I’ve just released a report I prepared on electricity privatisation in Queensland[1] This was a bit difficult given that the Costello Commission’s proposals have been announced with great fanfare, but the supporting analysis is so secret that even Campbell Newman claims not to have seen a copy. This Courier-Mail story by Paul Syvret gives the basic points

The report is online here.

fn1. It’s partly a followup from my previous response to Costello’s Interim Report. As in that case, I’m not getting paid for this, and it’s entirely my own work. So, it’s not as polished as the Costello report will doubtless be when it comes out, but I can confidently say it’s better value for money for the Queensland public.

I’ve been thinking quite a bit about Commissions of Audit lately[1]. Although the Costello report has not yet been released, I happened to find, on my bookshelf, a document entitled “Report of Queensland Commission of Audit”. It’s not a back-of-the-truck pre-release copy, but the report of the 1996 Commission of Audit, commission by the newly-elected Borbidge (Nat-Lib coalition) government[2], and led by Vince Fitzgerald (a credible, though conservative economist).

The Report makes interesting reading. Its key conclusions are

(a) Queensland’s balance sheet is strong. The state’s net worth is $51 billion
(b) There is an inbuilt negative trend in the state’s operating position, which if unchecked will reach a deficit of $2.7 billion in 10 years

Point (a) sounds pretty positive given that both the Newman government and the interim Costello report paint a picture of a state on the verge of bankruptcy. So, what’s happened to our net worth over the 16 years from Fitzgeral to (interim) Costello. Readers might expect that it’s fallen a lot, or even become negative. In reality, it’s more than tripled, to $171 billion.

Of course, the Costello report has switched attention from net worth to gross debt. While this makes little economic sense in ordinary terms (if you were buying a company, would you care more about its net value, or its debt level), it might be important if the ratio of debt to net worth had risen a lot. Actually, gross debt was $24 billion in 1996, and is $64 billion now. The ratio of gross debt to net worth has actually fallen.

To sum up, the big difference between Fitzgerald and Costello is that Fitzgerald is a serious look at the state’s finances, while Costello (in common with the majority of Commission of Audit reports) is a propaganda stunt. The state’s underlying position is strong, just as it was in the 1990s.

The second point reported by Fitzgerald is also interesting. Borbidge only had one term and didn’t do much, so the problem of dealing with the adverse trend identified in the report fell to the Beattie Labor government. Beattie kept the budget in surplus, and it remained in good shape until we were hit by the GFC and climate disasters of the last few years.

fn1. Of course, we’ve been treated to a peek at the conclusions. This is not calculated to inspire confidence in the analysis, but it certainly makes criticism more difficult.
fn2. Although the Costello Commission is often presented as if it’s something new, appointing a Commission of Audit has been routine piece of political theatre for incoming conservative governments since the early 1990s. The recommendations almost invariably involve spending cuts, and usually asset sales.

In the course of raillery with the famously scabrous Thames watermen, Boswell reports that Dr Samuel Johnson triumphed with the line “Sir, your wife, under pretence of keeping a bawdy-house, is a receiver of stolen goods”‘

That insult is applicable, with minimal modification to the Institute of Public Affairs. The IPA advocacy of dams in Northern Australia, long notorious among economists as the worst kind of boondoggle is the kind of scandalous behavior analogous to running a house of pleasure. But, as various interactions on Twitter and elsewhere have made clear, the IPA isn’t really keen on dams – that’s just bait to bring in the nostalgic believers in what Bruce Davidson famously called “The Northern Myth”

The real agenda is the creation of a special economic zone in Northern Australia, with lower taxes and less regulation, but apparently still receiving the same flow of public funds from the national government as at present[1]

Proposals for dams are mostly harmless since so few of them are likely to stack up, even with subsidies. But the suggestion of special tax treatment for businesses located in one part of the country rather than another is the worst kind of distortion[2], the public policy equivalent of receiving stolen goods.

And we don’t have to look further than the front page of the IPA website to see the promoter and biggest single beneficiary of this proposed ripoff – none other than Gina Rinehart, Australia’s richest woman and one who has done nothing to earn her wealth except to be very successful in Family Court.[3]

It’s a tough call whether the IPA has reached its lowest possible point in proposing that ordinary Australians should pay more taxes and get less services, in order to provide a targeted tax handout to Rinehart. That’s low, but arguably not as bad as lying in the service of the tobacco industry.

fn1. The NT government is easily the biggest per capita mendicant in the country, as can be seen from its massively oversized Parliament, more suitable to a medium-sized country than a population of 200 000. http://en.wikipedia.org/wiki/File:Legislative_Assembly_at_Night.jpg

fn2. Individual taxpayers already get a concessional “zone allowance”, but it’s small enough not to constitute a serious distortion. By contrast, the corporate handouts being pushed by the IPA could be huge.

fn3 As pointed out in comments, it was actually in the Supreme Court which deals with inheritance disputes, such as those between Rinehart, her stepmother and her children. The Family Court is only for divorces.

In the immediate aftermath of the GFC, I argued that the Public Private Partnerships model then in vogue was broken beyond repair, and that, even after the crisis we would be unlikely to see many more, though we might see deals wrapped up to look like PPPs, but with the public bearing most of the risk.

The recent failure of BrisConnections, the owners of the Airport Link Tunnel in Brisbane was no surprise. The AirportLink deal was one of the last pre-crisis PPPs, when investors were still optimistic enough to buy shares based on absurdly overstated traffic flows. In fact, they bought “partly paid” shares, a startling piece of financial engineering under which shares, trading at virtually zero, carried with them the obligation to come up with a payment of $2/share later on.

Because of the eagerness of private investors, the Queensland government bore little risk in the project. Former Treasurer Andrew Fraser’s description of the project as “a zinger of a deal for the public” displayed his customary tact, but was accurate enough considering the deal in isolation. The problem is that, after this and similar failures, it is highly unlikely that the pre-2008 PPP model can be revived in Australia.

For roads at least, there’s a simple alternative – road pricing based on congestion. I and other economists have been banging this drum for years, but politicians are terrified of even mentioning the idea. At one level, I can understand this – it’s tricky and likely to be controversial – but Queensland governments of both parties have adopted politically suicidal policies, largely motivated by the perception that they will free funds for capital investment.

First, Anna Bligh, along with Andrew Fraser reduced Labor to a seven-member rump with her pursuit of economically disastrous asset sales, exactly the opposite of what she had promised. Now, Campbell Newman has dissipated a huge volume of goodwill with savage cuts to public services, again a wholesale breach of promise, and is now pursuing privatisation. Compared to these electorally suicidal policies, road pricing ought to be a doddle.