Privatisation is not a magic pudding

A few days ago, the Courier-Mail ran an editorial supporting privatisation. They were kind enough to run a reply from me, which I’ve reproduced over the fold. The headline picked up the point at the end about the choice between higher taxes and reduced services, which is relevant more general

In a recent editorial, the Courier-Mail bemoans the fact that nearly thirty years after Paul Keating began the privatisation agenda, three in four Queenslanders are still opposed to the sale of public assets. In fact, the situation is more dire than that. Back in the 1980s when Keating ‘instinctively’ grasped the case for privatisation, opinion polls suggested that much of the public was receptive to the idea: publicly owned utilities were seen as slow and stodgy and didn’t have much of a reputation for public service.

Public opposition to privatisation isn’t the result of fear of the unknown or misunderstanding of the arguments. Rather, it’s the product of decades of experience. Far from producing lean, innovative and customer focused organizations, privatisation and corporatisation have given us bloated and overpaid management, higher prices, and customer service that ranges from limited to appalling.

On the other hand, privatisation has been a boon for the financial sector and for the various associated services (legal, accounting, consulting and so on) that dominate the CBD, and the thinking of those who work there. The result is a deep, and enduring, disconnect between the views of the policy elite and those of the general public.

The core of the editorial is the sentence “It does seem amazing that three out of four Queenslanders still can’t accept what is a pretty basic argument that governments don’t have any business running ports or selling electricity”. There are two big problems here.

First this isn’t an argument but an ideological assertion. While the ideology of privatisation is almost universally accepted among the policy elite and in the financial sector, it’s the reverse of the view that prevailed in Australia for most of our history, and worked well enough to provide us with the assets we are now arguing about.

The idea that governments should get out of the infrastructure business, leaving the funding of new investments to the financial sector came into vogue during the economic crisis of the 1970s. For a while, it seemed to be working well, as financial markets boomed in the 1990s. But, in the wake of the Global Financial Crisis, the idea of leaving everything to the financial sector looks less appealing.

More seriously, the public has never been given any serious opportunity to debate the free-market case for privatisation, presumably because politicians realised it was unsaleable. Although the statements of former ministers make it clear that the Bligh Labor government was fully convinced of the free-market case, nothing of the kind was presented to voters.

Instead, we got a spurious case based on the idea that we could sell income-generating public assets and use the proceeds to fund investments in schools and hospitals. The question of how the income flow from the privatised assets would be replaced was never addressed. The Bligh government’s case was so misleading that more than 20 leading economists, including advocates of the free-market argument for privatisation, signed a statement condemning it.

Treasurer Tim Nicholls has gone one better. In his presentation, embodied in the ‘Strong Choices’ website and echoed in the Courier-Mail editorial, we can not only use the proceeds of asset sales to build infrastructure, we can simultaneously use the same money to pay down debt and then spend the interest savings on schools and hospitals.

The Courier-Mail suggests that critics of privatisation are telling us we can have our cake and eat it. But the pro-privatisation case is even worse. It is a magic pudding that we can it seems, slice and eat, however many times we want.

The sad truth, admitted even by the government’s own Audit Commission, and recognised by the public response to the Strong Choices website is that there are no magic puddings.

Successive governments have sold us the myth that Queensland can be a low tax state while still enjoying public services of the same quality as high-tax southern states. While the mining boom lasted, this might have been true. But now we face a clear choice: either pay the same taxes as other states, or accept overcrowded schools and second-rate health services. This choice, and not the financial chicanery of ‘Non–Share Equity Interests’ is what we should be debating at the next election.

John Quiggin is an ARC Laureate Fellow in Economics at the University of Queensland. He has written on privatisation for 20 years. His most recent report, Electricity privatisation in Australia: A record of failure was commissioned by the Victorian branch of the Electrical Trades Union.

29 thoughts on “Privatisation is not a magic pudding

  1. @yuri

    Not much to justify condescension on your part. The idea of “eagle-eyed investors” keeping management in line was discredited by Berle and Means in 1932.
    Coincidentally, that was the same year as Eggleston.

    The attempt to revive it under the banner of “shareholder value” in the 1990s was a flop. See, for example Bebchuk on CEO compensation.

    I suggest you get up to speed on the post-1932 literature before resuming a position of condescension.

  2. yuri :
    @Ken Lovell
    2. Big businesses frequently do simplify by what is the equivalent of privatisation; cf. BHP right now.

    I don’t think BHP is a very good example of anything. The original merger with Billiton shuffled hundreds of millions of shareholder dollars to various investment bankers and management. Then during Klopper’s time at the helm more hundreds of millions wasted in abortive takeover bids. Now the current CEO is no doubt going to send tens if not hundreds of millions of shareholder dollars to investment bankers to undo what they did a decade or so ago – and I’m sure Mr Makenzie will be in line for a nice bonus to celebrate a successful de-merger. Frankly, they could have done nothing and the resources boom would still have increased the value of the company. Disclaimer: I own BHP shares.

  3. @yuri

    Large organisations do have problems resulting from their largeness. Small organisations have problems resulting from their smallness. Some things are better done by small organisations. Some things are better done by large organisations.

    Government businesses are probably less likely to be liquidated than private businesses: this is one of the reasons that some things are better done by government than by private businesses.

    The suggestion that the dominant influence on the government of California is exercised by public sector unions I find implausible, but even if it were true I don’t see how it supports the conclusion that governments shouldn’t run businesses.

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