QLD prepares for asset fire sale

ScreenHunter_2966 Jun. 24 15.17

By Leith van Onselen

The AFR is reporting today that Queensland Treasury Corp has called for expressions of interest to sell $33.6 billion of ports, power generators, electricity distribution networks and water pipelines (see below graphic).

ScreenHunter_3516 Jul. 29 12.50

Studying the for sale list makes me nervous, as most of the assets appear to be essential infrastructure, whose sale could potentially lead to deleterious outcomes for taxpayers.

As argued previously, it is the degree of market competition that usually determines whether an asset sale is positive for the public. And essential infrastructure like ports, water and electricity generation are by definition natural monopolies, and their transfer to private ownership confers significant pricing power to the new owners, which they generally pass on to end users.

According to Monash economics professor, Stephen King:

…privatisation without competition is like a hidden tax. The government gets more today because we will all be paying more tomorrow…

Privatisation without competition risks turning a public monopoly into a private monopoly. The owners may change but the public will get ripped off just the same.

This is why ACCC head, Rod Sims, has recently spoken out against the Abbott Government’s privatisation agenda, warning that the forecast $57 billion of federal and state-owned assets expected to be sold over the next few years could substantially lessen competition and push-up prices, particularly in the areas of electricity distribution, ports, and other essential infrastructure.

It is also why I remain so skeptical of the Abbott Government’s “asset recycling” incentive payments to the states, which will effectively reward states for selling-off assets and seems to presume that private ownership is superior in all cases, rather than being based on objective economic criteria, and on a case-by-case basis.

The Productivity Commission’s new report on the provision of public infrastructure, released earlier this month, raised similar concerns, noting that asset recycling “could act to encourage privatisation in circumstances that are not fully justified and encourage the selection of new projects that do not have demonstrable net benefits”.

Asset sales can be in taxpayers best interests, but generally only when the government enterprise is subject to significant market competition, thereby reducing the new owner’s ability to price gouge. While this appears to be the case with the proposed sale of Medibank Private, which competes with a large number of private health funds, it is less likely to be the case where essential infrastructure is involved, as with Queensland’s privatisation program.

[email protected]


Unconventional Economist
Latest posts by Unconventional Economist (see all)


  1. I wonder what consists the other 88% of state assets and how they came up with this $257b?

    land at inflated prices?

  2. Quote
    “Privatisation without competition risks turning a public monopoly into a private monopoly. The owners may change but the public will get ripped off just the same.”

    However privatisation with competition…???
    leads to an oligopoly….

    Hmmm fuck this isn’t working…

  3. Ronin8317MEMBER

    After losing the by-election with a 19% swing, it’s time for some good old-fashion last minute pillage and burning!!

  4. Is there something that can be done? Isn’t there some kind of mandated test such sales must pass through? Could the government be taken to court for what is a blatantly harmful policy?

    It seems many policies by Abbott are supported by no-one but his party. No commentators or economists.

    Surely he can’t just be allowed to destroy the country for his ideological or rich buddy purposes? The trouble is that being such an obviously bad guy, you only need to be moderately shit as a party to defeat him so we aren’t likely to see much change 🙁

    I guess as a mitigation, a newly created natural monopoly would be regulated quite quickly minimization the carnage that Abbot intends…

    • The fix is in. Newman and his good ol’ boys have clearly demonstrated they are not for turning on this issue. Experts and public opinion be damned. The wagons are circled around these assets and any counter-policy which may affect their value is being dealt with; the removal of the carbon tax is complete, the feed in tariffs for solar abolished, the dismantling of the RET to re-commence in earnest. Only thing Queenslanders can do is to ensure that this embarrassment of an LNP government doesn’t get a renewed mandate next year.

  5. Most of the reason the assets are being sold is that they are run down to the point where the Govt cant refurbish or rebuild them or in the case of the rail line and ports their economic future is now uncertain.
    The govt attitude is clearly, lets get rid of them so the gross neglect of these assets cant be attributed to occurring on my watch. The taxpayers are going to get fleeced. I hope Clive puts an offer in for the rail line and port of Townsville facilities WW

  6. In regard to the transmission and distribution network infrastructure in Queensland the opinion piece is flawed. These monopolies are far better off in private hands than in the State Government’s.

    The price regulation of these assets occurs in exactly the same way for private and state government owned assets.

    Monopolies, both Government and privately owned have incentive to argue for unnecessarily high prices with the regulator. In the case of the form of regulation applied to these business (a set return on capital invested) the incentive to over invest in infrastructure (justifying higher prices to consumers) is much higher in Government hands as their cost of funds is lower than private business (Government balance sheet subsidizing the business). This results in higher returns to Government and the tax paid on that return is siphoned back to the State Government via SOE arrangements with the ATO.

    I also believe that Government owned businesses have a far lower propensity to negotiate EBAs hard with their unions, thus adding cost to the consumers bills. This is evidenced by the far higher remuneration for employees within the government owned sector rather than the private sector.

    There are far higher cost per customer, cost per km of network, cost per kWh, (etc) metrics (almost any) in the state owned sector than in the private sector almost unequivocally across all businesses. After privatization in Victoria and SA costs fell across the board, to such an extent that the criticisms were generally of under investing not gold plating as is the case with the criticisms of State owned businesses.

    The other point, which is often a matter of point of view, is the unaccountable, murky and democratically illegitimate exercise of Government policy through a Government owned business. These taxes added to energy bills are never in the budget, they are blamed on the businesses and the exercise of the power to implement these policies is never seen, never understood and never held to account. There are vast cross subsidies, taxes and economic support for communities and businesses, that may or may not be right, which are implemented in the interests of Government without the scrutiny which we rightly demand to be placed on explicit Government expenditure.

