The Western Australian newspaper has reported today that the Abbott Government is considering selling-off Australia’s outstanding Higher Education Contribution Scheme (HECS) debt to investment banks, so that they can be bundled-up and sold as asset-backed security (ABS) to private investors:
The university education debt of millions of Australians could be sold off under a proposal to be examined by Prime Minister Tony Abbott’s inquiry into the state of the nation’s finances.
In a move that could boost the Budget bottom line, up to $23 billion of outstanding Higher Education Contribution Scheme debt would be effectively privatised under a plan that has already won support in some financial circles…
In a process called securitisation, the responsibility for HECS debts would be bought by the private sector and then sold to investors.
It is understood that Mr Hockey was made aware of the possibility of turning Commonwealth HECS debt into a finance product while shadow treasurer. The commission is also expected to look at the sale of Australia Post.
Let’s be clear, selling-off Australia’s HECS debts would not necessarily “boost the Budget bottom line”. Because HECS debts do not have interest (except CPI increases), by definition the sale would be at a significant discount to face value ($23 billion). The difference in effect becomes the annuity stream for investors. Therefore, while the Government would receive some funds up-front, it would lose the ongoing cash flow as loans are repaid – in effect substituting a future income stream for a smaller lump-sum.
Given that the move has “won support in some financial circles” (presumably from investment banks), we can presume that any deal would likely be weighted in their favour, not taxpayers’. After all, why else would an investment bank participate unless large profits were on offer?
The deal, therefore, reeks of another example of governments selling-off the family jewels in order to pay the bills. While such moves are financially beneficial in the short-term, they can prove costly over the longer-term as future revenue streams are reduced. There aren’t even privatisation arguments to support this sale (such as the notion that the private sector will be more efficient etc).
The skeptic in me also wonders whether the move represents a gradual shift towards the privatised US student loans model, where interest rates are set more by the market (rather than CPI as applies under HECS), and there are less favourable terms of repayment.