Privatisation, 80s style

I haven’t had time for a detailed analysis of the Iemma government’s proposed privatisation of the NSW electricity industry, though what I saw of the Owen report suggested that the case was weak.

Fortunately, the announcement that the sale will .help pay for a “new vision” for urban transport, a European-style metro rail line, better country roads and improved water management.’ tells us everything we need to know. The quotes in that link should be around “pay for”, not around “new vision”. There is no meaningful sense in which selling an income-generating asset allows you to pay for anything. The sale price merely offsets the loss of income.

As a matter of public policy, either a metro rail line is a good investment or it isn’t. Whether or not electricity assets are sold can make no difference to this. However, lots of evidence suggests that when people get money that they can regard as ‘free’, they generally squander it.

This is all set to be a repeat of the 1980s and 1990s privatisations when the proceeds of asset sales were sprayed against the wall (I’ve slightly bowdlerised the picturesque description offered at the time).

Following on from the Cross-City Tunnel fiasco, the Labor government in NSW is cementing its reputation as the country’s worst fiscal manager.

49 thoughts on “Privatisation, 80s style

  1. I agree with JQ on this – we are talking about privatising the whole NSW industry bar the distribution grid. So, a la telstra, another unregulated private monopoly is created. It is both a poor long term financial outcome and bad economics.

    Moving back from Telstra and monopolies to NSW, why is that State such a financial basket case? Just a few years ago they had enjoyed record income after the Olympics (Federally subsidised), record property tax revenues and more GST than expected. It has spent little on capital (toll roads may have cost road users but didn’t cost taxpayers) and schools and hospitals are still underfunded. Where has their money gone? They must have a huge deficit on recurrent spending.

  2. KS and Jogn Bignucolo

    I think the rail line from Perth to Mandurah has been a success already, before the first train has rolled. There has been a phenomenal boom in Mandurah housing, knowing that it will have reasonable acces to teh city. Given Perth’s overheated housign market, this both generates development and is most welcome from an equity viewpoint.

  3. They must have a huge deficit on recurrent spending.

    NSW has been running budget surpluses for most of the years since the election of the present ALP government in 1995. It’s one of the ALP’s main claims to fiscal responsibility.

    According to the 2007-2008 Budget Summary, the NSW budget surplus will be $376 million. Previous years have seen surpluses of 1153 (2003-2004), 724 (2004-2005), 994 (2005-2006), and 444 (2006-2007) $ millions.

    The budget summary goes on to say:

    Net financial liabilities of the general government sector will decline as a share of gross state product (GSP) over the forward estimates period from 8.0 per cent to 7.5 per cent. With an increase in net debt, total State sector net financial liabilities are forecast to rise as a share of GSP from 15.2 per cent in 2006-07 to 17.6 per cent in 2010-11. The increase in net debt will fund a record capital works program of $49.6 billion over the four years to 2010-11.

    I don’t know how NSW’s net debt and spending as a percentage of gross state product (GSP) compares to other states.

  4. “I assume the higher cost of borrowing that private firms will incur must mean higher electricity prices.”

    Well that’s a moot point all tied up in ‘sovereign risk’. The argument is that sovereign risk is always lower than private risk, so why not defer to sovereign risk whenever possible? Sounds fine but an example might show the fatal flaw. The govt follows the sovereign risk meme and deduces it can house all the people more cheaply than a plethora of private lenders with higher borrowing costs, so we all get our cheaper loans from the sovereign lender of first and last resort, fixed rate for the life of the loan naturally. From the North Shore of Sydney to Wadeye in the NT and everywhere in between, it’s all a matter of cheaper, fixed rate, sovereign risk folks. The old fallacy of composition again eh? The Soviets fell for it for 30 odd years too.

  5. I think the rail line from Perth to Mandurah has been a success already, before the first train has rolled.

    It’s a fine example of the benefits of smart, transit oriented development.

    The approach embraced by Michael Costa, Frank Sartor, Eric Roozendahl and the rest of the dominant ALP right faction is the exact opposite: take greenfield sites, provide only road access, and leave the provision of rail infrastructure to some indeterminate point in the future, subject to public demand. Or to (accurately) paraphrase Michael Costa, public transport is for losers.

  6. And then there’s Ikonoclast bitching about how Telstra who has to service 21 million potential consumers (hey the kids get pocket money)in a whole continent, when they’d all fit into a provincial town in China, reckons he’s getting ripped off. Obviously he’s pouring his life savings into Telstra shares as fast as he can in order to grab as much their supernormal profits for himself as possible. As for the Big Oil cartel, sticking it up us with petrol prices all the time, according to all those experts who never manufacture or distribute a drop of it themselves, I just can’t figure why the silly beggars ever drop the price. A warped sense of humour I suppose?

  7. I don’t know much about the merit of privatising electricity assets but your post doesn’t enlighten me much John. Attacking the government’s propaganda/marketing for the deal does not necessarily negate its worth.

