Home > Economic policy > Privatisation is not a magic pudding

Privatisation is not a magic pudding

August 22nd, 2014

A few days ago, the Courier-Mail ran an editorial supporting privatisation. They were kind enough to run a reply from me, which I’ve reproduced over the fold. The headline picked up the point at the end about the choice between higher taxes and reduced services, which is relevant more general

In a recent editorial, the Courier-Mail bemoans the fact that nearly thirty years after Paul Keating began the privatisation agenda, three in four Queenslanders are still opposed to the sale of public assets. In fact, the situation is more dire than that. Back in the 1980s when Keating ‘instinctively’ grasped the case for privatisation, opinion polls suggested that much of the public was receptive to the idea: publicly owned utilities were seen as slow and stodgy and didn’t have much of a reputation for public service.

Public opposition to privatisation isn’t the result of fear of the unknown or misunderstanding of the arguments. Rather, it’s the product of decades of experience. Far from producing lean, innovative and customer focused organizations, privatisation and corporatisation have given us bloated and overpaid management, higher prices, and customer service that ranges from limited to appalling.

On the other hand, privatisation has been a boon for the financial sector and for the various associated services (legal, accounting, consulting and so on) that dominate the CBD, and the thinking of those who work there. The result is a deep, and enduring, disconnect between the views of the policy elite and those of the general public.

The core of the editorial is the sentence “It does seem amazing that three out of four Queenslanders still can’t accept what is a pretty basic argument that governments don’t have any business running ports or selling electricity”. There are two big problems here.

First this isn’t an argument but an ideological assertion. While the ideology of privatisation is almost universally accepted among the policy elite and in the financial sector, it’s the reverse of the view that prevailed in Australia for most of our history, and worked well enough to provide us with the assets we are now arguing about.

The idea that governments should get out of the infrastructure business, leaving the funding of new investments to the financial sector came into vogue during the economic crisis of the 1970s. For a while, it seemed to be working well, as financial markets boomed in the 1990s. But, in the wake of the Global Financial Crisis, the idea of leaving everything to the financial sector looks less appealing.

More seriously, the public has never been given any serious opportunity to debate the free-market case for privatisation, presumably because politicians realised it was unsaleable. Although the statements of former ministers make it clear that the Bligh Labor government was fully convinced of the free-market case, nothing of the kind was presented to voters.

Instead, we got a spurious case based on the idea that we could sell income-generating public assets and use the proceeds to fund investments in schools and hospitals. The question of how the income flow from the privatised assets would be replaced was never addressed. The Bligh government’s case was so misleading that more than 20 leading economists, including advocates of the free-market argument for privatisation, signed a statement condemning it.

Treasurer Tim Nicholls has gone one better. In his presentation, embodied in the ‘Strong Choices’ website and echoed in the Courier-Mail editorial, we can not only use the proceeds of asset sales to build infrastructure, we can simultaneously use the same money to pay down debt and then spend the interest savings on schools and hospitals.

The Courier-Mail suggests that critics of privatisation are telling us we can have our cake and eat it. But the pro-privatisation case is even worse. It is a magic pudding that we can it seems, slice and eat, however many times we want.

The sad truth, admitted even by the government’s own Audit Commission, and recognised by the public response to the Strong Choices website is that there are no magic puddings.

Successive governments have sold us the myth that Queensland can be a low tax state while still enjoying public services of the same quality as high-tax southern states. While the mining boom lasted, this might have been true. But now we face a clear choice: either pay the same taxes as other states, or accept overcrowded schools and second-rate health services. This choice, and not the financial chicanery of ‘Non–Share Equity Interests’ is what we should be debating at the next election.

John Quiggin is an ARC Laureate Fellow in Economics at the University of Queensland. He has written on privatisation for 20 years. His most recent report, Electricity privatisation in Australia: A record of failure was commissioned by the Victorian branch of the Electrical Trades Union.

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  1. Newtownian
    August 22nd, 2014 at 11:54 | #1

    Ahhhh Keating, that great socialist that sat at the feet of Jack Lang and then left his brains there unfortunately when he left.

