In late May, Infrastructure Australia (IA) called on state governments to privatise their public transport networks, claiming privatisation could save taxpayers $15.5 billion by 2040. From The AFR:
Philip Davies, Infrastructure Australia’s chief executive, said Australia’s transport systems needed to continue expanding to keep up with population growth and governments could raise money for new transport services by franchising existing ones.
Demand for public transport is expected to rise 48 per cent in Sydney by 2031 and almost double in Melbourne and Perth…
Private operators may reduce costs by improving productivity with performance incentives and better asset management, as well as cutting jobs…
Rail networks, with the exception of Victoria which franchised its systems in 1999, are still in public hands. NSW could save almost $9 billion by franchising its rail networks and the remainder of its bus systems, while Queensland could save $3.3 billion and Victoria $1 billion, the report says.
Today, Dominic Helmsley, the head of infrastructure equity at Standard Life Capital, has argued that privatisation of rail networks has not always been a success, citing the UK as an example, and has warned governments to “proceed with caution”. From The AFR:
“The model needs to be carefully thought through”…
“The London Underground was split into two franchises that were incredibly complicated to document as to who was responsible for what in terms of operations and maintenance … there are some lessons to be learned there in terms of was it really worth it”…
Mr Helmsley, who spent seven years in infrastructure funds management with Babcock and Brown and 13 years with airports operator BAA plc before joining Edinburgh-based investment group SL Capital in 2013, said the privatisation of Britain’s rail networks was “not seen as a great success”…
“Mass transportation in large cities is always going to require some degree of subsidy,” Mr Helmsley said. “If you look around the world, the most successful cities from a public transport perspective are often the ones that have kept control of their transportation network”…
Indeed, just last month academics at Queen Mary and Essex universities released a report which found that the cost of running Britain’s railways has increased by £50 billion since the sell-off in 1995, leading to a sharp rise in passenger fares.
According to the study, the “ill-judged” break-up of British Rail two decades ago had created a hugely inefficient and fragmented system that was haemorrhaging money due to unnecessarily expensive track upgrades, excessive train leasing costs, the bureaucracy of the rail franchising system, and train operating company profits. In turn, these costs have been passed on to passengers via inflated fares over the last two decades, which have risen “way in excess of inflation”.
Supporters of privatisation, like IA, claim that private operators will necessarily run the system more efficiently than public operators and that privatising public transport will save taxpayers money.
However, experience the world over shows that the new private owners will almost always try to boost their profits by either forcing-up user costs or collecting ever-greater franchise payments from the government. We have seen this time and time again in Australia with ports, airport parking, public transport, toll roads, and utilities. In many cases, the cost-of-living burden for users is worse than raising their taxes, with the added drawback that it is less transparent since private profits are easier to hide from public view.
Back in May, David Hayward – a professor of public policy at RMIT – penned a stinging critique of the Victorian Government’s privatisation experience, which Hayward claimed had not led to lower user charges or reduced government spending:
…the scale of the PPP commitment built up over the last decade is now a story in itself, although not one easily discovered.
Fully one-third of Victorian Government debt is now accounted for by borrowings entered into with private parties to build, own and operate public assets.
Even more remarkably, almost half of the Government’s interest bill is accounted for by private lease payments.
It sounds a bit like a magic pudding, except there are none in public finance…
These privatisations wouldn’t be so bad, of course, were it beyond dispute that they delivered value for money to end users and not just a nice return.Trouble is the Auditor-General keeps pointing to evidence that goes in the opposite direction.
From trains, trams, and buses to prisons and even electricity and gas, the one thing that is common is the lack of transparency in performance measures.
Also consistent is how well the private operators manage to game the measures, whether by skipping stations or stops or using pricing systems that are so obscure, no-one knows what they are buying, on what terms or for how long…
It is quite striking that in the case of Victoria — Australia’s most ardent privatiser over the last three decades — there is no evidence of user charges falling, or government spending abating…
In the case of public transport we know that the state is now spending more today than was the case under inefficient public ownership.
The one difference is that these days the private owners of Victoria’s infrastructure tend to be overseas owned…
The bottom line is that privatising natural monopolies will almost inevitably result in bad outcomes for consumers. The householder has little choice but to continue as a consumer of the monopoly service. And the new private (often foreign) owners will almost always use their market power to force-up user costs or taxpayer subsidies to boost their profits.
Sadly, IA has failed to learn from history and continues to push for further monopoly privatisations under the ill-founded belief that it will magically boost efficiency and reduce costs for both taxpayers and users.
