Home > Economics - General > The secret case for privatisation

The secret case for privatisation

March 18th, 2008

Ross Gittins had a piece in the SMH yesterday offering an intriguing line of defence for the privatisation proposals of the Iemma government, in the face of attacks from me and Nicholas Gruen. As Gittins concedes Iemma’s arguments, based on the idea that the sale will protect the states AAA rating and allow for new investment in infrastructure, don’t stand up to scrutiny.

He starts off promisingly enough

You don’t have to be very bright to pick holes in the arguments Morris Iemma and Michael Costa have been using to sell their plan to privatise electricity.

But it seems you have to be wiser than some of our brightest economists to comprehend the deeper issues involved … Various economists, including Professor John Quiggin of Queensland University and Dr Nicholas Gruen of Lateral Economics, lost no time in blowing these arguments out of the water. But it doesn’t seem to have occurred to my learned friends that they’ve been busy demolishing a straw man. They may be economic geniuses, but they have more to learn about the politics of economics.

The line implied here and spelt out later on is that, while the ostensible case for privatisation is nonsense, there are deeper reasons which Iemma can’t acknowledge, but which provide a compelling case. It sounds promising. Unfortunately, Gittins makes rather a rhetorical mess of things.

First, the criticism that we responded to the actual version of an argument being presented, rather than every possible variant of that argument is silly in general – this is policy debate, not the Journal of Economic Literature – but it’s particularly silly in the context of a 700 word opinion piece. There is no room to do anything more than respond to the ostensible case put forward by the other side.

Second, Gittins spends most of the article responding to our critiques with marginally more sophisticated versions of the same arguments. These have duly been demolished in their turn by Nicholas, and by Joshua Gans. I don’t have anything much to add in substantive terms.

My objection, as I said, is to the structure of the argument. Gittins has already foreclosed the option of a direct reply by his rhetorical concession that Nicholas and I are “some of our brightest economists” and “economic geniuses”. In saying this, he’s implicitly conceding that we will have anticipated any technical response he’s likely to make, and to make an adequate counter, as we have done. If Gittins really thought he could knock down our arguments on debt levels and ratings agencies, he should have stuck to the high ground of a direct response, as we did when we responded to the shoddy case put forward by Iemma and Costa.

The real interest in Gittins’ piece doesn’t come until the final few paras when he says

But while I’m talking home truths, here’s the big one. No one wants to say it but the strongest reason for privatising electricity is so the electricity unions can’t use political pressure to get at their employers.”

Of course everyone knows this, but there are obvious reasons why no-one wants to be the first to say it. Privatisation is usually motivated, at least in part, by the hope of cutting pay and conditions for workers. Critics like me (and I expect Nicholas) don’t want to say this in response to privatisation undertaken by a Labor government because we will be drowned in indignant denials. Therefore, what we do is demolish the ostensible arguments and wait for someone on the other side to obligingly spill the beans as Ross has just done.

Second, the whole idea of an ostensible and a secret case for policy puts me in mind of the Straussian distinction between exoteric (or public) and esoteric (or secret) teaching. The obvious problem with this story is that of peeling an onion. Having been admitted to the esoteric secret teaching you realise that the story presented to the outer world (the “punters” in Gittins’ story) is a sham, designed to secure assent without understanding. But how do you know that the story you are now getting is the real secret and not another layer of deception? In my limited experience of these matters, the inner caucus that supposedly controls things is in fact controlled by a still smaller group and, while I’ve never got inside such a group, I imagine that the process only terminates with a minimal majority group of two in a controlling triumvirate.

In the present case, the esoteric story that has been sold to Ross is that, in their zeal to defend the public good, Iemma and his allies need to shake of the grip of the electricity unions by selling a bogus story to the innocent public. But, isn’t at least as possible that the financial sector players who stand to gain hundreds of millions (or more) from a privatisation have something to say about the matter, and that their representations have at least as much influence as the public good. Could it be that, in some inner circle from which not only Nicholas and I, but also Ross and other advocates of privatisation have been excluded, it’s been observed that privatisations tend to produce both lavish corporate donations and lucrative post-political careers for all those involved?

Unfortunately, there’s no easy way to test this kind of argument against reality. That’s why its better, at least in public forums like newspaper columns, to stick to open debate. If Iemma wants to put up anti-union arguments for privatisation, or, for that matter, to explain that we should support the deal because of the benefits that will flow to Labor mates, I’ll be happy to respond. Until then, let’s stick to the arguments that are actually only the table.

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  1. Spiros
    March 18th, 2008 at 17:11 | #1

    I thought Gittins made a pretty good real-politik case, until he said that it’s just so important that governments maintain their AAA rating.

    Surely, if the sub prime debacle and its aftermath has taught us anything, it is to not to take seriously the musings of the ratings agencies.

  2. SJ
    March 18th, 2008 at 18:23 | #2

    Kenneth Davidson responds to Gittins from a different angle in today’s Age.

    ROSS Gittins (BusinessDay, 17/3) ignores the main reason why privatising the NSW electricity generating and retailing industry is not in the public interest.

    The Government-owned generators in NSW set an effective cap on the wholesale price of electricity on the east coast, preventing the privatised Victorian assets getting the returns that were expected when they were sold at apparently inflated prices in 1995 to foreign generating companies.

    Privatising the NSW system will make electricity on the Australian east coast more expensive, the supply less reliable and the whole operation more profitable…

    Generators want the NSW Government out of the NEM to be able to game the market.

