Home > Economic policy, Economics - General > The power of persuasion

The power of persuasion

June 19th, 2008

That’s the headline for my article in today’s Fin, which follows:

After a messy and unedifying process, the Iemma government has finally reached an agreement with the Opposition to proceed with the privatisation of the New South Wales electricity industry. The price of the deal has been acceptance of the Opposition demand for an inquiry by the Auditor-General, Peter Achterstraat.

In most cases, inquiries into policies on which the government is already determined are little more than rubber-stamps. Whatever the desired result, a suitably distinguished former judge or some other eminent person, with appropriately written terms of reference, can usually be relied on to deliver it.

But Auditors-General are a sturdy breed, among the few groups of public officials who have offered significant resistance to the politicisation of the public service over recent decades.

Back in the 1990s, Tony Harris did sterling work exposing the spurious accounting behind some of the NSW government’s early ventures into privately-funded infrastructure, such as the Sydney Harbour Tunnel. (Fifteen years later, Achterstreet is still trying to clean up that mess). And in Victoria, Ches Baragwanath (along with DPP Bernard Bongiorno) stood up to a Kennett government that had cowed almost the entire state into submission, and helped to bring about its demise.

If Achterstraat lives up to the standard set by his predecessors, his report should make uncomfortable reading for the Iemma government, and particularly for Treasurer Michael Costa. The government’s case for privatisation is economically nonsensical, a fact acknowledged even by supporters of privatisation like Ross Gittins who argues that this is merely an instance where politicians ‘choose the arguments the punters are likely to find most persuasive and least offensive, not necessarily those that make sense to economists’,

The government’s case centres on the claim that selling electricity assets will enable it to finance projects such as a new new metro rail system. This is an argument the Auditor-General should reject out of hand.

The economic justification (or otherwise) of the metro rail proposal is entirely independent of whether the government sells or retains its electricity assets. As long experience has shown, hypothecating the proceeds of an asset sale to fund some politically attractive project or another is a recipe for boondoggles on a grand scale.

The Auditor-General should be primarily interested in the implications of the sale for public finances. Here the central issue is straightforward. Will the proceeds from an asset sale (net of expenses and any dissipation in electoral bribes) exceed the present value of the earnings lost to the public through privatisation.

Some privatisations have met this criterion, but many have not. In the electricity sector, Victoria got a very good price for its assets, several of which were subsequently resold at much lower prices. By contrast, the returns from the privatisation of the South Australian industry were well below the value of future earnings. To add to the ill effects, South Australian consumers experienced sharp price increase as a result of the Olsen government’s decision to kill off an interconnection project in the hope of boosting the sale price.

As far as the Auditor-General is concerned, the crucial requirement is to ensure that the sale process goes ahead only if the financial benefits outweigh the costs. The generators (Delta, Macquarie and Eraring) made combined earnings of $700 million which suggests that the sale price for these assets should be at least $14 billion (discounted at a real interest rate of 5 per cent) and probably more. Even allowing for the additional cost of emissions permits, it seems likely that the profitability of electricity generation will increase over time.

Whether such a price can be realised depends, of course, on the willingness of buyers to pay premium prices for assets. The Victorian privatisation took place at at a time when newly deregulated US utilities were engaged in a worldwide buying spree.

By contrast, it is hard to imagine a less favorable time for an asset sale than the present. The credit crisis has raised the cost of capital to private investors, while government bond rates remain at low levels by historical standards. And that’s before taking account of the emerging problems at Babcock and Brown, which seem likely to take one potential buyer out of the market, and perhaps to result in significant asset sales.

The Auditor-General will be under severe pressure to produce a report that places no obstacles in the way of privatisation. But his obligation is to protect the interests of the people of New South Wales, not the political agenda of its government.

  1. paul walter
    June 19th, 2008 at 20:44 | #1

    Again and again some of us ponder what has driven the Iemma government to this.
    Almost as much as we ponder the persistent failure of commercial press and media to properly explain whats involved.
    We get lots of nonsense about art galleries and fashion week and football, but nothing on the most serious issues that affect this nation.

  2. MH
    June 19th, 2008 at 21:05 | #2

    A city base capital infrastructure fund will surely arise to find the capital to buy the assets, the assets will go and then so will the labour seats where the electricity workers live and vote. The need for capital is spurious – after all is that not what the grand Rudd infrastructure goody box is for?
    A more witless and guiless government I have never seen.

    Edited slightly – JQ

  3. jack strocchi
    June 19th, 2008 at 21:51 | #3

    I cant improve on Pr Q economic analysis, which in regard to privatisation is invariably right. My only query is that the price of coal-based generators should be discounted for the likely higher costs of paying for carbon emissions. No doubt I am missing something.

