Home > Economics - General > Refuted economic doctrines #2: The case for privatisation

Refuted economic doctrines #2: The case for privatisation

January 3rd, 2009

This is the second in a planned series of posts assessing the implications of the global financial crisis for the economic ideas and policies that have been dominant for the past few decades. The large-scale privatisation of publicly-owned enterprises both in capitalist countries like the UK and Australia and in formerly communist countries after 1989 played a big role in promoting the kind of triumphalism that characterised much commentary about free-market capitalism in the 1990s and (to a somewhat lesser extent) in the years leading up to the crisis. How well do arguments for privatisation stand up in the light of the financial crisis.

The case for privatisation had two main elements. First, there was the fiscal argument for privatisation, namely, that governments could improve their financial position by selling government business enterprises. This argument assumed that privately owned firms would have higher levels of operating efficiency, and therefore that the value of those firms would be increased by privatisation. The second argument was a dynamic one, that the allocation of capital between alternative investments would be improved if governments were not involved in the process. Both of these arguments have been fatally undermined by the collapse of the efficient markets hypothesis.

The fiscal case for privatisation must be assessed on a case by case basis. It will always be true for example that if a public enterprise is operating at a loss, and can be sold off for a positive price with no strings attached, the government’s fiscal position will benefit from privatisation. Various early ventures in public ownership, such as the state butcher shops operated in Queensland in the 1920s (apparently a response to concerns about thumbs on scales) met this criterion, and there doesn’t seem to be much interest in repeating this experiment. However, for most recent privatisations in developed countries, the sale price has been less than any plausible estimate of the value of future earnings, discounted at the government bond rate. The fiscal case for privatisation therefore rests on the claim, derived from the efficient markets hypothesis, that the correct discount rate to use is one based on the private sector cost of capital and therefore dominated by the expected rate of return to equity capital.

The choice of discount rate makes a difference because the rate of return to equity has historically been much higher than the rate of interest on government bonds, a gap that can’t be explained by standard economic arguments about risk premiums. Although many explanations of this ‘equity premium puzzle’ have been offered, for present purposes they can be divided into two classes
(i) those which assume that the EMH is true, and imply that the equity premium is a correct reflection of economic risk, independent of equity markets
(ii) those in which the risk premium for equity reflects failures in equity markets that lead people to prefer holding bonds
In the light of the GFC and the events leading up to it, the case for explanations of type (ii) is overwhelmingly strong

The dynamic case for privatisation is based on the idea that the allocation of investment will be better undertaken by private firms than by government business enterprises. This claim in turn relies on the assumption that the evaluation of risk and returns undertaken by investment banks, with the assistance of ratings agencies, and the availability of sophisticated markets for derivatives like CDOs will be far superior than anything that could be obtained by, for example, using engineering calculations of the need for investment in various kinds of infrastructure, and seeking to implement the resulting investment plans on a co-ordinated basis. The GFC has shown that, for most of the past decade, market estimates of the relative riskiness and return of alternative investments have been entirely unrelated to related. For infrastructure in particular, the decision processes of Byzantine creations like Macquarie and Babcock and Brown have determined the allocation of investment. Unsurprisingly, the result has been a mess.

I’ve been making this argument for some time, so I can anticipate the immediate response that, if the case for privatisation developed in the 1980s were invalid, it would be necessary to advocate public ownership of all enterprises. I’m never quite sure if those putting forward such arguments are as ignorant of marginal cost and benefit calculations as they appear to be, or whether it’s simply meant as a debating trick. But it should not be hard to see that, if the public sector has lower costs of capital, while the private sector has (at least in a wide range of activities) lower operating costs and greater responsiveness to consumer demand, the optimal economic structure will involve public ownership of some firms and private ownership of others, that is, a mixed economy.

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  1. January 3rd, 2009 at 17:21 | #1

    I realise you are approaching this from an economic perspective, but there are other reasons (that are perhaps more political in nature) why privatisation may be the best option in some or most cases.

    One is the occasional tendency for a government to use state-owned enterprises primarily as dividend dispensers, rather than producing/servicing entities. This can lead to underinvestment, or diversion of funds from productive investment into favoured projects or porkbarreling.

    Another is the kinds of protection a politically well-connected SOE can get, like subsidies and tariffs and competition prevention. This has obvious downsides.

    I would continue, but dinner’s ready. I’m sure your readers can think of more.

  2. charles
    January 3rd, 2009 at 19:59 | #2

    I would argue government enterprises should be sold to suckers, sorry capitalist in the good times to suck money out of the system and brought back in the bad times to put money back into the system. Big mistake to have the future fund holding all those Telstra shares in the good times.

  3. Ikonoclast
    January 3rd, 2009 at 20:12 | #3

    It may be a bit old fashioned of me to say this. Surely, government ownership is warranted in cases of natural monopoly. Major utilities (water, power, communications) and transport infrastructures (rail) usually fit this bill.

    Major national utilities and infrastructure are “strategic” in every sense of the word. The power to plan strategically for social, economic and military requirements must remain in the hands of the democratic national government.

  4. TerjeP (say tay-a)
    January 3rd, 2009 at 21:05 | #4

    John,

    Q1. According to your case by case criteria was Margaret Thatcher right to sell the British coal mines?

    Q2. Was the corporatisation of Australia Post in 1989 the right thing to do?

    Q3. In a sector, such as banking, where there are many successful and popular private operators what is the merit of the government also being a supplier? And which bank should it buy?

