I managed to get something of a response from the Queensland Treasurer, Andrew Fraser to my critique of the case for privatisation put forward by the government. Fraser says

The global financial crisis has ripped a $15 billion hole in the state budget. There is no evidence to suggest the state is about to see that hole repaired despite the marginal turnaround in the economy.

“The fact is, Queensland will be better off.

“The myth is that John Quiggin represents the view of mainstream economists.

“The Government is not undertaking this process for the fun of it.”

A couple of responses.

First, the sale of $15 billion of assets does not in any way resolve a $15 billion shortfall in income (the “hole” in Fraser’s statement). The sale value of $15 billion (assuming it’s realised) represents the private sector valuation of the earnings from the assets. Perhaps (though this hasn’t been shown) the value in continued public ownership is less than $15 billion, but it can’t be much less. The coincidence between the two numbers is, intentionally or otherwise, deceptive.

Second, if Fraser is right, it ought to be easy to find mainstream economists to agree that his comparison between last years dividends to general government and the $1.8 billion interest saved (mostly by the GOCs) themselves if the assets are sold and $12 billion of investment is foregone. Any takers?

Finally, it’s worth asking why the government is doing this. My guess is that they place much more weight than they should on the AAA rating, and that Treasury is still pursuing the ideological goals of the 1980s and 1990s.

I’ve been very critical of the Queensland government’s proposed asset sales, which, I think, will worsen the fiscal position of the state in the long term. But, the combination of economic downturn associated with the global recession and continuing needs for infrastructure expenditure mean that the government is right to point out the problems and to state the need for politically unpalatable responses. I don’t have the resources of the Treasury, which means, among other things, that I can’t tell how big the problem is now, given that there has been a substantial recovery since the budget in June. So, I’ll just list some possible responses, some of which can be undertaken unilaterally, others requiring co-operation among the states, and, last but not least, action required from the Commonwealth government.

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On bad arguments for Queensland asset sales, it’s over the fold

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Updated: Following some criticisms by the Queensland Treasurer, I’ve updated the estimates to exclude gains made by the Port of Brisbane on the sale of its shareholding in Brisbane Airport. Obviously, there are other adjustments that ought to be made to get a proper comparison between the interest savings from privatisation and the income foregone. Treasury has the resources to do this, but instead has chosen to present a totally invalid apples-and-oranges comparison between current year dividends and projected whole of government interest savings

I have a piece in today’s Fin criticising the Bligh government’s case for asset sales. I will probably post it here tomorrow. In the meantime I’ve picked up and confirmed a bit of additional information.
(i) Although the estimated sale price is $15 billion, about $7.5 billion will go to repaying debt held within the Government Business Enterprises themselves. That’s currently being covered out of the revenue of the GBEs, so this debt repayment will make no difference to the fiscal position of the government. The net return to general government is also about $7.5 billion, and it’s only this money that can be used to repay general government debt.[1]
(ii) The estimated interest saving from a AAA rating is $266 million over four years
(iii) The Port of Brisbane and QR[1] produced pretax profits of $553 million in the last reporting year. These state-owned enterprises don’t pay tax to the Commonwealth, but make tax-equivalent payments to the state so it’s pretax income that is relevant.

Port of Brisbane: Pretax 2009 $332 million [3]
QR: Pretax 2008 $221 million

This provides a simple basis for assessing the short-term fiscal impact of privatisation. The gain from privatisation, assuming the sale took place now, the estimated price is realised, the risk-adjusted interest rate is 6.5 per cent and sale costs are ignored would consist of
(a) interest savings from debt repayment, 6.5 per cent of $7.5 billion or $490 million
(b) savings from the AAA rating, $66 million per year
for a total of $551 million per year

So, the short-term effect of privatisation is roughly neutral. In the long term, it seems likely that returns would grow at least in line with inflation, while interest savings would remain fixed in nominal terms. Hence, privatisation would result in a long-term fiscal loss.

Perhaps there is a case for privatisation that would outweigh these fiscal losses, but, if so, the government hasn’t put it forward.

fn1. The alternative would be to do a whole-of-government comparison, taking account of all debt repayments and using Earnings Before Interest and Tax (EBIT) as the comparator.

fn2. Note that this calculation does not include Queensland Motorways or Forestry Queensland. These organisations roughly broke even in the most recent period, but they hold assets that can be expected to grow steadily (and, in the case of forests, literally) in value in future years.

fn3. This excludes a $275 million profit on the sale of shares in Brisbane Airport, but includes other valuation gains, which have been earned consistently in recent years.