The Australian’s Margin Call column has an amusing comment on the privatisation of Telstra. The policy is rather like Voluntary Student Unionism in that it’s been pushed for so long that no-one in the government can abandon it, even though it no longer has any obvious rationale.
The fact that selling Telstra will make the public worse off in fiscal terms has finally sunk in and I suspect that Nick Minchin and the Finance Department (once the leading agency pushing a sale) would be happy enough to drop the entire idea.
John Quiggin 
Its true that if we had sold it all years ago we would have got a much better price. I hope all those that opposed it for so long see how detrimental their behaviour has been.
Actually I think an option worth considering would be to give Telstra away. If they divided the stock by the number of Australian citizens and then just used the electoray role to mail everybody their share then that would save all the fuss about what price its worth.
And it should short circuit the perpetual desire for constituent bribes.
Let’s face it Terje, with compulsory superannuation, that’s effectively what’s going to happen.
Way off the mark, Terje. We’ve had a far better return from our continued holding than from the T1 sale. T2 was a bit better but only because of the dotcom boom. If we had sold off the dotcom bits of Telstra and kept the rest (not hindsight- I proposed this at the time) we would have done much better.
Total loss to the Australian public from all this is around $10 billion and counting. Search the site and you can find the numbers.
If the reason for the government to own shares in Telstra is that they are playing the market, wouldn’t they be better off diversifying their portfolio and forgetting any 50.1% rule?
And JQ, when you talk about loss, are you talking about government loss, or Australian loss. Australian citizens count as Australian too.
John Humphries : Perhaps you would care to quantify how you believe that ‘Australia’, as opposed to the ‘government’, stands to gain from privatisation, or conversely, lose if privatisation does not procede?
It should be obvious to any numerate person that privatisation is harmful to the interests of everyone, except for a very small minority, no matter which way you look at it.
What have I missed?
Terje wrote : If they divided the stock by the number of Australian citizens and then just used the electoral role to mail everybody their share then that would save all the fuss about what price its worth.
As I wrote elswhere elsewhere in resonse to this same suggestion:
Well done JH. I would only add, this sort of discernment should be applied to a great many economic arguments about this or that topic – Australian privatisation, globalisation (as distinct from free trade proper), and so on.
BTW, use of revenue yielding domains to finance governments is actually the ideal in a small government oriented system, apart from tariffs when interfacing with the outside world. As to whether that approach is viable, that to a large extent depends on the conditions created and maintained by policies that keep the resources out of truly private (that is, individual) hands.
As to whether that in turn is practical, that in turn depends on finding and implementing a realistic transition that doesn’t (like nominal privatisation and globalisation) throw the babies out with the bath water – no mean feat in itself.
James, I didn’t state a position on the benefits or otherwise of the sale. I just pointed out the difference between the government and the nation. Do you disagree with me?
But since you ask — my preference is for a give-away, with no help to regional areas.
How do Australians benefit? If Australians keep the shares, then they will recieve the same returns as the government would have — so it’s a net zero. If Australians instead decide to sell the shares to foreigners, then they are indicating that they have a preference for other things (perhaps international shares, perhaps other shares, perhaps property, perhaps a new car… whatever) and so Australia is better off by divesting itself of Telstra shares.
I also think a privatised Telstra (not burdened with excessive regulation) will end up being more efficient. So it’s win-win.
And yes, I happen to think the post office, universities, medibank private, hospitals (and some other government businesses) should be privatised. But that is not relevant to the issue at hand… each piece of government legislation should be judged on it’s own merits.
You are trying to make one privatisation look radical by associating it with privatising everything. I could equally imply that you want to nationalise the local butcher and the 7-ELEVEN… but that would likewise be unhelpful.
As for the poor Australians burdened with these valuable shares… if the piece of paper is too troublesome, they can throw it away, give it back to the government, give it to friends or sell it for money.
John H, while part of the loss from T1 was a transfer to the buyers (mostly but not all Australians) from initial underpricing, most of it reflects the fact that Telstra is more valuable in public than in private ownership. That is, the value of the stream of earnings discounted at the government bond rate is greater than the market-determined share price.
The figures as I understand them.
At T2 the government sold 16.6% of Telstra or 2132million shares. The sale price was $7.80 per share. The revenue raised from the sale was in the order of $16.6 billion or roughly 1 billion per percent of ownership.
