'Asset recycling' is the current buzz phrase developed by the financial sector to convince politicians that they should part with some assets to raise money to build other assets. It all sounds terribly sensible, until you do some rudimentary analysis.
The first is about the nature of the assets. Selling an asset with a dividend stream (like electricity distribution) is totally different to building infrastructure that doesn't have a direct return to revenue (like the roads for Sydney's second airport). John Quiggin called it "melting down your tools to pay the rent."
Queensland to its credit is being a little trickier - it is using a quasi-equity instrument that Quiggin elsewhere discussed under the heading 'If it looks like a debt, walks like a debt and quacks like a debt...'
But it becomes even more bizarre when we hear about the visit of the PM to Canada. According to the AFR he has spruiked the value of investing in Australian infrastructure to Canadian pension plans. The story however includes some interesting facts.
Canadian entities have $27 billion invested in Australia, but Australian firms have $54 billion invested in Canada. We are told The Economist calls Canada's 10 pension funds the "maple revolutionaries" - but we then learn that the $1.1 trillion funds rates them sixth behind the US, Japan, the UK, Australia and the Netherlands. We also learn that the average Canadian allocation to infrastructure of 5% is second only to Australia.
The Canadians don't need much encouragement. The Canadian Pension Plan bought Broadcast Australia from Macquarie Bank. Ontario Teachers bought 70% of NextGen which counted among its assets the telecommunications transmission built by the Regional Broadband Blackspot Program.
The first of these needs a bit more explaining - since a major part of Broadcast Australia is the old National Transmission Authority privatised by the Howard Government. Its assets are a series of broadcast towers and two big contracts with the ABC and SBS for transmission.
But it is these very contracts that are at the heart of one of the considered savings from the Lewis review. I'm not exactly sure what potential Canadian utility investors will think of that.
But can we just consider how idiotic it is that we are suggesting that Governments, especially State Governments with unfunded superannuation liabilities, are selling assets to other superannuation funds (some of which are for Government employees) for the purposes of converting future dividend streams to upfront cash?
The situation gets even more absurd with the NSW idea of 99 year leases. These are a sop to the community so that it looks like the assets aren't being "sold." But the electricity grid only came into existence 110 years ago, and it puts off to the future the issue that for the last ten years or more the lessee has no incentive to invest in maintenance.
If you want to convert a future income stream to an immediate cash injection that is easy. You do something akin to the Queensland structure, the important part being that the income is entirely guaranteed by the entity not the State. But you don't need to call it privatisation - and you don't need to spend the very unhealthy amounts of money with lawyers and bankers required for a sale - whether by trade sale or IPO.
While Mike Baird has made great play of the infrastructure he proposes to build, one quarter ($5 of $20 billion) is supposed to come from the interest earnings on the money raised by the sale. As private investors can be assumed to be rational, this $5 billion in interest must be less than the dividends foregone.
The biggest issue though is the argument being spun by Baird that the privatisation will reduce electricity bills. This argument is based on research that one column said "was released to the Daily Telegraph." That is a tall claim - since the column was written by Brendon Lyon who is CEO of Infrastructure Partnerships Australia. This looks to be Australia's institutionalised infrastructure construction cartel. The research "released" to Mr Lyon was actually commissioned by his organisation from Deloitte Access Economics.
I cannot find the full research. The IPA (known in policy circles as "the other IPA" to distinguish it from the Institute of Public Affairs) press release simply notes:
The modelling of NSW consumer price impacts from electricity reform was undertaken at arm’s length by Deloitte Access Economics for Infrastructure Partnerships Australia. This modelling forms part of a larger research programme that considers the structure and reform of the National Electricity Market. The modelling will be released in its entirety over the coming months.
The release is quite upfront that these savings occur over 15 years. The only possible basis for this is the idea that incentive regulation - that is capping a company's prices to rate of return regulation on a regulated asset base and letting it keep efficiency savings - works. But that only works to the extent the firm makes bigger profits - not that prices are any different. Without the full report it is impossible to analyse this any further. And consistent with all such claims of what modelling "shows", if the model isn't available for interrogation the output is worthless.
All of this shows bureaucrats and politicians totally in thrall of an unproven superiority of private sector firms.
Meanwhile tonight I am going to hear Gavin Gatenby of Ecotransit Sydney. Gavin has a great video on the 'Great Rail Rip-off' that highlights the extraordinary cost of infrastructure construction in Sydney. He has another that highlights that the "rapid transit" model chosen for Rouse Hill to Chatswood is inappropriate for that section - let alone an extension through the city. It is not so much about the trains as it is about the tunnels!
And these videos pose the final question - why do we need to privatise electricity assets to build a privatised metro that creates a new harbour crossing that can't be used by the rest of the network?
The campaign needs to also go to the Northern Beaches. As we plan for a new Harbour Crossing we should also make the future plans for an underground rail line at least as far North as Mona Vale.
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