Rentiers gorge at Newman asset smorgasbord

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By Leith van Onselen

It’s good to see the nation’s parasite industries feasting at the trough of the Queensland Government’s planned $30 billion of asset privatisations:

If it was not for Campbell Newman’s Queensland government, our investment banks, law firms and accountants wouldn’t know what to do with themselves.

Bankers, lawyers and accountants are in Brisbane this week, doing their best to secure a role in the state’s mooted $30 billion asset sell-off.

It is fair to say there have never been so many advisers crawling through Queensland Treasury’s Brisbane office, or groups of pinstripes huddling around the airport’s taxi rank…

The electricity networks mandate is expected to be the most fiercely competed among the banks, given its size and the attractiveness of the assets to potential buyers in the current market.

Because the benefits for Queensland taxpayers from flogging-off the state’s ports, power generators, electricity distribution networks and water pipelines are questionable, given they represent essential infrastructure.

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.

As noted earlier this year by 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 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 the Abbott Government’s “asset recycling” incentive payments to the states, which will effectively reward states for selling-off assets are so dangerous, since they presume that private ownership is superior in all cases rather than basing payments on objective economic criteria, and on a case-by-case basis.

Indeed, the Productivity Commission’s report on the provision of public infrastructure, released last 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. This is less likely to be the case where essential infrastructure is involved, as with Queensland’s $30 billion privatisation program.

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  1. Financing is not funding.

    Funding refers to the ultimate source of money use to pay for the resources needed to build, maintain and operate infrastructure. Funding may be from user payments, or from taxes, or from a combination of the two.

    Financing refers to transactions in the capital markets to bridge the timing gap between the outlay of funds and the receipts of funds, from whatever source.

    Private financing does not create one cent – not one single, solitary cent – of additional funding.

    On the contrary, because of the relative illiquidity of private financing, in the absence of offsetting efficiency gains (many of which can be obtained by contracting out) private financing actually reduces the net amount of funding available for infrastructure.

    (See Morris’s 7th Law of Privatisation.)

    The real purpose of private financing is:

    a) to hide the real levels of debt being incurred by politicians in vote-buying schemes. The proceeds of privatisation are typically squandered within few years (as the public debt ratios of Britain vividly demonstrate); and

    b) to enrich the Mates of corrupt politicians.

    • I had to rush out at 11:00 am and didn’t have time to qualify my earlier intemperate comment.

      In relation to the electricity distribution assets it must be acknowledged that under their current ownership structure (“corporatisation”) they appear to be investing inefficiently large amounts in the distribution system.

      This paper by Professor Stephen Littlechild (the first Director-General of the Office of Electricity Regulation at the time of privatisation in the United Kingdom) examines the various determinants of distribution prices and finds that:

      a) the cost of capital allowed to publicly-owned distributors is generous; and

      b) the regulatory capital base of publicly-owned distributors (i.e. the amount they invest in their networks) is anomalously high in a way that is difficult to explain other than as a result of their ownership structure.

      It is worth examining these two aspect separately.

      In relation to cost of capital, one of the advantages of public ownership is that any excess revenue arising from high WACCs is not lost but goes to the State owners. It is, in effect, a State tax on the electricity industry. It might not be the most efficient way of taxing, but the money is not being lost.

      Because of Australia’s disastrous federal financial system (a problem that will not go away) state-owned enterprises have been long vital on-going sources of revenue. As noted earlier, selling that income stream and squandering the proceeds on non income-earning expenditure will actually worsen the states’ financial predicament.

      The more relevant issue is that of regulatory capital base. Professor Littlechild is famous for his application “yardstick regulation” to the UK industry and he has applied his methods to distributors in Australia.

      In an ideal world, yardstick regulation creates a “synthetic competition” between monopolists operating in different markets. In its simplest form, yardstick regulation would allow a set of regional monopolies to earn a target rate of return averaged over all of them. As each monopolist tried to earn above the average, it would tend to pull the average up and therefore pull down the price cap at which the average would be achieved. Thus each monopolist is in effect competing with all the others.

      In practice, the system is complicated by the fact that not all monopolists face the same costs conditions. (For example, a distributor servicing a low density population would face higher costs, irrespective of how efficient it was.) The trick in applying yardstick regulation is to identify (through regression) the determinants of cost and make appropriate adjustments to keep the system fair.