So the market value at that stage for the other 51% was about $51 billion. Since then the government has suffered something in the order of a $20 billion capital loss on the stake that it retained.
I don’t know how JQ figures that the government has profited from the delay.
JQ — the stream of earnings is the same. The govt used to get $1, now a citizen gets it. Net zero. There is no reason to use different discount rates in determining the present value of an estimated future income flow.
Share prices are determined by more than the current dividends. Furthermore, the asset value of Telstra to the government is irrelevant if it is never to be sold!
Clarification — are you saying that you think the difference between the share price and an artification guestimate of the value of a public estimate can only be caused by a change in the real value of the asset, and not by a mistake in either the market price or the guestimate?
John Humphreys wrote : I just pointed out the difference between the government and the nation. Do you disagree with me?
Obviously, government and nation aren’t the same, just as, in a golf club the managing committee is not the same as the entire membership. However, the power of Government, in a properly functionioning democracy should be wielded to serve the people. If that did happen, the intererests of the people and the interests of the people as a whole would not differ greatly. Clearly that is not the case in Australia, but that can, and should, be changed.
John Humphreys wrote : And yes, I happen to think the post office, universities, medibank private, hospitals (and some other government businesses) should be privatised. But that is not relevant to the issue at hand…
You are trying to make one privatisation look radical by associating it with privatising everything.
This is rather reminiscent of John Howard’s response to critics of his partial privatisation of Telstra, when he effectively said that his critics were falsely accusing him of having the more ‘radical’ long term goal of full privatisation.
Whether it is to be accomplished all at once or in stages, it is relevant, because the selling of every possible publicly owned asset would seem to be the ultimate goal of the Government.
John Humphreys wrote : I could equally imply that you want to nationalise the local butcher and the 7-ELEVEN… but that would likewise be unhelpful.
Yes, it would be unhelpful, because I don’t think nationalisation of local butcher shops or 7-11 stores is likely to achieve much good.
However, I don’t see that governments should necessarily be barred from owning and operating butcher shops or conveniece stores. It need not be national governments. It could be local or state governments. If, as the market fundamentalists allege, that they are inherently inefficient, then they would fold, and not a great deal more would have been lost than what is lost to the community when businesses fold on a regular basis.
On the other hand, if they were to become commercially successful, and also provide a useful service to the community, is that a bad thing?
As for the rest of the post about how giving Australians shares in Telstra and, eventually, every other Governement owned asset, the isses are too compex to be able to easily deal with now.
If selling Telstra is such a bad idea, why doesn’t the ALP commit to using the Future Fund to buy it back?
JQ
“That is, the value of the stream of earnings discounted at the government bond rate is greater than the market-determined share price.�
I do hope you are not an active personal investor on that basis. The value of the stream of (almost) any company’s earnings, discounted at the government bond rate will always exceed its market price because the risk to its future earnings is higher than the risk embodied in the government bond rate. My answer is to use the right discount rate. Yours would logically seem to be for the government to own everything.
But privatising Telstra is not merely a fiscal transaction. It is a further step in taking the government out of the ownership and control of commercial businesses that are providing goods and services to customers for profit in a competitive market place. Those who support this direction of “reform� recognise that it has merit for its own sake. Those who oppose it usually resort to accusations of “ideology� – although I seem to recall that it was originally State ownership of the means of production (etc) that was the ideological position…
The real value of completing the privatisation of Telstra lies in (a) ending the capacity of the agrarian socialists to use their political power to shift value in their favour; (b) ending the silly debate that confuses ownership with the power to regulate, without ever recalling that Telstra’s anti-competitive, anti-consumer behaviour under 100% government ownership was unfettered, harmful and out of control; (c) freeing the government’s fiscal future from the risk of the continued ownership that has seen billions of dollars of potential proceeds lost in the delay in competing this sale; and (d) signalling the continued move of commercial activity into the private sector as reform that needs to continue to build flexibility and resilience into the economy.
Terje, the market value of Telstra has fluctuated dramatically (which in itself might be a warning to those who believe in the all knowingness of markets).
If the government had sold at the peak they might have been better off, although not by as much as you say, because dumping all the stock at one time would have saturated the market and reduced the price of T2. However, at other times, including T1 the value was lower than it is now, and selling was a mistake.
So the supporters of privatisation cost the government billions by selling stock at the time of t1. The opponents cost the government billions by not allowing full sale at the time of T2. The only people who were wise advocates of government wealth were those who supported sale at the top of the market but not at other times.
