March 9th 2002

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Articles from this issue:

The Hollingworth Affair

Federal Cabinet decision on cloning

Media putsch overwhelms Governor-General

Will CHOGM bite the bullet, oust Mugabe?

Straws in the Wind: Rumpole arising

Environment: National parks are an unacceptable fire risk

Agriculture: Bar lowered on quarantine once again

Media: Crude but effective

Environmental optimism (letter)

Bias: in the eye of the beholder (letter)

Economics: Privatisation: the promise and the reality

Comment: Trust: a commodity in short supply

Culture: How the media exploits the US$150 billion American youth market

ASIA: WTO entry will put pressure on China-Taiwan ties

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Economics: Privatisation: the promise and the reality

by Colin Teese

News Weekly, March 9, 2002

The case for the policy of privatisation rests on a number of essential pillars. It is, however, questionable whether these represent the real reasons why the policy has been, and is still being, pressed upon governments with such vigor. Why that might be so will be examined later.

But let us first consider the stated basis for the policy.

Many on the non-ideological side of the economic debate - while staunchly defending the capitalist form of economic organisation - support the idea of a mixed economy. Nevertheless, competitive market capitalism, they insist, does not always provide the best means of delivering essential services to the market economy.

Senseless duplication

It makes no sense, for example, to duplicate, for purposes of competition, suburban rail network. Such competition would be wasteful and, in economic and social terms, inefficient. Customers will not be better served by two identical services traversing the same route.

These propositions, the free market ideologues, reject - at least in so far as publicly owned enterprises are concerned. To their minds, the idea of a natural monopoly - the usual justification for publicly owned and operated utilities - is unsoundly based.

Where possible, duplication of services will always deliver better and cheaper outcomes for consumers. And even if monopolies are unavoidable, those, too, are better provided by private enterprise - though sometimes it is necessary to safeguard against misuse of monopoly power through government managed regulatory mechanisms.

What has been the practical outcome of these policies? This article cannot consider all examples of the policy, but to take just a couple. Back in the late eighties, the Australian Labor Party then the government, and under its then Minister for Communications, and later leader, Kim Beasley, swallowed the new free market orthodoxy, hook line and sinker.

When it came to introducing a competitor into the telecommunications scene, the Labor Party, then in government, not merely allowed, but insisted, in the interests of competition, that the new entrant build its own identical transmission lines throughout suburban Australia.

Thus, were $2 billion squandered on a wasteful duplication of the means of servicing telephone and television customers. Far from providing consumers with any of the benefits of competition, this decision, ultimately, had to be paid for by consumers and/or taxpayers, one way or the other.

The only real beneficiaries were those companies making the telephone cables; and, presumably, Mr. Beasley himself, who established his credentials, and those of his party, as proponents of privatisation.

A second example is the privatisation of electricity production and distribution in Victoria. That monopoly was privatised by the Kennett Government.

At the time, the Government claimed to have received a huge price for the utility. It was also emphasised that prices could only rise in accordance with principles established by a government regulatory body, and after approval of that body.

Essentially, price increases would be approved in line with inflation.

The regulatory authority recently granted the first rises. Private providers have successfully argued for 20 per cent increases in electricity charges - far in excess of the movement in inflation. The companies have insisted the increases were necessary to cover operating based upon what they paid for the businesses, including amortisation costs - which is probably true.

Now the present government will limit the electricity price increases to customers to what inflation would have justified. The remainder will be paid to the providers by the government, effectively as a subsidy - out of tax revenue.

This means that the cost of privatisation has had to be paid by customers, either directly on their electricity bills or through taxation.

Customers are paying private companies more to operate a system they previously owned and operated themselves; with none of the benefits the publicly owned system gave them.

Those benefits will be discussed later.

It is maintained that public monopolies will not manage costs, especially wage costs, in the face of union demands, as well as private companies.

Consequences are said to flow from this. First, the cost of the service will be inflated to the disadvantage of consumers. And, second, wage demands, pressed successfully in one industry will, by the flow-on principle, pass to other industries. Ultimately, these will generate wage push inflation for the entire economy, which will feed upon itself.

Perhaps there is a measure of truth in this proposition. But surely it is not confined to public utilities. Consider the example of railways built and operated by mining companies to shift their product from mine to coastal port destinations.

