The Queensland Government is under pressure to stabilise the State’s financial position. Adding to the Government’s concerns is the need to pay down Queensland’s debt (projected to reach $100 billion in 2018-2019) in order to achieve its stated goal of restoring the State’s triple-A credit rating which was lost in 2009.

Queensland Commission of Audit Report

The Queensland Commission of Audit, headed by former federal treasurer Peter Costello, released its final report to the Government last week. Only the 26 page executive summary was released to the public. It contains a number of key recommendations, including the privatisation of government owned corporations (GOCs), particularly in the energy and ports sectors. The Government has indicated that it will release the full report (over 1000 pages) in the next couple of months, along with its official response.

The report acknowledges that the Government has taken steps to reduce its ongoing operating expenses. However, it makes clear that no steps have been taken to raise the estimated $25-30 billion required to reduce the State’s debt to more acceptable levels and restore its triple-A credit rating.

This reduction in debt cannot be done by adjustments to the state operating statement…if the government were to achieve a consistent fiscal surplus of 1% of revenue year after year, it would take 50 years to reduce debt by $25 billion.

As a step towards the debt reduction goal, the Commission has strongly recommended the privatisation of the State’s electricity generation, transmission and distribution assets. These assets have a combined book value of around $25 billion.

This recommendation is not new. In 1996 another Queensland Commission of Audit made the same recommendation for privatisation of energy sector GOCs. The Commission has estimated that the loss of value to the Government for not taking up the initial recommendation is in the order of $7.2 billion (in 2011-12).

Privatisation in the National Electricity Market

The Beattie Government privatised Queensland’s electricity retailers in 2007. However, the State’s generation, transmission and distribution assets remain in public hands. This state of play is at odds with a significant portion of assets in the National Electricity Market which are in private ownership, a public-private mix or in the process of being privatised.

South Australia and Victoria fully privatised their electricity assets in the 1990s. New South Wales privatised its retail assets in 2010 and commenced the process for sale of the state’s remaining generation assets in November 2012.

According to the report, by market share Queensland accounts for around 30 per cent of those transmission and distribution assets remaining in public ownership.

Reasons for privatisation–Commission of Audit Report

The Commission provided a number of reasons to support its recommendation to privatise electricity assets:

  • The Government is not well placed to manage the commercial risks involved in, or to fund the significant injections of capital which may be required to support the ongoing viability of, the businesses.
  • The State’s commercial activities in the sector are competing for resources against core services such as health, education and social services.
  • Capital from sale of the State’s assets could be put to better uses – reducing debt and debt servicing costs or new investment to produce returns which are a higher priority for the community. The Government would also be able to access finance for new investment at cheaper rates and pay for more investment from cash flows that are no longer tied up in servicing debt.
  • Many of the original reasons for government provision of electricity and similar services have lost force considering the improvements in contracting out, regulation and the deepening of private sector capital markets. In the past, start-up risks or capital requirements were too large for private enterprise.
  • Whereas private investors assess the risk/reward ratio of an enterprise and trade it for private gain, the public sector investors (taxpayers) are not in a position to make those decisions.
  • Substantial international evidence shows that privatised government enterprises operate more cost effectively when allowed to operate without government interference in the commercial decision-making process.

The Commission concluded that there is no need for governments to own commercially sustainable businesses which have monopoly characteristics, provided there is effective regulatory oversight governing the behaviour of private providers of these services.

