tag:theconversation.com,2011:/uk/topics/asset-recycling-10242/articlesasset recycling – The Conversation2023-12-01T17:52:49Ztag:theconversation.com,2011:article/2147562023-12-01T17:52:49Z2023-12-01T17:52:49ZElectric arc furnaces: the technology poised to make British steelmaking more sustainable<figure><img src="https://images.theconversation.com/files/556676/original/file-20231030-19-zblfpc.jpg?ixlib=rb-1.1.0&rect=50%2C0%2C5615%2C3741&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Steel production in an electric arc furnace.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/steel-production-electric-furnace-780620236">Norenko Andrey/Shutterstock</a></span></figcaption></figure><p>In a move to embrace sustainable steelmaking, British Steel has <a href="https://www.theguardian.com/business/2023/nov/06/british-steel-scunthorpe-furnaces-jobs">unveiled</a> a £1.25 billion plan to replace two blast furnaces at its Scunthorpe plant with <a href="https://www.sciencedirect.com/topics/engineering/electric-arc-furnace-process">electric arc furnaces</a>. This follows the UK government’s <a href="https://www.gov.uk/government/news/welsh-steels-future-secured-as-uk-government-and-tata-steel-announce-port-talbot-green-transition-proposal">commitment</a> in September to <a href="https://www.walesonline.co.uk/news/wales-news/live-updates-thousands-job-losses-27716778">invest</a> up to £500 million towards an electric arc furnace at Tata Steel’s Port Talbot plant in south Wales.</p>
<p>This method of steelmaking can use up to 100% scrap steel as its raw material, resulting in a significant reduction in carbon emissions. It is the future of steelmaking. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1721521512086196450"}"></div></p>
<p>Steel is an incredible material and for good reason. It’s the world’s most commonly used metal because it’s strong, durable and recyclable, making it the perfect material for everything from skyscrapers to electric vehicles and solar panels. More than <a href="https://worldsteel.org/steel-topics/statistics/annual-production-steel-data/?ind=P1_crude_steel_total_pub/WORLD_ALL/GBR">1.8 billion tonnes</a> of crude steel were produced globally last year. That number is only expected to grow as the world transitions to a more sustainable future.</p>
<p>The UK uses around 12 million tonnes of steel each year. And in 2022, it produced just under 6 million tonnes, contributing to around <a href="https://researchbriefings.files.parliament.uk/documents/CDP-2023-0016/CDP-2023-0016.pdf">2.4%</a> of the country’s greenhouse gas emissions.</p>
<h2>Electric arc furnaces</h2>
<p>There are <a href="https://www.eurofer.eu/about-steel/learn-about-steel/what-is-steel-and-how-is-steel-made">two main</a> steel production methods. Currently, Port Talbot and Scunthorpe use the blast furnace-basic oxygen furnace method. The purpose of the blast furnace is to separate iron ore extracted from the ground into its component parts: iron and oxygen. </p>
<p>A form of carbon, normally coal, combines with the oxygen in the iron ore. The outputs of this process are iron and carbon dioxide. The basic oxygen furnace is then used to convert the iron into steel. </p>
<p>As a global average, this method of steelmaking emits around <a href="https://worldsteel.org/wp-content/uploads/Sustainability-Indicators-2022-report.pdf">2.32 tonnes</a> of CO₂ per tonne of steel produced. </p>
<p>An electric arc furnace works by generating a high-temperature arc between graphite electrodes, using electricity as the energy source. This arc is then used to melt metal inside a chamber. </p>
<p>Using this method, up to 100% scrap steel can be used as the raw material, while the blast furnace-basic oxygen furnace method can only use a maximum of <a href="https://worldsteel.org/steel-topics/raw-materials/">30% scrap</a>. A switch to the electric arc furnace method could reduce emissions to 0.67 tonnes of CO₂ per tonne of steel produced when using 100% scrap steel.</p>
<p>In the future, it is also possible the electricity needed for electric arc furnace processes could come from 100% renewable sources, whereas a form of carbon will always be needed to reduce iron ore when using the blast furnace method.</p>
<h2>Recycled steel</h2>
<p>Steel is the most recycled material in the <a href="https://worldsteel.org/about-steel/steel-industry-facts/steel-core-green-economy/">world</a>, and so scrap steel is quickly becoming a crucial raw material. In 2021, the global steel industry recycled around 680 million tonnes of scrap steel. This equates to <a href="https://worldsteel.org/about-steel/steel-facts?fact=53">savings</a> of almost 1 billion tonnes of CO₂ emissions, compared to using virgin steel production. </p>
<p>In 2021, more than <a href="https://www.bir.org/images/BIR-pdf/Ferrous_report_2017-2021_lr.pdf">8.2 million tonnes</a> of steel scrap was exported from the UK. If collected and sorted more carefully, using this material domestically could provide both environmental and economic value, by helping to meet growing national demand for steel.</p>
<figure class="align-center ">
<img alt="A large steelworks lit up at night." src="https://images.theconversation.com/files/556639/original/file-20231030-27-aeouwv.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C6015%2C3357&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/556639/original/file-20231030-27-aeouwv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=335&fit=crop&dpr=1 600w, https://images.theconversation.com/files/556639/original/file-20231030-27-aeouwv.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=335&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/556639/original/file-20231030-27-aeouwv.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=335&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/556639/original/file-20231030-27-aeouwv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=421&fit=crop&dpr=1 754w, https://images.theconversation.com/files/556639/original/file-20231030-27-aeouwv.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=421&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/556639/original/file-20231030-27-aeouwv.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=421&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The Tata Steel plant in Port Talbot, south Wales.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/port-talbot-wales-uk-industrial-landscape-1264187401">Christopher Willans/Shutterstock</a></span>
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</figure>
<p>We know that steel produced with an electric arc furnace can have different properties to blast furnace produced material. A large factor in this is the <a href="https://doi.org/10.1080/03019233.2020.1805276">quality of scrap steel</a> used in the electric arc furnace – if the scrap steel quality is low, then so will the quality of the output.</p>
<p>With that in mind, there is a need for research, innovation and skills development to ensure this transition to lower-carbon steelmaking methods is successful. </p>
<p>Finding and sorting the right types of scrap material, confirming material properties and increasing supply chain understanding of electric arc furnace steelmaking are all necessary for a wide range of steel products to continue to be made in the UK.</p>
<h2>Sustainable steelmaking</h2>
<p>There is a race across Europe to secure investment for sustainable steelmaking technologies. <a href="https://www.hybritdevelopment.se/en/">Hybrit</a> is a fossil-free steel project in Sweden between several major steel producers and is already underway. </p>
<p>This follows plans to invest almost <a href="https://energypost.eu/hybrit-project-sweden-goes-for-zero-carbon-steel/">€40 billion</a> (almost £35 billion) in low-emission steelmaking technologies over the next 20 years. Also in Sweden, the company H2 Green Steel has secured <a href="https://www.reuters.com/markets/europe/swedens-h2-green-steel-gains-support-345-bln-debt-funding-fossil-fuel-free-plant-2022-10-24/">€3.5 billion</a> (£3 billion) to build a hydrogen-powered steel plant.</p>
<p>In July 2023, the German government announced €2 billion (£1.7 billion) of <a href="https://www.euractiv.com/section/politics/news/eu-commission-oks-e2-billion-state-aid-for-ailing-german-steel-sector/">support</a> for Thyssenkrupp, the steel multinational. And that was on top of the €3 billion (£2.6 billion) it had previously announced to support the country’s industrial green transition. A</p>
<p>ArcelorMittal, the second largest steel producer in the world, has also announced green investment in their plants in <a href="https://ec.europa.eu/commission/presscorner/detail/en/ip_23_3404">Belgium</a> and <a href="https://corporate.arcelormittal.com/climate-action/decarbonisation-investment-plans/spain-a-1-billion-investment-to-halve-our-carbon-emissions-and-create-the-world-s-first-full-scale-zero-carbon-emissions-steel-plant">Spain</a>, totalling more than €1.2 billion (£1.5 billion).</p>
<p>While the UK government has <a href="https://blogs.lse.ac.uk/politicsandpolicy/the-uk-should-lead-on-a-green-industrial-strategy-not-roll-back/">no published</a> industrial strategy, other organisations have produced roadmaps for decarbonised steelmaking in the UK. </p>
<p>A <a href="https://www.energy-transitions.org/new-report-breakthrough-steel-investment/">report</a> by the Energy Transitions Commission, a global coalition of energy leaders committed to net-zero emissions, outlined plans for investing in low-emission steelmaking in early 2023. With the right level of government and private sector investment, the UK could become a world leader in green steelmaking – but only it acts now.</p>
<p>As global temperatures continue to rise and the climate emergency deepens, the need for a decarbonised steel industry is greater than ever. Lower carbon methods of steel production are the future of the industry both in the UK and around the world.</p><img src="https://counter.theconversation.com/content/214756/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Becky Waldram receives funding from EPSRC, as part of the SUSTAIN Hub (Strategic University Steel Technology and Innovation Network). She is member of the Institute of Materials, Minerals & Mining. </span></em></p>Electric arc furnaces can use up to 100% scrap steel as its raw material, resulting in a significant reduction in emissions.Becky Waldram, Materials Scientist and SUSTAIN Impact & Engagement Manager, Swansea UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/810752017-07-23T22:37:14Z2017-07-23T22:37:14ZFinanciers are now controlling public works, much to the public’s confusion<figure><img src="https://images.theconversation.com/files/179098/original/file-20170720-23983-414x4m.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Ontarians got a taste of privatization in the 1990s, when the Conservative government of Mike Harris handed over the lucrative Highway 407 toll road in a 99-year lease for a fraction of its value.</span> <span class="attribution"><a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span></figcaption></figure><p>In the 1990s the large, nationally owned British Railways was split off into dysfunctionally separate entities and <a href="http://news.bbc.co.uk/2/hi/uk_news/politics/982037.stm">sold off to private owners</a> in a world-famous example of complete privatization. </p>
<p>During the recent British election, polls revealed that most citizens now support the Labour Party’s <a href="https://www.theguardian.com/politics/2017/may/10/labour-party-manifesto-pledges-to-end-tuition-fees-and-nationalise-railways">promise to renationalize the system.</a> </p>
<p>This may not seem very relevant to Canadians, because we never went through wholesale privatization — in part because we never had the wholesale nationalizations that Britain had in the 1950s. </p>
<p>But suddenly these international debates have indeed become relevant to Canada, although the issues here are being obscured by the downright Orwellian terminology used by infrastructure insiders.</p>
<p>In Canada, outright privatization was promoted in the mid-1990s by the neoconservative government of Ontario Premier Mike Harris. But one of the first instances of infrastructure privatization, southern Ontario’s 407 toll highway, <a href="https://www.thestar.com/news/queenspark/2015/03/30/pc-blunder-over-highway-407-looms-over-liberals-on-hydro-cohn.html">proved to be a disaster</a> and so enthusiasm quickly faded.</p>
<p>But while they may have shied away from completely selling off major public works, Canadian governments at all levels have still found ways to go along with the global trend of giving private capital a bigger role in public works. </p>
<h2>Not really partnerships</h2>