Unfortunately, people with an ability to pick the top of every market are rather thin on the ground. Actually this isn’t unfortuate – its natural, if every one could pick the top of a boom there would be no booms.
The real question is whether, on average these sorts of sales have made sense. Now I’m way out of my depth on calculating that one, but Prof Q’s numbers seem to make sense to me, besides the small fact that he does seem to be one of those rare birds who can pick the top of at least some markets based on his arguements at the time of T2.
Anybody care to answer the question – if selling Telstra is such a bad idea, why won’t the ALP commit to buying it back with the Future Fund?
And then they could by back CSL, QANTAS and the CBA. And roll-back the GST that was going to be the end of Australian civilisation as we know it (what??? it hasn’t???). And they could commit to reversing all the proposed changes to the industrial relations legislation and increasing the Unfair Dismal Protection for all workers.
If they won’t do these things then there must be some merit in them? No??
James — I think you’re getting confused. This is not a debate about whether the government should or shouldn’t serve the people. That is a strange side-track. My point was simply that if the government makes a loss, it doesn’t necessarily follow that the nation is worse off. Simple point really.
You other arguments are irrational. Are you saying that you’re not happy for Telstra to be privatised unless we also privatise the Post Office? Under your line of reasoning, nothing could ever be privatised! Each policy should be judged on its merits… and references to other potential privatisations are as irrelevant as references to other potential nationalisations.
And to accuse this government of having a radical free-market agenda is a statement vastly out of touch with reality. This is the most socialist government Australia has ever had. Highest taxing. Highest spending. More spending on health. More spending on welfare. These are facts — not opinions.
Your comments about the costs of failed government businesses are equally absurd. In the face of overwhelming experience to the contrary, you seem to deny the inefficiency of government business. But even stranger, you claim that there is no cost in having more inefficient businesses! That is wrong, by definition.
I think you’re out on a lonely limb here. JQ may be a social democrat, but I don’t think he subscribes to Green Left Weekly.
Stephen L — nobody argues that the market is all knowing. Just that it is a good way of passing on knowledge relatively efficiently.
Razor — one argument might be that any government (including a future ALP government) has finite political capital and they use it on those issues they consider the most important at that time. Hopefully, the re-natinalisation of Telstra is a low priority even for the feral-left of the ALP.
Of course, the more likely answer is that politics is about opinion polls and not good policy… but lets not let my cynicism get in the way.
QUOTE: And what do you think that would achieved by all the bureaucracy, paperwork and expense entailed in giving shares to each and every Australian citizen (although admittedly it would be fairer than what the Government is now trying to bring about)? Would such a scraps of paper make Telstra, as a whole, any more valuable to the public? Do you think that, also, shares for Australia Post be handed out, as well as shares for Medibank private? for the Snowy Mountain Hydro scheme? for all our roads, our schools, our universities, our libraries, our dams and water treatment plants, hospitals and national parks?
RESPONSE:-
With the exception of national parks and roads I would be pretty supportive of a demutulaisation of government owned entities through a share give away. And even national parks might be better managed if owned by a private trust.
Would this make the entities in question more effective. Maybe, maybe not. However it would make the industries in question more effective because consumers could now choose what they actually wanted. If you did not want the services of the local hospital then you would not need to pay for them.
In my humble view such a demand based allocation of resources is overall a much fairer and more efficient way compared with the current command based approach.
Is it safe to assume from the deafening silence that ownership of Telstra by the Government is not better than ownership by private enterprise?
Regarding suggestion that Telstra shares be given away:
John Humphreys wrote : How do Australians benefit? If Australians keep the shares, then they will recieve the same returns as the government would have—so it’s a net zero.
Firstly, it cannot be net zero. A huge cost would be incurred in the cost of this exercise, although, perhaps, the money required may be less the the amount that is to be wasted on the sale of the Government’s remaining share, as reported in today’s Adelaide Advertiser, that is $500 million.
Secondly, how will the Government make up for the shortfall for the revenue which will now be paid back to every shareholder? Either services will have to be cut or extra taxes will have to raised.
So, instead of money going straight from Telstra to the Government, it will instead be paid to the shareholders. Then those same shareholders will have to pay back the extra necessary extra tax.
What is the sense of that?
Even if, as market fundamentalists argue, we can make do with less taxes being raised, couldn’t the same effectivey be achieved by Telstra simply remaining in Government hands and it lowering its charges?
