Cormann misses the mark on asset privatisation

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ScreenHunter_1633 Mar. 13 09.47

By Leith van Onselen

Finance Minister, Mathias Cormann, has thrown his support behind the Government’s promise to provide the states with an additional 15% incentive payment if they agree to sell-off state assets and invest in productivity-enhancing infrastructure, claiming that the move would actually boost federal government revenues. From The AFR:

Senator Cormann said state-owned assets were exempt from paying company tax but once they were in private hands that exemption would no longer apply.

“So the 15 per cent payment…is an incentive to get [the states] to do the right thing”…

“But it is also a recognition that the commonwealth will be able to increase its tax base on the back of those sorts of asset sales”…

“We want to essentially free up the capital from existing assets, assets that will continue to be of benefit to the economy whether in public or in private hands,” he said.

While asset privatisations might improve the Federal Budget, it does not mean that they are necessarily beneficial for Australian taxpayers. For this to be true, the upfront proceeds from the sale would need to outweigh the expected net present value of future profits. If not, then the sale is likely to be detrimental to overall federal and state budget finances.

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Then there are efficiency and equity considerations that must also be considered. In general, any privatisation should boost competition within the relevant market, and at a minimum should not lessen competition. Moreover, there is generally a stronger case for public ownership or control where there are significant market failures. The clearest examples are those of natural monopolies – i.e. where the market can support only one supplier – although there are other situations of market failure requiring government intervention.

What concerns me most about Cormann’s call for the states to “do the right thing” and sell-off their assets is that it presumes that privatisation is superior in all cases. Instead, decisions on what should be in public hands versus privately owned should proceed on a case-by-case basis and be based on objective economic criteria, not ideology or sweeping generalisations about private ownership being necessarily most efficient.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.