  3. Ikonoclast
    March 18th, 2008 at 20:35 | #3

    Industrially and economically, Australia is a small place. In the heavily capital intensive industries this means we can carry a only few big players.

    Privatisation at this end of the market merely leads to oligopolies and duopolies. These entities by design and instinct do not compete too hard. They perform a kind of dance of ritual implicit collusion; understanding that the risk of damage from serious competition is not worth the possible gains.

    Can anyone – watching out Bank “Pillars” lifting their rates more or less in unison above the Reserve increases – believe that these oligopolies are in serious competition?

    With strategic infrastructure (power, water, roads etc.) we are better off, as a people, in according the benefits of natural monoploy to the state and thus essentially to the people.

    The Commonwealth Bank and Telstra also should be re-nationalised. I don’t buy the rot peddled under that inappropriate metaphor, “the omelette can’t be unscrambled.” That’s bunkum. What was made once can be made again.

  4. Joseph Clark
    March 18th, 2008 at 20:44 | #4

    Ikonoclast,

    Replacing oligopolies with monopolies doesn’t sound very helpful.

  5. SJ
    March 18th, 2008 at 20:58 | #5

    Joseph, you’ve left out important words, in an manner intended to decieve.

    What you should have said was “Replacing unregulated oligopolies with regulated monopolies doesn’t sound very helpful”, except that is doesn’t have quite the same impact like that, does it.

    Also, the fact that nobody is proposing to introduce an actual regulated monopoly kinda undercuts your argument as well.

    This type of argument, which is knowingly deceptive, is not terribly persuasive.

  6. Bobalot
    March 18th, 2008 at 21:01 | #6

    Privatization of Power is a stupid idea. It’s that simple.

    In Victoria and South Australia, not one new power plant has been built. The only proposals are for replacements for existing aging power plants once they hit heir use-by date (I’m no sure if any are underway). There goes all that rubbish about new private “Investment”.

    I can’t believe people cant see the obvious:

    There is simply no incentive for private operators to build capacity. It costs a hell of a lot of money and generally takes 10 years to build and commission a power plant. Private operators need to please shareholders which means aiming for short term profits.

    The other point, is that they don’t care that new capacity isn’t being added. If demand goes up and supply stays the same, they can jack up their prices.

    I think the problem with many economists is they have no idea how anything actually physically works. Free market ideas work great for distribution (like Department Stores), but not for things like power generation and supply. For a region it is generally physically and technically more efficient to have one operator. You don’t see seven sets of pipes to your house for water from different operators, do you? Why? Because it’s physically inefficient. It’s the same with power.

    Many different operators operating different plants, using the same electricity distribution system is pointless. It simply adds a layer of complexity.

  7. Tony G
    March 18th, 2008 at 21:27 | #7

    “The great neo-classical iconoclast”

  8. Joseph Clark
    March 18th, 2008 at 21:27 | #8

    SJ,

    Thanks for your continued translation of my comments. The maintenance of a government monopoly is precisely what is being proposed. I find it strange/funny when people attack privatisation by saying that it will lead to oligopolies when their alternative is a monopoly.

  9. SJ
    March 18th, 2008 at 21:32 | #9

    Bobalot, this isn’t really a problem with economics in general, but it is quite a possibly a problem with particular schools of thought within economics, and with particular individuals who happen to be economists.

    The design of the electricty market in Australia is “good” in one way, in that it’s one of the few that hasn’t fallen apart after couple of years. The things that caused the others to fall apart, i.e. lack of capacity, failure to produce efficient investment, price gouging, haven’t yet reached crisis level.

    But it’s still an experimental market, and there’s no evidence yet that it will survive a real test of the things it’s supposed to achieve. NSW Treasury knows this, and wants to run away as fast as possible from the model it advocated.

    This isn’t the only reason why the privatisation appeals to NSW Treasury, it’s just another straw on the camel.

  10. March 18th, 2008 at 21:48 | #10

    “Of course everyone knows this, but there are obvious reasons why no-one wants to be the first to say it. Privatisation is usually motivated, at least in part, by the hope of cutting pay and conditions for workers. Critics like me (and I expect Nicholas) don’t want to say this in response to privatisation undertaken by a Labor government because we will be drowned in indignant denials. Therefore, what we do is demolish the ostensible arguments and wait for someone on the other side to obligingly spill the beans as Ross has just done”.

    So you don’t like the denials or what?

    A strange statement.

  11. SJ
    March 18th, 2008 at 21:55 | #11

    There’s no factual content in the denials that can be refuted, Harry. Duh.

  12. CrocodileChuck
    March 18th, 2008 at 22:13 | #12

    Iemma wants to flog off the generating plants BEFORE the ‘global warming’ (sorry, refuse to use ‘climate change’) imperative to replace the dirty coal plants with ‘step change transformation’ cleaner technologies

    When the bill for this comes due, he(and NSW Labour)will be long gone

    CrocodileChuck

    ps PLUS, they are too corrupt and lazy to rectify ANY of their appalling conflicts of interest..

  13. Will
    March 19th, 2008 at 00:09 | #13

    Bobalot

    Not sure I agree with your observations about building new power plants privately.

    First, it doesn’t take 10 years; a modern CCGT (combined cycle gas turbine, a typical new power asset) can be built and operating in only a couple of years.

    Second, power companies and banks are more than happy to develop and finance them. This is shown not only in the huge number of power projects currently under development in the Middle-East, Euopre, Asia and the Americas, but the fact that that there is a long queue to secure contractors to supply equipment and build new plant, which is holding up development of even more.

