Still a strong case for keeping privatisation in the reform tool kit

Bookmark and Share Economics & Deregulation | Mikayla Novak
Canberra Times 22nd August, 2016

Despite recent concerns raised by the head of Australia's competition watchdog, privatisation remains a viable reform option.

Even though it has been firmly established as a modern economic reform mainstay, the notion of privatisation remains a controversial one among the public at large.

There are vested interests that will disparate privatisation as a matter of course, regardless of its successes, but when a longstanding, self-avowed proponent of privatisation starts raising doubts it makes sense to take notice.

Speaking at an economics forum in Melbourne a few weeks ago Rod Sims, former Hawke government adviser and reappointed head of the Australian Competition and Consumer Commission, said, "I'm now almost at the point of opposing privatisation".

The reasons for Sims' growing scepticism about privatisation policy are two-fold.

The first concern is that governments transferring ownership of assets to the private sector seem to be doing so with revenue-raising as a primary objective, and this becomes more apparent when governments are gripped by a budgetary crisis.

Referring to the case of recent sales of port infrastructure by the NSW state government, Sims remarked: "I just think governments are more explicitly now privatising to maximise the proceeds."

In the past federal and state governments have used the sales proceeds from privatisation to reduce public sector debt, and more recently have tried to make privatisation politically appealing by promising to spend funds from asset sales for recurrent or capital purposes.

Paying off debt is better than frittering funds on potentially low-value spending but the bottom line, from a classical liberal perspective, is that the bounty of sales revenues a government collects from privatisation ought to be a secondary concern.

The application of sales proceeds by federal and state governments during the 1990s and early 2000s to reduce the burden of public sector debt was welcome at the time. But the broader "political economy" problem of governmental overspending was unaddressed.

If politicians lack the discipline to control spending, as budgetary developments in recent years attest, then the sale of public sector assets today could perversely help to financially validate the excessive expenditures of the past.

Putting these considerations together, the promise of privatisation revenue is no substitute for sound public sector financial management practices.

There are far more compelling reasons to privatise than fundraising, so in relation to the revenue question there is merit in the argument posed by the national competition policy regulator.

The second major issue that Sims raised in his Melbourne talk related to the implications of privatisation for competition, not only from the perspective of rivals competing with the owners of the privatised asset but for downstream industries and final consumers.

Ever since privatisation became a part of the policy reformer's toolkit, it has been stressed that a privatised entity as part of a highly competitive environment, with numerous sellers already in place, is preferable.

At the very least there should be contestability pressures, or a credible threat of competitive entry into the industry by potential rivals, if a situation of converting a public monopoly into a private one is to be avoided.

In addition, a government preferably should not pursue any contractual arrangement that crimps competition, such as giving the buyer of privatised infrastructure a right of first refusal over future facilities located nearby, even if that potentially loses some privatisation sales revenue.

If a competitive environment cannot be ensured prior to privatisation, including through the structural separation of the privatised entity into its contestable versus monopolistic activities, it is recommended some form of regulated price oversight is needed to ameliorate the risk of monopolistic pricing.

Where privatised entities exist in sufficiently competitive markets governments have tended to relax price controls, whereas for private monopolies a regime of price monitoring, or even determinations of allowable price increases, have been implemented across Australia.

There is often a regulatory clamour for more prescriptive controls on prices charged by privatised entities and this can be fuelled by mischievous claims that privatisation, as opposed to government policies or changing market conditions, is responsible for price increases.

But there are risks surrounding more prescriptive price controls upon privatised entities, given the potential for regulatory action to deter new investment.

There seems little doubt that economic regulators would see additional pricing powers over privatised entities as highly desirable, but any potential changes must be scrutinised, with relative costs and benefits weighed judiciously.

The contrarian attitude assumed by Sims aside, it is helpful to reacquaint ourselves with the reasons why privatisation has become commonplace in Australia, Western Europe, North America and even in former and current communist countries.

Government-owned entities are forced to adhere to political imperatives, such as providing sub-cost services to favoured constituencies, while being insulated from the direct effects of competition and the threat of bankruptcy or takeover.

Such circumstances are prone to lead to wastage as government entities generally operate less productively than their private sector peers.

Although cases surrounding post-privatisation performance will vary several academic surveys, such as those undertaken by Bill Megginson, show an improved performance of privatised entities by way of efficiency gains and service reliability.

Sims has opened up a good debate about ensuring the political motives underpinning privatisation are sound, but his statements don't contravene the reality that governments tend to be poor allocators of capital.

There are still plenty of Australian government assets, in communications, human services, infrastructure, property and utility sectors, whose ownership could be divested.

Governments should investigate alternative ways to truly give assets back to the people where circumstances permit, such as transferring assets to community groups or gifting shares to Australians.

In an economic climate where we should want to operate assets and resources less wastefully, privatisation should definitely be seen as a plus.