NSW Premier Mike Baird has staked his government’s re-election on the privatisation of 49% of the state’s electricity distribution and transmission networks.
The A$13 billion of expected proceeds, along with A$2 billion from the federal government’s Asset Recycling Initiative and interest on the sale proceeds are all earmarked to fund A$20 billion of new infrastructure.
But that A$20 billion and the government’s infrastructure plan are both at risk because of two key events in the NSW election campaign.
A price tag undercut by a price “guarantee”
Premier Baird has made an election commitment “guaranteeing” lower network charges in 2019 from privatised NSW companies.
As I explained in The Conversation last week, the Australian Energy Regulator (AER) sets the network charges, rather than governments. Those network charges are set for five-year periods and the AER has issued draft determinations for 2014 – 2019.
So, a potential buyer has a good idea of expected income levels over the next few years.
But it’s now not quite that simple.
Baird has made an election promise that buyers will be required to sign a “guarantee” that network prices will be lower in 2019 than in 2014. But the notion that new owners can commit in advance to lower prices is loaded with assumptions that the NSW network businesses are riddled with waste, so-called costly work practices and “gold plating”.
If these assumptions are not correct, then where will new owners find savings to deliver lower network charges, while still providing a rate of return acceptable to shareholders? Will investment to meet reliability and safety standards be cut to get savings and thus increase the possibilities of blackouts?
Waste and inefficiencies are not the usual marketing techniques to get the best possible price for an asset. Will a potential buyer want to pay the NSW government’s reserve sale price or, more likely, a price discounted by the need to cover the price “guarantee” and the unknown evidence of waste and unnecessary cost?
Political controversy hurts investor confidence
The second event risking the expected privatisation proceeds concerns the release of a report on the proposed electricity privatisation by investment bank UBS, a privatisation adviser to the NSW government.
The timing of the report’s release less than two weeks before polling day made it political.
But its amendment and re-issue, widely reported in the media, has made it even more political.
The amended UBS research report presented a more positive picture of the outcomes of the proposed privatisation, and one more in line with the pro-privatisation arguments of the NSW government.
The NSW Labor opposition has alleged political interference by the NSW premier’s office. Mike Baird has confirmed that his office did contact UBS after the report’s initial release, but denies the report was changed because of that contact.
If it does emerge that political influence was brought to bear on the report’s analysis, that would flout the usual conventions of caretaker government during an election period. And if an investment bank engaged by a government did change its work because of political pressure, that would be seen as entering the political fray – and it would not promote investor confidence in the independence of the analysis.
At this stage, it’s not clear that’s really what happened. But it looks likely we will be hearing more about this after the election.
Labor, the Greens and the Shooters and Fishers Party – the three parties campaigning against electricity privatisation – are reportedly planning to push for a NSW upper house parliamentary inquiry into the allegations of political interference.
An inquiry would delay the planned electricity privatisation and hence, Baird’s infrastructure plan. And it will do little for investor certainty and confidence.
Nor will reports that the Australian and Securities Investment Commission (ASIC) has asked UBS to “please explain” the incident and its “Chinese walls” separating corporate advisory functions from research.
As one of ASIC’s regulatory guides makes very clear:
For research to be genuinely objective and independent, research staff must be quarantined from other business units such as units who have client relationship management responsibilities.
Two decades of controversy
The privatisation of NSW electricity has been bedevilled for decades by controversy and opposition since first being mooted in 1997.
The former Labor government’s 2010 strategy of selling generation trading rights and the retail businesses was dogged from the outset about retention values, bid prices and the governance structure for the sales. And that led to the Tamberlin Inquiry in 2011, set up by the then newly-elected O’Farrell Liberal government.
Once this weekend’s election is over, either a politically-charged parliamentary inquiry or an independent ASIC inquiry into the UBS report would make potential buyers understandably cautious.
Any ongoing controversy would also place downward pressure on the price, no matter how much the NSW government and its advisers confidently talk up the privatisation of the network businesses. Political uncertainty does not generate investor confidence.
Electricity privatisations across Australia have been like golden geese, providing some A$37 billion in proceeds to state governments since 1992, most of which has been used to retire debt.
But the election promise of lower network charges, combined with the possible fallout from the UBS electricity privatisation report, have placed at risk the NSW golden goose laying a A$20 billion egg.
Read more coverage of the 2015 NSW election.