Linking infrastructure funding to privatisation
During this inquiry the committee focussed its attention on the link
between infrastructure funding and privatisation under the Asset Recycling
Initiative, which provides states and territories with financial incentives if
they sell assets and recycle the capital into additional infrastructure.
While the committee was aware of some support for the Asset Recycling
the majority of submitters and witnesses identified a range of concerns and did
not support the Initiative. This chapter discusses the issues that may arise
from binding infrastructure funding to privatisation under the Asset Recycling
Initiative, with a specific focus on the:
potential distortion of state and territory decisions on
privatisation and infrastructure funding;
possibility that privatisation decisions will be rushed, leading
to poor processes, poor consultation and poor regulatory safeguards; and
potential unfairness and inequity between the states and
Distortion of decisions
The committee has considered evidence that binding infrastructure
funding with privatisation has the potential to distort state and territory
decisions on privatisation and infrastructure funding. The potentially
undesirable outcomes of this distortion may include:
privatisation of assets that would not otherwise be privatised;
negative impact on states and territory revenues by selling
revenue earning assets to purchase loss making infrastructure; and
distorting the consideration of a range of more appropriate
infrastructure funding mechanisms by states and territories.
Distortion of privatisation
Economist Mr Stephen Koukoulas informed the committee that in his view,
the Asset Recycling Initiative introduces a market distortion that could lead
to poor privatisation decisions:
...it is interesting that none of these assets have been sold
until this bonus, or incentive...has been offered. Presumably all of a sudden
these assets are not more valuable—arguably, in a low inflation environment
with a very subdued rate of economic growth, they are worth less today than
they were some time ago.
...if anybody offered me 15 per cent more for anything, I would
be very tempted to sell it whether I wanted to or not because I know I would be
able to do something else with the money.
Professor John Quiggin informed the committee that the Asset Recycling
Initiative could distort both privatisation decisions and infrastructure
The implication is that that (a) privatisation decision must
be marginal. Obviously, if we were in a situation where state government had an
asset which it held as a substantial premium product it would not need the
subsidy program to make that decision. So, what we are seeing, as with most
subsidies, is bad decisions. In this case, bad privatisation decisions are
being encouraged by the presence of the subsidy. The fact that you cannot get
it for a privatisation that makes such strong economic sense and for which you
do not need the subsidy is an indication of exactly how things are being
distorted on both sides of the decision. Regarding both the assets originally
for sale and secondary investments, this program distorts both of those
Mr Mark Lennon, Secretary of Unions NSW and Mr Adam Kerslake, of the
'Stop the Sell Off' campaign supported the view that the Asset Recycling
Initiative was distorting the market.
Professor Quiggin asserted that policy should be based on cost-benefit analysis
of projects and should not be driven by the Asset Recycling Initiative.
The distorting effect of the Asset Recycling Initiative was confirmed by
the Treasury submission which indicates that states and territories are required
to show that the decision to divest an asset must have been significantly
influenced by the Initiative in order to qualify for incentive payments.
In its May 2014 report on Public Infrastructure, the Productivity
Commission offered this blunt comment on binding privatisation with new
infrastructure projects through capital recycling:
Privatisation has been raised by participants in this inquiry
mainly in the context of ‘capital recycling’ — that is, selling existing
infrastructure assets and using the proceeds to finance new infrastructure
projects. The Commission’s view is that privatisation should only occur when it
is in the community’s interests in its own right, as a tool to improve
efficiency. What is done with the proceeds is essentially a separate issue.
Linking the two issues through capital recycling may help to build community
support for privatisation, but there are also risks.
The Productivity Commission also confirmed that one of the greatest
risks from the capital recycling model is the potential for it to distort
infrastructure funding decisions. The Productivity Commission argued that:
...an arrangement where the proceeds of sale are automatically
hypothecated to investment in new infrastructure projects may create risks for
over-investment in new greenfields infrastructure which, by its nature,
typically involves significant risks in the early construction and operational
Another problem with capital recycling identified by the Productivity
Commission is that it could possibly create a public perception that the only
time an asset should be privatised is if there is some new infrastructure
project in which to invest.
