Friday, 17 March 2017

Tas Water's problems

One doesn’t need Nostradamus’ foresight to realise that borrowing to pay dividends is unsustainable. Especially if the business urgently needs to spend more on capital upgrades.

Tas Water’s 2016 financial statements are an eye opener. An extra $65 million was borrowed during the year, $20 million of which went to councils as dividends in addition to other distributions of $10 million. The rest was needed to fund extra capital spending which coincided with a fall in net operating cash. Another year or two like that and the undertakers would be placed on standby. Treasurer Gutwein’s concerns about Tas Water aren’t without foundation.

Government businesses like Tas Water don’t pay tax to the ATO. Instead they pay income tax equivalents, in this case, to shareholder councils. It’s a requirement of national competition policy that government businesses don’t have advantages over private businesses, and hence they have to make income tax equivalent payments to owners. Such payments form part of the aforementioned ‘other distributions’ of $10 million.

Treasurer Gutwein is proposing a $1.5 billion investment splurge if he manages to wrest control of Tas Water from its current owners. Will that add $1.5 billion of value to Tas Water? Of course it won’t and who cares if it doesn’t? The punters out there in water and sewerage land just want decent services at a reasonable price. They’re not concerned about the value of the assets in the books of TasWater. They’re happy for TasWater to cover costs and keep the assets in a condition to provide the necessary services now and in the future.  

If Tas Water’s accountants need to revalue its assets on the basis of what they may earn in the future, much of the capital spending will need to be written off immediately, much like Tas Rail’s spending on fixing the rail network, so that Tas Water will or should be making losses.

If there aren’t any profits there aren’t any income tax equivalent payments or dividends that need to be paid to owners. Or at least there shouldn’t be.

But accountants have funny ways of doing things. Writing off capital spending because it won’t increase future income only affects the broader measure of what accountants call comprehensive income rather than operating profit used to calculate tax and dividends This perversely has the effect of reducing  future depreciation and increasing future operating profits and hence dividends. Wouldn’t it be sensible if a capital improvement doesn’t increase future income it be treated as if it was a repair, in which case while Tas Water is fixing the system and making losses, owners aren’t receiving distributions. Isn’t that what businesses do?

Councils however have pencilled in entitlements to returns on their respective investments in Tas Water based on the value of assets transferred. They all plan to cross subsidise their operations with the generosity of water and sewerage customers. This is a good deal for ratepayers who aren’t Tas Water customers.

When assets were transferred a few years ago some councils’ assets were in schmick condition but others offloaded a crappy collection. We therefore have a freeloader effect where a few councils are having their sins and omissions rectified by the rest of us. C’est la vie. But councils who handed over assets in good nick feel justified in demanding a dividend, a return for past prudent practices. They don’t want to leave funds behind to fix up say Launceston’s problems. Someone else should do that. That’s our buck passing federal system at work.

Tas Water’s extra spending on capital improvements won’t be reflected by commensurate increases in the value of Tas Water’s assets.  This is even more likely if Mr Gutwein keeps his promise to increase Tas Water’s charges more slowly than those currently in the pipeline. If borrowings increase arguably its shares will lose value and so will councils lose their entitlement to returns. Shares should be valued on earnings not on what the transfer value might have been a few years ago.

Therefore Treasurer Gutwein’s offer of $30 million to councils in 2018 and $20 million per year for the next 7 years thereafter is a pretty good deal. A dollar amount is far preferable to an amount determined by a profit figure derived by the esoteric practices of accountants.

Consider this for instance: Tas Water receives grants every year from the government which it holds in an unearned income account. Every year it allocates some to the profit and loss account. In 2016 the amount was $7.4 million. The bottom line increased accordingly. Tax of 30% was then paid to councils followed by the balance paid as dividends. How ridiculous is that? Grants used to fund Tas Water are eventually paid back to councils as tax equivalents and dividends. There’s got to be a better system.

Opposition Leader Green has proposed a variation on the discredited public-private partnership arrangements where investors, in this case superannuation funds, invest own and receive income from certain new assets funded by their investment. But what exactly is the point of guaranteeing an investor a higher rate of return than it would have cost Tas Water or the government to borrow the money and develop the projects themselves? I don’t think his system will be an improvement. Consumers will pay more, unless Mr Green has some other alchemy in mind.

This is where the deficiencies of the ‘let’s corporatise public assets and run things like a business’ approach become apparent. People want services like water and sewerage at cost plus a small buffer to ensure services can be maintained, rather than aiming for a rate of return on assets that are worth whatever you want them to be or whatever a consultant might say.

Treasurer Gutwein goes on a bit too much about Tas Water having a strong balance sheet. If it’s not intended to sell the business it’s irrelevant. The government’s too has a strong balance sheet but it can’t afford to service much debt.

The only issue is how Tas Water’s extra debt is to be serviced. That is where Mr Gutwein has been conspicuously silent. His failure to consult and construct a coherent plan before embarking on a sales campaign means a public policy issue with some merit will probably fall victim to the usual adversarial tribalism and myopic vision of the body politic.


  1. Hi John and thank you for a very informative article.
    Launceston’s sewerage system is an issue of interest to me. I don’t believe that TasWater have a social licence for their plans to fix the problems. My objections and those of many others fall on deaf ears and therefore I am cautiously in favour of the Government takeover of TasWater. Presently the accountability of TasWater to the people is effectively shielded behind the veil of 29 owners and hundreds of hangers-on. TasWater under government control is much more accountable to the people through the ballet box.
    Ian Kidd

  2. Ian, No Government is accountable regardless of the ballot box. All our GBEs have been completely trashed by successive Governments but does the Government care? Not a zot! Making Taswater another State Government GBE wont fix a thing nor improve accountability. Politics is always politics!