  5. Donald Oats
    January 3rd, 2009 at 22:28 | #5

    Luv PPPs. The Cross-City Tunnel in Sydney was eclipsed only by the Lane Cove Tunnel (and here). But that was another world away…Murray Bridge being the current abode.

    Anyway, since we seem to be posing questions, here is mine:
    Should the military be privatised? The government could use a tender process for supply of troops, equipment, logistics, etc. For example, the government could have used contracts to supply troops to Iraq, Afghanistan, various Pacific Islands, and other exciting places. Much cheaper than having a bunch of soldiers, tanks, subs and so on sitting around during the quiet times.

    Where does the risk reside, and how does it affect the economic analysis of whether to privatise all or part of the military?

    Personally I feel quite uncomfortable with the idea of privatisation to any degree (Haliburton, Sandline and others come to mind)…yet can an argument be convincingly made for privatisation?

    Anyway – Happy New Year, Prof JQ and bloggers; 2009 should be a doozy!

  6. Sebastian
    January 3rd, 2009 at 22:32 | #6

    @Jarrah:
    The political argument is problematic, too, as there is little reason to believe that private companies don’t engage in massive corruption, including, of course, in the process of privatization itself. (cf. the corruption under Carlos Menem in Argentina, as a case in point).

    More broadly, the political case for privatization in developing countries often rests on limited state capacity and/or state corruption. And its certainly true that that affects the performance of SOE – but it _also_ affects the ability of the state to effectively regulate and negotiate privatization (which is especially important in difficult cases such as any type of public utility: electricity, water, phone):
    Successful privatization relies on successful regulation – e.g. the spectacular success of German telecom privatization was based on the existence of an extremely powerful and well run regulatory agency – but set up an agency like that in a weak state (think Bulgaria, Ecuador, whatever) and you’re going to get a disaster.

  7. gdr
    January 3rd, 2009 at 22:56 | #7

    was Margaret Thatcher right to sell the British coal mines?

    John Major, surely? The Coal Industry Act was passed in 1994.

  8. Marginal Notes
    January 3rd, 2009 at 23:02 | #8

    Jarrah, your analysis applies well to many parastatals (marketing boards, land development boards, etc) in developing countries, used to appropriate agricultural surpluses and distribute them to the political elite. Many of them were used primarily to create jobs for the boys and contracts for the cronies. However they were at least notionally subject to the laws that created them (e.g., land development boards set up to develop land for poor smallholders) and therefore potentially subject to reform. Ironically, the privatisation bandwagon has frequently been used to hand over valuable public assets to clients of the political elite, further concentrating wealth and placing the management of those assets beyond public scrutiny. Witness the massive redistribution of public wealth in Malaysia through less than transparent privatisation processes. For example, I have studied the fate of the Sarawak Land Development Board whose valuable oil palm holdings were privatised through the creation of Sarawak Plantations Ltd, owned by a few cronies. Sarawak Plantations has an enigmatic motto that can serve as a catch cry for the privatisation ideologues – “we can do better” !! The question is “for whom?”

  9. Jill Rush
    January 4th, 2009 at 00:30 | #9

    Interesting point Donald Oats. The problem however is that PPPs lack the flexibility that is required by government. The Howard Government in the early years flirted with the idea of the privatisation of Centrelink. It was seen as a way of managing money passed from government to those deemed eligible for a variety of payments. Something that a bank or insurance or finance company could easily manage. However within a short space of time this idea in Australia ceased to be considered because in a PPP certain activities are contracted to be delivered. If circumstances change then a new tender has to be called or negotiations need to be started with the current provider to provide this new service. Neither option is efficient for those caught in floods, fire or hurricanes or industrial meltdown. Thus the PPP is inflexible because each change involves additional costs and time and the public servants developing policy may have no practical experience and therefore fail to predict what is obvious to those delivering the service. It also means that those negotiations are handled by public servants with no idea or consultants who have no incentive to keep costs down as it will affect their fee.

    In a war situation private armies can mean that there are too many factors outside the control of government, which is likely to react sluggishly anyway, with further inefficiency built in because the Private Partner will seek to maximise crisis situations to increase profits. In a war the consequences are likely to be more horrendous than they are currently. It all depends on the results that are desired. If your desired result is to have money transferred from the public to the military industrial arm of the economy it would work well especially if the warfare is on someone else’s soil. If the desired result is for peace, there would be no inbuilt mechanism to provide this, as the companies involved need war to make a profit.

  10. January 4th, 2009 at 00:46 | #10

    “here is little reason to believe that private companies don’t engage in massive corruption, including, of course, in the process of privatization itself.”

    and

    “the privatisation bandwagon has frequently been used to hand over valuable public assets to clients of the political elite, further concentrating wealth and placing the management of those assets beyond public scrutiny.”

    That is a very serious problem, to be sure. The famous Russian wealth-grab in the ’90s, and many of China’s divestment of SOEs spring to mind as well. Also, owners of large companies and big players in important industries are politically well-connected too, so it’s not like they suddenly won’t get favours anymore.

    Obviously there are good, well-designed privatisations, and there are corrupt, fire-sale, and otherwise bad privatisations (not to mention the different formats – auction, giveaway, privatising management or ownership, etc). So I support Quiggin’s call for case-by-case analysis.

    There are also important differences between appropriate strategies for advanced (and not-so-advanced) industrial countries and developing ones, so for simplicity let’s stick with the former.

