Tony Grant-Taylor and Mark Solomons

May 30, 2009

A MONTH ago Queensland Treasury Corporation chairman Sir Leo Hielscher flew to London where lenders were seeking bids for $A600 million in loans.

The dosh would have been a nice contribution to the poultice of funds Queensland needs to borrow to allow the Bligh Government to keep up its ambitious infrastructure spending plans in the face of a $14 billion revenue shortfall over the next few years.

But, as one wit put it this week: “All Sir Leo came back with was the duty-free scotch”.

Sir Leo has been raising funds for Queensland over 40 years - as the state’s longest serving Under Treasurer and thereafter as chair at the QTC.

The fact that he couldn’t get his mitts on any of that $A600 million is symptomatic of how difficult, and how expensive, the large borrowing program faced by the state will be.

And it highlights why the possible sale of state assets, which in the right circumstances might be a cheaper way to fund some of the State’s Budget “black hole”, has this week hit the headlines.

Before Queensland recently lost its AAA credit rating, as the global credit crisis bit, the state could generally borrow at 25 basis points (one quarter of one per cent) above the rate the Commonwealth Government pays.

Insiders say that with Queensland now rated at AA1, that margin has now blown out to as much as 100 basis points (1 per cent).

Sir Leo told the anecdote about missing out on the pounds sterling at a briefing for senior Queensland Council of Unions executives on May 14, also attended by Premier Anna Bligh and Treasurer Andrew Fraser.

The meeting, requested by the union council, was told of the difficulties the borrowing program faced and also heard “everything was on the table” in the Budget process.

That, of course, pricked up union ears. But QCU general secretary Ron Monaghan said yesterday that “they at no time raised the prospect that, say, rail, power or port assets, could be on the auction block”.

Mr Monaghan also said that despite the assurances by “a senior government source” this week that electricity assets would not be targeted, “the Electrical Trades Union has had no confirmation of that from the Government or the state’s government-owned corporations” such as Energex, Ergon and the state’s various electricity generating operations.

Other assets, from ports to government-owned property - and the state’s timber plantations - remain potential privatisation candidates.

But just as Sir Leo has his work cut out borrowing at decent rates, the private sector is just as cash-strapped, making this a particularly bad time to sell government assets.

A couple of years ago, with the structured finance masters of the universe at Macquarie Group and Babcock & Brown at the heights of their debt-fuelled powers, almost anything could be sold - and at prices that would now make the sellers look very good.

Airports, ports and toll roads all were in high demand from long-term investors keen on their steady but often inflation-proof cash flows.

But in today’s market, after the global credit crunch, things are not that simple.

As economics professor John Quiggin of the University of Queensland says, getting “a proper price for an asset depends on the appetite in the market. And it doesn’t look like a good time at present”.

Quiggin says the sale of the first tranche of Telstra - at $3.30 a share, often described as a knock-down price - “wasn’t too good’ for taxpayers.

The second tranche, sold at the top of the dot.com boom of early 2000s “was a whole lot better … but tranche three wasn’t so good”.

“Victoria (where premier Jeff Kennett sold of the state’s electricity generating industry during the late 1980s and early 1990s) got a reasonably good price.

Julian Vella, national head of infrastructure at KPMG, advised the Victoria government on its sale of electricity and public transport assets. It didn’t happen overnight.

“In Victoria the electricity sales took two or three years and the public transport ones, two years,” says Vella, who notes that monopoly businesses are particularly difficult to unpick.

“That’s where you need really detailed planning and preparation. If the company is operating in a competitive market, it’s (a) much shorter (process).”

Quiggin says that if you’ve run up too much debt on your credit card, selling off your house and having a bundle of cash in the bank might make you feel good.

But that’s cold comfort in the longer term if you end up living under a bridge.

Rather than simply trying to reduce net debt, privatisation, he says, should be based on increasing or at least maintaining “net worth”.

In other words, any asset should only be sold if the price compensates for its longer term contribution - through dividends and tax equivalents and the like.