John Humphreys wrote: As for the poor Australians burdened with these valuable shares… if the piece of paper is too troublesome, they can throw it away,
Your point only ilustrates how those of us who would prefer to get on with life, rather than devote our time to watching share prices, dealing with stockbrokers, financiers, insurance brokers, fund managers, lawyers etc, etc, stand to lose whether privatisation procedes as the Government now plans to or adopts this proposal.
As I wote share have no inherent ‘value’ and in no way add to the value of Telstra for the community. They will be, as I said, scraps of paper. Too much of supposed economic activity, these days, involves the shuffling around of scraps of paper, or their electronic equivalents, rather than creating actual wealth.
Will the injection ‘enterprise’ into telecommunications make it more effective and offset the huge costs of all the paper shuffling? Contrary to claims made by privatisation advocates there seems to be no magic wand that private enterprise has which allows them to run enterprises more efficiently, with the possible exception that thay have shown themselves willing to be more ruthless to their workforces, but it is debatable whether even the outside community has gained from this.
The past records of privatisation in this country, and elsewhere, show that there is ample evidence to the contrary, that is, that private management is a lot less effeicent, especially if we consider the way the copper network has been so badly neglected and so much of its previous value to the community has been lost as a result of the short-sighted dictates of shareholders to reduce costs in order to raise their profit levels.
Terje wrote : If you did not want the services of the local hospital then you would not need to pay for them.
Are you saying that once shares are given out, then all our hospitals will be run on a user pays basis? Having been ‘given’ shares in the hospitals that all taxpayers now own anyway, they will have foregone any right to be treated in hospital unless they are able to pay?
Your suggestion requires no further comment except that it further illustrates that the case for privatisation has no basis in the real world except for those very few Australians who stand to benefit at everyone else’s expense.
Razor, in the case of the GST the benefits probably didn’t outweigh the transitional cost – but changing back to the pre-extisting system would also be very costly.
Ask most small-business owners what they think of the GST – but don’t ask us around BAS time.
Given that repealing the GST is impractical, I’d like some changes made to reduce the inefficiencies in the current system. Specifically, the $50,000 limit for registration is ridiculously low. As I understand it, most other developed countries have a minimum turnover requireemnt of A$1,000,000 or more.
Terje, as a practical matter that sort of direct giveaway presents transitional problems. Mainly it’s the lack of a sort of tutelage period in which people can learn to cope with what they might otherwise react to as a windfall – the reason British Empire slaves were freed with a tutelage transition. If you just dump things on people who haven’t learned how to cope, like pools winners not learning, you could well get the sort of counterproductive thing that happened under the well-intentioned US allotment movement that parcelled out reservation land among individual Indians. Whitlam caused analogous harm to Australian aborigines.
Anyone seen the Moir cartoon in today’s Sydney Morning Herald?
Sorry to interrupt the thread but I want to point to this interview on the sale of Telstra that Minchin gave on Adelaide ABC local radio last week, notable for its egregious sophistry. The audio is available here.
http://www.abc.net.au/adelaide/morning/audio.htm
It’s about 20 minutes in.
This is the gist of Minchin’s remarks.
1. Telstra is better in private hands as government doesn’t do “commercial services” well and on the proviso that it is “properly regulated” as a monopoly.
2. But Telstra is not a monopoly because of things like wireless and satelitte services.
3. An “operationally separated” but integrated (i.e., not “structurally separated”) Telstra is in the “national interest”.
4. “Impossible to now unscramble the egg” of an integrated Telstra. Should have been done when Labor set Telstra up.
5. On the sale price, the government must take into account the “opportunity cost” of keeping its money in one telco.
6. The government’s shares are really a “financial asset”. The government is really “a financial investor with all its money in one phone company.”
7. The government would be better with a “diversified” portfolio. This is what any “suburban financial adviser” would recommend.
Now I think that to present the issues in this manner is simply deliberately false and misleading. There is no other more charitable interpretation.
Let the first 4 points go. On point 5, John has shown repeatedly shown that the opportunity cost of sale is less than the benefits of holding the shares.
Now focus on Minchin’s characterization of the government’s controlling ownership stake as a “financial asset” that needs to be “diversified”. So Murdoch, Gates and the Google guys should sell down their controlling interests too? Ownership or control provides no other benefits or rights than a mere “financial” stake?
