Indecent haste to sell public assets can cost taxpayers a fortune
The Kiwis go to an election about it this weekend, Barry O'Farrell has been in a tizz about it all week and the Greeks have been forced to embrace it through gritted teeth.
Almost three decades after the British prime minister Maggie Thatcher made it de rigueur, privatisation is back in fashion, although perhaps it never really lost its attraction as an easy way out for cash-strapped administrations.
There's a certain undeniable logic to the concept. Government should be in the business of governing. And private enterprise should be left to govern profit-making enterprises.
But whenever the idea of flogging government-owned businesses is raised, there is always a furious debate.
Those involved in the sale process think it is terrific. No surprise there. When multibillion-dollar assets are up for sale, the fee fest for lawyers, investment bankers, stockbrokers, advisers and other hangers-on can run into tens of millions of dollars and much more.
In the past couple of decades we've embraced the idea with gusto. Qantas, the Commonwealth Bank, our airports, government insurance groups, Telstra and more recently Queensland Rail are just a handful of former state-owned businesses that have been shunted out of the public sector and into private hands.
In some cases, it has been a roaring success. Removing government as the owner and bureaucrats as administrators liberated management to pursue expansion, improved customer service and eliminated the risk to taxpayers.
There have even been occasions where everyone appeared to emerge as winners. Governments used the sale proceeds to repay debt and reduce deficits, consumers benefited and buyers saw their shares appreciate in value as the operations became more market focused.
Other sales have been less successful. The second tranche of Telstra was a disaster for those who bought the stock, while recent efforts to auction off our road networks has seen some absolute stinkers such as Brisconnections and the Lane Cove Tunnel.
With the obvious commercial operations already disposed of, governments increasingly have lined up essential services such as electricity and water for sale.
It is in this area that privatisation can become a double-edged sword for taxpayers.
If a government attracts a huge price - as the Victorian premier Jeff Kennett did when he sold the state's power generators in the 1990s - there is the risk that rent-seeking buyers needing to recoup their investment costs will be forced either to jack up the price of the service they deliver or cut back on maintenance and capital investment.
For taxpayers, it becomes a case of what you pick up on the swing, you lose on the roundabout. The state's finances may be in better shape, but you'll pay a good deal more for the services you once owned.
As with any business transaction, it all gets down to price. But the question of what is an acceptable price is an extraordinarily malleable concept.
The furore over the recent sale of the NSW government-owned energy retailers - sold for virtually nothing after being rushed through late at night in the dying days of the Keneally government - and the proposed sale of the state's electricity generators have brought the issue into focus.
Sydney University's Professor Bob Walker and Dr Betty Con Walker argue that in the stampede to sell state-owned businesses, taxpayers overwhelmingly have come out well behind.
And they argue that the methodology used to calculate the price and justify the sale - often never disclosed because of ''commercial in confidence'' clauses - is a deeply flawed process designed to mask the desperation or ineptitude of various state governments.
In particular, they point to what is known as the discount rate that is used to value a business. This is a rate that is used to value the future cash flow of a business in current dollar terms. The higher the rate, the lower the current value of a business.
In a submission to the Tamberlin inquiry into the NSW power industry, the two academics argue taxpayers have been given short shrift over the years as various major privatisation deals have been undervalued.
Britain recently recommended a discount rate starting at 3.9 per cent for the sale of public assets, far lower than the rates customarily used in Australia.
For a regulated but high-risk market like electricity, Britain recommended a discount rate of a maximum 6.9 per cent. It is believed the NSW government calculated the sale of the NSW electricity distributors at about double that rate, effectively discounting the value of the businesses to fire-sale prices.
The ineptitude hasn't been confined to Labor.
When the Fahey government sold the State Bank of NSW in the 1990s, there was applause that it managed to pull in $576 million for the operation during a severe recession and with bad loans apparently threatening its future viability.
But the discount rate on that transaction was a whopping 18.9 per cent after tax. And since government agencies did not pay tax to the Commonwealth, the effective discount rate blew out to 29.5 per cent.
Not only that, the state picked up the tab for any bad debts, which was the rationale for offloading the bank in the first place. That meant the state reimbursed the purchaser hundreds of millions of dollars, virtually eliminating any benefit to taxpayers.
Within four years, the then owner, Colonial, valued the State Bank operation at up to $2.75 billion.
Walker and Con Walker reckon governments should think about the value to taxpayers of retaining a business.
The three NSW energy distributors - Energy Australia, Integral Energy and Country Energy - delivered $849 million in profit in 2007 to the state. That represented a 6.3 per cent return on assets and a 25 per cent return on equity.
But when the sale process was completed in the dark of night earlier this year, virtually nothing was returned to taxpayers after all the concessions were taken into account. No wonder the private sector buyers were popping champagne corks.
The recently elected O'Farrell government now is considering selling off the rest of the NSW power industry. But it is having second thoughts about whether to sell the lot, or just the power stations and retain control of the wires and poles.
Whichever way it jumps, taxpayers should be given access to not just the sale price but the methods by which the price was calculated.
As Walker and Con Walker argue, taxpayers should be entitled to an open and robust financial analysis of any sale that should compare the financial returns from retaining ownership to the benefits of a sale.
Late-night deals and secret calculations are simply not acceptable.