Home > Economics - General > The failure of privatisation and the case for a fully public TAFE system

The failure of privatisation and the case for a fully public TAFE system

August 11th, 2016

I have a new article in The Conversation, riffing off ACCC chairman Rod Sims’ recent denunciation of privatisation policy in Australia. The Conversation’s ran with the headline “People have lost faith in privatisation and it’s easy to see why“. To be slightly more precise, when privatisation started in the 1980s, most people had an open mind on the issue – there was plenty of dissatisfaction with public enterprises like Telecom Australia. As they experienced privatisation, they became more hostile and, eventually, implacably so, even as the political class remained convinced of the merits of the idea. The successive defeats of the Bligh (Labor) and Newman (LNP) governments in Queensland illustrate the point. The rare cases when privatising governments have been elected or re-elected usually arise only when the Opposition is utterly unelectable (Baird in NSW for example).

Part of Sims speech and my article referred to the continuing disaster of for-profit vocational education. Right on cue, the day the piece came out, the Victorian government terminated the contracts of another 18 shonky providers (though they are still registered with the national regulator ASQA), with the students being directed to the public TAFE system.

Billions of dollars are being wasted and thousands of lives ruined by this continuing policy disaster. Yet, it seems, no one in authority is willing to admit that the whole idea of publicly funded for-profit education is a disaster, guaranteed to generate scams and rorts on an industrial scale. The whole system needs to be shut down and replaced by a fully public TAFE system. The minority of for-profit providers who are doing a decent job could be hired as subcontractors to teach TAFE courses.

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  1. Jim Birch
    August 11th, 2016 at 14:05 | #1

    The political class remain convinced of the merits of offloading responsibility to parties not under their direct control. It clearly not based empirically on outcome quality and often doesn’t seem to be even ideological.

  2. alex
    August 11th, 2016 at 15:22 | #2

    I can’t work out whether the alleviation of responsibility for cockups, or the handy cash, or some other more hidden perks are the main driving factor for politicians who like to privatise.

  3. derrida derider
    August 11th, 2016 at 16:46 | #3

    Privatisation can often be the sensible thing – does anyone, for example, really still think the government should be running Qantas (and therefore doing its level best to block foreign carriers)? Or should own coal mines (as they used to)? But gee, you have to be smart about it – and this one wasn’t at all smart.

    If you are looking at a privatisation you should be able to credibly identify the source of the efficiency gains ex ante. That could never be done with this one. Given the difficulty of assessing output competition was always going to be on price, with a consequent rapid spiral downwards in quality.

  4. James Wimberley
    August 11th, 2016 at 17:01 | #4

    I’ve raised this before, as a genuine question not a talking point. France has a mixed public/private TAFE system and it seems to work. Presumably, being France, the private providers are heavily regulated. The key incentive is the self-interest of businessmen: they must either spend 2% of payroll on training or hand it over as an earmarked tax to fund the public TAFE system. There is a certain amount of cronyism and nepotism, but on the whole it pays employers to buy in serious courses. What bare the differences to Australia? Or have I got this completely wrong?

  5. Geoff Edwards
    August 11th, 2016 at 17:02 | #5

    Prof John, I’m not at all sure that the public had an open mind from the beginning. Privatisation always was an agenda run by the econocrats and I recall the public being sceptical from the beginning.

    However, the larger story I think is how a person like Sims who has reached a high level in his profession can have been so convinced of the logic of privatisation and so insensitive to the evidence of failure for, in his words, 30 years. Anyone who has been even lightly read in the subject must surely have been aware of the critiques dating back to the late 1980s. And since the advent of the Internet, no literate person in public office, especially an educated person, has any excuse for being unaware from one decade to another of the mounting numbers of casualties of this policy.

    Full marks to Sims for his frankness, but his admission that he has been an advocate of privatisation for three decades says a lot about the analytical capacity of our economic leadership class.

  6. John Quiggin
    August 11th, 2016 at 17:09 | #6

    @James Wimberley

    I don’t know anything about the French case (links appreciated), but Australia had a training levy of 3 per cent for a while, introduced by Hawke and scrapped by Howard (IIRC). It didn’t produce anything like the current set of scammers. I had the impression that most of the training was in-house.

