The great asset fire sale begins

ScreenHunter_61 Oct. 23 07.25

By Leith van Onselen

It looks like Australia’s governments are about to sell-off the nation’s assets en masse, with the AFR reporting today that the Federal Government is considering setting-up a new financing model whereby it would effectively pay the states to privatise public assets:

NSW Treasurer Mike Baird has confirmed he is in talks with the federal government to set up a new infrastructure financing model, so states would be paid for privatising public assets.

Mr Baird said on Wednesday that federal Treasurer Joe Hockey was seriously considering his proposal for states to receive a share of company tax revenue in lieu of revenue they would forfeit when assets were privatised.

He said it could “turbo-charge” infrastructure development across the country, as the funds from the privatisation of old assets were recycled to build new projects…

“The moment the asset is privatised those tax equivalent payments that used to come to the states are transferred to the commonwealth as company tax,” Mr Baird said.

Privatised companies pay federal income tax on profits…

Obviously, the Federal Government’s financing proposal to share company tax revenues with the states in return for privatising assets would provide the states with added incentive to sell, likely resulting in a ramp-up in privatisations across Australia.

From an average taxpayers’ perspective, however, the proposed financing mode does not change the equation one iota, since overall tax receipts would remain the same – only the states would receive the income tax instead of the Federal Government.

Whether such privatisations are beneficial to taxpayers will, therefore, still depend on whether the upfront funds received from the asset sales will outweigh the expected net present value of future profits. If not, then the sale is likely to be detrimental to long-term budget finances.

As argued previously, there are also equity and efficiency issues that need to be balanced in any privatisation proposal.

In general, there is a stronger case to keep natural monopolies, such as essential utilities, in public hands in order to prevent a private player from price-gouging and/or to to stop inefficient duplication of the infrastructure. The government can also better ensure access to poorer members of the community, thereby improving social outcomes.

On the other hand, there is generally a better case to privatise government-owned assets (businesses) that compete directly with private players, since the degree of market power is lower, consumers have choice, and the opportunities to price gouge are minimised.

The issues around whether privatisation is good from a financial, efficiency, and equity perspective are therefore complex, and a case-by-case approach is required.

What does concern me about the Federal Government’s financing proposal is that it seems to presume that privatisation is superior in all cases, otherwise why would the Federal Government seek to entice sales by shifting revenues from the Commonwealth to the states? While such an approach may leave the state governments better-off financially, in the end we are all federal taxpayers as well. Accordingly, a holistic approach is required whereby the costs and benefits to taxpayers at the national level (both Federal and State) are considered, along side equity and efficiency issues.

[email protected]

www.twitter.com/leithvo

 

Unconventional Economist

Comments

    • “On the other hand, there is generally a better case to privatise government-owned assets (businesses) that compete directly with private players, since the degree of market power is lower, consumers have choice, and the opportunities to price gouge are minimised.”

      Seriously “what planet are you on??” we all know as soon as a asset is sold to big business, prices only go one way and thats skywards, after all how else are the dividends and obscene directors wages paid.

  1. General Disarray

    Late on your mortgage repayments? Not to worry, sell the car you use to get to work and marvel at your brilliant economic management.

    • Exactly. Consequently, it appears that .gov.au will do only do the right thing after all other possibilities are exhausted. The worst-case scenario instead of macro, etc. introduced a few days ago is becoming the most likely scenario in my opinion. There’s really no sign of anything else.

    • Heck, we’re not even late on our mortgage payments, and the ‘adults now in charge’ of the family are proposing to sell the car needed to get to work.

  2. On the other hand, there is generally a better case to privatise government-owned assets (businesses) that compete directly with private players, since the degree of market power is lower, consumers have choice, and the opportunities to price gouge are minimised.

    Is the consumer better off in the banking domain since CBA was privatised? In competitive industry, the government can also play an important role as the only ethical player in the marketplace, keeping the others honest. If government chooses to exit the market, then additional regulation is likely to be needed to keep the consumer from being screwed over in favour of next quarter’s profits.

      • The difference between what Greenspan says and what he does is the biggest outrage.