And so the biggest risk from holding is “systematic risk” that needs to be diversified ? Not regulatory risk as argued so forefully by John? Come on. Minchin just assumes that the gorilla can be tamed by regulation, presumably on the basis of his assessment of the effectiveness of the current regulatory regime.
According to Minchin’s lights “we” would be “clearly” better off with a more diversified portfolio notwithstanding recent painful experience of privatization substantially increasing costs to us consumers.
Minchin’s interview was a shocking blend of the technical and conventional designed to maximally mislead and deceive. Not spin. But Frankfurtian bullshit.
I declare opposition to the sale of Telstra dead. Don’t waste your time. If the sale isn’t going to be reversed then why oppose. This sounds like the ALP and Superannuation Surcharge – oppose the introduction, oppose the reduction, oppose the abolition.
At leastthey are consistent and in name alone are acting as an Opposition by just opposing.
Gaby, thank you for your summary of that interview. I haven’t got sound working on my PC (1), yet.
One of the greatest weapons we have are the words which have come out of the mouths of John Howard, Nick Minchin, Helen Coonan, Peter Costello et al, themselves.
Democrats call for referendum on privatisation
I nearly forgot to mention. The Democrats have called for a referendum on the sale as, also, quite a few newspaper letter writers have in recent weeks.
I don’t know if this has been widely reported. My Google alert of this morning seem to indicate that it has not, so far.
However, a copy their excellent media release can be found on our web site.
I suggest that anyone who wants to stop the sale of Telstra get right behind the Democrats on this one and send letters of support to both the Democrats
and to Senator Lyn Allison who can be reached by emailing Senator.Allison at aph.gov.au
Footnotes
1. It’s a Linux PC, but I don’t even know what an ‘e-mail virus’ is, so it is well worth the minor inconvenience.
Razor, while the sale may be a fait accompli, my main point was about the brazen hucksterism that Ministers routinely get away with, especially when obediently interviewed by a badly informed or prepared media.
Gabby — you imply that govt ownership of Telstra gives the govt benefits other than the financial return. What are these benefits?
James — I can’t imagine why giving away shares would cost more than a few million, which is chump change for the federal government. I imagine this would easily be made up by the benefits of a more efficient telco and by allow people to divest if they want.
You ask how the government can replace the revenue. First (once again) if it revenue you’re after then the government should have a diversified portfolio — not just shares in one telco company. Second, the best way to raise revenue is allow the private sector control business, and then have a tax. This is because the private sector generally gets a higher return on their investments (because their investments are driven out of the profit-motive, not the vote-motive).
You effectively say that there is no sense allowing the private sector to do business if you’re simply going to tax them later. Once again, the logical extension of your argument is socialism. I’m not saying you’re a socialist, but you’re making the exact same mistakes in your reasoning. It is worthwhile understanding why socialism doesn’t work… or you’re destined to repeat the mistakes of the past.
Lowering Telstra charges is not “effectively” the same as a tax cut. They are “effectively” opposites. Lower Telstra charges is a subsidy being paid for by somebody else’s tax. Increasing the subsidy would decrease efficiency while a tax cut would increase efficiency.
If you’re not interested in shares — then sell them. Or donate them to the government. It’s not that hard. Personally, I’m not interested in being forced to finance your habits and your choices. All I’m asking you to do is look after yourself. You are asking (actually insisting) that I look after other people — many of whom are richer than me anyway.
Shares do have an inherent value. Being a scrap of paper doesn’t make something worthless… just like a $10 bill. The value is in that these things can be exchanged for what we want. And “shuffling” paper, as you put it, certainly is a productive activity that adds wealth. Risk management, communication of information, moving capital to more productive uses, etc.
As for the past record of privatisation — it has shown overwhelmingly that the private sector is more efficient than the public sector. This is why traditional socialism is discredited. This old debate has been run and won many years ago and I don’t think this is the best place to re-hash the arguments about the desirability of socialist planning.
Your response to Terje was a non-answer. User pays is a good system.
John Humphries – I believe we have them in a corner. No rationale except . . .”but, but it’s just bad to sell government assets!” and no commitment to buy the asset back once sold (which is the logical step if the sale is a bad decision cf Kerry Packer, Alan Bond and Channel 9).
Razor, I’m stunned. Since I started this thread, Minchin’s hints about not selling (or some sort of pseudo sale into the Future Fund) have good steadily more explicit. The government itself recognises that sale at the current price would be fiscally disastrous. It’s an odd time for you to declare victory.
