Alan Moran
Thirty years ago, at the dawn of the Australian reform era, there was a lively debate about the merits of public versus private ownership. At that stage, conscious of its support from featherbedded unions, Labor argued it was competition, not ownership, that drove efficiency.
Since then, those carrying the flag for public ownership have seen their ranks thinning. Now they are confined to the hard left and elements of the populist right. Hardly anybody sees a case for retaining public ownership of businesses that compete with the private sector to supply goods and services.
It was 20 years ago when even Gough Whitlam supported Bob Hawke’s privatisation of Commonwealth Bank of Australia and Qantas. This week’s decision by the Baird government to sell NSW’s electricity poles and wires renews the efforts Bob Carr’s treasurer, Michael Egan, made 20 years ago.
Locking up public funds in firms that have business rivals makes no sense, especially since the private sector will always prove superior in keeping down costs and seeking better ways to profitably supply market needs.
Even so, state-owned companies such as electricity generators, which are in competition with private businesses, are forced to follow their private sector competitors’ cost savings and innovations. If they don’t, they lose money.
These disciplines are absent with monopoly businesses, the most important of which are the electricity networks. Hence privatisation can bring far greater benefits with such businesses.
Performances by government-owned electricity networks are compared with those that are privately owned, even though no two networks pose identical challenges.
This year, costs of the state-owned distribution businesses in NSW and Queensland mean network prices are around twice those of Victoria’s private distribution businesses. And the situation is deteriorating. Over the past three years, NSW and Queensland costs increased three times as fast as Victoria’s (the private South Australian network also has high costs as it serves a very peaky load and had been run-down).
Hat trick of high cost
In the case of NSW and Queensland, costs are inflated for three main reasons. First, government ownership has led to more gold-plating of the systems as risk-averse ministers who have little incentive to save costs over-react to mishaps. Even so, the reliability of the states’ networks is, if anything, rather less than that of Victoria.
Secondly, because government ownership equates to a relative indifference to costs, workforces become bloated and over-generous conditions prevail. Private sector workers in networks earn far less than the $138,000 a year average earned by Sydney/Newcastle distribution business Ausgrid or the $127,000 average at country supplier Essential Energy, most of whose workers also have use of a company car. Private sector management also requires greater workplace flexibility. And private companies would not tolerate the use of their equipment for purposes like the erection of anti-privatisation signs on Ausgrid poles – forcing consumers to finance propaganda to maintain the high costs that government ownership imposes on them.
Finally, the lack of controls in government businesses means little discipline on spending. All electricity network businesses, as monopolies, have to obtain agreement from the regulator for a total spending cap. This dictates the prices that can be set. Having better information about their businesses, the firms will normally persuade the regulator to approve over-generous levels of the spending (and therefore higher prices than are necessary).
In the case of private sector companies, the owners will seek savings in the regulator-approved capital and operational spending for the benefit of shareholders. In subsequent regulatory rounds this provides guidance to the regulator who will demand a lower spending cap and lower prices. There is no such operational management discipline on government businesses. Executives in those organisations will spend all that they are allocated and often even more, confident they will recoup the additional costs in subsequent regulatory rounds.
The case for privatisation of networks is compelling. However, the NSW proposals are timid in exempting the inefficient Essential Energy and seeking only a 49 per cent private holding for the rest of the network. Baird is hoping that placing 51 per cent with an apolitical future fund will offer buyers sufficient assurances that they can pursue the necessary management reforms.
Alan Moran is the director of deregulation at the Institute of Public Affairs
The Australian Financial Review
SORRY ABOUT WHOLE ARTICLE BUT IT HAS A PAYWALL