Compensation for tax equivalent
The Water Services Association of Australia noted that corporatised
government owned businesses contribute two revenue streams to state and territory
governments. The first revenue stream that state and territory governments
receive is dividends from the profits made by the business. The second revenue
stream is the tax equivalent payments under the National Tax Equivalence
Regime, which are the income tax payments that an equivalent private company
would pay to the Commonwealth government. If such a corporatised entity or its
assets are sold by a state or territory government, that government will no
longer receive either revenue stream.
The committee heard evidence that the Initiative could be
considered as a way of compensating states and territories for the possible
loss of revenues from tax equivalent payments.
This was dismissed by Treasury, with Mr Chris Legg stating that the 15 per cent
payment 'is an incentive, and that is all it is. It is a figure that emerged
from negotiations with the states. It is high enough to be seen as meaningful
to them and low enough for us to see it as an economical way of achieving the
However the Productivity Commission questioned whether there was a need
to offer any incentives at all to the states and territories:
Whether the State and Territory Governments have a financial
disincentive to privatise their infrastructure assets that needs to be
compensated by the Australian Government is debatable. Several factors, such as
dividend imputation and productivity gains from privatisation could offset the
loss of notional income tax payments. Specifically, if dividend imputation is
complete and the purchaser of the enterprise can obtain full compensation of
company tax through franking credits, a State Government would not lose from
privatisation. Furthermore, if the purchaser is able to operate the enterprise
more productively, the price they pay would reflect some of that gain. The
State Government would then receive a premium over the (capitalised) revenue
stream that would have vested with the government, if the asset stayed in
Impact on revenues
This section discusses the committee's consideration of concerns raised
about the potential impact of the Asset Recycling Initiative on revenues to
governments that decide to sell income-generating assets to fund infrastructure
that will not generate income.
Asset recycling could involve using proceeds from the sale of existing
income generating assets to fund new income generating infrastructure. However,
it is entirely possible that a state or territory could divest itself of a
revenue generating asset and use the proceeds on activities that do not
generate income. Professor John Quiggin advised the committee that:
Income-generating assets are valuable precisely because they
generate income. Selling the assets and spending the proceeds on current or
capital items that generate no flow of income, and cannot be justified by
ordinary cost-benefit analysis is not, in any meaningful sense, recycling.
The Community and Public Sector Union (CPSU) and representatives from
the ‘Stop the Sell Off’ campaign raised concerns that if income generating assets
such as electricity networks are sold and the proceeds are used to fund
non-income generating assets such as roads, the reduction in long-term income
will make it harder to raise the revenue necessary to sustainably fund
additional infrastructure and public services in the future.
The committee understands that the NSW government is proposing to sell
the state’s electricity transmission and distribution assets. The McKell
Institute report notes that these make significant, stable, and low-risk contributions
to annual state revenues:
The $1.7B that the NSW Government earned from the network
last year was equal to over 25% of payroll tax, 30% of transfer duties, and
nearly 90% of taxes on gambling and betting.
The committee does not intend to conduct a financial analysis of the
proposed sale of 49 per cent the NSW electricity transmission networks.
However, the committee notes that the predicted sale price of $20B proposed by
the NSW government has been questioned by experts who have suggested that a more
likely value for the transaction is $11B.
Submitters and witnesses noted that federal, state and territory
governments are presently operating under significant fiscal constraints.
Mr Koukoulas advised the committee that in his view, retaining income
generating assets can make an important contribution to government budgets:
...you do run into the problem that, having had a look at the
score sheet of asset sales over the last 20-something years...You can only sell
these assets once, of course, and in the meantime you have got to rely on other
sources of revenue. Again, this has arguably been the problem over the last
five to 10 years. We are having a debate about, dare I say it, the GST,
Medicare co-payments and all these things that are designed to get towards a
balanced budget, because there is nothing much else that is generating the
revenue. It is a bit more complex than that, but that is the broad sense of it.
So we do need some income generating assets for the government sector to be
able to get close to balancing its budget.
