Home > Economics - General > Tim Nicholls makes a little progress in thinking about privatisation

Tim Nicholls makes a little progress in thinking about privatisation

April 17th, 2014

All through the Bligh government’s three year campaign to sell public assets, I challenged Treasurer Andrew Fraser to a public debate on the issue, or at least to a response to the criticisms I and other economists made of the government’s case. Fraser never responded: even when we spoke at the same event (to a friendly business-oriented crowd) he gave his speech and left before anyone else was allowed on the platform. Doubtless, he made the judgement that this was the politically clever thing to do: by sticking to events that could be scripted, and relying on the authority of Queensland Treasury, he maintained controlled of public discussion. We all know how that worked out.

Now there’s a new Treasurer, pushing the same arguments. I challenged Tim Nicholls to a debate on the “StrongChoices” campaign[1]. I don’t suppose he’s going to respond in person, but he has at least acknowledged my criticisms (as reported by Paul Syvret) and attempted to rebut them in this piece in the Courier-Mail.

Nicholls’ argument is confused, as the case for asset sales has always been, but he does make at least some progress. The usual magic pudding is in evidence: selling assets is supposed to repay debt, finance new infrastructure spending and obviate the need for higher taxes to maintain services, all at the same time.

But there is one point of light: responding to my observation that the StrongChoices website counts the interest savings from selling assets and paying down debt, but not the foregone earnings of public enterprises, Nicholls says

the value of a government-owned asset is not the same in private sector hands. Governments are not well placed to act nimbly when it comes to changing markets and commercial decisions. Who thinks the value of Telstra would be the same if it reverted back to full government ownership? What about the Commonwealth Bank?

While Nicholls’s specific examples don’t work well (see below), he at least expresses the right general principle. Privatising assets is a good deal for the public if their sale price is greater than their value in continued public ownership (and assuming that the gain isn’t achieved by raising prices or reducing service quality). Indeed, that’s true of every kind of sale: there’s a net benefit only if the item sold is worth more to the buyer than to the seller.

So, there’s a simple fix for the StrongChoices website. Instead of quoting the total sale price for assets, give an estimate of the difference between the sale price and the value in continued public ownership. I did this for both of Nicholls examples, the Commonwealth Bank and Telstra (all three “tranches”) and found a net loss to the public in every case except T2, the second Telstra tranche where the value was inflated by the Internet bubble. Even in that case, we would have done far better off by selling the overvalued Internet assets and using the proceeds to buy back the rest of Telstra, as I advocated at the time, just before the bubble burst.

fn1. If, as has been reported, the Queensland Government paid good money to a PR firm for this ludicrous name, then there is certainly an opportunity to cut waste and efficiency by dumping.

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  1. Alphonse
    April 17th, 2014 at 10:46 | #1

    Did not the PR firm notice that Gillard’s (or her script writers’) incessant use of “strong” dod her little good. Haven’t we been inoculated by this?

  2. Midrash
    April 17th, 2014 at 11:03 | #2

    What is your economist’s model (beyond the succinct summary in your second last par) for judging whether the sale of assets is justified? How do you weight it or vary the outcome according to not so readily measurable criteria such as all the relevant high level expertise being unavailable to the government for a state run enterprise (for any of several possible reasons not excluding pressure not to vary some highly restrictive employment conditions, unwillingness of the experts to be anything but offshore based contractors or whatever), the need to put a bomb in some set of complacent self-serving institutions (“creative destruction for the public sector” as someone called it), or just making sure that the (probably better organised, indeed unionised) public sector workforce is not so disproportionately powerful and unified as a voting bloc [cf. California where there is no compulsory voting] that its very size is a problem.

    Do you agree that the early privatisations by the Victorian government in the early 90s were brilliantly successful (and maybe to be contrasted with the later public transport privatisations????). How much of that was luck? (Certainly Stockdale and Kennett were lucky to get in first of all the states and to do it at a time when there were private companies trawling the world for such assets). How much was good design of the privatisation process? My basic assumption is that they were sold for a much greater price than they would have fetched 10 or even 5 years later.

  3. April 17th, 2014 at 18:01 | #3

    Hot knife through butter! Thank you very much.

  4. bjb
    April 17th, 2014 at 22:10 | #4

    Midrash :
    How do you weight it or vary the outcome according to not so readily measurable criteria such as all the relevant high level expertise being unavailable to the government for a state run enterprise

    If your contention is that state run enterprises are not currently being run effectively, and would be if they were privatised (because they would then have available to them this high level expertise), then all I can do is guess what all of that brings to the table, because in almost every case in recent years of privatisation the outcome for customers/consumers has been poor.

  5. Lt. Fred
    April 17th, 2014 at 23:24 | #5

    Off topic, but you’re a machine, Dr Quiggin. This last week you’ve just been on fire.

