Home > Economics - General > Ernst and Young oversell privatisation

Ernst and Young oversell privatisation

January 22nd, 2015

Ernst and Young, leading consultants to the Queensland government have released a report claiming that electricity costs would be lower under privatisation. Although the report was commissioned by private infrastructure lobby group Infrastructure Partners Australia, it’s just a rehash of the same line EY have been pushing for years in similar reports commissioned by pro-privatisation governments. The central claim is that electricity prices have risen more in Queensland and NSW, under corporatisation than in Victoria and SA, under privatisation. What they don’t tell you is that this merely offsets increases imposed in the leadup to privatisation, with the result that retail prices are much the same in all four states, and far higher than when the process of market reform (supposedly to reduce prices through competition) began in the 1990s. Here’s the response I issued:

Media Release

Professor John Quiggin, of the University of Queensland criticised the Ernst and Young report on privatisation of the electricity industry.
The Ernst and Young report ignores the biggest factor leading to higher electricity prices throughout Australia: the failed process of market reform, corporatisation and privatisation of which the LNP government’s asset sales is a part,Professor Quiggin said.
Although the problems have differed from state to state, there is no evidence that states which undertook full scale privatisation in the 1990s have performed any better. South Australia has some of the highest electricity prices in the world, and Victorian prices are comparable to those in NSW and Queensland.

Categories: Economics - General Tags:
  1. John
    January 22nd, 2015 at 10:35 | #1

    I have just a quick question to ask
    Are E&Y the same company that did the traffic forecasts for the Clem Jones tunnel ?
    John

  2. T
    January 22nd, 2015 at 11:54 | #2

    Before arriving in Australia, naively I thought electricity prices would be low because of this country has plenty of natural resources, specially coal and gas, which are used in the energy input. As you may expect, I was wrong, but it caught my surprise that the problem was in the transmission and distribution, which account more than 60% of the electricity bill (without taking around 20% that goes to the retailers). So, I am agree with all the problem is about the way how is operating the deregulation process.

    However, in many parts of the world, the deregulation processes has been developed successfully. Why Australia has been so erratic this process? I believe some of the reasons are the following:
    1. Australia’s states haven’t had a capacity of regulating the prices of their own assets in term of what price should pay customers for trans/dist. This is because the states that have their own transco/disco assets don’t care about the price they charge to customers, as long as their outstanding profits goes to the state accounts. As a conclusion, electricity bills in Australia are a hidden tax applied to households, that obviously anyone haven’t been notice of.
    2. There is strong evidence that privatised utilities achieve better efficiencies, because private sector can manage the risks of operating this business. In fact, public utilities are subject not only by private cost pressures, but other stakeholders such as workers (unions has a long history of pressures), communities and so on. The report of the Australian Productivity Commission is very clear about that.
    3. Finally, the zonal prices scheme (the current electricity market system that Australia adopted) is causing an additional pressure in raising long-term transmission prices. This scheme makes that a potential investor in generation doesn’t care about the location, so if any future power plant (including any renewable to accomplish the RET) will be located near SEQ, Mt. Isa or Cairns, they would perceive the same price. The logic indicates that any investor located far away from the demand should pay for the additional infrastructure, because simply they are using these assets. Otherwise, if they don’t, it is an investment cost pressure to the transmission sector (and for customers) because would have to invest in new infrastructure, as any potential investor who locates their power plant far away from SEQ needs additional capacity to deliver their power. The solution is quite simple: use an Location Marginal Price (LMP) scheme, as it is used in the US.

  3. Julia Perry
    January 22nd, 2015 at 12:52 | #3

    John, it has always seemed to me that privatisation is not advisable for a natural monopoly. For example electricity generation can be privatised but not the poles and wires; railway rolling stock but not the rails, planes but not the airport, etc.
    Without competition there is no incentive for a private owner to keep prices low and quality up.
    The incentive for Governments to do so is electoral.
    Yet the Federal Government is pushing States to sell off all sorts of utilities, many of which have no competition.
    Similarly the public-private partnerships used to build Sydney’s new road developments have been disastrous for users.
    Am I correct or am I missing something? Why isn’t this debated?

