Cyclone Debbie and the floods that followed have tragically resulted in the loss of at least five lives and have done billions of dollars’ worth of damage in Queensland and NSW. And through lower coal royalties (largely associated with an important rail line being out of action) and a hefty repair bill (a large part of which will be met by the Commonwealth, though), Cyclone Debbie will also adversely affect the Queensland State Budget, complicating the preparation of what will be the last State Budget before the next election. The magnitude of the impact on the Budget is difficult to gauge, given all the moving parts. One consideration, identified by Bill O’Chee yesterday, is the insurance the State Government has taken out on State assets since 2011, although at the time Premier Bligh suggested it would only cover a small part of the total cost of a natural disaster (see this ABC News report from 2011). In the Courier-Mail yesterday, former CCIQ Director of Advocacy Nick Behrens was quoted on the possible Budget impact:
Economist Nick Behrens said the royalties income would still be “well ahead’’ of the original estimate last June, but the weather disaster would shave up to $200 million from the revised figure. “However the damages bill I suspect will be far higher than the $2.748b sugar hit from coal royalties and additional GST receipts (of $889m). “So the State Government may actually find themselves in net terms behind.”
I agree Debbie will be a setback to the Budget. But nonetheless I expect the Government will pull a rabbit out of the hat sometime later this year, if not at Budget time, and set itself up for the election, with a major announcement on the $5-10 billion Cross River Rail (CRR) project. The Government needs to show real progress on CRR so it can defend itself against the Opposition’s criticism that it is a “do nothing government”. I expect the Queensland Investment Corporation (QIC), which looks after more than $20 billion set aside to meet the State Goverment’s superannuation liabilities, will commit to a major investment in CRR infrastructure, particularly the tunnels and subway stations, as its CEO suggested it may do last month (as reported in the Courier-Mail on 28 March).
We will need to look carefully at how the CRR project is structured to determine its impact on the Budget. We now have a CRR Delivery Authority that I expect will set up various companies to deliver different aspects of the project, and QIC will invest what may have to be billions into these companies. This should keep a lot of the expenditure for CRR off the State Budget, but the Government will no doubt have to commit to large ongoing subsidies, particularly of rail fares, to ensure the project’s commercial viability, given the project would not be commercially viable if it relied on fare revenue and other private income sources alone. The Government may be able to link some of this subsidy to value capture, but the project will undoubtedly be a net drain on the Government’s operating budget. CRR is not a commercially viable project on its own, and will require ongoing public subsidy of some kind.
This points to one of the major problems I see with QIC investing in CRR, in addition to risking the perception of QIC’s independence if it were to invest in one of the current Government’s priority projects. As noted above, the Government would need to subsidise CRR services so investors, including QIC, earn a return on the project. QIC would report a positive return on government funds invested in the project, because those returns are being guaranteed out of the current Budget. These returns would support the payment of the Government’s defined benefits superannuation payments. This would be a bit of smoke and mirrors, and would be rather fiendishly clever, but highly undesirable. My friend and former Treasury colleague, Joe Branigan, now an associate of Cadence Economics and Senior Research Fellow at the SMART Infrastructure Facility University of Wollongong, described it this way to me:
“When QIC invests in infrastructure that won’t by itself provide a commercial return, the lost earnings (from not investing in an alternative commercial asset) is not borne by Queensland’s defined benefit members (whose return is guaranteed) but, rather, by the Queensland taxpayer. In this sense, the returns paid to defined benefit members is a ‘fake return’, subsidised by the Queensland taxpayer.”
This is why it is very important that QIC ignores political considerations when it is making investment decisions. QIC should be investing the State’s superannuation money in commercial projects or investments outside of the State Government sector to avoid the risks I have described. While QIC proclaims it makes its decisions independently of the Queensland Government, it must be very challenging for the organisation when its owner, the Government, comes to it with an investment proposition.
Previously, in line with the recommendations of the 2013 and 1996 Commissions of Audit, I have recommended that QIC be privatised to avoid political interference and risks to the State’s balance sheet:
We will also need to look out for any borrowings associated with the project by Queensland Treasury Corporation that attach to entities classified as public non-financial corporations and which hence add to the State’s total debt reported in the Budget, currently projected to reach nearly $78 billion in 2019-20.
Let us hope the Government does not need to rely on QIC for CRR funding, due to the risks I have outlined above. I must say that I have been impressed with the Government’s response to the Cyclone and flooding to date, particular the focus on rapid economic recovery after the disasters.
CRR from Boggo Rd to RNA showgrounds
Queensland Economy Watch 
Gene, an election budget announcement of billions of dollars spent in SEQ would be a very “courageous decision” by both sides of politics as Sir Humphrey used to say, regardless of where it’s funding originates, the political reality is any announcement of that scale would result in a large loss of votes in regional Qld and probably be rewarded with what is now a long 4 years occupying the opposition benches.
Good point Glen! It is in the regions the government is vulnerable. Thanks for the comment.