Iemma’s power failure
Over the fold, my column from yesterday’s Fin, on NSW electricity privatisation, which ran under the title above
The Iemma governmentâ€™s plan to privatise the generation and retail sectors of the NSW electricity industry has drawn predictable applause. Yet it violates virtually every principle of good public policy.
First, it is a breach of trust with the electors. Privatisation was not mentioned in the election platform taken to the people earlier this year. In 1999, Labor fought and won an election on a platform of public ownership.
For self-described political hardheads, violating election commitments is to be encouraged rather than condemned. The conventional wisdom is that good policy is only undertaken if voters can be tricked or ignored.
The corrosive consequences of such thinking are evident in the downfall of the Howard government. Howard began in the recommended manner, by repudiating large parts of his 1996 platform as â€˜non-coreâ€™. By the time of his defeat, everyone knew that any statement he made could be repudiated, or parsed into meaninglessness, the moment it became convenient to do so.
Breaking election promises corrupts public debate. It encourages the general corruption of political processes that flourished under Howard, and is also rife in NSW. Ministers perform favours for powerful interests, and are rewarded with lavishly-paid sinecures when they leave office. Dishonesty about policy encourages all other forms of dishonesty.
Even Howard took his biggest single reversal, on the GST, to the electorate. Iemma should do likewise.
The dishonesty of the policy is compounded by its packaging. The payments to electricity workers have attracted some criticism from commentators. But this overt payoff is probably the least objectionable component of the deal.
Far worse is the attempt to tie the sale to investments in new infrastructure projects. This package presentation combines economic illiteracy with the potential for a gigantic boondoggle.
According to the Sydney Morning Herald, â€˜the sale will .help pay for a â€œnew visionâ€? for urban transport, including a European-style metro rail line.â€™ (Power ranger Iemma ignites state with $15b, 11 December). The quotes should be around â€œpay forâ€?, not around â€œnew visionâ€?. There is no meaningful sense in which selling an income-generating asset allows the government to pay for anything. The sale price merely offsets the loss of income.
As a matter of public policy, either a metro rail line is a good investment or it isnâ€™t. Whether or not electricity assets are sold can make no difference to this. However, when politicians get money that they can regard as â€˜freeâ€™, they commonly squander it.
The risk of dissipating sale proceeds is nowhere greater than with the proposed metro rail line. The worldâ€™s leading authority on megaprojects, Bent Flyvbjerg, has shown that, of all classes of infrastructure projections, urban light rail is most prone to cost blowouts and revenue shortfalls. Sydney needs major improvements to its public transport infrastructure. But such investments need careful scrutiny, not cosmetic packaging.
The losses from mismanagement of sale proceeds could easily outweigh the claimed benefits from privatisation. But these benefits themselves are largely a matter of faith. Despite the sale of billions of dollars worth of assets in the past fifteen years, there has been no serious attempt to evaluate the fiscal impact on citizens.
One problem here is that we need to assess what would have happened in the absence of a sale. Fortunately, for NSW electricity, that is not such a problem. We can look at the 1997 sale proposal, which was expected to raise around $20 billion, and compare the actual outcome under continued public ownership.
Assuming (over-optimistically) that all the sale proceeds were used to repay public debt, and that the resulting interest savings were compounded at 6.5 per cent, the $20 billion would have a 2007 present value of $40 billion.
By holding on to the assets, the government received dividend and tax equivalent payments averaging around $1 billion a year. In addition, a capital restructure yielded around $5 billion in equity repayments. Converting these flows to 2007 present values yields about $20 billion.
If the estimated sale price of $15 billion for the generation and retail assets is right, that leaves the NSW public with about $4 billion more debt than they would have had if the 1997 privatisation had gone ahead. But the distribution sector, still in public ownership, is worth at least $10 billion and probably $15 billion. So, the rejection of privatisation in 1997 saved the NSW public between $5 and $10 billion. We can only hope for a repetition.