    And there is no magic to it; all that is required is a viable business case, which bottom line really only requires that the project be high in the merit order (an efficient producer), or have a tolling contract with a strong counterparty, in a market that is not projected to overbuilt (have surplus capacity). Alternatively you might build a new project to hedge supply against projected demand for your electricity supply business. You also need to get comfortable with the cost of carbon going forward, but investors are more than happy to do so.

    In terms of short-term profits for shareholders, equity returns on a typical CCGT are earned over the 25 years or so life of the asset, and if it is project financed then banks are in for a similar tenor for anything from 50-85% of the capital cost. Couldn’t really be further away from the idea of short-term profits.

    Will

  14. Bobalot
    March 19th, 2008 at 06:01 | #14

    A couple of years? I really don’t think so.

    The Chinese don’t even manage that. They don’t have strict environmental standards(Thus no comparable environmental impact statements/studies) and are quite happy to throw peasants off their land with little or no compensation. Hell, they threw a couple million off for their enormous dam. I think they manage 5-6 years before they come onto full capacity.

    If one were to be built, it would need to be built relatively close to the cities for more efficient distribution(Near water as well). Local communities would have to be consulted, an environmental impact statement done, rail infrastructure put in place to take coal there(as it will most certainly be coal), etc.

    Perhaps THEORETICALLY it can be done in a couple of years, in reality that will never happen.

    “Second, power companies and banks are more than happy to develop and finance them. ”

    Really? Many of them have also been built with enormous taxpayer subsidies (Especially nuclear power industries). There is also the point that no new power plants have been built in Victoria or South Australia. If they are more than happy, why haven’t they been rushing into new developments here? There are going to be supply constraints coming up soon.

  15. March 19th, 2008 at 07:03 | #15

    i’ve got an idea, let’s have democracy!

    couldn’t resist. what if decisions were made in public, after discussion,through referendum? then public monopolies would not be subject to ‘inner’ cabals.

    selling off the power plants is very sensible, if you’re a politician: you get cash to paper over pressing problems and the short-comings of privatization are borne by someone else. only the electorate has a long term interest in this question, or any question, so the rational decision process would be through referendum.

    of course, if you have no interest in long term solutions, you are unfussed by leaving the nation in the hands of politicians. but why complain about decisions that are natural and proper to the people making them? you wouldn’t expect the pope to decide gay marriage was a good thing, and pollies can’t afford to think past the next election. indeed, they are often flat-out paying off the last one.

    but give iemma some credit: selling the power stations will have some value for pollies that come after him. rising power prices won’t be their fault. he’ll probably get a memorial plaque, in the secret meeting hall where the pollies plot our subjection.

  16. Salient Green
    March 19th, 2008 at 07:58 | #16

    bobalot, new power plants have been built in South Aust and Vic, wind farms, sewage and landfill gas generators, mini hydro and of course the many rooftop PV power plants.
    http://www.beyondlogic.org/southaustraliapower/

    This is clearly adequate along with interconnectors, and replacement of existing aged power plants results in higher efficiency and probably capacity at the same time. The first Geothermal is due to come on line this year and we will see it accelerate over the next few years.

    Higher prices drive efficiency improvements. Perhaps you should reduce your use as a way of reducing your power costs.

  17. Will
    March 19th, 2008 at 08:04 | #17

    Bobalot; perhaps I should find a new job, because clearly I don’t know anything about my current one.

  18. March 19th, 2008 at 08:37 | #18

    Ross Gittins actually makes quite a good case. He is addressing the core arguments that should be made by a government wanting to get out of the electricity market. These are the arguments that have stood the test of empirical evidence — i.e. private companies operating in a competitive market tend to provide better quality service at lower prices for consumers. And the government has no role in an area that the “market” (i.e. the community) can provide.

    The other arguments about debt ratings, borrowing, etc. are not as relevant because they have nothing to do with the real reason for privatisation. So “demolishing” them (sic) doesn’t really address the crucial issue. Probably because this is impossible to do without losing all credibility as an economist.

    Unfortunately no government will want to argue the real case for privatisation because that’s seen as having an ideological agenda.

  19. Fred Argy
    March 19th, 2008 at 08:53 | #19

    Sukrit,as you say, arguments about debt ratings, borrowings etc. are not as relevant as efficiency. And Quiggin and Gruen are simply asking the NSW politicans to focus on efficiency or wage costs and not mislead the public with wrong arguments.

    Today in The Australian, Mr. Iemma is reported as saying that similar visionary projects to the proposed European-style Metro “would have to be scrapped or extra borrowing undertaken if the Government was unable to proceed with the electricity privatisation”. Iemma still cannot or will not see that it is net worth not debt levels that are important for credit ratings and that selling assets does nothing for the capacity of the NSW economy to pay for additional infrastructure.

  20. March 19th, 2008 at 08:57 | #20

    “selling assets does nothing for the capacity of the NSW economy to pay for additional infrastructure.”

    It does if you use the gains to cut the corporate tax rate, thereby providing incentives to privately invest in infrastructure. Today Australia is at least 30% socialist, because the government owns 30% of the means of production.

  21. March 19th, 2008 at 08:58 | #21

    Fred, but you’re right in that sense — since the NSW govt. can’t control the corporate tax rate.

  22. wilful
    March 19th, 2008 at 09:07 | #22

    The secret unions plan has a counterfactual – the la trobe valley mass sackings and efficiency gains came before privatisation in Victoria, not after. For recollection, employment went from about 9000 to about 3000* in the space of a year or two, due to Kennett. The social impacts are still being felt, but the point is, if you’re brave enough, you don’t need to privatise.