    However, I do think that the Professor is placing too much importance in the GFC as some kind of death knell for privatisation justifications. Systemic mismanagement of risk is a huge component of the GFC, but to blame that squarely on capital markets when government failure played a significant role is not a good basis to extrapolate from. Besides, the theory is that capital allocation will be superior in private hands, not infallible.

    I also think that the overall success (ie improved efficiency and general welfare gains) of privatisation in competitive sectors should give pause to those who want to refute it as a doctrine.

  11. Gordon Pasha
    January 4th, 2009 at 03:01 | #11

    Hello

    An element to be kept in mind is that private companies fear the government, and therefore can be more responsive to customers’ complaints. I have lived in places where utilities were state run. If there was an outage, you had nowhere to turn, no one cared about you. When the same utility is privatized and there is an outage, you always get some government official threatening to impose fines, etc (it looks good politically). The utilities suddenly become much more responsive.

    Regards
    Gordon

  12. Ikonoclast
    January 4th, 2009 at 04:46 | #12

    A national high speed broadband network is also an exmaple of a natural monopoly. If Telstra was still public and the national government effective we would have a national high speed broadband network by now.

    Private enterprise wants to fight over the choice tidbits and ignore the rest of the country, hence the mishmash and the impasse we have at now.

    We also need a national Renewable Energy Department to get cracking on industrial scale renewable energy projects. We need a PM with the guts to say to the coal lobby, “I will also introduce a carbon tax and if you so much as squeal I will double it after the first year.”

    But Rudd is in the pocket of the fossil fuel industries. I wonder how much they contribute to the Labor Party each year?

  13. January 4th, 2009 at 06:47 | #13

    I think the GFC implies literally nothing about the case for privatisation (outside the financial sector) but quite a lot about the case for regulating the financial sector more strenuously.

    John the last argument you make is for a mixed economy because operating costs are lower for some private firms. I think this case is overwhelmingly strong and undercuts any connection you seem to be making about the GFC and privatisation.

    Firms should not be exposed to the vote-seeking idiocies of local politicians and the self-destructive impulses of irrational trade unions which raise costs and do their own members out of jobs. There are also administrative diseconomies when government tries to do too much.

  14. charles
    January 4th, 2009 at 08:22 | #14

    # TerjeP (say tay-a) Says:
    January 3rd, 2009 at 9:05 pm

    Q3. In a sector, such as banking, where there are many successful and popular private operators what is the merit of the government also being a supplier? And which bank should it buy?

    Do private banks have a future? would be a better question. With a large percentage of private wealth destroyed, they are now little more than packaging service for central banks.

    For many countries the question; which bank? has been answered, the deals are signed sealed and delivered.

  15. charles
    January 4th, 2009 at 08:31 | #15

    Oh and my comment goes double for Australian Banks, they now repackage loans fro a government guarantee. Very risky way to run a government business, take the risk with no direct control. We will see how it works out.

  16. January 4th, 2009 at 09:40 | #16

    “A national high speed broadband network is also an exmaple of a natural monopoly. If Telstra was still public and the national government effective we would have a national high speed broadband network by now.”

    I suspect telecommunications may be more complex and that any natural monopoly would also mean locking out competing technologies?
    http://www.businessspectator.com.au/bs.nsf/Article/Committed-to-market-failure-LYR64?OpenDocument

    Meanwhile the Qld Govt made a Christmas eve announcement of the successful sale of the Cairns Airport for what looks like less than expected but hardly surprising in the circumstances. An essential fast tracked expansion of Cairns Hospital was made conditional on the sale. The statement from the local member and Tourism minister was:

    “Other airports that have been sold to private operators have gone from strength to strength in terms of their operational capacity and tourist numbers,” she said.

    Which I guess can only be taken as an admission of their own failure in managing the airport in the communities interests, rather than their own political interests?

  17. January 4th, 2009 at 10:13 | #17

    There can be significant costs associated with privatising (or nationalising) a firm. There is also the issue of perverse incentives. If a government is planning on privatising a firm or utility, then how it is regulated could affect the price that the government receives. This can lead to an incentive to not regulate things properly. For example, when the NSW government was planning to sell its electricity generation assets, there would have been an incentive not to address greenhouse gas emissions from electricity generation. Coincidentally, the NSW stopped reducing the cap in the “baseline and credit” greenhouse gas abatement scheme (GGAS) at about the same time.

  18. Sam
    January 4th, 2009 at 12:42 | #18

    Did anyone look at John’s CV? University of New England? haha. I can’t believe people take his stuff seriously!

  19. Alanna
    January 4th, 2009 at 13:11 | #19

    Nothing at all wrong with UNE Sam (is something wrong with you?) except recently odd management issue now resolved to the relief of the lovely UNE community. At least they are not knocking out Lecturers walls to “office share” space or privatising students once good cafeterias (OK if they like living on burgers and chips) as at a particular other university in Sydney. Privatisation objectives taken to extremes on campus and uni strategies now spoken in marketjumbo. Depends who is in charge doesnt it?

  20. Michael of Summer Hill
    January 4th, 2009 at 14:38 | #20

    John, if ever there was a classic case of a PPP going to the wall then ‘Metronet’ fits the bill. For not only did the British taxpayers foot the bill for the failed project but gave the incompetent executives a ‘golden handshake’ all at taxpayers expense. Drongos.

  21. charles
    January 4th, 2009 at 14:44 | #21

    “Other airports that have been sold to private operators have gone from strength to strength in terms of their operational capacity and tourist numbers,” she said.

