As reported by Houses and Holes yesterday afternoon, the Federal Government and the states have agreed on a new financing model whereby the Feds will effectively incentivise the states to privatise public assets:
Under the in-principle deal, the states would have to agree to privatise assets. The corporate tax the private owner would then pay to the federal government would instead be returned to the respective state government as a tax equivalent incentive payment.
The idea is to fast-track the building of infrastructure to stimulate the economy as the mining boom ends.
NSW Treasurer Mike Baird described the move as an “incredibly positive step”.
The deal is being hailed as a way of “turbo charging” infrastructure investment across the country, since the funds received from privatising old assets will be recycled into building new projects. Under current arrangements, the moment an asset is privatised those tax equivalent payments that used to come to the states are transferred to the commonwealth as company tax. But, under the new arrangements, the states would instead receive the company tax, providing them with added incentive to sell and increasing the likelihood of a ramp-up in privatisations across Australia.
I remain very skeptical of this new financing model, which does not change the equation facing taxpayers one iota. Overall tax receipts would remain the same – only the states would receive the income tax instead of the Federal Government.
Given the overall tax pool is likely to remain unchanged, the issue facing taxpayers under the new agreement revolves around whether the upfront funds received from the asset sales will outweigh the expected net present value of future profits. If not, then the privatisations are likely to be detrimental to long-term budget finances. Given any asset sale is likely to be to investment funds or foreign firms, they may only participate if they can snare a “bargain” and reap a strong rate of return, which lessens the prospect of taxpayers getting a good deal on pure financial grounds.
Having said that, like everything else at the moment with a return above the risk free rate, valuations are blowing out owing to financial repression.
Not all privatisations are bad for taxpayers. They can work where there are likely to be strong efficiency benefits and the efficiencies generated by private ownership (usually from enhanced competition) more than offset the financing inefficiencies of private ownership.
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 lessened.
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.
That said, what concerns me most 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 asset sales by shifting revenues from the Commonwealth to the states? While such an approach may leave state governments better-off financially, and encourage asset sales that otherwise would not occur, 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 efficiency and equity issues.
