Clever use of debt enriches debtors

But whether or not there’s a legitimate case to privatise the electricity industry on productivity grounds, if NSW were being run like a prudent business, it would use the strength of its balance sheet to expand its investment in assets which generate higher returns than the interest cost of funds it borrows.

And as would occur in the private sector, the decision about what credit rating to target would emerge from a proper financial analysis taking into account the costs and benefits of securing AAA rather than populist political posturing.

As Professor John Quiggin puts it:

A government will generally improve its credit rating by forgoing investment opportunities, even if the investments have an expected rate of return well above the cost of capital. The same is true for corporations, and it is one reason why very few corporations now seek to maintain a AAA rating - the cost in terms of foregone investments exceeds the benefits.

If NSW took a single downgrade - to AA which Standard and Poor’s describes as “very strong” - differing in strength to AAA “to a very small degree”, it could massively increase its investment - providing it was for prudent, productivity enhancing, growth enhancing investment. Whether or not it retains its electricity assets, I'd like to see it borrow to fully fund its superannuation liabilities, and any other infrastructure assets which proper analysis suggests are cost beneficial.

The returns would build up to billions within just a few years. Indeed Professor Quiggin calculates that rejecting the last proposal to privatise the industry in 1997 has already netted the NSW public sector about $5-10 billion.

That’s not to endorse the loose practices of the past or to oppose privatisation per se. I’ve argued elsewhere for greater independent scrutiny or even control of both the operating and capital aspects of the budget. Governments fear this for the disciplines it would impose. But they would be different and better disciplines than those of the rating agencies. They might encourage higher surpluses now, but if there’s a downturn they would better enable governments to justify and prudently maintain the substantial deficits that are warranted in such circumstances - deficits the rating agencies won’t fancy.

If a substantial part of the Unsworth Committee’s justification for privatising electricity assets is protecting NSW’s AAA credit rating, you’ll know they still don’t “get it”. I'm guessing that if you wait for hours each week in traffic jams or pay mortgages inflated from lack of infrastructure on land on which we could otherwise have built more houses you probably “got it” some time ago.

The Government speaks of the privatisation as building for the future. Perhaps. But AAA or no, I'd rather face the future without a financial structure best suited to a retired couple.