Truth be told, I hadn’t devoted much blog space to Trump’s infrastructure plans because his version 1.0 was not going to lead to much activity of any sort. It was not going to be based on any Federal spending. Instead, it relied on the use of equity tax credits. As we wrote, not only was that a small market, but the deals in it are bespoke, meaning the financings take a long time to get done. That would add even more time to the usually drawn-out process of devising projects, bidding out the various contracts, and lining up the various pieces of the financing. In other words, even based on the default assumption that many of the deals would not be good deals, not many would be completed, hence any harm would be fairly limited.
But now Trump is attempting to use infrastructure spending, which is everyone’s favorite idea for boosting growth in the US right now, as a Trojan horse for large scale privatizations. The ruse here is to call its ‘asset recycling” and depict it as a vehicle for creating more infrastructure spending. Mind you, this central element wasn’t included in the White House’s 6 page napkin doodle; you had to get that critical bit of information the press conference, as reported by the Washington Post:
Trump advisers said that to entice state and local governments to sell some of their assets, the administration is considering paying them a bonus. The proceeds of the sales would then go to other infrastructure projects. Australia has pursued a similar policy, which it calls “asset recycling,” prompting the 99-year lease of a state-owned electrical grid to pay for improvements to the Sydney Metro, among other projects.
As the cross post below describes in sordid detail, the Australian asset recycling program was widely seen as a big failure, even among the Liberals, as in the conservative, pro-business party.
That isn’t the only thing not to like about the latest iteration of Trump’s infrastructure headfake. the new position paper says the Administration is only going to spend $200 billion in 10 years, which is peanuts. That means he’s relying on way too much in the way of Wall-Street enriching financial gimmickry, which means higher costs and fees, which means more rent extraction from the general public.
But it’s even worse than that. As the Economic Policy Institute points out, if you look at the budget, it tells a very different story:
If you’re not willing to say forthrightly how you’re going to pay for infrastructure investments, you really cannot be serious about it. As the old adage goes, “show me your budget and I’ll tell you what you value”.
The recently released Trump federal budget plan guts infrastructure, period. Read the link—the damage the Trump budget would do to public investment and infrastructure is staggering. This alone should make any open-minded person extraordinarily skeptical of their claims to value infrastructure spending.
The Trump campaign plan on infrastructure was notable only for its shallowness and its determination to increase cronyism in infrastructure provision. The plan claimed that the problem with American infrastructure investment was a lack of innovative financing, and that the private sector could somehow be convinced to build infrastructure at no cost to taxpayers. This was obviously false. Even long-standing, bipartisan efforts to leverage private sector financing of infrastructure have ranged from disappointing to disastrous. And in no case did they provide a free lunch to taxpayers—unless taxpayers have a huge preference to paying tolls to private companies rather than the same amount of tolls or taxes to governments.
Another ugly element of the White House plan is its priorities. Some articles have duly criticized the idea of letting private equity overlords run air traffic control. Another bad idea is selling off VA assets. We posted an interview that mentioned why Theresa May’s similar plan to dispose of NHS real estate was designed to weaken the NHS and set up further privatization, which is what the Republicans would love to do to the VA. Selling off real estate produces as one-time cash influx which is pretty much guaranteed not to go to the VA to any large degree. The agency would then be saddled with higher costs in the form of rent payments. The newly increased costs would be used to depict the VA as inefficient, a budget drain, and in need of “reform” as in divestiture.
Another featured idea is selling off Pthe ower Marketing Administration’s transmission asset. The logic is that most utilities are private and hocking the lines, towers, substations, and rights of way would “more efficiently allocate economic resources and help relieve long-term pressures on the Federal deficit related to future Federal capital investment.” You can guarantee that the hugely valuable rights of way will be sold on the cheap.
This excerpt also reveals that a significant driver of this scheme is that the Administration professes not to understand that well-targeted infrastructure spending will generate $3 of growth for every dollar spend, meaning it actually does pay for itself (and that’s before you get to the MMT argument that we clearly need and can afford more deficit spending right now).
And in terms of the priorities? The fact that more toll road spending features prominently should tell you all you need to know:
Liberalize Tolling Policy and Allow Private Investment in Rest Areas. Tolling is generally restricted on interstate highways. This restriction prevents public and private investment in such facilities. We should reduce this restriction and allow the States to assess their transportation needs and weigh the relative merits of tolling assets. The Administration also supports allowing the private sector to construct, operate, and maintain interstate rest areas, which are often overburden and inadequately maintained.
The point of this is to facilitate the sale of existing road and the construction of new toll roads. But the dirty secret is that new toll road deals are guaranteed to go bankrupt in the US. Excerpts from a post that explained why, quoting a 2014 article in Thinking Highways:
Beginning with the contracting stage, the evidence suggests toll operating public private partnerships are transportation shell companies for international financiers and contractors who blueprint future bankruptcies. Because Uncle Sam generally guarantees the bonds – by far the largest chunk of “private” money – if and when the private toll road or tunnel partner goes bankrupt, taxpayers are forced to pay off the bonds while absorbing all loans the state and federal governments gave the private shell company and any accumulated depreciation. Yet the shell company’s parent firms get to keep years of actual toll income, on top of millions in design-build cost overruns….
Of course, no executive comes forward and says, “We’re planning to go bankrupt,” but an analysis of the data is shocking. There do not appear to be any American private toll firms still in operation under the same management 15 years after construction closed. The original toll firms seem consistently to have gone bankrupt or “zeroed their assets” and walked away, leaving taxpayers a highway now needing repair and having to pay off the bonds and absorb the loans and the depreciation.