    Once again neo-liberalism, in the post-modern era, shows that it is still a front for rorts, rackets and rip-offs.

    The politics of privatisation are strange. Obviously the public are against it. Both parties are for it. This shows again the radical disconnect between elites and the general populace.

    No doubt the party leaders responsible for sheparding this through parliament will be richy rewarded in the form of sinecures in the financial industry. Carr is already getting his licks in.

    The intriguing question is why Rudd is supporting Iemma’s privatisation. It seems that Rudd is just a politician after all. (At least Howard had the decency to pull the plug on the Snowy Hydro privatisation.)

  4. SJ
    June 19th, 2008 at 22:28 | #4

    Another sterling effort there, John. Got quite a few people talking today.

  5. Ikonoclast
    June 19th, 2008 at 22:31 | #5

    Since the privatisation mania began in Australia it has been (in the main) the vehicle for massive wealth transfers from public common wealth to a limited circle of private wealth.

    I recall seeing the statistic that about 100 billion of federal and state assets (on a conservative valuation) have been sold since about 1990 for about 50 billion. If true, that’s a 50 billion dollar robbery from the general public. Pretty nifty for the winners I guess.

    The neocons are mainly about plundering rather than producing. I guess that’s why they don’t understand the importance of science in working to maintain a sustainable environment and a sustainable productive base for our economy. (I’m harking back here to the discussion about the anti-science views of the extreme right.)

    And yes, we ought to wonder why Labour and Liberal are looking so much alike now. I’m starting to feel like I’m living in something that’s a cross between a morality play and Orwell’s Animal Farm.

  6. June 20th, 2008 at 01:52 | #6

    Funny that the usual vocal free market extremists seem to have lost their voices on this occasion.

    What an outrageous imposition upon the right of individuals to achieve the true potential that only the selling off of all publicly owned property can possibly bring – to require that the public, this time, be informed as to whether they stand to gain or lose!

  7. Bobalot
    June 20th, 2008 at 08:04 | #7

    More plundering of national wealth against the wishes of the public.

  8. derrida derider
    June 20th, 2008 at 09:22 | #8

    The sale actually sounds like a good idea to me. I think everyone is underestimating the impact on NSW electricity of carbon trading, so it’s a chance to stick Macquarie Bank with the costs rather than the NSW taxpayer. And the warnings of mass job lossses from the unions are strong evidence that there are big efficiency gains available, which the sale price should reflect.

    But you’re right John – it’s a decision that should be made on the basis of cold financial calculation, not ideology, with the devil really being in the detail. And it’s not great timing too.

    Auditor General’s are more fearless because they are appointed by, and report to, the whole parliament rather than a minister. We should have more such bodies – in particular we need an analogue of the US Congressional Budget Office.

  9. James Haughton
    June 20th, 2008 at 09:33 | #9

    Is there a good single source comparing the actual positive and negative outcomes of privatisations?

  10. Peter Pan
    June 20th, 2008 at 09:55 | #10

    Another aspect of the privatisation of public utilities is the lack of accountability that results. You can regulate all you like, but private entities who are only accountable to their owners will alway find a way to game the system to the determent of the other stakeholders. I believe this is the main reason why the Iemma and company are pushing for the privatisation. They just do not want to be held accountable for energy shortages that a looming as energy demand reaches capacity. (This is currently a sore point with me as I am currently in despute with Telstra and now that it is fully privatised I can’t hold my local polie account for dreadful behaviour of this monopolist.)

    The other thing I’ve noticed is that competition in the energy retail market seems to be disappearing. (Here in Qld particularly!) There will soon only be two retailers of significance left standing (AGL & Origin). Anyone purchasing the NSW generators could end in the position of being captive to once this duopoly get hold of the NSW retail corporations.

  11. June 20th, 2008 at 10:21 | #11

    derrida derider wrote @ 8 :

    I think everyone is underestimating the impact on NSW electricity of carbon trading, so it’s a chance to stick Macquarie Bank with the costs rather than the NSW taxpayer.

    So, derrida derider believes that the NSW taxpayers can trick the Macquarie Bank into paying the costs of carbon its behalf? Perhaps he should knock on the doors of the Macquarie Bank with an some offer to sell them the Sydney Harbour Bridge or some real estate in Kirribati?

    derrida derider wrote :

    And the warnings of mass job losses from the unions are strong evidence that there are big efficiency gains available, which the sale price should reflect.