  6. Sancho
    April 18th, 2014 at 00:11 | #6

    I suspect fhwdgads are involved in the marketing.

  7. Megan
    April 18th, 2014 at 00:39 | #7

    @bjb

    We could theoretically ‘privatise’ everything (and in the sense that everything costs something in dollars, we already have).

    All services currently run’publicly’ could be run by corporations seeking to make profits at the maximum amount the ‘market’ would allow.

    Fire brigades are a good example of how this doesn’t really work out so well for the (“fiercely individualist” – yeah, right) profiteers:

    London suffered great fires in 798, 982, 989, 1212 and above all in 1666 (Great Fire of London). The Great Fire of 1666 started in a baker’s shop on Pudding Lane, consumed about two square miles (5 km²) of the city, leaving tens of thousands homeless. Prior to this fire, London had no organized fire protection system. Afterwards, insurance companies formed private fire brigades to protect their clients’ property. Insurance brigades would only fight fires at buildings the company insured. These buildings were identified by fire insurance marks.

    It became too costly for the capitalists to provide services to their customers, so they eventually decided the State should provide the services. They continued to make the profits and have been whining like jet engines ever since about having to pay taxes to the State to run the services they need to make their profits……etc..

  8. Megan
    April 18th, 2014 at 00:45 | #8

    @Megan

    PS: I liked this concept as well (Roman neo-cons):

    One of his most lucrative schemes took advantage of the fact that Rome had no fire department. Crassus filled this void by creating his own brigade—500 men strong—which rushed to burning buildings at the first cry of alarm. Upon arriving at the scene, however, the fire fighters did nothing while their employer bargained over the price of their services with the distressed property owner. If Crassus could not negotiate a satisfactory price, his men simply let the structure burn to the ground, after which he offered to purchase it for a fraction of its value.

    No ‘free-market’ fundamentalist will EVER be able to explain to you convincingly how a for-profit business would be able to save you and your family (and perhaps your property) from a house fire.

  9. Nathan
    April 18th, 2014 at 01:43 | #9

    I also found it rather delightful that Nicholls “takes issue” with the first point, namely that he misrepresented the QLD debt projections, by completely conceding the point that the outlook remains essentially constant. He nimbly changes his position to instead argue that it’s still terrible because the current situation is also completely unsustainable, QLD will be the next Greece by lunchtime etc…

  10. hc
    April 18th, 2014 at 10:21 | #10

    A lot of publicly-owned assets are not efficiently run and there is much featherbedding of trade union demands. Governments, moreover, can develop such assets at low cost because they have lower borrowing costs than private firms subject to non-diversifiable risk. So potentially these assets can be sold at a profit to the private sector.

    Getting the profitable price seems an issue as does the caveat about ensuring service quality and reasonable pricing. Some form of continued regulation often makes sense and setting a minimum price at the time they are auctioned seems the way to go but the latter is difficult. Obviously you want to maximise returns rather than just ensuring a positive return to the government. Set the minimum too low and offers will tend to cluster around that minimum as a focal point. Set it too high and, of course, it won’t sell and the government gets nothing.

  11. Peter T
    April 18th, 2014 at 11:33 | #11

    Some things you don’t want to be “efficient’ financially. An electricity system, to be really useful, needs to reliably deliver a standard supply with minimal variation (240V, 10A, 2 phase, 50 Hz) across as much of the country as can be reasonably covered. That way every user can just plug in. This requires redundancy in the system and a high degree of standing professional expertise and experience. It means the system has to be run largely (not entirely) by engineers and managers with engineering experience. So it’s either government or a utility run more or less along government lines. Either way, very little profit in it.

  12. J-D
    April 18th, 2014 at 11:39 | #12

    @Midrash
    Can you produce any evidence to support the assertion that privatised enterprises have relevant high-level expertise available to them that is/was not available to the same enterprises in public ownership? Can you produce any evidence to support the assertion that there are/were complacent self-serving institutions that need/needed to have a (metaphorical) bomb put in them (or be subjected to ‘creative destruction’)? Can you produce any evidence to support the assertion that there are or could be public sector workforces forming voting blocs so powerful and unified as to be a problem?

    Or are you just making all this stuff up out of whole cloth?

  13. Moz of Yarramulla
    April 18th, 2014 at 12:01 | #13

    @Peter T

    But it doesn’t. The USA, for example, has multiple competing grid operators (insofar as it even has *A* grid) and they get along relatively well with little redundancy and disturbingly low levels of expertise in some places. And NZ has partly privatised their grid without too many problems (central Auckland was without power for a few weeks a while ago, but they got over it).

    As with any other service, it’s all about the regulation and what standard of supply you actually want. Even the most inefficient publicly owned electricity supplier will still have blackouts and brownouts. And those really dependent on power will always have their own local emergency supply for that reason.