The list of bankrupt firms is staggering, from Virginia’s Pocahontas Parkway to Presidio Parkway in San Francisco to Canada’s “Sea to Sky Highway” to Orange County’s Riverside Freeway to Detroit’s Windsor Tunnel to Brisbane, Australia’s Airport Link to South Carolina’s Connector 2000 to San Diego’s South Bay Expressway to Austin’s Cintra SH 130 to a couple dozen other toll facilities.
We cannot find any American private toll companies, furthermore, meeting their pre-construction traffic projections. Even those shell companies not in bankruptcy court usually produce half the income they projected to bondholders and federal and state officials prior to construction.
And now to the hard look at the failed Australian “asset recycling” experiment.
By Lee Cokorinos, the founder and principal of Democracy Strategies LLC, a consulting firm that provides strategic research and advice to public policy organizations. He has also conducted strategic research for campaigns on privatization and the role of government. Originally published at In The Public Interest
The sixth impossible thing to believe, therefore, is that the “asset recycling” model is int he public interest. Rather, it looks very much like an extension of this Government’s favors to the corporate end of town. [New Matlida]
As debate over President Trump’s proposed $1 trillion infrastructure plan has gained strength
in Congress and the media, some are proposing that the U.S. should look to Australia—and specifically to that country’s Asset Recycling program—for a model of how to support a longterm program of badly needed infrastructure investment. The suggestion reportedly emanated from the first in-person meeting between President Trump, Prime Minister Turnbull and Australia’s ambassador to the U.S., Joe Hockey, who as federal Treasurer was the architect of the Asset Recycling plan in Australia.
However, from what Australians themselves have said and written about the program over the past three years, what we have witnessed recently is a caricature of the Australian experience with public asset “recycling.” Far from being a model to be followed, it is a model to be learned from for what should not be done to promote badly needed infrastructure improvements in theU.S.
Introduced in 2014, the Australian Asset Recycling program ultimately crashed and burned, and was withdrawn by the conservative Tony Abbott government. (“It was a rather miserable end for Joe Hockey’s centerpiece for 2014”). The Abbott government was unable to get enabling legislation and funding for the program through the Senate, which had held extensive hearingson the Asset Recycling program and raised multiple criticisms of its economics, administrativefeasibility, transparency, conceptual soundness, riskiness, fairness, policy impact, and ability todeliver good and necessary public infrastructure.
The Australian Senate amended the bill to “give the federal parliament capacity to determine what gets privatized and also ensure that new projects will be subject to cost benefit analysis” and block them “if they are judged not to be in the public interest.” While Abbott pointed to the funding restrictions on the plan as the reason for its failure, it was its poor design as a tool of proper infrastructure development and financing, and the raucous controversies that it produced (see below) that killed the plan.
If Americans wish to avoid a similar experience, they will do well to study the extensive analysis of the problematic issues with the Australian Asset Recycling Plan and apply them here so we can establish a sustainable infrastructure improvement program.
Following are some of the issues raised in Australia about the Asset Recycling Plan both in parliamentary hearings on the plan and as it rolled out after 2014. The 2015 Senate Committee report, expert witness submissions, and recommendations can be found here.
From an economic standpoint, the Australia Institute asked some crucial questions about the Asset Recycling Program:
“From an economic perspective this proposal raises a number of questions:
- Is privatization of government assets always desirable and should it be encouraged through
Commonwealth payments?
- Is the Asset Recycling Program the best way to assist the financing of new infrastructure
investment?
- Is private sector funding of infrastructure always desirable?
- How many assets are available for privatization and where are they?”
Regarding so-called expert financial and infrastructure industry advice supporting the Australian(and Trump) asset recycling program, the institute remarked “It is worth remembering many advocates of privatization have a vested interest in it,” but “as investor Warren Buffett once said: If you want independent advice, don’t ask a barber whether you need a haircut.”
A central criticism of the plan was that far from providing new funding or financing for infrastructure, it just redirected current funds to projects favored by the austerity-minded conservative government. The opposition Labor Party “attacked the heavily touted infrastructure package as a smoke and mirrors trick, with little genuinely new spending, and redirections from public transport investments to major arterial roads.”
The shadow infrastructure minister, Anthony Albanese, said of the Asset Recycling plan, “At the same time as [Joe Hockey is] saying we need to invest more in productive infrastructure, he’s planning to rip billions of dollars out of public transport projects that have been fully funded in previous Labor government budgets.” Unions also opposed the Asset Recycling scheme, and demanded that essential public services be protected from privatization. Such comments are similar to current American concerns about what the Trump infrastructure plan is doing to slash public transport funding.
But criticism of the Asset Recycling Program has come not only from the Labor side of the political spectrum, but also from staunch conservatives. For example, Rod Sims, chairman of the Australian Competition and Consumer Commission, said of the program, “I’ve been a very strong advocate of privatization for probably 30 years. I believe it enhances economic efficiency [but] I’m now almost at the point of opposing privatization because it’s been done to boost proceeds, it’s been done to boost asset sales, and I think it’s severely damaging our economy. If we want support for privatization then we’ve got to do them in ways that deliver what’s expected to be delivered, which is lower prices for consumers, not higher.”
As for who stood to benefit from the Australian “asset recycling” program, Australian researcher Warwick Smith offered a clear answer: “It’s tempting to call the federal government’s “asset recycling initiative” another example of their small government ideology, which is usually just cover for private rent seekers who want to pillage the public purse. When in doubt, follow the money. So who benefits from the privatization of public assets? The obvious answer is the buyer. Such assets will only be purchased if they stand to make a return. However, the biggest winners when multiple asset sales are considered are the banks. Privatized assets are almost always bought with borrowed money. So, while individual companies or consortia might benefit from the purchase of a government asset, it’s the banks and other lenders who benefit from a culture of privatization.”