        The guy regulated the supply of the worlds reserve currency and manipulates interest rates for crying out loud.

    • Who was that said that Oligopolies were the business models of favor by the LNP.

      WE all know how competitive Oligopolies are.

  3. “it seems to presume that privatisation is superior in all cases”

    But it is superior especially for natural monopolies, which are usually the last privatized. The new owners/private monopolies could increase the prices as they wish and it wouldn’t hurt the politicians as it would be “free” market matter and business as usual.

    OMG!It is brilliant, Joe is a magician. He has found a new way to fill the federal budget whole. And who says he is incompetent? He is genius.

  4. Yeah that’s great…. lets follow the British model and sell everything to off-shore investors…

    We’re already seeing price gouging in NSW where offshorers own critical infrastructure like toll roads and electricity.

    How misleading (fraudulent) is it to have a company called “Energy Australia” that is owned by a Hong Kong based firm called “China Light & Power Company”

    • You are half right tsport100.

      NSW is a basket case and has the worst electricity system of any state.

      But it is the only one that is still in the governments hands and yet to be privatized.

      Its a very illustrative example of how inept bureaucrats and central planners are.

      • as someone who works on the trading side of the aus elec markets its really an idealogical and somewhat empirical argument. the numbers show there is no example anywhere in the world i can think of that results in cheaper product for end users in most utility markets. so then it becomes idealogical and structural of how best to deliver these things. some kind of hybrid i believe may work better but then you have conflict issues etc.

  5. All this will do is line the pockets of the rent seekers in the FIRE sector, in other words, the coalition is looking after it’s mates, as there is no budgetary reason to sell off govt assets. Nor going by past performance, will it have any lasting effect on the deficit/surplus.

    • I think the implications here are that selling off assets will in the long term make surpluses a lot harder and deficits much easier.

      That’s the lasting effect.

      Although I’m sure it will all be chalked up to “ALP mismanagement” because structural deficiencies are very difficult for the electorate to grasp.

      • Indeed, I have always thought that we seem to closely follow the ideological and economic developments of the US.

        It seems we are well on the road to Govt debt at 100% of GDP, and the RBA printing money to cement the wealth advantage of the already wealthy.

      • I’m not concerned about deficits as the federal govt is the currency issuer and can sustain them, it’s just that it is being used as an excuse to transfer public assets into private hands, in order to further enrich a tiny minority of bludgers at the expense of everyone else.

      • But hamish, if they follow the US formula, the national currency will be printed to protect the wealth of the wealthiest. If you think that printed money will be used to fund infrastructure or social services, instead of the wealthy elite, you’re in for a rude shock.

      • @hamish Once you start printing people start losing trust in you and don’t let you borrow. Printing is a big problem for a small economy like Australia.

        Alas it is the only route I can see without a reset.

  6. Gotta love Joe Hockey’s Crack Squad of financial hotshots.

    Wrapping and bundling up presents for their banking and investment mates faster than the gift counter at DJ’s at 5.50 pm on Xmas Eve.

    I will not even start to identify the grand centrist implications of these plans – cue Stephen . ALP are you starting to get the picture why conservatives want centralisation even more than your relic Stalinists.

    Could someone in the Liberal (or god forbid even the National Party) ask those massive throbbing mounds of excited neurons if they could develop a simple financing model for new land development (perhaps Texas MUD style) so that the economy might reap the benefit of rapidly developed lower cost land for residential, retail offices and manufacturing.

    Like many brainiacs, these champs must be bored by the idea of picking the vast quantities of low hanging economic reform fruit right in front of them.

    /rant

    • +10 “Could someone in the Liberal (or god forbid even the National Party) ask those massive throbbing mounds of excited neurons if they could develop a simple financing model for new land development (perhaps Texas MUD style) so that the economy might reap the benefit of rapidly developed lower cost land for residential, retail offices and manufacturing.”