  7. Geoff Edwards
    August 11th, 2016 at 17:16 | #7

    @derrida derider

    Derrider, I believe that I can identify myself as a supporter of public ownership of Qantas, on two grounds. First, a public carrier can set a benchmark of safety with lower risk of competing itself to destruction. There is such a thing as destructive competition and there is some evidence that the US airlines have done that to themselves. The relative infrequency of spectacular crashes tends to contradict this argument, but the airline safety systems are very finely balanced.

    Second, exclusion of foreign carriers seems an eminently sensible economic action for a self-sufficient country. Why should we pay fees and dividends to foreign companies to run a service that we are perfectly capable of running for ourselves? I say this against a background of scepticism about the value of foreign investment generally.

    The question of blocking foreign carriers is a policy one distinct from the question of ownership. Qantas enjoys a partial sheltering from competition now through regulatory powers. What is objectionable is funnelling of extra profits to Qantas shareholders on account of these restrictions. These margins belong to the community.

  8. August 11th, 2016 at 19:15 | #8

    Privatisation is a way of having lower taxes, at least until you’ve sold everything and are in a total mess. The trouble is that otherwise apparently sane, sensible and successful people I know are in favour of lower taxes. They generally point to companies that will go elsewhere because of our “high” tax rates. And this sort of logic has taken hold everywhere, with countries rushing to cut their corporate tax rates. These people are often surprised to find that taxes were much higher during those hellish years of the 50’s and 60’s. But this information doesn’t change their minds.

    For what it is worth, I think Australia should tax at a sensible level, and rely on the captive businesses that can’t leave.

    And how anybody thought that private TAFE providers, particularly with the model used, had a snowflakes chance in hell of working, is a mystery.

  9. Ikonoclast
    August 11th, 2016 at 19:57 | #9

    I completely agree with J.Q. on this issue.

    Is this link of interest to anyone re this topic?

    http://scholarship.kentlaw.iit.edu/cgi/viewcontent.cgi?article=1205&context=fac_schol

  10. Robertito
    August 11th, 2016 at 22:36 | #10

    And yet I heard an economist on the radio the other day saying “and we know that the private sector provides services more efficiently than the public sector” as if it was not only true but undisputed.

    A basic information economics framework is enough to explain why education is not suitable for privatisation:
    Research goods – quality can be accurately predicted by an informed consumer
    Experience goods – quality can only be assessed after the good is paid for
    Credence goods – even after receiving the good, the consumer is unsure of the quality.

    Since education is a credence good, consumers are not the best qualified people to decide on who should provide it.

  11. Ernestine Gross
    August 12th, 2016 at 09:09 | #11

    @Robertito

    And, perhaps most importantly, education is not a ‘good’ or ‘commodity’ at all. If any of the elementary concepts in economics are relevant, then I would think it is the notion of ‘a joint product’, requiring joint effort (‘inputs’ from students and teachers), common inputs (information available to all) and resulting in more than one ‘output’ (tested knowledge and skills, officially recognised in certification) as well as whatever the students (and the teachers) do with observations and thoughts that may or may not constitute ‘input’ for other processes later on. Only some of the ‘outputs’ are marketable directly or at all.

  12. GrueBleen
    August 12th, 2016 at 09:41 | #12

    @Robertito

    Well of course it is “not only true but undisputed” for econorats and their running dog lackeys. And it may even be “true” in some ways – namely in reducing costs and increasing the “profit” of the private suppliers.

    But I was always told that it’s much better to be effective than to be efficient: first, do the right thing, and only then, do the ting right.

    And I believe that is ‘indisputable’ for the kind of complex, multi-participant, multi-stakeholder, multi-outcome effort such as Ernestine describes above.

  13. J-D
    August 12th, 2016 at 10:59 | #13

    John Quiggin :
    @James Wimberley
    I don’t know anything about the French case (links appreciated), but Australia had a training levy of 3 per cent for a while, introduced by Hawke and scrapped by Howard (IIRC). It didn’t produce anything like the current set of scammers. I had the impression that most of the training was in-house.

    1.5% (of payroll)

    The levy was only payable to the Commonwealth if the employer didn’t spend at least that much in-house.

