Who will audit the auditors?

The AFR had a very small article the other day written by Tony Shepherd that I wouldn’t have paid much attention to except that he is now going to run the Commission of Audit. One can only at this stage hope that the Commission does its job and raises the alarm about how our productivity is being wasted by governments in ways that lower our living standards and reduce employment. It is my strong belief after many years at the Chamber of Commerce and watching the ways of politicians, who respond to political rewards and not to economic, that governments should never allow themselves to think that anything they propose to produce will ever make the economy stronger, raise living standards or add to the number of jobs.

There are now a series of traditional areas for governments. National defence and roads which no one else will do. Schools, public transport and hospitals which may not be done to an optimal extent so we often find the private operators supplemented by the public. And there are a few natural monopolies that may require a more than usually heavy handed form of government regulation or even involvement. But after that, the governments should not involve themselves in any form of production whatsoever.

We have a market economy, and the plain fact is that most forms of production do not take place in the kinds of places politicians want to show up at to cut the ribbon when they are finally opened for business. You know, things like steel mills, mines, concrete producers, car washes, supermarkets, paint factories, paper clip and toothpick manufacturers. You know, the tens of thousands of small and detailed forms of production that are necessary to our wellbeing that spring to life as if from nowhere because there are profits to be made and which hire most of the people in this country who have jobs.

My article comments on a number of statements in Tony Shepherd’s own article which raise real concerns in my mind. Here are those statements:

“Governments and business and community leaders are increasingly united in recognising the merits of selling publicly owned assets to unlock funding for badly needed new infrastructure.”

“Contributing to a rethinking of privatisation is the opportunity to draw on superannuation funds as an alternative source of infrastructure investment.”

“The private sector can shoulder the lion’s share but governments will continue to have a substantial funding role when it comes to non-commercial or social projects.”

“We should be seeing a virtuous circle where governments funds get good projects started and, once the asset is mature, it is then sold.”

“Governments should be encouraging more private investment in green field projects by properly dealing with the problem of early market risk. There are ways to use the government balance sheet to do this.”

If these statements don’t raise dark thoughts in your own mind you should read my article. In fact, you should read my article anyway because there is likely to be a lot more of this up for discussion by a lot more people than myself in the years ahead.

A few scattered thoughts and questions

On Wednesday this week there was a small article on the editorial page of the AFR under the heading, “Sell Assets and Spend up Big”.

I wouldn’t normally have paid much attention to it except that it’s by Tony Shepherd who is about to head up the Commission of Audit. The headline is not a bad summary of the contents so let me do a bit of a review.

Governments and business and community leaders are increasingly united in recognising the merits of selling publicly owned assets to unlock funding for badly needed new infrastructure.

Here’s the problem which I will start with a question. How does the sale of assets translate into an addition to our resource base to allow us to undertake these projects? Looking separately at the financial side and the real resources side allows plenty of room for conceptual misjudgment. Sell up Medibank and Medibank is still there and operating. What resources have now been freed up? The Government now has more money to spend but has this sale increased the real level of national savings? I don’t see it but am willing to be convinced. But what must be done is to demonstrate that wherever these resources come from they are not crowding out other even more urgently needed and value adding investments. Selling assets won’t ensure that in any way.

Contributing to a rethinking of privatisation is the opportunity to draw on superannuation funds as an alternative source of infrastructure investment.

Those superannuation funds are not presently idle. They are not just sitting around doing nothing. They are invested somewhere, in whatever places the various trustees see as the place where the highest returns can be found. What will be different now? How will these funds become available to governments? What will happen to the projects that are currently being funded by superannuation? There is nothing new here, and if the government is in any way intending to divert these funds using some kind of guarantee or what will appear to provide a more certain monetary return, we are going to see our resources being used less efficiently and our growth rates diminish. Infrastructure is not a magic word that guarantees the money will provide a positive return or the resources used productively. See the NBN for a reality check.

The private sector can shoulder the lion’s share but governments will continue to have a substantial funding role when it comes to non-commercial or social projects.

There’s no doubt about that. No business will go anywhere near this kind of thing. The one certain province for governments is to invest in loss making projects. They do it all the time whether they intend it or not. But if it is loss making then it is slowing the economy and lowering our living standards. There may be equity and other considerations but do not confuse any of these with economic growth. This is four percent of GDP we are talking about, $760 billion on their own reckoning. Bad news to start wasting so much on government projects with no positive return.

We should be seeing a virtuous circle where governments funds get good projects started and, once the asset is mature, it is then sold.

Whatever this is, virtuous is not the word I would use. Governments have NO ability at picking value adding projects, none whatsoever. Before you start on something new, give us the list of previous projects, over the past fifty years let us say, where government money has built some kind of value adding profitable investment. There is no history this side of the Snowy River which may well have been done by the private sector had it been given the opportunity. Governments should never be allowed to choose projects and where they do they should start by admitting that the project will never be profitable but is being done for some other reason. Governments should stick to national defence and road building. Maybe schools and hospitals, maybe. But for the rest, they should leave alone. They have no history of getting it right and there is no reason to think this will change and every reason to think they will get it wrong.

Governments should be encouraging more private investment in green field projects by properly dealing with the problem of early market risk. There are ways to use the government balance sheet to do this.

Danger, danger, danger! The way to deal with early market risk is to leave it to the market. It is the only way. Every business would love to have its risks covered by some kind of government bail-out guarantee. That is the certain way to end up with sub-optimal projects, misdirected investment, slower growth and lower living standards.

But in the end, this is only one man’s view although it is the particular man who will be chairing the Commission of Audit. Hopefully by the time he has come to the end of this process and released his report he will see things in a completely different way.