The Productivity Commission noted that the net impact of capital
recycling on the government’s balance sheet remains unclear, and may even
create additional long term liabilities:
In effect, a government would be swapping ownership of a
mature asset (with known demand and cost characteristics), with ownership of a
new (and potentially more risky) greenfields asset (with often unknown demand
and cost characteristics). While government is receiving revenue from the asset
sale and avoiding future liabilities (including any contingent liabilities), it
would also lose access to the future revenue stream from that asset (be it from
dividends or otherwise) and be exposed to a new set of assets and liabilities
with less reliable estimates of dividends and other revenue.
Ultimately, poorly conceived decisions to link asset sales to
new infrastructure investments could in fact have a negative future balance
sheet impact and create long term additional liabilities for government.
Greenfield versus brownfield assets
Some submitters argued in favour of the Asset Recycling Initiative on
the basis that while government is often better placed to manage the demand
risks associated with the early stages of greenfield projects, the private sector is often better placed
to efficiently operate brownfield
assets that have a steady revenue stream.
The implication of the above being that mature brownfield assets should be sold
and the money invested into new greenfield infrastructure.
In his submission to the Productivity Commission inquiry into Public
Infrastructure, Professor Henry Ergas argued that the same factors that
lead to private investors being risk averse towards major new projects with
substantial cost and demand uncertainty should also lead the public sector to
be wary of those projects.
In short, ‘asset recycling’ should not be used as an excuse
to inefficiently shift risk on to taxpayers. If projects are inherently risky –
because their cost and demand characteristics are uncertain in ways that cannot
be hedged through diversification, and/or their likely net returns fluctuate
with aggregate incomes – then transferring their funding to the public sector
cannot in itself eliminate that risk or reduce its costs. That makes it all the
more important to ensure proper project evaluation, along with the other
safeguards discussed above.
Alternative funding mechanisms
The committee considered evidence on whether binding privatisation with
infrastructure funding may distort the way states and territories consider
other forms of funding including taxes, borrowing, user charges, and
Mr Koukoulas made the following observations, questioning the
appropriateness of binding infrastructure funding with privatisation under the
Asset Recycling Initiative:
if the private sector thought it was profitable within the
existing regulatory environment for them to build infrastructure, they would do
if it is worthwhile undertaking public infrastructure spending,
it should be done regardless of whether there is asset recycling or whether
interest rates are high or low; it should be based on need and not any other
The Productivity Commission noted that a further potential risk is that
the availability of funds from privatisation may mute or distort the incentives
for state governments to properly consider how user charges could be used to
fund new infrastructure. It also noted that capital recycling could prevent
funds from being directed to higher value uses, which may not necessarily be
new infrastructure investment.
Many witnesses noted that public sector debt is currently relatively
inexpensive and suggested that governments should take advantage of current low
borrowing rates for infrastructure funding.
In his submission to the Productivity Commission inquiry into Public
Infrastructure, Professor Henry Ergas argued that the public
sector cost of debt does not reflect the cost to tax payers of making funding
...current bond rates do not reflect an unusually low social
cost of risk but rather the opposite: individual savers demand a higher than
usual premium to bear risk. There is no reason to believe taxpayers differ from
savers in that respect.
...it is the cost to taxpayers of making funding available, not
the public sector cost of debt, that must be used. That cost to taxpayers is
unlikely to be below the private sector cost of capital, except where the
public sector has access to risk-pooling opportunities unavailable to the
private sector. Moreover, because taxes distort economic activity, the cost of
those distortions must be fully accounted for in assessing the projects that
are being considered for funding.
This section discusses the committee's consideration of the potential
for binding infrastructure funding and privatisation to create incentives to
needlessly rush decisions without establishing appropriate corporate
structures, safeguards and regulatory arrangements, or undertaking public
consultation or cost-benefit analysis.
In its inquiry into Public Infrastructure the Productivity Commission
commented on Australia's experience with privatisation. These comments
highlight some of the important steps for privatisation to be successful:
As in many countries, Australia’s experience with
privatisation has been mixed. A key lesson is that the structure of the
industry and relevant markets should be well defined prior to any
privatisation, and the method chosen to privatise assets should be designed to
maximise net benefits to the community. Practices designed to reach inflated
sale prices are rarely successful, can disadvantage further efforts at
privatisation and lead to an overall net cost to the community over the long
Above all, privatisation should be undertaken not for its own
sake, but to achieve a more efficient outcome for the community at large.
