Another idiotic privatisation takes flight

In desperate search of quick cash to fund the state’s ballooning population, the Victorian Government is looking to sell-off the state’s monopoly motor registry agency, VicRoads, to private interests:

Investment bank Morgan Stanley has won the role to embark on a scoping study for the Victorian Government to determine whether to sell its motor registry unit…

Should the unit, which is called VicRoads, be placed up for sale, it is expected to be worth about $2 billion.

Also working with Morgan Stanley is KPMG.

VicRoads handles all of the state’s motor vehicle registrations, which helps to fund critical roading infrastructure.

Expected to bid for the asset, should it come up for sale, is Macquarie Infrastructure and Real Assets.

Australian funds, including IFM, would also be logical contenders.

The government is likely to make a decision about a sale of VicRoads ahead of the state budget around May or June.

Victoria’s motor vehicle registry is an essential government service and a profitable natural monopoly. It’s sale will inevitably result in end-users being gouged by the new monopoly owners, whereas the State Government will lose a reliable income stream.

The Victorian Government has clearly hit peak stupid in its lust for privatisation. Voters deserve better.

Leith van Onselen

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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Comments

      • I don’t think so, you’re eminently sensible.

        Except your hi flow schtick, which is starting to look a little redundant coz soon we ain’t gonna be able to have showers!

    • From Queensland Parliament, Transport and Public Works Committee, “Inquiry into the operations of Toll Roads in Queensland”, Submission 165, pp12-13 (parliamentary privilege is claimed on the following):

      Speaking from experience, even if an “independent” adviser is motivated by the highest standards of probity, it is all but impossible to stand in the way of a transaction which has already been effectively agreed, either by the senior public officials involved or by the relevant Minister. At most, the adviser may suggest some cosmetic changes to justify their role but if they go further they run the risk of being blacklisted from further appointments and in extreme cases being dismissed pre-emptively.

      Moreover, it is far from assured that such advisers are motivated by the highest standards of probity. On the contrary, they are often participants – or would-be participants – in other such transactions. A reasonable person might reasonably conclude that they are motivated primarily by a desire to stay on good terms both with contractors and financiers and to be “invited to the party” next time.

      Moreover:

      • the use of commercial-in-confidence secrecy to hide details of such transactions; and

      • the range of uncertainty surrounding what might be considered reasonable commercial terms ,

      minimises the risk that an “independent” adviser could ever be called to account for their actions.

      Moreover, the growing practice whereby retiring senior public officials – and even former Ministers – obtain lucrative employment from parties enriched by such transactions is corrosive to public faith in the institutions of government.

      To fully grasp the surreal absurdity of this system, consider a counter-factual “thought experiment”.

      Imagine, if you will, a judicial system in which supposedly “independent” judges were selected by the Minister on a case-by-case basis from a pool of lawyers. Imagine that their deliberations were held in secret (we might call it “judicial-in-confidence”). Imagine that those same lawyers were themselves hoping to be involved in other commercial dealings either with one of the litigants or with the government. Imagine that the Minister had made it clear that he wanted a particular verdict to be reached. And imagine that he himself later took up a lucrative directorship with one of the parties which had been successful in its litigation.

      Given the existence of precisely these conditions in the provision of public works, is it any wonder that voters’ trust in the institutions of elective government has fallen to dangerously low levels?

    • Or an annual tax on all net wealth.

      “Inquiry into the operations of Toll Roads in Queensland”, Submission 165, p 43:

      An alternative is a net wealth tax. Not only does this include a wider range of sources of rent, but it also accounts for liabilities which produce the greatest distortion in the case of property tax. As of 2010, the only OECD jurisdictions collecting significant sums of net wealth tax were Norway and Switzerland with Switzerland collecting about 1% of GDP[54] .

      Significantly in the context of this submission, Swiss net wealth tax is collected by the cantons – not the Federal Government – at rates of up to 1% per annum. Wealth subject to the tax includes real estate, securities and other investments, cash, gold, precious metals,
      cash value of life assurance policies, shares in undistributed inheritances, business capital, shares in a partnership, motor vehicles, boats, etc. Pension funds are not considered as assets, and all liabilities can be deducted in order to determine net wealth [55] .

      Taxpayers must declare worldwide assets belonging to all immediate family members. Foreign real estate and qualifying business interest are exempt but made be taken into account in determining the tax rate. Liabilities are allocated according to the location of gross assets.

      It is worth noting that Swiss net wealth taxes evidently have public support as they could at any time be removed through the system of initiative-and-referendum which operates federally and in every canton. Moreover, there is no evidence that net wealth taxes at these rates have led to a flight of capital.

      A further option – which may complement either of the others – is a corporate commons tax levied on the market capitalisation of listed companies[56] and possibly on the assessed capitalisation of other companies.