There were also major issues with how the program was implemented. Although the idea behind the Asset Recycling plan was to fund good new projects that were fully vetted in exchange for a federal top-up of the proceeds of public asset sales (a 15% bonus), the Northern Territory government, in an attempt to access Asset Recycling funds, went ahead in 2015 and privatized two major public assets (including leasing Darwin port to a Chinese company for 99 years) without having a clue where the money would go.
Opposition to the deals was strong, with one Northern Territory lawmaker saying the process was inappropriate: “Public assets like TIO belong to Territorians, not the government. If a government has a case to sell a public asset in the best interests of the community, where there has been a cost-benefit analysis, they should make that case to the voting public and win their mandate to sell. The CLP have failed to consult with the public and they are arrogantly pursuing a behind-closed-doors sell-out of assets that belong to Territorians.”
Many of these shortcomings were laid out in the parliamentary inquiry. The Australian Senate committee reported: “2.1 During this inquiry the committee focused its attention on the link between infrastructure funding and privatization under the Asset Recycling Initiative, which provides states and territories with financial incentives if they sell assets and recycle the capital into additional infrastructure.[1]
2.2 While the committee was aware of some support for the Asset Recycling Initiative,[2] the majority of submitters and witnesses identified a range of concerns and did not support the Initiative. This chapter discusses the issues that may arise from binding infrastructure funding to privatization under the Asset Recycling Initiative, with a specific focus on the:
• Potential distortion of state and territory decisions on privatization and infrastructure funding;
• Possibility that privatization decisions will be rushed, leading to poor processes, poor consultation and poor regulatory safeguards; and
• Potential unfairness and inequity between the states and territories.”
The coercive nature of the Asset Recycling program was illustrated in Queensland, whose treasurer said the federal government was using the program as a whip to drive privatization deals it considered unsound. “Sadly the Australian Government intends on withholding federal infrastructure funding from Queensland, unless we agree to sell state assets.”
Flawed Decision-making and Distorted Incentives
Australia’s experience invites serious questioning of the methods of project selection being used in any “Asset Recycling” scheme to address the issue of whether a politically or ideologically distorted federal decision-making body (possibly a “captured agency”) will override existing safeguards for sound decision-making and risk analysis, and become a political football come election time.
In addition to this, Prof. John Quiggin pointed out to the committee that state and local decision-making on whether to privatize or not is affected by the privatization incentive being offered. In the case of the Asset Recycling Initiative, “bad privatization decisions are being encouraged by the presence of the subsidy. The fact that you cannot get it for a privatization that makes such strong economic sense and for which you do not need the subsidy is an indication of exactly how things are being distorted on both sides of the decision. Regarding both the assets originally for sale and secondary investments, this program distorts both of those decisions.” Quiggin called the Asset Recycling Initiative “a spurious justification for privatization,” and said “the politically toxic idea of privatizing public assets is being repackaged as ‘recycling’.”
The Senate committee itself notes that “the distorting effect of the Asset Recycling Initiative was confirmed by the Treasury submission which indicates that states and territories are required to show that the decision to divest an asset must have been significantly influenced by the Initiative in order to qualify for incentive payments.”
To this can be added a point made by the Australian Productivity Commission (p. 280), that the incentive structure of all “capital recycling models” (such as Abbott’s Asset Recycling Initiative), “where the proceeds of sale are automatically hypothecated to investment in new infrastructure projects, may create risks for over-investment in new greenfields infrastructure.” In addition to being more risky in the construction and ramp-up phase, this might discourage needed investment in existing “brownfield” infrastructure.
In fact the Productivity Commission said the central problem with such “capital recycling”schemes is that they merge what should be different aspects of any good public investment decision-making process:
“Capital recycling involves the linking of two separate decisions; the decision to privatize stateowned assets, and the decision to invest in a new infrastructure project or set of projects. While the linking of the two decisions may be a useful mechanism to alleviate community resistance to privatization, this should not replace the need to undertake these sets of analyses separately. Ideally, both sets of decisions would be made within a transparent decision-making environment, where a robust cost–benefit analysis is undertaken, and there is scope for independent review.”
Regarding the “potential unfairness and inequity between the states and territories,” the Australian Senate committee noted that “the Northern Territory government submitted that…some jurisdictions appear to be at a much more advanced stage of preparation for asset sales and have a large pipeline of potential privatizations. It is foreseeable that the existing pipeline of privatizations in the larger jurisdictions may significantly eat into the pool of funds allocated for incentive payments under the asset recycling initiative.”
The committee also noted that “the Business Council of Australia suggested that the Asset Recycling Initiative should be designed to prevent one or two states from capturing all of the available $5 billion in funding through large-scale privatization projects,” and that “Emeritus Professor Bob Walker and Dr. Betty Con Walker also suggested that incentives for privatization from the Commonwealth may encourage states and territories to sell their most profitable businesses, which are currently providing essential services.”
The Public Balance Sheet
In his testimony to the Senate committee and other writing, Prof. John Quiggin also raised the larger possibility that the asset recycling scheme will do longer term damage to the public sector’s balance sheet by removing income-producing assets and transferring these over to the private sector and creating other distortions.
After reviewing a decade and more of experience in Australia and the United Kingdom, Quiggin concludes, “In reality, most privatizations have reduced public sector net worth, either because the assets have been underpriced, or because the proceeds have been dissipated in current expenditure or economically unsound investment projects.” (p. 7).
Quiggin maintains that if widely scaled-up and bundled into an “asset recycling” scheme, the risks of such a negative impact on public net worth would increase:
The idea of asset recycling is, in essence, an attempt to systematize and subsidize this procedure. Rather than once-off deals in which asset sales are packaged with expenditure project, a general procedure is suggested to subsidize such packages.
