Wise words from the PC on capital/asset recycling

I’ve been a strong supporter of the Queensland Government’s privatisation agenda, but have been unimpressed by the Strong Choices campaign promoting the agenda, which is uninformative and based on questionable logic. In its just-released Public Infrastructure Inquiry Report, the Productivity Commission nicely explains the logical problems with the capital/asset recycling argument that partly underpins the Strong Choices campaign (p. 262):

Capital recycling involves the linking of two separate decisions; the decision to privatise state-owned assets, and the decision to invest in a new infrastructure project or set of projects. While the linking of the two decisions may be a useful mechanism to alleviate community resistance to privatisation, this should not replace the need to undertake these sets of analyses separately. Ideally, both sets of decisions would be made within a transparent decision-making environment, where a robust cost–benefit analysis is undertaken…

The main risk from the capital recycling model is the potential for it to distort either of these decisions. In particular, an arrangement where the proceeds of sale are automatically hypothecated to investment in new infrastructure projects may create risks for over-investment in new greenfields infrastructure…

…A further potential risk with capital recycling is that the availability of funds from privatisation may mute the incentives for state governments to properly consider the extent to which user charges can be used to ‘fund’ the new infrastructure…

…A final problem with capital recycling is that it might cement in the public a view that the only time an asset should be privatised is if there is some new infrastructure project in which to invest — that is, that privatisation is not of benefit in and of itself.

This is what I’ve been saying all along. Privatisation is potentially good because it improves the efficiency of privatised businesses and the productivity of the economy overall. Budgetary impacts should be considered, but are not necessarily of primary importance.

I’ll say more on these issues at an upcoming panel discussion in Brisbane at Griffith’s Southbank campus Wednesday night next week:

Productivity and privatisation – panel discussion

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