Privatisation has damaged the economy, says ACCC chief

In a blistering attack on decades of common government practice, Australian Competition and Consumer Commission chairman Rod Sims said the sale of ports and electricity infrastructure and the opening of vocational education to private companies had caused him and the public to lose faith in privatisation and deregulation.

“I’ve been a very strong advocate of privatisation for probably 30 years; I believe it enhances economic efficiency,” Mr Sims told the Melbourne Economic Forum on Tuesday. “I’m now almost at the point of opposing privatisation because it’s been done to boost proceeds, it’s been done to boost asset sales and I think it’s severely damaging our economy.”

Mr Sims said privatising ports, including Port Botany and Port Kembla in NSW, which were privatised together, and the Port of Melbourne, which came with conditions restricting competition from other ports, were examples where monopolies had been created without suitable regulation to control how much they could then charge users……

Deregulating the electricity market and selling poles and wires in Queensland and NSW, meanwhile, had seen power prices almost double there over five years, he said.

I have also been a strong advocate of privatising state assets, but Rod Sims raises some important concerns that need to be addressed.

There is a strong trend in capitalist economies away from free enterprise and towards privatised “monopolies”. Investors place a great deal of emphasis when evaluating stocks on a company’s “economic moat” or competitive advantage. Both of which imply the ability to restrict competition. While this may maximize revenue for the individual economic unit, it is harmful for the economy as a whole.

Which brings me back to Mr Sims’ point. Higher prices paid for infrastructure services destroy the competitiveness of the economy as a whole, with profound implications for exports and productivity.

Source: Privatisation has damaged the economy, says ACCC chief

16 Replies to “Privatisation has damaged the economy, says ACCC chief”

  1. That Mr Sims and others have taken so many years to arrive at the bleedn’ obvious suggests to me that the word “privatisation” creates some sort of mental clouding of the mind that overrides rational thought, like ideas of heaven or nirvana. Anther one is “the free market will sort things out”. They all have a kind of “if we wish hard enough it’ll all be ok” kind of ring about them.

    But the underlying basis of privatisation is fundamentally flawed, because any service which arose for the common good of society was inherently not for profit, but instead was for the purpose of enabling society to generate wealth and well being – an enabler, if you like. After privatisation, its purpose changes to generating profit for a corporation outside of any market controls (imperfect as they are), and certainly outside any obligation for societal common good, so a kind of Darwinian processes takes root – ie what ever enhances growth for the corporation is maximised.

    1. You have stated your case very well and I have to say I agree with you. The whole point of privatisation is about profit, Essential services should be first and foremost about the public good while any profit achieved should continue towards the public good. The other point I would make is that in the past public utilities were the lifeblood our apprenticeships

      1. Thanks Robert, and you also make a good point. I had forgotten about the reliable apprenticeship system we once had, which was a sort of comforting glow on the horizon for kids to aim for after school if they didn’t matriculate. I’m sure the epidemic of anxiety afflicting young people today is partly because there are no well trodden paths (like apprenticeships) for them to follow any more. Not everyone wants to be, or can be, a trail blazer. Most just want a modicum of security of employment so they can buy a home (another lost dream – thanks Govt. mismanagement) and raise a family. I voted for the Libs, but I really struggle with Mr Turnbull’s logic that keeping house prices out of the reach of new home buyers is a good thing. It might make the economy numbers look good (whatever that means) but the social effect is awful. Nothing exacerbates anxiety like being subject to the whim of a landlord for the rest of your life.
        Anyway, I’ve strayed off topic. Sorry Colin :-).

      2. Frank, You raise an important point. One that voters seem oblivious to:

        I voted for the Libs, but I really struggle with Mr Turnbull’s logic that keeping house prices out of the reach of new home buyers is a good thing. It might make the economy numbers look good (whatever that means) but the social effect is awful…

        Possibly voters are oblivious because they want to be……. having benefited from Howard & Costello’s baby boomer bonus. Boosting house prices to create a wealth affect among homeowners probably won the Libs a lot of votes at election time. Both sides of politics also benefited at the State level — higher house prices boosted stamp duty revenues.
        But the downside is awful as you say: creating a generation of renters who cannot afford a new home. And the impact of that on the economy is terrible. Encouraging an itinerant rather than stable labour force. But more importantly, a house purchase is one of the most significant events in an individual’s life cycle and in their consumption patterns. It generally coincides with starting a family, substantial investment in consumer durables and other items directly linked to establishment of a home. The slow rate of establishment of new households will hurt (domestic) population growth and retard GDP growth.

      3. Robert & Frank,
        We have to be careful not to throw the baby out with the bath water.
        I would still choose private management of infrastructure over state-managed assets.
        But it needs to be better regulated. And there needs to be a healthy debate about retaining state ownership of key infrastructure assets, with separate entities providing management and maintenance, as with French Rail.
        There has to be a happy medium. We don’t want enterprises run by politicians — they are focused on optimizing votes, not minimizing costs and building sustainable revenue.
        I deliberately avoided the term “maximizing revenue” as we don’t want to fall into that trap, with infrastructure monopolies run like airport parking.

  2. The privatisation of assets came out of the Hilmer review and was broadly endorsed by COAG. The real price of electricity to consumers is currently below what it was in the 1950s. It was clear in the late 1980s & 1990s that the price of electricity was unsustainably low because relevant Governments were not recovering the weighted average cost of capital and were delaying necessary capital expenditure on networks. The break up of integrated State utilities was strongly supported by the ACCC which has also been responsible for authorisation of key parts of the process (eg purchase of Loy Yang A generator by AGL) as well setting tariffs on monopoly parts of the system. Private ownership may be having a marginal affect on prices but the major contributors are assets revaluations due to sale process (note funds generated by sales have been used to reduce debt in most cases), increased variability in the domestic load (more peak load needed as a proportion of average load), more extensive networks required as cities spread out and modern applications require more consistent supply), higher safety, reliability and environmental standards. Arguably assets should have been carried at replacement value in the first place. Electricity is a very valuable product to consumers and has had very significant demand growth since the 1940s because of the changing economy and because it has been priced below its cost of production and distribution for a significant part of that time.
    The conclusion is that it is simplistic to blame todays issues on privatisation when other more important factors mean that it was inevitable that electricity prices would increase to cover the real costs of production and distribution.

