By Leith van Onselen

It looks like Australia’s governments are about to sell-off the nation’s assets en masse, with the AFR reporting today that the Federal Government is considering setting-up a new financing model whereby it would effectively pay the states to privatise public assets:

NSW Treasurer Mike Baird has confirmed he is in talks with the federal government to set up a new infrastructure financing model, so states would be paid for privatising public assets. Mr Baird said on Wednesday that federal Treasurer Joe Hockey was seriously considering his proposal for states to receive a share of company tax revenue in lieu of revenue they would forfeit when assets were privatised. He said it could “turbo-charge” infrastructure development across the country, as the funds from the privatisation of old assets were recycled to build new projects… “The moment the asset is privatised those tax equivalent payments that used to come to the states are transferred to the commonwealth as company tax,” Mr Baird said. Privatised companies pay federal income tax on profits…

Obviously, the Federal Government’s financing proposal to share company tax revenues with the states in return for privatising assets would provide the states with added incentive to sell, likely resulting in a ramp-up in privatisations across Australia.

From an average taxpayers’ perspective, however, the proposed financing mode does not change the equation one iota, since overall tax receipts would remain the same – only the states would receive the income tax instead of the Federal Government.

Whether such privatisations are beneficial to taxpayers will, therefore, still depend on whether the upfront funds received from the asset sales will outweigh the expected net present value of future profits. If not, then the sale is likely to be detrimental to long-term budget finances.

As argued previously, there are also equity and efficiency issues that need to be balanced in any privatisation proposal.

In general, there is a stronger case to keep natural monopolies, such as essential utilities, in public hands in order to prevent a private player from price-gouging and/or to to stop inefficient duplication of the infrastructure. The government can also better ensure access to poorer members of the community, thereby improving social outcomes.

On the other hand, there is generally a better case to privatise government-owned assets (businesses) that compete directly with private players, since the degree of market power is lower, consumers have choice, and the opportunities to price gouge are minimised.

The issues around whether privatisation is good from a financial, efficiency, and equity perspective are therefore complex, and a case-by-case approach is required.

What does concern me about the Federal Government’s financing proposal is that it seems to presume that privatisation is superior in all cases, otherwise why would the Federal Government seek to entice sales by shifting revenues from the Commonwealth to the states? While such an approach may leave the state governments better-off financially, in the end we are all federal taxpayers as well. Accordingly, a holistic approach is required whereby the costs and benefits to taxpayers at the national level (both Federal and State) are considered, along side equity and efficiency issues.

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