Most of the examples of fiscal austerity leave one puzzled as a result of the sheer myopia that is usually present – the ‘save a penny today to spend a dollar tomorrow’ sort of nonsense that history tells us repeats when governments try to reduce spending in areas that it should not. But sometimes one encounters examples of the government pretending not to be the government and making decisions that are just absurd on any basis. Here is one example that is current in the Australian context but which carries general principles that apply everywhere. I am currently doing some work on the proposal of Airservices Australia (ASA) to outsource the provision of its infrastructure to a private partner in the financial sector under what it calls a ‘Value-for-Money’ partnership. The details of this proposal, inasmuch as there is public information released makes you wonder how far the neoliberal lunacy has gone. It is a case of a government deliberately constraining itself in its responsibilities to provide an essential service – essentially denying its unique capacities – then proposing that it can ‘save taxpayers money’ by delivering profits to a private speculator (in essence) and get a better deal. But the arithmetic that delivers this ‘better deal’ is only possible if the government denies that it is the government and tilts the playing field so far that a terrible deal becomes the preferred one. Lunacy exemplified. And all the parties to this deal produce glossy PowerPoint slide shows, and have meetings and all the rest of the ‘private consultancy capture of government’ hoopla that is played out on a daily basis in these days, pretending that it is just normal business. Yet, anyone who actually understood what was going on would realise that this is a scam of all proportions.
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We learn from their – About us<\/a> – page that:<\/p>\n \nAirservices Australia is a government-owned organisation responsible for safely and efficiently managing air traffic in 11 per cent of the world\u2019s airspace, as well as the provision of aviation rescue fire fighting services at Australia’s busiest airports.\n<\/p><\/blockquote>\n In other words, it is part of the Australian government and accountable to the Australian Parliament through the Minister responsible for the Department of Infrastructure, Transport, Regional Development, Communications and the Arts (DITRDCA).<\/p>\n Its raison d’\u00eatre is to provide safe conditions for air travel within and into and out of Australia and the services at airports related to that mission.<\/p>\n It had previously been part of the Civil Aviation Branch but in July 1995, that organisation was split into Airservices Australia (ASA) and the Civil Aviation Safety Authority (CASA).<\/p>\n Its legal framework is provided by the – Air Services Act 1995<\/a><\/p>\n That is interesting reading because it specifies in detail the functions of ASA, what it can do as a wholly-owned public corporation, and what the Minister in charge of the relevant portfolio can do with respect to ASA.<\/p>\n For example, Section 13 tell us under “Matters to be considered in preparation of corporate plan” that:<\/p>\n \n(e) the need to maintain a reasonable level of reserves, having regard to estimated future infrastructure requirements;<\/p>\n (f) the need to earn a reasonable rate of return on AA\u2019s assets (other than assets wholly or principally used in the provision of search and rescue services);<\/p>\n (g) the expectation of the Commonwealth that AA will pay a reasonable dividend;\n<\/p><\/blockquote>\n Under Section 14, the Federal Minister can essentially tell ASA to vary its corporate plan.<\/p>\n Under Section 16 ‘Ministerial directions to AA’, we read that the Minister can direct the statutory body to do whatever he\/she wants, that ASA “must comply”, and, importantly, that:<\/p>\n \nIf AA satisfies the Minister that AA has suffered financial detriment as a result of complying with a direction given by the Minister under subsection\u00a0(1), AA is entitled to be reimbursed by the Commonwealth the amount that the Minister determines, in writing, to be the amount of that financial detriment. In this subsection, financial detriment includes:<\/p>\n (a)\tincurring costs that are greater than would otherwise have been incurred; and<\/p>\n (b)\tforgoing revenue that would otherwise have been received.\n<\/p><\/blockquote>\n That last point is very relevant to what I am writing today.<\/p>\n Section 46 is also very relevant and relates to the ‘Payments of dividends by AA to the Commonwealth’ – in essence, ASA must remit dividends on its ‘profits’ (keep that word in inverted commas please) to its owners, the federal government.<\/p>\n Section 48 relates to ‘Borrowing by AA from the Commonwealth’:<\/p>\n \nThe Finance Minister may, on behalf of the Commonwealth, out of money appropriated by the Parliament for the purpose, lend money to AA on terms and conditions determined in writing by the Finance Minister.\n<\/p><\/blockquote>\n Which means that ASA essentially has access to the same bond market resources that the Federal government has.<\/p>\n As I will explain below, ASA is currently claiming that its borrowing is limited and its credit rating as a “standalone entity” is BB-, which raises the costs of borrowing in the open financial markets.<\/p>\n But that is a ruse, because the BB- rating is a sort of fiction which treats ASA as equivalent to a private corporation.