Friday, 17 October 2014

When is a Sale Not a Sale?

Privatisation, lately rebadged as "asset sales", is electoral poison for political parties and their leaders in Australia.  In 2008, after NSW Labor Premier Morris Iemma proposed to privatise parts of the state's electricity system, he was rolled at the party's State Conference by a huge margin and resigned as Premier soon after.

Queensland's Labor Premier Anna Bligh didn't quite manage to learn the lesson.  Soon after her government's re-election in 2009 she announced a privatisation process that included parts of Queensland Rail, various forestry assets, the Abbot Point Coal Terminal and the Port of Brisbane.  Anger at this announcement was heightened by the fact that not a word was breathed on the subject during the election.  She may have hoped this anger would have faded by the 2012 election but it clearly hadn't and her party was almost wiped out.

All this left the incoming LNP government with a problem.  The combination of the Global Financial Crisis and structural problems in the Queensland Budget led to large deficits and a lot of debt.  The LNP loves privatisation and their key financial backers were chomping at the bit to get their hands on valuable State assets.  Yet they had ridden into power on the back of anger over just such a sales program.  As a result, they promised to not to sell any major assets (although they have sold many minor ones) without taking the issue to an election.

Finally, after two and a half years of scare tactics about the budget, savage spending cuts, the odd token tax increase and a huge amount of PR dressed up as consultation, the government has released its strategy.  The final document, The Strongest and Smartest Choice: Queensland's Plan for Secure Finances and a Strong Economy, has a fake stamp on the front that says "No Asset Sales".

So that's it, asset sales are off?  Well not quite.  Instead, the government is proposing to lease key assets - ports, electricity assets and water supply infrastructure valued in total at the deceptively precise figure of $33.6b - for periods of 99 years.  Treasurer Tim Nicholls has been proclaiming that this is a very different thing, because we get the assets back in the end.

Yes, but no.  At the end of 99 years (or 50 if the lessee fails to comply with the terms of the lease) the Queensland Government (assuming such an entity still exists) will be able to take its assets back.  WE, of course, will be long dead, as will the original people and companies who signed the leases.  The leases themselves, or the companies which hold them, will have been bought and sold on the open market many times.

But there's more to it than that.  You see, assets are not static things.  The port infrastructure, power stations, poles, wires and pipes that are about to be leased out did not exist 99 years ago.  Nor will they exist 99 years from now.  Assets gradually wear out and need to be replaced.  Technologies become obsolete and need to be upgraded.

So far the government's details on how this will work are a little sketchy, but it seems to to be like this.  The lease fees to the government will not be paid annually, they will be paid up front at the beginning so the government can use them to pay out debt.  The lessees will then, as part of their lease conditions, assume full responsibility for the management, maintenance and renewal of the assets, at their own expense, and have access to all the revenue that they generate.  Is this sounding like a sale yet?

The big difference between this and a sale is that there is an end date.  There are actually two - at 50 and 99 years.  However, a lot will happen before we get to those dates.  In the early years, investment decisions for the lessee will be clear - they have the reins for 50 years, so it is worth spending the money to upgrade the asset knowing they will get the full benefit.  However, at around the 30 or 35 year mark, they will start to examine their expenditure a bit more closely.  Parts of the electricity distribution network, say, are run down and need replacement.  The new items have an economic life of, say, 30 years, but the company only has 15 years left to run on its lease.  Is it financially prudent to spend the money?

To try and secure their investment, they will start to play hard-ball with the government of the day.  "It's just not worth our while," they will say, "to spend the money unless we have the assurance that we will get the return, so unless you extend the lease we're sorry, but we can't upgrade the infrastructure."  They will have the government over a barrel - their lease will have been prepared by the finest corporate lawyers and the government will have no grounds to end it until the 50 years are up, at which point the electricity system will be so run down that voters will be ripping politicians' heads off in frustration.  Leases will be extended well before it reaches that point.

So, it looks like a sale, it walks like a sale, it talks like a sale....  Dressing it up as a lease is pure PR.  The government is proposing to sell assets.  If you support asset sales, go ahead and vote for them.  If not, don't be fooled by the BS about leases.

Here's the thing about selling assets to reduce debt.  The government has a balance sheet (of which a summary appears in the Strongest Choice strategy) which lists its assets and liabilities.  State assets currently total a bit over $300b, with about $40b in financial assets and about $260b in land and other fixed assets.  Against this are set about $130b of liabilities, the largest item being $85b in debt, and the other big item being over $30b in superannuation and other accrued employee entitlements.  This means the State Government's net asset position - its net worth - is just under $180b.

Now if you sell some of the assets to pay debts, the net worth will stay about the same.  The fixed assets will be reduced, and the financial liabilities will be reduced by the same amount (or less if, as the government is proposing, some of the proceeds are passed back to citizens in various vote-buying exercises).  The overall position will not change, our assets will just be rearranged - more cash (or at least less cash liabilities), less fixed infrastructure.

This is where the problem with asset sales as a budget solution comes in.  Government assets are not simply inert things which sit on the books and can be sold to realise cash.  They are items that are used to provide services - electricity, water supply, transport, etc.  These can be provided in two ways - on an economic basis (the users pay a market price and the asset makes money) or on a subsidised basis (the government uses the asset to provide a free or subsidised service - for instance a hospital or school).  If the asset earns money, this money will now be paid to its private buyer not to the government, so while the budget will get an immediate boost through the one-off sale it will take a hit in each of the subsequent 99 years because the revenue will now be going elsewhere.  If the asset sold is the site of a subsidised service the government will now have to pay the private owner/lessee of this asset for the service, so expenditure will go up.

The LNP government says it wants to sell assets to "repair" the budget. Asset sales don't work like that.  If you sell assets, you structure into future budgets either reduced revenue or increased expenditure.  You put off the evil day when you have to either cut services or raise taxes, but that day will come as sure as the seasons turn.  It's not a strong choice, its a wimpish one.  But I doubt the current LNP politicians care.  By the time we all realise this, they will be long gone.

1 comment:

Mike Westerman said...

Great treatise Ted. Since this government long ago lost all credibility, you'd wonder why they go thru this charade! If you look at prices around the NEM, you see that they reflect the relative density of population: ownership has done nothing to change costs. So Vic with the most compact grid is slightly cheaper than NSW, with Qld slightly more expensive and SA much more expensive. Vic is private, NSW and Qld state owned and SA leased. BS is a polite term for the skulduggery of lawyers and bankers make a meal of taking our assets!