    And I wonder if that will continue now the period of cheap private money has ended. We will see.

  22. January 4th, 2009 at 16:04 | #22

    “I can’t believe people take his stuff seriously!”

    I know, I know, I shouldn’t feed the troll. But…

    Quiggin – BA (hons) (Maths), BEc (hons) (Econ), MEc (ANU), PhD (New England)

    From Wikipedia:
    “Quiggin is a prolific author, and is regularly among the top economists in Australia, measured by output in high-quality journals and by citation frequencies.[1] He is among the top 500 economists in the world according to IDEAS/RePEc.[2] He is best known for his work on utility theory. Quiggin has frequently been awarded and recognised for his research, including twice receiving Federation Fellowships from the Australian Research Council.[3]“

  23. January 5th, 2009 at 02:13 | #23

    I think it is highly likely that after the coming Queensland state elections, that the corporate sector will apply pressure on whichever Government wins office to carry out further privatisations in the same outrageous way that it leaned on the NSW Government to privatise its electricity assets last year.

    In Queensland, the leading propaganda organ of the corporate sector is, of course, Rupert Murdoch’s Courier Mail newspaper. On 29 December the Courier Mail editorial renewed its call for an early election.

    I don’t consider that the stated reasons for calling for an early election stand up to scrutiny and I have written about them in the article “Courier Mail manipulates reporting of water recycling to demand early election”.

    I consider the Courier Mail’s attempt to bring about an early election unjustified interference in Queensland’s electoral system.

    It is an attempt to rush through an election early in the year before people can properly consider the issues at stake and before the Greens, Independents and community activists can organise sufficiently to challenge the two pro-business parties.

    After the election the Courier Mail, if its past conduct is any guide, will deem that the Government will have a mandate to enact ‘strong’ policies it deems to be in the best interests of Queensland, regardless of whether or not they are actually put to voters during the course of the election. One such policy will be privatisation, most likely of out rail network and our water infrastructure.

  24. BilB
    January 5th, 2009 at 07:02 | #24

    Corporatisation is the only step necessary to provide a flexible operating environment for state owned assets. The argument that private ownership is more efficient only really holds up for businesses of a small to medium size and early age. Once a business goes beyond a certain size, or survives beyond the influence of its original imagineer, it becomes reliant on market available managemment talent. This talent is equally available to state owned corporations as it is to privately owned corporations.

    The other need for any community service entity is the availability of capital. Traditional state owned infrastructure required funding through the public purse, even though this funding may have been sourced from insurance investors. The corporate structure insulates the government purse from the funding requirements of its functional corporations for as long as institutions are willing to lend to them. That is the beauty of compulsory superannuation and legislation. Post global financial meltdown might provide a new very favourable investment environment for state owned corporations. Not very commercially sexy, but far more stable.

    The other requirement of state owned assets is longevity. Privately owned corporations are proving (outside Europe that is) to have a volatility that is not condusive to the provision of stable service on a community timeframe. Maximising business returns, an expectation of optimised markets, requires a relatively high turnover of opportunities, experimentation and risk. All of these features are completely at odds with public service infrastructure.

  25. January 5th, 2009 at 09:02 | #25

    Another go at same issue.

    You say John that the appropriate boundary between public and private activity depends on the issue of whether ‘the public sector has lower costs of capital, while the private sector has (at least in a wide range of activities) lower operating costs and greater responsiveness to consumer demand’.

    This is not a standard view – by itself it suggests the state should run steel mills – but I cannot see how this boundary depends of the GFC. Are you saying that costs of capital in the public sector become permanently lower in a crisis?

  26. David B
    January 5th, 2009 at 09:27 | #26

    One of the areas that should be and IMHO, NEED to be state controlled is health resources. We spend 15-20% of moneys on paperwork, that does nothing in providing care to people; rather it is to find out how to get the most PROFIT out of someone being sick, (which in and of itself is a morally very bad idea). Studies which I have seen, show that the cost of providing health care through government programs usually reduce the cost, and give equal if not better outcomes to the patient.

    For me, there needs to be a open discussion as to what areas would be best suited for government vs private approach. Health, infrastructure, military are three areas that should be provided by the government. Applying appropriate government regulations (but not ownership or providership) could be best used in the financial systems, corporation operation and other areas where private ideas could best serve the public.

    But most importantly, all information should be made public (both government/private). Exceptions would be obvious needs in the military (and even there, would be a reviewing board of civil as well as military personal). Secrecy has been the downfall of almost all the public/private endeavors – remove the penchant
    for secrecy and maybe things might improve. At least the public won’t be caught in the dark. And it would have the added benefit that people who would be trying to game the system, would be more likely to be caught – a few might slip through, but the incentive to cheat would be countered with the prospect of spending your retirement time and funds in a legal battle instead of on the beach in some faraway island.

    Food for thought.

  27. Vangel
    January 5th, 2009 at 12:03 | #27

    No wonder social democratic ideas lead to constant failure. Their proponents lack both knowledge of the real world and the ability to think logically.

    Most advocates of privatization will point out that there is little doubt that private companies can make bad decisions because objective observation reveals that some business managers and entrepreneurs are making some mistakes at any point of time that we choose to examine. They do not advocate privatization because the market makes no errors but because in an unhampered system in which entrepreneurs have to account for profits and losses, market institutions will lead to less waste and the least amount of failure.