    But NSW doesn’t have that sort of leadership.

    Ken Davidson’s argument is utter crap. All he is saying is that NSW taxpayers are subsidising the rest of the grid. (which works for me, but I’m not a silly waler)

    (* not counting the consultants and new contractors, which may well add up to a few thousand!)

  23. Ernestine Gross
    March 19th, 2008 at 10:37 | #23

    Will has put forward a concise and measured description of the corporate finance perspective and that he knows how it works and he is good at it and he wants to make a living. That is all fine.

    But, why is the corporate finance perspective relevant?

  24. Ernestine Gross
    March 19th, 2008 at 10:46 | #24

    Sukrit Sabhlok, your revelation has exceeded my expectations of the power of JQ’s method of public debate. And who talks about short-term objectives, eh? Its good to see the power of logic working.

  25. derrida derider
    March 19th, 2008 at 11:26 | #25

    Maybe there’s another hidden motive. Sooner or later we’re gonna have to have carbon quotas or taxes. The existing NSW power plants are coal-based, so whoever is their owner is going to have to wear the cost – reduced (after carbon tax) revenue will be amortising a sunk capital cost, so profit will be less. If bidders for the plants don’t realise that (and there’s enough of a winner’s curse that the ones who don’t realise it will be the ones who win the bidding), then they’ll pay too much. Maybe Iemma, far from allowing gains to be privatised and losses socialised, is trying to privatise a loss?

    Naah – I’m giving him far too much credit for shrewdness.

  26. cs
    March 19th, 2008 at 11:47 | #26

    Excellent response John.

    (small typo at the start of the second sentence in the second last paragraph)

  27. rog
    March 19th, 2008 at 13:42 | #27

    As far as I know the Iemma govt proposal does not include selling the power stations – merely leasing the operations

  28. mugwump
    March 19th, 2008 at 14:59 | #28

    Privatisation is usually motivated, at least in part, by the hope of cutting pay and conditions for workers.

    If the NSW electricity industry is anything like the SA one, those “conditions” need cutting. My first encounter with a unionized shop was a summer job in the Electricity Trust of SA as it was then known.

    The working conditions were outrageous: most people did as little as they possibly could. Management had no control over the staff. Several people were running their own businesses on the side and would be on the phone all day. One guy was paid a full salary but not allowed to work (ever) because at some point in the past he had defied a union ban. Estimates of overstaffing ranged between 2 and 3 times, a statistic that was freely admitted by the rank-and-file.

    It was a disgrace. Put me off unions for life.

  29. March 19th, 2008 at 15:37 | #29

    broaden yer viewpoint,mug: it should have put you off the generic ‘stand-over gang’.

    there’s several that lurk in a palatial subterranean hall in canberra, much more expensive, vastly more dangerous, and widely admired for the audacity of claiming to be the natural masters of oz, in the continuing absence of ‘er majesty.

  30. Joseph Clark
    March 19th, 2008 at 16:04 | #30

    mugwump,

    I’ve heard similar stories from NSW. It’s amazing how much these people can get away with. They must find the support from anti-privatisation activists absolutely hilarious.

  31. Spiros
    March 19th, 2008 at 16:48 | #31

    “One guy was paid a full salary but not allowed to work (ever) because at some point in the past he had defied a union ban.”

    Where can I get a job like that?

  32. Ernestine Gross
    March 19th, 2008 at 17:47 | #32

    Demand for government bond issues:

    http://business.smh.com.au/australia-should-sell-more-bonds-to-cover-deficit-afma/20080319-20gm.html

    Surely there must be an easier way; one which avoids a few rounds of transactions costs.

  33. Joseph Clark
    March 19th, 2008 at 18:19 | #33

    Ernestine,

    There is an easier way. The government can sell off assets to finance the deficit.

  34. March 19th, 2008 at 20:27 | #34

    The working conditions were outrageous: most people did as little as they possibly could. Management had no control over the staff. Several people were running their own businesses on the side and would be on the phone all day. One guy was paid a full salary but not allowed to work (ever) because at some point in the past he had defied a union ban. Estimates of overstaffing ranged between 2 and 3 times, a statistic that was freely admitted by the rank-and-file.

    I did some undergraduate work in the NSW electricity sector circa 1993 and my experience wasn’t overly different. The porno magazines three inches deep on the floor of every second authority vehicle, through most of the workshops, toilets and beyond confirmed the notion that there were a lot of idle hands in the place. The lead hand with the line gang I was assigned to for a few days would drive out with a crew of trucks and workers, notionally to do some assigned work and then radio base to say it was raining lightly (which it wasn’t) so we would all have to just wait in the trucks where we were until it cleared. And then they would all read porn magazines. I have never seen (before or since) so many blokes staring at porn.

    Mind you the stories from the engineering undergraduates that worked for the water board seemed to suggest an even more corrupt culture. There the crews would over order copper piping, sell the excess on the side for scrap, and then use the profit to pay for brothel parties.

    I’m no wowser but the sooner they privatise this lot the better.

  35. Ernestine Gross
    March 19th, 2008 at 20:48 | #35

    Josef Clark, I am not sure you read the article. It deals with Australia.

    The alternative to privatising agencies and selling off assets is for the government to issue bonds and run the agencies and construct new public infrastructure physical assets. In the absence of evidence to the contrary this would save a lot of currency money with which taxes are paid.

