What the Premier is telling the people of New South Wales
Another perspective on the "transformation of our state"
From
the pen of Financial Review contributing
editor, Christopher
Joye,
@cjoye,
Portfolio Manager & Chief Investment Officer at Coolabah
Capital…...
Live Wire,
25 June 2022:
In the AFR I write that after 12 years of Liberal leadership,
encompassing four premiers and four treasurers, NSW is sadly
degenerating into one of the worst run states in Australia.
Since
Premier Dominic Perrottet was appointed NSW treasurer in January
2017, he has presided over an unprecedented, $106 billion surge in
taxpayer debt. That means Perrottet and his fierce internal rival,
Treasurer Matt Kean, will have saddled NSW residents with $13,000 of
extra debt per person. One day, that debt has to be repaid.
If
the annual interest rates on this debt converge to current levels
around 4.2 per cent, NSW taxpayers will be paying almost $7 billion a
year in interest alone. Put differently, NSW residents will be
spending the equivalent of seven new hospitals each year in interest.
It
is ironic that supposedly imprudent Labor leaders are running rings
around NSW, with resource-rich states like Western Australia and
Queensland reporting budget surpluses, which has allowed them to
slash debt issuance as the economy rebounds post pandemic. Even
Victoria is starting to look more fiscally conservative. In the
coming financial year, NSW will issue twice as much debt as
Queensland, one-third more than Victoria, and about six times more
than Western Australia. It is also more than quadrupling South
Australia’s debt supply.
In
a desperate attempt to cling to power, Treasurer Matt Kean has blown
a $7.1 billion improvement in NSW's budget with $8.8 billion in new
spending next financial year alone. This means that NSW will issue
almost $10 billion more debt in the 2023 financial year than it did
in 2022 when the budget was smashed by COVID-19. Perrottet and Kean
are literally stealing from future generations to bribe the current
one to allow them to remain in power.
While
some of this debt was unavoidable due to the pandemic, Perrottet’s
government increasingly resembles a degenerate gambler, addicted to
spending money they don't have.
As
a lender to the state, my worry is that that this tale of
mismanagement gets worse. It turns out that Perrottet’s government
has been systematically misleading taxpayers. The 39 year old Premier
promotes himself as the great "asset recycler". Perrottet
claims he is selling taxpayer-owned infrastructure to invest this
money in new infrastructure….
But
this was untrue. Instead of funding new infrastructure, Perrottet
took $7 billion of the $9.3 billion in WestConnex proceeds and put it
in a speculative investment vehicle called the NSW Generations Fund
(NGF). Technically, the money was actually allocated to a subsidiary
fund inside the NGF called the Debt Retirement Fund.
Since
2018, not a single cent of the $7 billion has been used to pay for
infrastructure. It has instead been gambled on stocks and illiquid
junk bonds, amongst other risky assets. Amazingly, this has involved
lending money to Russia ($75 million), Saudi Arabia ($45 million),
China ($225 million), UAE ($15 million), Cayman Islands ($30 million)
and Angola ($15 million).
Perrottet
might have actually helped build President Vladimir Putin’s new
palace rather than NSW roads, schools or hospitals. (After we
expressly warned this was nuts last year, NSW has had to write-off
$30 million of the money it lent to Russia.)…. [my yellow highlighting]
Yet
in 2022, NSW taxpayer’s $7 billion still sits in the NGF. It is
still invested in listed equities, private equity, and junk bonds.
And it has lost money in 2022 (as it did in 2020) as markets have
tumbled. In fact, since its 2018 inception, the NGF has now formally
failed to meet its own performance benchmark of a return in excess of
inflation plus 4.5 per cent.
The
question is who benefits from this scheme? Who has a vested interest
in it? Unsurprisingly, it is the folks punting the money. That is,
TCorp. The NGF represents about 15 per cent of TCorp’s assets.
Former Perpetual CEO David Deverall, who runs TCorp, has been
desperate to turn it into a global asset manager, and aggressively
grow its capital.
While
TCorp blames NSW Treasury for the now-discarded plan for NSW to issue
tens of billions in extra debt to enable TCorp to speculate on
markets, the truth is that TCorp are the ones who directly benefit.
Across TCorp’s 180 staff, the average compensation cost in 2021 was
a staggering $323,000 per person. That is almost double the average
pay of the RBA’s 1,300 plus employees.
The
NGF is currently worth $15 billion, partly because it has been
bolstered by the asinine decision to divert billions of NSW taxpayer
royalties and income to it, and due to a debt-funded transfer of more
than $2 billion to the NGF in 2020, despite the NSW budget being in
record deficit.
This
revenue had to be replaced with extra NSW debt, which explicitly
contradicts the legislated objectives of the Debt Retirement Fund.
These focus on three goals: maintaining NSW’s AAA rating, which
Perrottet lost in 2020; reducing the cost of NSW borrowing, which has
soared; and repaying NSW debt.
After
widespread criticism last year, NSW suddenly stopped diverting
taxpayer revenue to the NGF and then belatedly committed to using $11
billion from the sale of the second-half of WestConnex in 2021 to
repay taxpayer debt.
Yet
Perrottet and Treasurer Kean still refuse to invest the original $7
billion from the sale of the first half of WestConnex in 2018 into
the infrastructure they promised. They also refuse to use this money,
and the NGF’s remaining (partially debt-funded) $8 billion, to meet
the Debt Retirement Fund’s legislated mission of repaying taxpayer
debt.
We
can quantify the cost of this madness: Perrottet and Kean would
rather NSW taxpayers spend $630 million a year in extra interest on
the $15 billion in new debt they will issue next year (but could have
avoided) just to allow their TCorp pals to gamble this money on
markets…..
Our
interest in this matter is that as a fund manager, we lend money to
all Australian states, including NSW. And we expect them to behave
ethically from an ESG (specifically the “g” or governance)
perspective. The huge ESG conflict of interest at the heart of the
NGF—whereby NSW taxpayers have to pay $630 million a year in extra
interest to allow TCorp to continue to punt their money—is
unacceptable to all stakeholders.
Kean
says he cares about ESG concerns. Time will tell if this is actually
true.
Read
the full article here.