On Wednesday last week there was a small column on the editorial page of the AFR under the heading, “Sell Assets and Spend up Big”.
I wouldn’t normally have paid much attention except that it was by Tony Shepherd, who is about to head up the Commission of Audit. The headline is not a bad summary of the contents, which filled me with no end of worry. By the time I was through with reading it the worries had only grown. So let me do a bit of a review.
“Governments and business and community leaders are increasingly united in recognising the merits of selling publicly owned assets to unlock funding for badly needed new infrastructure.”
They may be united, but so what? There’s plenty of unity on global warming as well. Here’s the problem which I will start with a question. How does the sale of assets translate into an addition to our resource base that allows us to undertake these projects? Looking separately at the financial side and the real resources side allows plenty of conceptual slippage. Sell Medibank and Medibank is still there and operating. What resources have now been freed up? The Government now has more money to spend, but has this sale increased the level of real national savings? I don’t see it, but am willing to be convinced. But what must be done is to demonstrate that wherever these resources come from they are not crowding out other even more urgently needed and value adding investments. Selling assets won’t ensure that in any way. Looking at the finance side ignores what really matters.
“Contributing to a rethinking of privatisation is the opportunity to draw on superannuation funds as an alternative source of infrastructure investment.”
What do you suppose those superannuation funds are doing right now? One thing is certain: they are not presently idle. They are not just sitting around doing nothing, waiting to be tapped by government. They are invested somewhere, in whatever places the various trustees have determined where the highest returns can be found. What will be different now? How will these funds become available to governments? What will happen to the projects that are currently being funded by superannuation? And if the government is in any way intending to divert these funds using some kind of guarantee or providing assurances that will appear to provide a more certain monetary return, we are going to see our resources being used less efficiently and our growth rates diminish. Infrastructure is not a magic word that guarantees the money spent will provide a positive return or that the resources be used productively. See the NBN for a reality check.
“The private sector can shoulder the lion’s share but governments will continue to have a substantial funding role when it comes to non-commercial or social projects.”
There’s no doubt about that. If it’s destined to lose money no commercial enterprise will go near it. The one certain province for governments is to invest in loss-making projects. They do it all the time, but if it is loss-making then it is slowing the economy and lowering our living standards. There may be equity and other considerations, but do not confuse any of these with economic growth. This is four percent of GDP we are talking about, $760 billion and, as a proportion of our total level of investment, a far more significant number. Bad news to start wasting so much on government projects with no positive return.
“We should be seeing a virtuous circle where governments funds get good projects started and, once the asset is mature, it is then sold.”
Whatever shape this is, circular or otherwise, virtuous is not the word I would use. Governments have no ability at picking and choosing value-adding projects. Before starting on something new, give us the list of previous projects, over the past fifty years, let us say, where government money has built some kind of value-adding profitable investment. There is no history this side of the Snowy River Scheme which may well have been done by the private sector had it been given the opportunity. Governments should never be allowed to choose projects and where they do they should start by admitting that the project will never be profitable but is being done for some other reason. Governments should stick to national defence, road building and schools. Maybe a few hospitals. But the rest, they should leave alone. They have no history of getting it right and there is no reason to think this will change.
“Governments should be encouraging more private investment in green field projects by properly dealing with the problem of early market risk. There are ways to use the government balance sheet to do this.”
Danger, danger, danger! The way to deal with early market risk is to leave it to the market. It is the only way. Every business would love to have its risks covered by some kind of government bail-out guarantee. That is the certain way to end up with sub-optimal projects, misdirected investment, slower growth and lower living standards not to mention higher deficits and debt.
But in the end, Tony Shepherd’s perspective is only one man’s view, albeit that of the person who will chair the Commission of Audit. Hopefully, by the time he has come to the end of this process and released his report, he will see things in a different way.
Steve Kates teaches economics at RMIT University. His most recent book is Free Market Economics: an Introduction for the General Reader