      Fanciful elaborations of all these – involving, for example, imputation credits on corporate commons tax being available to offset personal net wealth tax – can be imagined. However that goes well beyond the scope of this submission.

      – – – –
      [54] Kayte Lawton and Howard Reed, Property and Wealth Taxes in the UK, Institute for Public Policy Research, March 2013, Figure 1.2.
      [55] See PwC’s Worldwide Tax Summaries: http://taxsummaries.pwc.com/ID/Switzerland-Individual-Other-taxes (This site is updated periodically and the link may cease to be available at this address.)
      [56] Karl Fitzgerald, op cit, p 27.

      • It is probably a lot easier to tax foreigners who are not allowed to vote.

        The baby boomers went troppo when the ALP said the franking credits rort should end.

        • “It is worth noting that Swiss net wealth taxes evidently have public support as they could at any time be removed through the system of initiative-and-referendum which operates federally and in every canton. Moreover, there is no evidence that net wealth taxes at these rates have led to a flight of capital.”

          The real problem is that it would require rich and politically powerful people to pay more tax and thus jeopardise the million-dollar-a-year directorship for any politician who dared to implement it.

          Therein lies the essential difference between efficient Democracy and our corrupt and dysfunctional system of elective government.

  1. proofreadersMEMBER

    “Victoria’s motor vehicle registry is an essential government service and a profitable natural monopoly.”

    And that’s exactly why the government will flog it? It’ll be a nice little earner in private sector hands?

  2. “Investment bank Morgan Stanley has won the role to embark on a scoping study for the Victorian Government to determine whether to sell its motor registry unit.”

    Can anyone recall a recent scoping study that has recommended that the government not privatise? The scoping study just exists to provide a facade of independence in the decision making and justify the decision that has already been made. The governments could at least have the integrity to say
    “We’ve decided to do this because it will provide us with a short term financial gain. It is also an acknowledgement that we have gutted and politicised the public service to such an extent that even if we wished to continue running, or attempt to reestablish, a necessary service such as this we no longer have the ability to do so. This will all be done under the guise of economic efficiencies yet shall end up costing the broader community more while enriching the rent seekers. If you don’t like it you can vote us out but don’t expect the other guys you always vote in to be any different. Kisses, the governing party of AUS, QLD, NSW, ACT, VIC, TAS, SA, WA, NT.”

  3. Banana ManMEMBER

    Lets start an Australian Citizens crowdfunding campaign and buy it. Usually comes with a guaranteed profit clause like the toll roads, money for nothing.

  4. Privatisation is Leith’s blind spot.

    This deal, if structured correctly, makes eminent sense. As you point out it is a natural monopoly. But being Government run it is likely run very inefficiently.

    Suggested model:
    * 30 – 40 year concession (that is, it isn’t gone for good, the State takes back full title at the end of the concession period; with the magic of compound interest rates you don’t get much up front from the years beyond 40).
    * Government retains 40% ownership (important as insurance in case you sell it too cheaply, also better aligns interests over the term of the concession).
    * Prices are fixed and only increase by CPI (it’s an established pattern and the superannuation investors who buy these assets like the CPI exposure)
    * Job guarantee for workers for a period where the new owners can offer voluntary redundancies (I’d probably go so far and tie it to whatever formula the current State public service uses for VR’s).
    * Key thing before sale will be to run it independently of Govt to determine what the important key performance stats are so you can set them up contractually. Is it customer wait times? Processing speed? Etc etc. These need to be set carefully as whatever service levels are proscribed is what you will get.

    • James D

      “..This deal, if structured correctly,..”

      If the deal is structured correctly, sufficiently holes are left so that the successful bidder will pay much more than expected.

      The government now gets the opportunity to claim a roaring success and then the successful bidder over the next few years exploits the holes to make the bid look cheap.

      At some point close to the end of the successions period the government will be offered some “upgrade” in return for an extension of the concession for another extended period. Toll roads concession holders usually offer an extra lane each way or a few more entry / exit ramps.

      By this point the only people paying attention are the public servants and they know there is no upside in upsetting some well connected corporate donor to whoever is power at the time.

      • which is why I suggest the government retain a 40% ownership stake. better aligns interests in the case of the issues you raise. you are letting the private owner run it more efficiently and still retaining a seat at the table.

    • “Inquiry into the operations of Toll Roads in Queensland”, Submission 165, p 16:

      It is an irony of privatisation that the ideologues who argue most vociferously that government is incapable of doing anything properly are also those who argue most vociferously that government is capable of constructing perfect regulatory regimes to eliminate all problems of private monopolisation.

      • But there is a big difference between policy formulation and policy execution; see Batts, Pink (2010).