  36. Ikonoclast
    March 19th, 2008 at 20:52 | #36

    A wise man once said, “For every complex problem there is a simple solution… and it is always wrong.”

    The decisions on where to allow competition in our economy and where to allocate a natural monopoly to the state are complex decisions and must be made on a case by case basis. (There are other alternatives too as the milk industry example below will show.)

    Simplistic and extreme solutions of the “one-model-fits-all” type do not work. Neither Communism (100% state monopolies) nor pure unregulated capitalism (100% private ownership) will ever prove to be the best in practice across the whole gamut of the economy. This is shown by the problems which have repeatedly arisen when economies (and societies) are taken too close to one extreme or the other.

    Frankly, to say there is no role for state ownership in an economy is as foolish as to say there is no role for private enterprise in an economy. There are governence methods other than the discipline of the market which can and do guard against abuses by state monopolies.

    Strategic industries and natural monopolies are often (but not always) best handled by the state. The outcomes can be both more equitable and more efficient.

    The automatic assumption that deregulated market competition is ALWAYS more efficient than any other model (in every case) does not hold up when the empirical evidence is assessed.

    Before we had our current nationalised milk market we had regulated private regional monopolies known as co-operatives. When the milk market was deregulated – and a national market was created and immediately taken over large corporations – the price of milk increased dramatically. The consumers lost out and the producers (farmers) lost out. A large wealth shift occurred in favour of the large milk processing/distribution corporations and their share holders.

    To advocate a simplistic model one-size-fits-all at either end of the economic spectrum shows either very lazy thinking or thinking that is severely limited by ideology. Which mode of thinking do such advocates wish to own to?Aternatively, you should advance some cogent arguments for your case rather than bleating “private good, public bad”.

  37. jquiggin
    March 19th, 2008 at 21:00 | #37

    Umm, don’t you think your free-market outrage is a bit misdirected? In the last five years, the three top guys at Bear Stearns took home $500 million between them (they’ve lost a fair bit of it in the crash, but Schwartz at least is in line for some further big payoffs whether he goes or stays).

    The money these guys got, alone, would pay for 2 000 surplus workers each getting 50 000 a year for the same period. And that’s before you start thinking about the $30 billion of US taxpayers money that’s been tipped in to clean up the mess.

  38. Ikonoclast
    March 19th, 2008 at 21:01 | #38

    Furthermore, if we want to talk anecdotally about abuses in workplaces we could mention the private enterprise bosses who (still!) sexually harass female staff and bully and harass workers.

    We could even mention the murderous above-the-law abuses of US private security companies in Iraq. That would make the porno magazines (presumably “soft” porn available at any newsagency and made and peddled by free enterprise) look rather tame by comparison.

  39. Ernestine Gross
    March 19th, 2008 at 21:08 | #39

    And we are back to the specific case of the electricity industry in NSW and the specific question of the information content of public policy statements.

  40. SJ
    March 19th, 2008 at 22:34 | #40

    wilful Says:

    Ken Davidson’s argument is utter crap. All he is saying is that NSW taxpayers are subsidising the rest of the grid.

    No, he’s not saying that NSW taxpayers are subsidising the rest of the grid.

    The argument that he’s making is a bit difficult to fit into the word limit he had, but it’s good that he had a go at it.

    Retailers and generators from outside NSW have been complaining for years now that the role of IPART had to be eliminated. They’ve said a number of times that prices had to rise in NSW in order to encourage competition.

    Now, there’s something fundamentally wrong with the argument that you have to increase prices, in order to encourage competition.

    Competition is not supposed to be the final goal. Competition is just a means to an end, namely lower consumer prices.

    Davidson is trying to tell you that you’ll ripped off even more if you believe the argument for privatisation that’s currently being put.

  41. mugwump
    March 19th, 2008 at 22:39 | #41

    Umm, don’t you think your free-market outrage is a bit misdirected? In the last five years, the three top guys at Bear Stearns took home $500 million between them

    Free market outrage? ETSA was a rort, pure and simple. Free markets have nothing to do with it. Obviously the salaries taken home by the top guys at BS were also a rort – I have commented before that the compensation structure needs changing – but using the existence of one rort to justify all rorts is hardly an argument.

  42. March 20th, 2008 at 06:17 | #42

    Further to the point, gas turbines are really quick and easy to construct, and their cost structure is rather different to coal (and, hypothetically, nuclear). The capital cost is relatively low, but the fuel cost is much higher. However, if the cost of gas rises, the marginal cost of electricity will rise with it.

    This makes them the least risky, and thus the preferred, investment for financial types.

    However, Australia’s gas prices will gradually come much closer to parity with world prices, because export LNG terminals are being built. That might tilt the balance back in favour of other, more capital-intensive options.

  43. Will
    March 20th, 2008 at 07:18 | #43

    Of course the question of government versus private ownership of infrastructure will throw up many issues to do with relative costs of capital, market forecasts and risk tolerance, potential for efficiency gains, positive and negative externalities, subsidization, etc. But I’m not sure how these can be answered in any specific case with generalizations.

    To me the only way to resolve it transparently is to transfer the assets to a holding company and then get both private entities and the government to bid for it. The government should, like everyone else, line up its sources of long term capital, forecast the cash flows and their volatility, place a value on the externalities, and then put in their bid. If it has the highest bid then it has effectively monetized the assets, by borrowing against them, the same as it would if a private entity had won the bid and bought the assets and the government lost the revenue from them.

    In fact the same approach could be used for the development of new infrastructure as well. The government simply bids for the concession along with everyone else. I would expect (hope?) that you would get a mix of outcomes depending on the specific circumstances of the case.