<\/p>\n In fact, under Section 48, ASA is deemed part of government and enjoys the bond market access that the government itself enjoys as a ‘risk-free’ borrower.<\/p>\n I use the term ‘borrower’ here advisedly because clearly the federal government as the currency-issuer doesn’t actually need to borrow from the private sector in order to spend its own currency.<\/p>\n But it does borrow – as an ideological artefact – and can do so at much lower yields (interest rates) than a corporate borrower must pay exactly because it is the currency-issuer.<\/p>\n So the only way that ASA would have to access the debt markets with a BB- rating is if the federal government refused to guarantee its debt and that would be highly unlikely, given ASA is 100-per cent government owned.<\/p>\n In other words, it is part of government.<\/p>\n The other aspect that is relevant is that (Source<\/a>):<\/p>\n \nAirservices is a government owned statutory authority, fully funded by industry through a five-year pricing agreement.\n<\/p><\/blockquote>\n Air Services Australia (ASA) have proposed a \u2018Value-for-Money\u2019 deal, which involves what they term a \u2018Strategic Partnership\u2019 with a private sector financial corporation.<\/p>\n The Strategic Partnership would see the ASA outsource the provision and maintenance of ARFFS (Australian Rescue Fire Fighting Service) assets in its infrastructure portfolio.<\/p>\n It claims that this proposal will allow it to deliver ‘world-class ARFF services’ within an air travel environment where passenger numbers are forecast to double between 2019 and 2050 on current trends.<\/p>\n ASA estimates that the real economic contribution (that is, adjusted for inflation) of the aviation sector in Australia will grow to $A210 billion by 2025 up from an estimated $A100 billion in 2022.<\/p>\n To maintain its service mission in the face of this estimated expansion, ASA argues it need to significantly increase the ARFFS infrastructure.<\/p>\n It cites an ‘ageing fleet’, ‘thin reserves’, current issues with existing infrastructure and proposed airport upgrades, problems with maintenance facilities, etc as challenges it is facing with respect to the provision of its services.<\/p>\n Importantly, the capacity they deliver is a significant consideration in the way Australian airports are categorised by aviation authorities, which, in turn, impacts on airline costs and willingness to fly in and out of Australian airports.<\/p>\n If an airport receives a category downgrade then it will struggle to maintain connectivity, which in the Australian context is significant – we have a number of regional centres that are far apart from the main urban centres.<\/p>\n Okay, so the issue is that ASA needs to expand and upgrade its existing ARFFS infrastructure assets.<\/p>\n So why propose to outsource this to a private financial corporation rather than simply purchase and maintain the assets themselves as a government body?<\/p>\n ASA operates as a public monopoly in Australia in the provision of airport services.<\/p>\n It is regulated by CASA in terms of safety and its pricing of services to users of airports is regulated by the Australian Competition and Consumer Commission (ACCC).<\/p>\n The ACCC regulations are of relevance here.<\/p>\n The charges ASA can impose on airlines are based on a ‘cost-recovery model’ which has the following characteristics (see – ACCC decision on Airservices Australia\u2019s 2024 price notification<\/a> – for more detail):<\/p>\n 1. Pricing is based on a ‘building block’ model which allows ‘efficient costs’ to be recovered.<\/p>\n 2. This framework calculates the total revenue required to cover the costs of providing air traffic and rescue services while preventing the misuse of monopoly power.<\/p>\n 3. Regulated Asset Base (RAB) – the value of its investment in infrastructure and equipment.<\/p>\n 4. Recovery of day-to-day business expenses (scrutinised by ACCC to ensure no price gouging occurs).<\/p>\n 5. Return on Capital – a reasonable rate of return on its assets, calculated using a Weighted Average Cost of Capital (WACC), which includes both debt and equity. <\/p>\n 6. Depreciation – straight-line depreciation used.<\/p>\n Historical evidence suggests that the ‘reasonable rate of return’ on assets that ASA earned pre-COVID was around 8 per cent.<\/p>\n Recent projections suggest ASA is aiming for a 5 per cent RoA.<\/p>\n But essentially, the reasonableness is determined by the Australian government in terms of what dividend it expects to be paid by ASA.<\/p>\n In effect, the federal government treats the air service charges that ASA levies as a tax revenue source (above the cost of providing the services).<\/p>\n ASA is bound by the – Public Governance, Performance and Accountability Act 2013 (PGPA Act)<\/a> – which aims:<\/p>\n \n… to establish a coherent system of governance and accountability across Commonwealth entities;<\/p>\n … to establish a performance framework across Commonwealth entities …<\/p>\n … to require Commonwealth companies to meet high standards of governance, performance and accountability\n<\/p><\/blockquote>\n Among other things.<\/p>\n The reality is that the Federal Finance Minister must approve any debt issued by ASA and imposes restrictions on its capital expenditure.<\/p>\nThe ASA proposal to outsource its infrastructure provision<\/h2>\n
Government constraints on ASA pricing<\/h2>\n
Government constraints on ASA debt issuance<\/h2>\n