    1. Thanks John,
      Interesting viewpoint.
      I am not in favor of state-run utilities (notoriously inefficient) but well-regulated privately run utilities.
      A major concern is that Australian electricity prices are not competitive.

      Electricity prices

      Prices were obtained here. At least we are lower than Vanuatu.

      This discussion on Nobel prize-winner Jean Tirole’s work on how to regulate monopolies raises some interesting points.

      The structure of French Railways, separating ownership of the infrastructure (RFF) from the operator (SNCF), also appeals to me. Simply because the government retains control of the monopoly assets which are then rented to private operators. But I see that moves are under way to merge the two entities.
      Rail regulator Araf raised some concerns:

      Araf’s main worry is that SNCF Network will lack independence which could adversely affect the ability of other train operators to access the network thereby hindering the development of competition. Araf believes the danger lies in the centralisation of information systems, possible cross-subsidies between SNCF Mobility and SNCF Networks (formerly RRF), and a lack of transparency of financial flows within SNCF.

      SNCF Networks president Jacques Rapoport counters:

      “With the separate companies of RFF and SNCF, we had opposing interests,” says Rapoport. This was most acute in the way that responsibility for the network and its maintenance was shared between the two organisations. Rapoport says it was very difficult to modernise the conventional network efficiently, with the result that it has become degraded after 17 years under the former regime. “It is a huge task to modernise the network and we need to integrate the organisation to achieve it,” Rapoport points out. “You can’t provide a good service with an old network and old equipment.”

      Transfer of monopoly assets to private owners still does not seem a good idea. I hope they find some other way to address the problem.

    2. I actually agree with everything Mr Barton says and yet (oddly) haven’t altered my position. Government mismanagement of essential assets should not be a reason to privatise them. I’m not against privatisation on blind ideological grounds, but I am (mostly) against privatisation because once something is privatised the Government loses all its in-house expertise in being able to judge whether the decision was a wise one in the first place. Yes, the accountants might remain and judge it to be a good sale for a particular year’s books, but long term value to the consumer is much harder to measure, especially once control of the asset is lost and loyalties have shifted.

      Personally I would prefer the Government got excellent at managing essential assets, using them to create an environment that enables Australian businesses to excel, rather than just selling them off when the coffers are low. Otherwise why hand over the entire nation’s assets for paper representations of wealth to those who have the most paper?
      Perhaps I’m old school (well, no perhaps about it) but I can’t see the point of selling my home to someone who says “trust me, I’ll rent it back to you at a good rate”; at lease not unless I knew I was going to die (or face an election) in three years.

  3. Privatisation in my view is needed to spur innovation and generate prosperity; BUT its “bleedn’ obvious” (thanks frankaquino) that a free market cannot be a self-sustaining state of nature.
    The head of ACCC, Rod Sims should have known this basic fact!
    What a fool!
    It’s obvious. In the absence of a competent watchdog, markets will be overrun by fraud and corruption, or the biggest player will try to take over or squeeze out competition, or both. Sometimes it’s done by dirty tricks and sometimes it’s done through outright violence.
    Examples overseas (recently) have been where businessmen hired mercenary armies to take over a country, and they have even been seen massacring striking workers.
    It’s just commonsense to know that we need a strong and effective government authority to prevent this outrageous behaviour; to keep the markets running smoothly and provide a level playing field.
    Rod Sims is blaming private enterprise; BUT it is he and his organization that it are incompetent and inadequate.
    It is the role of the ACCC (as stated on their web site) to: “protect the interests and safety of consumers and support fair trading in markets”.
    Well it’s quite simple isn’t it? Don’t sign off on a contract that gives any business an unfair advantage – for 30 or more years.
    The ACCC just needs to do their job – and be accountable.

  4. Who said the electricity assets were poorly run? This has never been substantiated yet is often stated as fact.
    The assets grew over the years and were in very good condition due to the capital put back into the assets by the government authority. Has there ever been loss of power to our grid?
    Instead the governments milked the electrical authority as it was to provide a return lowering the ability of the authority to supply new infrastructure.
    I have seen millions pored into infrastructure just before sale is this not strange behaviour.
    Privatisation is a fort.

  5. You’re right Colin. I hadn’t even considered the economic knock-on benefit of owning your own home, even though I personally keep Bunnings Hardware and Harvey Norman in business. Not to mention all the security systems, renovations, soft furnishings, potting mix, pot plants, hanging baskets etc etc etc, which landlords never bother with. Goodness! Has anyone done a proper economic analysis of the benefits of owning a home? It might actually surpass the wispy “digit on a screen” value that inflated home prices purport to create.

  6. Agree regulation is the key but it takes strong leadership and commitment to make it work. I was on the other side of the fence some years ago and saw how easy it was to manipulate authorities into making self regulation look like government regulation, especially when you realise the govt. doesn’t hire the finest minds in the world.

    Coincidence: I just heard on the news that China wants to buy a chunk of NSW power utilities. A short step from privatisation to foreign ownership to “please sir, may I…”

    1. Agree that regulatory capture is a threat. Especially when there is a “revolving door” between the regulatory body and high-paying jobs in the industry.

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