Consultation and public disclosure
A common concern identified by many submitters and witnesses was the
lack of public disclosure of the benefits and costs of privatisation, including
transaction costs, retained liabilities and regulatory costs associated with
In the Northern Territory, the committee repeatedly heard concerns about
a lack of public consultation in relation to the privatisation of the Territory
Insurance Office (TIO) and other assets in the Northern Territory.
The Northern Territory opposition raised concerns about privatisation of assets
being rushed and the lack of public debate that occurred about the sale when compared
to other jurisdictions.
The Hon Delia Lawrie MLA asserted that TIO was sold without public
consultation on the merits of the sale and with a lack of real scrutiny.
United Voice NT raised related concerns in its submission.
Independent MLA Mr Gerry Wood informed the committee that:
In the Territory, unfortunately, I think the big issue in
relation to the sale of assets has been (1) the lack of consultation with the
people and (2) the lack of consultation even with parliament. A classic example
would be the recent sale of TIO.
...the real issue was that the government did not take the
issue to the people to put their case in an open way so people could at least
hear the arguments for it.
Officials from the Northern Territory government did provide evidence of
some recent attempts at public consultation,
but the committee notes that this may not have provided the community with an
adequate level of information, or enough time to consider a response.
The Transport Workers Union also identified concerns regarding the lack
of consultation around the sale of the Darwin bus service:
This decision was made on the last day of parliamentary
sittings, and was therefore met with limited parliamentary scrutiny. Public
transport plays a critical role in Northern Territory life. Every day, members
of our community rely solely on a safe, cost-effective and efficient public
transport system. There was no pre-election commitment to privatise the Darwin
bus service. There was no meaningful consultation with the community, the union
or employees over the decision to privatise the Darwin bus service.
Similar concerns have been raised about public consultation in relation
to the proposed leasing of the Darwin Port.
The committee notes that a Northern Territory parliamentary committee was
established in relation to the leasing of the Darwin Port.
Disclosure of transaction and
regulatory costs of privatisation
The committee heard concerns relating to the disclosure of transaction
and regulatory costs associated with privatisation. Mr Peter Emery submitted
that in his view, transparency around the sale of state owned assets in South
Australia had been insufficient to allow the community to make informed
decisions about whether the privatisation was beneficial. He submitted that the
degree of disclosure and detail of financial analysis and transactions entered
into between the South Australian government, intermediaries and the buyers of
assets had been very low, and that there was no significant detail on the
public record. 
Some submitters raised concerns about the possible lack of disclosure of
liabilities that are retained by governments when assets are privatised.
Emeritus Professor Bob Walker and Dr Betty Con Walker submitted that in their
view, the privatisation of the State Bank of NSW in 1995 did not properly
account for risks relating to bad debts that were retained by the NSW
The NSW Greens submitted that in their view, lack of disclosure of liabilities
associated with the 50 year lease of the NSW desalination plant did not permit
an open public debate on the lease.
Other potential costs are feasibility or scoping studies, cost-benefit
analyses, corporate restructuring, and the structural separation of monopoly
and competitive elements. Emeritus Professor Walker informed the committee that
he estimates transactions costs are approximately six per cent of the
transaction value, without including the cost of feasibility studies.
The Northern Territory government noted that for relatively small
projects, such as those that are likely to occur in less developed or regional
and remote areas of Australia, a substantial amount of the Commonwealth contribution
under the Assets Recycling Initiative would be likely to be consumed by the
transaction costs associated with the privatisation process.
Some submitters suggested the cost of regulating privatised functions
should be included when assessing the total costs of a privatisation. These
costs could include the cost of establishing a relevant regulatory body, as
well as the costs of compliance for the private entities involved. Mr David
Richardson informed the committee that:
...you are also going to need a good regulatory environment.