    This is the kind of mentality that has helped cause the current skills crisis. Previously large publicly owned utilities were able to meet the cost of training large numbers for their own benefit and the benefit of society at large. But that was changed with corporatisation and privatisation. The costs previously borne by these utilities were shifted onto the wider community.

    Do we want NSW electricity workers to be treated as the privatised Telstra now treats its workforce? I would hope not.

    If it turns out that there are some unjustified levels of feather bedding, then why shouldn’t the NSW public, rather than a private corporation, be the beneficiary of any efficiencies to be gained?

    Anyway, as far as I’m concerned, a lot of so-called “feather bedding” is simply allowing workers to work at a reasonable dignified pace and be driven to work as slaves.

    At least derrida derider accepts that their should be public accountability. It’s a shame that the pubic weren’t given the same opportunity to scrutinise previous privatisations such as the state banks, the state insurance corporations, Telstra, QANTAS, the Comnowealth Bank, etc., etc.

  12. June 20th, 2008 at 10:28 | #12

    Whoops! The second last paragraph above should have been:

    Anyway, as far as I’m concerned, a lot of so-called “feather bedding� is simply allowing workers to work at a reasonable dignified pace and not be driven to work as slaves

  13. AJWak1
    June 20th, 2008 at 10:50 | #13

    While you may not agree with the governments argument, I think Ross Gittins’ point is that if you agree with the behaviour then you support the proposal.
    I agree the governments argument is weak, but there is a reasonable case to be made that untangling the government ownership of the asset and their vulnerability to union pressure will yeild a positive outcome for NSW.

  14. AJWak1
    June 20th, 2008 at 10:53 | #14

    you seem to be making two points
    1) the government is making the wrong case, and should be told that there argument isn’t good enough. If they are truthful they should make the stronger case which may be politically less palatable.
    2) now is not a good time to sell a major asset anyway, so even if its a good idea to sell, it will be better to sell in the future.

  15. AJWak1
    June 20th, 2008 at 11:01 | #15

    I find both points 1 and 2 are each individually strong enough to cause supporters of the current privatisation proposal to rethink their positions. However, given Iemma’s political investment in the proposal I think he can only press forward regardless of opposition. To shelve the privatisation for after the next election (I think a sensible idea) is death for Iemma and he may as well retire now.

  16. June 20th, 2008 at 12:01 | #16

    AJWak1 wrote:

    … there is a reasonable case to be made that untangling the government ownership of the asset and their vulnerability to union pressure will yield a positive outcome for NSW.

    A more ‘positive outcome’ than contempt for 85% of NSW public opinion, the resounding vote against privatisation at the 1999 election and the vote against privatisation at the last NSW state Labor conference?

    Let’s hope that Iemma and Costa and their supporters in the NSW Labor caucus are made to pay the full price for the outrage they have attempted to commit against democracy and are consigned to the political oblivion they richly deserve. May they serve out he rest of their working lives as Telstra call centre workers, preferably in India.

  17. Smiley
    June 20th, 2008 at 12:41 | #17

    At least Howard had the decency to pull the plug on the Snowy Hydro privatisation.

    I seem to recall that one of the justifications for privatising Telstra (at least the first third) was that the funds were going to be used to save the Murray Darling river system… Given the current state of the MD, I want to know where that $10 billion went.

  18. Roger Jones
    June 20th, 2008 at 12:58 | #18

    JQ,

    it seems to me also that the timing for this would suggest any time but now because circumstances suggest low sale prices. The arguments around public v private will continue but it seems to me much more important as to whether generators have factored in carbon price and risk correctly, as to whether they are public or private. At least one of the Victorian baseload generators has not factored carbon prices into their ROI – they are likely to be toast as a result.

    Given climate risks that mean (in my view) the social cost of carbon is already well above the likely trading price – would the current NSW privatisation plans lock high emissions in place, or make it easier for operators to move to low emissions supply. Or does it not make a difference?

  19. June 20th, 2008 at 13:36 | #19

    Smiley asked

    Given the current state of the MD, I want to know where that $10 billion went.

    Check out these stories:

    Uncoordinated environment projects wasted hundreds of millions from previous Telstra sales of 31 Aug 04

    The Farmer and the Damage Done of 22 Aug 04 on Background Briefing

  20. derrida derider
    June 20th, 2008 at 13:46 | #20

    If it turns out that there are some unjustified levels of feather bedding, then why shouldn’t the NSW public, rather than a private corporation, be the beneficiary of any efficiencies to be gained
    But selling it is exactly how the NSW public gets that benefit – the potential efficiency gains will be reflected in the sale price.

