Earlier this month, the High Court decided that the Victorian government could be required to compensate a private purchaser of a government asset for failing to ensure the purchaser received beneficial tax rates.

Arrangements in which the government promises a private company that it will ensure stable or beneficial policy settings are common in privatisations and public-private partnerships (PPPs).

The judgment in Port of Portland Pty Ltd v Victoria indicates that private purchasers can demand compensation from the government for failing to bring about changes in policy. This is a significant judgment in the context of the proliferation of privatisations and PPPs, including the NBN and the sale of New South Wales’ electricity assets.

The case concerned the 1996 sale to a private company by the Kennett government of the deepwater commercial Port of Portland in western Victoria, midway between Melbourne and Adelaide.

As part of the sale, the government agreed to “effect an amendment to statutes governing the assessment and imposition of land tax to ensure” that the purchaser (Port of Portland) would be subject to a lower rate of tax than would otherwise be the case. The government also agreed that, if statutory amendments could not be effected to ensure that result, Victoria would reimburse the purchaser for the difference between the two amounts.

Because the ongoing value of the asset often depends on future public policy settings, promises of this kind are relatively common when the government sells assets or enters PPPs. At the same time, once the asset leaves government hands, the government’s incentive to protect the asset’s value may be substantially diminished. Tax arrangements protecting the asset when it was government-owned may no longer apply. Government may demand greater or different regulation of the asset once it leaves government hands. Alternatively, government may establish a new public competitor to the newly privatised asset to ensure equitable service provision.

The challenge for government is that, unless it promises stability, purchasers will cost the risk of adverse changes in public policy into the purchase price of the asset. This would, of course, defeat a major purpose of many privatisations, where the government’s aim is to maximise the sale price to improve current cash flow.

Sometimes, rather than demanding mere stability in policy settings, purchasers demand favourable policy changes. As commuters have become all too familiar with, toll-road operator may, for example, demand that alternative roads be made less accessible to funnel traffic onto the toll-road.

When governments promise to fulfil these demands, it increases the asset’s value and so its sale price: the former satisfies the purchaser, the latter the government. The issue, touched on by the High Court in Port of Portland, is that governments are expected to make policy in the public interest and according to present needs, and should not be fettered by private agreements negotiated in long-past circumstances.

The situation confronted by the High Court was at the extreme end of this. Not only did the Victorian government promise to change policy settings so that they would be more favourable to the purchaser, it promised to change these policy settings by effecting a change to statute law.

The case raised, effectively, three questions. First, should courts allow the executive to agree, by private contract, to effect amendments to statute law? Second, irrespective of the answer to the first, had statutory amendments in fact been effected which ensured that the purchaser achieved beneficial land tax assessments? And, third, if amendments of that kind had not been effected, could the purchaser claim reimbursement from the Victorian government for the difference?

The High Court, in a joint seven-judge decision, answered the second question “no” (based on the particular factual circumstances) and the third question “yes”. These conclusions rendered the first question moot.

In respect of the first question, the High Court noted that, as long ago as the English Bill of Rights of 1688, the executive government has not had the power to dispense with the operation of statute law. The executive cannot override statutory rights; the executive cannot refuse to perform a statutory duty; and the executive cannot decide the limits of its powers. The High Court suggested, but did not decide, that the effect of these longstanding principles was that the executive government could not purport to fetter the legislature. If that principle were accepted, it would be a short leap to hold that the executive government could not promise to effect changes to statute law.

The High Court did not, however, need to decide this question. This was because of the particular provisions in the contract of sale. The contract provided that, irrespective of any obligation the executive had assumed to change the law to bring about beneficial tax rates, if the law was not in fact changed, the government would reimburse the purchaser for the higher tax it was required to pay.

The High Court upheld this provision. In effect, the Court held that the government may, in certain circumstances promise to reimburse a private company if statutes are not amended to guarantee that the private company receives beneficial treatment.

In answering the questions in this way, the High Court noted that the contract of sale had what it called, “statutory backing”. Victorian statutes empowered the Victorian treasurer to direct that the port be sold and to approve any contract of sale. The treasurer, Alan Stockdale, had issued a direction blessing the contract of sale on 14 February 1996. In other words, while parliament had not approved the particular contract or the particular provisions in issue before the High Court, parliament had given the treasurer the power to approve some future contract, and the Treasurer had exercised that power.

For the High Court, this link between parliamentary authority and the ultimate terms of the contract was significant. Because the treasurer had blessed the contract, and because the treasurer had statutory power to do so by virtue of a law enacted the parliament, the contract could not, according to the High Court, be portrayed as an attempt by the executive to control parliament.

The High Court did not decide whether the situation would have been different if the contract of sale did not have that “statutory backing”. Neither did the High Court decide whether there might be circumstances in which the executive’s statutory power to approve a contract was so tenuously related to the contract that the contract could no longer be described as having statutory backing. The executive has statutory power to do many things, can a statute enacted long previously give statutory backing to a contract executed by the executive today?

Lawyers and treasuries will take note of the decision in Port of Portland. The decision shows that, so long as a contract for the sale of government assets is structured appropriately and so long as the contract is blessed by the executive pursuant to a statutory power, the executive can promise to pay a private individual if statute laws do not take a particular shape in the future.

The executive government can, in other words, take out what is effectively a “futures contract” on how public policy will look at some specified point. Once the executive has made the promise, incentives change. The executive has an incentive to bring about a change in the law, lest it be obliged to provide financial reimbursement to the affected company. The legislature, which, in Australia, is ordinarily controlled by the executive (at least in practice), will often be amenable to the executive’s will. Hundreds of millions of dollars may be at stake, and possibly a budget surplus. A government forced to pay cash to a private company without obvious public benefit will face embarrassment and charges of ‘waste’ or incompetence.

Of course, any contract entered into by the executive government changes governmental incentives, but rarely is there as direct a correspondence between specific policy settings and financial loss to the government as in clauses of the kind considered in Port of Portland.

The inevitable result may be public policy that reflects private agreements historically reached by long-past governments, not current public policy needs. Certainty for business may entail inertia for government.