Page 580 - Week 02 - Wednesday, 24 February 2010
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Now that sounds like a reasonable analysis of what the Treasurer is proposing, but, of course, we have had the minister saying that no-one has done any analysis. Let us read further. What does Sinclair Davidson say? He goes on to quote some text:
In their classic finance text Richard Brealey and Stewart Myers indicate that only cashflow is relevant for discounted cashflow analysis. Furthermore they indicate that cashflows must be included on an incremental basis. This, in turn, breaks out into six rules that guide the inclusion of items into a cashflow analysis.
Again, a fairly detailed understanding of the situation:
• Do not confuse average with incremental cashflow
• Include all incidental effects
• Do not forget working capital requirements
• Forget sunk costs
• Include opportunity costs
• Beware of allocated overhead costs.
It is my opinion that the ACT Treasury have not followed these criteria when undertaking the analysis that supports the purchase of the Calvary Hospital. This is almost certainly true for the analysis that looks at ‘Operating Impact’. The ACT Treasury say
The favourable operating impacts associated with the Territory owning the assets under “Buy” and “Build” are primarily due to capital investment expenses being recognised over a long period through the depreciation of the assets.
But depreciation is not a cashflow item and should not be included in the cashflow analysis. It should only be included to the extent that it contributes to the creation of a tax-shield. The ACT government, however, is not a taxpayer and so should not include depreciation in any cashflow analysis.
It simply goes on and on, and it is worth reading just the last couple of paragraphs:
It seems that the ACT government are concerned that the public hospital may be cross-subsidising the private hospital. Yet it is not clear why they have this concern or why they would care if that did in fact occur. The ACT government does not own the Calvary Hospital and contracts on a fee for service basis. At best, the ACT Government has a view that they are paying too much for the service that they receive. But if they wish to reduce ACT health expenditure they should state that desire clearly. The ACT government needs to demonstrate that they are not getting value for money from the current arrangements at the Calvary Hospital and as best I can see they have not made that argument nor have they produced any evidence to support that view. Indeed anecdotal evidence suggests that ACT residents prefer the Calvary to the Canberra Hospital.
He concludes by saying:
Today the ACT government put out a press release saying, in part, “But no one has been able to dispute the Treasury analysis or provide any alternative, any solution, to the dilemma facing the Government.” Of course, that is simply not true. The Treasury analysis is not just in dispute; it is just disreputable.
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