  4. Phil
    January 22nd, 2015 at 13:27 | #4

    As far as I am concerned the privatization of public assets has always been a scam and crony capitalism. Typically what happens when a public asset (power, water, rail, etc) is sold the number of managers/spin merchants rapidly grow and to save salary dollars they reduce the maintenance workforce (or outsource it). The managers’ increase their salaries massively over what they were being paid as a public servant for doing the same job. So what happens, prices continue to increase, service declines and infrastructure deteriorates resulting in massive price rises to fix the problems down the track. Australia is too small a market to have multiple players for these “natural monopolies” and over the years it has cost Australia a great deal of money going to these companies, and f they have significant foreign ownership, the money disappearing overseas. I will admit that I am not an economist and I do not understand this “dismal science”, but blind freddie could have predicted the outcomes that have occurred since the privatization scam began.

  5. bjb
    January 22nd, 2015 at 14:01 | #5

    Who would have thought – one of the enablers of the privatisation process, along with various lawyers, merchant bankers and other leeches, determines that privatisation is a good thing.

  6. January 22nd, 2015 at 14:31 | #6

    The belief that private enterprise managers are better than public enterprise managers is just a belief system, not a fact that is universally correct. If the public asset being sold is a ‘natural monopoly’ there will be no advantage to efficiency, except that the business now has to be run to achieve short-term profits without provision for environmental or public good. This surplus, ie profit will be achieved through austere inefficiencies, cutting the wage bill, cutting corners on safety and very often imposition of higher prices and lower-quality service to the public.

    There are many examples in which the sale of a public business asset is under-priced or that no account was made of the private buyer using commercially-borrowed money to buy and then bleeding the business to pay down this debt. There are also many examples in which the privatisation was specially arranged to provide benefit to business mates and donors of the then serving government. As Phil said, “privatization of public assets has always been a scam and crony capitalism” – yes, privatisation is inherently corruption-inducing. Too often, the private buyers did their sums wrong or over-estimated business prospects. When they fail, governments have to use our money to bale them out.

    Campbell Newman’s track record, including the benighted Clem 7 tunnel, suggest that his enthusiasm for privatisation is driven by ideology, not facts. We should hit the stop button now.

  7. David Irving (no relation)
    January 22nd, 2015 at 14:38 | #7

    @Willy Bach
    Willy, I don’t think Newman’s enthusiasm is all that ideological either. I haven’t heard him say, “Don’t you worry about that,” but I can see it coming.

    Cui bono?

  8. tgs
    January 22nd, 2015 at 15:22 | #8

    Are E&Y the same company that did the traffic forecasts for the Clem Jones tunnel

    No, EY are one of the ‘big 4’ professional services firms (i.e. audit, tax, management consulting, risk consulting, corporate finance, etc).

    AECOM (previously Maunsell Australia), a global engineering consulting firm, was responsible for the traffic modelling used by RiverCity Motorways.

  9. rog
    January 22nd, 2015 at 16:06 | #9

    As Peter Martin points out Aus 10 year bonds are 2.5% so now is the time to borrow and build all that infrastructure. But the LNP have painted themselves into a corner and will sell anything rather than borrow.

  10. MWS
    January 22nd, 2015 at 16:12 | #10

    @Julia Perry

    For example electricity generation can be privatised but not the poles and wires;

    Or alternatively, the Government sells off the telecommunications network, then pays taxpayers’ money to buy it back at the end of its lifespan, instead of replacing it with a much better, more durable system. Thank you Lord Copper!

  11. John
    January 22nd, 2015 at 16:18 | #11

    Thanks for responding TGS, that answers my question

  12. bjb
    January 22nd, 2015 at 16:55 | #12

    @rog

    and it makes it very clear to all that the LNP’s desire to sell off everything has very little to do with debt management and everything to do with ideology.

  13. Ikonoclast
    January 22nd, 2015 at 17:07 | #13

    There was another thread recently with a link to a report which indicated much of our increase in retail electricity prices has been levied and justified in relation to the gold-plating our distribution network. This gold-plating occured because of perverse incentives to over-invest in distribution. These perverse incentives arose out of the poor design of the privatisation and possibly other factors. I’ll make some general observations.

    1. It’s ironic that such severe gold-plating occurred in at least some places under privatisation. Usually, the charge of gold-plating is levelled against state enterprises.

