A History of Australian Privatisation

During this year we have investigated privatisation.    A summary of the last seminar talk The Prophets of Privatisation is available from the Association.   This short article leads to some conclusions

The Nature and Origins of Privatisation

     “Privatisation” seems to have been a word invented in England in the early 1980s to encompass the sale to private interests of what hitherto were called public utilities or public works.

     Stagflation (the co-incidence of inflation and stagnation) in the 1970s  prepared the way for this phenomenon. It unhinged Keynesian economics and brought a resurgence of faith in the capacity of markets. At last triumphant, Friedrich Hayek stated in 1976 that a high degree of order in economic affairs in the midst of growing complexity had only been achieved by the operations of the market.

     This flush of enthusiasm created ‘think tanks’ such as the Centre for Policy Studies in Melbourne and the now familiar call (here stated by the Business Council of Australia) to commercialise government “by removing the monopoly powers of government business enterprises and other barriers to competition”. A grim picture was painted of the inefficiency of public utilities. Reforms were needed to lower the costs of essential services to business and consumers and to help make Australian industry more ‘internationally competitive’.    

      This call was reinforced by Treasury and various bodies of  government economists, principally the Industry Commission.    Following the lead of especially Britain and New Zealand a Special Premiers’ Conference called in 1991 committed the states to a program of commercialisation.  

     The inter-governmental agreement set a minimum ‘reform’ of corporatising those government bodies that drew the bulk of their revenue from “user-pays” charges. “Government Trading Enterprises” were transformed into corporations.  Privatisation was expected to follow.

It was decided to divide the electricity industry into three parts: generation; transmission; and distribution.   Generating companies would lease access to the transmission network without contributing to its upgrading or, even, maintenance.    Eventually from this came a National Electricity Market (NEM) that in practice created a common electricity grid for S-E Australia.

Costs and Charges

The object sought from this corporatised government was a higher ‘rate-of-return’.  One way to achieve this was by reducing “expenses”.    In the cases of electricity and water this meant ‘downsizing’- a trend that had started prior to incorporation.    Between 1995 and 2003 the number employed in the electricity industry fell from 83,000 to 33,000.   In SA unions reported that the 900 workers engaged in maintenance and repair had been reduced to somewhere close to 300.   The number of workers maintaining water infrastructure was reduced from 22,000 to 13,000 (that is, a reduction of 40%).

Privatisation was most pronounced in SA and Victoria.   In what was called Project Victoria the Kennett Government, responding to advice commissioned by business organisations from the Tasman Institute,  privatised water, electricity, public transport, roads, ports and workers’ compensation.

Regulatory bodies for privatised industries and bodies to monitor the performance of corporatised industries accompanied these ‘reforms’.    In the electricity industry a National Electricity Market Management Company (NEMMCO) now employs over 200 workers and has a budget of $60m.    Community service obligations (CSO) were applied in Victoria, for example, by setting a uniform tariff, for the benefit of regional “customers” though this was resisted by electricity companies.

It became apparent in the electricity industry (as it had in the UK and California) that competition failed to develop.   There was in fact what  economists call an oligopoly; that is, a monopolisation of the market by a small number of firms.   Rather in the way that petrol companies fail to build refineries, these companies manipulated prices by withholding supply on hot days, by not increasing capacity in line with demand, and by not keeping very much reserve capacity.    Outages became common in transmission.    In SA in January 2001 there were no less than 500.

For a time ordinary citizens obtained cheaper prices because of the actions of the regulators, but overall in both water and electricity, prices have risen for ordinary customers.   In water the changeover from property based charging to “user-pays” charging allowed providers (both public and private) to discriminate in their charges in favour of larger industrial users.  

However, not even manufacturers tended to benefit from the privatisation of electricity.    Alcoa, the largest single user of electricity, was one of the few to obtain a benefit.    In 2001 in SA it was reported that a practice called ‘curtailment’ had developed.    On hot days some manufacturers found it more profitable to curtail operations and profit by “on-selling the power they would have used” (7.30 Report, April, 2001).

Privatisation Analysed

One interesting question to come out of this brief history is why government so readily embraced privatisation.    One could of course say that government supports big business and big business wanted privatisation.    However, it is not clear that even big business has benefited from privatisation.   Certainly some elements of it have.    And there have been large foreign consortia that have formed associations in Australia to promote privatisation.   One appears to be Australian Water Services Ltd.   It has also been said that such influences were unduly prominent in the Business Council of Australia.

