JOHN MENADUE: Privatisation is costing consumers and damaging economic reform. (Repost from 26 July 2016)

‘Privatisation is costing consumers and damaging economic reform’ said  Rod Sims, the Chairman of the Australian Competition and Consumer Commission, recently. He added ‘Poorly regulated privatisations are driving up prices and have little to do with economic reform … this situation is getting worse and as the main concern of governments with privation is maximising proceeds from the sale by fighting against effective regulation. … A sharp uppercut is needed. [Privatisation] is increasing prices. … The whole idea of asset sales is that the private sector can run them more cheaply than the public sector.  … Very bad reform implementation [of privatisation] has been a big part of the current backlash against any economic reform’  

The NSW Premier says that privatisation is the only way to go to fund new infrastructure. I doubt it. In the short term it may give a “sugar hit” but it often brings long term damage.

But if governments do decide to go down the privatisation route it is important to first get competition and regulation right.

I argued in my blog on January 6 this year that the privatisation of Telstra by the Howard Government was a serious mistake, or at least the privatisation of the network with its cables, wires and exchanges. Telstra should have been structurally separated and if privatisation was preferred then only the retail arm should have been sold. If the wholesale arm, the cables, wires and exchanges had stayed in public hands we would now be well on the way to an NBN. The self-off of Telstra’s wholesale arm meant that the NBN had really to start again from scratch.

There is an overwhelming case that natural monopolies – rail lines, water and sewerage pipes, poles and wires, and telephone cables, should remain with a single provider usually a public provider. It is absurd to think that we should have parallel and competing pipes, wires and cables. In electricity, poles and wires should remain in the hands of a single provider. But with only one supplier, regulation is critical.

It is important in the electricity sector to get regulation right before embarking on privatisation. Recently the chairman of the Australian Competition and Consumer Commission, Rod Simms, has warned that he may block asset sales because it could push up prices. Ross Garnaut has also warned that the NSW and Queensland governments need to fix pricing regulation before considering selling off the states’ power network. We obviously have flawed regulation of the electricity sector which has allowed gold-plated over-investment in ‘poles and wires’ which is then recouped in excessive prices. It is ‘poles and wires’ and not the carbon tax which is responsible for most of our increase in electricity prices. Clearly we have wasted billions of dollars in poles and wires and the community has paid for it in higher prices.

Competition where appropriate and good regulation where there is a natural monopoly supplier is essential to protect electricity consumers.

There are likely to be further problems in the future as our demand for electricity from the existing electricity network shrinks. The shrinking demand is due to many factors, including the closing of smelters and factories and the new technology of solar and wind. As Ross Garnaut put it ‘lower demand forces another increase in prices to secure the guaranteed rate of return for the owners … which then leads to further reduction of demand and a further increase in price.’

The NSW Government sold Port Botany and Port Kembla to the same buyer. It made competition between the two ports impossible. John Mullen of Asciano has said that “In Sydney and Brisbane (ports) we have had rent increases of up to 400%”.  Maersk lines, the world’s largest shipping container company has drawn attention to the major increases in port charges and warned Victoria about making the same port privatisation mistakes that NSW and Queensland have made

The real risk is governments fattening up an entity for privatisation. This ensures a better financial return to the Treasury and ‘political’ success for the government but at great long term cost.

When I was at Qantas we saw the problems arise when privatisation proceeds without a competitive market being first established. To fatten up BA for privatisation in 1887, the Thatcher Government entrenched BA’s market position by approving the take-over of competitors like British Midland and entrenching BA with more gates at Heathrow and better access to the profitable routes on the North Atlantic. I recall senior executives of British Airways saying that privatisation was ‘a once in a lifetime opportunity’ to get favourable deals for BA. For Maggie Thatcher and her government, the BA privatisation was a success – a good sales price and political plaudits for her ideology. If the Thatcher Government had ensured more competition in advance, airline travellers would have been much better served.

When the Keating Government privatised Sydney airport it fattened up the sales price by agreeing that the purchaser of Sydney airport would have first refusal on any second airport.  Sydney airport is now ripping off customers and has a privileged position in tendering for a second airport.

The Baird Government in NSW proposed to sell Macquarie Generation to the state’s largest power producer, AGL, one of the states three largest retailers. The ACCC tried to block the deal because it was seen to be anti-competitive. But the ACCC was over-ruled (by the Competition Tribunal. The sale is now likely to proceed.

Before any entity is prepared or fattened up for privatisation, we need to ensure that regulation and competition are settled first to ensure that consumers and the public are protected. If not, we are likely to see privatisation result in increased prices and poor outcomes for consumers. Competition and regulation in the case of a natural monopoly must be a much higher priority than privatisation.

Beware governments fattening up public companies for privatisation.

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6 Responses to JOHN MENADUE: Privatisation is costing consumers and damaging economic reform. (Repost from 26 July 2016)

  1. David says:

    Good article – thanks John. Just one minor thing:
    ‘To fatten up BA for privatisation in 1887, the Thatcher Government’

  2. John Boyd says:

    Isn’t there a role here for state auditors general? I have had some experience of their involvement in the costing of major projects, to ensure that the long term costs, including decommissioning if appropriate, were included, rather than just the initial capital costs. It would seem appropriate for some insistence on making a real cost-benefit case for privatisation, rather than the current ‘selling off the silverware’ approach.

  3. Kladr Gnivc says:

    Nor are they designed to reduce government assistance to the health insurance industry, although this subsidy, now costing $7.0 billion a year once forgone income tax is taken into account, dwarfs the amounts proposed for the automobile and other industries, which are rightly the subject of public debate.

  4. derrida derider says:

    What Baird said made no sense at all – governments can borrow cheaper to finance infrastructure than any private sector provider because the risk for the lender is pooled across the whole taxpayer base. Which is why more projects are cost-effective with government-guaranteed funding than with private funding, not the other way around.

    As John Kay says private managers are good at the actual construction, while governments are good at raising money by using their monopoly of force – so why not get each to do what they are good at?

  5. Wayne Mc Millan says:

    John, This is one of your best articles. The public in many cases are being duped by private marketing agencies/consultants, that produce slick advertising highlighting the short-term benefits of privatisation whilst downplaying its long-term costs.
    We are seeing sophisticated 21st century snake oilsmanship convincing the populace that privatisation is always the best way to go.

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