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February 17th 2014 print

David Flint

The Principles Of Privatising

The last thing any government should do is spend a one-off windfall on recurrent expenditure – welfare, for example. The reason is obvious. Where will it continue finding the money to maintain such levels of expenditure?

gavelLabor governments incur large debts and Coalition governments pay them off, partly through privatisations. Is that a fair assessment? Certainly that has been the pattern federally, and in some of the states, over the last two decades. Privatisations, started under the Hawke and Keating governments, were clearly against the spirit, if not the letter, of the Labor Party platform, so it is perhaps not surprising that the proceeds were not put to wise use.

Surely, the last thing any government should do is spend a one-off windfall on recurrent expenditure – welfare, for example. The reason is obvious. Where will it continue finding the money to maintain such levels of expenditure?

Privatisation can be justified if the funds to be generated can be better investmented elsewhere or to pay off debt, but selling assets to underwrite recurrent expenditure simply puts off the day when governments must confront the consequences of their profligacy. Politicians know that the ultimate cost will be someone else’s problem, so they sell assets and live happily off the proceeds in the short term. No sensible person sells the family home and spends until the nest egg is gone.

The Keating government left John Howard with a massive debt of about $96 billion, and that in 1996 dollars. Seventeen years later, Rudd-Gillard-Rudd saddled Tony Abbott with the staggering burden of $300 billion. It is worth recalling that the  Howard government paid off a little under half  of the inherited debt by way of privatisations. It paid off the rest from revenue, an heroic effort, and left the next government with a very substantial surplus.

Now there is talk of privatising the few federal assets that remain: Medibank, valued at around $4 billion; Defence Housing, and the 13% the Commonwealth holds in the Snowy River Part scheme. The government has ruled out selling Australia Post, the substantial HECS debt (some $26 billion), and the ABC/SBS. There is surely a moral argument  that Medibank is really owned by the policyholders.

It would seem not much of a dent can be put in the $300 billion-plus inherited debt, leaving the government of the day with four choices -– or a mix of them – apart from doing nothing, of course, which would see the disadvantage of massive and ongoing interest bills. The four options are:

First, exercising a massive and courageous, but necessary, budgetary restraint, particularly in the key areas of welfare, health and education. That list, by the way, should not include defence, because the Gillard governmentran down spending, as a percentage of GDP,  to pre-Second World War levels.

Second, selling off the few assets left, including those which the govrnment has inexplicably said would not be sold, such as the $26 billion HECS debt. Although socialist ideologues will protest, it is hard to see how this will any way adversely affect debtors.

Third, by increasing tax directly, either by raising rates generally or on targeted classes of taxpayers. This would be unacceptable.

Fourth, by removing or reducing tax deductions, rebates and other concessions. These measures could also be unacceptable to the electorate, but the government of the day would hope their immediate impact would be less noticed.

In the meantime, the federal government is offering incentives to states to engage in a new wave of privatisation. Apparently this involves about $100 billion in assets, the incentive being offered if the proceeds are used for new infrastructure.

Apart from the emotional response — that the family silver should never be sold off — it is hard to justify a total objection to privatisation, provided it is done properly through public tenders or by a share floats. There are some principles which should be observed about a privatisation.

First, given that governments are quite capable of manipulating tenders, as the Gillard government did with the Australia Network, it’s worth stating the obvious and stressing the sale of public assets must be completely above board.

Second, it should be completely unacceptable to sell assets merely to spend the proceeds in the year in question, as was done in relation to the first tranche sale of the Commonwealth Bank, Qantas and, incidentally the Keating government sale of the Tokyo embassy.

Third, special considerations apply where the asset enjoys a monopoly or near-monopoly position. As Professor Stephen King argues, ”…simply privatising a fat, lazy, government-owned monopoly tends to create a fat, lazy, private monopoly — not a lean, mean productivity machine.”

Either don’t sell it or break it up, as should have been done to Telstra, or introduce special regulatory controls. If it’s the latter, don’t over-regulate, as happened with Qantas, which was hardly in a monopoly position. Equally, don’t under-regulate, as was the case with the state-owned grain corporations which were privatised and then allowed to form an East Coast monopoly. Natural monopolies are a special problem, e.g., airports and railways. They need special regulation. The ruinously expensive cost of parking at Australian airports makes that case.

Fourth, where the public asset is part of an oligopoly — a market with a small number of sellers — competition tends to be focused on advertising and all the associated gimmicks. In such markets, a publicly owned business tends to keep prices down, as with the state corporations which used to exist in the insurance industry. A similar role was played by the mutually owned corporations, those where the policyholders were the owners. Readers will recall that teams of rent-seeking brokers and lawyers managed to privatise most of the mutual assets that had been carefully husbanded by earlier generations of Australians.

Fifth, there are some services which a nation should not leave to the exigencies of the free market. This is where we make a conscious decision that everyone should receive a certain standard of service, even if unprofitable. Professor King gives the excellent example of emergency services. This is where we obviously prefer to have on standby ”a fire brigade or ambulance service that can deal with very low chance events, such as a major terrorist attack.”

Sixth, timing is important. Except for the Tokyo embassy, sold at the peak of Japan’s real estate boom, the Hawke-Keating years’ divestitures recouped remarkably little, the bottom line benefiting only in the year in question.

There should above all be an overriding principle: the owners of public assets, the people, ought to have some control over the sale of their assets. Equally they should have some say over the accumulation of enormous debt which they and their children will have to repay.

With the increased control over the political process by the Liberal-Labor duopoly, it is surely time to consider making our political leaders accountable – and not just every three or four years at the ballot box. Never forget, these are elections which have been corrupted by the factional powerbrokers who choose many candidates on the basis of their personal loyalty, not merit.

It is surely time to make our politicians accountable, just as everyone outside government, employed or in business, every day of every month and of every year.

Professor David Flint is the author with Jai Martinkovits of Give Us Back Our  Country. The 2nd edition, published by ConnorCourt, has just gone to press