Treasurer Joe Hockey has promised to provide the states with additional federal funding if they agree to sell-off state assets and invest in productivity-enhancing infrastructure. From The AFR:
At a meeting in Canberra on Friday, federal Treasurer Joe Hockey will impose a deadline on the states to qualify for the incentive payments.
The time frame is yet to be finalised but sources told The Australian Financial Review it would be less than five years and probably about three years…
There is an estimated $220 billion in unsold federal and state assets…
While the deal is being hailed as a way of “turbo charging” infrastructure investment across the country, I am skeptical of the Government’s “cash for asset sales” proposal.
Obviously, the Federal Government’s providing incentive payments to the states in return for privatising assets would give them added incentive to sell, likely resulting in a ramp-up of privatisations across Australia.
From an average taxpayers’ perspective, however, the proposed incentive payments do not change the equation one iota, since overall tax receipts would remain the same – only the states would effectively receive a larger share of the sale proceeds at the expense of the Federal Government.
Whether such privatisations are beneficial to taxpayers will 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.
Given asset sales are 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.
That said, 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), which 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; although effective regulation can also achieve the same outcome.
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. Medibank Private seems to fit this mould.
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 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 it seek to entice asset sales by shifting revenues from the Commonwealth to the states via incentive payments? 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.
Rather, 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.
Certainly, Australia needs to boost its infrastructure investment, in order to catch-up with decades of underinvestment and years of strong population growth, as well as to see the economy past the mining investment cliff. At the same time, such projects should not be funded by asset sales that meet the Coalition’s ideological objectives, but fail on broader financial, equity and efficiency grounds.