    2. We are always told privatisation will lead to lower prices. It almost always leads to higher prices than would have otherwise been the case. There might be a few exceptions to this usually very reliable rule.

    3. Privatisation also usually leads to poorer services and no services for the poor.

    4. The public in Australia have consistently indicated for at least 10 to 15 years that they don’t want more privatisation.

    5. The major parties of capital (LNP and ALP) consistently ignore the public and either progress privatisation or sometimes promise a temporary halt to get back into power from opposition. Sooner or later, the privatisation agenda is back on the table and being implemented once again.

    Hint: While you keep voting for pro-capitalist parties you will keep getting pro-capitalist policies (i.e. policies designed to make the richest 1% richer and the other 99% of people poorer).

  14. Other Rob
    January 22nd, 2015 at 19:42 | #14

    As an Adelaide consumer my message is simple. The only outcome of privatisation that is positive is the achievement of ideologies. Everything else is negative, how negative depends on the generosity of the regulator and the foolishness of the contract.

  15. Jordan
    January 23rd, 2015 at 02:08 | #15

    Privatisation has another negative aspect; it is also the weapon of choice in ‘tit for tat’ bickering between parties.
    Since privatisation brings upfront liquditiy and reduce income later on, the privatisation party in power uses such aditional upfront liquidity to spend extra and then brag about the succes in battle for votes. Years after privatisation, usually with different party in power, the income flow from privatised company is gone and the party now in power has to manage reduced income to government which makes public management more difficult. Not to mention oportunities for bribe income to privatising party.

    These benefits of privatisation of public resource to party in power creates hightened animosity between parties and while they fight about dividing the loot, problem solving cooperation suffers and with it economic stagnation from accumulated unsolved problems takes place.
    Parties are giving more attention to holding the power for the purpose of dividing the loot then about solving problems for population.
    This interparty animosity also leaks down to state contractors and also among the populace increasing the division and unresolved problems.

  16. rog
    January 23rd, 2015 at 04:24 | #16

    Perhaps these actions are better understood as a capital market operating a democratically elected government – the very antithesis of a free market.

  17. Jim
    January 23rd, 2015 at 10:31 | #17

    I don’t understand how such amateur and narrow analysis gets through a peer review process at Ernst and Young (assuming they have a peer review process).

    The key message I got from the E&Y analysis is never use E&Y for analysis and advice. They just produce rubbish.

  18. Crocodile Chuck
    January 23rd, 2015 at 12:41 | #18

    There is no ‘peer review’ at E&Y. The devil takes the hindmost!

  19. Megan
    January 24th, 2015 at 00:14 | #19

    Apparently there were some of those bogus “debates” on tonight where the ALP and LNP pretend there is any difference between them.

    Rupert Murdoch ran both. One through his privately owned Sky/News Ltd arm and the other through his publicly funded ABC arm.

    Qld’s LNP treasurer is quoted:

    Mr Nicholls said the Government would lease 11.6 per cent of state assets, including ports in Gladstone and Townsville, power generation corporations Ergon, Energex and Powerlink and SunWater.

    He said the Government had to reduce debt.

    “To return the state to its Triple-A credit rating and to give it capacity in the future to be able to borrow, to build the infrastructure we need, we need to get rid of that stock of debt,” he said.

    So the argument is: we need to sell the publicly-owned assets so we can pay off the debt so we can get more debt to build more assets which will be privately-owned?

    PS: Right in the middle of tonight’s Bernard Tomic match on Channel 7 (he won in straight sets) there was a PUP ad. It was simple and clear – Newman on a loop saying “sell assets”, followed by Palmer on a loop saying “goodbye Campbell”.

    Since the ALP/LNP have a history of selling assets and lying about it, I’m betting PUP is a ‘dark horse’ in this election.

  20. paul walter
    January 24th, 2015 at 00:21 | #20

    It isn’t about peer reviews.

    It’s about alibiing blatant swindles that if perpetrated by anyone outside the oligarchic umbrella lead to huge outcries of criminality, via the propaganda organs.