Don't the engine drivers in such a system have the same power to extract higher wages from their employers as those of a publicly owned railway? And is not there the same possibility of flow on effect to the wider economy?

In fact, the real reason why railway systems, among others, have a greater temptation to yield to wage pressures has nothing to do with the nature of ownership. It concerns the nature of the enterprise.

In certain public utilities and industries such as mining, wages comprise a small part of total operating costs and yet have a significant potential to disrupt profitable operations. It makes sense to settle industrial disputes amicably, even at the cost of higher wages.

Yet nobody has ever suggested that mining companies should be compelled to allow competition in the provision of these services, in the interest of efficiency, either for themselves or for the wider community.

The counterbalancing arguments in favour of the public enterprise for infrastructure projects are overwhelming - though they may not, and should not, be applied to purpose built private railways.

Cheaper borrowing

The first is that governments and the instrumentalities they stand behind, can borrow cheaper. All other thing being equal, they should be able to deliver any service cheaper than the equivalent private provider.

As a matter of fact all things are not equal. Indeed, the record routinely shows that public utilities actually do the job better. Take power stations, for example; and Victoria as the model.

Performance shows, that such was the efficiency of the former State Electricity Commission that it built its power stations cheaper and delivered power at better prices as compared with private operators in other countries. Furthermore it provided a more reliable delivery system. (Since privatisation in Victoria users have had to insure their appliances against damage from power surges; the SEC carried this liability itself because of efficiencies in its distribution system.)

There are good and sound reasons for all of this. Modern business practice, including the pressures of shareholder demand and the corresponding pre-occupation of CEOs to concern themselves with short-term share price gains, requires longer term considerations to take second place.

Most public utilities are not so preoccupied. They are able to concern themselves with the long-term needs of their customers - business or domestic. They also accept that long lead times are associated with planning for the provision of services associated with population and business growth, and with demographic movements.

In power generation, to take just one example, planning for needs twenty years hence may require financial outlays commencing now, but unlikely to generate returns for many years. Capital needs for such projects are better developed through the public financing systems.

There are also gains for the wider community. Privately funded developments will almost always be foreign owned. Much more of such projects will be sourced overseas, with a consequent cost for our current account. Dividends, also with be remitted overseas. And if less of the manufacturing is done in Australia, there will be a loss of jobs and of technical know-how.

If all of these facts are known, why then is the push for privatisation so strong?

The real reasons behind the advocacy of privatisation lies in the commitment to free market and free trade ideology standing behind the so-called 'Washington consensus'. In other words globalism.

It has been a well-understood fact in North America and Europe and their own markets, by virtue of stagnation in population growth (incidentally, made worse by unbridled market capitalism) are growing at ever decreasing rates.

And in the only areas of the world where population is growing - and rapidly - the population was too poor to sustain market-driven economic policies. Especially, that is so for the basic industries that feed consumer demand. Thus there is a need to expand into markets in other prosperous countries. Privatisation opened up opportunities where previously these were the preserve of public owned utilities.

On the basis of successfully preaching the so-called efficiencies and benefits of free trade and competitive markets, many prosperous countries- including Australia- have been persuaded to open their markets to the entry of foreign companies in areas which were previously the preserve of publicly owned enterprises.

The emphasis on trade in this equation is critical. A campaign has persuaded much of the developed world, and some developing countries, that trade is the underpinning factor in their economies. As a matter of fact it is not.

In Australia's case, trade delivers only 10% of GDP - and it is the same for most other countries. The World Trade Organisation, and the emphasis it has placed on trade has helped in the development and execution of this campaign, in contradiction of this important fact.

The policy, from the very beginning, was always more ambitious than the trade in goods. Through the WTO it is in the process of applying the same principles to the trade in services. Some success has already been achieved. But much more liberation in the pipeline for trade in services.

WTO members will be pressured during the current round of negotiations to open up markets for health and education to name just two.

Under these circumstances, the funding presently provided to Australian owned and operated private schools would, almost certainly be impossible to maintain.

In short privatisation has little to do with efficiency, but everything to do with power economics. It underlying purpose is to consolidate and enlarge the reach of the corporate strength of large and influential US and European companies.

  • Colin Teese was Deputy Secretary of the Department of Trade

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