    Also, although it’s of course right that selling an income generating asset does not make you better off to the extent of the sale price, if the buyer values the asset at a greater amount then gains can be made.

    Isn’t it at least possible that this is the case? Won’t the private sector be able to make the electricity industry more productive? (Didn’t this happen in Victoria?) Won’t private ownership be able to manage risk better (by merging with retailers and/or interstate companies)?

    You might have good responses to these points, but you at least need to address them to convince me.

  8. The whole Owen inquiry was a sham.

    The terms of reference were as follows:

    1. Review the need and timing for new baseload generation that maintains both security of supply and competitively priced electricity.

    2. Examine the baseload options available to efficiently meet any emerging generation needs.

    3. Review the timing and feasibility of technologies and/or measures available both nationally and internationally that reduce greenhouse gas emissions.

    4. Determine the conditions needed to ensure investment in any emerging generation, consistent with maintaining the NSW AAA Credit Rating.

    Point (4) is treasury speak for not borrowing money. In other words, do we need another power station, and can we get one without paying for it.

    The obvious answer, delivered in report is, yes, you need one, and no, you can’t get one without paying for it. Duh.

    The report offers the escape that the government can walk away from the problem altogether, and the market pixies might (or might not) fix it.

    Costa is probably deluding himself about how much money he’s going to get, as well. The going rate for retail customers has collapsed completely, to something like one tenth what the Queensland government got, and the NSW government’s equity in the generators has dropped to about $500m. Its equity in Macquarie Generation is actually -$57m. Most of Macquarie Generation’s future income is already committed to servicing its existing loans and hedging contracts. Good luck trying to find a buyer for that.

    We’ll probably find out after the sale that the NSW government has taken on the debts of the generators and given exemptions or guarantees in respect of future greenhouse taxes or costs as well, so that everyone involved apart from the purchaser loses in the biggest way possible.

  9. John,

    Your argument assumes that the price private investors are willing to pay for a public assets is equivalent to the capitalised value of the current revenue stream.

    In practice, rightly or not, private investors assume they will be able to significantly increase the revenue stream and price the asset accordingly.

  10. Spiros: “What’s more, coal fired power stations might become stranded assets in the future, when a carbon price finally kicks in.”

    Actually I believe that while the transmission and retailing assets are being sold outright the generating assets are being leased out.

    Uncertainty over future carbon taxation policy probably does have lot to do with that.

    On the other hand, it’s wroth noting that Hazelwood power station in Victoria was sold off by the Kennett government for something like $1-2 billion but is now several times that.

    Closing Hazelwood, a lignite-powered plant which produces more carbon dioxide per unit of power than virtually any other plant in the developed world, and replacing it with power from a new anthracite-powered plant in Queensland or Victoria would overnight reduce our national GHG emissions by a couple of percent.

    Closing Hazelwood while it was still in public ownership would have required a write-off of its written-down book value (probably under a billion dollars). Closing it now would require cancellation of the operating license and probably involve compensation roughly equivalent to the current market value.

  11. Matt, it’s possible that a buyer like AGL or Origin will value the assets higher, if that will put them in a position where they can extract monopoly profits. This represents a part transfer from future NSW electricity consumers to current NSW taxpayers, who are mostly the same people. Because it’s only a part transfer, those people will be worse off.

    As far as productivity gains, those were mostly won back in the 90s. Labour is now a tiny cost in generation. Some savings in marketing for the retail businesses would be possible, along with savings in the energy trading arms of the generators. Note that these savings come about through a reduction in competition, not through something inherent in the private sector. The NSW government could duplicate the savings by, say, merging Integral with Country Energy, or Eraring Energy with Delta Electricity.

  12. Ian Gould Says:

    Actually I believe that while the transmission and retailing assets are being sold outright the generating assets are being leased out.

    Not quite right. The transmission assets aren’t being sold at all. The retailing assets are mostly intangible (brand, existing customer base). The generating assets are to be leased for 99 years, which on plant with a lifetime much less than 99 years, is equivalent to a sale.

  13. John, I have been aware of Professor Peter Newman’s view on the value of public transport since I saw him on Lateline back in Maxine’s days (1998 I think).

    I hope more rail lines are built (I am sure Peter would agree). I heard the W.A. government is thinking of putting a line to the airport which could be easily extended to service the hills regions (via buslinks) and the current suburb extensions in the foothills. These extensions are already having an impact on the already clogged roads of that area. If the peak oil theorists are correct, a new link would be an added bonus. Not to mention the health related bonus’s (a key point of concern, but dismissed by some, in discussions as we saw on Difference of Opinion).

  14. The fact that the unions are whinging that a $40000 govt bribe is not enough to compensate for being transferred to the private sector, should tell us all why certain private investors would value the assets higher than the govt http://www.news.com.au/business/story/0,23636,22900423-31037,00.html
    This is of course the same govt that most reckon can’t run a chook raffle, but somehow JQ reckons they should know all about the intricacies of electricity generation, transmission and pricing.