      My reading of Littlechild’s report is that his primary concern is the lack of rigorous (yardstick style) regulation in Australia which could be applied to both public and private distributors.

      Nevertheless his regressions find that the corporatised public distributors incur capital costs which cannot be explained.

      It might be noted that this is not an argument against public ownership per se. In the 1980s, for example, the Queensland electricity industry was noted for applying “world’s best practice” (in contrast to other states). It seems that corporatisation (“pretending to be private”) may have created a perverse incentive to over-invest.

      If privatisation does occur – and that now seems inevitable – the battle will be to ensure that the regulatory system uses yardstick methods to maintain synthetic competition, and that that system is not white-anted by regulatory capture.

      Or course, that does not solve the problem of the proceeds of privatisation being squandered.

  2. How much can I, a regular QLDer with an interest in infrastructure investment, buy? Oh that’s right, nothing. This is all just a scam, as SM often notes, to give monopolies to mates or whoever can offer the tastiest bribe.

  3. sydboy007MEMBER

    Worthy of a uni thesis to investigate the cost / benefits of various public assets sold to the private sector and if there were any efficiency gains and if these were passed on to consumers or retained as profits.

    Sydney airport could be a great example of how badly it can go when you privatise a monopoly and let the free (expensive) market run with little over sight.

    • Another interesting aspect of it would be privatisation model, eg. Public offering vs. ‘Institutional/Sophisticated only’ vs. ‘Invitation only’, vs. rate of return.

    • Ronin8317MEMBER

      The sale of Sydney Airport also include a clause which gives it the first right to build a new airport, so there will never be any competition.

      • This is a common component of the privatisation arrangement. The private entity usually seeks legislation enshrining their monopoly rents, and our government more often than not gives it to them.

        The same thing is going on with the HSR debate. Foreign interests offering to finance the construction want a government guaranteed minimum patronage.

      • And don’t forget:

        Cl. 76 dc. Parking F**kfest

        “Parking prices may be used to f..k over everyone and their cat and or for profit or as otherwise necessary to give effect to the agreement.”

      • Yes – parking and toll roads to the new Sydney airport are going to be a massive gouge fest.

        Note that well dressed Carni (apologies to Carnies) Mr Truss explained that they would not extend the Leppington railway to a new airport for a while.

        Railways from the get go might reduce demand for road access and parking.

  4. It’s a bit off topic, I’m in Victoria and we found a Tasmanian stated owned power company to be the cheapest and best option for us. I agree competition is important, but if state owned asset can deliver a great and cheap service then why not let them play in the sand pit with the private companies? Why does everything need to be sold off?

  5. Sell off 51% and keep the rest forever. Govt cant run anything. At least then the people get 49% of the monopoly profits.

    • Sell off 51% and keep the rest forever. Govt cant run anything.

      I’ll buy the courts and the police. You can buy all the rest (it will soon be all mine anyway). Govt can’t run anything.

  6. “…since they presume that private ownership is superior in all cases…”

    They are not presuming anything. They are just trying in enrich themselves, their families, and their mates.

  7. Well Newman will need a job post election. Wonder which privatised operation he’ll appear at?

  8. Philly SlimMEMBER

    I appreciate where you are coming from regarding the potential issue with monopolies but I think you miss one of the potential benefits from privatisation …

    … and that is labour. There was a great set of articles in the Australian on 20 August. In an op-ed, Vince Graham (CEO of the NSW electricity distribution businesses) made the following great point:

    “We have this almost ‘Bermuda triangle’ for consumers where you have public ownership, politically powerful unions and compliant management that has led to very high and uncompetitive union agreements and cost structures in the public sector”

    • Private sector management of natural monopolies face the same pressures – do a deal with organised labour in the interests of harmony and pass the cost onto the captive customers.

      Public or private – It is just a question of good disciplined management.

      The main difference is that the customer gets slugged with an extra charge for the financing costs of the private firm.

      • Philly SlimMEMBER

        “Public of private – it is just a question of good disciplined management”

        That doesn’t work in theory and it doesn’t work in practice.

        From a corporate governance perspective, key levers (such as management incentives, capital structure, capital markets information like equity analysis and threat of change of control for poor performance, the role and quality of the Board of Directors etc) are either weakened or absent under Government ownership.

        Additionally, the academic literature on privatisation from around the world (see Professor Megginson et al) includes a weight of evidence that privatisations taken have generally led to improved firm performance.