statement critical of the Queensland government’s case for asset sales.

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34 thoughts on “QR sale plan off the rails

  1. @Graeme Bird
    We now see China getting on the ball with the construction of very fast trains while we diddle around with our pathetic two buck dabbles with PPS businessman and government cronyism in Australia..

    China doesnt have any ideological problems with public investment…so what is our pathetic problem with it here?

    So far, the People’s Republic of China has built 185 km of track capable of handling 350 km/h trains, including the link between Beijing and Tianjin, which opened shortly before the 2008 Olympic Games. And there is more, much more, coming on line by 2012.

    Welcome to Australia where nothing happens fast…the wide brown land of hick ministers, tinpot bigwigs, media immoguls, bribes, back massages and BBQs!

  2. John,

    Did Andrew Fraser take up your offer to debate this on Madonna King? If not it has to be the first agenda item for 2010.

    Peter

  3. Peter, As I wrote here, the debate lasted all of 5 minutes and that was only within another regular feature “Party Games” on Friday Mornings in which Madonna King normally interviews both Andrew Fraser and Opposition Tresury spokesperson, Tim Nicholls.

    So, unless Madonna King has plans to stage a longer debate early this year, then she has reneged on her commtiment to hold a proper debate on the issue.

    There was not even an audio file of that debte made available.

    So, as far as I am aware, the most substantial recorded public debate on privatisation, that is, outside Parliament (which is not properly reported by the newsmedia) remains, for allof its shortcomings, my meeting with Andrew Fraser linked to above.

  4. Keep on punchin’ Dagget!
    Even if not everyone replies, they are reading those post and making up their own minds, as a more complete picture emerges.

  5. Cheers,

    She committed to give “as much time as they wanted” to John and Fraser, so that needs to happen first up if any of this has any chance of being transparent. Sick of hearing 3am “do whops” as the justification for discrediting academics with plenty of street cred.

    Peter

  6. Thanks for that paul walter. For my own part, I am often also remiss in not responding, or not responding adequately when thoughtful interesting and informative posts are made in response to my own. I mean at some later date to revisit a few past such posts on privatisation.

    Had you considered signing my e-petition calling for the resignation of the Queensland Government and for for new elections? I am in the proces of writing an article about why I believe it necessary even if it were to result in the election to Government the same Liberal National Party I have voted against at every election until now.

    Of course that would be not my own most preferred outcome, but I believe that even that would be vastly preferable to the continued rule of this ‘Labor’ Government, all but two of whom, when they voted in caucus for the fire sale in early June, completely disqualified themselves from being fit to sit as representatives in any democratic Parliament, let alone as representatives of the Labor Party.

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