Dissenting Report by Government Senators
1.1
While the majority report of the Committee contains some informative
discussion of some elements of the Commonwealth Government’s Asset Recycling
Initiative, it provides an unbalanced presentation of the evidence and
arguments received during the course of the inquiry. A number of the issues
raised by participants to the inquiry highlight some of the benefits of the
Government’s asset recycling policy as well as evidence on the wider benefits
from infrastructure privatisation were not considered or only received limited
attention. This imbalance has resulted in recommendations of the majority
report that are either unnecessary — as they call for processes or actions for
which there are already established mechanisms within governments — or
misguided, and hence cannot be supported.
Importance of Infrastructure to
Economic Growth
1.2
Spending on productivity enhancing infrastructure is one of the keys to
economic growth and prosperity. The Government is responding to the needs of
the economy by building infrastructure that will drive economic growth, create
jobs and improve productivity:
1.3
A core element of the Government’s Economic Action Strategy is the
commitment of an additional $11.6 billion for the Infrastructure Growth
Package. Part of the 2014–15 Budget, the Growth Package delivered $5 billion
for the Asset Recycling Initiative, $3.7 billion to boost infrastructure
investments to expenditure projects and $2.9 billion for the Western Sydney
Infrastructure Plan. The Commonwealth’s total investment in infrastructure
through to 2019–20 will be around $50 billion.
1.4
This investment will generate significant additional state and private
sector participation to build the infrastructure that Australia needs and will
transform infrastructure across the country to lay the foundations for future
growth. When the construction projects supported by the Government’s
infrastructure initiatives are completed, they will add around 1 percentage
point to GDP.
Asset Recycling Initiative
1.5
The Asset Recycling Initiative is designed to provide incentives to
States and Territories to realise existing assets (sale or lease) and invest
the proceeds in new, productivity enhancing infrastructure. This ‘recycling’
frees money currently locked up to help fund the projects that the States and
Territories consider important to their future economic prosperity. The
Initiative taps into private sector investment interest in current assets in
order to fund new infrastructure.
1.6
The Commonwealth will provide incentive payments to the States and
Territories of 15 per cent of the sale price of assets, but only on the
condition that proceeds are reinvested in productivity enhancing assets. The
initiative is estimated to support up to $38 billion in new infrastructure
spending according to the Department of Infrastructure and Regional
Development.[1]
1.7
The first Asset Recycling Initiative agreement was signed with the Labor
Government of the ACT on 19 February 2015 – around $60 million in incentive
payments following the ACT’s decision to sell ACTTAB along with some property
assets.
1.8
On 8 March 2015 the Commonwealth Government announced $2 billion in
incentive payments for crucial infrastructure projects in conjunction with the
NSW State Government.[2]
Privatisations under previous
governments
1.9
In addition to placing heavy reliance on the views of union witnesses,
the committee majority has placed a very heavy reliance in their report on
testimony from Mr Stephen Koukoulas, quoting him at length. Mr Kouloulas was an
economic adviser to the former Labor Government, serving as Senior Economic
Adviser to Prime Minister Julia Gillard from September 2010 to July 2011.[3]
It is not very convincing for the Labor majority to place heavy reliance on the
opinions of a former Federal Labor adviser in support of the Federal Labor
prejudice against privatisation.
1.10
The former Labor Government presided over a period when privatisations
at a federal level were dormant, because of the economic prejudices of that
Government. The former Hawke and Keating Labor Governments were far more
reformist and modern in their outlook, undertaking a series of privatisations
across different points in the economic cycle (see Table 1 below). In contrast
to the Rudd/Gillard/Rudd Labor Government’s record, state Labor governments
have also pursued a number of privatisations including several that straddled
the same period (see Table 2 below).
