Privatisation a logical fallacy for Government

Monday January 12 2015, 11:30am

AMONG the things blocked in the Senate in 2014 was the Government’s asset-recycling scheme. The scheme has a certain logic to it, but also a big ideological contradiction for the government.

The scheme is based on the premise that state governments are struggling to keep up with demands for infrastructure.

A smart Federal Government would deal with the root causes of that – population growth, particularly immigration, being too high and poor revenue bases. It would cut immigration and raise taxes.

But that would upset the Coalition’s core supporters, so it has come up with asset recycling. Under this scheme the states are encouraged by bribes from the Commonwealth to sell infrastructure assets. After selling the infrastructure the states would have money to invest in other infrastructure.

In states where asset sales have had a toxic effect on voters, such a Queensland, long-term leasing is substituted.

The logic to it is that the private sector can run businesses, particularly utilities, better than big cumbersome state bureaucracies. 

Another piece of the logic is that state governments face a severe conflict of interest when regulating state-owned businesses and utilities. If a state-owned utility abuses its monopoly power what is the point of the state fining itself? What is the chance that the state regulator would go easy on a state-owned utility?

There is some value in that logic, but on the broader scale there is a contradiction.

That the Federal Government wants to raise money for infrastructure by selling infrastructure does not make a great deal of sense unless you admit something that must stick in the craw of all those private-sector worshippers who believe that if only government got out of the way, the private sector would provide wealth and prosperity to all. Government need only run a few things: police, courts, the defence forces, the currency and foreign affairs, they argue. Even health and education could all be run by the private sector.

The stick in the craw is that to support the raising of money for government to invest in infrastructure by selling other infrastructure, you have to admit that only the public sector can do some forms of infrastructure, otherwise you would assume the private sector would jump at the chance to invest in the required new infrastructure.

Typically, the private sector is not good at really big projects. It cannot raise the money at a low enough interest rate to make a goer out of high-risk big projects. Neither is the private sector very good at schools, universities and hospitals. Sure, the private sector has built some, but only with very large public subsidies.

With asset recycling, the message from the private sector is: “We’ll wait while the public sector takes all of the risk in the start-up phase and when the thing is up and running we’ll buy it and privatise the profits.”

That certainly happened with the early privatisations in Australia. They were sold off cheap.

Successful privatisations require that the taxpayers are not cheated.

They key to successful privatisation is to get a good deal for the taxpayer and to harness private-sector management skills. 

In short, not to allow the private sector to let the taxpayers take all the risk and then take all the profit.

Governments take the courageous investment decisions at the riskiest part of the project, so it is only fair that they get a suitable return.

More importantly, though, the neo-liberal economists’ view that government is sluggish and should only fix market failures and otherwise get out of the way is contrary to historic experience.

The Snowy Mountains Scheme is a good Australian example of public-sector vision. Comfortable, sewered and powered suburban living was initially driven by public-sector investment in roads and government mortgage backing.

There are numerous US examples, as pointed out by Mariana Mazzucato, professor of economic innovation at the University of Sussex, in the latest edition of Foreign Affairs.

The internet was created in the public sector.

Aerospace and electronics initiatives began in the public sector.

In the US, the most important drug breakthroughs have come through the public-sector National Institutes of Health which now has a $30 billion a year budget.

GPS technology came from public-sector investment in military research.

Silicon Valley is often feted as a private-sector engine house, but without big public-sector investment in education it would not exist.

The touch-screen came out of the University of Delaware and created by people underwritten by the National Science Foundation, for example.

Yes, governments can pick losers, but history shows they have also picked some significant winners.

Markets are not good at creating visionary shifts.

Only deliberate state intervention can do that, and when it does markets and private-sector activity follow, benefiting all.

The idea behind the asset recycling scheme and neo-liberal economics generally that the public sector is an inefficient version of the private sector is wrong-headed.

A better model would be for the government to be more than an administrator-regulator that corrects market failure.

It should provide some overall vision and direction where the private sector fears to go.

Yes, it should harness private sector management skills, but there is no harm in the government retaining a bit of equity in privatised entities even if it eventually withdraws from management.

We do ourselves a grave disservice if we do not recognise the role the public sector has played in shaping economic direction.

If we do not recognise it then future public sector investment will be harder to justify and society as a whole will miss out.

The big trouble with relying too much on private-sector investment is that the private sector is not cohesive.

It is a whole lot of small selfish entities pursuing their own profit aims There is nothing wrong with that.

Adam Smith’s invisible hand works, but only up to a point.

Without some overall vision and continued active role by the public sector in investment and the economy generally our prosperity and well-being will not be as good.

Just as the communism experiment of total state ownership was utter folly, so too would be total withdrawal of the public sector from economic activity.