    • What are the specific examples of privatisation of electricity generation decreasing final costs to consumers ? And specific evidence of where privatisation has provided a better financial return to the government in aggregate on a present value basis ?

      • I am not talking about generation, however if you look at the number of jobs cut by generation companies post privatisation (really pretty much true across the board in any industry) one can clearly see that previously government owned enterprises are significantly more productive after privatisation than before. Any argument that government ownership keeps energy prices low is odd because all the evidence demonstrates energy prices under government ownership are higher and rise faster.

        If you discount cash flows using a governments cost of funds everything everywhere always should be owned by government. But….. given that, even a first year finance student would recognise discounting should occur by the assets costs of funds (which should in simplistic terms only deviate between owners based on a different risk position and gearing) and that in fiercely competitive processes (as these will be) the government will capitalise most of the value of the cash flows from cost savings (which governments repeatedly demonstrate themselves incapable of managing)…. well then the logical case is irrefutable that the NPV under sale will be higher than in case of retention. The empirical evidence that Government’s have solved the problems (which they cause by overspending) by selling assets (in which they are again responsible for over spending) and resulting in cheaper energy prices better reliability and welcome and necessary funds for new infrastructure spend is fairly overwhelming.

    • Ronin8317MEMBER

      Victoria and South Australia’s electricity network is now mostly owned by the Singapore government and the Chinese government. So the argument becomes : foreign government ownership leads to lower prices!!

      If the sales process result in a public float to domestic investors, there is a chance for a positive result. Unfortunately, the QLD government wants a private sale, which means a foreign-owned private equity funds, or a foreign state sovereign funds. Either way, we’ll be selling it to foreigners.

      For a private equity fund, they can make their money back within 2 years by doing the following:

      1) Borrow money from Bank A to buy the asset
      2) Using the asset as collateral, leverage to the max and borrow even money from Bank B to repay Bank A, plus extra profit. In the case of Sydney airport, they made 100% profit in 2 years!!
      3) The debt laden network is then floated publicly to suckers, er, I mean our superannuation funds >_<
      4) They will ask the government regulator for increases in prices to service the loans, or they'll go broke.

      It has to be a foreign owned private equity fund since they don't have to pay ANY tax on the profit they make. (see Myers for an example),

      At least the state sovereign funds don't leverage the firm to the brink of disaster. They just want a steady cash flow.

      • Private equity funds do not invest in poles and wires assets, they as you rightly describe expect their money back in 2 years and to target average returns of 25% across a portfolio.
        The sovereign funds do invest in poles and wires as you rightly point out…. expecting below 10% returns and not getting their money back on investment for over 20 years….. They place a huge amount of faith in our flimsy and fickle government placing money at risk to regulatory and legislative change like that…. Given recent government policy this really is an act of faith which benefits the people of NSW and QLD. These companies will overpay, meaning the people of NSW and QLD will have….
        – more money in their coffers than the assets are worth;
        – an owner who runs the business on a profit motive, reducing the fat bloated and profligate cost base and fighting union cronyism; and
        – an end to the use of energy companies as an unaccountable tool of government policy, resulting in reduced inefficiencies and greater transparency.
        As a matter of record
        – don’t give up your day job if you think your steps 1-4 are how its done
        – government owned investors do pay tax on income (both company income and dividend) – they have less ability to use franking credits so across the board their average tax rate might be higher….. Of course there are endless foreign and local companies taking advantage of loopholes and legislative and ATO incompetence to pay less tax than they should an distribute that burden onto you an me. (sadly)

      • Ronin8317MEMBER

        I didn’t make it up : what I described in step 1-4 is what Macquarie Bank did with Sydney Airport. They managed to milk it even more with management fees.

  7. The government gets more today because we will all be paying more tomorrow…

    exactly what the baby boomer led governments want – here today for the benefit but gone tomorrow when the pain hits

  8. The main points of neo-liberalism include:

    THE RULE OF THE MARKET. Liberating “free” enterprise or private enterprise from any bonds imposed by the government (the state) no matter how much social damage this causes. Greater openness to international trade and investment, as in NAFTA. Reduce wages by de-unionizing workers and eliminating workers’ rights that had been won over many years of struggle. No more price controls. All in all, total freedom of movement for capital, goods and services. To convince us this is good for us, they say “an unregulated market is the best way to increase economic growth, which will ultimately benefit everyone.” It’s like Reagan’s “supply-side” and “trickle-down” economics — but somehow the wealth didn’t trickle down very much.

    CUTTING PUBLIC EXPENDITURE FOR SOCIAL SERVICES like education and health care. REDUCING THE SAFETY-NET FOR THE POOR, and even maintenance of roads, bridges, water supply — again in the name of reducing government’s role. Of course, they don’t oppose government subsidies and tax benefits for business.

    DEREGULATION. Reduce government regulation of everything that could diminsh profits, including protecting the environmentand safety on the job.

    PRIVATIZATION. Sell state-owned enterprises, goods and services to private investors. This includes banks, key industries, railroads, toll highways, electricity, schools, hospitals and even fresh water. Although usually done in the name of greater efficiency, which is often needed, privatization has mainly had the effect of concentrating wealth even more in a few hands and making the public pay even more for its needs.

    ELIMINATING THE CONCEPT OF “THE PUBLIC GOOD” or “COMMUNITY” and replacing it with “individual responsibility.” Pressuring the poorest people in a society to find solutions to their lack of health care, education and social security all by themselves — then blaming them, if they fail, as “lazy.”

    skippy…. its like were flying blind… ummm… wait a minute…