    Now we understand what Win-Win really means. Privatization means Government gets to grab windfall cash at our expense so as to get themselves reelected. And when little problems emerge like higher prices they can say – not us – blame the private sector, though they don’t scream this too loud else they might not be hired onto the boards of those companies after they leave government with a fat pay check.

    (The symmetry/ecology is a wonder to behold. Pity the economists generally seen to lack an understanding of complex systems and timeseries.)

    All the while forgetting such things as:
    - we’ve been here before in the 19th century when business owned the water and the railways and the coal mines and the post and stuffed it up and had to be bought out by the government (whereas today the movement is to use government power to bail out private sector incompetency using public money as illustrated by the US TARP and the EU mess – and then tell those taxpayer they have to suffer austerity rather than the clowns/masters of the universe who caused the mess.
    - with governments we had some control but with private enterprise its much harder as they are a much more amorphous entity and they have the protection of private property laws which give us few rights – and soon we will have none after the TPP gets signed off. They also have fewer constraints on how they circulate their assets. Corruption is mainly about business bribing government in shady ways not vice versa.
    - the law was never designed to protect our rights in the event of privatization but rather to protect private property and if there is ever a problem, the government will change the rules to suit business as illustrated by Glass Stegal repeal.

    You just wouldn’t read about it.

  2. Newtownian
    August 22nd, 2014 at 12:01 | #2

    ps John – Great article except its clear you have had to pull your punches given the paper. Amazing though given their proprietor they gave you any space! They must be worried. Or else the editors etc. are expecting mass sackings in light of the current News Ltd bottom line and they are discovering their bolshie inner beings. Wouldn’t you just like to scream out load on occasion?…..I’m fed up and I’m not taking it any more!

    I’m going to miss Gore Vidal.

  3. Jim Birch
    August 22nd, 2014 at 12:19 | #3

    Good piece. Every opportunity to get this information out there is a positive.

  4. Ikonoclast
    August 22nd, 2014 at 12:23 | #4

    I agree with every point you make here J.Q. As I keep arguing, it is no accident that the Coalition and Labor both support privatisation. The Coalition has always been the party for rich privilege and sectional interest. And Labor has defected from being a workers’ party to being another party for neoconservative economic principles though slightly more enlightened about personal liberties. Nothing will ever change while we, as an electorate flip-flop between these two parties of the one neocon right-wing. We have to abandon these reactionary parties and vote for genuinely progressive parties further left.

  5. Ken Lovell
    August 22nd, 2014 at 12:53 | #5

    “three out of four Queenslanders still can’t accept what is a pretty basic argument that governments don’t have any business running ports or selling electricity”

    This encapsulates the faith-based dogma of the economic rationalists: it’s the elegance of the argument that counts, and who cares about any empirical evidence that might tend to invalidate it. Like all fundamentalists, they will simply respond that the argument hasn’t yet been adopted with sufficient commitment to allow the benefits to flow.

  6. Dave Lisle
    August 22nd, 2014 at 13:31 | #6

    What I find most interesting in the article is the idea that three quarters of Queenslanders have yet to completely align their thinking with the neoliberal vision of the state’s ‘correct’ role. Yet Queensland is still much like Kansas – the people seemingly want to disarticulate the package and take the jobs and growth that (obviously) flow from efficient markets operating free from the tinkering of bloated governments.
    But the policy elite have swallowed privatization’s cool aid. This ideology (or structured knowledge if you like) reminds me of an anecdote about an economist from Cambridge who was comparing productivity growth in the UK National Health Service with the private sector in the 1980’s. In the early 1980’s he found that private sector productivity suddenly jumped and stayed a constant percentage ahead. Puzzled, he contacted the statistician responsible who told him that because productivity growth was always difficult to measure (apart from inputs) and it was ‘obvious’ that the private sector was more efficient, he simply added a plausible number onto private sector growth. Common sense becomes a self-fulfilling prophesy.

  7. kevin1
    August 22nd, 2014 at 14:34 | #7

    Is the commonwealth’s 15% of sales value incentive payment, previously rejected by the Senate, now a dead duck? Because if Treasurer Tim Nicholls is suggesting the sale proceeds can be used to pay down debt rather than put into new infrastructure, then there’s no commonwealth payment, as I understand it.

  8. August 22nd, 2014 at 15:52 | #8

    Somewhere I can see a collection of ministers and representatives of the top end of town crying in their beer and asking, “What will it take for the public to see sense?”

