IAN MCAULEY. Warning from Colin Barnett: Privatisation is on the nose

The WA Government’s proposal to privatise Western Power – the government-owned electricity utility – was one of the factors contributing to the extraordinary anti-Liberal swing in Saturday’s Western Australia election. Privatisation of electricity has also been an issue in the eastern states. While the coal lobby and climate change deniers have blamed South Australia’s blackouts and shortages in other states on renewables, more detached observers, such as John Quiggin, have pointed out the part played by privatisation in raising prices and contributing to electricity shortages. 

Airport privatisation has also become prominent in recent days, with the release of the ACCC report on airport charges, confirming what people who park at airports already know, and pointing out how privately-owned airports are using their monopoly position to extract high fees from airlines – fees that flow through to ticket prices.

When corporations have a degree of market power they prioritise profits over service provision – every Economics 1 student, every farmer who has dealt with a stock and station agent, and every person who has had a bank loan knows that. There has always been a good reason for governments to own certain essential monopolies.

In an election post-mortem, Geoff Gallop – former Premier of WA and now Director of Sydney University’s Graduate School of Government said:

‘Privatisation in and of itself is not an economic reform. It’s a change that may or may not create better productivity in the community. One thing we do know about it: we’ve had lots and lots of it in Australia over a long period of time; it hasn’t produced a public benefit sufficient to convince the people that it’s a good thing. We need economic reform, productivity is stagnant – we need to deal with that as a nation – but just to assume flogging things off is economic reform – that’s the mistake of too many Liberals in this country and it’s why they’re in a mess politically.’

The outcome of privatisation has often been high prices through exploitation of monopoly power (electricity, airports), shonky business practices (technical education), poor performance (employment services), and economic distortions (tolled roads in an otherwise untolled system).

Privatisation has spawned new private bureaucracies, such as electricity “retailers”, new public bureaucracies of regulators who can never keep up with firms’ capacity to game the regulatory system, and whole new lobby groups trying to influence governments. The advertising industry has benefited tremendously in the name of “competition” for simple undifferentiated products such as electricity and water that were once delivered cheaply and efficiently, without fuss or hype, by government utilities.

Although the push for privatisation has generally come from the Liberal Party, Labor has also been on board. Anna Bligh, the former Labor Premier of Queensland, must be feeling some sympathy for Colin Barnett, because it was her government’s decision to privatise some transport assets that cost her the 2012 election.

So if privatisation is so unpopular, why do governments persist?

I suggest four reasons, starting with the only defensible one.

Reason 1: Changed conditions

In a few cases the conditions – the market failures – that originally called for public ownership may have changed. Government ownership of a domestic airline (Trans Australia Airlines) made good sense in 1946 when the country was going through postwar reconstruction: left to the market aviation would have been a dreadful mess. By 1992, when our government-owned airlines were privatised, the market was much more developed.

Sometimes changed conditions may call not for privatisation, but for a change of ownership within the public sector. There was probably no enduring case for the Commonwealth to own airports and ports, but there is a good case for cities to own them, following the model of the Port Authority of New York and New Jersey, the government body that owns New York City’s three airports. Eager for a quick and lucrative sale and overlooking possible security problems, the Howard Government bypassed that opportunity and sold our airports to private corporations.

Reason 2: Fiscal opportunism

The second and possibly main reason for privatisation is fiscal opportunism. Selling an asset is an easy way for a government to raise cash. Sometimes the stated reason is that if the public want certain new assets they have to sell existing ones – the Commonwealth’s “asset-recycling” policy has been about getting states to sell ports and electricity utilities in order to finance urban transport projects. And sometimes it’s simply in the name of “budget repair” – achieving some reduction in public debt.

It would patronise the readers of John’s blog to point out the irresponsibility of selling assets to pay for recurrent expenditure, or to explain that it’s quite reasonable for a government to borrow for capital purposes, just as businesses do. So why do governments persist?

The reason lies in the political rhetoric established during the Howard-Costello years, when so much virtue was attached to the idea of governments running a cash surplus. It’s a simple concept that can furnish easy headlines in the tabloid press, and that journalists who have never studied economics or accounting can craft into a story. The business cycle was kind to the Coalition with its simplified message. It could hardly have avoided running cash surpluses during the boom times of the Howard-Costello years, just as the Rudd-Gillard Government had no responsible option but to run deficits in the wake of the 2008 financial crisis.

Hence the simple message: “Surplus good, deficit bad, Liberal surplus, Labor deficit”.

In that political atmosphere, so conditioned by a focus on the cash bottom line, it has been virtually impossible for governments to return to a balance-sheet idea of sound economic management – the idea that what counts is not the level of debt, but rather the government’s net asset situation. As a result our governments, state and federal, are like undercapitalised businesses, missing opportunities for productive investment.

It’s ironic that the Barnett Government has fallen victim to this cash obsession. It has accumulated significant public debt while investing heavily in public assets. If we had a mature balance-sheet approach to public economic management the Barnett Government may not have done so badly last Saturday.

Reason 3: A lazy substitute for reform

The third reason for privatisation is that over time many (but certainly not all) government business enterprises become burdened with inefficient work practices, featherbedding and a lack of responsiveness to customers. It happens in many established businesses, public or private. (Older Australians remember waiting three months for the PMG to install a telephone.) Privatisation has been the lazy substitute for reform. Many Liberal Party politicians believe, as a matter of faith, that governments are intrinsically incapable of running efficient and customer-friendly operations (a belief to which they’re contributing with their management of Centrelink, the NBN and the NDIS). 

