Better off allocating all lease proceeds to debt reduction

John Quiggin’s interesting new paper on the budgetary impact of asset leases, reported in the Brisbane Times today (Strong Choices will have ‘adverse impact’), correctly points out the adverse budgetary impact of the Queensland Government allocating around one-third of asset lease proceeds to infrastructure projects and the Cost of Living Fund. It means the Government doesn’t receive the interest savings it would from an equivalent amount of repaid debt – interest savings it could have used to partly offset the loss of forgone dividend (and tax equivalent) payments from government-owned businesses whose assets are leased out. For this reason, and because I also want to maximise our chances of regaining our AAA credit rating, I would use all the lease proceeds to pay down debt, as I’ve noted in previous posts (e.g. Reforming solar cross-subsidy is good policy, but unclear why $3.4 billion should be locked up in Cost of Living Fund).

While I agree with several of the points Professor Quiggin makes in his new paper, I have a couple of criticisms.

First, I don’t agree that interest savings from the repaid debt of government-owned corporations should be excluded from the analysis (see p. 6 of Professor Quiggin’s paper), because ultimately that debt is owed by the Government and thus taxpayers, who will benefit if the debt is repaid. By excluding these savings, the paper over-estimates the negative impact of the proposed asset leases (and uses of the proceeds) on the State’s finances.

Second, the paper focuses too much on the budgetary impacts of asset leases to the neglect of productivity and efficiency impacts-i.e. whether the assets would be more efficiently run by the private sector, which I suspect they would be (see my previous post Productivity and Privatisation). A comprehensive cost-benefit analysis of asset leases would consider the full range of economic impacts, and would look further than the budgetary impacts. For example, lower costs of electricity supply (and hence lower electricity prices) under private management than would otherwise occur may be important benefits flowing from asset leases that would need to be considered in a cost-benefit analysis.

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10 Responses to Better off allocating all lease proceeds to debt reduction

  1. Katrina Drake says:

    Except off course, no-one really believes that the price of electricity will be lower under private management.

    • Gene Tunny says:

      Katrina, for clarity, I’m not saying power prices would fall. I’m just saying that they would be lower than they would be if public ownership continued. The evidence from other jurisdictions is that privatised networks are more efficient and hence prices would be lower. The networks are regulated so price gouging should be prevented.

  2. Katrina Drake says:

    Thanks for your article, I read John Quiggin’s publication with interest, it certainly was an insightful commentary. As is yours, as usual. Thank-you for keeping us informed with your blog – it is reassuring to have as many views as possible on the assets sales, as it is clear we will not be told the full-story during the election campaign.

    • Gene Tunny says:

      Thanks for the comment and feedback, Katrina. It’s unfortunate that there is so little information around about the proposed asset leases. I’m certain the Treasury would have done the type of modelling John did in his paper and it should have been released to inform the public debate.

  3. If you include interest paid by GOCs as a saving, you have to use EBIT, rather than dividends+tax equivalent payments as the income foregone by the government. That nets out to exactly the same number.

  4. Jim says:

    Gene

    A good post to get us thinking (as always). I agree with John Quiggin’s logic regarding the treatment of savings. In a nutshell, there is very little actual evidence in the public domain to suggest the State Government’s budget or balance sheet would actually be any better off under leasing / privitisation (possibly worse off in the long-run for the reasons John has pointed out).

    I think we also have to be very careful when simply assuming there will be meaningful efficiency gains passed on as lower prices from any private operator. Most of the assets for lease are very capital intensive and the cost drivers are primarily fixed (return on assets, renewals, routine maintenance etc.), or the new operator is a still a price taker for dominant variable costs (e.g. coal for power plants). Even if the new operators could reduce staffing levels and some variable operating costs, would those savings be enough to offset the higher returns that private owners would likely be seeking? And won’t most of the privatised assets effectively be regional monopolies anyway? No effective competition is means no market imperative to pass any cost savings to be passed onto consumers?

    I’m still not convinced the centerpiece of the LNPs election strategy actually makes economic or fiscal sense. I’m even less convinced when they give an indication of what they will spend some of the lease proceeds on.

    • Gene Tunny says:

      Yes, it appears I misunderstood exactly what John was arguing when I first read his paper. I still think he’s missing something, however, which is the benefit that would flow from getting our AAA credit rating back (if the debt reduction excites the rating agencies). Of course, this won’t turn a negative budgetary impact into a positive.

      Your comment on the efficiency aspects shows we will have to rely on the regulators to some extent to see those benefits in terms of price, which I concede may be a bit optimistic. The shareholders would then receive more benefit from any efficiency gains, and there an important question is what proportion of any gains would flow overseas to foreign shareholders. Lots to think about, which supports the point you’ve always made that a comprehensive CBA should have been done.

      Thanks for the comment, Jim.

  5. Jim says:

    Gene

    The LNP is now full steam ahead with the promises of shiny new infrastructure to be funded from the proceeds from privatisation. Some of the ideas provide even more reasons to oppose the privatisation agenda.

    The white elephant for today is $150 million for a new stadium in Townsville (subject to privatisation of course). The existing stadium has a capacity of about 27,000 and is rarely full even when the NQ Cowboys make the finals. OK. The existing stadium doesn’t have a roof. But the use of the stadium is almost exclusively in the dry season anyway. There is no way in the world that this project stacks up.

    The ALP have also promised $100 million for this white elephant. Townsville needs a new mega-stadium like a hole in the head. I’m sure there are other infrastructure projects and services that would provide a much greater benefit to the region.

    This demonstrates poor economic thinking by both parties. We deserve better.

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