Table 1: Commonwealth
Privatisations under Labor
|
Commonwealth Privatisations under Labor
|
Sale Proceeds ($m)
|
Government
|
|
April 1988
Commonwealth Accommodation and Catering Services
|
14.9
|
Hawke
|
|
November 1988
Defence Service House Corporation Loan Portfolio
|
1,515
|
Hawke
|
|
May 1991
Australian Defence Force Home Loan Franchise
|
42
|
Hawke
|
|
June 1991
Commonwealth Housing Loan Assistance Schemes in the ACT
|
47.3
|
Hawke
|
|
September 1992
Australian Airlines
|
400
|
Keating
|
|
March 1993
25% of Qantas
|
665
|
Keating
|
|
October 1993
Commonwealth Bank Secondary Public Share Offer
|
1,700
|
Keating
|
|
November 1993
Snowy Mountains Engineering Corporation
|
1.5
|
Keating
|
|
June 1994
Moomba-Sydney Pipeline System
|
534
|
Keating
|
|
June 1994
CSL (former Commonwealth Serum Laboratories) Public Share Offer
|
300
|
Keating
|
|
June 1994
Commonwealth Uranium Stockpile
|
57
|
Keating
|
|
June 1995
Aerospace Technologies of Australia Pty Ltd
|
40
|
Keating
|
|
July 1995
Qantas Public Share Offer
|
1,400
|
Keating
|
Table 2: Privatisations under state Labor governments
|
Year
|
State
|
Asset
|
Price ($m)
|
Government
|
|
1994
|
Queensland
|
Gladstone Power Station
|
750
|
Goss (ALP)
|
|
1997
|
NSW
|
NSW TAB
|
936
|
Carr (ALP)
|
|
1999
|
Queensland
|
Queensland TAB
|
268
|
Beattie (ALP)
|
|
2006
|
NSW
|
DirectLink
|
170
|
Iemma (ALP)
|
|
2006
|
Queensland
|
Allgas Energy
|
535
|
Beattie/Bligh (ALP)
|
|
2006
|
Queensland
|
Sun Retail
|
1,202
|
Beattie/Bligh (ALP)
|
|
2007
|
Queensland
|
Powerdirect
|
1,200
|
Beattie/Bligh (ALP)
|
|
2010
|
Queensland
|
QR National 66% sale
|
4,050
|
Bligh (ALP)
|
|
2010
|
NSW
|
NSW Lotteries
|
1011
|
Rees/Keneally (ALP)
|
|
2010
|
NSW
|
First tranche of electricity assets
|
5,300
|
Keneally (ALP)
|
Income substitution effects
1.11
In their report, the committee majority claims that privatisation of an
income producing business would cause a state or territory government to lose
dividend streams, as well as tax equivalent payments under the National Tax
Equivalence Regime.
1.12
This argument simply ignores that the cessation of future dividend flows
would be compensated through capital proceeds from sale (which implicitly
recognise long-run income producing potential, net of holding costs and other
factors affecting the value of the business in question).
1.13
It also ignores the fact that direct dividends to taxpayers through a
state or territory government would be replaced in future with corporate income
tax and income tax from resident shareholders who receive dividend streams.
While these tax streams would flow to the Commonwealth following privatisation,
the 15 per cent incentive provides an up-front incentive to partly recognise
the movement of benefits between tiers of government. Far from the incentive
“distorting” decisions, as the majority contend, it helps make the decisions
stand more clearly on their merits by removing a current disincentive to
privatisation.
1.14
Government Business Enterprises face inherent difficulties in doing
their job well and it is these problems that have impelled governments to
increasingly look at alternative forms of delivery, such as privatisation.
1.15
Government run business operations have found it increasingly difficult
to obtain funding injections from Government because they have to compete
against other high priority pressures for taxpayer spending. As a result
Government Business Enterprises can be prevented from or hamstrung in the
extent to which they can upgrade new plant and equipment or invest in business
innovation or re-engineering (eg: modern IT or improved business processes). As
a result, while these business operations are in public hands, the value
creating capacity of these operations can be constrained. Private operators in
practice have better flexibility to access capital and improve business
efficiency and output. This means that private control and investment can also
maximise the profitability of such business operations and the tax yield which
flows back into public hands.
Evidence about specific
privatisations
1.16
The committee majority has placed an unusual level of reliance on
examples from the Northern Territory, citing testimony from the Northern
Territory Labor Party and trade union officials. Curiously the committee has
not taken any interest in the privatisation proposals announced by the
Australian Capital Territory. The ACT Labor Government became the first
administration to sign up to a privatisation program under the Australian
Government’s Asset Recycling Initiative.
