This is getting to be a habit

As with the Lib-Nat merger in Queensland, I was just working on my analysis of the Snowy Hydro privatisation when the news came through that the deal is off. A few observations:

First, this episode confirms that privatisation is political poison in Australia, as is shown both by opinion poll evidence (links to come on this) and by election results in NSW, Tasmania and elsewhere. The more experience people have with privatisation, the less they like it. When you have the National Party celebrating a victory for people power, the point is pretty obvious.

Second, while the promoters of privatisation have criticised opponents as emotive, the case in favor of privatisation was made up in equal parts of emotive appeals to ideology and economic illiteracy. Ideologically, privatisation was assumed by its advocates to be a Good Thing, with no attempt to identify, let alone quantify, any concrete benefits in the case of Snowy Hydro. Economically, this was (I hope) the last outing of the idea that selling income-generating assets “frees up” or “unlocks” cash that can then be spent on schools, hospitals and so on. If the asset is sold for an amount equal to the risk-adjusted present value of expected future earnings, there is no change in the government’s fiscal position. In practice, higher risk premiums in the public sector and the absurd restrictions on ownership that are usually part of deals like this means that the government ends up worse off, not better off.

Coming to the arguments against, the “iconic” argument is indeed emotive, but not necessarily the worse for that. If it’s paying its way, why shouldn’t we keep ownership of an asset like the Snowy in the hands of the public sector that created it?

In any case, there were substantive arguments against privatisation that weren’t effectively answered. We’re in the middle of trying to sort out what to do with the water in the Snowy-Murray system, and not making a really good job of it. The last thing we need is to have a private company (probably with foreign owners who can appeal to the protection of the US-Australia FTA) with large, but still poorly-specified, entitlements to use the water or receive compensation for changes in use.

Finally, there are some big losers from the cancellation of this deal, namely the banks and financial institutions that would have had a cut of it. To that group can be added the politicians involved, whose prospects of highly-paid post-political jobs in those same banks have just taken a nosedive.

74 thoughts on “This is getting to be a habit

  1. That makes perfect sense : selling infrastructure in order to pay for … infrastructure!

    Eureka! – swap one power station for a whole heap of hospitals, schools, roads, rail etc etc.

  2. Egan did identify and quantify concrete benefits arising from the sale of the power stations and he did address the ALP’s long standing policy on privatisation (case by case basis) but was beaten by the lowest common denominator.

  3. That makes perfect sense : selling infrastructure in order to pay for … infrastructure!

    Eureka! – swap one power station for a whole heap of hospitals, schools, roads, rail etc etc.

    There is just one tiny difference, rog. Power stations generate income (as well as electricity) ; schools and hospitals do not. So, selling a power station does not make schools or hospitals any more (or less) affordable.

    This is basic economics and was pointed out in the post and in numerous comments since. You really should read and rethink before commenting further.

  4. If the basic economics of State owned power generation was so profitable you would have to ask why they are not building more power stations – demand is expected to grow by 50% by 2020 – NSW will need an additional 6,000 MW – even the Unions are calling for new plants to be built to meet future projected power demands and avoid brown or blackouts.

    The NSW govt sees power generation as a risky business and has a policy of seeking private sector investment. However the govt recognises that such investment may be deterred by the perception that the govt is running a “non-commercial” activity and are therefore selling “development options” ie new generators – one example is the proposed gas fired power generator at Tomago to be developed and then sold by Macquarie Generation.

    The NSW govt believes that by stating that they will not be investing in the energy market they will encourage private investment.

    The future has to lie with privately owned generators.

  5. The fact that the NSW Government is not investing in new power generation(1) and leaving the field open for private industry, in particular, the ‘millionaire factory’ Macquarie Bank, for which former NSW Premier Carr now works, is symptomatic of the fact the NSW Government is a willing captive of the still prevailing neo-liberal ‘small government’ orthodoxy.

    Bob Carr once revealed that Jeff Kennett, himself, once complained to him that New South Wales power generation utilities had an unfair competetive advantage over Victoria’s power generation utilities because the former were publicly owned and the latter had been privatised!

    The claim, that handing across ownership and control of publicly owned assets to unelected private corporations, whether through outright privatisation or through Private Public Partnerships, is in the public interest, should have long since run its course.