Despite the enthusiasm of government economists events have shown that, in water and electricity, and indeed in other areas such as public transport and the management of ports and airports, there is not anything approaching competition.

The enthusiasm of government economists in the various Treasuries and Departments of Finance seems to emerge from several sources.  One source is the fact that Treasury and its allied branches of government have been averse to large government borrowing for several decades.   When Warragamba was built in 1965 it was planned to build filtration plants.    These were not built and recommendations from medical officers in the 1980s were suppressed.    The McClellan Report notes that the reply of Treasury to the head of the water authority seeking finance was “wait for it to crash, you only get money in a crisis”.

Privatisation however provided them and their political masters (servants?) with a golden opportunity to avoid such borrowing, and to pass on these large costs of building, maintenance, repairs, (and indeed the responsibility for their administration) to outsiders while, at the same time, obtaining added revenue from either their sale or lease.   They had in fact created a new stream of hidden taxes that could be attributed if need be to the greed of private enterprise!

Associated with this is the fact that government economists, who in any case favour ‘market solutions’, saw that commercialisation of government would advance their own careers and job security.  

The senior public servants in the departments of cabinet, where they served conservative governments, saw that commercialisation, by reducing the ‘labour force’ and changing work practices, could be used to replace union and award-based wages and conditions by one-on one private agreements.   

Thus, two factors of enormous importance seem to have pushed governments into indecent haste towards privatisation.    The first is the avoidance of debt – the debt in corporatised industries belongs to the corporatised body and not to Treasury – and the addition to revenue.   The second is the political externalities of substituting a private company for a public utility.

These considerations may go some way to explain the features of the negotiated agreements with these private companies.   These contracts are remarkable in that all seem to have been made with the successful tenderer in a commanding position.     In the case of the filtration plants ordered by Premier Greiner one expert says of the successful foreign tenderer that “It defeated the competitive tendering process, it set its own timetable, it established its own standards, and it eliminated all the risks to its own rate-of-return”.   In this case the government bore the cost of maintenance and repair of the plants and accepted all responsibility for their failure to provide water that was free from cryptosporidium!

This highlights the paradox of privatisation.    In each case the object of the bidding has been to collect monopoly profits yet the successful company has obtained terms which can only suggest that it is helping the government out of a fix!

A final interesting fact about privatisation and even the incorporation of government departments such as the NSW Electricity Commission is that, once created, the Minister loses virtually all control over the operation of the entity.   At best the Minister and the public are reduced to shareholders.   The board of directors and the CEO have primary importance and the cost and trouble of transmitting policy directions to it are enormously increased.   In the case of a privatised company to impose the will of the government against the company would require litigation.

This consideration is amply demonstrated by recent events.   The new CEO of Telstra took no notice of a request of the Prime Minister to stop talking down Telstra shares.   He is still there!    The NSW Premier more recently has been even more severely humbled.   He failed in his pleading to have the toll on the new cross-city tunnel reduced.    In fact, amid the furore about the virtual shutdown of William Street, Premier Iemma told the media that he would have to ask the company to consider allocating more than one lane in William Street to motorists!  

Our Premier did say (in spite) that, if the tunnel operators did fall on evil days he was not going to bail them out.    This only reminded us of the fact that it has been the habit of state governments to bail out toll road operators with low interest loans and hidden subsidies. 

Conclusion

What allowed essential services to be commercialised was that they already charged the public to use them.   Those common services whose revenue came from general taxation were specifically exempted from commercialisation.

The government by charging for public utilities had created a commercial test.   It was a stick that supporters of privatisers used to beat the utilities with by talking of ‘running at a loss’ or failing to achieve a profit.   They could offer to make these public assets more profitable.  It was the thin end of the wedge.   
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It may have been that what Treasury really wanted was a crisis that would facilitate the drastic action it really wanted, privatisation.   When the banned report was finally circulated as “a drinking water program” in April, 1991, Premier Nick Greiner permitted the building of filtration plants only if they were privately owned and operated.

There is no doubt that one phenomenon that finally hastened action was the world-wide incidents and deaths from cryptosporidium in the 1980s and 90s.  Between calling for tenders and finally accepting one in November, 1992, numerous reports documented the poor state of water in the Sydney region.   

The Government committed itself solely upon the basis of the cheapness of the plant.