Spurious arguments for privatisation

Here is a basic economic principle: don’t sell an asset unless you have verified that someone actually places a higher value (at least financially) on it than you do. This is a principle that the Queensland government has apparently forgotten and is articulated nicely in a letter published today [over the fold] and signed by every economist you can think of. Well, actually, I had agreed to be on it too but am not listed (due to an error which also left off Stephen King) but that is understandable given the sheer volume of names. Let me assure you that I agree with every word and echoed much of it when I wrote about NSW’s moves in this direction.

Statement by academic and business economists on the Queensland government’s case for asset sales

Decisions on the sale or retention of public assets have important implications for competition and public policy, as well as for the fiscal position of governments. These decisions cannot be resolved on the basis of general ideological arguments for or against public ownership, and require informed public debate in each case. The normal lines of economic debate include whether a given business is more efficiently operated in the private or public sector, the appropriate allocation of risk and the extent to which the enterprise is required to pursue social as well as financial objectives.

The signatories of this statement have a range of views on the appropriate balance between the public and private sectors and on the merits of privatisation in particular cases. However, we share the view that these questions should be resolved on the basis of well-informed discussion of the economic and social costs and benefits of privatisation, and not on the basis of spurious claims that asset sales represent a costless source of income to governments.

The arguments put forward by the Queensland government in its booklet ‘Facts and Myths on Asset Sales’ do nothing to promote a well-informed debate. Two central claims are particularly, and sadly, noteworthy. In relation to five public assets proposed for sale, the “Facts and Myths” booklet states

Keeping these businesses would cost the Government $12 billion over the next five years. That’s $12 billion spent on new coal trains and new wharves that can’t be spent on roads, schools or hospitals.

This claim is economically unsound. Forgoing income generating investments, and borrowing an equal amount to fund investments that return no additional revenue, leaves the government with no flow of income to service the associated debt. The necessary income must be raised by increasing taxes or cutting expenditure.

Selling public assets will improve the public sector’s fiscal position only if the price realised for the assets exceeds the value of the income stream that the asset would otherwise generate for the public sector. In this respect, the ‘Facts and Myths’ booklet states

The total return from all five businesses in 2008-09 was approximately $320 million … When the sale process is completed, it is anticipated the Government will save $1.8 billion every year in interest payments.

This is an invalid, apples-and-oranges comparison. The $320 million figure consists solely of dividend payouts, excluding retained earnings, tax-equivalent payments and the interest paid by the government business enterprises to service their debts.

The $1.8 billion represent the interests that would be saved, at a rate of about 6 per cent, if the state realised $15 billion from the asset sale and avoided $12 billion in new investment. Most of this interest would be serviced out of the revenues of the GBEs, and can therefore not be compared with dividends derived from earnings after the payment of interest and tax.

The people of Queensland deserve a robust and well-informed public debate over the costs and benefits of privatisation. So far they have not received it.

Signatories

Harry Campbell, Professor of Economics, University of Queensland

Tim Coelli, Adjunct Professor of Economics, University of Queensland

Henry Ergas, Economic Consultant, Canberra

John Foster, Professor of Economics, and former Head of School, University of Queensland

Paul Frijters, Professor of Economics, QUT

Joshua Gans, Professor of Management (Information Economics), Melbourne Business School

Ross Guest.Professor of Economics, Griffith University

Nicholas Gruen, CEO, Lateral Economics

Christopher Joye, Managing Director, Rismark International

Andrew McLennan, Australian Professorial Fellow in Economics, University of Queensland

Flavio Menezes, Professor and Head of School of Economics, University of Queensland

Christopher O’Donnell, Professor and Deputy Head of School of Economics, University of Queensland

Stephen King, Professor and Dean of the Faculty of Business and Economics, Monash University

Andrew Leigh, Professor of Economics, ANU

Adrian Pagan, Professor of Economics, QUT, former member RBA Board

Rohan Pitchford, Australian Professorial Fellow in Economics, University of Queensland

John Quiggin, Federation Fellow in Economics, University of Queensland

John Rolfe, Professor of Economics, Central Queensland University

Prasada Rao, Australian Professorial Fellow in Economics, University of Queensland

Rabee Tourky, Professor of Economics, University of Queensland

Warwick McKibbin, Professor of Economics, ANU, current member RBA Board

2 thoughts on “Spurious arguments for privatisation”

  1.  
    No one will buy an asset that only returns 6%.
    The reason private enterprise hasn’t offered to make the $12B investment is because they can’t make a decent return if they have to compete with the government.
    I thought the main driver for privatisation was to out-source the fighting of entrenched unions.

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  2. There’s also the issue of how the network business will be regulated following the sale as the current regulation means that it will no longer be able to be regulated by the competition authority and that a lengthy process to apply to the minister will have to take place. That is assuming that the network fits the criteria to be economically regulated.

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