  7. If you guys follow the New Zealand model currently in play, it’s just a way of getting at your superannuation money. There’ll be a caveat of “51% will remain Australian owned”, which means your superfunds will be ‘encouraged’ to to buy into the float. Then, you guys, like us, get to buy what you already own – bought and paid for with your past tax monies – with your future savings in your superfunds, to pay off your today’s debts…..Reallocation of assets? New for old? Don’t think so!

  8. Oddly enough . . . .

    we proposed precisely this arrangement (company tax reimbursement) in February 1992 when I was at Schroders as a way of encouraging “good” privatisations (i.e. privatisation of businesses satisfying the the first 5 Laws of Privatisation).

    And the idea wasn’t original to us. A similar arrangement has existed for Canadian provinces for years.

    And oddly enough . . . .

    we were roundly condemned for even suggesting that there was any loss of tax revenue requiring compensation. There is a “theorem” by Samuelson which purports to show that under certain conditions a tax-free investor should be prepared to sell an asset at the same price a tax-paying investor is prepared to pay for it.

    Of course, that all assumed that the state was a tax-free investor.

    Louis XIVth (of “L’Etat, c’est moi” fame) might have regarded the state as a tax-exempt investor. More modern people might regard the state as a collection of tax-paying individuals (citizens) who can either invest on a tax-exempt basis through their “state cooperative” and take their “dividends” in the form of cheaper services, or through a tax-paying private firm.

    Anyway, that debate is irrelevant now.

    The more important issue is that the Comomonwealth’s promise of tax reimbursement is utterly worthless. As soon as the assets have been sold it will renege on the deal or make some other change to the taxation arrangements to offset it.

    Again there is a precedent for this (although my memory of the details is vague). As part of the arm-twisting to make the states agree to the Hilmer “reforms” (i.e. the monopolisation of regulatory power), the Commonwealth agreed to make “compensation payments” to them. I think the amount was several hundred million dollars in total.

    However, as soon as the deal was bedded down, the Feds made an offsetting change (I think it was to some tax exemption enjoyed by state car fleets) which exactly offset it!!!

    The point is, you simply cannot hold the Commonwealth to any contractual obligation (with the possible exception of a contract under Section 105A of the Constitution, and even there the Commonwealth placemen on the HIgh Court might read it down).

    Anyway, none of this matters now. Australia is running headlong down the path of lining the pockets of the investment banking community at the expense of just about everybody else. And with Abbott/Hockey in charge, there will be no stopping it.

    When the Great Conservative Counter-Revolution was launched in May 1979, it was couched in terms of promoting economy efficiency and welfare. I myself was a True Believer. I really did think that we were going to make people better off.

    It didn’t take long for it to degenerate into an ugly program of granting monopolies and tax farms to Mates of the government. Nowadays, the “economic efficiency” justification is just lip-service.

    Older and wiser, we can see that 1979 actually marked the beginning of something far more basic and visceral: a complete winding back of the ideals of the 19th and 20th centuries.

    We are in full retreat from the notion that “all men are created equal”. That was, after all, a very modern concept borne out of very specific and historically anomolous conditions.

    We are now returning to the state of affairs which governed human relations for thousands of years. That state of affairs was best summed up by Charles I:

    “A subject and a sovereign are clean different things”.

    • As part of the arm-twisting to make the states agree to the Hilmer “reforms”

      Come on. That Hilmer reference surely must trigger Godwin’s law. All this history and thinking is confusing me. I need a simple way of calling winners and losers.

    • Once you look at the counter-revolution of the 80’s beyond one country you notice that it wasn’t the so-called left parties or the so-called right parties that spearheaded the change. It was whichever party was in power at the time throughout the western world. This was the policy of the newly discovered ‘centre’. The policies of the 80’s counter-revolution are something that Labour and Coalition agree on and continue to pursue. There is a right ‘faction’ in the Liberals and a left faction in Labour but it’s the centre that calls the shots and the centre is all about the new post-industrial economy dominated by the FIRE sector and operating in the interests of a very few.

  9. Why not privatize all levels of government? I’m sick of my tax payer dollars being wasted on this green/leftist “democracy” scam.

    • Free_Market_Delusion

      I have long pondered the privatisation of government!!