  15. obby Says:

    The fact that the unions are whinging that a $40000 govt bribe is not enough to compensate for being transferred to the private sector, should tell us all why certain private investors would value the assets higher than the govt

    But the objection isn’t that the bribe isn’t “big enough”. John Robertson says:

    “The $40,000 is about clouding people’s judgments about what is in their best long term interests,” he said.

    “Whilst it looks good on paper, the reality is that this is an industry that people are going to rely on for the rest of their lives, either as workers or as consumers.”

    This is of course the same govt that most reckon can’t run a chook raffle, but somehow JQ reckons they should know all about the intricacies of electricity generation, transmission and pricing.

    This is silly. No one is arguing that the NSW government is great at these things, just that it’s proposing to make things worse.

  16. Silly me, the penny’s just dropped. The Labor govt wants to handball those electricity bill rises to the nasty private sector, whilst big corpora wants to get its hands on the freebie emission caps which is clouding everyone’s judgement about their best long term interests. They’ve got at least 12 months to hunker down the deal before Garnaut reports and the freebie caps are doled out by Rudd and Co and then it’s just a matter of how much of your hard-earned the unions want as a lump sum to grease the wheels. Welcome to Labor and Industry Policy.

  17. “This is of course the same govt that most reckon can’t run a chook raffle, but somehow JQ reckons they should know all about the intricacies of electricity generation, transmission and pricing.”

    Electricity generation costs in Australia are amongst the lowest in the world.

    There are some industries where the success criteria are very simple and the main challenges are technical.

    That doesn’t mean those industries should necessarily be run by the government but it does mean there probably aren’t huge efficiency gains to be made from privatisation.

  18. JQ said;

    “There is no meaningful sense in which selling an income-generating asset allows you to pay for anything. The sale price merely offsets the loss of income�.

    There is “meaningful sense� when you don’t have to supply the service and still keep the income.

    This is the scam of privatisating and corporatizing government services. The government gets the services off balance sheet and the consumer has to pay twice; Once to the corporation and again to the government who are maintaining or increasing taxation revenues as a proportion of GDP.

    Large sections of previously provided public services are now provided privately. The cost to the consumer for these services is now borne on top of taxation revenue.
    Expenses previously included in taxation are on top of it.

    Many public sector services have been removed from the calculation of public sector revenues by privatisating and corporatizing. Welfare pensions into private super; public to private healthcare; corporatizing of public utilities; public into private education; private toll roads; private hospitals; privatising public transport, etc etc.

    Privatisating and corporatizing is disguising and camouflaging the real increase in taxation.

    Taxation as a proportion of GDP has been rising, yet the services provided by the public sector has been reducing substantially.

    The issue isn’t who provides the service as both corporations and the government can and do provide good and bad service. The issue is why do we have to pay twice?

  19. Oh and a word of advice for you Ikonoclast. If you didn’t ditch your T1 shares before the election and switch into the AGLs and Origins you’re a mug with those poll figures. By the time those Federal chook raffle experts get around to investing your hard earned in their grand broadband fibre rollout, it will be all over bar the shouting
    http://www.news.com.au/business/story/0,23636,22907117-31037,00.html
    but then that’s why Howard wanted to flog Telstra for you in the first place.

  20. “Following on from the Cross-City Tunnel fiasco, the Labor government in NSW is cementing its reputation as the country’s worst fiscal manager.”

    Really, as the worst government. Pretty much the worst government of NSW ever, including the short-lived Unsworth government.

  21. John, I just came across something you wrote in 2003:

    At one level, politicians are aware that this idea is false.Their own Treasuries have repeatedly told them that public-private partnerships are not a means of expanding the overall level of resources available to spend on government-funded social infrastructure. Putting the point succinctly, NSW State Treasury Secretary John Pearce and Victorian Treasury Secretary Ian Little have observed that ‘PPPs do not provide governments with an additional bucket of money for use on infrastructure projects’

    This is, of course, consistent with what you’ve written here.

    However, I believe that you were completely wrong about John Pearce. From my experience, Mr Pearce is a committed Thatcherite, who regards privatisation and competition as ends in and of themselves, and not as a means to economic efficiency. Hence the rhetoric in the Owen report that prices have to rise to encourage competition. What’s the point of the competition if it doesn’t reduce prices? Allocative efficiency, of course, but there’s no evidence presented of cross-subsidisation.

  22. Nice ball on middle stump John. To me, it is evidence of how bankrupt the government is in the ideas department. Privatising electricity has been around since Greiner, growing a beard in Treasury’s draw. Whenever a new government comes in, or the call goes out for departmental ideas, the dear old thing is dusted out, and the Treasurer or Premier of the day becomes momentarily virile on the idea, to the applause of the Big End of Town. Usually, the idea is buried for another 18 months or so in the next act, but you never know. This lot have a good deal of vacant space to fill, and seem very keen to appear “tough”, for reasons that entirely escape me at the moment.

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