The idea of recycling is that a resource, used once to produce some good or service such as a newspaper or container, can be reclaimed and reused. Ideally, the same resource can be reused many times, reducing the need for new supplies. ‘Asset recycling’ has nothing in common with this process. Income-generating assets are valuable precisely because they generate income. Selling the assets and spending the proceeds on current or capital items that generate no flow of income, and cannot be justified by ordinary cost-benefit analysis is not, in any meaningful sense, recycling.
In addition, the distortions are compounded by misplaced financial incentives that would impact project selection and, as noted above, political factors (pp. 8-9):
The idea of asset recycling, in which specific balance sheet transactions are identified asa funding source for favored projects runs the risk of violating the core principles of public infrastructure investment. Projects are selected on the basis of eligibility to attract financing from the proceeds of asset sales, rather than being evaluated on a standard benefit-cost basis. Moreover, given the political unpopularity of privatization, there is considerable pressure to fund politically attractive projects, rather than those with the greatest long-term benefits. (…)
Asset recycling is commonly seen as a way of financing projects that would otherwise not proceed, implying that they do not pass the relevant benefit-cost test. Under these circumstances, the value flow of services from the project is less than would have been obtained by repaying debt or making a cost-justified investment. It follows that public sector net worth will decline.
There is also the question of accurate valuation. There is a risk if revenue-producing assets are privatized, and if they are the public must be sure the benefits outweigh the lost revenue. Australian conservatives have been touchy or evasive on this issue, even to the point of allegedly fixing a bank advisory report’s conclusions about the negative revenue effects of privatization.
But if the sums are done correctly and the public balance sheet issues taken into account, Quiggin suggests that “a sustainable system of asset-recycling” can be developed “which would result in a sustainable balance between the private and public sectors, rather than the liquidation of public assets. Such a policy would involve the allocation of risk to the agents best able to bear it.” At the earlier stages of a project where demand and regulatory risks are high, Quiggin suggests, the government can take a risk-bearing role, and when “demand risk settles down and regulatory issues are resolved,” then the project “is sold and the proceeds are used to build a new port, or some other piece of income-generating infrastructure.” (p. 10-11).
Note here that this would not apply to many infrastructure needs, such as an essential project that is not income-generating—e.g., a non-tolled or non-subsidized road. A decision could certainly be made to use the proceeds of an asset sale for such a purpose, but the negative balance sheet and revenue effects would be compounded, and would hardly support a sustainable “recycling” chain. This is why tolling and/or subsidies are normally hard-wired into “public-private partnership” projects, and are central features of the both the Australian and Trump “asset-recycling” plans.
Potential Unfairness and Inequity Between the States and Territories
The actual choice of infrastructure investment priorities has also been affected by Abbott’s scheme, with Victoria’s elected leaders saying they were refused Asset Recycling funding because they chose to use the money to remove level crossings, and accusing the federal government of reneging on its agreements under the program. So another lesson from the Australian experience is “will the promised federal dollars ever materialize?” or will a “recycling” program just set off a race to the bottom of competitive underpricing of public assets so they can attract private investment?
Recently the Turnbull government has been accused of playing politics with the remaining funds in the asset recycling scheme by “punishing Victoria for voting Labor by withholding asset recycling funds from Melbourne Metro, which Infrastructure Australia identified as a projec with national significance” to instead help fund a toll road it favored.
An asset recycling program also runs the risk that it will favor asset-rich states. In announcing his program in 2014, Joe Hockey himself conceded that, as the Sydney Morning Herald put it, “some states would get more money from the [incentive] pool than others because some states had more public assets to sell.”
Transaction Costs
When rolling out the Trump administration’s proposed budget, Gary Cohn, Trump’s economic advisor, said officials were closely looking into the Australian model, and proposed that “instead of people in cities and states and municipalities coming to us and saying, ‘please give us money to build a project’, and not knowing if it will get maintained, and not knowing if it will get built, we say, ‘hey, take a project you have right now, sell it off, privatize it, we know it will get maintained, and we’ll reward you for privatizing it.’” [Emphasis added].
However, the Australian experience—where public electricity asset privatization has been a hotly controversial topic with a significant electoral impact—indicates that the question of automatic maintenance comes with economic incentives to the private sector that may not be visible through the fog of “it will cost the taxpayer nothing” boosterism:
As anyone who has ever sold a house knows, there are transaction costs in selling assets. Stockbrokers, valuers, bankers and lawyers all stand to do well out of privatization, without providing a cent of public value. Once these companies are privatized, managerial salaries rise sharply. In order to get a high price for the sale, the government may grant special privileges to the new owners, such as a permissive pricing regime. Most notably, prices of the services provided by these utilities will rise because the private owners will seek a higher return on investment than the previous public owners — a significant impost in these capital-intensive industries.
Senate Committee Recommendations and Comments
Having closely examined the issue of asset-recycling, The Australian Senate committee summarized its concerns and recommendations as follows:
The committee is concerned about the possibility that incentives under the Asset Recycling Initiative may encourage privatization without effective public consultation and communication strategies, and without appropriate consideration or analysis of future costs. The committee strongly encourages governments to conduct proper, rigorous analysis of the all current and future costs associated with privatization projects. In addition, thorough and appropriate public consultation should be always be undertaken, including consultation around transactions costs and the cost of creating an appropriate regulatory environment and compliance with those arrangements.
So its three principal recommendations are:
Recommendation 1: “The committee recommends that proper and rigorous analysis of total costs associated with privatization projects be conducted when privatization is proposed by governments at any level. In addition, appropriate public consultation should be undertaken,including consultation around transactions costs and the cost of creating an appropriate regulatory environment and compliance with those arrangements.