  14. GrueBleen
    August 12th, 2016 at 11:21 | #14

    @Ikonoclast

    Your #9 of 11 Aug

    Yes it is, and I’m kinda settling in for a long read, but so far it comes across as very ‘legalistic’, when

    1. it refers in the Intro to “The Article also suggests that third-party service beneficiaries
    should be permitted to sue to enforce such contracts.”
    Yay for untrammelled Tort law and lots of fees for lawyers !

    2. It doesn’t have any kind of up front ‘management summary’ which is, of course, the favoured tl;dr passage for those of us for whom a long read is a significant percentage of the remainder of our lives.

  15. Ikonoclast
    August 12th, 2016 at 13:00 | #15

    @GrueBleen

    Of course, I posted this paper as possibly of interest. I was not saying I endorsed it wholeheartedly. It advances some useful ideas, I think. Where these ideas might take us would need more thinking.

  16. J-D
    August 12th, 2016 at 13:39 | #16

    GrueBleen :
    @Ikonoclast
    Your #9 of 11 Aug
    Yes it is, and I’m kinda settling in for a long read, but so far it comes across as very ‘legalistic’, when
    1. it refers in the Intro to “The Article also suggests that third-party service beneficiaries
    should be permitted to sue to enforce such contracts.”
    Yay for untrammelled Tort law and lots of fees for lawyers !
    2. It doesn’t have any kind of up front ‘management summary’ which is, of course, the favoured tl;dr passage for those of us for whom a long read is a significant percentage of the remainder of our lives.

    Why do you refer to tort law? Tort law has nothing to do with it.

  17. Historyintime
    August 12th, 2016 at 14:05 | #17

    @Robertito

    The private sector can definitely run things more efficiently when there is a singe objective (ie profit) – basically because they can adjust their labour force (sack people, pay people more or less) more easily.

    If there are more than one objective, it will depend on whether the Government has a well thought out and effective policy and contracting framework. The approach to VET has obviously been overly ideological.

  18. GrueBleen
    August 12th, 2016 at 16:27 | #18

    @Ikonoclast

    Don’t take my criticisms too seriously (I thought my second point might have hinted that).

    And of course a lawyer is going to propose a lawyer based action (especially when there’s over a million – ie more than one for every 300 men, women and children – practicing lawyers in the USA. But also, as you are doubtless aware, the right wingnuts in the USA are always campaigning on “Tort reform” – ie cutting back the rights to sue and also the level of compensation that you might get even if you sue and win (just about enough, hopefully, to pay off your lawyes, I suspect).

    I prefer an Ombudsman type approach, but hopefully one that works better, quicker and more even handedly than does Victoria’s VCAT.

  19. J-D
    August 12th, 2016 at 16:29 | #19

    @GrueBleen

    However, there’s no relationship between ‘tort reform’ and contract law.

  20. Ivor
    August 12th, 2016 at 17:09 | #20

    @Historyintime

    …they can adjust their labour force (sack people, pay people more or less) more easily.

    Actually when they do this they risk making matters worse because they rely on workers having wages to purchase a appropriate share of the output.

    So what one capitalist does leads to crisis when all of them follow suit.

  21. GrueBleen
    August 12th, 2016 at 17:20 | #21

    @J-D

    Oh, well spotted J-D, you’re certainly on the ball today. And I’m relieved to know that contract law is so all encompassing that no injury or service failure could fall outside it.

  22. J-D
    August 12th, 2016 at 18:41 | #22

    @GrueBleen

    That’s exactly the opposite of what the article under discussion is saying.

    Under the common law of contract, if you have a contract with me for me to do something for you in exchange for your paying me, and you pay me but I don’t do whatever it is I contracted to do for you, then you can sue me for breach of contract. But if you have a contract with me for me to do something for somebody else (a third party) in exchange for your paying me, and you pay me but I don’t do whatever it is I contracted to do, then you can sue me but the third party, the one I was supposed to deliver the service for, generally has no right to sue me for breach of contract. (In common-law systems this is called ‘privity of contract’.) There are, however, many exceptions to this general principle, which allow third parties to sue in specific cases, because the doctrine of privity of contract is considered to be a problem. The article is recommending making another exception to the doctrine of privity of contract, so that when governments enter into contracts for privatised delivery of services, the service recipients (who are third parties) have some right to sue for failures on the part of the private contractors.