<p>As I’ve learned as an academic researching infrastructure governance, what’s emerged as the main Canadian model goes by the name of “public-private partnerships.” <a href="http://munkschool.utoronto.ca/imfg/research/data-visualizations/infrastructure/">Ontario</a> and British Columbia are its key promoters, though the Ontario government prefers to use the obscure term “Alternative Finance and Procurement,” which does not contain the politically sensitive word “private.”</p>
<p>If George Orwell, that foe of euphemistic <a href="http://www.vqronline.org/essay/musing-about-orwell%E2%80%99s-politics-and-english-language%E2%80%9450-years-later">government-speak</a>, was still with us, he’d likely point out that “partnership” is a highly misleading term. Major provincial infrastructure projects like hospitals, bridges and transit lines do bring public and private sector “partners” together, but they’re not partnerships.</p>
<p>A legal partnership is a long-term agreement to join forces and share financial risks over time — such as a law firm with partners.</p>
<p>But today’s public-private partnerships are actually arrangements whereby corporations provide financing, engineering, construction and design services for projects chosen by governments and ultimately funded by governments. The construction folks do their work and leave. The lenders stick around to be repaid over a long period. And any project that cannot be made attractive to the big financial players simply does not get built.</p>
<p>Infrastructure financiers, including pension funds, make big profits. But in Canada, public-private projects have so far remained publicly owned. Some of these will generate revenue — like transit lines via passenger fares — but many will not, since in Canada road and <a href="http://www.metronews.ca/news/vancouver/2017/06/22/bc-liberals-vow-to-end-bridge-tolls-credit-downgrade.html">bridge tolls are politically unpopular</a>. That’s one major reason why the financiers don’t really want to own the assets.</p>
<h2>The bill isn’t due for decades</h2>
<p>Why do governments continue to overpay for private finance, as Ontario’s auditor general <a href="http://www.auditor.on.ca/en/content/annualreports/arreports/en15/3.07en15.pdf">pointed out in 2015?</a> </p>
<p>Because of the time frame. Infrastructure investors, especially pension funds, want to secure revenue streams 30 and 40 years in the future. Even youthful Justin Trudeau will have long retired when the private finance credit-card bill comes due.</p>
<p>Another reason for the popularity and success of the Ontario/B.C. model is that governments are happy to use big contractors who hire union labour. And hospitals and prisons built through private finance and private procurement are staffed by the same public sector union workers as older facilities. So opposition from labour and NDP opposition is muted.</p>
<p>Nonetheless, the infrastructure model used for the past decade, in which major infrastructure projects continue to be publicly owned and union labour is protected, is now in danger. </p>
<p>The federal government is making noises that it will fund the new “Infrastructure Bank” — which is not actually a bank but an infrastructure agency, to confuse Canadians even further — by <a href="https://www.spacing.ca/.../06/.../op-ed-does-canada-need-federal-infrastructure-agency/">selling off the few major assets that Ottawa owns</a>, mainly airports.</p>
<p>The Liberals’ Infrastructure Bank might not ever do much; its predecessor from the Stephen Harper era, Public-Private Partnerships Canada, hardly made a dent. </p>
<h2>It sounds virtuous – but isn’t</h2>
<p>But a very real danger lies in what insiders call “asset recycling,” an approach <a href="https://mowatcentre.ca/recycling-ontarios-assets/">heavily promoted by infrastructure guru Michael Fenn.</a> The term sounds vaguely ecological, but it means selling off choice public assets to raise funds for infrastructure capital costs, as Ontario did with 51 per cent of Hydro One. That selloff netted the province $9 billion.</p>
<p>The Ontario Ministry of Infrastructure’s 2017 update states that in addition to Infrastructure Ontario’s public-private projects, <a href="https://www.ontario.ca/page/buildon-2017-infrastructure-update">the province is also</a> “unlocking the value of existing assets …all net revenue gains from the sale of designated assets are to be credited… to support the province’s key infrastructure priorities.” </p>
<p>If you did this at home, you’d essentially be selling your backyard to pay for a new summer cottage. You can make it sound somewhat virtuous by calling it “asset recycling,” but that’s what it is.</p>
<p>And we won’t see governments selling off dilapidated public housing, which could actually use new investment. Instead, they’ll sell well-maintained, revenue-generating assets — those that would, if they remained in public hands, provide steady revenues into the future. </p>
<p>So the privatizations that Ontario’s neocon Mike Harris dreamed of in the 1990s? </p>
<p>They may be at long last be successfully implemented by a host of Liberals.</p><img src="https://counter.theconversation.com/content/81075/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mariana Valverde has received funding for research on infrastucture governance from the Social Sciences and Humanities Research Council of Canada. She is not associated with any of the organizations and businesses involved in the field.</span></em></p>Canadian governments aren’t completely selling off major public works, but their embrace of public-private “partnerships” is giving private financiers control of major infrastructure projects.Mariana Valverde, Urban law and governance, infrastructure researcher; professor of criminology, University of TorontoLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/386592015-03-19T02:42:58Z2015-03-19T02:42:58ZPower privatisation is bad for the NSW budget bottom line<p>Private firms experiencing financial distress are sometimes compelled to sell-off profitable business units just to survive. But the state of New South Wales is not in that position, which is just one of the reasons why the latest push to privatise its electricity assets does not make economic sense.</p>
<p>The Baird government’s campaign for re-election essentially involves privatising profitable businesses – <a href="http://www.smh.com.au/nsw/mike-bairds-electricity-dilemma-popular-premier-selling-a-toxic-electricity-privatisation-policy-20150306-13x13f.html">Transgrid, Ausgrid and Endeavour Energy</a> – and spending most of the proceeds on non-revenue generating infrastructure. </p>
<p>Premier Mike Baird is a former investment banker, and he has claimed that <a href="http://nsw.liberal.org.au/back-baird/">his government</a> “has been working tirelessly to Rebuild NSW … [and] fix the budget”, among its top priorities.</p>
<p>However, from <a href="https://drive.google.com/a/theconversation.edu.au/file/d/0B0vOSyC-9daBNlE3cGNMdHMwNXVRNHJQZVhOei1Ocng0STBB/view?usp=sharing">our examination</a> of NSW finances, several telling facts emerge. </p>
<p>Among <a href="https://drive.google.com/a/theconversation.edu.au/file/d/0B0vOSyC-9daBNlE3cGNMdHMwNXVRNHJQZVhOei1Ocng0STBB/view?usp=sharing">our findings</a> was that without state-owned electricity revenues, all other things being equal, the NSW Coalition government would have struggled to avoid deficits in every budget since its election in 2011. We also found that curious accounting methods have masked the underlying profitability of the agencies to be privatised.</p>
<h2>Keeping NSW in the black</h2>
<p>The table below is from our recent <a href="https://drive.google.com/a/theconversation.edu.au/file/d/0B0vOSyC-9daBNlE3cGNMdHMwNXVRNHJQZVhOei1Ocng0STBB/view?usp=sharing">briefing paper on Electricity Privatisation</a>, which we prepared out of concern at how poorly-informed the public debate has been about the true costs of privatisation.</p>
<p>As this table shows, the state’s electricity agencies have been a key contributor to keeping the NSW budget in surplus over the past four years.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/75152/original/image-20150318-2151-rmem4m.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/75152/original/image-20150318-2151-rmem4m.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/75152/original/image-20150318-2151-rmem4m.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=163&fit=crop&dpr=1 600w, https://images.theconversation.com/files/75152/original/image-20150318-2151-rmem4m.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=163&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/75152/original/image-20150318-2151-rmem4m.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=163&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/75152/original/image-20150318-2151-rmem4m.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=205&fit=crop&dpr=1 754w, https://images.theconversation.com/files/75152/original/image-20150318-2151-rmem4m.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=205&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/75152/original/image-20150318-2151-rmem4m.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=205&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><span class="source">Electricity Privatisation: Bad Financial Management briefing paper</span>, <span class="license">Author provided</span></span>
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<p>The electricity revenues in the table are predominantly from network agencies, with some small amounts from generation, and represent both dividends and notional taxes that government businesses pay to the budget.</p>
<p>Obviously with the proposed partial privatisation, not all of these revenues will be lost – but the real loss will not be known until after the election.</p>
<p>Even an investment bank involved with the government’s electricity privatisation plan <a href="http://www.smh.com.au/nsw/nsw-state-election-2015/nsw-election-2015-premier-mike-bairds-office-sought-to-influence-report-critical-of-electricity-privatisation-20150318-1m1ni9.html">has concluded</a> it is “likely have a negative impact on state finances in the long run” because of the loss of billions of dollars in dividends and other payments. The <a href="http://www.afr.com/business/energy/electricity/ubs-revises-damaging-nsw-power-sale-critique-20150318-1m1gyc">original 14-page UBS report</a> released this week was entitled “Bad for the budget, good for the state”. After being <a href="http://www.smh.com.au/nsw/nsw-state-election-2015/nsw-election-2015-premier-mike-bairds-office-sought-to-influence-report-critical-of-electricity-privatisation-20150318-1m1ni9.html">contacted by Premier Baird’s office</a>, the UBS report was reissued with a new title, “Good for the state” and <a href="http://www.nsw.gov.au/sites/default/files/miscellaneous/economic-impact-of-state-infrastructure-strategy.pdf">new information</a> about supposed other benefits from increased infrastructure spending. </p>
<p>We agree with the original UBS conclusion that privatisation would be “bad for the budget” – yet as we have shown above, that negative impact would not just be “in the long run”, but felt immediately.</p>
<h2>Future loss to NSW taxpayers</h2>
<p>The Baird government has tried to downplay the scale of any future loss of budget revenues by referring to the Australian Energy Regulator’s <a href="https://www.aer.gov.au/node/29613">draft determination</a>. This would reduce the reported profits of the retained electricity interests – but their effective return on shareholders’ funds would still be the envy of most listed companies.</p>
<p>Moreover, the NSW government has avoided any mention of the potential loss of revenues since partly-owned network agencies will be exposed to “real” Commonwealth taxes – a fact conceded by a Treasury official during a recent hearing of a <a href="http://parlinfo.aph.gov.au/parlInfo/download/committees/commsen/152890ee-3326-4157-8c8a-698b766845c2/toc_pdf/Economics%20References%20Committee_2015_02_18_3209.pdf;fileType=application%2Fpdf#search=%22committees/commsen/152890ee-3326-4157-8c8a-698b766845c2/0000%22">Senate committee inquiry</a> into privatisation of state and territory assets and new infrastructure.</p>
<p>Mention should be made of three crucial matters.</p>
<p>First, a state budget only reflects the financial results of the “general government” sector. State-owned corporations are required by national competition policy to pay commercial rates of interest on debt, and in NSW this is handled by the payment of a loan guarantee fee to the NSW Treasury Corporation, or <a href="https://www.tcorp.nsw.gov.au/html/">TCorp</a>, which is not part of the general government sector.</p>
<p><a href="http://stoptheselloff.org.au/">Anti-privatisation campaigns</a> have referred to the <a href="http://www.audit.nsw.gov.au/ArticleDocuments/340/01_Volume_Five_2014_Full_Report.pdf.aspx?Embed=Y">A$1.7 billion</a> in dividends and tax equivalents that the electricity agencies paid to the NSW government last year. That amount is actually an understatement, as it doesn’t take into account loan guarantee fees.</p>
