Is asset recycling making a comeback Down Under?

With growing scrutiny of rising debt levels in Australia’s state governments, the stage is set for another round of privatisations.

The possibility of ‘asset recycling 2.0’ has raised its head in Australia over the past two weeks.

The release of New South Wales’ and South Australia’s state budgets in early June revealed large increases in debt to fund capital spending on infrastructure. Both states are still well behind Victoria, which announced projected net debt of A$39.0 billion ($27.2 billion; €24.1 billion) in June that is set to rise to A$55 billion by 2023.

Queensland’s situation is even more striking, with debt levels at A$71.4 billion and set to rise to A$90.7 billion by 2022/23.

State finances had been looking rosy in recent years, thanks to the first round of asset recycling, launched in 2014. This enabled NSW to achieve higher-than-expected sale prices for assets such as NSW Ports and its land registry business.

The scheme’s success has prompted some politicians to suggest it be revived.

NSW transport minister Andrew Constance actually called on prime minister Scott Morrison to revive the programme at a conference in Sydney last month. And the state’s treasurer Dominic Perottet has said NSW could sell its remaining stakes in WestConnex (with the Transurban-led consortium surely in pole position) and Ausgrid (though this would be more politically difficult than fully privatising a toll road).

This will surely be music to the ears of infrastructure investors, who have repeatedly told us they viewed the scheme as a success and one they would like to see replicated – not just in Australia, but in places like the US, where assets such as airports are ripe for privatisation.

There is still one outlier in Australia, though, and that is Queensland. The state started down the privatisation path when asset recycling began, before the Labor Party gained power in 2015 on a ‘no asset sales’ platform and halted the programme in its tracks.

The Labor government, led by Annastacia Palaszczuk, is still in power, and state treasurer Jackie Trad was quoted this week as saying: “Queenslanders have been abundantly clear on this. They do not want their assets sold. Scott Morrison can put as much money on the table as he likes but we are not going to sell our energy assets or our ports.”

Trad has been campaigning for Queensland to receive a greater share of federal funding for critical infrastructure projects, arguing that the state is not receiving a fair slice based on population. But it will be a hard argument to win should Morrison and federal treasurer Josh Frydenberg decide to kick-start a second round of asset recycling. It will certainly be an interesting case of state politics butting up against a well-regarded federal initiative.

“We don’t want to be paying the state governments for what they should already be doing,” Frydenberg has said, arguing that they have access to finance as well. He has pointedly not ruled out asset recycling. In fact, on a recent overseas trip he met with Joe Hockey, Australia’s current ambassador to the US and the federal treasurer who kicked-off asset recycling in the first place. Did they swap notes on what went well last time and how it might be repeated? It’s hard to believe they didn’t.

With Australia’s ongoing infrastructure spending boom beginning to leave its mark on state government finances, the smart money wouldn’t bet against another round of privatisations – as long as the federal government can keep itself together long enough to do it.

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