    In terms of the effect on the state’s credit rating, if this is important to you, this would be very transparent process. The government could show the rating agencies the amount of debt financing it is proposing to raise to support its bid, and the rating agencies could give an opinion as to the rating the debt financing would be given if the government was successful. Pretty standard stuff.

  44. Ernestine Gross
    March 20th, 2008 at 08:38 | #44

    That’s o.k. Will, you put your real assets (net of debt) into a holding company, you pay for the costs of setting up the holding company, and you and who ever wants to can then bid for the assets in the holding company with the proviso that all securities issued in the process have pay-off functions defined on physical things and failure to deliver will result in something akin to ‘boiling in oil’.

  45. jquiggin
    March 20th, 2008 at 10:05 | #45

    To spell out a point made in the post, mugwump, the point is that if you are going to justify privatisation on the basis that “it will get rid of a lot of rorts” you are open to the objection “only to create new and bigger rorts”.

  46. mugwump
    March 20th, 2008 at 10:25 | #46

    It’s not mutually exclusive: you can get rid of the existing rorts without creating new and bigger rorts.

    For starters, I would get the existing private operators from other states around the table, and ask them what they think is the best way to privatize NSW electricity. That would tell me what not to do. Then I’d visit the US states (and jurisdictions in other countries) that have successfully privatized their electricity operations , to find out how it was done. Probably also visit the failed cases (like California) , to see how not to do it.

  47. Joseph Clark
    March 20th, 2008 at 10:58 | #47

    John, Nobody is saying that private companies don’t rort. The difference between private and public rorts is that private rorts are held to account by the market while public rorts are held to account by a bureaucracy. People being ripped off by a private company can at least choose not to trade with them. People being ripped of by the government don’t get to make that choice.

  48. Socrates
    March 20th, 2008 at 11:58 | #48

    Joseph

    That is too simple. Public rorts are also held to account by governments, and ultimately voters. Arguably public Qangos are the worst to teh extent that they avoid this process. Even so governments can still restructure them. Private rorts for things which are monopolies are precisely what people cannot chose not to trade. This is why public monopolies are often so bad. Surely we don’t need to list examples here to provce the point?

    In an overall efficiency sense, if you look at OECD stats, the nations with the smallest public sectors, as well as those with the largest, are usually the ones with the worst long term economic performance. Most competitive enterprises should be private; some essential services should be public; to believe otherwise is ideology not economics.

  49. Ernestine Gross
    March 20th, 2008 at 12:11 | #49

    Joseph, would you please provide the postal address for ‘the market’ and tell me the location (restricted to planet earth accessible by train, car, aircraft, boat and on foot with the special request of excluding the South and Northpole – where St Claus lives) where I can inspect this entity.

  50. Joseph Clark
    March 20th, 2008 at 12:21 | #50

    Socrates, Mostly agreed. I guess I have more faith in the market as an oversight mechansism. I am also unconvinced that there are any problematic private monopolies outside of those provided and protected by government. Perhaps you could give me that list of examples?

    Ernestine, The market is just people. You will have to ask their permission if you want to inspect them.

  51. Hal9000
    March 20th, 2008 at 12:45 | #51

    “private rorts are held to account by the market”

    That’ll explain the low and falling rates of senior executive and board members’ remuneration across the private sector, then. Thanks, Joseph, I was confused about that until now.

  52. Socrates
    March 20th, 2008 at 13:18 | #52

    Joseph,

    Too many examples to fit into one lunchhour, but here is a good one from my field. Central Qld (coal) ports were privatised in the 90s. With the sher tonnage of coal exports from the Bowne basin, there is no economical alteranative to their use for mining companies. The new private owners systematically avoided building new capacity so that they could exploit their monopoly power and raised their loading prices. Now as demand goes up, by 2006/07 millions of tonnes of saleable coal exports sat on the stockpile sites because there was not capacity spare to load it onto ships. The private port operator increased their profit by tens of millions, but the Australian economy lost billions. The same was true of the failure to expand the (public) coal trains from mines to the ports. I don’t call that efficient on the public side or the private. I have plenty more such examples.

  53. Joseph Clark
    March 20th, 2008 at 13:40 | #53

    Socrates, I’m not too familiar with the industry but I remember there being an issue with capped return on investment after privatisation leading to underinvestment in capacity. Are we talking about the same thing?

  54. Socrates
    March 20th, 2008 at 14:57 | #54

    Joseph

    partly, but much more than that. Some of these cases are a straight exploitation of monopoly power. Whether returns are capped or not, the monopolist may be tempted to pick a supply position which maximises their profit, even if overall economic outcomes are very poor. This example (coal ports and coal trains to them) is such a case. I picked this example because “both sides” (private ports and public railways) are guilty, but the point is, that market failures can persist with both public and private supply. Hence I don’t think you can say the market always does it better than government, even when very large sums of money are invovled. It depends on the nature of the industry.

  55. Joseph Clark
    March 20th, 2008 at 15:15 | #55

    Socrates, Don’t get me wrong. I don’t think markets aren’t perfect or even necessarily always preferable. But you are giving an example of a monopoly that is provided and sustained by government. It seems that most examples of monopolies behaving badly are in this category.

  56. Socrates
    March 20th, 2008 at 15:22 | #56

    Joseph
    Not true at all. There is a huge amount of literature on this topic; read it. I just gave one example. The point is that some things by their nature tend to be natural monopolies. Ports are a good example, but far from alone. Consider things like the market for computer operating systems, most public utilities, and almost anything with a very large start up cost. I don’t claim to be pro-government, but I think the current trend towards the free-market solves all, is a fallacy.

