Perrottet lumbers NSW taxpayers with $106 billion in extra debt

Christopher Joye

Coolabah Capital

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...

In the budget this week, Treasurer Kean revealed that NSW debt will have exploded from the relatively modest $55 billion sum that Perrottet inherited in 2017 to a difficult-to-comprehend $160 billion by June 2023.

If the annual interest rates on this debt converge to current level 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. The truth is, however, that Perrottet has sold billions of dollars of NSW infrastructure only to pay his mates extraordinary sums to gamble this money on global markets.

When Perrottet sold the first half of Sydney's WestConnex motorway in 2018, he told us that the $9.3 billion in proceeds would be used to "fund the vital M4-M5 Link - the final stage of WestConnex – and contribute to future infrastructure projects across NSW”.

“We are not only funding the completion of the congestion-busting WestConnex but injecting billions more towards critical projects like new schools, roads, public transport and hospitals,” Mr Perrottet continued.

“[Labor] opposed this sale which has allowed us to get on with the job of not only funding the vital M4-M5 Link, but has given us billions more to continue to build the infrastructure NSW so very badly needs,” he said.

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 indirectly 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.)   

The NGF is managed by Perrottet’s pals in NSW’s investment arm, which is called TCorp. Last financial year, Perrottet and TCorp tried to take this misadventure one crazy step further: they wanted NSW taxpayers to take-on tens of billions in extra debt to expand TCorp's gambles on global stocks and other high yield (risk) assets. The explicit goal, which TCorp acknowledged, was the hope that stocks and junk bonds paid higher returns than the cost of NSW debt. In other words, they wanted to put on a “leveraged carry trade”.

This column and others, including former NSW Treasury Secretary Rob Whitfield, who resisted the idea when it was being developed, and NSW Shadow Treasurer Daniel Mookey, told Perrottet to dump the proposal, which had the potential to blow-up the state. After months of moral suasion, Perrottet relented. And thank heavens: global equities have since crashed up to 30 per cent while the interest rates on NSW debt have almost quadrupled from 1.3 per cent last year to 4.3 per cent this year.

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.

To be fair to Kean, this was never his idea. In fact, left to his own devices, Kean would get rid of the NGF. Asked about it during the week, Kean prudently stated he would “always act in the best interests of all NSW taxpayers”, leaving every option on the table.

TCorp has told him that repaying debt now would force a “firesale” of the NGF’s assets, which should be avoided at all costs. But they would say that. Every dollar of NGF money that leaves TCorp means NSW is paying less fees to TCorp to run the money, which makes it harder to pay every person at TCorp $323,000 a year, on average. If they had sold the assets in 2021, as we proposed, they would have done so at the top of the market. The ongoing risk is equities fall further as rates continue to climb, costing NSW taxpayers billions in losses.

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.

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Christopher Joye
Portfolio Manager & Chief Investment Officer
Coolabah Capital

Chris co-founded Coolabah in 2011, which today runs over $8 billion with a team of 40 executives focussed on generating credit alpha from mispricings across fixed-income markets. In 2019, Chris was selected as one of FE fundinfo’s Top 10 “Alpha...

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