      If privatisation is the universal cure all then it only makes sense???

      • If privatisation is the universal cure all then [privatisation of government] only makes sense???

        It most certainly does!!

        The “privatisation of government” takes the form of a Coasian Polity Market.

        But this is certainly not privatisation in the way Joe Hockey would conceive it. On the contrary, it is a hyper-democratic system in which “customers” can choose between different “suppliers of governmental services”.

        In a Polity Market politicians would lose their monopoly on power and would be unable to direct rents in the direction of Mates.

        It is the ultimate in “good” privatisations. And – and as night follows day – it is the one most savagely opposed by politicians!

  10. Labor might have been really poor when it came to introducing genuine economic reform – but at least it was in the right direction most of the time.

    The Coalition seems to be speeding away in the wrong direction entirely.

    • Wrong for whom? For them it is the very right direction. Did you expect anything else or any concerns about the broader population?

  11. The less jobs for the chardonnay socialist and union mafia the better.

    Instead of them looking down on us with their bloated salaries and investment properties, they need to be destroyed so that they might join us in the georgist fight.

  12. “Whether such privatisations are beneficial to taxpayers will, therefore, still depend on whether the upfront funds received from the asset sales will outweigh the expected net present value of future profits. If not, then the sale is likely to be detrimental to long-term budget finances.”

    In other words, taxpayers win if investors lose; investors win if taxpayers lose.

    This is the situation, then:

    In the south-east corner, on 60 kilos, wearing Mr. Magoo glasses, denture and red short, the 84 yo Taxpayer!

    In the south-west corner, on 120 kilos of muscles, wearing the Kevlar black body armour and with a Uzi machine gun, the 30 yo Investor!

    In this big fight the obvious loser will be lucky if he ends with a black eye, only. Particularly when the referee is good mates with the bigger fighter.

    • “In other words, taxpayers win if investors lose; investors win if taxpayers lose”

      Not at all.

      It can be win-win if the real efficiencies generated by private ownership (usually the result of competition) more than offset the financing inefficiencies of private ownership.

      It can be lose-lose if the financing inefficiencies of private ownership (such as “illiquidity premium” – see 7th Law of Privatisation above) exceed any real efficiencies generated by private ownership.

      Purely financial transactions and tax farming arrangements typically incur financing inefficiencies with no scope for offsetting real efficiencies and are therefore poor candidates for privatisation (13th Law of Privatisation).

      Privatisation of irreducible monopolies may gain real internal efficiencies but typically at the expense of real allocative inefficiencies (9th Law of Privatisation). The internal efficiency gains are usually concentrated and obvious (manifesting as improved profits) while the allocative inefficiency losses are widely dispersed and hard to identify (manifesting as under-investment and over-pricing to thousands of individual customers).

      Attempts to restore allocative efficiency through regulation either fail through information asymmetry and capture, or tend to reduce internal efficiencies again as the monopolist games the regulatory regime.

      In accord with the 15th Law of Privatisation, sale proceeds will tend to be squandered by politicians trying to buy votes at a subsequent election, which tends to make the final situation worse all round.

      • Stephen,

        Nope.

        I repeat the quote from UE:

        “Whether such privatisations are beneficial to taxpayers will, therefore, still depend on whether the upfront funds received from the asset sales will outweigh the expected net present value of future profits. If not, then the sale is likely to be detrimental to long-term budget finances.”

        Argue with him.

        • Magpie. That is exactly my point (re-read my post). Privatisation can work where there is likely to be efficiency benefits. But when it is merely a transfer of ownership – as it is in this case – then there will be no efficiency benefits, which makes the decision purely financial.

      • There are two assumptions here:

        a) that the cash flows are the same under public ownership and private ownership; and

        b) that the discount rate is the same.

        Regarding (a), cash flows for private owners will be higher if there are real efficiency gains to be had (as there often are in “good” privatisations). In purely financial transactions this is not likely to be the case. In the case of monopolies, the gain in real internal efficiencies may come about at the expense of real allocative inefficiencies (under-investment and over-pricing).