    Of course, an objective observer will point out that when you have institutions like central banks being able to create purchasing power out of thin air and governments being able to take actions to pick winners and losers in the business world it makes little sense to pretend that there is such a thing as an unhampered market and that the failures that are seen are the primary responsibility of governments and the idiot voters that tolerate their actions.

  28. BilB
    January 5th, 2009 at 13:47 | #28

    “because in an unhampered system in which entrepreneurs have to account for profits and losses, market institutions will lead to less waste and the least amount of failure”

    That is a broad statement there, Vangel, and in my experience, anything but true. The reality is that private enterprise has a very selective memory. Failed private enterprises are instantly forgotten as the upstanding tear the business carcass to pieces refreshing themselves with the fatty bits that can be stripped away with little effort. Private industry has the luxury of being very selective with their customer base. The 20/80 philosophy.

    Corporations serving the broad public interest have none of this luxury. They have to service every need down to the lowest nil return, and for the full lifespan of the community. Failure is not an option. Woe betide any public interest provider that fails to deliver as it will be dealt with in the manner of a caught out cheating husband where the memory will tattoed onto the standing government of the day for all eternity. There is no name change springback for such entities.

    The infallible, super efficient, super profitable, private enterprise that you suggest here is a fable. I believe.

  29. January 5th, 2009 at 14:07 | #29

    “I think it is highly likely that after the coming Queensland state elections, that the corporate sector will apply pressure on whichever Government wins office to carry out further privatisations in the same outrageous way that it leaned on the NSW Government to privatise its electricity assets last year.”

    Damn, and here some of us were thinking that it was the notorious mafia culture of the NSW Labour right which was more critical in the Iemma coup-de-ta?

    But I just dont see how, on a case by case basis, electricity generation assets are any kind of natural monopoly? They would seem to be rather high actually and very risk sensitive to unpredictable technology? The distribution network maybe a natural monopoly? But the generation assets?

    I’m old enough now to have encountered some of the policy mistakes on this in the past where it was the publicly owned utilities who stopped water supply from tanks in competition with their own supply …. and in NSW at least stopped anyone for many years feeding excess supply into the grid so stopping for many years methane plants attached to NSW coal mines …. great stuff …..

    I would also note here that while I often disagree with JQ ideologically I also find much in his fundamental approach to admire and agree with. However my recollection is that some of his previous argument opposing Telstra privatisation are now mincemeat given asset valuations and technology?

  30. BilB
    January 5th, 2009 at 14:44 | #30

    Obviously, Kithenslut, you are beyond the cares of younger childrens needs, but perhaps you might offer some mature thoughts about the incredible entrepreneurial wisdom and decision making behind ABC Learning. Then imagine that you are talking about ABC Electricity, ABC Health Care, or ABC Water. When it comes to government memory is elephantile. When it comes to private enterprise it is only the shining star of the day that people recal. Private enterprise has that wonderful thing called “commercially sensitive, private and confidential” with which to obliterate foibles as if they never happened.

  31. January 5th, 2009 at 14:58 | #31

    BilB?

    Your comments dont address any particular issue?

    I thought I was being concilliatory and promoting debate rather than elucidating an ABC of ignorance!?

    I dont see any specific lessons in ABC learning to any comment I have made? If you do then congratulations, mate!

    On the basis of a case by case basis I have no opinion there yet sorry but hey ….

  32. derrida derider
    January 5th, 2009 at 15:16 | #32

    I think only the most blinkered ideologues on both sides would disagree with the call for a case-by-case consideration. But its beside the point – the real arguments are about the criteria for deciding these cases.

    Given the history of government investment you can’t seriously hold to the view of impartial, economics-and-engineering driven, efficiency-maximising central planners. Speaking as someone in government, government doesn’t work like that.

    But of course we have to weigh serious risks of failure up against each other. After all, those dreadful PPPs can be seen as partly government rather than private failures. The worst of them came from Treasurers dressing up their accounts with off-balance sheet transactions to impress the punters, without worrying themselves too much whether said transactions gave said punters good value.

  33. BilB
    January 5th, 2009 at 16:05 | #33

    DD,

    I think that it is very important to now be looking at infrastructure establishment environments, of all forms, as we move reluctantly (it seems) into a warming world where most of our energy machinery will need to be replaced with different machinery with widely varying commercial returns. Just as the last few months have shatterred perceptions of what can and can’t be done by governments in the face of crisis, the coming decades, I believe, will wash away ideological positions on how the hardware of our civilisation will be morphed to our needs in a harsher, hotter world. When the dust has settled from the current global economic crisis, a crisis very much of too much money chasing too few investment opportunities, and the reality fully sets in that there is a very serious challenge ahead in solving global warming, it is going to be an investment environment like none before it that builds the energy world of the future.

  34. jquiggin
    January 5th, 2009 at 18:35 | #34

    “However my recollection is that some of his previous argument opposing Telstra privatisation are now mincemeat given asset valuations and technology?”

    Would you like to spell this out? I think you’ll find that the dividends and tax credits foregone through Telstra stage 1 have already exceeded the sale price (including interest savings on the generous assumption that all proceeds were used to repay debt). That is, even if Telstra shares became valueless today, T1 would still be a loss to the public.

    T2 was a much better deal but only because of the absurd valuation of the dotcom component of the business. As I pointed out at the time, it would have been much better to sell off this but while the bubble lasted (it burst not long after).

    As regards T3, it’s too soon to tell, but certainly full privatisation has been a disaster in policy terms.