1.17
The committee majority also ignored the recent Medibank Private sale,
which is an exemplary case of a privatisation done well and is a key part of
the Asset Recycling Initiative. This is one of the largest floats in Australian
history. This sale provides $5.679 billion in proceeds that will be re-invested
into productivity enhancing infrastructure through the Government’s Asset
Recycling Initiative.
1.18
The committee majority has floated some short-sighted testimony from
particular opponents of privatisation. Mr David Richardson of the left-wing Australia
Institute argued that privatisation sometimes requires an investment by
taxpayers in improving the regulatory oversight of an industry, where
previously there was inadequate supervision to protect consumer interests. This
view overlooks the fact that continued public ownership of a business operation
can place the Government in a conflicted position, as both regulator and
provider of services. That conflict can work against the interests of consumers
and business. The desirability of sound regulation does not disappear where a
Government operator is a participant in the market.
1.19
The committee majority contradicts itself where it subsequently stresses
the importance of good regulation, to ensure fairness in competition and to
give certainty to the operators in a market ahead of privatisation. The
arguments for good regulation and for safeguards against anti-competitive
behaviour are not exclusively applicable to privatisation, but equally well
apply to Government monopolies.
Impacts of infrastructure
privatisation on consumers and capital productivity
1.20
An unfortunate result of the majority report’s selective use of evidence
is that considerable relevant information and evidence available was ignored or
received limited consideration. For example, there is substantial evidence that
privatisation of infrastructure tends to lead to reduced prices to consumers
and more productive use of infrastructure assets. The improved outcomes in
terms of prices are likely to reflect several factors. Governments that own
infrastructure face mixed incentives, particularly as higher prices can assist
with budget bottom lines. Privatised operations generally face higher
incentives for efficiency. This has been confirmed in a number of studies,
including several released during the final months of the inquiry.
-
A report by Ernst and Young, prepared for Infrastructure
Partnerships Australia concluded that in privatised networks businesses
generally operate more efficiently, resulting in lower price increases.[4]
These results were achieved without compromising service standards, and applied
across both urban and rural customers.
-
An Australian Industry (AI) Group report released in January
concluded overinvestment in the network over time had substantially increased
the state’s electricity prices.[5] The
report found that Queensland’s electricity prices could be expected to fall
substantially if power companies were privatised. Another benefit of
privatisation identified in the report was the capacity to free up capital for
reinvestment.
-
A report by CME commissioned by UnitingCare on electricity prices
released in February 2015 showed how costs to Victorian consumers, specifically
network charges, were about half those in the Queensland and NSW level.[6]
Further, the privatised Victorian system has seen network charges also
increased at a lower rate.
-
Analysis by Tony Wood of the Grattan Institute released in March
2015 addressing the anti-privatisation campaign in New South Wales noted the
benefits of privatisation in terms of electricity prices to consumers.[7] A
detailed comparison between government and private ownership, published in the
Grattan Institute’s 2012 report found that government-owned companies had more
physical infrastructure per customer and spent more on capital investment than
did privately owned companies.[8]
Process for privatisation
1.21
The committee has recommended that any privatisation be based upon
rigorous analysis of all costs and be preceded by public consultation. This is
precisely what governments ordinarily do as part of considering any option for
privatisation. The Commonwealth for example conducts scoping studies, as a
means of identifying the most effective approach to deliver a service. Such
exercises do not proceed from a bias towards privatisation, rather they are
exercises aimed at identifying the best delivery method for a service to the
community. A scoping study may for instance recommend better regulation,
greater competition, or restructuring of government delivery mechanisms.
1.22
A scoping study is traditionally run by department officials and
informed by independent advice from business advisers and legal advisers who
have the expertise to assess the relevant service and market in fine detail.
This work is done at arms length from Ministers and at arms length from those
who currently have vested interests in the market.
1.23
These studies usually involve extensive consultation, including with
consumer groups, current providers and potential future providers (including
institutional investors). There is nothing new or profound in what the
committee majority is recommending.