<p>An internal government document distributed to Coalition MPs and selected journalists identified loan guarantee fees from the electricity businesses as amounting to <a href="https://drive.google.com/a/theconversation.edu.au/file/d/0B0vOSyC-9daBNlE3cGNMdHMwNXVRNHJQZVhOei1Ocng0STBB/view?usp=sharing">A$338 million</a> in 2012-13. The agencies’ financial statements did not separately disclose loan guarantee fees but aggregated them with “interest” expense.</p>
<p>Second, governments can influence how earnings are calculated. Depreciation expense is a percentage of reported asset values, and in NSW government businesses have based those values on current replacement costs (not historical costs), and that has led to higher depreciation expenses and lower reported profits.</p>
<p>Third, and more significant, is the fact that the state government can choose how much of the electricity networks’ (reported) profits are paid into government coffers as dividends. That’s an important point, because of a recent report that the electricity dividends and other payments to the state are set to fall from A$1.7 billion last financial year to <a href="http://www.theaustralian.com.au/business/ubs-revises-negative-power-play-in-nsw-privatisation-debate/story-e6frg8zx-1227267070056">around A$1.1 billion</a> this year. </p>
<p>If dividends fall, is that necessarily a sign of falling profits? No – it could simply mean the NSW government is choosing to pay less into the budget. State governments can often “manage” budget results simply by requiring state-owned corporations to pay higher or lower levels of dividends to their consolidated fund.</p>
<p>In addition, at 30 June 2014, the three agencies slated for privatisation by the Baird government (Transgrid, Ausgrid and Endeavour Energy) disclosed <a href="https://drive.google.com/a/theconversation.edu.au/file/d/0B0vOSyC-9daBNlE3cGNMdHMwNXVRNHJQZVhOei1Ocng0STBB/view?usp=sharing">nearly A$2.6 billion</a> in retained earnings. That was an increase of A$666 million on 2012-13, or A$1.35 billion over the past two financial years.</p>
<p>NSW Treasurer Constance has claimed that the budget <a href="http://www.smh.com.au/nsw/nsw-state-election-2015/nsw-election-2015-andrew-constance-says-dividend-losses-from-electricity-privatisation-far-less-than-luke-foley-claims-20150303-13tmyg.html">will not lose as much</a> from privatisation as his opponents claim, arguing that Treasury forecasts diminishing returns to government to 2017-18.</p>
<p>But you can safely bet that if privatisation goes ahead, the network agencies will be stripped of cash in a last-chance effort to bolster budget results.</p>
<h2>Curious accounting masks super profits</h2>
<p>Our analysis also found that NSW electricity network agencies were far more profitable than shown in their 2013-14 accounts.</p>
<p>As noted above, the network agencies had based their asset valuations on current replacement prices rather than historical cost. Then in 2012, the NSW Treasury reversed its stance on the appropriate method valuing specialised assets for which there was no market evidence of “fair value”. </p>
<p>On the last day of the 2012-13 financial year, Ausgrid revalued system assets upwards by A$2.9 billion. That was done without explaining how those book entries had affected reported indicators of profitability. But the effect was to almost halve the reported rate of return the following year.</p>
<p>As explained in greater detail in <a href="https://drive.google.com/a/theconversation.edu.au/file/d/0B0vOSyC-9daBNlE3cGNMdHMwNXVRNHJQZVhOei1Ocng0STBB/view?usp=sharing">our briefing paper</a>, we calculated what the financial results of the network agencies would have been with normal private sector accounting techniques, as used by listed industrial companies.</p>
<p>Those recalculations revealed that Ausgrid and Endeavour Energy were earning returns on shareholders’ equity of between 80-82% per year – which are extraordinary super-profits.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/75167/original/image-20150318-12105-plonlh.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/75167/original/image-20150318-12105-plonlh.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/75167/original/image-20150318-12105-plonlh.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=165&fit=crop&dpr=1 600w, https://images.theconversation.com/files/75167/original/image-20150318-12105-plonlh.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=165&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/75167/original/image-20150318-12105-plonlh.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=165&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/75167/original/image-20150318-12105-plonlh.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=207&fit=crop&dpr=1 754w, https://images.theconversation.com/files/75167/original/image-20150318-12105-plonlh.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=207&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/75167/original/image-20150318-12105-plonlh.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=207&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Electricity Privatisation: Bad Financial Management briefing paper</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>That suggests either Ausgrid and Endeavour Energy are highly efficient, and/or they have been allowed to gouge consumers with excessive charges. Either way, they have been far more profitable than their accounting reports have suggested.</p>
<h2>Reviving an old proposal, despite better economic conditions</h2>
<p>New South Wales has low levels of debt. In June 2014, NSW had general government net debt of A$6.869 billion, or just 1.4% of Gross State Product. </p>
<p>This level of debt is highly manageable on annual budget revenues of around A$70 billion – especially at a time when Australian government <a href="http://www.abc.net.au/news/2015-03-16/australian-governments-have-never-had-cheaper-debt/6322322">borrowing costs are at record lows</a>. NSW can keep its electricity businesses and use their revenues to fund new projects in other areas.</p>
<p>The current privatisation proposal is hardly new. Privatisation was first mooted by then Labor Treasurer Michael Egan in 1997, with a price tag of A$22 billion. Yet had he succeeded, the state would have
missed out on dividends and tax equivalent payments to the budget in the period up to 2014-15 of <a href="https://drive.google.com/a/theconversation.edu.au/file/d/0B0vOSyC-9daBNlE3cGNMdHMwNXVRNHJQZVhOei1Ocng0STBB/view?usp=sharing">A$20.2 billion</a> – plus loan guarantee fees, and many billions of dollars in retained earnings. In that time, the electricity agencies were also able to fund tens of billions of dollars of infrastructure renewal.</p>
<p>Currently NSW is experiencing a boom in real estate prices, which will flow through to increased revenues from land tax and stamp duties on property transfers. This tends to be cyclical. The loss of a relatively stable source of revenues from the electricity network agencies would only make NSW more dependent on volatile property taxes.</p>
<p>Whether it was under Labor in the past or under the Coalition government now, the push to privatise NSW’s electricity assets is indicative of poor financial management. If it goes ahead, it would be bad news for NSW’s budget bottom line.</p>
<p><em>* This article was co-authored with <a href="http://www.ncoss.org.au/content/view/8559">Dr Betty Con Walker</a>, an economist with experience in the private and public sectors, including with the NSW Premier’s Department and NSW Treasury. She has worked with various governments on policy and legislative development, and state budgets. She runs her own government and corporate consultancy. Her books include <a href="http://purl.library.usyd.edu.au/sup/9781920899400">Casino Clubs NSW: Profits, tax, sport and politics</a>, and <a href="https://sup-estore.sydney.edu.au/jspcart/cart/Product.jsp?nID=290&nCategoryID=1">Privatisation: Sell off or sell out</a> (co-written with Dr Bob Walker), which are both available from Sydney University Press.</em></p><img src="https://counter.theconversation.com/content/38659/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>This article was co-authored with Dr Betty Con Walker, an economist with experience in the private and public sectors, including with the NSW Premier’s Department and NSW Treasury. She has worked with various governments on policy and legislative development, and state budgets. She runs her own government and corporate consultancy. Her books include Casino Clubs NSW: Profits, tax, sport and politics, and Privatisation: Sell off or sell out (co-written with Dr Bob Walker), which are both available from Sydney University Press. This article and their briefing paper, Electricity Privatisation: Bad Financial Management, were prepared independently, with no external funding.</span></em></p>We found that without state-owned electricity revenues, the NSW Coalition government would have struggled to avoid recording deficits in every budget since its election in 2011.Bob Walker, Emeritus Professor, Discipline of Accounting, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/380932015-02-27T12:47:19Z2015-02-27T12:47:19ZNSW Premier Mike Baird on health, privatisation, and Abbott’s shadow<p>The March 28 New South Wales election and the battle over the prime ministership have become inextricably linked.</p>
<p>Tony Abbott has become a dead weight for the Baird government; the fevered speculation about the timing of a fresh assault on the prime minister is hanging over the state Liberals and will feed into polls that have <a href="https://theconversation.com/nsw-galaxy-gives-labor-some-hope-but-coalition-gains-in-federal-polls-37917">already tightened</a>.</p>
<p>The need to stop the federal disaster threatening the only big eastern state the Liberals now hold is one argument being mobilised by supporters of Malcolm Turnbull to advocate another leadership vote as soon as possible.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/73298/original/image-20150227-16185-t2sab2.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/73298/original/image-20150227-16185-t2sab2.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/73298/original/image-20150227-16185-t2sab2.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/73298/original/image-20150227-16185-t2sab2.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/73298/original/image-20150227-16185-t2sab2.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/73298/original/image-20150227-16185-t2sab2.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/73298/original/image-20150227-16185-t2sab2.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/73298/original/image-20150227-16185-t2sab2.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Michelle Grattan interviewing Mike Baird in Sydney.</span>
<span class="attribution"><span class="source">Matt Dawson</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
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</figure>
<p>In an interview to launch our <a href="https://theconversation.com/au/topics/nsw-election-2015">NSW election coverage</a>, The Conversation asked Baird whether he would like to see the crisis resolved next week.</p>
<p>“There’s no doubt there’s challenges in Canberra, I’m not going to deny that … it is a difficult time. But I’m actually running to be premier of New South Wales.</p>
<p>"I am not going to buy into what might be happening down in Canberra, it’s not my role and responsibility,” Baird said, though he noted pointedly, “I would like Canberra to get on with the job of actually looking after the people it’s supposed to be representing.”</p>
<p>Assuming Tony Abbott is still prime minister, would he be campaigning in coming weeks with the premier and attending the formal launch of the campaign?</p>
<p>“Yes, I mean, of course. I mean he is the prime minister, he has invested a record amount of infrastructure into western Sydney, indeed across the state. He is doing his job as he should and we will be doing things together.”</p>
<p>Baird pledges to continue to vigorously take on the federal government to get a better deal on health.</p>
<p>“The biggest challenge facing this state and the nation is health funding. And what happened last federal budget is not sustainable.</p>
<p>"That was, the commonwealth and the federal government said ‘we are going to allocate a large part of the future growth in health costs from ourselves to the state governments’.</p>
<p>"The states do not have the capacity to meet those health costs on their own. The commonwealth has a critical role to play.</p>