  35. Alanna
    January 5th, 2009 at 18:42 | #35

    Thank goodness no-one fed the little troll and with a bit of luck he is gone. UNE economics brilliant and not subject to overwhelming dominance by neo liberal economists and free marketers either?. Could that be because they are a bit more critical and a bit more objective and a tiny bit freer from the wash of private money slushing through city campuses?

  36. Brendan
    January 5th, 2009 at 20:34 | #36

    #30 “electricity generation assets … are very risk sensitive to unpredictable technology”. Really? Care to fill us in on the economically important changes in electricity generation technology in the last 50 years?

  37. TerjeP (say tay-a)
    January 5th, 2009 at 21:00 | #37

    I think only the most blinkered ideologues on both sides would disagree with the call for a case-by-case consideration. But its beside the point – the real arguments are about the criteria for deciding these cases.

    At the end of the day I agree with the mixed economy approach. I just think that the mix should involve a lot less of the public sector.

    I’m very happy with local councils owning local roads and footpaths. I like public parks. I’m okay with the government having some websites. I don’t want the sewers privatised. And I think 99.99% of people agree that there is a role for the public sector.

    So I agree that Johns point, without further qualification, doesn’t really say a whole lot.

  38. Socrates
    January 5th, 2009 at 23:33 | #38

    You can use anecdotal evidence to argue this one either way. There wil be times when privatisation (or not) is appropriate. But the position that privatisation is always best is ideology not fact.

    In my experience the decision makers don’t beleve themselves that privatisation is always better – the economics is a convenient excuse. The real reason is hiding a structural deficit (eg NSW), or appeasing business lobbiests (eg Howard).

  39. Dave
    January 6th, 2009 at 00:57 | #39

    It doesn’t really matter whether privatization is a good idea or bad, it will continue in Australia simply because elected governments are pathetically focused on the short term and ‘Keeping out of debt’ (while really incurring long term liabilities from the privatized entity).

    Also by privatizing something, you can wash your hands of it. A good example is the abysmal Brumby government in Victoria, which wont take public transport back under its wing because its easier to blame all the problems on the private companies.

    Get some quick money now, ‘Stay out of debt’, and shove the worst businesses on someone else’s shoulders. This is the typical Australian state government playbook.

  40. BilB
    January 6th, 2009 at 07:12 | #40

    The converse of your argument, Dave, is that the private sector desperately wants to get their hands on anything that is a fundamental human need that can be monopolised, and screwed for everything that it is worth. The jewel in that crown is water. Roads looked good, but now it seems that enough people will drive around them to avoid the cost thereby reducing them to an OK investment. Electricity is capital intensive. But….Coal….every one needs it (so far), has only been publicly owned in NSW, is capital intensive enough to keep out small players, yet has longevity if only those blasted horse owners would get out of the way. Black gold. Only drwback, it requires intensive government lobbying.

  41. Tom N.
    January 6th, 2009 at 08:28 | #41

    “hc” gets it most right. Contrary to the implications of John’s post, the GCF does not significantly alter the economics of privatisation. Indeed, even in the narrow area of the privatisation of infratructure, all the key arguments for and against PPPs mentioned in this thread, and the need for case-by-case analysis, were discussed by the Industry Commission in its (sceptical) paper on BOOT schemes more than a decade ago.

    In this sense, John’s suggestion that he is refuting an “economic doctrine” needs to be understood to be principally a claim about the practices of governments, rather than the advice of policy economists.

  42. Boy from Flynn
    January 6th, 2009 at 08:49 | #42

    We in Gladstone (central QLD) were able to witness first hand the attempted exploitataion of that very jewel in the crown.

    A long, severe drought had reduced water in our resevoir to a critical level. The heavy industries, who use the majority of the water, were forced to invest expensively in alternative technologies (desalination, seawater cooling etc). Not long after this infrastructure had been put in place, Cyclone Beni dumped a phenomonal amount of rain on the region, filling the resvoir. Water was now abundant – but the industries had spent large sums on alternative means of water supply and were not inclined to simply abandon them. The profitability of the privatized water board took a severe blow.

    They proposed a new pricing system to compensate for their loss – water price hikes of between 300% and 1200% for residents and businesses. I remember them actually giving a local press release to the effect of “people need to understand that water is a business and business must profit”.

    So, water was now very abundant (the dam wall had been raised during the drought, meaning that the resevoir now held 50% more that it was ever previously capable of holding) but people were to be slugged up to 12 times the previous price. The law of supply and demand is meaningless in such a situation.

    It was only the intervention of a very embarrassed QLD government that settled the great brouhaha that was erupting and settled the issue of fair pricing.

  43. Jill Rush
    January 6th, 2009 at 10:49 | #43

    A salutary tale Boy from Flynn. It seems that the QLD government had to go for Water as a basic necessity and right rather than water as commodity. In any privatisation it is difficult for the contractual lawyers on the government side to foresee such a situation and put it into the contract. A right to affordable/drinkable water should be part of a Human Rights Charter and therefore govenment obligation.

    According to Adele Ferguson in the Oz http://www.theaustralian.news.com.au/story/0,25197,24876607-7583,00.html

    from the side of the corporations, building and running toll roads, there is a desire for government to support the business model of the corporation because of the downsides of corporations taking on the risk for infrastructure development. A clear call to socialise the losses whilst privatising the profits. A new model is needed.

