Competition will determine privatisation's success

The SMH’s economics editor, Ross Gittins, has today thrown a wet blanket over the privatisation debate, arguing that it is the degree of competition in the given market that will ultimately determine whether an asset sale will be in the public’s interest, while cautioning against both the Coalition’s widespread privatisation agenda as well as Labor’s blanket opposition:

Whether publicly or privately owned, the monopoly business that doesn’t seek to overcharge its customers has yet to be discovered by archaeologists. Monopolies that don’t seek to maximise profits usually succumb to overstaffing and overpaying workers and managers…

The public sector unions understand this full well, which is their real reason for opposing privatisation so vehemently…

So voters would be mugs to believe Labor and its union mates have consumers’ best interests at heart…

Unfortunately, that doesn’t mean Coalition privatisers can be trusted to do their best by customers. The temptation facing all privatising governments is to seek to maximise the price they get for the asset they’re selling…

The simple truth that escapes so many privatisation supporters on the non-Labor side is that privatisation is only worthwhile if it leads to greater competition in the market. If it doesn’t, it will be of little benefit to anyone bar the new private owners.

Gittins has nicely summed-up the flaws in both sides of the privatisation debate – i.e. that privatisation is neither good or evil per se, but rather depends on the individual circumstances and market structure.

For example, simply shifting a government-owned monopoly to a private monopoly is unlikely to benefit taxpayers. While the government is likely to receive a significant up front payment from privatising such enterprises, it will no longer receive ongoing dividend payments from the enterprise. There are also likely to be extra charges to consumers arising from the privatised enterprise exercising its pricing power, which acts as a hidden tax from privatisation, as noted by professor Stephen King last week:

… privatisation without competition is like a hidden tax. The government gets more today because we will all be paying more tomorrow…

Privatisation without competition risks turning a public monopoly into a private monopoly. The owners may change but the public will get ripped off just the same.

On the other hand, selling-off government enterprises that compete directly with a large number of private players is more likely to be beneficial, since the degree of market power is lower, consumers have choice, and the opportunities to price gouge are minimised. I consider Medibank Private, which competes with a large number of private health funds, as an example of a government-owned business that could be sold without damaging consumer’s interests.

In broad terms, the first rule of any asset privatisation should be that it boosts competition within the relevant market, and at a minimum does not lessen competition – a point also acknowledged by Professor King:

…privatisation with competition can be a big win for Australia. Private ownership creates incentives to produce what we want, when we want it, at minimum cost. Competition keeps prices down…

As argued previously, the thing that concerns me most about the Abbott Government’s policy of providing states with financial incentives to sell-off their assets is that presumes that private ownership is superior in all cases, rather than basing decisions on objective economic criteria, and on a case-by-case basis.

Such a “private ownership is always best” approach is more likely to lead to asset sales that are not in the long-term interest of taxpayers and consumers. That is, where the upfront proceeds from the sale are below the expected net present value of future profits, and where the degree of competition in the market is lessened, resulting in higher costs and a less productive economy.

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Competition will determine privatisation’s success