That is a costly thing. If you look at Telstra, for example, the Commonwealth
sold that but had already corporatised it and, having corporatised it, you then
need to set up a regulatory structure. So now you have the position where you
have an army of people in the ACCC regulating Telstra and you have an army of
people in Telstra providing information to the ACCC. This is a crazy resource
cost that is usually not factored in. In each state you have a similar thing.
Now that the electricity authorities have been corporatised, we have a
bureaucracy that monitors those state authorities, and they employ a
significant number of people putting together facts and figures to satisfy the
In its report on Public Infrastructure the Productivity Commission noted
that private sector involvement in infrastructure development and/or financing would
only deliver efficiency gains with careful planning and implementation. Government
guarantees and tax concessions still involve both risks and costs, and ultimately,
it is the users and/or taxpayers who will absorb these.
The transition to
privatisation involves a range of activities, including effective communication
with the community, which requires careful management and leadership.
The value of future earnings
Submitters raised concerns about the disclosure of discount rates used
to estimate the value of future earnings.
The value of the potential sale relative to the future earnings of the entity
to be privatised is an important consideration. The sale and the future earnings
will happen in different timeframes, and adjustments should evaluate the
possible changing value over time:
This involves forecasting the future cash profits a business
will generate, and discounting these back to the present day at the Weighted
Average Cost of Capital. The cash flows are discounted to reflect the time
value of money, where $1 today is worth more than $1 tomorrow due to the returns
that could be made by investing the $1.
Emeritus Professor Bob Walker and Dr Betty Con Walker submitted that in
their view, the privatisation of the State Bank of NSW in 1995 led to a poor
financial outcome for the State of NSW, with the sale price being a fraction of
what the bank was worth. Central to this concern was the very high 18.9 per
cent discount rate used.
The committee is concerned about the possibility that incentives under
the Asset Recycling Initiative may encourage privatisation without effective
public consultation and communication strategies, and without appropriate consideration
or analysis of future costs. The committee strongly encourages governments to
conduct proper, rigorous analysis of the all current and future costs
associated with privatisation projects. In addition, thorough and appropriate
public consultation should be always be undertaken, including consultation
around transactions costs and the cost of creating an appropriate regulatory
environment and compliance with those arrangements.
The committee recommends that proper and rigorous analysis of total
costs associated with privatisation projects be conducted when privatisation is
proposed by governments at any level. In addition, appropriate public
consultation should be undertaken, including consultation around transactions
costs and the cost of creating an appropriate regulatory environment and
compliance with those arrangements.
Public safeguards and the
This section addresses concerns raised about public safeguards and
Submitters and witnesses identified the importance of ensuring that these were
put in place before privatisation occurred, particularly in relation to natural
The Australian Competition and Consumer Commission (ACCC) indicated that
the benefits of privatisation could be at risk if actions to maximise the sale
price limit competition or inhibit appropriate regulation. These concerns are
increased where, in the case of the Asset Recycling Initiative, the
Commonwealth proposes to provide incentive payments of 15 per cent of the sale
The ACCC indicated that:
it is important not only for competition reasons but also
important for bidders in terms of ensuring certainty about the regulatory
regime when they bid in the sale process; and
not having a mechanism that ensures appropriate up-front
regulatory arrangements are reached may be distorting incentives.
The ACCC had previously raised concerns in its June 2014
submission to the government's competition policy review noting Australian governments
are focusing on short term budget goals without sufficient regard to longer
term competition. The ACCC indicated that anti-competitive provisions have been
included in contracts between the states and potential acquirers that effectively impose a tax on future
generations and hinder Australia’s competitiveness in the global market.
To highlight these concerns the ACCC provided the committee with
the example of the right of first refusal that was provided to the acquirer of
Sydney Airport to operate a second airport:
The right of first refusal, along with certain provisions of
the Airports Act 1996, confers on the operator of Sydney Airport a
potential monopoly over the supply of aeronautical services for international
and most domestic flights in the Sydney Basin, with the real prospect that the
potential for competition between Sydney Airport and an independent operator of
a second airport will be foreclosed. Indeed, the National Audit Office has
found that the sale price for Sydney Airport was higher than a number of
possible valuation benchmarks, including the government’s own estimate of the
sale price in the 2001-02 budget.