    On the flip side, more people are finding it economic to go off grid every year. For them it’s irrelevant what the “national” grid does, because their only concern is that they might be taxed to pay for it again.

  14. Moz of Yarramulla
    April 18th, 2014 at 12:05 | #14

    Which brings me to a point that’s not mentioned: the state should get out of businesses that are about to collapse, ideally without offering any guarantee to the new owners. The Gillard govt, for example, should have encouraged the selling/sold off the coal generators ASAP before bringing in the carbon tax. Sell them while the market still thinks they have value, then kill that value by making legislative changes that the market knows are inevitable but doesn’t believe will happen. It’s cruel, but as we keep being told, the market is much, much better at valuing things than any government possibly can be.

  15. April 18th, 2014 at 12:11 | #15

    @J-D

    Can you produce any evidence to support the assertion that privatised enterprises have relevant high-level expertise available to them that is/was not available to the same enterprises in public ownership?

    Well, I can think of one example. When Medibank is privatised, the salary of its CEO will greatly increase. Now only a fool would pay more for something that wasn’t better, so presumable the CEO of the privatised Medibank will be much more expert than the CEO of the government owned Medibank. Remarkably, this will hold true, even if they are one and the same person…

  16. Historyintime
    April 18th, 2014 at 22:07 | #16

    Governments cannot actually establish businesses at less cost than the private sector. They have lower borrowing costs but do not receive a tax deduction on their borrowings

  17. April 18th, 2014 at 23:50 | #17

    @Moz of Yarramulla

    This is so beautifully understated as to almost qualify as a Poe:

    central Auckland was without power for a few weeks a while ago

    February to mid-April is probably technically “a few weeks”.

    From the book “In Government We Trust”: “A full service was only finally restored in mid-April after new lines had been laid and supply cables reconnected. The delay in restoring power was a direct consequence of the zealous labour retrenchment, which meant that skilled cable staff had been lost to the electricity industry in New Zealand. (pg. 192)”

    Not only that, but the failure in the first place was directly due to the running down of safeguards in order to minimise costs and maximise profits.

    That academic work has lots of other examples. Sydney water (privatised in 1989) gets a mention.

    This quote from page 81 sums it up fairly well:

    As the new class of capitalists began to supplant the aristocracy, who normally had a strong sense of obligation for the welfare of their tenants, and to deny the bulk of the population a share in the newly created wealth, governments were formed to redress some of the imbalance. In addition, the worsening living conditions which accompanied unregulated industrialisation and urbanisation eventually made it necessary for government to intervene to ensure there was a sufficient supply of educated, healthy workers to meet the needs of industry… The resulting surge in social legislation in the latter half of the nineteenth century was testament to not only the social consciences of a few influential individuals but also to the self-serving foresight of those whose position, power and wealth were most threatened by glaring social and economic imbalances.

    Neo-liberalism was only allowed to get away with it because its ideological proponents controlled the media and threw most collective memory out the window.

  18. Rob
    April 19th, 2014 at 22:59 | #18

    Moz of Yarramulla :
    Which brings me to a point that’s not mentioned: the state should get out of businesses that are about to collapse, ideally without offering any guarantee to the new owners. The Gillard govt, for example, should have encouraged the selling/sold off the coal generators ASAP before bringing in the carbon tax. Sell them while the market still thinks they have value, then kill that value by making legislative changes that the market knows are inevitable but doesn’t believe will happen. It’s cruel, but as we keep being told, the market is much, much better at valuing things than any government possibly can be.

    You seem to be arguing that government should behave in an unethical behaviour, relying on information asymmetry. A government might get away with that once, with an insanely gullible buyer, but forget about ever being able to sell a public asset after that.

    Furthermore, consider the Victorian coal powered generators. Their lobbying power doesn’t seem to be reduced by the fact that they bought there assets when the market was… “more fair” if you like. We may even need to buy them back in order to shut them down. The public good has (further) diverged from the private/market.

  19. Peter T
    April 20th, 2014 at 15:43 | #19

    Moz

    Many US electric utilities are state or local government owned. Most of the others are highly regulated, and maintain considerable levels of internal redundancy. But the US grid structure is weak, which leads to occasional major blackouts. And, because of the US bias for private ownership, standards are lower (eg 110 volt supply is cheap to install, but leads to more house fires and less capacity). The cost is largely invisible – in disrupted processes, failed appliances, fires, deaths in winter and so on – but very real.

  20. derrida derider
    April 20th, 2014 at 20:54 | #20

    @hc
    Surely, Harry, at auction the government should behave like every other vendor – you have a reserve price, you let everyone know you have a reserve price, but you don’t tell anyone what it is before the auction for fear of signalling effects (not to mention encouraging collusion).

    But that is politically hard; privatisation is unpopular enough without having to ask the punters to understand “we’ll sell it only if the price is right”. From the pollie’s POV better to stick to the “privatisation=free beer” line.