<p>"Now, this will be front and centre of the white paper discussion on federalism, which is planned for the middle of this year. And that’s where it’ll be resolved. But I will be strongly making the case between now, the federal budget and that [white paper] discussion, saying there is no doubt that states cannot afford that health position … [Health] is <em>the</em> critical issue, because it is the largest cost to the budget and it’s growing at the fastest rate, and that is a very bad combination for a state tax base.”</p>
<p>Less than a year ago, Baird was suddenly thrust into the premier’s seat when Barry O'Farrell quit after giving incorrect evidence to the Independent Commission Against Corruption about a $3000 bottle of Grange he received.</p>
<p>Baird’s Liberal/National government is going into the election with a big buffer thanks to the bloodbath Labor took in 2011, and Baird is personally very popular.</p>
<p>But Baird’s election pitch includes an electricity “poles and wires” privatisation program. Privatisation proved lethal for the Newman government in Queensland, and the Baird push is being resisted by a <a href="http://www.unionsnsw.org.au/">well-organised union effort</a>.</p>
<p>Baird acknowledges the “scare campaign” will have an impact, but argues “everyone in Macquarie Street knows that this is the right thing to do, in terms of leasing the poles and wires business”. </p>
<p>“But because of the scare campaigns that have gone in the past, no one’s wanted to touch it.</p>
<p>"And I think it’s about time that someone did the right thing for this state, was prepared to front up to the scare campaigns that were going to come, confront them with the truth, and confront them with the reality that this is the way we can fund the infrastructure we need.”</p>
<p>Baird says the election will be “tight”, with a swing inevitable because of the size of the last win. But when asked what he would consider a “good result”, he wouldn’t be drawn on numbers, apart from joking he would be happy with a win.</p>
<p>A recent Galaxy poll had the Coalition ahead 53-47%. Labor sources believe they could get a swing of about 10%, which would pick up about 15 to 17 seats – not enough for a win. Labor expects the Abbott factor to rate behind privatisation and cuts to services as the most pressing issues.</p>
<p>Baird’s smooth and moderate image contrasts starkly with the aggressive styles of both former Queensland premier Campbell Newman and Tony Abbott.</p>
<p>Asked if he thinks people have tired of aggressive approaches to politics, Baird said: “I don’t think there’s any right answer to that.”</p>
<p>“I think people can get a sense of … if a politician is being genuine. They can get a sense of if they understand that that politician actually can sense and understand the issues that are important to me and the challenges I’m facing in my day-to-day life, and they’re being honest with me.</p>
<p>"I think all of that is what’s important. I think people’s styles - well, people can be themselves. But I generally think that’s all the electorate’s looking for.</p>
<p>"Individuals are just saying they’re sick of politicians, they’re sick of politics, they want someone to stand there, to tell them the truth, to do it honestly, and to look after them.</p>
<p>"I think if you get that package right, you’ve got a capacity to connect with the electorate.”</p>
<p>March 28 is shaping up as a substantial test of connectivity.</p>
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<p><em>You can listen to Mike Baird’s interview on the Politics with Michelle Grattan podcast <a href="http://michellegrattan.podbean.com/e/mike-baird/?token=b2e1efc5840b78f5750cc55b2aca1a3b">here</a>, read the transcript of the full interview <a href="http://theconversation.com/in-conversation-with-mike-baird-full-transcript-38171">here</a>, and read more coverage of the <a href="https://theconversation.com/au/topics/nsw-election-2015">2015 NSW election</a>.</em></p><img src="https://counter.theconversation.com/content/38093/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michelle Grattan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>‘There’s no doubt there’s challenges in Canberra … I would like Canberra to get on with the job of actually looking after the people it’s supposed to be representing.’ – Mike BairdMichelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/381712015-02-27T12:46:53Z2015-02-27T12:46:53ZIn Conversation with Mike Baird: full transcript<p><strong>Michelle Grattan:</strong> New South Wales voters go to the polls on March 28. Premier Mike Baird is popular and his government enjoys a huge majority and is travelling fairly comfortably in the polls. But we saw in Queensland that a big buffer is no guarantee of success. And the tricky issue of privatisation is central in New South Wales, as it was in Queensland, where the Newman government fell.</p>
<p>And then there’s the factor of Tony Abbott and the intense federal leadership speculation.</p>
<p>The premier joins us today.</p>
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<p>Mike Baird, we’ve just seen the demise of two conservative governments at state level. Do you think this election will be closer than the present polling, which is quite good for you, suggests?</p>
<p><strong>Mike Baird:</strong> There’s no doubt that it will be a tight election, I’ve said that from day one.</p>
<p>Because what you will see unfold, what I anticipated seeing unfold, is exactly what we’re seeing. And that is that Labor would be very well funded, the unions will put a lot of money into this, they’re running a lot of advertising already. And obviously that’s going to have an impact. Doesn’t mean that their ads are true, in fact it’s quite the opposite.</p>
<p>But what’s very clear is that this campaign is a scare – it’s not about a vision, it’s about a scare – [and] they will be running that very hard.</p>
<p>But I’m very confident that our positive plan will prevail, because I genuinely think the people of New South Wales are looking for that sort of leadership. They don’t want the scare, they actually want the hope and they want truth, and I strongly believe that’s what we’re providing.</p>
<p><strong>Michelle Grattan:</strong> Now you’ve got such a big majority that inevitably there’ll be some swing. What do you think would be a good result for you?</p>
<p><strong>Mike Baird:</strong> A win? (Laughs.) Look, I’m not going to talk about [that], genuinely I’m looking to fight for every seat.</p>
<p>And I think Labor, I mean they were very confident they’re going pick up seat after seat after seat. They think that it’s their natural right to own seats.</p>
<p>And I have made the point, well, they actually don’t deserve, I mean every seat should be in contest, because the plans and policies they have put forward, I don’t think anyone’s seen anything as light as what Labor has offered over the last four years. And I think that is something they’re taking the electorate for granted.</p>
<p>So they might have the scare campaign but they don’t have a vision, they don’t have a plan, they don’t have a track record to run on.</p>
<p>And my hope is that we get more opportunity to convince more people in New South Wales to vote for us, because I think that’s what the state deserves: a plan and vision and hope for the future, as opposed to just the scare they’re running. </p>
<p><strong>Michelle Grattan:</strong> There’s been talk of a swing of about 10%. Do you think that’s a realistic assessment at this stage?</p>
<p><strong>Mike Baird:</strong> I don’t know what swing there’ll be but I’m not going to take anything for granted between now and the election and obviously as the votes are cast. </p>
<p>We will value and absolutely honour every vote we are given, because I think that this election, it’s not about should we be returned or not. It actually is about what is the future of this state? Do we have the comprehensive plan to deal with the congestion that’s gripping the city through the second harbour rail crossing, which gives 60% more capacity to our network? [It’s about] the motorways, the schools, the hospitals.</p>
<p>We have the capacity to fund them and deliver them, versus going back to bad old ways of what we saw in Labor, which is policies announced with no funding. That’s why this state didn’t move anywhere for such a long period.</p>
<p><strong>Michelle Grattan:</strong> Privatisation seems to scare the hell out of people. We saw that in Queensland, you’ve got a bit of struggle with it here in New South Wales. Why do you think people take this attitude?</p>
<p><strong>Mike Baird:</strong> It’s very easy to run a scare campaign against it. And Labor have done it very well. I mean, I pay credit to them that they’re good campaigners and that they can paint a story – doesn’t have to be true – but [they] can paint a story that says privatisation is not in the state’s interests, because they try and pretend on matters such as service reliability and pricing that the private sector means that things are going to get worse.</p>
<p>The facts tell a very different story.</p>
<p>I mean, there’s one story I have, which is the Manly fast ferry. It’s one where the government used to run it, it used to cost A$10 million a year, it used to break down every 16 trips. And people hated it.</p>
<p>The private sector has come in, it now costs government nothing. Fares are lower, service is better, reliability is much better, and that shows that it can work.</p>
<p>And in privatisations in terms of electricity, when they [private power companies] came into South Australia, when they came into Victoria, real costs actually went down.</p>
<p>So the truth is very different. Everyone in Macquarie Street knows that this is the right thing to do, in terms of leasing the poles and wires business, they know it’s the right thing to do. </p>
<p>But because of the scare campaigns that have gone in the past, no-one’s wanted to touch it.</p>
<p>And I think it’s about time that someone did the right thing for this state, was prepared to front up to the scare campaigns that were going to come, confront them with the truth, and confront them with the reality that this is the way we can fund the infrastructure we need. When we stood there waiting for it [before], we now have a plan to deliver it.</p>
<p><strong>Michelle Grattan:</strong> Just one more thing on privatisation. The unions have obviously been able to mobilise a big grassroots campaign. Do you have the resources in the Liberal Party and elsewhere to match that campaign on the ground?</p>
<p><strong>Mike Baird:</strong> We have a lot of local members, a lot of volunteers, a lot of supporters that are desperate for some of the infrastructure we’re going to be able to deliver that otherwise you wouldn’t. And really that’s what it is.</p>
<p>Yes, Labor has a lot of money through the union movement to throw at us. And I expect all types of scare campaigns to come between now and election day.</p>
<p>But my hope is our army of volunteers and members of parliament and candidates go out and tell the community that we are actually in a once in a generation position to deliver all of the infrastructure that we have waited for and waited for. We can deliver it.</p>
<p>And that provides benefits for their day-to-day journey. I mean, do they want to support a plan that keeps them in traffic longer, in more crowded trains, higher taxes? Or do they actually want a plan that enables them to get home quicker, to take away that congestion, greater sporting/cultural facilities that we’ve looked at and hoped for? Well we can deliver it.</p>
<p>And I think New South Wales is due the best, rather than the second best that we’ve seen before.</p>
<p><strong>Michelle Grattan:</strong> Your leadership image is a much softer, more moderate one than the images that either Campbell Newman had or Tony Abbott has now. And your popularity is much higher either than Newman’s was or Abbott’s is. Do you think that voters these days really are over the aggressive political approach?</p>
<p><strong>Mike Baird:</strong> I don’t think there’s any right answer to that. </p>
<p>I think people can get a sense of all types of things. They can get a sense of if a politician is being genuine. They can get a sense of if they understand that that politician actually can sense and understand the issues that are important to me and the challenges I’m facing in my day-to-day life, and they’re being honest with me.</p>
<p>I think all of that is what’s important. I think people’s styles – well, people can be themselves. But I generally think that’s all the electorate’s looking for.</p>
<p>Individuals are just saying they’re sick of politicians, they’re sick of politics, they want someone to stand there, to tell them the truth, to do it honestly, and to look after them.</p>
<p>I think if you get that package right, you’ve got a capacity to connect with the electorate.</p>
<p><strong>Michelle Grattan:</strong> Now obviously Canberra is in turmoil over the leadership of the federal Liberal Party now. How much is this impacting on your campaign?</p>