Arguments against the Asset
Recycling Initiative
1.24
Some of the criticisms of the Asset Recycling Initiative are not
particularly convincing. Plainly the measure is aimed at encouraging future
investment in new infrastructure, but some critics complain that this does not
benefit jurisdictions which have undertaken past privatisations. This criticism
is not contending that the initiative is innately undesirable, but that it
isn’t as available as widely as possible. The complaint however shows poor
understanding of sound public policy principles. It is normal for any incentive
scheme to operate prospectively, where the policy intention is to encourage
activity which might not otherwise occur.
1.25
Other critics worry that a ‘first come first served’ model might
disadvantage late comers. Again this is a criticism that a desirable scheme it
isn’t as available as widely as possible. As we live in a world of finite
resources, it is not possible to have an open-ended scheme. Given that the
Government has made very clear up front how decisions would be taken, all
states and territories begin with the same opportunity to put forward their
best cases early.
1.26
The criticism that 15 per cent is not as much as some would like, is
another concession that the scheme is intrinsically a desirable one. As the
figure was negotiated between the Commonwealth and the states and territories,
this figure strikes the right balance to provide a sufficient incentive to
unleash locked-up capital.
1.27
Some of the criticism is entirely speculative and counter-intuitive. The
majority assert that “there is a distinct risk that states and territories will
take shortcuts to avoid thorough and transparent analysis.” In fact, in a
competitive scheme, states and territories will be under pressure to present
the most convincing analysis. Moreover public interest in privatisations will
compel governments to be transparent. Governments are always conscious that if
they fail to be sufficiently transparent, they can be held accountable through
the democratic process.
1.28
Several participants to the inquiry highlighted the benefits that asset
recycling can provide governments. For example, the Australian Logistics
Council stated that one of the benefits of asset recycling is its capacity to
provide governments with constrained balance sheets the ability to unlock
capital tied up in mature assets. It also stated that the idea was by no means
novel, noting:
For instance, the Infrastructure Finance Working Group (established
by the previous government in 2011 to provide advice to Infrastructure
Australia on infrastructure finance policy) recommended State and Territory
governments conduct strategic reviews of ‘brownfield assets’ to: identify and
monetise suitable candidates so as to allow the freed up capital and [allow
for] avoided debt repayments to be recycled/invested into infrastructure
projects.
...the budgets of most Australian governments are likely to be
in deficit for the foreseeable future, and likely to remain so, with growing
demand for recurrent spending on health, education, NDIS etc. It is therefore
necessary to identify alternative funding sources for the roads and
infrastructure hitherto regarded as public goods funded from consolidated
revenue.[9]
1.29
Finally, the quotation and paraphrasing of the discussion in the
Productivity Commission inquiry into Public Infrastructure on asset recycling
in the majority report (paragraph 2.68), while noting the Commission’s concerns
about risks, omitted to include the Commission’s concluding paragraph which
noted:
[T]he Initiative does not obviate the need for good
governance and transparent and sound analysis of privatisation and procurement
decisions. Only under these constraints can the additional risks of the initiative
be managed in a way that preserves the interests of the broader community.[10]
1.30
As noted above, Government accepts that rigorous analysis of costs and
benefits as well as sound decision making processes are necessary to protect
the interests of the wider community.
Comments on recommendations
1.31
Response to recommendation 1. This recommendation calling for
good processes prior to privatisation decisions, including a full assessment of
the costs of projects as well as extensive consultation, is consistent with the
Government’s proposed policy that the full costs of any privatisation and
investment projects as well as an assessment of the benefits should be
undertaken, before decisions are made to proceed. It is noted, however, that
primary responsibility for this lies with State and Territory Governments.
1.32
Response to recommendation 2. The introduction of appropriate
regulatory arrangements and safeguards against anti-competitive behaviour are
important considerations for governments undertaking privatisation. These are,
however, matters for the responsible State and Territory Governments.
1.33
Response to recommendation 3. For the reasons outlined in the
preceding discussion, this recommendation is not supported.
Senator Sean Edwards Senator
Matthew Canavan
Deputy Chair Committee
Member
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