  57. Joseph Clark
    March 20th, 2008 at 15:50 | #57

    There is no monopoly in computer operating systems and public utilities are public. I’m trying to think of an example of a monopoly that is not provided by government.

  58. Ernestine Gross
    March 20th, 2008 at 17:16 | #58

    #50: Joseph Clark says “The market is just people”.

    Substituting “just people” for ‘market’ in #55 gives:

    “Socrates,Don’t get me wrong. I don’t think just peoples aren’t perfect or even necessarily always preferable. But you are giving an example of a monopoly that is provided and sustained by government. It seems that most examples of monopolies behaving badly are in this category.”

    I wonder who Joseph Clark thinks he is.

    Assuming Joseph Clark is a real person rather than part of a hoax played on commentators of blogs in the form of an automated debating point program, then I’d say Joseph, breaucrats and politicians are also people and so are managers of corporations. However, the corporate form of enterprise relies on an artificial legal construct. Perhaps this is where your gripe lies.

  59. Joseph Clark
    March 20th, 2008 at 17:25 | #59

    Ernestine,
    You asked for the postal address of ‘the market’ so that you could inspect it. I just pointed out that the market is just a bunch of people and as such has no one fixed address. Sorry if I confused you.

  60. SJ
    March 20th, 2008 at 18:09 | #60

    But you are giving an example of a monopoly that is provided and sustained by government. It seems that most examples of monopolies behaving badly are in this category.

    This is probably true, but has very little explanatory value. The reason being that if private monopoly suddenly pops its head up, the government will in most cases intervene, by assuming ownership or regulating, or changing the industry structure. You’re trying to think of something that probably doesn’t exist.

    (And Ernestine, John has assured by email that Joseph is in fact a real person known to John.)

  61. Socrates
    March 20th, 2008 at 23:28 | #61

    Joseph

    When I said that C.Qld ports are monopolies, it is by virtue of geography, not acts of government. There is nothing stopping anyone building a rival, but there are only so many locations viable to build such deep water ports. Hence if you own the port it is a natural monopoly, not by virtue of government power.

  62. Joseph Clark
    March 20th, 2008 at 23:48 | #62

    If I tried to build a port I would require approval. Would I easily receive that approval?

  63. SJ
    March 20th, 2008 at 23:59 | #63

    Joseph, you’re still tied up with correlation issues. You need to sort out which is the cause and which is the effect.

  64. Socrates
    March 21st, 2008 at 00:16 | #64

    Joseph
    You are a sophist who really has a psychological difficulty in admitting you are wrong. Under the relevant planning legislation, which I presume you have never read, permission could only be refused for a defined ground. If someone applied for a facility that met all navigational and environmental rules, permission could not reasonably be refused. But if you own the port site with the only deep water natural harbour for a few hundred kilometres, building an alternative is prohibitivbely expensive. Such examples exist; this is the end of your free education.

  65. Joseph Clark
    March 21st, 2008 at 03:41 | #65

    Socrates, You seem overstimulated. Don’t try to turn everything into a race. I only asked a question.

    If it is easy to get approval then I don’t think there is a problem. If there are profits then there are profits to entry, regardless of the entry costs. There is always a bigger fish in the sea.

  66. Joseph Clark
    March 21st, 2008 at 03:51 | #66

    And if it is not profitable to enter then the price is low enough already and there is no problem. Of course, some people feel indignant when a company sells at the lowest price and still makes a profit. I can understand that.

  67. March 28th, 2008 at 15:34 | #67

    If Terje had intended to be objective about the threatened privatisation of NSW electricity, he would have also paid regard to the way workers employed by privatised companies such as, for example, Telstra are treated, as an example, by the privatised Telstra as shown on the 4 Corners documentary Tough Calls of 18 June 2007 when he gave his sensationalised account of working for NSW electricity.

    However, Terje has his extreme free market ideological barrow to push, so, of course, objectivity is not to be expected.

    Clearly the practises described by Terje back in 1993, if his descriptions are accurate and not embellished, are indefensible, but many workplaces have since become the extreme opposite of what Terje describes, where workers have no rights and are subject to the arbitrary whims of petty minded bosses.

    What is needed are workplaces in which the pace of work and hours are civilised and the remuneration can provide at least frugal comfort to all. This is not possible in a society where market forces rule unchallenged.

  68. March 28th, 2008 at 16:18 | #68

    If Terje had intended to be objective about the threatened privatisation of NSW electricity

    I wasn’t making an objective point. I was sharing a subjective anecdote about dodgy behaviour. I could also share some from when I worked at Optus in the mid 1990s if it helps.

    All workers have the right to quit and go elsewhere. However when it comes to public utilities consumers (and or taxpayers) don’t generally have this privaledge.

    I suspect that we don’t share the same view about what “rights” people are entitled to. I don’t generally accept positive rights as having any moral legitamacy. I’m more into negative rights.

  69. March 28th, 2008 at 16:22 | #69

    extreme free market ideological barrow to push

    The thing is I think freedom is a moderate ideal.

  70. SJ
    March 28th, 2008 at 20:21 | #70

    Terje Says:

    All workers have the right to quit and go elsewhere. However when it comes to public utilities consumers (and or taxpayers) don’t generally have this privaledge.

    Terje, as is not uncommon, you are making an argument from ignorance.

