How important is the return of leased out assets in 99 years time in a cost-benefit analysis?

The Premier’s interesting comparison of the proposed leasing out of Queensland Government assets to the long-term lease of Hong Kong, which was eventually returned to China, made me think about how important the eventual return of assets should be in Government decision making (see Brisbane Times coverage of the Premier’s comments). Given that very few Queenslanders alive today will be around when the assets would revert back to Government control next century, it seems obvious to me that very little weight should be given to the fact the assets are eventually returned.

In any cost-benefit analysis of the decision to lease out assets or not, the Government should be mostly concerned about the benefits and costs to Queenslanders over the next few decades. Under typical assumptions for the time value of money (i.e. the fact a dollar today is more valuable than a dollar in the future), the value of the returned assets in 99 years time would be relatively tiny, and likely have very little if any influence on the bottom-line result for the cost-benefit analysis of whether to lease out assets or not (see chart below).

timevalueofmoney

The return of assets to the Government after the lease period ends provides some cover for the Government in the privatisation debate, but it really shouldn’t be a major consideration in the debate. The eventual return of the assets isn’t that important from our point of view today, so we may as well sell off the assets and maximise the privatisation proceeds.

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7 Responses to How important is the return of leased out assets in 99 years time in a cost-benefit analysis?

  1. Jim says:

    Gene

    I fail to see how a comparison between a lease on Hong Kong and long-term asset leases is valid. They are completely different types of assets. It might be valid to compare Hong Kong to a pastoral lease, but a power station???? The only similarity seems to be the 99 year term. You have to wonder if/where Mr Newman is getting his advice.

    While I’ve been pretty critical of the privatisation process, it has been due to a lack of analysis on individual assets, not privatisation per se. I’m indifferent to the outcomes, I’m just not tolerant when the analysis is not done (properly, or at all).

    I now wonder if the lease option has also suffered from the same dearth of analysis, particularly for the energy assets. Surely very long-term leases may not be an appropriate mechanism for assets that face technology obsolescence (e.g. by efficient decentralised solar). How do you realistically establish a lease contract that deals with such uncertainty? Does the taxpayer wear the liability (underutilisation, decommissioning etc.) when the obsolete assets are handed back in 2115?

    • Gene Tunny says:

      Yes, it’s a bit of a weird comparison. Interesting question regarding where the risks are allocated. A lot gets allocated to the lessee in my view because they have to pay up front and have to sign up for a long-term lease. Obviously the risk to the lessee will be reflected in a lower willingness to pay for the lease up front. Thanks for the comment, Jim.

  2. It would appear clear that the only consideration given when making the decision between sale or lease was the political one.
    Despite previously making well documented comments about a lease being as good as a sale (when the previous Govt leased assets) the State Govt are hoping to be able to convince a sceptical public that the “Strong Choices” campaign,and the resultant apparent decision to scrap sales, was anything other than a PR exercise.
    Sale or lease, we still need to see concrete cost/benefit analysis of these decisions; unfortunately I doubt we will. It almost seems as if the Govt is trying to run the line that, because it’s a lease rather than a sale, the benefit is obvious and therefore requires no further analysis. We have the LNP candidate for Mulgrave in the local paper today comparing the lease of state assets with the rental of your home when you go on an extended trip; as if a 6 month road trip equates to a 99 year lease.

    • Gene Tunny says:

      Yes, they probably regret now they were anti-privatisation in opposition. There’s a piece in the AFR today I understand about how Oppositions shouldn’t be so opportunistic and should support good policy such as privatisation (in situations where it is good policy, of course). Thanks for the comment, Pete.

  3. pathession says:

    Hi Gene. It’s also very hard to imagine that future governments would be interested in taking over assets once the lease terms expire. Surely the more likely options would be that they would either extend the lease term, or sell the asset outright?

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