  21. Midrash
    April 28th, 2014 at 18:21 | #21

    @J-D
    You obviously don’t regard precise language as important. I didn’t “assert” anything but asked someone whose qualifications to write on the subject greatly exceeds that of most of his regular bloggers how he weighted his criteria with particular reference to a number of possibilities just to act as a prompt.

    The idea that anyone is so naive and uninformed as not to know the importance of the voting power of public sector employees, particularly organised ones below senior executive level is mind boggling. Have you ever spoken to a Labor politician? Have you know knowledge of the strikes by public sector unions that Labor governments have had to endure – not unconnected to fear of the way the strikers and their families would vote pretty obviously. Have you no knowledge of the battles in California where, admittedly there are other interest groups that get organised e.g. on budget and tax matters, but the public sector unions effectively decide who form the majority (Democrat but that only tells part of the story) in Sacramento?
    Have you never dealt with local government in the old days before Kennett’s bomb was thrown despite the fact that his Local Government minister thought most of the needed reforms could be effected without major restructuring of local government? The latter may have been right but the need for reform was unarguable – even if much of it had more to do with geography than people.
    As I have said, I wasn’t making assertions but hypothesising and inquiring about factors that might have seemed relevant to JQ. But it is obvious that one employer or provider of capital may find it difficult to get the right people to do a technically difficult job and it might well be a state government. (Can’t you envisage it being difficult to get a young engineer of great talent to go to Tasmania on a salary that was restricted by public service rules?). Another rather obvious example springs to mind. It is notorious, and hardly needs proof it is so probable a priori, that the Victorian public service suffered in quality for many years because of the availability of Commonwealth public service positions in Melbourne for many years, indeed decades, after 1927. In 1976 there was only one graduate employee in the Victorian public service I was told by the economist in question though there would have been a few engineers in the public sector, some of whom might have been university graduates. The head of the Premier’s department, Major-General Green may have counted as another: I’m not sure. At the same time there were any number of Victorian graduates of major universities in the Commonwealth Public Service including External Affairs (as it was called for decades) and Treasury but not confined to them.

  22. Midrash
    April 28th, 2014 at 18:45 | #22

    @bjb
    You have avoided the error of J-D by not reading my words as assertions. See my reply to him.

    I think I would have been one of those who was keen on the colonial government providing railways in the 19th century and the reasoning would have been consistent with what we have seen over the last 160 years or so. Those catching up could often copy established practice in advanced economies where the “world’s best practice” had been learned the hard way with lots of errors and losses of risk capital. Likewise the great Monash driven electrification of Victoria based on its brown coal was not something to give up on just because there weren’t any great risk taking entrepreneurs to do it.

    What is at best naive is the idea that politicians and bureaucrats who (a) have avoided the commercial risk taking way of life and (b) have far more incommensurable and difficult decisions to make than just how to run a widget factory well and profitably can be expected to do the widget making very efficiently or to choose whether to do it at all. By contrast there could be projects for which the case was pretty clear and the method of building was by way of competitive tenders from established businesses that would justify hard nosed government people, with good lawyers at hand to stitch up the warranties and the guarantees of solvency, using the government’s lower borrowing costs till the whole project could be sold at a profit and the borrowed capital reused or repaid. Even so it is not a lay down misere that the valuable, if not vital, AAA ratings (or AA) will be maintained if the government borrows more than an amount the markets and ratings agencies are happy with (and I am not going in to bat for ratings agencies but these are facts of life).

    I am not sure about the outcome for consumers from the privatisations which you say have nearly all been poor. I have certainly heard it said even with respect to Victoria’s electricity privatisations. But, even if the price rises have been greater than they should have been (and they have all been subject to a regulator), it may be that the Victorian privatisations were a great success because Stockdale and Kennett got in first and obtained ridiculously high prices as they now appear to have been. Victoria was the public sector liability basket case but the privatisations did much to turn that round. Its rail privatisations can only make one hang one’s sore head and wonder how anyone anywhere can get rail workers trained and motivated to give satisfaction and efficiency – unless they are perhaps Japanese or Germans. I suspect that the old jibe about Pommy Shop Stewards has something to be said for it, even if they were Irish or Scots, because British railways haven’t been much better than Australian despite the compact population……

  23. April 28th, 2014 at 20:02 | #23

    @Midrash
    I lived in England for two years in the 1970s (you know the era of “Pommy shop stewards”). The rail system was extensive and very good. It doesn’t seem nearly as extensive or good on my recent visits. Aren’t they thinking of renationalising it?

  24. April 28th, 2014 at 20:19 | #24

    The British people would like to renationalise the lot apparently http://yougov.co.uk/news/2013/11/04/nationalise-energy-and-rail-companies-say-public/

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