Tuesday, November 24, 2009

What could possibly unite Henry Ergas and John Quiggin? Criminally dodgy work by Queensland's government.

In fact it's united a veritable Who's Who

An extraordinarily high-powered group of academic and private sector economists from across the political spectrum have released an open letter attacking the Queensland government's $16 billion port, rail and motorway privatisation program and the $1.9 million television and letterbox advertising campaign that supports it.

Labeling the case presented by Queensland Premier Anna Bligh "economically unsound" and "based on spurious claims" the letter says the people of Queensland "deserve a robust and well-informed public debate over the costs and benefits of privatisation and so far have not received it"...

Signed by economists identified with Labor such as John Quiggin and Nicholas Gruen and others identified with the Coalition including Henry Ergas and Warwick McKibbin the letter says they have a range of views about merits of privatisation in particular cases but "share the view that these questions should be resolved on the basis of well-informed discussion of the economic and social costs and benefits of privatisation, and not on the basis of spurious claims that asset sales represent a costless source of income to governments."

Attacking the arguments in the taxpayer-funded booklet Facts and Myths on Asset Sales  it says they compare "apples with oranges" and understate the value of keeping the assets up for sale.

Twelve of the signatories are are professors of economics. Two have served on the board of the Reserve Bank. The Queensland Council of Unions has launched its own anti-privatisation TV campaign and sought advice from accounting professor Bob Walker.


Statement by academic and business economists on the Queensland government’s case for asset sales


Decisions on the sale or retention of public assets have important implications for competition and public policy, as well as for the fiscal position of governments. These decisions cannot be resolved on the basis of general ideological arguments for or against public ownership, and require informed public debate in each case. The normal lines of economic debate include whether a given business is more efficiently operated in the private or public sector, the appropriate allocation of risk and the extent to which the enterprise is required to pursue social as well as financial objectives.

The signatories of this statement have a range of views on the appropriate balance between the public and private sectors and on the merits of privatisation in particular cases. However, we share the view that these questions should be resolved on the basis of well-informed discussion of the economic and social costs and benefits of privatisation, and not on the basis of spurious claims that asset sales represent a costless source of income to governments.

The arguments put forward by the Queensland government in its booklet ‘Facts and Myths on Asset Sales’ do nothing to promote a well-informed debate. Two central claims are particularly, and sadly, noteworthy. In relation to five public assets proposed for sale, the "Facts and Myths" booklet states

Keeping these businesses would cost the Government $12 billion over the next five years. That’s $12 billion spent on new coal trains and new wharves that can’t be spent on roads, schools or hospitals.

This claim is economically unsound. Forgoing income generating investments, and borrowing an equal amount to fund investments that return no additional revenue, leaves the government with no flow of income to service the associated debt. The necessary income must be raised by increasing taxes or cutting expenditure.

Selling public assets will improve the public sector’s fiscal position only if the price realised for the assets exceeds the value of the income stream that the asset would otherwise generate for the public sector. In this respect, the ‘Facts and Myths’ booklet states

The total return from all five businesses in 2008-09 was approximately $320 million … When the sale process is completed, it is anticipated the Government will save $1.8 billion every year in interest payments.


This is an invalid, apples-and-oranges comparison. The $320 million figure consists solely of dividend payouts, excluding retained earnings, tax-equivalent payments and the interest paid by the government business enterprises to service their debts.

The $1.8 billion represent the interests that would be saved, at a rate of about 6 per cent, if the state realised $15 billion from the asset sale and avoided $12 billion in new investment. Most of this interest would be serviced out of the revenues of the GBEs, and can therefore not be compared with dividends derived from earnings after the payment of interest and tax.

The people of Queensland deserve a robust and well-informed public debate over the costs and benefits of privatisation. So far they have not received it.

Signatories

Harry Campbell, Professor of Economics, University of Queensland

Tim Coelli, Adjunct Professor of Economics, University of Queensland

Henry Ergas, Economic Consultant, Canberra

John Foster, Professor of Economics, and former Head of School, University of Queensland

Paul Frijters, Professor of Economics, QUT

Joshua Gans, Professor of Economics, Melbourne Business School

Ross Guest.Professor of Economics, Griffith University

Nicholas Gruen, CEO, Lateral Economics

Christopher Joye, Managing Director, Rismark International

Stephen King., Dean, Faculty of Business and Economics, Monash University, former Commissioner ACCC

Andrew McLennan, Australian Professorial Fellow in Economics, University of Queensland

Flavio Menezes, Professor and Head of School of Economics, University of Queensland

Christopher O’Donnell, Professor and Deputy Head of School of Economics, University of Queensland

Andrew Leigh, Professor of Economics, ANU

Adrian Pagan, Professor of Economics, QUT, former member RBA Board

Rohan Pitchford, Australian Professorial Fellow in Economics, University of Queensland

John Quiggin
, Federation Fellow in Economics, University of Queensland

John Rolfe, Professor of Economics, Central Queensland University

Prasada Rao, Australian Professorial Fellow in Economics, University of Queensland

Rabee Tourky, Professor of Economics, University of Queensland

Warwick McKibbin, Professor of Economics, ANU, current member RBA Board


Published in today's Age

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5 comments:

Anonymous said...

Seems:
1. Mr & Mrs Disastercapitalism are advising the Qld govt, and,
2. govt is naive enough to believe it, or,
3. govt is just outright duplicit, or,
4. govt is punch drunk and does not know what it is doing.

Other possibilities probably exist.

Adam S said...

I don't really buy the whole disaster capitalism argument, but I reckon 3 and 4 could be part of it. Let me give you another: the QLD government is maybe desperate for cash and see asset fire sales as a way from getting out from under it. Not saying it's right, but it's a possibility.

My personal view on privatisation is that it should follow the guidelines that the economists quoted put forward. I would also add that it should not grant an instant monopoly to the privatised organisation. Markets work best with robust competition, for consumers at least.

Anonymous said...

Anything that unlinks the coal wagons from public revenue is a good thing. It's like profiting from pokies.

derrida derider said...

"privatisation ... should not grant an instant monopoly to the privatised organisation."

But there's the problem - if a government is desperate for cash it's going to be desperate to maximise the sale price. The easy way to do that is to promise that instant monopoly.

This has been the rule in privatisations worldwide. Abstract arguments about whether privatisation can be a Good Thing or not (of course it can) are often beside the point when we see the actual circumstances in which goverments sell assets.

Adam S said...

DD, no argument there. Perhaps that underlines the insanity of most public fire sales. Done in less desperate times, the results would be better I am sure. I could also be completely naive and ask for local, state and federal governments to better manage their finances in the first place so these situations don't occur to begin with. But that would holding out too much hope, I suspect.

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