  44. Alanna
    January 6th, 2009 at 11:57 | #44

    I think governments are continuing with privatisations and pps policies for the simple reason that infrastructure still needs to be maintained and constructed. The blind faith placed in privatasation has brought about a situation where government skills in these areas are simply not there any more, or a very much reduced, (with government department services themselves having been contracted out to private organisations) and it is probably more likely “the government simply doesnt know how” anymore. The loss of Commonwealth public sector skills up to the highest levels was even commented on by McFarlane when he departed. The state department of public works no longer exists except as a shell.

  45. Alanna
    January 6th, 2009 at 12:10 | #45

    In fact have a look at the old NSW department of public planning website (now called the office of public works under the NSW Department of Commerce)
    which appears to do nothing more than offer services to businesses (any businesses) at a “fixed price quote.”
    Check their product offerings under “public works quicklinks.” and note the tone of “client satisfaction” throughout. This is about attempting to make money by offering services to private sector firms who can pay, its not providing public infrastructure.
    http://www.dpws.nsw.gov.au/Home.htm

    Its pathetic. I dont know what we were thinking criticising shabby privatisation deals gone awry that cost taxpayers more. What is the alternative? There isnt one.

  46. rog
    January 6th, 2009 at 12:15 | #46

    Governments skills in conducting tendering processes are often flawed as they usually dont have any real practical experience in contract management.

    There is always conflict, the contractor wants to complete the job at a profit and the client wants to fulfill a policy. Then there is office politics, seniority etc.

  47. Alanna
    January 6th, 2009 at 12:18 | #47

    I can also find a number of instances of State significant sites (permitted to be developed by Frank Sartor) that started life as a 30 mill development but mysteriously rose to 100 mill developments without a single clod of earth being turned, yet were then able to be called in as “state significant” (50 mill threshold) ignoring local council and community objections. Where are the independant auditors here? Where are the proper controls against dishonesty and corruption and where is ICAC? Asleep at the wheel?

  48. Boy from Flynn
    January 6th, 2009 at 13:24 | #48

    Agree completely Jill@44.

    Water should remain under the full control of government and after the fiasco here, few people in my area would disagree. As a for-private-profit enterprise, it appeared to run relatively smoothly until a situation beyond any human control dramatically altered the shape of the local water market. The big paying customers found an alternative supply and the monopoly holder was determined that households and local business would now cover their loss. After all, we couldn’t very well refuse could we? I can refuse to buy widgets if I think they’re too expensive but I can’t refuse water.

    Agree re PPP’s as well. Many of these are involved in providing services that the community would suffer without. Yet it would appear that quite a few of these may not be viable when the situation shifts from one of economic good times to something a bit tougher (the private job provider network is now going cap in hand to govt as their market shrinks). I think we also need to think about whether some important services should be fully or largely public provided – the failure of the country’s biggest for-profit childcare provider should give us pause.

    I agree with Prof Quiggin that the exact mix of public and private should be subject to reveiw on a case-by-case basis.

  49. Ian Gould
    January 6th, 2009 at 20:27 | #49

    “Q3. In a sector, such as banking, where there are many successful and popular private operators what is the merit of the government also being a supplier? And which bank should it buy?”

    Actually if the Australian government decided it wanted to own a bank again the most sensible option would probably be to issue a banking license to Australia Post.

  50. January 9th, 2009 at 05:56 | #50

    It seems to me that the lower cost of capital to the public sector reflects the power of the government to raise funds by taxation. There is less risk in lending to an organisation that can use coercive powers to meet its debt obligations.

    However, a country with widespread public ownership and high public sector debt is a less attractive place to invest because of the threat that taxes will have to be raised to meet the debt obligations.

  51. Alanna
    January 9th, 2009 at 10:51 | #51

    Agree completely Winton – it all comes down to a moderate approcah to the usefulness of the PPS. Water – crazy. It can cause civil disruption. Electricity – same. Transport and roads – people need it to get to work. Education – mixed but the greater weight should be for access to the majority – ie on the public side. Basic infrastructure – should be recognised for its collective use. Back to JQs suggestion, the most sensible – case by case but with hands off exceptions. Water, electricity and public mass transport systems should be on that list as should be the cost of election campaigns (and no donations at all permitted ever) and an independant broadcaster to keep the bastards honest.

  52. nanks
    January 9th, 2009 at 10:59 | #52

    @Alanna “as should be the cost of election campaigns (and no donations at all permitted ever) and an independant broadcaster to keep the bastards honest.”
    Oh that would be sweet – but more than one independant broadcaster, using a funding method that removes the sort of political disruption we have seen at the ABC for quite a while and SBS more recently.

  53. Barni
    January 10th, 2009 at 06:25 | #53

    You say: …. while the private sector has lower operating costs and greater responsiveness to consumer demand, ……
    The operating costs may be lower due to lower wages and benefits but the difference is more than made up in profits fueled exclusively by greed. As for responsiveness, private ownership will only provide those products/services on which they can make the most money. An example is the major American drug company which has a cure for a kind of childhood brain cancer but will not make it because the number of cases is not enough for them to make the proscribed greedy profit.
    The notion that private enterprise equates to a “free market” is nonsense. A free market is a market for which there are no barriers to entry or exit. Does anything seen in the last century even vaguely resemble this?
    Free market is used like a syllogism – the worst manipulative form of logic, two premises and a conclusion. Premise 1: free is good; premise2 market is good; therefore free market is good. When one accepts such a syllogism all critical thought stops – this is the purpose of a syllogism. It is the favourite tool of all public manipulators and a speciality of right agenda ideologues.