    The term “public utility” does not mean “government owned utility”. Electricity is a public utility whether or not it’s owned by government.

    Public utility is a US term meaning:

    any organization which provides services to the general public, although it may be privately owned. Public utilities include electric, gas, telephone, water, and television cable systems, as well as streetcar and bus lines. They are allowed certain monopoly rights due to the practical need to service entire geographic areas with one system, but they are regulated by state, county and/or city public utility commissions under state laws.

    You still won’t have much freedom to stop using the public utility after it’s privatised. And because it’s being proposed that the price controls will be abolished, it’s likely to cost even more than it currently does.

    You might feel some smug satisfaction that a bunch of fat lazy bastards you observed in a workshop 15 years ago have been replaced by a different bunch of fat lazy bastards in a boardroom getting paid a thousand times as much, but that smug satisfaction comes at a high personal cost to you. I wouldn’t care about that if you chose to pay the entire cost yourself. But because you’re also advocating that I should help pay as well, I feel entitled to tell you to sod off.

  71. March 29th, 2008 at 14:31 | #71

    Firstly to correct my error in which I repeated myself. My apologies:

    If Terje had intended to be objective about the threatened privatisation of NSW electricity, he would have also paid regard to the way workers employed by privatised companies such as, for example, Telstra are treated as shown on the 4 Corners documentary Tough Calls of 18 June 2007 when he gave his sensationalised account of working for NSW electricity.

    Terje wrote: “I wasn’t making an objective point. I was sharing a subjective anecdote about dodgy behaviour. …”

    But you were using this example as evidence in support of privatisation.

    Terje continued: “… I could also share some from when I worked at Optus in the mid 1990s if it helps.”

    Perhaps you should have. There is a capacity for featherbedding for workers at the expense of the public even in privatised monopolies or duopolies.

    If we are to discuss public ownership rationally, we need a complete picture of what the problems with both public and private ownership are and what are the possible solutions. The clear problem with privatised companies is that the likes of Trujillo and the big investors want to take everything possible from everyone else: wages jobs, employment opportunities, service quality, service reliability, and service affordability in order to line their own pockets.

    The problem you identified could have been solved in a win-win way with greater openness, public accountability and good will on the part of employees and management. Why couldn’t shorter working hours and guarantees of employment and training been offered in return for acceptable levels of productivity?

    But the vested interests whom Iemma and Costa serve were never interested in a fair win-win solution.

    Terje wrote: All workers have the right to quit and go elsewhere. …

    How original! I never heard that one before. Can you say when you thought up this argument? Just now? 2005? 1930? or 1830?

    (Thank you SJ for your response.)

  72. TerjeP (say tay-a)
    March 31st, 2008 at 05:58 | #72

    SJ – I’ll accept your terminology. I did indeed mean government owned utility. In terms of being free to choose I will note than in my business and my home I have successful divorced myself from Telstra. If you wish to return to the days when I didn’t have that freedom then you can sod off also. Otherwise have a nice day.

    Daggett – it is reasonable for you to infer that my anecdote was meant in support of privatisation because I am a frequent advocate of privatisation. However it was just an anecdote offered in response to an anecdote by somebody else. My personal experiences do suggest that the government owned sector is more prone to cultural deviance, waste and mismanagement, however whilst my personal experiences no doubt help to shape my opinions they don’t amount to an arguement and I didn’t mean to suggest that they do.

    If I was Iemma I’d privatise hospitals a long way before I’d privatise electricity. The electricity works reasonably well. However thats also just a point of view rather than an argument.

  73. SJ
    March 31st, 2008 at 18:28 | #73

    If you wish to return to the days when I didn’t have that freedom then you can sod off also.

    Ah, the non-sequitur. E.g: Terje, if what you’re really saying is that you want to wipe out all human life on earth, then I’d have to say you’re completely nuts.

    This sort of argument is easy to make, but is just a useless distraction. I haven’t proposed to do anything with Telstra, but if that’s the first thing that pops into your head when you try to think of a successful example of privatization and the introduction of competition, well, perhaps you haven’t thought this through very well.

    Have a day.

  74. wizofaus
    April 1st, 2008 at 08:08 | #74

    Worse, Terje is incorrect – it is still virtually impossible to divorce ourselves completely from Telstra. Were Telstra to switch off / decouple every bit of telecomms infrastructure it owns in the country, your ability to make any sensible use of the phone or internet would be about zero.

    I do agree with him however that there is a far better case for privatising hospitals than electricity. Canada’s health system, publicly-funded but privately-supplied, appears to work somewhat more efficiently than Australia’s, though neither are particularly bad when compared to say, the U.S. (where I just spent 4 weeks working: virtually every day most of lunch would be taken up with discussing somebody’s recent woes dealing with health insurance companies).

  75. April 9th, 2008 at 23:57 | #75

    I would not entirely rule out wizofaus’s point about the Canadian Health system, but we cannot allow this one purported success of privatisation allow us to be undemocratically stampeded into either the privatisation of NSW’s electricity power generation or of its health system as has happened all too often in the past.

    We need to establish firstly that the Canadian Health system is working well (and this is disputed by at least one Canadian) and, if so, we need to establish whether it is because of or in spite of it being privatised and also if costs haven’t been shifted onto for example the taxpayer or the workforce.

    Even then we woudl need to think carefully as to whether under Australian conditions privatisation would improve the situation or make the situation worse like it is with the privatised US health system

    I somehow suspect that if, this time, we followed democratic processes and the public were consulted and kept fully informed, we would not end up with a privatised system in Australia.

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