Fake privatisation of Titles Registry helping Qld Gov’t pretend it has debt management plan

This post is an early draft of an article I’m preparing for a public finance or public policy journal about the Queensland Government’s accounting trickery regarding the Titles Registry last year. The state government has violated some well-established principles for government financial reporting and risks being called out by the ABS when it publishes its annual Government Finances Statistics report in April.* The state government is defying logic by pretending the Titles Registry has a market value of nearly $8 billion, even though a large part of that value relates to a general government taxation power the government couldn’t possibly transfer, as comments at Estimates from Treasurer Cameron Dick confirmed. The state government has effectively capitalised the value of a general government taxation power as a financial asset on its balance sheet, something which it is not allowed to do, given that the offsetting liability to pay for future government services is not recognised on the balance sheet. 

Introduction

In a remarkable feat of creative accounting, the government of the Australian state of Queensland has recorded a financial benefit from privatising its land titles registry, without actually privatising it. It is using a dubious and logically-flawed valuation of the registry of $8 billion, compared with sale prices in the order of $3 billion achieved in NSW and Victoria, to claim billions of dollars of additional financial assets which reduce Queensland’s net debt. But the economic substance of the Titles Registry has remained the same, and the state government cannot legitimately count those additional assets. Indeed, the Queensland Government is in breach of the spirit and, in my view, the letter of well-established international principles for government financial accounting codified by the IMF and adopted by the Australian Bureau of Statistics (ABS).   

How was this valuation reached?

The Queensland Treasurer Cameron Dick explained the Titles Registry valuation to the Budget Estimates committee on 16 July 2021 like this:

To give some context as to why our Titles Registry is so valuable, it is important to note that our registry turns over approximately $350 million per year. This is higher than the revenue streams estimated by other jurisdictions which have privatised their registries. Because Queensland has retained the asset in public hands, we have included ad valorem fees in its valuation, which other states have not. Informed by several independent valuations and independent commercial advice, QIC has valued the registry on a multiple of 23 times earnings before interest, tax, depreciation and amortisation. That is quite a conservative multiple. Of the four titles registries that have traded in the last few years, only one traded at a lower earnings multiple, and that was the first one to be sold, when it was a novel asset in Australia. A concession period of 50 years was adopted, reflecting discussions with the Queensland Audit Office and agreed by the QIC steering committee. Having used a conservative earnings multiple and a 50-year horizon, QIC has arrived at the valuation of almost $8 billion. (from p. 51 of the Hansard, emphasis added)

The huge logical flaws in the Queensland Government’s accounting

Regardless of whether the 23x multiple is appropriate based on the discount rate and other assumptions, there is a huge logical flaw in the Titles Registry valuation which is clear from a close reading of what the Treasurer told Estimates. The Treasurer has basically admitted that, if the Titles Registry were privatised, the privatised entity could not charge ad valorem (i.e. according to value) fees (i.e. $37 for each $10,000 or part of $10,000 over $180,000 of consideration). This is because the ad valorem fees in question are characteristic of a general government taxation power, and the government would not allow a private monopoly to have this power. Ultimately, it means the Titles Registry could not be sold for nearly $8 billion. So how does the Queensland Government now have a financial asset worth $8 billion, which it is using to reduce its net debt, if it couldn’t sell the Titles Registry for $8 billion? It is a complete sham. 

The large value of the Titles Office is essentially related to its ability to levy what is effectively a tax rather than a fee-for-service. The ability to generate future taxation revenues is treated as an asset on the government balance sheet. If governments were allowed to do this, then the future liabilities to deliver government services would have to be, too. 

The Government has legally separated the Titles Registry, which records land transactions, from the general government Department of Resources, and made it a Pty Ltd company (i.e. to pretend it’s a private entity outside of the general government or public non-financial corporations sectors), owned by various state government investment funds. The tricky financial engineering is well documented in the Queensland Audit Office’s Establishing the Queensland Future Fund report published in early December 2021. In a telling passage of the report, on p. 7, the Queensland Audit Office observed:

While the indirect owners of the Queensland Titles Registry were all government entities as at 30 June 2021, there is no legislative protection under the Queensland Future Fund Act 2020 or the Queensland Future Fund (Titles Registry) Act 2021 to prevent some or all of the holdings in the Queensland Titles Registry from being sold to private entities.

