Don’t privatise government HECS-powers at a discount


With Rohan Pitchford.

Following the collapse of Lehman Brothers in 2008, the Australian government may have quietly bailed out an investment bank or two. It did so by transferring bank risk to itself. For example, in  early 2009 Macquarie Bank was allowed to sell US dollar denominated commercial bonds that are guaranteed by the Australian government.  This helped MacBank avoid the massive US credit crunch, gave it favourable Libor rates and, in fact, one cannot be sure if MacBank or any Australian bank could have had access to commercial loans in the US and Europe in the first half of 2009 without a government guarantee. Essentially, the Australian government transferred an asset, its own ability to repay loans, to banks in a non-transparent way, and perhaps—given the immediate risk to the financial sector at the time—for free.

Turning to 2014, there is no doubt that investment banks would be very interested in managing HECS debt, after all there is a lot of money to be made when governments transfer their ability to guarantee repayments. We are not entirely against the idea of moving the management of HECS debt to the private sector but should this be on the cards such a transfer ought to fairly value  the government’s special powers to tax citizens.

Our proclivity is to think that the value of the government’s special powers to tax Australians is extremely high. To our minds there is no available theoretical model that can place a  dollar amount on this value; basically, an assets market no matter how complete, does not replicate assets that have built into them these kinds of powers. Further, the value of these special powers cannot be determined through bilateral negotiations between the government and a bank or a bank-peak-body. It would also  be foolish to think that a secret tender process can appropriately value the ability to tax citizens. To have any hope for getting a fair value, any transfer of assets that involves the transfer of government powers to tax, such as the `outsourcing’ of managing HECS, must involve free, competitive, transparent, auctions whose design needs to be carefully studied and crafted.
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