The ACCC went on to recommend that:
...the Commonwealth require the states and territories to
demonstrate that appropriate market structure and/or access and pricing
arrangements have been put in place as part of the privatisation process, and
link this requirement to any payments made under the Commonwealth Government’s
proposed incentive scheme for privatisations (the Asset Recycling Initiative).
This view was confirmed by the Productivity Commission, who emphasised
the importance of
addressing structural arrangements and regulation prior to privatisation,
including separating natural monopoly components from competitive components.
The Productivity Commission noted that:
Structural separation can bring benefits because it can make
it easier to achieve effective competition in those components where
competition is possible. This is because a vertically-integrated firm with a
monopoly over network infrastructure has an incentive to discriminate against
competing firms that need to access this infrastructure. Regulating against
such discrimination, for example in the telecommunications sector, can be
The Productivity Commission also suggested that the highest priority for
the sale of government owned assets is not to secure the highest price,
but to first ensure that:
economic efficiency is achieved;
the risks to consumers and other public interests are managed;
the market structure is amenable to the privatisation; and
the sale is conducted efficiently, ethically and transparently.
The Business Council of Australia (BCA) supported introducing
appropriate pricing and access arrangements prior to privatisation, even if
those arrangements may reduce the sale price of the asset.
The BCA submitted that:
These regulatory arrangements will enable potential investors
to have a clear understanding of the terms under which the asset will be
permitted to operate, and should allow customers to raise any issues or
concerns they may have. It minimises the risk of pressure for post-sale
regulation in subsequent years that, in turn, would undermine the confidence of
investors and their willingness to invest in growing these businesses.
Treasury indicated that in its view, states and territories are
accountable to their constituents for ensuring that the necessary regulatory
arrangements are in place. Treasury also submitted that the Commonwealth
respects the role of the states and territories to make decisions about
appropriate regulatory arrangements within their jurisdiction.
The committee did not receive much evidence on parliamentary
scrutiny of privatisation. However, the Northern Territory government submitted
that in its view, the
current levels of parliamentary scrutiny and other regulatory and
legislative safeguards are sufficient to ensure an appropriate balance between
maintaining the long term interests of the public and allowing sufficient
flexibility in achieving the best outcomes for investment in new economic
The committee considers that appropriate safeguards and regulatory
arrangements should be put in place for all asset privatisation, well in
advance of the sale process commencing. The committee is concerned about the
evidence it has received that the Asset Recycling Initiative may encourage
states and territories to take shortcuts on safeguards and regulatory
arrangements in order to meet the timeframes established by the Asset Recycling
The committee recommends that prior to privatisation of assets,
governments at all levels introduce appropriate regulatory arrangements and
safeguards, including safeguards against anti-competitive behaviour to ensure
that future costs are known and established.
Inequity of the initiative across states and territories
This section discusses the committee's consideration of the possible
inequity of the Asset Recycling Initiative across states and territories.
Binding infrastructure funding to privatisation may lead to unfairness and
inequity across states and territories because it:
disadvantages those jurisdictions that have already undertaken
operates on a 'first in first served' basis, benefiting those
jurisdictions with assets to sell or prepared for sale, rather than those
jurisdictions most in need of infrastructure funding; and
the fixed 15 per cent incentive does not correlate to
infrastructure need and may be substantially consumed by transaction costs for
small projects in small jurisdictions.
The section also notes that steps have been taken to minimise the impact
of the Asset Recycling Initiative on the distribution of GST proceeds.
Some jurisdictions are
Several submitters and witnesses reminded the committee that those
states and territories which have already undertaken significant privatisation
activities may be disadvantaged by the Asset Recycling Initiative.
Some raised concerns about the 'first in first served' nature of the
The Northern Territory government submitted that:
...some jurisdictions appear to be at a much more advanced
stage of preparation for asset sales and have a large pipeline of potential
privatisations. It is foreseeable that the existing pipeline of privatisations
in the larger jurisdictions may significantly eat into the pool of funds
allocated for incentive payments under the asset recycling initiative.