Reason 4: Cronyism

The fourth is straight cronyism. Shareholders and executives of privatised enterprises have made fortunes, particularly when they have been able to buy assets with strong monopoly power and when they have been able to pressure governments into loose regulation or measures to protect their market power. Australia’s permissive lack of controls on political donations and post-government employment have paved the way for cronyism.

 

Let’s have economic reform by all means. But don’t give economic reform a bad name by associating it with Australia’s ill-advised and costly privatisations of the last 20 years.

 

Ian McAuley is an Adjunct Lecturer in Public Sector Finance at the University of Canberra and a Fellow at the Centre for Policy Development. He and his colleague Miriam Lyons have written on the economics of privatisation in their work Governomics: Can we afford small government?.  

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8 Responses to IAN MCAULEY. Warning from Colin Barnett: Privatisation is on the nose

  1. Bruce says:

    Ian,
    There is one huge drawback in reading your articles, you steal my thunder. Not only that but you so eloquently put the arguments out there.
    As an investor in the sharemarket I remember well the sage advice of one of my first mentors, “Don’t go near a company without debt”. No debt usually equates with no assets. Privatisation of government (our) assets is like selling the family home and going to rent a property instead. Looks great for a few months but in the long run an economic and lifestyle disaster.

  2. Colin Cook says:

    ‘The Federal Government is not an ATM’
    This statement by the PM – at the December 2016 COAG meeting – shows the confusion, ignorance or deceit at the top levels of our body politic.
    Read more at http://cooksourdough.blogspot.com.au/2017/01/the-federal-government-is-not-atm.html

  3. Julian says:

    Splendid analysis Ian; and your conclusion recommends the only sensible way forward.

  4. Philip Laird says:

    Thanks Ian for an informative article, with four reasons why governments are prone to make some asset sales which in the end cost the taxpayer and or user of services.

    Two such in the transport area are rail and port privatization. In Tasmania, their rail system was owned and operated by the Australian National Railways Commission, was sold cheaply in 1997 with a track lease. After some initial success, problems emerged, and in 2004, the Tasmanian track lease was taken back by the public sector in 2007, followed by the trains in 2009. In New Zealand, their government railways were sold at a low price in 1993, and due to problems were brought back by government in stages by 2008, at a high price.
    A 1999 Victorian track lease, with above rail operations, proved problematic and in May 2007 the Victorian Government brought the track lease back, for a consideration of $133.8 million. The West Australian track lease has also proved problematic, with adverse comment by that state’s Auditor. Above rail (locomotives and rolling stock) privatizations have been less than successful, in many ways, demonstrating a failed experiment.
    For ports, combining long terms leases of Port Botany and Port Kembla may have given the NSW Government a better short term return, but have lessened competition with some restrictions on container movements through Newcastle.
    Perhaps the best form of competition for an industry sector is when it has keen players from both the private and the public sector.

    Government rail asset sales, and return to the public sector, in New Zealand and Tasmania

    Philip G Laird
    University of Wollongong, Australia

    ABSTRACT
    The paper outlines the sale, with a track lease, in 1993 of the state owned New Zealand Railways Corporation to a consortium, TranzRail Holdings formed by United States and New Zealand interests. It also notes increases in productivity and traffic levels to 1999 with subsequent problems leading to the New Zealand Government agreeing in 2003 to repurchase and rehabilitate the track. The paper then outlines transfer of effective ownership of the trains and related services in 2003 to an Australian company, and in 2008 back to the New Zealand Government at appreciable net cost.
    After a brief outline of railways in Australia, the paper notes how government rail in Tasmania, then owned and operated by the Australian National Railways Commission, was sold in 1997 fwith a track lease to a company related to TranzRail Holdings. The paper then notes emerging problems after initial success, and how after a change in ownership in 2004, the Tasmanian track lease was taken back by the public sector in 2007, followed by the trains in 2009.

  5. Dennis (Dixie) Lee says:

    Ian McAuleys’ comment could be considered as generally accepted facts without risking too much backlash. Why then do government persist with intentionally dysfunctional responses to anything important.

  6. Hi Ian,

    Fiscal populism predates Howard/Costello.

    Carr in NSW was in it like a rat up a drainpipe likewise Kennett, though he was dealing with a pretty compromised balance sheet and he and Stockdale seem to have had the most disciplined approach to privatisation, maximising sale price subject to disciplines on competition.

    Generally at the state levels, it seems to me to have been more a left of centre thing than a right of centre thing. Bracks and Brumby went the PPPs route at great cost to Victorians.

    The way these guys fused their own political interests with those of the big end of town is perhaps to be expected from the right but is particularly dispiriting from the left and only a small part of the left’s intellectual collapse.

  7. Julian says:

    Further to previous comment, I noticed that last night on late night ABC-TV it was mentioned (as a caption) that the “business lobby” in WA was calling for privatization to deal with State debt.
    If that report is correct, then who indeed shall tell said “business lobby” just what it can do with its essentially useless advice ? And apart from that, just what the hell gives this bloody collective the right to decide the appropriate course for all persons in WA. ?

  8. Bruce says:

    Privatisation leads to more debt that the taxpayer has to service, it is just not government debt. The taxpayer also has to pay the profit, which on the electricity industry is about 6% per supplier. Multiplied out for the 4 stages of supply it equals about 20% on each electricity bill. More is paid in interest to the “financiers” than in dividends, in Origin’s case more than three times the dividends last year.

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