<p><strong>Mike Baird:</strong> There’s no doubt there’s challenges in Canberra, I’m not going to deny that, but I mean I’m actually running to be –</p>
<p><strong>Michelle Grattan:</strong> Challenges literally and figuratively!</p>
<p><strong>Mike Baird:</strong> Well, I mean, it’s – it is a difficult time. But I’m actually running to be premier of New South Wales. I’m not a member of the federal party, I’m not running for prime minister, I’m running for the incredible privilege and honour of being premier of this state and that’s what I’ll run on –</p>
<p><strong>Michelle Grattan:</strong> But is that all affecting you? Is this turmoil hitting your chances?</p>
<p><strong>Mike Baird:</strong> I think that by the time we get to the election, what will be clear is a choice for the people of New South Wales.</p>
<p>They will look at our track record, the vision of where we want to take our state, versus what Labor is offering, which is a scare.</p>
<p>I think you’ve got a vision versus a scare. Hope versus same old. And I think that’s what the people of this state will focus on.</p>
<p>If you’re in the north-west of Sydney, you have stood there for more than a decade, waiting for a – in fact, 17 years, Bob Carr announced the north-west rail link in 1998. It was not delivered, there was not a dollar towards it when we came in. </p>
<p>We are now close to halfway through it, it’s actually borer machines in the ground, it’s being delivered. And that to me is the difference. We’ve said we would; we are.</p>
<p>And the community has waited a long time for these projects. Under us, we are actually delivering them.</p>
<p><strong>Michelle Grattan:</strong> I am going to round you up back into this particular pen. Those who are agitating for the federal leadership to be resolved next week are using as one of their arguments that it will be damaging for the New South Wales government if this goes on throughout your campaign, better to get it done soon. Would you like to see a resolution next week?</p>
<p><strong>Mike Baird:</strong> I would like Canberra to get on with the job of actually looking after the people it’s supposed to be representing.</p>
<p>I am not going to buy into what might be happening down in Canberra, it’s not my role and responsibility.</p>
<p>What my job is is to continue to look after and focus on the people of New South Wales, whether it be delivering those infrastructure projects, putting more teachers in our schools, getting progress on the National Disability Insurance Scheme – all of those things, we are making huge progress.</p>
<p>And I think that’s what the people of this state want: they want me to focus on them and their issues, and obviously leave other matters to other people.</p>
<p><strong>Michelle Grattan:</strong> Now assuming Tony Abbott is still in place, will he be campaigning with you here in New South Wales, and will he be at your formal launch?</p>
<p><strong>Mike Baird:</strong> Yes, I mean, of course. I mean he is the prime minister, he has invested a record amount of infrastructure into western Sydney, indeed across the state.</p>
<p>He is doing his job as he should and we will be doing things together. So there’s no doubt that he would.</p>
<p><strong>Michelle Grattan:</strong> And he’ll be on the platform with you at the launch?</p>
<p><strong>Mike Baird:</strong> It’s not going to surprise you Michelle, I’m not in charge of the seat design at the convention or the launch, but he would be there, obviously.</p>
<p><strong>Michelle Grattan:</strong> He will be present, he will be speaking at that launch?</p>
<p><strong>Mike Baird:</strong> He would be there obviously, yep.</p>
<p><strong>Michelle Grattan:</strong> Apart from the leadership, are there other federal issues that are impacting on this campaign? I remember, for example, after the budget, you and other premiers were very upset about health and education funding. What about those sorts of issues federally, some of those budget issues: the Medicare co-payment, the university deregulation?</p>
<p><strong>Mike Baird:</strong> The biggest challenge facing this state and the nation is health funding. And what happened last federal budget is not sustainable. That was, the commonwealth and the federal government said ‘we are going to allocate a large part of the future growth in health costs from ourselves to the state governments’.</p>
<p>Now I said at the time, and I say it again, and I’ve said it many days since, both publicly and privately to the prime minister, that is not sustainable. The states do not have the capacity to meet those health costs on their own. The commonwealth has a critical role to play.</p>
<p>Now, this will be front and centre of the white paper discussion on federalism, which is planned for the middle of this year. And that’s where it’ll be resolved.</p>
<p>But I will be strongly making the case between now, the federal budget and that [white paper] discussion, saying there is no doubt that states cannot afford that health position, the requirement that’s been asked by the last federal budget on the states in the long-term.</p>
<p>So it does need to be resolved. And it is <em>the</em> critical issue, because it is the largest cost to the budget and it’s growing at the fastest rate, and that is a very bad combination for a state tax base.</p>
<p><strong>Michelle Grattan:</strong> Can you win that issue though?</p>
<p><strong>Mike Baird:</strong> I’m absolutely sure I can win that issue because it’s right.</p>
<p>And I think that’s where we are much better to have a constructive dialogue with the federal government, rather than to play megaphone diplomacy. </p>
<p>The people of the state want us to get outcomes for them and I can assure you that will be a key focus of mine, both now and every day until it’s resolved. Because it is really something that does need to be resolved for the good of the long-term finances and health system in this country.</p>
<p><strong>Michelle Grattan:</strong> Just finally, you came to this job in sudden and extraordinary circumstances, catapulted on a <a href="http://www.abc.net.au/news/2014-04-16/nsw-premier-barry-ofarrell-to-resign-over-icac-grange-wine/5393478">bottle of good red wine</a>, indeed. Do you now feel on top of the job, or you do still feel that you’re on training wheels?</p>
<p><strong>Mike Baird:</strong> I feel very comfortable in the job, but I am absolutely determined to do much more.</p>
<p>I would be incredibly disappointed, I can’t tell you how disappointed I’d be, if I didn’t have the opportunity to continue beyond March. Because I can see where New South Wales is going. </p>
<p>If you walk amongst the streets, if you talk to our businesses, you see the cranes in the skies, you can see the economy is starting to move. And we want to do even more than that.</p>
<p>So we have a capacity to build this infrastructure, a once in a generation opportunity, and if you look at what’s happened in Queensland and in Victoria, the infrastructure focus and the momentum in our economy, it’d be almost unprecedented.</p>
<p>So to have an opportunity to lead that, to deliver things like the NDIS and to make a difference to some of our most vulnerable, together with some of the reforms we’ve done in health and education. I think this is some of the most exciting times in politics, to be honest, in terms of the opportunities to make a difference to people and to set New South Wales up like never before.</p>
<p>So from my point of view I feel very much comfortable in the role. I know I’ve got a fight on my hands. But I’m determined to keep New South Wales working, which is what this whole election’s going to be about.</p>
<p><strong>Michelle Grattan:</strong> Mike Baird, thank you very much. Thanks to my producer Matt Dawson, and also watch out for The Conversation’s coverage of the NSW election over the next few weeks.</p>
<hr>
<p><em>You can listen to Mike Baird on the Politics with Michelle Grattan podcast <a href="http://michellegrattan.podbean.com/e/mike-baird/?token=b2e1efc5840b78f5750cc55b2aca1a3b">here</a>, and read more coverage of the <a href="https://theconversation.com/au/topics/nsw-election-2015">2015 NSW election</a>.</em></p><img src="https://counter.theconversation.com/content/38171/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michelle Grattan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>‘I would be incredibly disappointed, I can’t tell you how disappointed I’d be, if I didn’t have the opportunity to continue beyond March … [these are] some of the most exciting times in politics’.Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/371642015-02-11T03:31:02Z2015-02-11T03:31:02ZPM’s infrastructure plan failing growth and cost-benefit goals<p>The OECD’s <a href="http://www.oecd.org/economy/growth/going-for-growth-australia-2015.pdf">Going for Growth report</a> released this week is a good reminder of why Tony Abbott wants to be remembered as “the infrastructure Prime Minister”.</p>
<p>The OECD argues addressing infrastructure service shortfalls will help productivity performance and sustainable growth, and in the 2014-15 Australian federal budget, <a href="http://www.budget.gov.au/2014-15/content/glossy/infrastructure/html/index.htm">spending on infrastructure</a> was planned to increase substantially, compared to the last budget of the Rudd government.</p>
<p>The focus carried through to the Brisbane G20 meeting. It saw a commitment to use infrastructure spending, along with other measures such as free trade agreements, as a lever to improve productivity and help deliver the additional 2% of GDP growth over five years targeted by the G20.</p>
<h2>How is Australia performing?</h2>
<p>Australian contributions to the G20 target, in terms of infrastructure investment, are outlined in the <a href="https://g20.org/wp-content/uploads/2014/12/g20_comprehensive_growth_strategy_australia.pdf">Comprehensive Growth Strategy</a>.</p>
<p>Two proposals are highlighted. First, there is a commitment</p>
<blockquote>
<p>“to achieve better project prioritisation, selection and coordination by providing greater transparency through cost benefit analysis of major projects and improving the operation of Infrastructure Australia (the body that assesses major infrastructure projects). Rigorous appraisal processes will help ensure that high-quality projects that create the most benefit will be prioritised.” </p>
</blockquote>
<p>Things have not started well. For example, The 2014-15 budget provides funding for 36 major named infrastructure projects but, as a <a href="http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/BudgetReview201415/Infrastructure">report</a> by the Australian Parliamentary Library notes, only four have been assessed by Infrastructure Australia, and only seven appear anywhere on the priority list.</p>
<p>Sydney’s WestConnex motorway is one of the infrastructure projects named in the budget but not prioritised by Infrastructure Australia. The federal commitment comprises a grant of A$1.5 billion to the New South Wales government, and a A$2 billion concessional loan. In December 2014 the New South Wales Auditor-General <a href="http://www.audit.nsw.gov.au/news/westconnex-assurance-to-the-government">reported</a> that the government’s Major Projects Assurance Framework had not been implemented and that, as a consequence, there were deficiencies in the analysis of the risks, cost and benefits of the project. Clearly this falls short of the G20 commitment.</p>
<h2>Asset recycling</h2>
<p>The second proposal is the <a href="https://theconversation.com/asset-recycling-no-dream-for-hockey-but-efficiency-boost-likely-28802">asset recycling initiative</a>. State governments that sell assets will receive 15% of the net sale proceeds as a grant from the Commonwealth, provided the funds are reinvested in infrastructure. Proposals must pass evaluation and approval before 1 July 2016, with construction to commence before 1 July 2019.</p>
<p>The Australian Competition and Consumer Commission this week <a href="http://www.afr.com/p/national/accc_warns_on_asset_recycling_XfHInVjskCpfCIfCm5AdEP">flagged concerns</a> about the scheme, warning of the risk of governments taking action that could lessen competition due to the lure of incentive payments.</p>
<p>At A$5 billion, the initiative accounts for only 10% of federal infrastructure spending commitments over the next ten years. However, the government forecast the incentives it provides will leverage an additional A$33 billion of infrastructure investment, making a major contribution to the proposed boost in infrastructure spending.</p>
<p>Asset privatisation was a central issue in the recent Queensland election. Of the estimated A$37 billion proceeds from the sale of energy and port assets, the Newman government proposed to allocate A$3.4 billion to a “cost of living” fund and A$25 billion to pay off state debt. New infrastructure investment of A$8.6 billion would attract a Commonwealth recycling incentive of A$1.3 billion, making A$9.9 billion in total.</p>
