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Privatisation debate fails public good

Illustration: Michael Mucci.

Illustration: Michael Mucci.

The trouble with the latest round of state government privatisations is that those who oppose them do so for the wrong reasons, but their promoters are also pushing them through for the wrong reasons.

Joe Hockey's 15 per cent incentive payment to encourage ''asset recycling'' - selling existing government-owned businesses to fund the building of new infrastructure - has fallen on receptive pockets in the NSW and Queensland governments, which are worried about their credit ratings and, unlike the Victorian government, still have valuable electricity transmission and distribution businesses to flog off.

The previous government in NSW - a Labor government - tore itself apart over electricity privatisation, with the cabinet supporting it but the powerful public sector unions bitterly opposing it.

It wasn't much better with the previous government in Queensland, which was also Labor.

Now Labor is free of the responsibilities of office, it will be completely united in its opposition and its unceasing claims that privatisation will lead to big rises in electricity prices.

Since voters in all states strongly oppose privatisation, Labor will hope to do well with this argument at the NSW election in March. But polling also shows voters are much less opposed when the sale of businesses is linked to the building of specific new projects.

Labor's counter-argument is deceptively simple: government-owned businesses act in the best interests of their customers, whereas privately owned businesses seek to maximise their profits by raising their prices.

The truth is far more complicated than that. Whether publicly or privately owned, the monopoly business that doesn't seek to overcharge its customers has yet to be discovered by archaeologists. Monopolies that don't seek to maximise profits usually succumb to overstaffing and overpaying workers and managers. Why wouldn't they?

The public sector unions understand this full well, which is their real reason for opposing privatisation so vehemently.

They know that whether or not the private owner succeeds in raising prices, it will seek to improve its profitability by moving in on union perks and rorts. They know even Coalition-government owners give them an easier ride than a private owner would.

So voters would be mugs to believe Labor and its union mates have consumers' best interests at heart.

Unfortunately, that doesn't mean Coalition privatisers can be trusted to do their best by customers. The temptation facing all privatising governments is to seek to maximise the price they get for the asset they're selling.

If you can't see why that would be a problem, you're helping demonstrate why privatisations so often fail to deliver their promised benefits.

The main thing that protects customers from being overcharged is effective competition between the privatised entity and other businesses.

So the main way governments seek to inflate the price they get for a privatised business is to protect it from competition, or otherwise ensure its ability to overcharge. They tie the hands of the price regulator in some way, or explicitly guarantee freedom from certain future sources of competition, or sell the business to some player who already owns businesses in the industry and so can use the acquisition to increase the player's pricing power.

The simple truth that escapes so many privatisation supporters on the non-Labor side is that privatisation is only worthwhile if it leads to greater competition in the market. If it doesn't, it will be of little benefit to anyone bar the new private owners.

When the Keating government privatised Sydney airport, it guaranteed the purchaser first refusal on control of any second Sydney airport, thus virtually ensuring that even with two airports there'd be no competition between them.

When the Kennett government privatised Victoria's electricity industry in the 1990s it took care to ensure a wide range of buyers. But it seems the Baird government in NSW has no such scruples. It planned to sell Macquarie Generation, the state's largest power producer, to AGL, one of the state's three largest power retailers.

The Australian Competition and Consumer Commission tried to block the deal, judging it would have resulted in a substantial lessening of competition in the electricity market. But last week the commission was overruled by the Competition Tribunal, so the deal is likely to go ahead.

Only a couple of days earlier, however, the chairman of the commission, Rod Sims, reiterated his view that ''electricity companies have a strong commercial incentive to have all players vertically integrated … If electricity retailers can tie up most of the generation then they can create a stable oligopoly with high entry barriers and so higher prices and better returns.''

I'd be wary of believing any politician who tried telling you electricity privatisation won't lead to higher prices.

Twitter: @1RossGittins

69 comments

  • In the past, say forty years ago, all businesses were inefficient by the standards of today and the work was generally less demanding. This efficiency has been gained partly by computer technology but manly by a better understanding of systems, systems thinking.

    This clouds our thinking when we compare the publicly owned airline or railways of forty years ago with the private airline or railway of today. Where publicly owned companies do employ more people this is at least partly for good reasons. The old SEC in Victoria spent a lot more on line maintenance and fire clearing than their privately owned successors.

    Commenter
    Glen
    Date and time
    June 30, 2014, 8:54AM
    • Many govs accross the world are having to buy back privatised assets, because privatised public assets operate for profit, so they don't spend to repair if they feel it's going to cut into their profits.......so many privatised rail and electricity assets that are essential services, that have been allowed to run-down have had to be bought back, so the govs can repair them.......

      In fact the US has quite a few abandoned railways that buckled to such an extent they could no longer be used because of lack of repair after privatisation, so some no longer have these services.......

