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sydney alternative media - non-profit community independent trustworthy
Sunday, 21 September 2008
Ex treasurer's '$500M risk' to AAA rating for NSW is stupid say Walkers
Mood:  irritated
Topic: nsw govt

Bob and Betty Con Walker, public finance champions have revealed the truth about the bogus interest claims of ex treasurer Michael Costa. All the tub thumping, posturing, positioning and stampeding by Costa has turned out to be economic rubbish according to the Walkers.

Here was the claim paraded in all the 'serious' press courtesy of loud mouth Costa:

Quoting AAP here 5 Sept 08

"The loss of the AAA credit rating would add $500 million to NSW's interest costs over the next few years, he warned, and called for a "push out" in major projects to prevent the need for savage cuts to health and education budgets." at LIVENEWS.com.au > National > Rees rules out returning Costa to cabinet

5 Sept 08 Business Spectator - NSW credit rating future hangs in the balance

On NSW Stateline last Friday 19 Sept 08 had the reality - a AAA rating which is very atypical for a sub national government to a AA+ rating would amount in NSW case with our low debt levels to a mere $14M increased interest payments per year.

To put that in context that is 1/10 of the money thrown at the World Youth Day corporate welfare for the Catholic Church earlier this year.

Here is the referencing:

19/09/2008 Saving NSW  Is it true the AAA rating is endangered?

Over the last two weeks, Premier Rees has been warning of the consequences of that in these terms: a massive cost in interest payments on borrowings of $500 million extra a year.

DAILY TELEGRAPH EXCERPT (voiceover); The main priority was to avoid losing NSW's triple A credit rating, which would mean an interest payment blowout of $500 million a year, Mr Rees said.

QUENTIN DEMPSTER: Are you saying that that figure is inaccurate?

BOB WALKER, SYDNEY UNIVERSITY: That figure is wrong and I think it's unfortunate that Mr Rees was advised in that manner. It's even more unfortunate that he was - repeated it three days later. The NSW Treasury has got a lot to answer for for not intervening and correcting him and giving him the proper advice. I think they've left him exposed in making somewhat exaggerated statements. Now he's the new boy on the block. He needs time to get on top of those facts. But it's the responsibility of the public service to protect their minister, not leave him exposed.

QUENTIN DEMPSTER: Professor Bob Walker is Professor of Accounting at Sydney University and a former chairman of the council on the cost of government, appointed by the Carr-Egan Government. What would it cost the state if the credit rating was downgraded?

BOB WALKER: The standard reference to this is a publication of NSW Treasury by former assistant secretary Don Nicholls who estimated that the cost of a downgrade from triple A to double A plus would be 20 basis points - that's 20 per cent of one per cent. Now, the interest rates currently being paid by the state are only six per cent, roughly. So if we increased that modestly to 6.1, it would have a very minor impact on the state budget. In fact, not all the debt in the state would rollover at once; about $7 billion might rollover in the next year or so. That would increase the interest cost to the state of a modest $14 million, not $500 million, as has been popularly reported.

QUENTIN DEMPSTER: Fearing the public was being misled by the Costa analysis and rhetoric about the state's possible loss of the triple A, Professor Walker's wife Betty Con-Walker, an economist and former State Treasury official, has extracted the budget figures on net debt of the state.

At June 2008, the net debt was $22 billion, or 6.2 per cent of gross state product.

With infrastructure borrowings, including the north west metro, net debt was projected to rise to $41.76 billion, or 9.1 per cent of gross state product, by 2012.

BETTY CON-WALKER, FORMER TREASURY OFFICIAL: And remember, it compares with international developed countries at more than 40 per cent. Some of them are as high as 80 per cent of their gross state product. It's going to rise to, according to the budget papers, to $41.8 billion over the next three years. Now, that will still only be nine per cent, 9.1 per cent of the gross state product. Still a very modest indebtedness ratio for the state. And these figures have been there and available to the credit rating agencies.

QUENTIN DEMPSTER: We've got a cash flow problem with declining property tax revenues and a blow out in the health budget.

BETTY CON-WALKER: Well we have Mr Costa's word for that because he's claiming that on the basis of two months figures - that's July and August - figures that have not been published, not available to anyone to analyse, and he's projecting those two months figures to the whole year, and we're still talking about less than $200 million in a budget of $48 billion.

QUENTIN DEMPSTER: The Walkers believe State Treasury has a responsibility to the public to publish accurate figures about the state's fiscal position and a realistic assessment of risk to the triple A. They say the Treasury website, usually giving monthly status reports, has not been updated since May.

Under the Iemma Government, the north west metro became a showpiece of propaganda designed to show everyone the Government's new found commitment to borrow money for much-needed public transport. At his exit new conference, Michael Costa confirmed there'd been an almighty row in Cabinet over the north west metro; he'd been rolled.

MICHAEL COSTA: We've got to push out our capital program and it's no secret that I'm not a fan of the north west railway.

QUENTIN DEMPSTER: So we have to wait to see if the north west metro survives the mini-Budget process. There's no doubt Michael Costa has softened up the public for its axing or radical modification.

Bob and Betty Walker believe that while some reprioritising of capital works projects may be necessary along with some economic stimulus, the state's triple A credit rating is not at risk.

You, I take it, would be surprised if the state does lose its triple A credit rating?

