Comment on Nine News about desirability of asset sales in Qld Budget

I was pleased to run into Katherine Feeney from Nine News on Boundary St, West End this afternoon. She was gauging community views on the upcoming Queensland Budget and I made a comment to her on the desirability of asset sales:

Newman gives no clues about third budget

As I’ve commented before, asset sales are a quick, no regrets way to pay down a large amount of debt so Queensland can get its AAA credit rating back. Otherwise we’d need to restrain spending growth even more or raise taxes – both measures that are possibly undesirable given the current risks to the economy, as I posted on last week:

Qld Budget needs to reflect challenging conditions – asset sales good option to cut debt

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7 Responses to Comment on Nine News about desirability of asset sales in Qld Budget

  1. Katrina Drake says:

    Queenslanders are very suspicious of assets sales because;

    > the confidence level in fair tendering is low due to continuing revelation of corruption in all levels of political parties, government members, and major corporations, together with weakening of Qld’s public systems of governance in relation to corruption.

    > the public has seen the Great Barrier Reef destroyed by government decisions to sell assets to foreign companies, and then loosing all control over environmental decisions. Eg Abbot Point leased to India’s Mundra Port and the subsequent dumping of dredge on the reef, when far better environmental alternatives exist.

    Assets sales such as Qld Rail, Aurizon where Queenslanders where able to buy back there own assets on the ASX through public offering maybe more acceptable to the Queensland public.

    There are many, many regrets with asset sales.

    • Gene Tunny says:

      Katrina, thanks for your comment. I’m unsure what exactly you’re driving at regarding corruption. A privatised company with a strong incentive to minimise costs would definitely try to run a fair tender process. If the managers aren’t acting in the best interests of the shareholders, then that’s an issue for the Board. I can’t see how that’s any more of an issue for a privatised company than a government-owned one.

      Regarding the GBR, the Government hasn’t lost control, in my view. Decisions that potentially impact the reef still have to be cleared by the relevant authorities.

  2. Katrina Drake says:

    Listening to the proceedings of the Royal Commission into trade union governance and corruption or the NSW Independent Commission Against Corruption – you quickly realise what a tangled web is being unwoven.

    A web that penetrates political parties, high profile individuals, construction companies, major public-private partnerships, international companies etc…. I am just saying when major public assets are being sold, the public currently has little confidence that their best interest are the highest priority. There are many undeclared interests involved.

    Regards the GBR – state and federal government have lost control, and have admitted as much. The Marine Park authority stated they had no alternative and no authority to oppose dumping at sea. There were more environmentally acceptable solutions to dumping dredge at sea, however, as they were a higher capital cost, these options were excluded from the assessment and decision making process.

  3. Katrina Drake says:

    Also while it may be fair to assume that a privatised company with a strong incentive to minimise costs would definitely try to run a fair tender process. There is actually nothing compelling a private company to run a tender process at all, they can set their own purchasing policy, purchasing what they like, when they like, from whom they like. That can apply to purchasing their labour, and materials from a related foreign owned overseas company.

    • Gene Tunny says:

      Thanks Katrina. I’ll have a closer read of GBRMPA’s statement regarding Abbot Point. I can’t disagree with your point about how there’s nothing compelling companies in the private sector to run tender processes, but the ones I’ve encountered all seem to have rigorous purchasing policies designed to squeeze all they can out of suppliers.

  4. Jim says:

    Gene

    What is the evidence that privatisation would actually restore Queensland’s AAA credit rating? Credit ratings are based on analysis of the balance sheet and the cashflow statement.

    Selling of assets for $25-30B might restore gross debt levels to January 2009 levels (when the AAA rating was lost). Potentially a big tick from the credit agencies.

    But selling the prize assets also means the bulk of the $1.7B in dividends paid by those businesses to the State will also be lost. Correct me if I’m wrong, but aren’t the dividend payments made after their interest has already been paid?

    So isn’t selling the prize assets a bit like selling an investment property that is positively geared? Gross debt comes down in line with assets on the balance sheet, so the net assets are pretty much unchanged. But the net cashflow statement is actually worse off (i.e. my losses are bigger).

    I’m yet to meet a banker (or credit agency) that thinks my overall credit worthiness would actually improve because I’ve deliberately sold a positively geared investment and subsequently reduced my capacity to service the remainder of my debt.

    Yes we need to reduce debt to restore our credit rating. But I’m yet to be convinced selling the prize assets is actually the way to do it.

    To restore the State’s credit rating, we need to place more emphasis on the structural deficit (i.e. the cashflow statement), not the balance sheet.

    • Gene Tunny says:

      Thanks Jim, you make a good point that we wouldn’t exactly return to the position prior to losing AAA because we would no longer have the dividends from the assets we sold to pay off the debt. But ratings agencies use a pretty simple metric for State Govts (gross debt to revenue) and if we can get that to below 100% and continue to reduce it for a few years I think we’d have a good chance of regaining our credit rating.

      Your analogy with a positively geared investment is correct, and everything depends on whether the interest savings which will come from using the sale proceeds to pay down debt will offset the loss of dividends. It’s certainly possible they won’t be, which is why it would be good to see a proper analysis of the privatisation proposals.

      That said, I’ve never thought the impact on the Government’s budget should be the primary consideration in deciding whether asset sales are worthwhile. We should instead consider what’s best for the overall economy, and whether assets would be better run by the public or private sectors.

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