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SOUTH AUSTRALIAN SUBMISSION TO THE COMMONWEALTH
GRANTS COMMISSION
EXPENSE ASSESSMENTS:
Following the staff meeting of 2-3 August 2007, South Australia provides the
following comments on selected expense assessments for the 2010 Review.
CAPITAL

SA is strongly in favour of a capital needs assessment which relates to the year
of use of services from physical assets. In other words SA favours capital needs
continuing to be assessed in the context of the Net Operating Statement rather
than a Net Lending Statement as has been canvassed by Commission staff.
 Year of use is preferred to year of acquisition because it avoids the
requirement to estimate future population related (compositional and total) and
other needs for capital expenditure.
 Year of use needs are based on known populations, age composition etc.

We believe the depreciation assessment is generally on the right track and favour
depreciation being functionalised. Also the possibility of upscaling depreciation
assessments to recognise a holding cost, which has been discussed, may need
to be considered. (Any such assessment should not inadvertently introduce
partial net worth equalisation and should be independent of policy impacts on the
level of actual interest expense and interest earnings etc.)

However, we consider the current debt charges assessment methodology to be
deeply obscure and probably flawed, and that there is little to be learned from, or
reapplied from, that methodology.

It is important to distinguish needs relating to the services of physical assets
(whether in year of use or year of acquisition of the physical assets) from needs
relating to financial capital, notwithstanding that physical assets may play a role
as a store of wealth.

Interest on borrowings, superannuation liability interest, interest earned on
financial assets, dividends from GBEs combined, represent the earnings of
accumulated net worth. Considered separately, or in any part combination, these
items are virtually completely discretionary or policy affected. The disposition of
net worth is an entirely policy determined matter, eg whether assets are leased
and cash conserved, whether electricity businesses are privatised or not, mix of
defined benefit vs accumulation superannuation schemes, extent of commutation
of defined benefit superannuation liability etc.
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
Further, considered in aggregate, net interest on net worth/financial capital is
greatly affected by past fiscal policy settings State by State. If we make the
assumption that the intended post Review needs assessments for all items giving
rise to the standard budget result term are correct (by definition) and have always
applied (by assumption), then it could be said that needs which give rise to
earnings on net worth have already been assessed.

If the intention were to consider needs relating to net worth/financial capital ie for
earnings on net worth not to be treated as EPC, SA would suggest that the
valuation gains which give rise to net worth over and above the accumulation of
net operating surpluses, which tend to be greater in higher growth States, may
need to be assessed. We understand that WA will be making a submission in
respect of a ‘population dilution effect’ in respect of net worth/financial capital
needs. On our current state of understanding as to how this is said to arise, SA
does not agree that such an effect exists. However, should such an argument be
subject to consideration we think it appropriate that other arguments pertaining to
net worth/financial capital equalisation also be allowed to be heard in that event.
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