    The article isn’t suggesting that nothing falls outside the scope of contract law; it’s suggesting that this is an example where something that does fall outside the scope of contract law can and should be brought within that scope by a modification along the general lines of others already made.

    In the Napoleonic code there’s no general doctrine of privity of contract and third parties are not generally excluded for suing for breach of contract. Do you think Napoleon (or his legal advisers) set things up that way to create more work for lawyers?

  23. GrueBleen
    August 14th, 2016 at 02:38 | #23

    @J-D

    Apologies for the delay in reply, J-D, but ltuae, you know.

    Anyway, so the “article under discussion” has provided the thesis, to which I have provided the antithesis, and now all that remains to complete this dielectic is for you to provide the synthesis. Go for it !

    I thank you for your tutorial on ‘privity of contract’ and your belief in the right of third parties to sue over matters which the “article under discussion” clearly states can’t actually be specified in the contract, viz: quality of service. But then, with such a vague idea, maybe even a tort case couldn’t be mounted – unless, maybe, you have very very smart lawyers.

    In the meantime, you might contemplate the difference between common law and civil law, and you might even note that, by postulating an Ombudsman, we might bypass both. Not that we actually have a civil law situation in this nation which has common law by right of origin.

    As to the Code Napolean, well I just can’t quite see why you might think I’d have any knowledge, or even the slightest curiousity, about what Napolean’s four eminent jurists might have had in mind. Do you have any such knowledge or interest yourself ? If so, why would you be interested in the draft of a civil code here in a non civil code nation ?

    However, let me introduce you to a somewhat recondite concept: that ‘intent’ and ‘effect’ are two different words with quite different meanings. So, I’m seldom as interested in the ‘intent’ as I am in the ‘effect’. How about you ?

    So, the ‘effect’ of the Napoleonic Code would be to allow for legal actions – suing for breach of contract by third parties – that our law wouldn’t unless it is modified. But then our common law allows for tort actions in all sorts of situations. So, lots of work and fees for lawyers as usual, non ?

  24. J-D
    August 14th, 2016 at 09:56 | #24

    @GrueBleen

    Somebody wrote an article suggesting that it might help to do something about some of these problems if we extended a third-party right to sue, and somebody posted a link to that article here.

    You object that ‘of course a lawyer is going to propose a lawyer-based action’, that it will mean more lawsuits.

    But you also mention that in the US right-wingers advocate for ‘tort reform’, meaning fewer lawsuits, so that big businesses get sued less and pay less in damages.

    In general, fewer lawsuits is better. But not every specific measure that reduces lawsuits is good, and not every specific measure that increases lawsuits is bad.

    This particular proposal for a third-party right to sue is probably not the ideal solution, but that doesn’t mean it has to be a bad idea.

    I suggest this synthesis: ‘Well, perhaps it could be a good idea, I don’t know, it’s not obvious rubbish, although I don’t think we should give up on looking for other ideas.’ I can sign up to that. Do you have a problem with it?

  25. GrueBleen
    August 14th, 2016 at 10:22 | #25

    @J-D

    No problem at all, J-D; not a bad synthesis all things considered.

    Just a couple of small caveats though:

    1. the author of the article is American, and “In the United States, there is no unified federal ombudsman service” (from Wikipedia, just Google “Ombudsmen in the United States”. So, our article author is not likely to pursue an Ombudsmen ooption which would be my first choice.

    2. “Tort reform” as I’m sure you really are well aware, is just Yanqui Wingnut speak for protecting “corporations” from legal redress. It’s a broad based approach that also finds plenty of expression in the very limited – and favouring foreign, ie American corporations – dispute resolution rules incorporated into so-called trade agreements like the TPP. So I am personally agin ‘tort reform’ in any of its many guises.

  26. James
    August 16th, 2016 at 00:46 | #26

    Slightly off topic, but the quote is too good to miss. The privatised Family Day Care rort has been going on for a long time, in many forms, but the latest is a bogus scheme that appears to have creamed $27million dollars from state and commonwealth sources. To quote the ABC web site from 16/0/2016; Police have been unable to locate a massive portion of the $27 million and are investigating whether the money was defrauded to fund IS, potentially making Australian taxpayers one of the biggest funders of the terrorist group.. It appears that the utopian dream of unfettered markets has yet again landed face first in the mud. Or maybe that is the idea?

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