Education Minister Christopher Pyne has confirmed the government is considering securitising Australia’s HECS debt, and has referred the issue to the Commission of Audit.
This has immediately attracted a furious response from the Opposition and the National Union of Students.
The argument arises because two separate issues are being conflated.
Securitisation is an ugly word. The underlying concept is simple: it refers to the process of converting something into an asset which can be sold as a security. In this case, it refers to the flow of repayments of the HECS debt, which at the moment is just a taxation inflow to the government. It is quite feasible for the government to sell the right to that stream of inflows to anyone else.
In this sense the inflows of HECS repayments is no more than a stream of payments, just like the interest payments you might get on a government bond, or even the stream of dividends that Australia Post and Medicare provide to the government. From a financial point of view, the sale of Medicare is no more than someone giving the government a lump of money today in return for the right to the stream of future dividends. Selling off the HECS repayment stream is conceptually the same.
The key attraction for the government is it could convert a stream of payments in the future into cash today. This may or may not be a good idea, it simply depends on whether the government can make better use of the money today rather than by waiting. The new government clearly feels constrained from making investments today (for example in infrastructure) by the amount of debt it currently has. Selling off some assets to reduce those constraints may let it invest more in other areas.
Super diversification
The stream of HECS repayments could be attractive to superannuation funds. Fund managers need to diversify their portfolios in order to manage their risks. The HECS repayments would be a new asset which was not closely correlated with the stock market, and hence would provide some diversification benefit. As such it is probably worth more to them than it would be to the government. HECS architect Professor Bruce Chapman has speculated a sell-off could attract a tender as high as A$15 billion.
The HECS repayments could also be packaged in ways which made them even more attractive to outside buyers. Repayments by some students (for example medical students) might be much more certain of repayment than others, so the repayments could be bundled according to the degree of risk that they will be repaid, or to the extent to which they are correlated with the stock market. This sort of bundling (called tranching) is common with other assets such as mortgage repayment flows.
It would be quite easy to confuse this exercise, primarily one of privatisation, with the separate issue of changing the terms and conditions underlying HECS, fundamentally an issue of policy design.
The HECS system is fundamentally a loan scheme with the government acting as banker.
The government can probably operate the scheme more effectively than could the private banks because (i) it can offer unsecured loans to students at rates far below what banks would have to charge, (ii) it can use the taxation system to gather the revenue in a way which is probably cheaper than can banks or other lenders, and (iii) it can differentiate the repayments by making them contingent on income – a process which would be much harder for a private provider.
In its role as banker, the government might decide to reduce the subsidy or increase the repayment schedule. These are fundamentally policy issues, choices we make as a society about whom to subsidise and by how much. They have nothing in particular to do with the securitisation of the repayment stream.
It would be unfortunate if the debate about the extent of subsidisation of students was conflated with the issue of privatising the repayment flows.
The HECS repayment flows could be a valuable new asset for Australian superannuation fund, adding to the suite of alternative assets they have available for investment.