Committee Comment on Recommendation 1: “The committee considers that appropriate safeguards and regulatory arrangements should be put in place for all asset privatization, well in advance of the sale process commencing. The committee is concerned about the evidence it has received that the Asset Recycling Initiative may encourage states and territories to take shortcuts on safeguards and regulatory arrangements in order to meet the timeframes established by the Asset Recycling Initiative.”
Recommendation 2: “The committee recommends that prior to privatization of assets, governments at all levels introduce appropriate regulatory arrangements and safeguards, including safeguards against anti-competitive behavior to ensure that future costs are known and established.”
Committee Comment on Recommendation 2, and specifically on the Australian Asset Recycling Initiative: “The committee notes that in its inquiry into Pubic Infrastructure, the Productivity Commission considered the Asset Recycling Initiative and concluded that on balance: the aims of the Asset Recycling Initiative are laudable, but the risks are significant; decisions to privatize a state owned asset and procure new infrastructure should be separate; there is a distinct risk that states and territories will take shortcuts to avoid thorough and transparent analysis; and governments should avoid creating expectations in the community that privatization is only acceptable when the proceeds are used for procuring new infrastructure, constraining future governments from optimizing their balance sheets in the public interest.”
The committee was also concerned that the Asset Recycling Initiative would lead to problems including:
• Potentially distorting decisions by states and territories on infrastructure investment, leading to projects being pursued that would not stand on their own merits;
• Potentially distorting decisions leading to privatization that would not go ahead if they were considered on a case-by-case basis;
• The possibility that privatization and infrastructure projects will be rushed without:
- Appropriate public consultation and debate leading to poor outcomes; and
- Appropriate safeguards, corporate structures and regulatory arrangements in place; and
- The potential to create inequitable outcomes between states and territories as the Initiative may unfairly benefit those jurisdictions which currently have assets for sale or prepared for sale, rather than those jurisdictions where the infrastructure is most needed.
Recommendation 3: “The committee recommends that the link between privatization of assets and infrastructure funding under the Asset Recycling Initiative should be removed. This would provide an environment where:
• States and territories are encouraged to consider the merits of privatization on a case by case basis;
• Decisions to fund infrastructure projects are based on the community and economic need; and
• The Commonwealth contributes funding based on the merits of proposed infrastructure projects while considering the equitable distribution of funds across states and territories.
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. . . Such comments are similar to current American concerns about what the Trump infrastructure plan is doing to slash public transport funding.
I must be losing my mind. Every time the word Trump goes by, Turnip is what it reads.
Hey, watch it! You just insulted turnips.
“States and territories are encouraged to consider the merits of privatization on a case by case basis.”
And guess what they would (and do) decide on that case by case basis…
Thank you, Yves.
The looting / privatisation is mentioned by some commentators / readers in reaction to https://www.theguardian.com/business/2017/jun/07/australia-sets-new-world-record-for-recession-free-economy. Hopefully, readers familiar with the “lucky country” will pipe up.
It’s not just Australia and the US. Across the Indian Ocean from Perth, Mauritius has experienced the same. The public does get something, but the cost is much more than it should be. Much of the takings leak overseas, for example the apartment owned by a former minister of finance overlooking the Tower of London and Tower Bridge.Rabid Gandhi recently addressed the issue with regard to Argentina.
A Nigerian friend and former colleague of dad’s, from their two decades plus in Riyadh, observed that Saudis get something even if the family which owns the kingdom gets a lot, but Nigerians get nothing and the kleptocrats in charge get the lot. A couple of miles from where I am typing, a former governor of the central bank of Nigeria owns an apartment on Harley Street. One of his sons, who studied at nearby University College, is living it up at Fort Leavenworth.
Thanks Colonel. The absurdity of the “new world record” is well covered in van Onselen’s piece
Debunking Australia’s fake growth record which I believe was linked here recently.
John Quiggin also has a good piece on the asset recycling failures in the Grauniad today.
Asset recycling may look new and exciting. But it’s the last gasp of a failed model.
The core problem with the “recycling” idea is that income-generating assets were sold to finance new investments that did not generate income. Rather like selling your house to buy an expensive car, this is a trick that can only be done once, and leaves governments with increased net debt.
This end of asset recycling has been part of a broader reaction against privatisation and PPPs, a reaction which has swept a number of state governments from office. After decades of trying to reduce public debt through these measures, Australian governments have finally realised that the best way to get a job done is to do it yourself.
The remarkable thing is that Oz governments seem to have learned some lessons. The summary:
After many attempts to develop a workable light bulb, Thomas Edison is supposed to have said, “I haven’t failed. I’ve just found 10,000 things that won’t work”. Australian governments had a similar experience in trying to finance public infrastructure without going into debt.
Edison found a light bulb in the end. Australia may not have found its light bulb, but it has provided the world with a lot of experience on what doesn’t work.
For a novice like me, the comment on Edison learning so many ways that do not work, reminds me that our US government has been trying to suppress lessons on what hasn’t worked, and is now trying to stop observation and meaningful investigation (private or public) on negative consequences.
It also makes me think of how the Soviet Union collapsed and had a lot of advisors on how to piratize (oops, privatize) their economy with what, to me, looked like handing state assets to a new class of oligarchs for a song. Should look further into Picketty and some particular critics or commenters to see comparisons of the differential accumulations of wealth and power in the old Soviet Union member states and compare it to the unbelievably strong push for piratization/privitization the US seems to be falling victim to?
As if real estate interests don’t have a big enough seat at the table when it comes to state and local government, now this? Trump is an idiot, but I’m sure he’s thinking how this program can grease his real estate interests as well as his old cronies.
A curious (but not catastrophic) anomaly: many NC posts appear in my RSS feed. Some (including this one) do not.
Is this by design, I wonder, or just a glitch?
A glitch. I’ll resync the feed and I hope that fixes it. Thanks for letting me know.