  54. El Mono
    January 10th, 2009 at 10:23 | #54

    Barni, their is nothing wrongs with a system that makes use of peoples self interest, it is important to a acknowledge the limitations though. Declaring all private enterprise as evil is just as idealogically driven and unhelpfull as ignoring the limitations of the market.

  55. TerjeP
    January 10th, 2009 at 12:44 | #55

    1: free is good; premise2 market is good; therefore free market is good. When one accepts such a syllogism all critical thought stops – this is the purpose of a syllogism.

    I accept the syllogism but critical thought has not stopped. Where the evidence is clear that intervention works to make things significantly better without unbearable cost I’m happy to have intervention. To judge such evidence we should use something comparable to a jury system where the evidence needs to be credible to well more than 51% of the peoples informed represenatives. I’d propose that we allow interventions to be legislated with a sunset clause of no more than 20 years unless a supermajority of 75% of parliament is convinced by the evidence.

  56. piglet
    January 13th, 2009 at 08:22 | #56

    “An element to be kept in mind is that private companies fear the government, and therefore can be more responsive to customers’ complaints.”

    I don’t think that is true. To the contrary, I believe that one big reason why politicians have come to love privatisation so much is exactly the fact that they won’t be held responsible any more. When a government-provided service is performed badly, people know where to complain: it’s the government’s fault. If that service is sufficiently important and popular, it’s quality becomes a high profile political issue. Once that service is privatized, it’s “the market” or “the economy” or whatever. You cannot complain about “the market”.

    Train delays, fee hikes, denied health care? A scandal if the government is responsible. Business as usual if it is a private business decision.

  57. piglet
    January 13th, 2009 at 09:05 | #57

    “Q3. In a sector, such as banking, where there are many successful and popular private operators what is the merit of the government also being a supplier? And which bank should it buy?”

    This is an interesting question and it is related to the financial crisis. Many governments do provide financial services. Switzerland is a major example. Most states operate their own bank (Kantonalbank, some of which have meanwhile been privatized) and the federally owned Postal Service, although not a full bank, is actually the country’s biggest financial services provider (by customers, not by revenue, of course). Having public institutions provide cheap and reliable financial services for ordinary people has been and is still regarded as important, and I believe adds stability to the financial sector. Moreover, a host of co-op savings banks similarly provide banking services. This is “mixed economy” at its best and in my experience, ordinary customers get much better services and lower fees here than in the US where there are virtually no non-commercial banks.

    Germany’s financial sector has a similar structure but the Postbank there has been privatised, and some of the public institutions have been involved in the financial crisis due to lack of oversight. It should be noted that even many government-owned companies have in recent years adopted a “privatization” mindset, increasingly acting like ordinary profit-maximizing coporations, often with the blessing of regulators. That is likely to change now that the consequences are becoming obvious. But the municipality-owned savings banks (Stadtsparkasse or Kreissparkasse) that still serve most Germans are now seen as solid as a rock and customers of the commercial banks are coming in droves to deposit their savings.

  58. January 14th, 2009 at 15:58 | #58

    I commend the article “National broadband: what kind of monopoly?” by Tristan Ewins on Online Opinion. The forum discussion is here.

  59. Kaleberg
    February 4th, 2009 at 09:36 | #59

    I remember the 1960s when NYC privatized commercial trash pickup. I remember a friend of my father’s saying quite simply, “the family”. He was referring to the Mafia and organized crime. Sure enough, that’s who ran commercial trash pickup in NYC into the 1990s when the likes of Rudy Giuliani finally put an end to it. (One undercover cop who pretended to be a building manager did such a good job that the building hired for that job him when he left the police force.) Needless to say, the private sector was able to keep costs relatively high. It’s not sure if anyone saved any money on trash pickup since the Mafia guaranteed each of its operators a profit. Of course the trash pickup guys got lower pay and fewer benefits than if they had worked for the city, but that’s what privatization is all about.

  60. Alanna
    February 4th, 2009 at 11:05 | #60

    Kalenberg#

    Didnt something like that happen in Naples under Berlusconi? Garbrage piled up on the streets (to the utter amazement of the rest of the world ?)

    See these photos for privatised and now mafia run garbage collection. Its a shocker. Unfortunately privatisation doesnt incorporate morals testing. If ever there was a case for nationalising garbage this is it!

    http://www.time.com/time/photogallery/0,29307,1702831,00.html

    and
    http://www.reuters.com/article/worldNews/idUSL0830577220080109

  61. Alanna
    February 4th, 2009 at 18:20 | #61

    62# J’accorde les points à Cent commentaires…

  62. February 19th, 2009 at 03:07 | #62

    Privatisation as a principle has failed. The stimulus package been introduced is a complete negation of the privatisation doctrine which has been preached and forced on developing Economies. The insistence that governments do not have a role to play is now been revised now that they are faced with similar situation. This is Hypocrisy . Now where is IMF that would insist of privatisation before Aid is given to developing?.

  63. February 19th, 2009 at 03:08 | #63

    Privatisation as a principle has failed. The stimulus package been introduced is a complete negation of the privatisation doctrine which has been preached and forced on developing Economies. The insistence that governments do not have a role to play is now been revised now that they are faced with similar situation. This is Hypocrisy . Now where is IMF that would insist of privatisation before Aid is given to developing countries?.

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