Henry Ergas has an interesting piece, defending privatisation in general, while criticising the sale of Sydney Airport. Henry nominates me as ‘the most perceptive critic of privatisation’, and I’ll return the compliment by observing that Henry is the most persuasive advocate of the case for ‘light-handed regulation’ of privatised monopolies such as Telecom NZ and (assuming Howard gets his way) Telstra.
Henry’s basic point about Sydney Airport is the same one that I’ve made. While the sale looks like a good deal for the public at first glance, the price was boosted by raising the monopoly prices the airport is allowed to charge, relaxing regulation and ruling out any competition from a second airport in the foreseeable future.
The more general point is that privatisation cannot be assessed simply by looking at the effect on the net worth of the public sector, that is, the difference between the sale price and the value of the earnings that would have been achieved under continued public ownership. If privatisation is accompanied by policy changes that make the market more or less competitive, or changes in working conditions, quality of service and so on, these effects must be taken into account in working out the total effect on the welfare of the community.
I’ve focused on the net worth test in assessing past privatisation because most advocates of privatisation have got it wrong – claiming that privatisation has been good for public finances when as Ergas notes ‘many past privatisations would have failed the net-worth test’. But the net worth test provides an evaluation of privatisation on an ‘other things equal’ basis (economists like the Latin version, ceteris paribus).
For a complete evaluation it’s necessary to take account of regulatory changes and so on. In my assessments of privatisation, I’ve tried to do this. Nevertheless, the net worth test is still relevant.
In the Australian context, many of the changes that are commonly associated with privatisation have occurred separately, as a result of the corporatisation of government business enterprises and the introduction of regulatory systems designed to be ‘competitively neutral’ between public and private firms. Corporatised government business enterprises have employment conditions more similar to their private counterparts than to old-style government departments. In particular, they have shown themselves willing to undertake labour-shedding on a large scale. On the other hand, private enterprises that are subject to extensive regulation necessarily become responsive to political pressures rather than pure market forces.
As Ergas says, the differences that cannot be eliminated are those associated with ownership. He notes:
For example, before Telstra was partly privatised, each Australian citizen could be said to own a non-tradeable ‘share’ in Telstra.
Because shares are non-tradeable government business enterprises are not subject to the threat of takeover, and the associated capital market discipline. But estimates of the costs and benefits of takeovers vary widely. In the mid-1980s, a lot of Australian commentators were very enthusiastic about the market discipline imposed by raiders like Bond, Skase and Elliot. When their jerry-built empires collapsed, more realistic assessments suggested that, even where there were benefits, they had been greatly exaggerated. The recent scandals in the US, which have particularly affected ‘serial acquirers’ like Tyco and Worldcom, are leading to a similar reassessment there.
Moreover the costs and benefits are not all one way, as Ergas implies. Public ownership of Telstra is a form of social insurance – the risks associated with profits and losses are spread through the tax system.
Like other forms of social insurance, this is a ‘one size fits all’ solution. As Ergas notes, ‘This means that people who wanted to take on the risk of owning more shares in return for greater reward could not do so’. The disadvantages of inflexibility must be balanced against the fact that compulsory risk-spreading through the tax system is much more cost-effective than market alternatives. The superiority of is reflected in the difference between real rate of return required for typical private investments (around 8 per cent, even in relatively stable areas like infrastructure) and the real rate of return on government bonds (generally less than 4 per cent).
Whenever costs and benefits of alternative approaches must be balanced, the optimal outcome is likely to be a mixture of the two. The mixed economy, in which some goods and services are produced by the private sector and others by the public sector has historically outperformed the alternative extremes of pure socialism and free-market capitalism. In recent years, some lessons have been relearned the hard way. The wave of privatisation in the infrastructure sector (telecommunications, electricity, roads etc) has been followed, in many cases, by a return to public ownership, as the defects of the privatisation model became apparent.