The Australian sell off of power generation over twenty years had led to power prices for industry now being six times that of prices in the US so these input prices are now affecting international competitiveness by business who previously cheered on these asset recycling schemes. There will be an end as State Governments are now in the process of building their own generation capacity and will cut loose the private generators who are now squawking foul. Funny how it was fine for households to pay the highest electricity prices in the developed world, but when the worm turns and it affect corporates they scream their guts out!
The other fiasco is LNG where it is cheaper for gas fired generators to buy Australian LNG from Japan who purchased it from Australia in the first place. Talk about Nigeria – huh! Australian natural resources have been pillaged with the aid of the Australian Federal Government financial assistance to miners who plot against the State Governments extracting royalties which belong to the States anyway so this hurdy gurdy in Australia has to be seen to be believed.
Australia is now moving their health system towards the American model which is the least efficient in the world – go figure. Both countries are controlled by morons!
Australia is now moving their health system towards the American model which is the least efficient in the world – go figure. Both countries are controlled by morons!
Couldn’t dispute that last bit, but what do you mean by moving towards the American model?
There’s been no substantive changes here in recent times that I’m aware of.
A “moron” is a stupid person, they are not morons. They serve their masters and their self-interest, even if they come cheap. It’s the public that are “morons”, they elect the same con-artist over and over again. In the self-delusion that the con-artists are acting for the common good. Einstein is claimed to have an definition on that. Ignorance is not an excuse, even if it’s an explanation.
In the 30s the public was significantly less educated than today, but they were much more able to grasp complex political messages on economy and so on than people seems to be today. Have the public become more stupid with more education?
When democracy and universal suffrage was touted some 100 years ago the big fear among the elites was that people would vote in their own self-interest, because the elite were strikingly aware of how unfair the society was organized. That “problem” is now solved with submissive media. And education?
At the risk of displaying my lack of knowledge of Australia, how can retail electric prices of ~6X U. S. averages be sustained? That would be c. USD $0.60 per kilowatt hour. It would drive mass adoption of home solar panels in our desert southwest, and your solar assets are greater still. There can’t be a mine in the western states without its own solar panel field at those rates. They’d break even in a few months.
How have electricity prices remained so high? Do your governments organize power production so as to completely shut out small generation projects?
I doubt that 6x is accurate overall. Retail electricity prices for home use in Oz are complicated, but to simplify, if you are on a “single rate” you’ll be paying about USD $0.60 per day service charge, and about USD $0.20 per kWh for usage.
If you are on a “time of use rate” you’ll be paying up to USD $0.75 per day service charge, and up to USD $0.45 per kWh for “peak” usage (2pm to 8pm weekdays), but as low as USD $0.09 per kWh for “off-peak” usage.
Prices vary according to location, supplier and type of contract you choose, above is Sydney. If you use a lot in peak time, you’re better off on a single rate. If you can control your usage timing, you can do better on a time of use rate. You can choose a “supplier” from dozens, because these are essentially parasitic intermediaries between you and the real supplier.
Solar panel usage is widespread in sunnier states. Some lucky early adopters were paid handsomely for exported power via government subsidies and had negative bills, but for most solar is a way to reduce but not eliminate bills. Service charges have risen to ensure suppliers are still profitable even though customers may be using less power.
The richer you are, the less you pay. Rich developers all have the same dream and they manifest that dream by saying the words “Economic Development.” That said, all things become possible. Suddenly the land they want is free, permit fees are waived, building cost are subsidized by the taxpayer and operational cost are shared with the pubic. This is the pro stadium model and if it’s good enough for pro sports, it’s good enough every pothole in the country. The single essential ingredient to make this model work is desperation and fortunately we are not lacking in this regard. Drooling politicians will sell out their constituents in a NY minute for the promise of redevelopment no matter how many studies are presented to prove otherwise because “this project is different.” It’s a win/win.
It’s how Trump came to a desperate Atlantic City and left behind a trail of bankrupt project that made him personally very rich. For him and his developer brethren, it’s a proven model of success. No one can say no to these dreamers. In American right now, the only way to climb out of the cutter is to get into bed with Trump and his pals.
I wasnt familiar with the Australian experience. Excellent piece, A lot to think about here.
We would also do well to recall the looting of Russian/Ukranian/Byellorusan public assets following the breakup of the Soviet union, if we are looking for model programs.
And of course, the outcome of the US invasion of Iraq, about which one author wryly noted that Iraq was not so much ‘liberated’ as forcibly liberalized.
US, Australia could instead simply direct their central banks to purchase state and local infrasrtucture bonds. It makes public finance sense to match benefits over time, as happens with long lived assets like a port or a bridge, so that future economies bear some if the cosrs, hence debt us used, instead of taxes being used upfront, for the full building cost.
So the question is, how to get self interested people to take responsibility over time for the asset’s operations and good maintenance, ensure fair distribution of costs over time, and keep the price of borrowing as low as possible. Traditional state/local bonds and public ownership and accountability have worked well. So you want more infrastructure? Have the central bank buy the bonds directly at a low price of credit, though you would need to make it discretionary so only good bonds get the opportunity to be purchased, you cap this direct buying amount, and apply a formula distribution rule of law so every State gets some opportunity to use the facility (if they don’t use it, the authorities can be used in other places).
I would prefer this type quantitative easing over the purchase of private company bonds, that may help that company and those who trade in its bonds, but not have anything directly obvious and meaningful for public purpose.
I wonder if Trump’s business interests and his cronies will become very rich from this plan. That’s the only reason why I can think of for this whole madness.
Privatization is almost a scam that will rip of taxpayers, employees working for the once public firms, and the general public that uses the services (hence ripped off twice).