<p>Queensland voters rejected these proposals. Should the same result emerge from the New South Wales election next month the asset recycling initiative will effectively lapse.</p>
<h2>An alternative approach</h2>
<p>Where investment in long-lived productive infrastructure is involved, attaching the label <a href="http://www.dailytelegraph.com.au/news/nsw/prime-minister-tony-abbotts-speech-from-the-national-press-club-in-canberra-on-february-2/story-fni0cx12-1227204983604?nk=2ddb61facd9133e0d55d3bac5bbf4287">“intergenerational theft”</a> to government borrowing is clearly misleading – the generations who benefit from the investment also service the debt.</p>
<p>If the asset recycling initiative fails to meet its targets, alternatives are possible. The first requirement would be to live up to the commitment made to the G20 for stringent and transparent project evaluation by Infrastructure Australia. Second, think carefully about ways to improve efficiency in state-owned assets. Then, given that the yield on 21-year bonds is currently less than 3%, the government could pursue its infrastructure agenda by borrowing long-term and investing through the states in the same way as in the past.</p>
<p>Implementation of this strategy would require a more mature political discussion about fiscal deficits, debt, and long-lived infrastructure. Relying on slogans like “debt and deficit disaster” is unlikely to achieve positive outcomes.</p><img src="https://counter.theconversation.com/content/37164/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Graeme Wells does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The OECD’s Going for Growth report released this week is a good reminder of why Tony Abbott wants to be remembered as “the infrastructure Prime Minister”. The OECD argues addressing infrastructure service…Graeme Wells, University Associate, School of Economics and Finance, University of TasmaniaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/324882014-10-08T01:02:51Z2014-10-08T01:02:51ZMaking the case for selling off Queensland’s power assets<p>Queensland’s Campbell Newman-led coalition will <a href="http://www.news.com.au/national/breaking-news/nicholls-to-detail-qld-asset-plan/story-e6frfku9-1227082032589">seek a mandate</a> to privatise the electricity sector, along with two ports and water pipelines, in next year’s state election, despite it being rejected by voters in the past. </p>
<p>While there may be solid arguments for privatisation, the political debate continues to lack substance. In particular, the use of long-term, 50-year leases, with an option to extend for another 49 years, rather than a straight out sale, and the argument that voters have to choose between schools, roads or hospitals and owning assets are both red herrings, and distract from the substantive issues.</p>
<p>For all practical purposes, there is no meaningful difference between a straight out sale and a long-term lease. With the exception of land, very few if any physical assets will be around in 50-years’ time and none in 99-years’ time. Additional public funding for schools or roads or for paying off the debt will only be available if the revenue generated by the sale of these income generating assets is greater than the net present value of the income generated by these assets under government ownership.</p>
<p>Therefore, the debate on privatisation ought to be instead framed around the conditions under which Queenslanders will be better off if assets are transferred to private owners. </p>
<h2>Realising benefits</h2>
<p>Two conditions have to be met for this to happen. First, the assets need to be more valuable in the hands of the private sector than in the hands of the government. Second, the sales process should be able to extract this additional value from the buyers.</p>
<p>Electricity assets may be worth more in the hands of the private sector because private ownership is often associated with incentives for managers to pursue profit maximisation and to innovate. It is difficult if not impossible to replicate such incentives under public ownership.</p>
<p>There are, however, two approaches to profit maximisation, which have different implications for electricity users. Profit maximisation can be pursued by raising revenue, lowering costs or a combination of both.</p>
<p>In the monopolistic world of electricity distribution and transmission, it is cheaper to serve the market with a large facility rather than with two smaller facilities. To constrain such monopoly power, the Australian Energy Regulator sets the maximum prices that electricity distribution companies are allowed to charge consumers and the maximum revenue that electricity transmission companies can recover from users.</p>
<p>So would a private monopolist be able to charge a higher price to the detriment of consumers, undermining the case for privatisation? A possible way for this to happen is for the private monopolist to behave somewhat more aggressively in its dealing with the regulator than a public monopolist.</p>
<h2>Efficiency is king</h2>
<p>In <a href="http://ideas.repec.org/a/bla/coecpo/v30y2012i1p60-74.html">a paper with Bob Breunig at the ANU</a>, I examined whether Australian regulators treat private and public monopolists differently. In particular, controlling for different industries, regulators and time, we found regulators appear to be tougher when the decision relates to a privately-owned firm than to a publicly owned firm. </p>
<p>Taken at face value, this evidence suggests private ownership of electricity distribution and transmission can lead to higher profits only if it leads to more efficient operation and lower costs, since the option to raise revenue by raising prices is constrained.</p>
<p>International <a href="http://faculty-staff.ou.edu/M/William.L.Megginson-1/prvsvpapJLE.pdf">evidence</a> suggests electricity assets may be worth more in private hands and not because it leads to higher prices but rather because of more efficient operations and lower costs.</p>
<p>But the potential additional value of private ownership still needs to be captured by the sale process in order for privatisation to be worthwhile for Queenslanders.</p>
<p>A well-designed IPO or a direct sale via a cleverly designed auction are <a href="http://www.cs.princeton.edu/courses/archive/spr08/cos444/papers/bulow_klemperer96">likely</a> to lead to the best value for taxpayers. </p>
<p>But it is also important to look at the cost of running the sale. This is an area where there is very limited information, likely for commercial reasons. There is also a public perception that investment banking and advisory firms benefit disproportionately from the process through the fees they charge.</p>
<h2>More transparency required</h2>
<p>Summing up, it may be possible to build a case for the privatisation of electricity assets in Queensland based on a coherent narrative about why these assets may be more valuable in private hands and some reassurances that the sales process will be able to capture a significant part of this additional value. </p>
<p>In addition, greater transparency and debate around the cost of the sales process, and its beneficiaries, may go a long away to reassure the public that privatisation may be beneficial to Queenslanders.</p>
<p>While the arguments above are complex, continuing to focus on differentiating between a long-term lease and a straight out sale and asking voters to choose between owning assets and more hospitals and new infrastructure risks alienating the public, and undermining any support for privatisation.</p><img src="https://counter.theconversation.com/content/32488/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Flavio Menezes does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Queensland’s Campbell Newman-led coalition will seek a mandate to privatise the electricity sector, along with two ports and water pipelines, in next year’s state election, despite it being rejected by…Flavio Menezes, Professor of Economics, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/288022014-07-17T19:59:37Z2014-07-17T19:59:37ZAsset recycling no dream for Hockey, but efficiency boost likely<p><em>UPDATE: This piece originally said the Asset Recycling Initiative had been passed by the Senate. Subsequent to publication, the amended legislation was rejected by the House of Representatives. The piece has been corrected to reflect these events.</em></p>
<p>The future of the federal government’s A$5 billion asset recycling initiative, part of Prime Minister Tony Abbott’s claim to be the “infrastructure prime minister”, is yet to be decided. </p>
<p>Under the initiative state and territory governments will receive from the federal government a payment of 15% of the sale value of privatised assets, so long as the proceeds are invested in new infrastructure projects. The legislation was amended in the Senate to allow parliament to veto the payments on a case-by-case basis, with a cost-benefit analysis by Infrastructure Australia before payments are approved. </p>
<p>But a key amendment that prevented the transfer of $3.5 billion from the Education Investment Fund to the infrastructure-incentive pool left a funding black hole. When the legislation returned to the House of Representatives to approve the amendments, the government used its majority to reject them. The Senate, with the support of Motoring Enthuasiasts’ Ricky Muir and Palmer United Senators, have insisted on the amendments. The process has stalled.</p>
<p>In his <a href="http://www.budget.gov.au/2014-15/content/glossy/infrastructure/html/infrastructure_04.htm">budget announcement</a>, Treasurer Joe Hockey stated: “The government’s $5 billion investment through the asset recycling initiative will leverage close to $40 billion of new infrastructure investment from the states and territories.” </p>
<p>Economists have engaged in a long and inconclusive debate about the size of the “multiplier”, which is a measure of the extra expenditure induced by an additional dollar of government spending. Given that many economists doubt the multiplier is much greater than one, Treasurer Hockey’s claim of a multiplier value of eight is surely the high-water mark of Keynesian optimism. Rather, state governments are likely to repackage projects already planned so as to qualify for the incentive. </p>
<h2>Correcting the consequences of competitive neutrality</h2>
<p>It is better to view the asset recycling initiative as a correction of an unintended consequence of the National Competition Policy which, in 2001, required that state-owned enterprises pay company tax equivalents to their state government owners. </p>
<p>This so-called tax equivalence regime was designed to bring about neutrality between government businesses and competitors in the private sector. </p>
<p>Hydro Tasmania, for instance, competes with private sector generators. It pays dividends which are calculated as 70% of its operating result. This is, in turn, calculated before asset revaluations, impairments and tax. A company tax rate of 30% therefore implies a dividend of 49% (0.7 multiplied by 0.7) of the operating result; both the dividend and the company tax equivalent are paid to the Tasmanian government. </p>
<p>What is the impact of tax equivalence on the incentive to privatise? </p>
<p>On privatisation, the new owners receive dividends and pay company tax to the Commonwealth, so it involves a transfer of taxes from states to the Commonwealth. States have an incentive to privatise only if the sale price is sufficient to compensate for the loss of the income stream comprising <em>both</em> dividends and tax equivalents. </p>
<p>It might be thought that the simplest way to compensate states for the tax transfer would be to reimburse them for tax equivalents paid prior to privatisation. Such a scheme would almost certainly be too generous. Depending on the ownership, financing and tax incentives available to the purchaser, the company tax paid by the purchaser would most likely be less than the statutory rate. </p>
<p>For example, a foreign owner using aggressive debt finance could significantly cut its Australian company tax liabilities. In turn this behaviour might, in a competitive bidding process, be reflected in a somewhat higher offer price for the asset so that the state would capture some of the tax transfer. </p>
<p>By offering the states 15% of the sale price, the asset recycling initiative does not attempt to fine-tune the tax compensation. They might have thought that it was over- or under-compensation, but state and territory leaders at COAG would have viewed it as the best offer on the table; hence their acceptance of it. </p>
<p>Two other features of the scheme are worth noting. </p>