The Business Council of Australia suggested that the Asset Recycling Initiative
should be designed to prevent one or two states from capturing all of the
available $5 billion in funding through large-scale privatisation projects.
Emeritus Professor Bob Walker and Dr Betty Con Walker also suggested
that incentives for privatisation from the Commonwealth may encourage states
and territories to sell their most profitable businesses, which are currently
providing essential services.
Fifteen per cent incentive
The committee heard several concerns about the seemingly arbitrary and
fixed 15 per cent figure of the Asset Recycling Initiative, and assertions that
it may not be a sufficient incentive for some new infrastructure projects.
Both the Northern Territory government and Northern Territory opposition shared
The Northern Territory government submitted that:
There is also inequity in the size of potential Commonwealth
contributions due to the fixed 15 per cent contribution rate. As previously
noted, a flat rate of 15 per cent represents a significant contribution for
larger projects. However, for relatively small projects (under $200 million)
such as those that are likely to occur in less developed or regional and remote
areas of Australia, a substantial amount of the Commonwealth contribution may
be offset by transaction costs.
Treasury confirmed that the figure of 15 per cent was not a result of
economic modelling, but of negotiation between the Commonwealth (seeking to
achieve the lowest percentage possible) and the states and territories (seeking
to achieve the highest percentage possible).
Impact on GST redistribution
The committee notes that the Asset Recycling Initiative does acknowledge
inequities between the states and territories by exempting the Initiative
payments from the GST redistribution treatment undertaken by the Commonwealth
If the incentive payments were not fully exempt, an incentive
payment to a state or territory would have also resulted in a decreased GST
allocation for that jurisdiction over time. The net effect of this would have
been to reallocate any incentive payment made across all states and territories
according to their respective population shares, irrespective of their
commitment to recycle capital into additional infrastructure. This would have
greatly diminished the incentive effect of the payments.
Committee comment on the Asset Recycling Initiative
The committee has considered a wide range of evidence on the Asset
Recycling Initiative and in particular, evidence on the link that the
Initiative creates between privatisation and investment in infrastructure.
The committee notes that in its inquiry into Pubic Infrastructure,
the Productivity Commission considered the Asset Recycling Initiative
and concluded that on balance:
the aims of the Asset Recycling Initiative are laudable, but the
risks are significant;
decisions to privatise a state owned asset and procure new
infrastructure should be seperate;
there is a distinct risk that states and territories will take
shortcuts to avoid thorough and transparent analysis; and
should avoid creating expectations in the community that privatisation is only acceptable
when the proceeds are used for procuring new infrastructure, constraining
future governments from optimising their balance sheets in the public interest. 
The committee is very concerned that binding privatisation with
investment in infrastructure may lead to several significant problems
potentially distorting decisions by states and territories on
infrastructure investment, leading to projects being pursued that would not
stand on their own merits;
potentially distorting decisions leading to privatisation that
would not go ahead if they were considered on a case-by-case basis;
the possibility that privatisation and infrastructure projects
will be rushed without:
- appropriate public consultation and debate leading to poor
- appropriate safeguards, corporate structures and regulatory
arrangements in place; and
the potential to create inequitable outcomes between states and
territories as the Initiative may unfairly benefit those jurisdictions which
currently have assets for sale or prepared for sale, rather than those
jurisdictions where the infrastructure is most needed.
For the reasons set out above the link between privatisation and
infrastructure funding under the Asset Recycling Initiative should be removed.
This would provide an environment where states and territories consider the
merits of privatisation on a case by case basis and fund infrastructure projects
based on community and economic need. The Commonwealth should contribute
funding based on the merits of proposed projects while considering the
equitable distribution of funds across states and territories.
The committee recommends that the link between privatisation of
assets and infrastructure funding under the Asset Recycling Initiative should
be removed. This would provide an environment where:
states and territories are encouraged to consider the merits
of privatisation on a case by case basis;
decisions to fund infrastructure projects are based on the
community and economic need; and
the Commonwealth contributes funding based on the merits of
proposed infrastructure projects while considering the equitable distribution
of funds across states and territories.
Senator Sam Dastyari
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