It is literally a transfer of wealth from the collective to privateers like Trump himself or the Carl Ichan type people in this world. Public assets are gradually being stripped so that we live in a society without access to basic services.
At this point, I’m in favor of looking at nationalization of formerly privatized services where the private sector has failed to deliver and of nationalizing public goods.
I think it’s pretty apparent that our entire government apparatus has been captured by interests looking to see out the taxpayers to make a buck (or a billion). Republicans argue that Government controlled anything is incorrect and everything should be privatized for profit. The result is that everything will be run by the wealthy for those who can pay for it. Nothing goes unearned – whether it be roads or schools. You get what you can pay for.
In other words, what they want is a banana republic and both parties ran banana republic candidates. The voting public chose the one that resembles them the most and now he’s going to deliver on the promise to the corporate rent seekers that have been slowly bleeding the country dry for decades.
This is an opportunity for connected carpet baggers from anywhere in the world to come into the US and drain out local and federal tax dollars that they’d be in little danger of having to pay themselves. ie., what neoliberals do in the developing world already. If US Fedgov pays for all the infrastructure itself, the most they’d be able to get (and all we’d have to pay out) is whatever Fedgov deigns to pay on US national debt.
In part, this is a symptom of a capitalism that is all out of legitimate business ideas, that has gone full blown pan handler, more and more dependent on the state for the fiction of its continuing relevancy all the time.
In other words, capitalist boosters (libertarians, etc) should be embarrassed to even utter the word “privatization” but the obfuscatory fog is so thick on the ground that they’re totally not.
actual libertarians are few and far between. I mean are libertarian orgs championing this? Cato? Reason magazine? Etc.. There are way more conservatives in this country than libertarians. Some conservatives call themselves libertarians, but many of those are really pure opportunists, so no they don’t care if it violates libertarian doctrine in every way.
!! I have a hard time believing this is even a serious question, but yes of course they are.
http://www.google.com/search?q=cato+privatization
http://www.google.com/search?q=reason+magazine+privatization
It’s in quite a contrast with the Hoover dam model. The Hoover dam was actually build by private companies with Federal government contracts, however at the end it was turned over to the Federal government.
So that model of public-private partnership at one point actually worked (it wasn’t perfect but the reasons for that aren’t relevant to this argument). But to just leave private companies to own things partly (OR FULLY) paid for by taxpayers seems like pure scam.
One particular sentence of the many in this post caught my eye. ‘In order to get a high price for the sale, the government may grant special privileges to the new owners, such as a permissive pricing regime’ . I would add ‘or perhaps tax abatement in perpetuity’ which leads us to why the bridge fell into the river to start with….the lack of tax revenue from tax evaders.!
Yves, brilliant analysis! Yves Smith for President!
To be honest I think she is far more useful running NC. NC is just that awesome.
Yves – good post.
Any government infrastructure plan that focuses on privatization is a bad idea. Investors will just lobby for below market prices for government assets, then cut operating costs from their acquisitions to maximize returns which does not help jobs. A better idea might be to expand the government definition of infrastructure, and allocate money to projects that align corporate interests with job creation.
Manufacturing factories and distribution facilities ( warehouses, storage terminals, pipelines, shipping facilities ) are major investments for companies that contribute significantly to the cost of products sold to consumers. For more sophisticated manufactured products ( cars, airplanes, high-tech ) this cost is comparable and might exceed the cost of labor. The US government could choose to build large multipurpose factories and distribution facilities for lease to anyone at below market rents to manufacture and distribute their goods. Companies could use this cost savings to raise wages, and hire more workers while maintaining the same cost of production ( a condition of the lease ). If leases are offered to all comers then no single company would benefit from an anticompetitive corporate handout, and smaller innovative companies would have a lower ( cost ) barrier to enter these competitive markets. The government could also choose facility locations which benefit communities most in need like Appalachia, Detroit, the Rust Belt, Chicago, ect. Finally, many high tech manufacturing companies are the biggest offenders holding overseas untaxed corporate profits which could be leveraged to demand they sign lease agreements, and help fund facility construction as a condition of partial repatriation. These would be ( below market ) income producing assets, which help support more and higher paying domestic jobs.
Maybe I’m being naive, but it’s just a though.
The commenter ger hits the nail squarely on the head — lack of infrastructure investment can be traced to legalized tax evasion by the wealthy and by large corporations. They benefit from our infrastructure and laws, but refuse to pay for their maintenance. They are not idiots. They are a**holes.
California, the World Leader in Grift, pulled the “privatization” stunt with its public utility infrastructure 20 years ago. It has been a disaster. Back in 2003 I would use the following parable to explain it:
It gets worse:
Thanks for this post Yves. This is the blueprint for how crony capitalism will destroy the United States of America under Donald Gump. The privatization of profit and the socialization of loss, all to be financed by Our Friends the Saudis!
We should get Jim Brulte to do a follow up on the supposed benefits of privatizing our public utilities with his AB 1890 of 1996 (and explain what they learned from what ENRON did with the “opportunities” enabled by such deregulation and privatization). Theory is fine, but someone ought to monitor unintended consequences (like opening the barn door to less ethical or publicly beneficial horse thieves).
Thank you for this deeply informative post. I particularly appreciated that the writers distinguished between transfers of existing publicly owned assets to private parties for private financial gain through their subsequent monopolization of public services and related increases in fees and rates; versus funding upgrades and maintenance of existing publicly owned assets and services through monetarily sovereign federal government spending, as well as funding new infrastructure projects by federal government spending. Seems to be plenty of money available for perpetual wars, bank bailouts and to push up financial asset prices; but not for improved public infrastructure, public education and healthcare.
