Infrastructure Australia warned on rail privatisation

By Leith van Onselen

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.

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Unconventional Economist

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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  1. If a case can be made for investment in a new rail line, the question is then nothing more than.

    1. Allocating the resources to build it efficiently.

    2. Once built managing the asset efficiently.

    The ownership of the asset is irrelevant and should remain in public ownership as a natural monopoly.

    If there is a concern the public sector cannot build or manage the asset efficiently call for tends for those tasks and pay someone who has proven track record to do it for us. If they fail to perform sack them.

    As for sufficient resources, that is not a question that should be asked in a country that happily allocates hundreds of billions to upgrading splashbacks and feature walls.

    As we have seen the private trading banks have been the most useless organisations imaginable when it comes to their performance using their special credit creation privileges.

    Pissing money against a wall does not come close to capturing the extent of their failure over the last 30+ years.

    But so long as we swallow the bull crap that governments must not create public money – as that is what a fiscal deficit implies – and if they do they have to ‘borrow’ from the private banks as part of the farce, we will continue to believe we don’t have the ability to construct common assets owned by ALL Australians.

    We simply must reform the monetary system and by that, and in the spirit of achieving harmony with some of my constant companions, starts with nothing more than unwinding the worst and most idiotic deregulations of the monetary and banking model over the last 40 years.

    Banking and monetary system Royal Commission now!

    • GeordieMEMBER

      A Royal Commission into something they scarcely understand beyond the best way to pander to? Ha! Comedy gold.

      You’re dead right though. We need to determine the way we want the country to grow into the future, and them move toward that goal. The current plan of milking economic rents and squeezing labour neither sustainable nor the best use of the nation’s resources.

    • Sounds great – BUT:
      ” If they fail to perform sack them” – would need to stop agreeing to no accountability clauses and termination fees.
      “As for sufficient resources,” – domestic consumption aside – we can afford to give billions in diesel rebate to two businesses running the most profitable enterprises on the planet …

  2. Here in NSW we have privatization by stealth as existing rail network gets cannibalized and defunded by new “Metro” and light rail lines intended to be run by private operators and eventually “recycled” into private ownership. The strategy has been devised with the operator Hong Kong’s MTR whose own business model is to leverage its monopoly into managing and developing commercial and residential property in the vicinity of stations. Commuters at these stations become a captive market for the owner/operator/landlord, that is why these stations and routes intentionally have minimal linkage with the existing network.

    • That’s how many of the private rail operators work in Japan. Build massive shopping centres at either end of a line and you now have a reason to travel. It is also why the shopping mall operators and rail operators have the same name … Keio!

      • Damn its convenient though. A Don Quixote at the end of the line and a supermarket in the basement. Sure beats driving a few suburbs to get to a westfield.

  3. The other thing that’s been ignored is the fact that it creates a “heads I win, tails you lose” situation for the privatised companies – if things go well, they get great profits. If things go badly, they just walk away and the risk/costs of failure are still borne by the taxpayer. That’s not always true but it is in the case of public transport, where the buck ultimately stops with the government. Moreover, they have every incentive to make outlandish bids because either they will get lucky and turn it around, or they’ll fail and won’t have to bear the full burden of the costs.

    In fact that’s exactly what happened in Victoria – the winning bids were overly ambitious, and one of the tram operators eventually walked away when they realised they couldn’t turn it around. Pretty sure the OECD cited that example as one of how NOT to do things…

    • >In fact that’s exactly what happened in Victoria – the winning bids were overly ambitious, and one of the tram operators eventually walked away when they realised they couldn’t turn it around.

      ITAg has illustrated this very point yesterday too – with a different example: :

      1. Private investor closed Hazelwood – they purchased it after its use-by-date and pocketed the depreciation for 8-10 years.
      2. This investor will walk away from $400-500 mill remediation cost for open cut leaving a $30 mill retention bond.
      3. Private investors (facilitated by Kennett) gutted the Latrobe Valley power industry. The irony of the LNPs saying they will support building of a new power station drips off the trees in the Strzeleckis.
      4. No national energy policy / coordination has led to a ‘free-market’ energy solution (problem!!). The states cannot do it individually.

    • On the Sydney Metro the government has granted the construction contractor huge “contract variations” (i.e. we are paying for the cost overruns) at the same time it is paying compensation to the eventual operator MTR for the delays in construction. Everyone wins, ‘cept us. Same thing happens on toll roads, if no-one wants to use them because toll set too high, its the taxpayer that’s on the hook.

  4. Jesus.

    I’d always just assumed IA were ineffective but mostly harmless. It’s horrifying to discover that they’re actually dangerously stupid. They’ve clearly drunk the ‘private business good, government bad’ kool-aid. How can the IA CEO justify these idiotic assertions? Certainly not on the basis of the past few decades of Australian economic history, that’s for sure…

    The causation is completely reversed: the government isn’t inefficient because it’s “the gubmint”; It’s inefficient because it mostly concerns itself with things that don’t have efficient market solutions (e.g. ensuring the unemployed don’t starve to death) and with the production of public goods (e.g. national defence). In other words, it doesn’t face market discipline because it operates where competitive markets won’t form. Selling public responsibilities and natural monopolies to private monopolists won’t fix anything: it will make things worse (and a select few much richer).

    It seems Australia isn’t even close to hitting bottom. The next few years are going to be bloody awful…

  5. The Neo-Libs / privatisers worship the tooth fairy each morning.

    Regulating natural monopolies is a pretty big ask without having jelly-backed (and bankrolled) politicians getting in the way. However, your mates (LibLab) must be looked after.

  6. ErmingtonPlumbing

    “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.”

    Well that “magical boost to efficiency” was peddled pretty hard by the ALPs, PJK and with a large part of the Labor party still celebrating his legacy, where is the opposition to this process going to come from? If not from the ALP.

    It needs to be retaken from within and put back on its traditional course.

  7. Actually everyone staying behind the privatisation is very well awarded. This is what everyone interested learns from history.
    The rest (including a range of fairy tales) is for consumers, whom CNN characterised as dump as shit.

  8. Delivery networks and their hubs are natural monopolies and should remain public.

    Poles, wires, conduits, cables, tracks, ports, pipes, stations. Arguably mobile phone towers fit this because duplication is unsightly.

  9. – No, IA wants to make a profit on exploiting the existing infrastructure at the detriment of the people whi use that infrastructure.

  10. Privatise everything possible.

    The government should only be selling the land to who ever agrees to build and maintain the best system for us and who seek to profit from it.

    Government can pocket money from the sale and hopefully wipe their hands of the matter, next!

    • Australian government should just back away at this point. Advocating for government to build anything like this is idiotic given their previous track record.

      Myki vs private, yeah ok.

  11. Yes a classic case of ‘first, assume a can opener’ economics from IA.
    You can argue that the networks in Melb/Sydney need more investment to simplify the operations by seperating from freight etc and reducing the number of branch lines which are inefficient compared to circular routes, however this has little to do with private ownership.

  12. There’s literally no question that Neo-Liberal privatisation has proven to be a failure.. the only question remaining to be answered is how to undo the mess?