I recognise that the political imperative to implement a long-promised policy will ultimately prevail. But the government’s collective reluctance on this issue speaks volumes.
PrQ,
All along the PM has said that it would be sold when the price likely to be gained made it worthwhile – not before. I am not one of our PM’s greatest fans, but he has been clear on this. The reason for the hurry on the authorisation is so that, once the price is right, it can be sold straight away without having to go through the entire debate at that point, taking up to 6 months and having to pay out even more to the Nats to get it done in a hurry. Please give some credit for being clear on that on the way through.
.
BTW, what would you consider a fair price? What discount rate would you apply?
JQ – I don’t have a problem with making sure they get a reasonable price.
In fact, I had the idea when they first started talking about the Future Fund of just putting TLS straight into it and letting it then be sold off over time rather than in one big hit.
The fact of the matter right now is that the ALP and readers of this blog have yet to commit to buying back TLS, let alone the other asset sales of recent years. This asset sale in particular would be particularly easy to reverse as virtually all the funds are going to be retained – unlike previous asset sales.
So, who supports a roll-back, oops, buy-back??
Razor,
Only problem with putting it all into the future fund is that this creates a huge stock overhang, depressing the price. What would be needed is a clear schedule for its disposal from the fund – probably not what they intend to give.
QUOTE: Terje, as a practical matter that sort of direct giveaway presents transitional problems. Mainly it’s the lack of a sort of tutelage period in which people can learn to cope with what they might otherwise react to as a windfall – the reason British Empire slaves were freed with a tutelage transition. If you just dump things on people who haven’t learned how to cope, like pools winners not learning, you could well get the sort of counterproductive thing that happened under the well-intentioned US allotment movement that parcelled out reservation land among individual Indians. Whitlam caused analogous harm to Australian aborigines.
RESPONSE: So we do Telecommunications this year and hospitals next year. Or some such thing. However you make a good point.
There is an overhang now – what’s the big difference?
So who supports a buyback?
I have been arguing for a buyback since at least 2002
Razor, there was no overhang until the sale became a likely prospect at the last election. If the sale process was quick the overhang would be of short duration. If, OTOH, it takes many years that is how long the overhang will exist for.
.
PrQ, as you may remember, I support a buyback, provided it is followed by a breakup and resale. While this may cost the government a lot, I believe the benefits of a properly competitive telecoms market would be worth it.
Mike said it best above.
The govt can make almost any profit it likes out of Telstra – it contains a huge piece of the core infrastructure of Australian communications (landlines or more importantly access rights to the holes in which the landlines run) and the govt can manipulate the rules of access to that infrastructure any way it sees fit.
So arguments based on past or future discounted cash-flows are virtually meaningless. By the same arguments we should (re)nationalize all industry: think of the profits the govt could generate then!
JQ asked:
“So who supports a buyback?
I have been arguing for a buyback since at least 2002�
I assume John means the Government buying back the 48.2% of Telstra that it doesn’t own, rather than the more sensible idea of Telstra buying back some of the 51.8% that the Government still owns?
That might be one of the greatest (= “largest� rather than “best�) acts of nationalisation since the UK Labour Party nationalised the British coal mining industry in 1947. It looks like a courageous policy idea. Quite a challenge.
But once we have done that we could borrow some more cheap cash and buy some more commercial businesses – and so on until we achieved the commercial dynamism, efficiency and productivity of the old Soviet Union – or today’s North Korea, or Cuba – through a large State-owned enterprise (SoE) sector that enjoys the benefit of a very low cost of capital.
Thank goodness we have a Canberra bureaucracy that is highly skilled at supervising the ownership of SoEs and that can be relied upon to ensure proper coordination and planning of and within a much enlarged SoE sector… We could call that reform (sic) “central planning� – clearly a good policy.
Thank goodness we have a political system that is so skilled at managing the ownership of commercial enterprises that the future profits are as certain and riskless as the taxation capacity of the Government is today… Thank goodness we have a Government that can and will provide the capital than is needed to continue the innovation, development and risk taking that is a necessary part of the ownership of commercial enterprises – and will never defer such expenditure to cosmeticise pre-election budgets or curry political favour. Thank goodness the political system will readily accept the outcome of commercial risk taking when risks actually eventuate. No political pillory from the Opposition. No smart alec point scoring by the clerks of the Australian National Audit Office.
