Illustration: Michael Mucci.

Illustration: Michael Mucci.

Privatisation is back on the agenda.

The argument was kicked off last week when Rod Sims, chairman of the competition regulator, said privatisation would be key to improving Australia's productivity and that the Abbott government ought to consider all government-owned assets in its ''root-and-branch'' review of competition laws.

''Generally, the private sector will run commercial enterprises more efficiently than government,'' Sims said.

You can bet we'll be hearing a lot more about privatisation in the next few months, with the Productivity Commission due to release its draft report on the costs and financing of national infrastructure.

So let's address some of the furphies about privatisation.

One of the main arguments for selling off government-owned businesses is the belief that the private sector does things better than the public sector.

A lot of the time that's true. Private businesses operating in competitive markets will often produce goods and services far more efficiently and productively than a government-owned enterprise.

But it's not always the case.

Some privately owned businesses have had to be nationalised after they failed to provide the services a country required. Others have had to be brought back under government control after a failed experiment with privatisation.

One example is Victoria's Dame Phyllis Frost Centre, a maximum security women's prison. It was built in 1996 as the first privately financed and run prison in Victoria. But Victorian taxpayers had to assume responsibility for it just four years later.

One of Switzerland's major airlines, Swissair, had to be re-nationalised after the September 11 attacks, thanks to problems in the global airline industry and its own financial mismanagement.

That's only two examples but they are worth keeping in mind.

A second furphy about privatisation is that we can cut ''red tape'' by offloading government-owned businesses onto the private sector. The economic literature shows the reality is more complicated than that.

A former commissioner for the Australian Competition and Consumer Commission, Stephen King, has written a bit about this. In 2002, the economics professor summarised Australia's experience with privatisation - the bulk of which had been done by then - in a report called Privatisation: A Review of the Australian Experience for the Committee for Economic Development of Australia. He showed why the theory of government ownership and privatisation is intrinsically linked with ''regulation''.

King said a ''naive theory of privatisation'' is that if private firms in competitive markets operate more efficiently than equivalent publicly owned firms, and if that leads to allocative and productive efficiency, then private ownership seems like a good idea in most places. But that misses the point in a country like Australia.

The public debate about privatisation in Australia should not be about the many areas in the economy where private provision works well, he argued, but about those sectors where the private sector does not operate appropriately.

''Government ownership, in transport, energy and other infrastructure industries, may reflect that competition is unviable, so that private ownership means a monopoly provider,'' King wrote.

''In areas of pollution management, waste disposal, incarceration and health services, externalities may mean that private incentives are not aligned with public welfare, even if the market is highly competitive.''

It is these areas - where private ownership may not lead to socially desirable results - that provide the key to the privatisation debate.

He said government intervention was required in some parts of Australia's economy: when natural monopolies occurred and where privatisation was unlikely to lead to a competitive environment.

In those cases, ''selling a monopoly firm might be a good way for the government to raise revenue but it is likely to involve a high social cost if the new private owners can exploit the firm's monopoly power without constraint'', he wrote.

The key word here is ''constraint.'' If we decide to hand over a government-owned business to private interests then we may need to keep regulating it - but with different regulations - so everyone can still afford to access its goods and services.

Privatisation should be about designing an optimal mix of ownership and regulation to achieve the best outcomes for society.

See what that means? Privatisation of government-owned assets does not cut red tape. Rather, it simply replaces old tape with new.

If the Abbott government pushes ahead with the privatisation of any Commonwealth-owned assets then that's what it will be doing.

Ross Gittins is on leave.