<p>The first is that the asset recycling incentive is not available to states wanting to privatise assets and use the proceeds to cut state debt. Rather, the scheme provides an incentive to invest in infrastructure while carrying debt on the state books; depending on realisations of company tax receipts, the incentive payment from the Commonwealth may also imply that its debt is also larger than otherwise.</p>
<p>But whether Commonwealth or state debt is involved, the same calculus as to the intergenerational effects of debt-financed infrastructure applies. If long-lived infrastructure investment realises sufficiently high returns, bond-financed investment is a good deal for future generations. High-yield projects of this kind should be undertaken with or without the asset recycling initiative.</p>
<h2>Efficiency benefits will trump the multiplier</h2>
<p>What the initiative does is to provide an incentive to improve the efficiency with which state-owned assets are used. This is particularly true for enterprises that are so poorly run that they presently pay no dividends or tax equivalents. States have little to lose from selling these assets. In this sense the asset recycling initiative provides a strong signal as to which privatisations should be prioritised. </p>
<p>Forestry Tasmania, for example, currently receives an annual subsidy of A$30 million to maintain its commercial viability. It is just possible (assuming community and environmental service contracts could be written) that new private owners adopting different harvesting practices, emphasising low volumes and high values, could turn a profit. In this situation overall efficiency could also be improved because private growers would not be crowded out by the activities of a state-subsidised competitor. </p>
<p>It is doubtful that Treasurer Hockey’s dream of unlocking an infrastructure revolution, with a multiplier of eight, will be realised. But if it improves the performance of state-owned assets the asset recycling initiative will be worthwhile. </p><img src="https://counter.theconversation.com/content/28802/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Graeme Wells does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>UPDATE: This piece originally said the Asset Recycling Initiative had been passed by the Senate. Subsequent to publication, the amended legislation was rejected by the House of Representatives. The piece…Graeme Wells, University Associate, School of Economics and Finance, University of TasmaniaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/280922014-06-18T06:54:40Z2014-06-18T06:54:40ZNew federalism promise recedes on falling wave of state asset sales<figure><img src="https://images.theconversation.com/files/51512/original/t6qkys2t-1403071573.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The NSW Baird government is relying on asset sales to fund infrastructure, but all state governments have a revenue problem.</span> <span class="attribution"><span class="source">AAP/Dan Himbrechts</span></span></figcaption></figure><p>The fiscal relationship between the Commonwealth and the states in Australia’s federal system is unsustainable in the long term. That statement has been difficult to deny ever since the 1940s, when Canberra took over income tax from the states in order to pay for the war, and then refused to hand it back.</p>
<p>Since then all the states have muddled on, year after year, without effective control over their finances, and depending on the generosity of the Commonwealth in order to survive. The latest NSW budget, handed down by the Baird government so soon after the Abbott version, is just one illustration.</p>
<p>In principle the states have a revenue problem. Money comes in from a share of the GST, from extra grants for specific purposes from Canberra, and from various taxes and charges such as land taxes, stamp duty, car registration and public transport charges. Most states can keep things ticking over with this regime by constantly looking to trim expenditure and cut services. However, anything that needs a large chunk of capital, such as new infrastructure, needs the help of Canberra. </p>
<p>More significantly, the maintenance of old infrastructure, such as the existing railway system, or modernising old hospitals and schools, needs constant injections of capital, but tends to be a low priority for governments at both levels. </p>
<p>That is just postponing a problem till the crisis hits. The Abbott federal budget signalled the states will need to become more self reliant. Quite simply, they can’t. Well, at least not without the loss of services that citizens have come to expect – and vote for.</p>
<h2>Selling the family silver</h2>
<p>Where to get more capital? Of course the states can always borrow, but, although our levels of government debt are low by international standards, they are high enough to cause some anxiety about servicing the interest payments, and besides, any borrowing needs the permission of the Loans Council where the voice of the Commonwealth is very strong. </p>
<p>In recent years state governments have been attracted to Public-Private Partnerships (PPPs) where they invite private enterprise to, for example, to put in the capital to build new roads or tunnels, and collect tolls from users. </p>
<p>Unfortunately, this means that governments lose control of the projects, and there have been a number of unfortunate PPP failures, prompting caution. Another recent solution at all levels has been to sell off government-owned enterprises to private enterprise. This promises an instant sugar hit of capital that can be used to pay for high ticket budget items. </p>
<p>The Baird government wants to sell off the remaining electricity power generation resources to pay for significant infrastructure spending. However, this means foregoing the income from those enterprises in the future, so is eroding the revenue base in the long term. </p>
<p>One advantage that is often suggested is that private enterprise operates in a competitive environment, so there is likely to be some advantage to consumers in lower prices. Maybe, but we are nearing the time when the only resources left to sell off will be public schools and hospitals. Who would want to buy them? And if someone did buy them, consumers will pay more for their services.</p>
<h2>The receding promise of “new federalism”</h2>
<p>Most Commonwealth governments over the last half century have come to office with some promise of a “new federalism”. This has usually meant that states will be encouraged to give up some competencies in exchange for greater security in those that remain.</p>
<p>Robert Menzies took over the costs of university systems with the general agreement of the states; Tony Abbott wants to get rid of that burden, which is now completely beyond the power of the states. The Whitlam government introduced a comprehensive system of medical and hospital insurance, which successive governments have eroded, even though the states do not want to take up the slack. </p>
<p>The John Howard government wanted the states to abandon their power over industrial relations, while it introduced the GST, promising that a fair share would be returned to the states. The Rudd-Gillard governments tried to reinvigorate education funding with the Gonski education reforms, while the Abbott government wants to hand any such programs back to the states. </p>
<p>There are suggestions that Abbott will accommodate an increase in the rate of the GST, but only if the states will take the “blame” for it. As long as any “new federalism” is merely part of the short term policy of the incumbent Canberra government (of whatever colour) there is no future for this way of proceeding. Buck passing remains the dominant paradigm. Responsible government? Contemporary federalism means that governments at all levels are fundamentally irresponsible.</p>
<h2>Reviving a healthy relationship</h2>
<p>What can be done to revive a healthy federal relationship? Some people would like to abolish the States, but, as attractive as that idea may be in some respects, it is not going to happen short of a revolution. This is not a battle between Labor and the Coalition; <strong>any</strong> government in Canberra is reluctant to give further autonomy to the states and territories. </p>
<p>At some stage state premiers and treasurers are going to have to put aside party allegiances and differences to demand that Canberra recognise the problem and provide long term guarantees about which level of government has responsibility (and the money) for what. After all, that is no more than their predecessors in the 1890s thought that they were doing when they were writing the Australian Constitution. </p><img src="https://counter.theconversation.com/content/28092/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Hogan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The fiscal relationship between the Commonwealth and the states in Australia’s federal system is unsustainable in the long term. That statement has been difficult to deny ever since the 1940s, when Canberra…Michael Hogan, Associate Professor and Honorary Associate, Department of Government and International Relations, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/264472014-05-08T20:37:55Z2014-05-08T20:37:55ZAsset recycling scheme looks more like policy recycling<p>The Abbott government is about to unveil a new A$10 billion <a href="http://www.abc.net.au/news/2014-05-08/government-to-detail-road-funding-and-detention-centre-closures/5437748">infrastructure package</a> in its first budget. Apparently it is to be funded by a “special immediate measure” in the form of a levy imposed on high-income earners over a four-year period.</p>
<p>Discussions about this likely measure seem to have focused on whether or not this levy is a tax. I see it as a hypothecated tax, not unlike the 3+3 fuel excise or the gun buyback levy or the Queensland floods levy, all of which were short-term, designed to cover particular spending needs but operated in the same way as any other tax.</p>
<p>In focusing on the largely insignificant tax-versus-levy issue, discussion has largely ignored the spending side of this special measure, the link to the asset recycling plan being devised by Treasurer Joe Hockey.</p>
<p>About A$5 billion is to be set aside to encourage states to privatise their assets by providing a <a href="https://theconversation.com/capital-recycling-plan-good-in-theory-difficult-in-practice-25855">15% “bonus” payment</a> for privatising state-owned assets, which I assume to include physical assets and public sector agencies and, perhaps, service delivery mechanisms.</p>
<h2>What about regulation?</h2>
<p>The assumptions underpinning such a policy are breathtaking in their disregard for evidence and for their promulgation of simplistic propositions about the relative efficiency of public and private sector management. Importantly, the policy does not recognise the fundamental link between ownership and regulation, and the impact that changes to the regulatory regime, which usually accompanies privatisation, have on market behaviour and the eventual success of any privatising activity.</p>
<p>For example, in promoting the privatisation of Medibank Private, Treasurer Hockey, and Peter Costello before him in 2006, claim that privatisation will reduce private health insurance premiums or at least restrain their growth. But this claim is largely dependent on government being the arbiter (the regulator) of proposals from private health insurance providers for any increases in premiums. </p>
<p>The impact on premiums will also depend on whether there are other regulatory measures imposed to accompany the sale of Medibank Private, such as limits to market share, conditions attached to ownership change (perhaps in the same way that takeover bids involving the four pillars in the banking sector are considered) and, importantly, the management of community service obligations such as any discounts for pensioners or safety net arrangements for other users.</p>
<p>In the debates surrounding the abandoned sale of Medibank Private in 2006, Labor suggested that retaining public ownership would also restrain the growth in premiums, arguing that the significant market share held by the government provider enabled the government to exercise price control through competition in the market place. In short, the impact on premiums had little to do with ownership, rather it depended on the regulatory arrangements that applied and the role that government would play in such arrangements.</p>
<h2>Private isn’t always better</h2>
<p>This brings us to the issue of ownership and its relationship to performance. There is no credible evidence that performance differences between public and private organisations undertaking the same services in similar ways can be attributed to ownership. Over and over again, we see that differences in performance and efficiency relate to the environment in which the organisations operate, especially the regulatory regimes involved.</p>