In terms of building effective political oppo to this latest looting scheme, perhaps the politically effective campaign to kill the so called “trade agreements”, another deliberately obfuscated looting endeavor cloaked in deceptive language, provides some guidance. Key constituencies who would NOT benefit from the large banks’ and private equity efforts to “Privatize” public assets and services, and who can perhaps be counted among political allies of We the People in opposing this Wall Street-engineered “Privatization/Asset Recycling” plan prospectively include corporate consumers of privatized assets and services, large equipment manufacturers, contractors, suppliers of construction materials, trade and labor unions, and perhaps even the Chamber of Commerce itself (I know, dreaming big).
At the very least, formal legislation requiring independent GAO cost-benefit analysis, hurdles and audits, together with very public hearings of any ‘Asset Recycling’/Privatization/’Public-Private Partnership’ deals should be a strict prerequisite.
This looting scheme has worked many times in the past and the present terms of discourse — which force all things to fit the “bed” of a Market — bodes ill for efforts to stop this latest incarnation. TPP had to leap many hurdles the “asset-recycling” grift can sneak around. I fear that once passed into Federal law as a nonsense “concept” by simple majority — execution of this grift will shift to state and local levels where each instantiation of the grift might grow heads like the Hydra.
Great piece.
Also good article at Macrobusiness today on the general issue of Aussie corruption. (I sent as a possible item for links but I’m having computing issues and my mail server is falling foul of some sites including this one).
Both articles resonate with me, having lived in Sydney 2009-2015. When I once complained that a call for proposals was withdrawn after our submission, then re-issued, looking as if it drew on our ideas but pitched at a generalist accountancy/consultancy, Aussie colleagues laughed and said that was par for the course in Aus. My former boss also loved to recount his tale of the Lane-Cove tunnel and the fact that his was one of three groups that showed it would a complete waste of resources and a total disaster whilst the fourth cheerled.
You can guess which group got the contract to do the full cost-benefit analysis. Of course it got into financial trouble soon after opening and even if one leaves aside financial considerations it never achieved the real benefits promised. We all know this sort of thing goes on in the UK and US but in a much smaller country by population there are fewer competing funding sources/sources of expertise with any power, making it that much harder to become an insider.
Outstanding introduction by Yves. The shell/parent company interplay final result is an unfair transfer of public money to private equity’s pockets. Has anyone of you driven on the Riverside Fwy? No one with a sane mind can call this civilization.
The “asset-recycling” described in this post is deeply troubling in so many ways. The word hash “asset-recycling” defames “recycling” while the arguments of the “sustainability” of “asset-recycling” make a mockery of “sustainability”. What next? Will “asset-recycling” be painted “Green”?
Accepting the business/investment notions of public spending for the Common Good muddies the arguments with business/investment arcana while leaving uncontested the dilution — of any notion of the Common Good — with return-on-investment and cost-benefit analysis. A cost-benefit analysis of Common Good as a financial investment forces the subjective values out of the concept.
Selling or leasing our Commons to benefit business interests is such an old ploy, such an old means of looting the public coffers I do not understand how it can dress itself in new clothes, parade in public and fool anyone. Maybe no one is really fooled and the Public be damned — because the Government does not care for the Public and those who own the Government feel comfortably protected — secure in their Homelands.
I fear there will be no stopping this grift which leaves a particularly bitter taste in my mouth.
this is most interesting stuff. and i apologize for this glib comment (up at 5, to the hospital by 8, home and pooped at 2, but before i nap just this) I think that it is offensive to open the floodgates of privatization under false pretexts – but if Trump had the courage of his convictions he would make the case that private companies can do the heavy lifting, with tax write-offs, etc; when they have recouped enough fees and tolls to satisfy themselves – which would have an explicit limit – then the taxpayer can take over. I don’t think this is terribly harmful since its only money. That stupid stuff. As long as the private corporations play fair. (long shot, i agree). But it will produce progress. We just need to insure that the cost of this progress isn’t destroyed by the terminal destruction to the environment. and lesser stuff. Let’s satisfy all sides and form a commission for environmental protections and economic progress and watchdog them 24/7.
I am shocked, SHOCKED that the founder of that fine institution of education Trump University would be associated with such a cynical scam.
Really, did anyone expect anything better from this guy?
I am Australian and living in Australia .
Some privatisations were dumb and others quite smart .
Generally speaking privatising natural monopolies in a way that leaves
them as monopolies is not just dumb it is criminally dumb .
However on occasion natural monopolies are not what they appear to
be . For example our electricity grid ( State of Victoria ) was sold off in
sections and separated from the act of power generation .
So we have competing power generators offering power for the state
wide grid ( or did have until our new stupid Labor government started to
kill coal ) . While the grid has nominally been divided in to sections
grid owners can sell across the whole grid ( compete against each other ) .
An example of stupid privatisation was selling the standards office .
Now a 3 page standard might cost you $300+ .
Brilliant and important article and introduction. Thank you Yves!
This post leads me to consider how I/we might move someday towards a “stewardship economy” as opposed to an ownership economy. If/when the current system falls apart, we will have the opportunity to consider different models.
I start thinking in this direction now, as impractical as it may seem, because the biggest barrier to my doing anything differently is being tied to my current thought patterns and beliefs about how things could/should be done. I have to change my personal thinking first–expand my vision of what things could be like. Regarding my current homeplace–what would it look like if I had some form of “stewardship agreement” for some specific time or conditions? What would be a better way to organize my responsibilities to “my” space? How could this be considered for larger commons / public infrastructure–as an alternative to the disasters described in this post, and the disasters we already have pre-privatization?
bespoke is defined in Mirriam-Webster, Oxford, and several other dictionaries as: made to fit, tailor-made, custom ordered.
So the deals are custome made.
Using 50 dollar words when 25 cent words would communicate best?
That’s not-woke.
Which isn’t in the dictionary, but I think you get the meaning.