Reasons for privatisation–other notable recent reports

In October 2012, the Productivity Commission released a draft report in relation to its review of Electricity Network Regulatory Frameworks. That report also recommended privatisation of the remaining state owned generation, transmission and distribution companies. The Productivity Commission put forward the following propositions as support for this recommendation:

  • The current regulatory regime is incompatible with GOCs which do not have strong cost-minimising or profit motives. The National Electricity Rules therefore lack effective incentives for GOCs to reduce costs and intra-government conflicts. Incentive based regulation would therefore be strengthened, rather than diminished, by privatisation.
  • Investment considerations for GOCs can work against the cost minimising incentives which are the basis of the current regulatory regime. This can lead to ‘gold-plating’ assets, which invariably drives up electricity prices. For example, the weighted average cost of capital (WACC) for GOCs is likely to be lower than the regulated WACC, removing the penalty for GOCs overinvesting in assets and in some cases even making it profitable.
  • In contrast to GOCs, the performance of a private business is typically monitored by multiple parties who provide debt or equity. Subsequently, the cost and availability of capital act as further incentives for performance.
  • Where governments retain ownership, they are held publicly accountable for electricity cost and service level outcomes, which can lead them to take short-term decisions for political purposes.

In October 2012, the Australian Government released the Energy White Paper. The Queensland Commission of Audit echoed the Australian Government’s reasoning in support of privatisation as outlined in the White Paper:

  • Different cultural practices or approaches to managing risk may result in an overemphasis on engineering objectives at the expense of optimal commercial outcomes.
  • Government ownership brings with it the potential for conflicts of interest in operational or investment decisions and in the declaration of dividends.

So what are the prospects for electricity privatisation in Queensland?

On 17 December 2012 the Queensland Government released a directions paper initiating the process to establish a 30 year electricity strategy. The paper outlines the Government’s broad approach to the immediate, medium-term and long-term reform agenda.

  • Immediate (2012-13 to 2013-14): The Government established the Interdepartmental Committee on Electricity Reform to analyse drivers of electricity prices. That committee will receive recommendations on ways to reduce network costs from a newly established panel of electricity experts, the Independent Review Panel on Network Costs. The Government will then develop a 30-year electricity strategy.
  • Medium-term (2014-15 to 2018-19): The Government will continue reforms based on recommendations of the Interdepartmental Committee, Independent Review Panel and the Commission of Audit in step with the 30-year electricity strategy.
  • Long-term (2019-20 to 2041-42): The Government will implement long-term reforms identified in the 30 year electricity strategy and formally review progress to measure success of the reform agenda.

Stakeholders were invited to respond to issues raised in the directions paper by January 2013. The Government will consider those responses along with the findings of the Interdepartmental Committee on Electricity Reform and the Independent Review Panel on Network Costs when it develops a discussion paper to be released in mid-2013. The finalised 30-year electricity strategy will be released by the end of 2013.

The Government has made it clear that the electricity sector will not be privatised without a clear mandate from voters at the 2015 election – this much seems certain. However, members of the Government have shown varying support for the recommendation even beyond 2015.

Premier Campbell Newman has repeatedly said that he would not support the sale of the State’s electricity transmission and distribution assets, stating that he remains to be convinced about privatisation of natural monopolies. Interestingly, from these same public comments, it appears that Premier Newman may be less concerned with privatisation of the generation assets. The release of the Commission of Audit report sparked similar statements from Queensland’s Energy Minister, Mark McArdle.

I believe there is a strong argument to indicate that holding these assets in state control and looking at better and long-term efficiencies is a solution that should not be thrown off the table.

However, Treasurer Tim Nicholls is advocating a full and frank debate on asset sales, including electricity assets. It has been reported that he has said that the next few years will be used to make GOCs ready for sale. Mr Nicholls has also reassured voters that the Government would continue to subsidise regional power suppliers if the assets were sold and that nothing will be sold without a mandate.

Reacting to the Commission of Audit report, Queensland Council of Unions president, John Battam promised to execute the ‘mother of all campaigns’ against the plan to privatise.

The political agenda at present is therefore unclear.

If the Government elects not to sell assets, significant debt reduction could be achieved through other measures recommended by the Commission of Audit, including long-term leases, securitisation of income streams, joint-ventures, partial sales and outsourcing various operations.

With the future of the carbon tax uncertain, Mr Costello has made public statements recommending no sale of power generation assets, particularly coal-fired generators, until 2015 or at least after the federal election.

There’s a window that’s going to open up in two years, three years’ time.