      I think most tax-payers are probably unaware that they can pay more tax-payer monies to these privatised asset owners after they are privatised, compared to what they cost govs before privatisations....it's all a rort in my opinion in favour of lobbysts....

      Commenter
      Rorty
      Date and time
      June 30, 2014, 10:17AM
    • Gas, electricity, water and public transport charges have all increased exponentially since the dark days of the Kennett regime in Victoria,
      when all of these basic essential services were privatised.

      Often a lot of the profit from these former public utilities ends up going overseas.

      Toll roads are another ripoff on the taxpayer that increases charges for road users.

      Commenter
      Get Real
      Date and time
      June 30, 2014, 10:45AM
    • Government monopolies can also bring citizens a benefit through revenue streams - which are unavailable once the asset has been sold, and any profits go straight to shareholders, not Treasury.

      Oddly enough, loss-making Government businesses (like Australia Post's daily mail delivery) don't seem to whet the appetite of the private sector to any degree - all part of the "privatize the profits, socialize the losses" continuum of how the private sector perceives it's relationship with the public sector.

      Commenter
      chilli
      Date and time
      June 30, 2014, 5:09PM
    • When competition existed privatization is good, because they'll compete with each other. When privatization becomes monopoly then you can kiss your service goodbye. Ask Sydney Airport!

      How can power outage will fail, it's extraordinary considering its operation can be critical, i can't believe they don't even have a backup generator in place. Power failure should be simple contingency procedures for such events.

      Commenter
      Gerson
      Location
      Sydney
      Date and time
      June 30, 2014, 6:24PM
    • But of course everyone is in the business of privatising their profits and ensuring their losses are covered by the public purse. Why would you buy a public utility if you didn't expect to charge what the market will bear and pare the quality of the service to the bon?

      Commenter
      Clive
      Location
      Manly West
      Date and time
      June 30, 2014, 7:56PM
    • i think its much more simple than that. the major reason for opposing privatisation in australia is because our record in privatisation has been dismal. someone may be able to help me, but i can hardly think of a single example where privatisation in this country has delivered lower prices and better performance. and selling off revenue generating assets is silly, because it means that cost will have to eventually be added to the tax bill.

      as for unions, id rather workers get marginally overpaid, or have a few people employed where they are not entirely necessary, than to have some executives take home multimillion dollar payslips for figuring out how to sell a necessity in a natural monopoly to a captured market, or to deliver a windfall for overseas investors (especially when foreign governments are actually taking massive dividends on infrastructure in australia).

      Commenter
      cos1
      Date and time
      June 30, 2014, 10:03PM
    • What's also dismissed by the smell of big money is that Public Utilities were once also large employers of apprentices. They were traditional training grounds for a myriad of trades.
      Privatisation and cheaper costs is a fallacy. Another urban myth perpetrated by the winners and grinners, those winners and grinners are not the consumers nor our young in need of training.
      I'm a firm believer in essential services remaining in public hands. Would we out source our defence force, oh but wait......
      It's been proved time and again that perceived efficiencies and cost savings are a mythical con.

      Commenter
      A country gal
      Date and time
      July 01, 2014, 1:58AM
    • The Baird government is starting to point the finger at unions for the high cost of power in NSW. The LNP say a private owner will eliminate 'union featherbedding'. I take it to mean that the union has struggled, fought and achieved reasonable working conditions for the employees it represents in the power sector, and that these conditions will be stripped away by selling off the poles and wires. This public asset theft - condoned only in the minds of LNP, their supporters and totally irrational free marketeers - will expose the worker's decent living conditions to the vagaries of 457's, and a lot of the current employees will probably end up victims of the bottom line (i.e. on the dole queue). I suppose at least this time the LNP aren't lying about the consequences of their policy.
      Given that prices end up falling for a very brief period after the privatisation, but then skyrocket in subsequent years (Victoria is a case in point), can any conservative commentator or sycophant cheer-squad member identify:
      (i) one single benefit this supposed privatisation dogma entails, and be sure to factor in the social cost
      (ii) real measures to avoid price gouging and all the profits heading off-shore, given that banks and foreign governments are the only players big enough to consider such purchases

      God help us, let us never vote these LNP used-car salesmen and women in, EVER again!

      Commenter
      Mary Johnson
      Date and time
      July 01, 2014, 8:50AM
    • The sale in NSW is clearly not in the public interest. The new owners receive the profits from the poles and wires for 99 years for only 7 years of dividends upfront. It is far less expensive overall for the tax payer to pay a small amount of extra tax now instead of huge increases later to make up the revenue shortfall as well as the increased prices for power. It's a great deal for the promoter$ though.

      Commenter
      Good Logic
      Date and time
      July 01, 2014, 9:34AM

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