    Whenever these claims (Alexander McLeay, you had me fooled for a while) are evaluated against the evidence in the light of experience, they have been shown to have been wrong, as Ilan and Steve Munn have shown above and as Professor Quiggin has demonstrated on so many other occasions.

    The Australian public has paid an enormous price for this folly and, as a consequence, polls show consistent and overwhleming oppostion to it. The fact that our political leaders are able to persist with these bankrupt policies to the extent that they still do is a symptom of how shallow the practice of democracy in this country is (as I have often said before).

    Footnote(s)

    1. I would hasten to add, as implicit from what I have written above, that we should not be building more coal-fired power generators, whether public or private, because of the parlous state of our planet’s life support system. Instead, we simply have to begin the urgent process of reorganising or society so that we can live on the interest provide by nature rather than the capital. This also entails achieving population stability rather than perpetual exponential increases.

  6. People have short memories. Power stations controlled by pollies can help the pollies with more than special dividends. The Snowy helped Nifty Nev stay in power by providing electricity to NSW during a Nifty-inspired power crisis. If the Snowy were privatised, would a State government, even the NSW gov’t, be able to direct it to supply power?

  7. People have short memories. Power stations controlled by pollies can help the pollies with more than special dividends. The Snowy helped Nifty Nev stay in power by providing electricity to NSW during a Nifty-inspired power crisis. If the Snowy were privatised, would a State government, even the NSW gov’t, be able to direct it to supply power?

  8. Sorry. Didn’t mean to send that twice. Repetition adds nothing to my argument, I’m afraid.

  9. JQ,

    Isn’t it the case that your five-year fellowship was funded by the part-privatisation of Telstra? If so, how has your personal experience of privatisation been in any way unpleasant?

  10. The Snowy helped Nifty Nev stay in power by providing electricity to NSW during a Nifty-inspired power crisis. If the Snowy were privatised, would a State government, even the NSW gov’t, be able to direct it to supply power?

    Probably not but my understanding is that Nemmco could.

  11. People have short memories. Power stations controlled by pollies can help the pollies with more than special dividends. The Snowy helped Nifty Nev stay in power by providing electricity to NSW during a Nifty-inspired power crisis. If the Snowy were privatised, would a State government, even the NSW gov’t, be able to direct it to supply power?

    I don’t think that’s a correct reading of the situation.

    At the time, NSW had an entitlement to 70% of the output of Snowy, and Victoria had an entitlement to 30%, both after the ACT’s requirements had been met.

    The design fault at Liddell power station can’t really be pinned on Wran. Askin, maybe, but it’s hard to see how he could have been expected to forsee the problems it would create.

    When the problem with Liddell happened in 1981, NSW still had a number of generation sources. Coal fired power stations at Munmorah, Vales Point and Wangi on the central coast, Talawarra south of Wollongong, Wallerawang near Lithgow, Pyrmont, etc. It had the pumped storage scheme at Shoalhaven, a bunch of small hydro schemes around the state, and finally the Snowy scheme.

    The total supply available from these was not able to meet the total demand. Restrictions on electricity usage were imposed. Nothing saved Nifty’s bacon in that respect.

    It’s false to attribute some special significance to the Snowy back in 1981. It’s true that things would have been worse if the Snowy wasn’t there, but that also true of every other bit of generating plant. And don’t forget that if the Snowy had never been built, other things would have been built in its place.

    The fact that Nifty had the power to “direct” Snowy to generate is a furphy. Nifty had the same power to direct all of NSW generation assets, but he didn’t actually need to use it, because no-one opposed the use of the assets to generate power at a time of shortfall. In the current situation, the NEM Rules govern. If there was another similar failure of a large generator, no-one would have to direct Snowy to operate because they’d be perfectly willing to earn the $10,000/MWh on offer.

  12. “Isn’t it the case that your five-year fellowship was funded by the part-privatisation of Telstra? ”

    No it isn’t the case (and since the part-privatisation reduced the government’s net wealth it couldn’t be), but I’m interested to see that my success on this is on your mind yet again, Tim.

  13. Oh, it’s only that you’re so sour on privatisation, John. I recall you replying in the affirmative to a similar question re the funding of the Federation Fellowships; comments at that post (your announcement of the award) have since vanished, however.

    Obviously my memory is faulty. Apologies.

  14. John,

    Good commentary – I ask – as I am not at all satisfied with any of the voices:-

    How much did the Snowy cost in 2006 dollars? How much is it making now? How much is it worth? How much will the economics of maintenance v. revenue change as the scheme ages? Is the flow on effects of river use positive or negative?