<p>There is no substance to the argument that private banks, for example, would be any more, or less, efficient than publicly-owned ones, working in the same environments. Differences in performance might relate to, say, government decisions that branches of the publicly-owned bank should be placed in more remote communities which might prove to be less financially viable but will enable greater access to banking services. </p>
<p>Or that publicly-owned hospitals with the same regulation relating to admissions and the like would, by virtue of their ownership, be any less (or more) efficient than their privately-owned counterparts. Or that performance differences found at Sydney Airport under public ownership (and managed by Federal Airports Corporation) in comparison to its subsequent private owners were related to ownership rather than to the different management models used coupled with changes from higher to “lighter” government regulation that accompanied airport privatisation.</p>
<p>And so it is with state-owned assets and organisations. There is nothing in robust academic studies (beyond individual cases, often selectively drawn to support the propositions of superior private, or public, ownership) to back the underlying assumption that state-owned assets will intrinsically be better off in private hands. To propose a policy based on that dubious assumption, and then attach a value of A$5 billion to it, is not only simplistic but leaves the government open to charges of irresponsible policy making based more on belief than on evidence.</p>
<h2>Recycled ideology</h2>
<p>Unfortunately, it reflects a re-emergence, or recycling, of some of the privatisation strategies introduced by the Thatcher and Howard governments. Driven by goals such as blunting union power, providing windfalls for conservative supporters, reducing the size of government and other essentially normative political goals, we witnessed the divestment of many public organisations justified by allegations that they were inefficiently run. </p>
<p>While there were numerous examples of successful privatisations, the literature is replete with examples of poorly managed ones. As a consequence, the public has lost valuable assets and been short-changed by their undervaluing; and governments have paid enormous fees to the consultocracy to manage the processes involved, have sometimes been required to take repair action such as buying back failed privatised entities and have foisted on the public more inefficient private replacement organisations over which they have less control. All because of hasty, ideologically-driven policies of privatisation.</p>
<p>I hope the states will be able to resist the 15% bribe and undertake due diligence of any potential asset sale. This should take into account necessary changes to the regulatory regimes that should, in almost all cases, accompany proposals for divestment of publicly-owned assets. The public deserves from this government a more mature, evidence-based and more nuanced policy rather than a simplistic recycled policy from the Howard era.</p><img src="https://counter.theconversation.com/content/26447/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Chris Aulich does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Abbott government is about to unveil a new A$10 billion infrastructure package in its first budget. Apparently it is to be funded by a “special immediate measure” in the form of a levy imposed on high-income…Chris Aulich, Professor of Public Administration, Institute for Governance and Policy Analysis, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/258552014-05-05T20:35:55Z2014-05-05T20:35:55ZCapital recycling plan good in theory, difficult in practice<p>The provision of new infrastructure is a high <a href="http://www.liberal.org.au/latest-news/2013/08/12/tony-abbott-new-accountability-infrastructure-and-major-project-delivery">priority</a> for the Abbott government.</p>
<p>It is a worthy cause. New infrastructure will ensure we remain competitive in the international market. Reducing logistics costs could compensate any decrease in agriculture productivity, which may arise because of climate change. Tackling the infrastructure gap over the next few years will also ensure we are better prepared for the full impact of the ageing population. Public funds to finance infrastructure, or to undertake other typical government roles such as providing social insurance or defence, will be in short supply once this impact takes hold.</p>
<p>The Abbott government, however, faces a difficult task to deliver on its ambition to become an infrastructure focused government. The main challenge is financing infrastructure in a political environment where public debt is inherently bad, and the government narrative (both at the federal level but also across many of the states) is that there is a <a href="https://theconversation.com/topics/is-there-a-budget-crisis">budgetary crisis</a>.</p>
<p>Private funding through Public Private Partnerships (PPPs) was once considered the solution to this conundrum. But it’s now understood that while PPPs can provide a meaningful contribution to funding infrastructure, they can turn negative if not carefully designed.</p>
<p>Along with a colleague at the University of Auckland, I studied the consequences of the private partner entering the post-construction phase with substantial debts. In <a href="http://ideas.repec.org/p/qld/uq2004/499.html">two</a> research <a href="http://ideas.repec.org/p/qld/uq2004/484.html">papers</a> we showed that the need for private partners to borrow large amounts to meet up-front construction costs creates real potential for strategic manipulation of the government.</p>
<h2>From PPPs to capital recycling</h2>
<p>More recently, capital recycling has taken centre stage as a favourite solution to funding infrastructure. Under this approach, the government sells existing income generating assets to build another asset.</p>
<p>Victoria has just become the first state to take advantage of the federal government’s 15% incentive payment for privatising assets, moving to sell the Rural Finance Corporation to Bendigo and Adelaide Bank for A$1.78 billion. It will also offer a 40-year lease of the Port of Melbourne, with the funds from both sales to <a href="http://www.abc.net.au/news/2014-05-05/rural-finance/5430994">go towards</a> upgrading rail tracks in regional areas.</p>
<p>In a world where governments face constraints on how much they can borrow to invest in income generating assets, capital recycling can make sense. For example, if the public sector has a greater ability to bear demand risk than the private sector for some types of projects (like ports or airports), governments can fund the construction of the port or airport and own it until demand uncertainty is less material and the asset generates a reasonably steady income stream. An additional advantage is that if governments build to sell, there may be a more realistic (and less political) project assessment.</p>
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<img alt="" src="https://images.theconversation.com/files/47808/original/3rwnfjw2-1399271649.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/47808/original/3rwnfjw2-1399271649.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=503&fit=crop&dpr=1 600w, https://images.theconversation.com/files/47808/original/3rwnfjw2-1399271649.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=503&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/47808/original/3rwnfjw2-1399271649.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=503&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/47808/original/3rwnfjw2-1399271649.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=632&fit=crop&dpr=1 754w, https://images.theconversation.com/files/47808/original/3rwnfjw2-1399271649.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=632&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/47808/original/3rwnfjw2-1399271649.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=632&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p>Unfortunately, like PPPs, capital recycling is no magic bullet either. To see why, we need to look at the types of assets that can be sold and how recycling can then work.</p>
<p>The simplest case to consider is that of public assets in competitive industries where a change of ownership will not have a significant impact on market outcomes such as prices, quality, and the availability of supply. In this case, selling the assets makes sense if the value of the asset under private ownership is greater than under public ownership and if this value can be realised through the sales process, taking into account transaction costs.</p>
<p>The first condition holds true if the private sector can operate the asset more efficiently. The second condition is more difficult to ensure, but generally speaking a well-designed auction can ensure that the asset is allocated to those who value it the most at a price above the value under public ownership.</p>
<p>The second type of public assets are those in industries where the government is a dominant supplier with the ability to determine prices. In this instance, in addition to the two conditions above, an effective regulatory regime needs to be in place for the asset sale to be worthwhile to society.</p>
<p>Infrastructure Australia [included](http://www.infrastructureaustralia.gov.au/coag/](http://www.infrastructureaustralia.gov.au/coag/) electricity generators and retailers in the first class of assets, and ports, freight rail, electricity distribution and transmission companies, and regional airports in the second category. It valued these assets around A$62 to $76 billion. We could add Medibank Private to the first class of assets and Australia Post to the second, adding perhaps another $7 billion to the value of assets potentially for sale.</p>
<p>A third class of assets includes those where the government is a dominant supplier but there is no effective regulatory framework or appropriate governance structure. Infrastructure Australia includes roads and water, and wastewater assets in this group.</p>
<h2>Roads are likely to be excluded</h2>
<p>The water assets alone are valued at A$54 billion to $63 billion, whereas the value of the road assets, while unknown, will be very large. However, the absence of a comprehensive road pricing system and the lack of governance arrangements (to ensure the right roads are built), effectively means roads will not be part of any capital recycling program, except for existing toll roads. A similar argument can be made about the water industry, where a myriad of arrangements exist across Australian states and territories.</p>
<p>This implies that a capital recycling program, covering the sale of assets in the first two types of assets mentioned above, would raise around A$70 billion. For recycling to work, however, the sale proceeds will need to be invested in other income generating assets. This is where things get complicated.</p>
<p>The estimated capital costs of Infrastructure Australia’s priority list is of the order of A$82 to $91 billion. It divides the list into four groups with the highest priority given to those projects that are ready to proceed and the lowest priority to those projects in an early stage of development.</p>
<p>The key issue is that most projects in the top two highest priority lists, adding up to over $A25 billion, are either road extensions and upgrades, or urban railways or busways. While worthwhile, these projects will not be suited for a capital recycling program until a comprehensive user pays system is in place. In fact, there are only two projects in those lists that would fit well into a capital recycling program, namely the Oakajee Port (A$5.4 billion) and the Darwin East Arm Port Expansion (A$336 million). This is well short of the revenue that may be raised by asset sales and so recycling of capital would not be very effective.</p>
<p>This means that capital recycling, while a potentially worthwhile concept in a world where governments cannot borrow directly, will be at best one additional tool for funding infrastructure. At worst, the proceeds from the sale of assets will be spent to ensure future electoral support, on projects that would not pass a cost-benefit test.</p><img src="https://counter.theconversation.com/content/25855/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Flavio Menezes does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The provision of new infrastructure is a high priority for the Abbott government. It is a worthy cause. New infrastructure will ensure we remain competitive in the international market. Reducing logistics…Flavio Menezes, Professor of Economics, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.