        Regarding (b) the discount rate will differ between government and pivate investors even after adjusting for business and default risks because of the illquidity effects discussed previously.

      • The other downside is that historically (in infrastructure at least) monopolies are able to be ‘mined’ leaving a future government to pick up the tab of rehabilitating them – or face the loss of that utility.

        By this, I mean, that essential maintenance is deferred and the system let run down while extracting monopoly dividends. At some point in the future, having extracted enough dividends and with the infrastructure in appalling state, the private company just leaves.

        This is essentially what Telstra has done, and received a nice cheque from the Government for doing it, and now, be that the original NBN or the more costly Turnbull NBN, we are going to have to pay to replace the Telstra network.

        However, Telstra is not a ‘one-off’, there are also precedents in both the Victorian (Electric Supply Company of Victoria) and South Australian (Adelaide Electric Supply Company) jurisdictions where those companies just let the assets wither to the point where governments had a choice – take over the supply, or see the State run out of electricity. Both SA and Vic had to pay a premium for systems that were on their last legs, and then pump a massive amount of taxpayer funds into rehabilitation.

        Given that this has happened historically in two states previously for electricity, and nationally with Telstra, I suggest that privatisation of monopolies also carries a significant risk of those private companies mining the assets.

        It has also happened to public transport as well in most states.

        From an economic point of view, it would also mean that one not only has to look at the cash flows, but also the high probability that there is a great big negative lump of capital required at the end of the analysis period.

  13. Turbo-charged infrastructure…

    Sounds like someone’s buttering up someone in the Senate who gets hard, turbo-charged hard, for such words.

  14. This is like a Cash for “Clunkers” style programme for infrastructure!

    I can see the slogan now:
    “Trade it your old, dull and boring infrastructure for cash! Because, let’s face it, unless you can drive on it, through it or over it, it’s not a sound investment for government anyway!

    Even better, once you’ve done this, you can then spend the cash you get for selling quality, high value, critical infrastructure on low quality, low income, depreciating assets like roads and bridges etc. But wait – there’s more! You can then sign away most of your rights and controls over said new infrastructure under a ludicrous PPP arrangement which will grant monopoly rents in perpetuity to yet another multinational corporate entity – possibly the same one you just sold your old assets to in the first place!

    …Call me cynical but we’re really doomed aren’t we?

  15. The Liberals sold off Telstra, now they are having to buy it back at an inflated price.

    Using that as an example of how well its going to work, this is looking more and more like an extremely stupid idea.

    Basic public infrastructure is better under government control.

    • Not only at an inflated price, but in much worse operating condition.

      Telstra ‘mined’ the asset.

  16. @UE,

    “But when it is merely a transfer of ownership – as it is in this case – then there will be no efficiency benefits, which makes the decision purely financial.”

    Actually, that’s precisely what I am saying! This is how I see things:

    (1) The “upfront funds received” is the actual current market price of the asset to be privatized, I suppose. Say M.

    (2) The “expected net present value” of the asset to be privatized is the discounted value of the incomes the asset would produced, if it remained in public property. Say NPV.

    Therefore, the passage:

    “Whether such privatisations are beneficial to taxpayers will, therefore, still depend on whether the upfront funds received from the asset sales will outweigh the expected net present value of future profits…”.

    Means that “such privatizations are beneficial to taxpayers” if M > NPV; but this means that the Investor is paying more than the discounted stream of incomes of the asset. Are you still with me?

    Well, that’s a bad deal for the Investor.

    The only way around is the “efficiencies” Stephen kept speaking of: by a mere ownership change the assets will earn higher incomes. Say, the ownership change originates a NPV’ > NPV.

    Sometimes this can happen, sure. But what are these “efficiencies”? Put a finger of them. How much are they worth?

    Here it’s not enough to wave one’s hands and have faith that the private sector will be more “efficient”.

    More likely? The “Referee” will charge a suitably low M: the Taxpayer gets screwed.

    • Another thing: there’s a further reason to doubt the convenience of these privatizations.

      The analysis above does not consider any externalities a change in ownership is bound to have: people sacked comes to mind.