  9. Peter Chapman
    August 22nd, 2014 at 17:07 | #9

    The proposal that assets can be “recycled” suggests that government investment in infrastructure, funded by sales of existing assets, has as its primary purpose the creation of new assets (+ slices of pudding) for sale to the private sector, and so on ad infinitum. But the assets now proposed for construction – more tunnels, bridges and highways, in effect more static concrete – are not assets that the private sector actually wants. We’ve seen how many investors in PPP ventures in this area have been burned. We are coming close to disposing, now, of all the assets created in the past that are capable of turning a buck, whether for the public purse or the private profit. The Abbott government does not seem interested in fast rail, light rail or other much-needed infrastructure projects that might also deliver a revenue stream. Where are the proposals for public investment in new infrastructure that will deliver more than future maintenance liabilities? The corollary to the privatisation ideology is that now, only private capital can create wealth-generating assets and activity. Yet surely, if private capital is invested in the purchase of existing public assets, even at fire-sale prices, it is diverted from its potential role in new wealth-generating activity, an opportunity cost. Where is the “animal instinct” [!!] of the private sector in all this? Is it so bereft of ideas and opportunities for new investment in industry, technology, communications, marketing, etc., that it must wait for crumbs (if not whole puddings) to fall from the public table? The privatisation ideology seems to be a tacit admission that private capital has no ideas or motives of its own.

  10. ZM
    August 22nd, 2014 at 17:48 | #10

    I really wish there was a (and nor is the Earth) after the title :(

  11. m0nty
    August 22nd, 2014 at 18:14 | #11

    Very good, Prof Q. The magic pudding analogy is so apt for so many issues in Australia where politics and economics intersect.

  12. yuri
    August 22nd, 2014 at 18:40 | #12

    On the fly so forgive evidences of what I haven’t read. Still I want to record the fundamental points I made long ago with both conservative instinctively anti-privatisation people and zealous privatisers. That is simply that an important part of the reality one starts with is that whatever can reasonably be done to simplify the enormously complicated tasks required of politicians and bureaucrats in government should be done. The idea of people who run for parliament or career public servants running or even setting up any business is absurd given the time need on the necessary tasks of government. (Of course you can say that war is the great socialist activity. No one pretends the level of error and incompetence would be tolesrable in peace time in a democracy).The second point is to emphasise that contracting out and regulating doesn’t provide much simplification and certainly needs specialised abilities of a high order.. Some privatisations are good just because of the price received and the way the money was spent. Victoria’s electricity privatisation has to be the great example.

  13. J-D
    August 22nd, 2014 at 21:59 | #13

    @yuri

    How is this more persuasive than the converse argument more or less along the following lines? ‘Whatever can reasonably be done to simplify the enormously complicated tasks required of commercial entrepreneurs and managers should be done. The idea of people who are seeking a profit on an investment establishing or even operating any service to the public is absurd given the time needed on the necessary tasks of business.’ Sound silly? I don’t know. But how is it any sillier than your argument?

  14. Ernestine Gross
    August 23rd, 2014 at 07:19 | #14

    @yuri

    The ‘reality’ you argue one starts with is not an observable.

    You write:

    “The idea of people who run for parliament or career public servants running or even setting up any business is absurd given the time need on the necessary tasks of government.”

    The observable reality is that privatisation is concerned with the sale of existing public enterprises. (It is not concerced with an “idea” which you judge to be ‘unrealistic’.)

    You are essentially saying that the people who are now attracted to become politicians and bureaucrats no longer have the abilities which previous generations of politicians and bureaucrats in Australia and elsewhere had. This may be part of ‘the reality’ we now have to start off with and the question then becomes what abilities should voters look for.

  15. Ken Lovell
    August 23rd, 2014 at 08:10 | #15

    “The idea of people who run for parliament or career public servants running or even setting up any business is absurd given the time need on the necessary tasks of government.”

    Ummm Yuri they have different people do different tasks, just like a big private business. The managers of public hospitals or the ABC aren’t parliamentarians, and they don’t have to worry about any “necessary” tasks other than the ones involved in running their enterprises. So I’m afraid the absurdity you perceive is non-existent.

