February 9th 2002

  Buy Issue 2626

Articles from this issue:

Cover Story: Water - Australia's most urgent priority

Canberra Observed: Simon Crean faces a horrible year ahead

South Australia: Close contest looms in SA Election

A tale of two legacies

Straws in the Wind: Old crooks and new / Paying the piper

East Timor: Opposition warns of Fretilin power grab

MEDIA: ABC TV 'Media Watch' - Who polices the police?

Letters: Public servants defended

Letters: Population: asset or disaster?

Letters: Harris Scarfe retailing business

DEVELOPMENT: Privatisation and the national debt: what is to be done?

Comment: Terrorism, refugees and the the populist resurgence

The new Vietnam: Ho Chi Minh and The Colonel

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Privatisation and the national debt: what is to be done?

by Emeritus Professor Lance Endersbee

News Weekly, February 9, 2002

Emeritus Professor Lance Endersbee looks at the implications of Australia’s surging national debt and provides a number of potential solutions.

Public utilities operate as natural monopolies within their service areas. But those advocating privatisation assumed that natural capitalism and market forces would take over, even though the new private organisations remained as natural monopolies. There is much evidence in other countries that where there are such natural monopolies, market forces can be very good at mis-allocating resources. Unfettered market forces combined with weak government can lead to inefficiencies and serious failures in the allocation of a society’s resources. The collapse of Enron in the US comes to mind.

I was an engineer in government utilities for a total of 30 years before I became Dean of Engineering at Monash University in 1976. In the government utilities, we were well aware of best world practice in our fields, and we watched costs worldwide, as did our major customers. We earned an international reputation for excellence in our work. We had no doubt that the public sector could and should operate efficiently and well. We had strong leaders who expected excellence, and encouraged us to achieve it.

All of that structure of public service was changed dramatically during the decade of the nineties - in the name of privatisation and market forces. Many government instrumentalities, and other assets such as buildings and land, were sold for cash.

If we consider the magnitude of the revenue gained by governments in the sale of government utilities, Australia led the world in the decade to 1997. In the decade to 1998 Australia raised $92 billion from privatisations, and we are now second to Brazil which has sold government utilities to an amount of $137 billion. Chart 1 shows the company we keep.

It is better to view this data on a per capita basis. In this case, Australia and New Zealand are grand champions, leading the rest of the world by a substantial margin.

These two charts show that over the past decade, governments in Australia have been quite creative in gaining additional finances outside of federal and state taxation, simply through the sale of public assets.

The proceeds from these sales (privatisations) of government instrumentalities raised far more funds than the residual debts of those enterprises. Most of the government instrumentalities were already largely amortised. The public enjoyed low user charges because of the sustained investments by governments over decades, together with properly funded maintenance.

The privatisations meant that the net result of all these prior investments had to be refinanced. Thus the users now face the higher charges that are necessary to amortise these instrumentalities all over again.

The national watchdog, the ACCC, was kept at bay by the simple fact of state government sovereignty. The associated deals and negotiations shocked the state auditors, but they also were silenced. The creative accountants were in charge, plundering the assets of the people. In essence, the people were being defrauded by their own governments.

If we include other asset sales, these capital gains by governments over the past decade probably amount to about AUD$100 billion. That large sum is about 8% to 10% of the total government revenue from income and company tax over the same period. It was a great honey pot of additional funds that was entirely outside the tax system. It was particularly attractive to state governments, who could increase services beyond the allocations of the Federal Government to the states.

The refinancing of $92 billion provided wonderful opportunities for creative work by the major banks. The banks and the institutional investors supported the conduct of seminars and conferences, in every state and every year, on the new efficient financial management of public infrastructure, and praised the State Treasurers for their vision ( the honey pot!), and ridiculed all those who had carried responsibilities in the public authorities.

The Victorian Auditor-General was worried, so he was threatened with privatisation to help improve his understanding and confidence in the new system. The Senate of the Federal Parliament passed an opposition motion calling for a Federal Parliamentary inquiry into the proposals by the State Government to change the role of the Auditor-General. But the Federal Government does not have powers in such matters, and the action was just a token gesture. The sovereign state of Victoria proceeded to pass the contentious Auditor-General legislation, after the auditor-general had made a last-ditch direct appeal to MPs to vote against it.

Captains of industry praised governments for their financial acumen, but we now note that in many cases they were in fact captains of sinking ships.

The superannuation schemes, which had long invested in bonds of public authorities, were encouraged to divert their funds to the stock market. Superannuation became compulsory. Stock prices rose, and the banks and institutional investors praised governments for creating such prosperity.

This concept of privatisation was also applied to ongoing obligations of governments. I think that the law on Native Title was introduced as a device to privatise aboriginal welfare, but it has brought manifold problems that were never contemplated by those who thought they had found an easy solution. Questions now arise as to whether the future benefits under Native Title may be capitalised and sold, or leased to others, and how the benefits should be taxed.

A similar pattern of behaviour then emerged in the private sector. I refer to the stripping of assets of public companies, often without the approval or knowledge of most small shareholders. The superannuation schemes have suffered major losses from such activities, and many small shareholders now wonder what happened to their investments.

Any government instrumentality or public company that is planning and building for the future is inevitably and deliberately accumulating assets to gain future income. In the case of public companies, dividends may be deliberately kept low because the company is focussed on growth. Thus the share price may not reveal the true long- term value of the company. That does not worry most of the ordinary small shareholders, because they have also invested for the long term. But it means that such public companies with an open shareholding can be plundered for their assets. On the other hand, tightly held private companies can resist these pressures. One public company that remains secure for its shareholders is Santos, where the South Australian Government has legislated to protect the company from take-over. But it does seem that our system of public companies is under attack. Many small shareholders are worried, and are watching helplessly.