Thank goodness we have a Government that will resist the temptation to use the power of patronage in appointments to this massive SoE sector, and can be relied upon to make such appointments only on commercial merit regardless of political allegiances or personal relationships.
So, let us start this bold program…tomorrow.
John Humphreys wrote : “… the logical extension of your argument is socialism…”
This debating ploy seems to be in use quite a lot these days. The logical conclusion of opposition to unfettered private ownership of everything, is socialism. And since no reasonable person, these days, could possibly be in favour of socialism, then all privatisation has to be supported without reservation.
Leaving aside the rather silly CBA/QANTAS comparisons, where will the infrastructure investment needed by this vast sparsely populated country come from?
craigm,
Where it always has come from – either taxation, revenue from government enterprises or the capital markets, both domestic and foreign.
If it comes from taxation it represents a net transfer from the productive earners into government financed schemes. If from government enterprises it represents a monopoly (or other regulatory) profit. If from the markets it represents voluntary contributions in the expectation of future returns.
We get to choose. That is what this whole debate is about.
Fortunately for Mike and others, we don’t need t hypothetical reasoning to determine the fiscal impacts of privatisation. We have ample recent experience of full privatisations, partial privatisations and rejected privatisations to enable a comparison, and the results are quite clear. In most cases, governments (that is, the Australian public) have been worse off as a result of privatisation.
You can find numerous papers on my website going back to the 1990s and demonstrating all this. Alternatively, you can stick to a priori reasoning, rhetorical invocations of North Korea and so on.
“the results are quite clear” Governments by the main are inefficient bureaucracies that have trouble regulating let alone running anything.Those businesses only shone after the shackles of public ownership were removed.
Read the articles, econwit. I include case studies where privatisation was proposed and a sale price estimated, but the sale did not proceed. For example, the Liberals proposed selling Telstra for $20 billion in 1993. You can compare this to the flow of earnings realised under continued public ownership.
test
That a priori reasoning has some pretty good foundations: all the centrally planned economies that I know of have been singularly unsuccessful. Can you point us to a representative paper jquiggin?
As I said above, when the government controls the rules and is a monopoly owner of significant core infrastructure it can generate whatever earnings it likes. It is effectively taxation by another name. So your argument from earnings seems without merit. Unless of course you believe that all industry should be nationalized and hence under the monopoly control of the government so that it can extract arbitrary earnings for the public. In which case Mike’s points about the effectiveness of centrally planned economies are quite valid.
JQ says:
“…case studies where privatisation was proposed and a sale price estimated, but the sale did not proceed. For example, the Liberals proposed selling Telstra for $20 billion in 1993. You can compare this to the flow of earnings realised under continued public ownership….�
True, John (in part) and your work is generally admirably consistent and rigorous except in always assuming (wrongly):
(a) that the future cash flows of a State-owned enterprise should be valued at the same discount rate as (essentially) risk free borrowings by a well-rated sovereign government; and
(b) the commercial performance (profitability, capital appreciation) will be no worse under government ownership than under State ownership.
Of course when the Libs proposed to sell Telstra in 1993, their $20 bn figure was only a notional pre-sale estimate. They actually proposed to sell it at the price the market would then pay. The market would have paid a price based on its dcf valuation of the then expected future cash flows. History now tells us that those expectations would have been conservative and their discount rates would have been higher than JQs.
In much the same way, the Libs 1996 policy implicitly assumed that 1/3 of Telstra was worth $8bn. The market paid $14bn and then ramped up the value even further (proving clearly that the laws of supply and demand apply to share sales – the more you try to sell at any one time the lower the price you can obtain).
It clearly is possible for State ownership to be associated with commercial success in an SoE, although I would hold that any such result is usually transient and is best followed by a quick exit before the inevitable downturn. Singapore, through Temasek, is the obvious outlier, and even JQ does not usually suggest we base policy on a single outlier (especially one that is explicable in terms that are simply not replicable in Australia).
Australia Post has been a unique domestic State-owned success since the late 1980s, but only after several prior generations of commercial weakness and failure. And its long term future remains clouded as its core business matures and its ownership constrains its commercial options for strategic development.
