If it looks like a debt, walks like a debt and quacks like a debt …

I’ve finally got around to checking out the big-ticket item (estimated value $28 billion) in the Queensland government’s privatisation program, involving the electricity distribution sector. It’s called a Non-Share Equity Interest, and the Treasury web page explains its appeal to the government.

Under this option the State retains 100 per cent ownership of the ordinary shares in the network businesses and assets. Private sector participation occurs through a hybrid security instrument, a Non–Share Equity Interest (NSEI).

The private sector contribution will equate to the net funding for the capital expenditure requirement and therefore represents new capital injections.

The NSEI security is debt in its legal form, but classified as equity for tax and accounting purposes and these characteristics give the security it’s (sic) “hybrid” form. (emphasis added)

The returns on the NSEI are sculpted to reflect the holders proportionate interest in dividends and tax equivalents paid by the network businesses separately.

In other words, the government is replacing debt raised by the Queensland Treasury Corporation from the private sector with an instrument that’s almost identical, but is classified as equity, and can therefore be presented as a reduction in debt

It’s not quite as simple as that. Rather than a fixed rate of return, the private investors will get the regulated return determined by the Australian Energy Regulator. This is a higher rate than the government bond rate, which makes the public worse off. On the other hand, it entails a limited transfer of risk to the private sector, which is needed to get the debt off the books.

11 thoughts on “If it looks like a debt, walks like a debt and quacks like a debt …

  1. So the whole exercise is really just dressing up the books in time for the next shareholders’ meeting state election. Strangely enough this is reassuring – if the accounting boondoggle means the economic reality is unchanged than that is surely a Good Thing.

    Nevertheless if I were the Qld Oppostion I’d be asking parliamentary questions like “can the Minister advise if the Queensalnd Treasury has employed ex-Enron accountants?” and “did the government insure the debt using Collateralised Debt Obligations issued by Icelandic banks and bought from Lehmann Bros?”. Some punters still remember 2008 and and will be – as they should be – very intolerant of dodgy bookkeeping.

  2. Something like the bank hybrids, a supposedly tradeable commodity and paying above the bank bill rate. In so doing govt is apparently willing to pay above their borrow rate to hide/obscure that they are borrowing money ie debt.

  3. In other words, the government is replacing debt raised by the Queensland Investment Corporation from the private sector with an instrument that’s almost identical, but is classified as equity, and can therefore be presented as a reduction in debt

    Minor point: My understanding is that QLD’s debt funding is raised by Queensland Treasury Corporation, not Queensland Investment Corporation.

  4. Just joined to say that I love your words of wisdom John Quiggan. I`m learning a great deal re the political system and all of its intricacies.

  5. @John Quiggin

    1826 (implied in sculpted): from French sculpter, from Latin sculpt-, past participle stem of sculpere “to carve” (see sculpture).

    Thus, “to carve (up) the public sector”. Implied. LOL.

  6. Government debt = bad, private debt = good.

    This sounds like another case of parse the parcel of debt from the people who own it (via the government) to the same people owning it and additional debt (directly) with the real winners being the financial industry sharks who take a percentage of all pass the parcel transactions while they create a new financial product.

  7. Newtownian :
    with the real winners being the financial industry sharks who take a percentage of all pass the parcel transactions while they create a new financial product.

    and I wonder just how much in consulting fees the favoured few in the finance/investment banking industry have already pocketed in coming up with such a wonderfully opaque structure.

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