    The politics of privatisation are strange. Obviously the public are against it. Both parties are for it. This shows again the radical disconnect between elites and the general populace.
    No, this shows the deep susceptibility of the general public to Fear, Uncertainty and Doubt (FUD), especially on highly technical questions. Put another way, how else can you explain this “disconnect” than that the elites happen to be aware that privatisation can be good policy?

    Is there a good single source comparing the actual positive and negative outcomes of privatisations?
    No, for good reason. Whether it has positive or negative outcomes depends on your criteria for success, the regulatory capacity of government, the efficiency or otherwise of your starting point, prevailing financial conditions (as others have said, the strongest argument against it at the moment) and a whole host of detail on the exact terms of privatisation. As a generalisation, it’s a process that has had massive successes and dismal failures, and you need to account for what led to both before you can say it’s “good” or “bad”.

  21. June 20th, 2008 at 14:17 | #21

    DD: I suspect the time to shuffle the costs of dealing with climate change to private investors was five years ago.

    As far as I’ve heard, state governments still think “clean coal” is just around the corner and is going to avoid painful regional adjustments.

    One final point: it’s Victoria and SA’s brown coal, not NSW’s black coal, that’s the first to go under emissions trading.

  22. June 20th, 2008 at 14:59 | #22

    Robert,
    Don’t forget WA’s brown coal. Leaves us even more reliant on the gas. Joy.

  23. SJ
    June 20th, 2008 at 19:02 | #23

    Robert, SA has brown coal reserves, but doesn’t use them. The coal that they’re currently burning comes from Leigh Creek, and it’s black:

    The only currently producing coalfield in South Australia is near Leigh Creek, where coal occurs in the Late Triassic part of a Late Triassic – Early Jurassic sequence of freshwater sediments. The low-grade sub-bituminous coal occurs in five discrete basins over a distance of 20 km.

    WA is the same as SA. It has some brown coal, but the coal it’s actually using is black.

  24. SJ
    June 20th, 2008 at 23:10 | #24

    derrida derider Says:

    No, this shows the deep susceptibility of the general public to Fear, Uncertainty and Doubt (FUD), especially on highly technical questions. Put another way, how else can you explain this “disconnect� than that the elites happen to be aware that privatisation can be good policy?

    I can’t tell whether you’re being sarcastic here or not. Anyway, assuming that you’re not, I’d say that it reflects actual public experience with previous privatisations.

    I’ll repeat an earlier comment:

    We elect politicians to implement policies on our behalf. If a particular policy is a good one, it should be possible to explain why it’s good, without having to resort to lying about it.

  25. Jill Rush
    June 21st, 2008 at 02:15 | #25

    Derrida Derider,
    You suggest that costs will be transferred from the taxpayer to a private corporation with privatisation. However, that corporation will pass those costs on, plus a little extra, to the consumers who are also taxpayers. That is everyone who pays tax now gets to pay more for a service which may or may not be more efficient. After all in a near monopoly market service levels can be dropped to increase profits and the government can no longer be held accountable.

    The people of NSW and the Labor Party rank and file know this – that is why they are against the privatisation of assets they have already paid for.

    Sir Thomas Playford was a Liberal who understood that a basic piece of infrastructure like electricity is better in government hands and acted accordingly. Nation building is now, of course, so old fashioned.

    A monopoly can be an ugly beast and leave a nation at the mercy of those who don’t have the interests of the nation at heart.

    Just because Governments can be bad does not of itself make corporations good. It is easier to change a government than it is to get back assets once they have been sold off.

  26. June 23rd, 2008 at 12:21 | #26

    See Weekend Reflections where I accidentally posted my response to derrida derider’s previous post.

  27. August 30th, 2008 at 18:07 | #27

    Costa’s and Iemma’s latest antics

    In anyone else here following the astonishing antics of NSW Treasurer Michael Costa and NSW Premier Morris Iemma? Just when I thought that this pair had already taken NSW politics to depths not previously imaginable, they have outdone themselves. Costa, who had promised the NSW that he would resign if his privatisation legislation was not carried, has since changed his tune. He is not to resign after all, it seems, that is unless the NSW Parliament agrees to a savage program of cuts to services and public service jobs, the privatisation of NSW’s ferries and railways maintenance in additon to the privatisation of NSW electricity’s retail arm.

    Anyhow, for those who may be interested, I have posted quite a lot more material at candobetter.org/NswElectricity. This includes what I found to be a surprisingly good speech by NSW Upper House Opposition Leader Michael Gallacher. Costa’s atrocious record and his case for privatisation is torn to minute shreds during the course of this speech.

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