The track record is simply that almost all businesses, almost everywhere, are less efficient, less profitable and less customer responsive in the long run under State ownership than private ownership. That means lower future expected cash flows under State-ownership. And the present value of those cash flows is also lower because the discount rate, reflecting the uncertainty of those cash flows, is higher (not lower) under State ownership. Yes, there may be periods when these conditions may not apply. But policy should not be based on transient exceptions.
Finally, and Singapore (uniquely) aside, it is clear that countries with larger State-owned enterprise sectors end up less highly rated financially so that their cost of borrowing rises, further undermining the Quiggin calculations. This is the relevance of the Soviet/North Korea/Cuba citations.
Yes, there have been mistimed privatisations, ill-structured privatisations and even mis-managed privatisations. But any such flaws in execution pale into insignificance compared with the long term destruction of value and efficiency that almost inevitably accompanies State ownership.
James — it was not a “debating ploy” to point out that the logical extention of your argument is socialism. It was factual.
You effectively said that it makes no sense to allow the private sector to make money if you’re just going to tax them later… so why not cut out the middle man and just have the government run business. You were applying this logic to Telstra… but the logical extention of it would also apply to any other business. That’s socialism.
I was not arguing that you are socialist and should therefore be ignored. I was saying that your argument was not internally consistent with your conclusions (assuming you’re not a socialist).
I was not arguing that “opposition to unfettered private ownership of everything” makes you a socialist. That is absurd and I never said anything like it. I also didn’t say that “all privatistion has to be supported without reservation”. In fact, I specifically said that we should consider each policy on its merits. You are the one that tried to link privatising Telstra with privatising roads!
You are either blatently lying, or are actually unable to understand the very simple points that I am making. Either way, you are doing your side of the debate a disservice.
(Further to my previous response to John Humphreys)
John Humphreys wrote : As for the past record of privatisation, it has shown overwhelmingly that the private sector is more efficient than the public sector.
Complete rubbish!
Even, Mike, further below, in arguing for privatisation, concedes, “yes, there have been mistimed privatisations, ill-structured privatisations and even mis-managed privatisations.”
The privatisation of the Commonwealth Bank has been a disaster for the public interest. The presumably ‘inefficient’ government owned Commonwealth Bank was somehow able to provide many services, which we now pay dearly for, for free, and many other charges (e.g. for bounced cheques) were much much cheaper then. It did all this and was able to cover all of its costs, and was able to keep the other banks honest.
It’s interesting that the presumably more ‘efficient’ private banks were not able to drive the Commonwealth Bank out of business.
The privatisation of the Electricity Trust of South Australia has been an unmitigated disaster. A friend who worked there as an electrical apprentice told me of how, soon after privatisation, one of the executives, in classic Montgomery Burns style, told him that from now on, he was to forget about encouraging customers to save on electricity, and to not hand out out any more of the stickers to urge the to switch off power.
How is that in the public interest?
When water was privatised in the UK, the board, who were previously public servants voted themselves huge pay rises and then over following years cut maintenance costs. As result, it was estimated, years later, that 20% of the UK’s water was lost due to leakage from its neglected pipes. (Can’t cite the sources, but I heard it on Radio National a few year back.)
Neglect, similar to what occurred to the UK water utility has happened to much of Telstra’s network, most notably to its copper network, which has been scandalously and wantonly neglected. This has been done in order to save on staff costs, in order to increase the return for shareholders.
Now, surely, wouldn’t we have been much, much better off as a national community, if we had simply kept shareholders out of it altogether? The money obtained for the past partial privatisations has been largely wasted anyway, on either piecemeal, uncoordinated National Heritage Trust environmental projects, or else on blatant pork barrelling.
Why couldn’t all those investors have simply taken their funds and invested them somewhere else, where they might have achieved some good for the community?
There is no evidence that public sector enterprises and utilities are inherently less efficient than the private sector. The assumption that they are presumes that people will only give their best if driven by either greed or else the threatened loss of livelihood should they fail to perform.
This makes the worst assumptions about human nature. Such assumptions may be true of most of today’s privatisation advocates, but I would dispute that this is true of the wider community.
jquiggin wrote : “I recognise that the political imperative to implement a long-promised policy will ultimately prevail.”
This seems rather odd thing to say. If 70% are opposed to privatisation, then, unless we live under a military dictatorship, it can be stopped.
Some of us haven’t yet thrown in the towel on this one. If you change your mind and decide to do something to stop privatisation this then please visit our website. There you will find suggestions of what can be done in order to stop the sale, and links to other groups and individuals who are trying to do the same.