  16. Ikonoclast
    August 23rd, 2014 at 08:17 | #16

    @ZM

    Absolutely correct, ZM. Orthodox economists clearly believe the earth is a magic pudding. They clearly believe, for all practical purposes, that the earth and its resources are infinite. Of course, if you ask them outright if the earth is infinite they will say no. But if you ask them when the limits of growth might be reached, you essentially get the answer of “never” or “not for a very long time”. The limits of growth are held to be nebulous and in the far distant future. This position is held despite the evidence that many limits are being reached now or will be reached soon in historical terms.

    Most peaks which will affect humanity are either;

    (1) Past (e.g. peak conventional oil, peak wild fisheries, peak natural forests, peak topsoil, peak fresh water, peak uranium, peak world ice cover)

    (2) Imminent within the next 20 years (peak coal, peak gas, peak copper, peak rare earths) ;

    or

    (3) Due by 2100. (See below.)

    “Ultimately, the world may not physically ‘run out’ of copper, coal, gold or other minerals, but aggregate production must peak and decline as new mining operations become increasingly constrained by low grade mineral deposits, greenhouse emissions and water. Thus, the concept of ‘Peak Minerals’ does appear to be significant, with the timing and severity of the peak fundamentally related to other sustainability constraints.” – Will Sustainability Constraints Cause ‘Peak Minerals’ ? – G M Mudd & J D Ward (Monash U.)

    The sustainability constraints also include energy. Energy use becomes a key factor in costs. This does drive substitution (glass fibre optic for copper in data transmission, aluminium for copper in electrical transmission and so on). However, even substitution has limits.

    “It is widely demonstrated that as ore grades decline the energy and greenhouse costs increase,
    generally exponentially (see Cook, 1976; Norgate & Rankin, 2002; Mudd, 2007c; Mudd & Diesendorf, 2008)” – G M Mudd & J D Ward (Monash U.)

    “For many metallic commodities such as copper, gold, nickel, lead and zinc, there is clear
    evidence of declining ore grades over the past several decades (eg. Ruth, 1995; Mudd,
    2007a,b) – leading to the outcome of an increasing unit cost over time. If production continues to grow, this leads to an ever-increasing energy and greenhouse cost. In the context of the global climate change challenge, this is a formidable issue and is likely to present a major sustainability limit to future mineral production – well beyond whether a given mineral
    resource is perceived as finite.” – same source as above.

  17. calyptorhynchus
    August 23rd, 2014 at 13:30 | #17

    Absolutely, couldn’t agree more, my life has coincided with privatisation and it has witnessed ever declining public services.

    My blood boils when I read adverts like “go to wxy.com and find great deals on electricity prices”; I want to shout “I don’t want a great deal, I want the government to run the electricity industry, for all domestic consumers to pay the same price and there to be concessionary rates for poor people and pensioners… just like it used to be”.

    The other thing you didn’t mention is the peculiarly habit of pandering the snobbishness of the middle-classes by subsiding so-called private health care and so-called private education.

  18. calyptorhynchus
    August 23rd, 2014 at 13:31 | #18

    sorry, peculiarly Australian

  19. Fran Barlow
    August 23rd, 2014 at 13:39 | #19

    @calyptorhynchus

    I can endorse your sentiment on electricity pricing but I’d be even happier if everyone paid the same price but there were no poor people.

  20. Calyptorhynchus
    August 23rd, 2014 at 19:12 | #20

    @Fran Barlow
    Well, that’s the next stage!

  21. Peter Chapman
    August 23rd, 2014 at 19:29 | #21

    http://www.theguardian.com/politics/2014/aug/22/sale-of-century-privatisation-scam?CMP=fb_gu
    As a very different news organisation, with different editorial policies, puts it… “scam”

  22. yuri
    August 24th, 2014 at 04:41 | #22

    @J-D

    @Ken Lovell
    I don’t want to sound condescending but, after many years of close up observation and interaction I don’t think those inclined to chide my shorthand summation here really have observed or thought much about the realistic possibilities for effective government business. I’ll try to keep it short if not particularly well ordered.