    A crude alliterative example comes with the Paxtons, an unemployed family publically pilloried by tabloid msm for the appling crime of being unemployed in an era of high unemployment, against the more recent example of valorised Rupert Murdoch allowed to walk away with a $billion bucks of tax dodged money.

    Its about the “capture”of workable societies and a subsequent ransacking of these by barbarians. It revisits the stubbornly held practices and outlook of financialised capitalism from the mid eighties, through the repeal of Glass-Steagall, to the Meltdown.

    What we get, is an obdurate thumbing of the nose by financialised capital.. the set up that led to the Meltdown has not been reformed; if anything it appears to be intact and even obdurately reinforced.

  21. Ikonoclast
    January 24th, 2015 at 09:23 | #21

    @Megan

    Don’t forget PUP is run by a billionaire. Billionaires don’t create parties to help the little people. PUP is in the same category as LNP and ALP. PUP is a capitalist party.

  22. Ikonoclast
    January 24th, 2015 at 09:33 | #22

    @paul walter

    I agree, the Meltdown (GFC) has changed nothing. The oligarchs still increase their wealth and dominance every year. All that the US “recovery” has consisted of is increased wealth for the super-rich oligarchs. The middle class and poor have had no recovery. Even crashes are used to further concentrate wealth. It’s how the whole system works.

    Search stories like;

    The middle class is poorer today than it was in 1989

    What recovery? US rich get richer, middleclass treading water

    Middle Class Sank and Shrank During Recovery

  23. January 24th, 2015 at 10:20 | #23

    Just watching Newman now. I must admit he is an indefatigable political campaigner. But his policy is little better than a slick version of Yeltsinism. That really is what liberalism has come to now: simply a policy of selling off our ancestral heritage whether it be economic, ecologic or ethnic.

    Just one long fire sale of our inheritance.

  24. jungney
    January 24th, 2015 at 10:31 | #24

    On the general subject of the joy of a Qld election: first Jones calls Newman a liar, Newman and some other stooge are set to sue Jones, Clive offers to pay the legal bills for Jones (he’s such a bitch, Clive) and then, to top it all off, The Mouth (Hinch) describes Jones as a “bitter old queen” or some such all the while defending himself from allegations that he made an homophobic slur against Jones on the grounds that he, Hinch, had heaps of gay friends from his days with Jackie Weaver.

    The people of NSW would like to gift the presence of Jonesy to Brisbane, pronto and permanently, in the same spirit that Oz gifted Murdoch to the states.

  25. Julie Thomas
    January 24th, 2015 at 11:49 | #25

    This is a funny.

    http://www.theage.com.au/comment/fennelly-does-newman-no-favours-with-attack-on-big-green-al-20150123-12w00i.html

    And I heard that Springborg is also going to sue Alan Jones.

  26. Donald Oats
    January 24th, 2015 at 12:25 | #26

    @jungney
    Hinch’s comment “bitter old queen”, does it stand the test of fact? Bitter, check; old, check; queen…

    To whatever extent the comment may be seen as a defamatory slur, it would turn on whether the word “queen” is accurate, and whether it is offensive to people it signifies, i.e. has a derogatory connotation beyond being a synonym for male homosexual.

    It is quite bizarre how quickly various LNP members launch into suing for defamation, almost at the drop of a hat, and yet they are the first to man^fn1 the barricades in defence of “free” speech.

    fn1: I’d say “people” the barricades, except most of the litigators are men.

  27. Julie Thomas
    January 24th, 2015 at 12:38 | #27

    @Donald Oats

    Gina Rhinehart sues a lot of people so maybe it is not just a man thing to want to inhibit other people’s free speech.

  28. jungney
    January 24th, 2015 at 17:44 | #28

    @Donald Oats
    Thanks fro the acute and brief analysis. “Bitter old queen” could have been much more damaging had it been “bitter old cottager” which would have referenced Jonesy’s arrest in London, many years ago, for soliciting in a public toilet. The toilets preferred by men who were game were repro dunnies with thatched roofs and some type of wattle and thatch walls. Seriously. Roy and HG have made much play of this.

    In general, I reckon that frauds like Jones get what they deserve, whatever their sexual preferences might be. God alone knows about the sexuality of the high and mighty. Just look at the mess that ole Prince Andrew has got himself into. Old school ruling classes rooting the plebs? Never! What a slur on patrician rule. Gadzooks, pistols at dawn.