I’m guessing the Government probably can’t provide that legislative protection because then it would be an open-and-shut case on the nature of the Titles Registry: that it remains a general government entity, subject to government direction and with employees effectively remaining public servants, regardless of whatever legal status the Government attempts to give it. Indeed, the Titles Registry appears to be operating out of the same offices as it previously did, including offices where it’s co-located with Resources department officers in the regions. 

Violation of well-established principles for government financial reporting

The ABS made it clear in a note on ABS public sector unit classification decisions in early July, a few weeks after the Queensland Government released its 2021-22 Budget including the Title Registry change, that:

When classifying a unit for official statistics, the ABS looks beyond legal status and focuses on the economic substance behind the nature of an entity.

I have no idea whether the ABS was sending a message to the Queensland Government (and to other governments watching the Queensland Government’s tricky play), but I hope the state government noticed it. It’s possible the ABS could refuse to recognise the state government’s hypothetical privatisation of the Titles Registry and, hence, won’t recognise the billions of dollars of additional financial assets. We’ll learn its decision next April when it publishes its annual Government Finance Statistics for the 2020-21 financial year. In my view, the ABS should recognise the Queensland Titles Registry is exercising a general government taxation power and hence it should remain as part of the general government sector.

The ABS is responsible for reporting Australia’s government finance statistics on a basis which is compatible with the IMF Government Finance Statistics (GFS) standards. This is to ensure statistics are as accurate and reliable as possible. My feeling is that the Queensland Government’s Titles Registry manoeuvre is contrary to the spirit, and probably the letter, of IMF rules. The Queensland Government is at risk of violating well-established IMF GFS rules, by not properly accounting for the scope of government activities, by pretending it has privatised an activity that it has not. After all, this is a government which opposes asset sales. 

While I’ve been critical of some previous Queensland Government budgetary manoeuvres, such as the 2015-16 debt switch, at least they were accounted for correctly. We know something fishy is going on here, because the state government won’t release full financial statements for the various funds which part own the Titles Registry (see InQld’s report Show me the money: Auditor-General demands answers on future fund fate). This is disgraceful in its lack of transparency. 

Conclusion

The fake privatisation of the Queensland Titles Registry is the most deceptive fiscal play I’ve seen from any government in Australia in recent decades, and we need to call it out so state governments don’t think they can get away with worse.

*Alas this did not occur and the ABS has simply taken on faith the Queensland Government’s estimates. I am presenting a paper on this issue at the Australian Conference of Economists in Hobart in July 2022 and will forward it to the ABS for its consideration.

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week.

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6 Responses to Fake privatisation of Titles Registry helping Qld Gov’t pretend it has debt management plan

  1. Paul says:

    question more than a comment – if the Qld Government quarantined the income arising from the taxation power could the value of the government taxation power be recognised as a financial asset on the balance sheet? that is a commitment is made to not use the income to fund future government services.

    • Gene Tunny says:

      Excellent question, Paul. My initial reaction is “no” because of the fungibility of money. The government can earmark the money for a specific use, but it’s still effectively supporting the delivery of future government services, one way or another. Let me think more about it and write something about it in the paper. Thanks Paul.

  2. Katrina Drake says:

    Very interesting. Perhaps a comment on why this is being done, and what affect it will have on the day to day business of a Queensland taxpayer.

    • Gene Tunny says:

      Yes, good point, Katrina. I’ll need to make that clear in the article. It’s being done to make the net debt metric look better so it’s less likely the state’s credit rating is downgraded. By reducing the reported net debt relative to what it otherwise would be, it could also provide the government with more room politically, although not actually because the state’s financial position isn’t improved, to spend money.

  3. Dan Petrie says:

    Gene,
    Brilliant piece. I dare say the elevated metallurgical coal price is providing a near term revenue tailwind for Treasury and masking what should be a please explain question from many in the media (obviously I include myself in that category). Dan

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