The sales of government utilities and the stripping of assets of public companies has brought in a huge flow of funds from overseas, and led to a great increase in our national indebtedness. The proceeds went straight into consumption. There was a multiplier effect arising from the increased spending. The financial services sector rejoiced, and real estate prices rose, especially in Melbourne and Sydney.

There was no concern about the continued decline in the production sector of the economy, in manufacturing, farming, and mining, as the decline was obscured by the continuing devaluation of our currency, although that improved the competitive position of our exports.

The Australian GDP, measured in Australian dollars, was growing strongly. Politicians and economic commentators praised the booming economy and our wise economic leadership. The Australian perspective of our economy is shown in the continued rise in the chart.

But that situation was quite different when viewed from the perspective of other countries such as US, UK, Japan, Europe and Singapore. When we consider ourselves as others see us, in US and Japan for example, we see that Australia has ground to a halt. Of course the United States and Japan are also facing serious difficulties which will certainly impact on exchange rates.

But what do we do now? What more can we sell? There is now a momentum of expenditure by the federal and state governments which is running well above the available tax base. That creates pressures for even more privatisations. The proceeds of the sale of the remaining part of Telstra are already in the federal budget, but will that be enough?

I find this present situation of over-expenditure by governments (beyond tax revenues) as quite disturbing, but nobody seems to know or care. In the private sector, such practice leads inevitably to the receiver. But all that we know from the Australian media, and government treasurers, is that Australia is growing more rapidly than most other countries. Of course it is growing, it should be after the injection of huge funds from the sale of our assets. But what do we do now?

The standard response by our national government is to reduce interest rates, sell gold reserves, sell federal assets such as airfields, and borrow more money from abroad, and to stimulate the housing sector through the first home-owners scheme. WilI we have a first car-owners scheme to stimulate the automobile industry? I wonder what the dour Adam Smith would have said about such hanky-panky?

The standard response by State governments is to privatise much more. There are still some hospitals and prisons which could be sold. They could permit more casinos. There may be some government superannuation funds that could be transferred and sold to the private sector.

Importantly, nobody seems to be responsible for the management of the national economy. The federal government is busily allocating GST revenues to the states in the hope that they will mend their profligate ways.

Meanwhile the economists assure us that market forces will inevitably sort out the problems for us. If that is the case, what am I worried about? It is simply that when the inevitable market forces are imposed upon us, they will expose all the weaknesses I have described, and we will be shocked by the ruthless reality of it all.

Here are my views on what we should do next.

1. National Development

In the present problems of the nation there is no alternative other than government leadership at the national level. We are at the end of state-based development. The states are busily selling their public infrastructure and leaving the field.

There are very serious national problems, and there are national solutions, and these solutions include major public works in water, transport, energy, and related mining and industry projects. But there is no Federal Ministry of National Development, as that might offend the states. A Department of National Development should be formed.

Over the past ten years, I have been working on conceptual plans for several national projects for national development. I believe they are all feasible and economic.

In the north of Australia the summer monsoonal rains cause widespread flooding every year. There are potential sites for reservoirs to capture part of these floods, and vast areas of potentially irrigable land downstream and in nearby catchments. The Flinders, Victoria and Fitzroy Rivers and others all show excellent prospects for economic development on a very large scale. Some small areas have been considered in the past for cotton and found uneconomic. But now there is a growing demand in our region for fruit and vegetables to feed large and rapidly growing cities. With fast freight shipping and air services to markets in Asia and the Middle East, these irrigation areas would develop and prosper.

Furthermore, by managing the market price for water in these new irrigation areas, and using tradeable credits for negative environmental consequences, we can use market forces to ensure the resources are sufficiently highly valued that environmental damage is kept to a minimum, and that there are strong environmental benefits.

The present waste and inefficient use of water in the Murray-Darling Basin reveals the potential to at least double the output of irrigable crops for the same volume of water as we now use. That would require the redesign and rebuilding of much of our irrigation distribution systems, the opening up of new lands for irrigation, and also the closure of some low lands that should never have been irrigated anyway.

Such an approach would work wonders in correcting our wet land salinity, and correcting the degradation of the rivers. I think it would be shown that it is just not economic to waste water and land the way we do.

The Snowy Scheme was the only national public works project in the history of the nation. It lifted the national economy and inspired all those who worked on it. The subsequent growth in demand for electricity and for water has justified the cost of that project many times over. The dams, tunnels and power stations of the Snowy Scheme will last indefinitely into the centuries ahead, steadily increasing in value each year through the benefits of renewable energy and the water diverted inland. Such national projects can set the basis for greatly expanded national production, and real national development.

Australia has been surviving by selling off assets, public and private. We must now greatly increase our national production, especially for export and to replace imports. And we may not need to replace imports, if we export even more.

2. Development Projects and Population Growth

In a world of strong population pressures, and the migration of hungry and frightened people, it is incumbent on Australia to consider our response to these human needs.

In the decade of the fifties, the population of Australia increased by 25 per cent. There was increasing prosperity and full employment. Major development projects were in hand at state and national levels, including the Snowy Scheme.

We can do the same again. The Australian population could be increased from the present 20 million to 25 million by the year 2010.

I think it would be quite reasonable to embark on a program of national development projects, and to accept a prospective increase in population of 25 per cent over the next decade. Perhaps it is our only realistic option.

One of my sons, who is overseas, put it another way. Countries are wealthy when they put together efficient capital infrastructure (roads, ports, energy supplies) with an effective regulatory infrastructure (our laws - including the Constitution) and an educated population.

What works hard against Australia getting the right capital infrastructure is a legal/political system that cannot adequately respond to the wishes of the people.

If we get that right, we can certainly get on with national development, and ramp up immigration.

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