Crispin Hull's Portico: Privatising public assets

Tuesday January 21st 2014

Privatising public assets

“It doesn't matter whether a cat is white or black, as long as it catches mice,” so said Chairman Mao’s successor Deng Xiaoping.

He was applying an old Chinese adage to economic changes in China – moving from a stagnant almost totally state-owned economy to one which permitted more private activity.

In Australia, just before Christmas, the deadline for initial submissions to the Productivity Commission’s inquiry into public infrastructure closed. The submissions were made public and have been given a fair amount media attention.

The terms of reference, as you would expect from a Coalition Government, were heavily loaded towards privatisation of existing public assets to “free-up” money for desperately needed new infrastructure.

Nearly all the submissions come from big industry groups. There are some individual and academic submissions, but the weight of the submissions are from business, all cheering on privatisation.

The Coalition state governments, especially Queensland and NSW, are also cheering for privatisation and the Commonwealth is offering to help privatising states. The Tasmanian Labor Premier Lara Giddins calls it blackmail and refuses to contemplate the sale of Tasmania’s hydro electric assets.

The Western Australian Coalition Premier Colin Barnett will not sell his state’s ports.

Those two aside, it looks like Australia is about to get some new cats. The big question is will they catch mice, and for whom will they catch them?

However, the danger is not in privatisation per se, but what sort of privatisation and what price.

In the Hawke-Keating period we saw public assets sold off far too cheaply, particularly the Commonwealth Bank and the first tranche of Telstra. With other privatisations, jobs were slashed and assets stripped.

However, no one can deny that the Commonwealth Bank catches a lot of mice and has done extremely well for its broadly based, mainly Australian shareholders. Telstra, too, has done okay, especially with dividends when times were bad.

Their services to the public have probably been as good, if not better, than when publicly owned. The privatisation of airports has had mixed results. Once privatised, the new owners invested large amounts of money that governments simply would not have done. Services improved.

The downside was that the new owners have made sure they extracted the maximum amount of money from the travelling public either directly or through the airlines and shops. They also used their spare land for office and retail outlets in ways never envisaged by local, state and territory planners.

It meant they got bargains when buying.

The big public assets now being eyed off are the states’ and territories’ water and electricity networks. Given the way some of these have behaved with price gouging and misrepresentation of the costs of the carbon tax to justify huge price rises, can we be much worse off if they were privatised? Probably not.

Indeed, if governments get the regulatory framework right, the public might be better off with private providers properly regulated than with government owners regulated by the owner – namely, the government itself. That conflict in the past decade or so has led to cash-strapped state and territory governments bleeding electricity and water consumers for all they can get.

Now a possible saviour has emerged. Superannuation funds say they would be keen to invest in privatised assets.

A submission by Maritime Super, for example, pointed out that long-term investments with stable income streams would be very helpful in stabilising returns for its members.

Maritime workers and their union have not been noted as rapacious capitalists or for being running dogs of capitalism in the past. Now their non-profit industry fund is calling for imaginative ways to create financial instruments to help overcome some of the liquidity requirements under present superannuation rules.

Non-profit industry super funds have about $150 billion in assets. Many of their members are also members of unions which vehemently oppose privatisation. Some of those unions might have a rethink about whether they would rather deal with a utility company owned by a Coalition state Government or a utility company owned by industry super funds.

Interestingly enough, Steve Bracks, who now chairs a $25 billion industry fund, as Victorian Labor Premier agreed to the privatision of Snowy Hydro whereas the ever populist then Coalition Prime Minister John Howard vetoed it.

A reasonable question is why do states and territories need to sell these infrastructure assets to “free up” money just to invest in new infrastructure assets? If you are going to invest in infrastructure, why not just keep what you have got?

The answer is that the existing public assets are mature businesses with income streams and therefore can be easily financed by the private sector. And once the private sector owns them, they are freed from the constraints of public financing – particularly having to be more risk averse. It means the businesses will get large injections of capital that government would not provide because governments have other priorities.

New ventures, on the other hand, can be financed by government at low cost because of governments have high credit ratings that the private sector cannot get. Once mature, there is no need for government to continue ownership.

Snowy Hydro is a case in point.

It will work well for the broad public provided that there are no fire sales and that the new owners are put into a solid regulatory environment that prevents short-term gouging.

The important thing here is to make sure the new cats catch mice in a way that benefits the whole nation, not just a few short-term profiteers.

An announcement on the new Governor-General must be made soon. Quentin Bryce retires in March.

What a great system that the Prime Minister of the day can consult whomever he likes; ignore whomever he likes; tell the Queen in London to appoint whomever he likes; be accountable for the appointment to no-one; and not have the appointment ratified in any way by the people of Australia or their representatives.

And equally, once a Governor-General is appointed, the Prime Minister of the day can ring up the Queen in London and have the Governor-General sacked without any grounds or without being answerable to anyone.

What a great symbol the office of Governor-General is for our mature, self-confident and independent democracy.