    Corin

  15. Corin:

    Snowy float was always likely to take on water.

    The deal also struggled because the mooted sale price of around $2.7 billion appeared low. As in all floats, the price was a function of what Snowy Hydro could earn. Its net profit of $147.5 million in the year to July 2005 represents an earnings yield of 5.5 per cent on $2.7 billion, and the dividend yield would have been lower, because Snowy Hydro needs to retain earnings and find new capital to fund expansion. Those who lived through the creation of the scheme knew, however, that it is vast and irreplaceable. The scheme cost over over £400 million pounds to build: that’s the equivalent of over $15 billion today.

  16. $15B could have been better spent! Menzies and his era – they went to sleep – what value do we get for $15B – $147m a year. Also if it’s worth $2.7B that kind of ruins John’s premise that government holding keeps the asset value at a neutral level: $15B v 2.7B …. mmmmm ….. thoygh I suspect the fall is based on an incredibly poor initial decision to build it.

    Don’t get me wrong – it may be an icon – but that’s a commercial disaster.

    How many schools and universities can you buy with $15B?

    What about the environmental costs and benefits? Hydro is generally a far more environmentally destructive power-source than wind. Just look at the proposed Franklin scheme: I really doubt teh Snowy would have succeeded in getting support now.

    I note the Murray gets some downstream flow – is this the real benefit – the power generated is negligable.

  17. Corin, the 400 million pounds is a sunk cost. There’s not much use arguing now that it could have been better spent back then.

    Better to concern yourself with Howard’s fresh proposal to build a bunch of nuclear plants, which are also likely to be recognised in hindsight as economic and environmental basket cases.

  18. SJ – I note the venom of some against the sale – I’d rather direct it to the people in 1950 odd who thought $15B in today’s money was well spent: argue that it is! It’s not[full stop] …….. it was an incredibly bad financial decision that perhaps indicates governments generally sink into a poor cost/benefit result from such projects.

    Please argue the “case by case” analysis – as this case is rather “damming” of those politicians who thought it was good idea in 1950 odd.

  19. I note the Murray gets some downstream flow – is this the real benefit – the power generated is negligable.

    Wikipedia suggests that the construction cost in todays terms was more like $6 billion not $15 billion. And electricity was never the sole motivation for the Snowy Mountains Scheme and perhaps not even the major motivation.

    http://en.wikipedia.org/wiki/Snowy_Mountains_Scheme

    QUOTE:-
    The Scheme provides approximately 2100 gigalitres of water a year to the Basin, providing additional water for an irrigated agriculture industry worth about $5 bn per annum, representing more than 40% of the gross value of the nation’s agricultural production.

  20. I’m not sure that the Wikipedia number is any more reliable than the number from the Age. The Wikipedia number is sourced from here:

    It was huge undertaking, an $800 million scheme (around $6 billion in today’s dollars)

    But that was just a passing reference, and it looks like the author just took Snowy’s reference to historical cost:

    Construction was completed in 1974, for a total historical cost (funded by Commonwealth Government advances) of $820 million.

    then treated it as expenditure incurred in 1974 dollars, and escalated using CPI since 1974. I don’t think that’s the correct way to read the Snowy reference. And in any case, the Wikipedia reference is from 1999, so it can’t possibly be read as a correct cost in 2006 dollars.

    I’ll dig around and see if I can get something better.

  21. If Snowy Hydro is returning $147.5 million less retained earnings on a business worth an estimated $15B then yield is no more than 0.938%.

    If they retained 50% earnings yield 0.48%!

    No wonder the NSW wanted to free up the capital.

  22. rog,

    Having Snowy Hydro in the hands of a private corporation won’t suddenly make it able to create more wealth. All it would have achieved is to have made it appear to be more profitable by having tansferred wealth out of the pockets of farmers, electricity consumers, its workforce and taxpayers.

    One way or another, the rest of us would have had to paid for whatever money our Governments would have raised from the sale, and a whole lot more, as we are now paying with Telstra.

  23. If the Snowy Mountain Hydroelectric Scheme was merely a collection of power stations then the case for privatisation would be much stronger than it was for Telstra. Telstras position in the telecommunications market is much stronger than Snowy Hydros position in the national electricity market.

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