    1. All large organisations are difficult to keep operating solvently and efficiently but few are even remotely as complicated or as beset by conflicting, competing or merely incommensurable objectives as governments.
    2. Big businesses frequently do simplify by what is the equivalent of privatisation; cf. BHP right now.
    3. When a business CEO is appointed by a board which is under pressure from eagle eyed institutional investors and analysts to create shareholder value time served climbing up the ranks or buttering up people for their votes is not going to feature highly. (Not that herd behaviour can be excluded). And he appoints people who will -:with some chance of success – help him to serve what are, in business, still much simpler clearer goals than those of government.
    4. By contrast the Minister responsible for appointing the board of a SOE is rarely going to have any relevant expertise or knowledge of who does even if he isn’t under pressure from his leader or the party organisation to appoint hacks.
    5. Private business undergoes (sometimes) creative destruction, including liquidation. Government businesses can and usually do resist any such fate for usually bad or anyway bad for business reasons. What a pity that Queensland power station that is losing out to solar hadn’t been privatised long ago. And railways staggered on for decades after the motor car started eating their business while decisions on just about everything were decided by the location of critical votes.
    6. Public sector union capture is now visible in all its ghastly corrupt ugliness in America – even having taken hold of the once golden state of California. It is of course partly a function of thevpublic sector unions ability to get out the vote in a countrybwhere few people bother to vote so our problem is real but not of the same gravity.

  23. yuri
    August 24th, 2014 at 04:44 | #23

    …”or who does”..

  24. yuri
    August 24th, 2014 at 05:13 | #24

    #!*$@#
    Lost it but please try and imagine how politicians and public servants spend their time on the often trivial and alwayscincommensurable with other objectives.
    “State Socialism in Victoria” by Sir Frederick Eggleston is interesting but doesn’t explain why Monash’s SEC had to be preserved to morph into the overmanned monopoly it became or why another sensible copying of established foreign models in the shape of 19th century railways were allowed to become so run down.
    Please also note the qualifications I made re contract management and regulation…

  25. Ikonoclast
    August 24th, 2014 at 07:28 | #25

    @calyptorhynchus

    I agree plus I agree with Fran’s amendment. I want to see all natural monopolies run by the Federal government. I want to see a Job Guarantee where the Federal Govt is the employer of last resort and pays a living minimum wage.

  26. John Quiggin
    August 24th, 2014 at 11:23 | #26

    @yuri

    Not much to justify condescension on your part. The idea of “eagle-eyed investors” keeping management in line was discredited by Berle and Means in 1932.
    Coincidentally, that was the same year as Eggleston.

    https://en.wikipedia.org/wiki/The_Modern_Corporation_and_Private_Property

    The attempt to revive it under the banner of “shareholder value” in the 1990s was a flop. See, for example Bebchuk on CEO compensation.

    I suggest you get up to speed on the post-1932 literature before resuming a position of condescension.

  27. bjb
    August 24th, 2014 at 18:02 | #27

    yuri :
    @J-D
    @Ken Lovell
    2. Big businesses frequently do simplify by what is the equivalent of privatisation; cf. BHP right now.

    I don’t think BHP is a very good example of anything. The original merger with Billiton shuffled hundreds of millions of shareholder dollars to various investment bankers and management. Then during Klopper’s time at the helm more hundreds of millions wasted in abortive takeover bids. Now the current CEO is no doubt going to send tens if not hundreds of millions of shareholder dollars to investment bankers to undo what they did a decade or so ago – and I’m sure Mr Makenzie will be in line for a nice bonus to celebrate a successful de-merger. Frankly, they could have done nothing and the resources boom would still have increased the value of the company. Disclaimer: I own BHP shares.

  28. J-D
    August 25th, 2014 at 19:07 | #28

    @yuri

    Large organisations do have problems resulting from their largeness. Small organisations have problems resulting from their smallness. Some things are better done by small organisations. Some things are better done by large organisations.

    Government businesses are probably less likely to be liquidated than private businesses: this is one of the reasons that some things are better done by government than by private businesses.

    The suggestion that the dominant influence on the government of California is exercised by public sector unions I find implausible, but even if it were true I don’t see how it supports the conclusion that governments shouldn’t run businesses.

  29. August 30th, 2014 at 10:11 | #29

    I think I’ve seen this cartoon before – My Little Crony: Privatisation is Magic.

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