Why won’t the rationalists stand-up to privatisation?

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ScreenHunter_06 Aug. 26 11.45

By Leith van Onselen

The Australia Institure’s Richard Denniss has produced a ripper article today in The AFR questioning why the economic rationalists of the 1980s and 1990s have gone silent on the privatisation of natural monopolies, which threaten to worsen outcomes for Australian consumers:

Who could have foreseen however, that by 2014, their desire to privatise and cut taxes would see [economic rationalsist] supporting the creation of monopolies in order to “generate revenue” for governments…

The whole point of economic rationalism was that the consumer was king…

How far the debate has come… the privatised Sydney airport is not only one of the most expensive and poorly performing airports in the world, but its owners have first right of refusal for any second airport…

There is a simple reason that governments like to ignore economic rationalists when it comes to selling off government services; monopolies attract much higher prices than competitive firms. Politicians can deliver a “magic pudding” of lower taxes and lower levels of debt simply by transferring government monopolies into private monopolies…

[But] excessive high prices for airport parking, ferry services, toll roads, electricity and water create just as much cost-of-living burden for families as taxes do, but, compared to taxes, monopoly profits are easy to hide…

Selling monopolies may help governments raise money in the short term, but it hurts both consumers and the economy in the long term.

Denniss’ critique is spot on and a timely reminder why the Abbott Government’s privatisation fettish is so risky for Australian consumers.

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Privatising natural monopolies, such as airports or utilities, inevitably creates extra charges for consumers from the privatised enterprise exercising its pricing power, which acts like a hidden tax for consumers. As argued by professor Stephen King earlier this year:

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.

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

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…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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This is why ACCC head, Rod Sims, has spoken out against the Abbott Government’s privatisation agenda, warning that the forecast $57 billion of federal and state-owned assets expected to be sold over the next few years could substantially lessen competition and push-up prices, particularly in the areas of electricity distribution, ports, and other essential infrastructure.

It is also why the Productivity Commission’s report on the provision of public infrastructure, released last month, noted that the Abbott Government’s financial incentives to the states (“asset recycling”) “could act to encourage privatisation in circumstances that are not fully justified and encourage the selection of new projects that do not have demonstrable net benefits”.

Denniss is right. Why have the economic rationalists gone silent on the spate of monopoly privatisation? Perhaps it’s because “they have all just gone to work for the monopolists”.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.