BOB WALKER: I'd be rather shocked because there doesn't seem to be any justification for it and nor have the credit rating agencies indicated that is even a likelihood.

QUENTIN DEMPSTER: So, what do you think's at play here?

BOB WALKER: Oh, it's a common practise when there's a change of government, change of minister for some bureaucrats to wheel up their pet projects and their pet scare stories. I mean, a case in point is this talk about a decline in state revenues. The fact is the Government publishes monthly figures about its revenues, but for some reason, nothing's been published since May.


Back on 24 June 2008 we notice this Citizen's right of reply to Michael Costa then Treasurer of NSW who has the smell of dead cat about him now in the politics of NSW, via largish PDF file off the parliamentary website (at least with Explorer brower if not Firefox):

Citizen's Right of Reply (Prof Bob Walker and Ms Betty Con Walker ...

Appendix 1

Response by Professor Bob Walker and Ms Betty Con Walker, agreed to by

Professor Bob Walker and Ms Betty Con Walker and the Committee, according to standing order 203(4)(b)

We seek a Citizen’s Right of Reply regarding comments made by the Hon Michael Costa MLC in the

Legislative Council on 6 March 2008 regarding the proposed privatisation of the State's electricity industry and issues relating to public sector financial management.

We believe that Mr Costa’s statements under privilege are wrong and that they have adversely affected our reputation; and have the potential to injure us in our occupation and/or trade (Bob Walker as a Professor of Accounting with expertise in government finances; Betty Con Walker as an economist with experience in both the public and private sectors).

Mr. Costa was asked a question by Dr John Kaye on the basis of the contents of our jointly authored book, Privatisation: Sell off or sell out? released with a New Introduction that morning at Parliament House.

Dr Kaye specifically referred to two pieces of information contained in the New Introduction, namely:

the more than 25 per cent rate of return on equity of the six electricity agencies being considered for privatisation, and the 93 per cent of the electricity retail market served by the three Government agencies with 7 per cent being served by privately owned retailers.

Dr Kaye asked Mr Costa why the Government’s submission to the Unsworth Inquiry referred to a much lower rate of return of 5 per cent and a much higher proportion of 20 per cent of electricity customers as being served by privately owned retailers.

The rate of return on equity of 25.2 per cent rate, reported in the New Introduction, was calculated on the basis of detailed analysis of the audited financial statements of the six agencies for 2006-07. Data regarding the market share of state-owned retailers (Energy Australia: 44.1%, Integral Energy: 25.0%, and Country Energy: 23.8%) and of privately owned retailers (7%) was sourced from the Standard & Poor’s, Industry Report Card: After Weathering A Stormy Year, Will Valuations Hold Up For  Australian Government-Owned Energy Utilities Facing Privatization?, 12 February 2008.

Mr Costa did not answer Dr Kaye’s questions. Instead he attacked the content of our book, and did so by referring to one of the authors – Bob Walker. Since the book is a joint publication, we believe that any attack on its content is an attack on both authors.

In particular, Mr Costa accused Bob Walker of being wrong on four separate times without providing a single example. He stated variously:

Bob Walker is wrong.

Bob Walker has been wrong on a number of issues.

Bob Walker is consistently wrong.

Bob Walker gets these analyses wrong because he assumes that State governments and some national governments can borrow at some preferential rate.

Mr Costa also stated:

One problem Bob Walker has regarding his economic and financial analysis … is that he thinks that governments can borrow for nothing. That is his fundamental problem.

These statements are false. Neither of us has ever made such claims. A reading of our book or of several submissions prepared to various Parliamentary inquiries will show that to be the case. The differential between the cost of public sector and private sector borrowings and the impact of that differential are reviewed in our book at Ch 5 and elsewhere, while a 22 page technical appendix examines the related concept of the 'cost of capital'.

Mr Costa also asserted a lack of understanding on our part of key financial management issues (which are our areas of expertise) on a further four occasions. The assertions focused on our understanding of credit ratings, and their impact on interest costs.

In response, we note that that the use of credit ratings began in NSW in the 1980s. Before then, governments were able to borrow without the benefit of credit ratings.

Contrary to Mr Costa's assertions that we believe that government borrowings are 'cost free or at a very low cost', our book provides an extended discussion of yield differentials between differently-rated securities. That discussion was based (among other sources) on information presented in the 1994-95 NSW Budget Papers, which reported that during 1993-94 the average yield differential was only 0.25 to 0.35 per cent, and that a downgrading of the NSW credit rating by two notches - from AAA to AA - would have added less than $20 million to the NSW Government interest bill in the first year (at a time when Gross State Debt was reported to be almost $31 billion).

Further, our book acknowledged that governments with high levels of borrowings relative to Gross National Product or Gross State Product, may have to commit a high proportion of their expenditures to interest costs. However it also pointed out that this was not relevant to Australian federal or state governments, because of their relatively low (and historically low) levels of debt.

We also noted that on 11 October 2007, the credit rating agency, Moody’s Investors Service, in confirming its Aaa credit rating of the State and describing the outlook as ‘stable’, reported that the State has the capacity to take on more debt, and that State Owned Corporations, such as water and electricity utilities, are capable of funding new infrastructure investment since their debt is selfsupporting.

In summary, each one of Mr Costa's defamatory statements is contrary to evidence.

Posted by editor at 11:27 AM NZT
Updated: Monday, 22 September 2008 2:38 AM NZT

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