        The government, through its central agencies, are quite good at coming up with regulatory frameworks. The government, through its line agencies, are tremendously hopeless at running IR/HR. The rules that govern how the public service operates could in theory be improved, and the execution made better. But the evidence suggests its too hard and is ignored. If a government agency was run efficiently I’d agree there’d be no benefit to privatisation, but there is. I’ve worked with many such entities both pre and post privatisation.

        • Benefits to who? And cost savings for who?
          One of the lowest hanging fruits of the privatisation of government industry over the last 40 years is stopping all apprenticeship programs, and that is what all of them did. Great for saving the new owners money, but those costs are transferred back to the government in ever increasing apprenticeship incentive funding, and increased tradie costs as the pool of qualified tradies shrinks due to lack of apprentices coming through.
          It seems we have merely transferred the costs from the private owners making out like bandits and back onto the government and public. This really isn’t a good deal.

        • Privatisation ideologues invariably focus on:

          “internal efficiency” (the efficiency with which a particular bundle of goods and services is produced)

          and ignore

          “allocative efficiency” (the efficiency with which resources are allocated to ensure that the size of bundle meets demand and is correctly priced to match demand).

          In fact, most of them – being almost wholly ignorant of the subject on which they pontificate – are not even aware that there are different dimensions of efficiency.

          Private monopolies are internally efficient but allocatively inefficient in that they over-price their output and under-produce it (relative to demand) because this is the profit-maximising strategy. (That may take some time to manifest. For example, they cut back on maintenance of the electricity grid until a massive substation shutdown closes one of the State’s most important industries for months on end!!)

          For most basic infrastructure which does not face rapidly changing technology or fashion, and which is capital intensive, allocative efficiency is far and away more important. Internal efficiency can be largely achieved through contracting out of particular functions without selling the monopoly. See: https://www.scribd.com/document/178013254/Laws-of-Privatisation

          I have seen far more money (billions upon billions of dollars) lost through privatisation than lost through internal inefficiency in government. The armchair experts are usually unaware that it has even occurred because it comes in the form of “opportunity losses” which do not show up in any accounts.

          See:

          https://www.scribd.com/document/388209151/QTPWC-Toll-Road-Inquiry-Submission-165

          p14, et seq.

          (I would also particularly draw your attention to the findings of the UK National Audit Office in Appendix A.)

          And all of that is before one takes into account the problems of entrenched corruption caused by privatisation which I have also seen. Key decision-makers will hand over millions – perhaps billions – of dollars in renegotiations in order to secure their million-dollar-a-year directorship.

          Of course, fundamentalist ideologues are immune to any such evidence. They will carry on believing whatever suits their self-interest and prejudices.

          But we shouldn’t let the pig-ignorant and the criminal determine public policy.

    • And the irrefutable evidence presented by the undeniably detrimental outcome of virtually every privatisation of a national industry seems to be your blind spot.

    • It depends on how you define efficiency. A private company should effectively minimise costs to themselves if it will increase their profit, however, they have no incentive to minimise costs to the public or provide anymore than the basic level of service required in the contract. Infact the only incentive a private company has is to make as much profit as possible for their shareholders and if that involves screwing over the public they gladly will.

      • Privatisation ideologues invariably talk about:

        “internal efficiency” (the efficiency with which a particular bundle of goods and services is produced)

        and ignore

        “allocative efficiency” (the efficiency with which resources are allocated to ensure that the size of bundle meets demand and is correctly priced to match demand).

        In fact, most of them are not even aware that there are (at least) two different dimensions of efficiency. (A third – “dynamic efficiency” – refers to the speed at which organisations respond to external changes in demand.)

        Private monopolies are internally efficient but allocatively inefficient in that they over-price their output and under-produce it (relative to demand) because this is the profit-maximising strategy. (For example, they cut back on maintenance of the electricity grid until a massive substation shutdown closes one of the State’s most important industries for months on end!!)

        For most basic infrastructure which does not face rapidily changing technology or fashion, and which are capital intensive, allocative efficiency is far and away more important. Internal efficiency can be largely achieved through contracting out of particular functions without selling the monopoly.

        See:

        https://www.scribd.com/document/178013254/Laws-of-Privatisation

  5. The move to EVs is going to leave a massive shortfall for fuel excise. Maybe this new privatised VicRoads can institute proper road usage charging.

    • darklydrawlMEMBER

      Whilst I agree it is moronic and based on past experience will produce a lousy outcome for the plebs, I suspect it has something to do with filling in a budget hole created by lower stamp duty receipts on low RE volumes.

      • +1 Perhaps they could fix the place instead. I haven’t noticed sublime efficiency there, and perhaps jobs shouldn’t be allocated as sinecures.