    Watch that space. What a hoot. It’s like watching the French Revolution in real time.

    Who would have thought?

  29. Donald Oats
    January 24th, 2015 at 20:21 | #29

    @Julie Thomas
    This is indeed true.

  30. January 24th, 2015 at 20:27 | #30

    Pr Q said:

    The central claim is that electricity prices have risen more in Queensland and NSW, under corporatisation than in Victoria and SA, under privatisation. What they don’t tell you is that this merely offsets increases imposed in the leadup to privatisation, with the result that retail prices are much the same in all four states, and far higher than when the process of market reform (supposedly to reduce prices through competition) began in the 1990s.

    Utility privatization is a glorified rort masquerading as economic reform. The level of economic analysis by the he said-she said journalists recycling spin-doctored press releases is embarrassing.

    Pr Q is charitable to a fault here. The privatizers have shameless debating ethics where bait-and-switch and apple-to-oranges comparisons are SOP. The state owned NSW and QLD electricity networks have much higher maintenance overheads because their network coverage area is much larger and more spread out than VIC and SA. SHane Green of the Age puts out the E & Y garbage by quoting an Australia Institute critique:

    It has backed up its argument with a Treasury-commissioned report from Ernst and Young which found electricity network prices are lower in Victoria and South Australia as businesses are more efficiently run by their private owners. But the new report, Nothing to gain, plenty to lose, argues the Ernst and Young analysis is flawed because it did not take into account the larger physical span of the NSW network. It says this leads to higher costs due to the need for more staff to service more poles and more vegetation management.

    The report compared overhead costs of NSW companies Ausgrid and Endeavour Energy with the Victorian company AusNet, owned by Singapore Power and State Grid Corporation of China – touted as potential bidders for NSW assets. The comparison found AusNet had higher overhead costs and faster growth in overhead costs.

    The whole privatisation program is obviously a lucrative move by capitalists who have run out of entrepreneurial ideas and decided to move into the governments role because its a safer bet with plenty of up-side. Nice monopoly niche so they can gouge the public with extortionate prices. Bonuses for managers who hit their KPIs, which include shedding maintenance staff. And of course very little oversight from cony capitalist politicians whose wheels have already been greased with a nice little post-political career earner, usually a sinecure on the board of some investment bank.

    Green focused on Kennett’s 1992 privatisation program which was, to be fair, one of the better of a bad bunch because JK got a pretty good sale price:

    The 1992 election changed that. The SEC was lined up by the new government, which claimed that the authority was laden with debt and had to be privatised. This despite the fact that in its last year of operation, it paid $995 million in interest, a $191 million dividend to the state government, and had a profit of $207 million. Basket case, indeed.

    The electricity privatisation exceeded government expectations, delivering more than $20 billion to a cash-strapped state, with promises that in private hands, the delivery of electricity would be better and cheaper than the service provided by the old state-owned behemoth.

    In a report this year, the Australia Institute used official figures to calculate that the cost of electricity increased by 170 per cent from 1995 to 2012 – four times higher than the rise in the consumer price index.

    The Australia Institute report is one of several that have tried to make sense of this policy mess. It attempts to answer the question: why has privatisation and corporatisation of electricity failed to deliver the promises of lower prices, and in fact, delivered higher prices?

    It draws some surprising conclusions. The report identifies a productivity slump compared to the rest of the economy. One explanation may be the rise of the number of workers in the sector not involved in generating electricity. The rise of the manager class is an example – the number of managers in the sector grew from 6000 to 19,000 in the five years to 2012. The report also considers whether the higher prices are the result of private owners trying to recoup costs, having paid over the odds, lured by the prospect of big profits.

    Our ancestors built the nation, including the public utilities, with their taxes and loyal patronage. A trust that was broadly returned by reasonably conscientious public service managers, high-standards engineers and non-corrupt political class. (Although utility unions would occasionally exploit their monopoly power to blackmail the public.) And we’ve let it all slip through our fingers like dissolute heirs.

    Anyone who tells you that this country is better governed in the present generation than, say, from 1955 through to 1975, is a liar. And that would be most of the political class.

Comments are closed.