Victorians are justified in disliking privatisation of public assets

By Leith van Onselen

Federal Opposition leader, Bill Shorten, has tapped into the perceived voter angst surrounding the privatisation of public assets, claiming that former Victorian Premier Jeff Kennett’s privatisation of the state’s electricity network has lead to rising electricity prices. From The Australian:

“Anyone who has been to Victoria and lived in this state with the (State Electricity Commission), which was government owned, we saw the power generators privatised in Victoria in the 1990s,” Mr Shorten said.

“The problem is that, ever since then, our power prices have gone up as big private companies have tried to extract more profits out of the power system and the energy generation system.

“I won’t be silenced on criticising privatisation in the electricity industry just because some people don’t agree with me.”

Mr Shorten said most Victorians thought the Kennett government’s decision to sell the state’s electricity assets was a mistake.

“I think most Victorians agree with me; they look at the privatisation and they see out of control prices and more unreliable power,” Mr Shorten said.

“So I’m not an unvarnished, uncritical fan of privatisation. But I don’t think that is the only issue.”

Shorten’s criticisms are justified.

The Australia Institute’s recent report entitled Electricity costs: Preliminary results showing how privatisation went seriously wrong, found that electricity prices have increased at three times the rate of CPI, primarily due to private companies ‘gold-plating’ financial assets and passing those costs onto consumers:

Two decades ago Australia embarked on an experiment with the privatising, corporatising and marketization of the electricity sector. The proponents at the time assured the nation that everything would be better. Clearly that is not the case; between December 1996 and December 2016 Australian prices increased by 64 per cent but electricity prices increased by 183 per cent—almost three times the overall increase in prices. In those figures the carbon price was barely noticeable…

Too often we assume that private and corporatised state-owned corporations are operating efficiently. In the real world such as in the Australian economy where the checks and balances are imperfect and companies exercise considerable power…

Electricity is now management heavy with a blow out in the number of managers relative to other workers. In addition electricity now employs an army of sales and marketing and other workers who do not actually make electricity.

… official figures show that productivity has in fact fallen in electricity. The latest figures for electricity, gas, water and waste and show that over the two decades to 2015-16 the gross value added per worker fell by 34.9 per cent from its peak in 2000-01 or by 19.1 per cent over the total period.8 Based on the figures in Table 1, that means that there are 14,150 more workers than would have been if productivity had remained at 1995-96 levels…

In addition the reforms seemed to encourage profit gauging on the part of companies in the industry who are able to inflate the asset base used in calculating the permitted return on assets. More than half the asset base appears to be ‘goodwill’ and retained earnings. There is a weird circular process in which high rates of return are capitalised in ‘goodwill’ and other fictitious or notional items while high profits guarantee high retained earnings which also feed into the asset base. In that way the unproductive capital base is allowed to increase and we are charged for capital that has no real function in producing electricity.

Adding up the additional labour costs of the new functions under privatisation, corporatisation and marketization and adding the costs of allowing returns on fictitious capital and retained profits we find that the additional charges are likely to be of the order of $404 to $502 per household per annum…

The examination of electricity costs and price setting suggest that Australians are paying much more than they should be if their regulators were guided by considerations of the most efficient delivery of electricity…

There is also the question of how to respond to the unnecessary functions that the electricity companies have undertaken. Nobody expected that in with corporatised and privatised electricity companies there would be a large numbers of sales people trying to sell indistinguishable commodities to consumers. The costs of ‘acquiring and retaining customers’ probably costs quite a large amount. Consider the pub test: Should you have to pay electricity companies the costs of advertising and marketing to you?

David Hayward – a professor of public policy at RMIT – also recently penned a stinging critique of the Victorian Government’s privatisation program, which has forced-up user costs without reducing taxes:

…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.

Asset recycling has so far involved the sale of income producing businesses like the Port of Melbourne, which are sold to pay for new roads, which don’t directly produce any return.

The family silver is being sold to buy some family bronze. It might be good politics, but it certainly isn’t good for the budget bottom line.

PPPs are rather costly, thanks to the high interest rates attached to private debt, compared to that issued by the Treasury Corporation of Victoria (around 3-4 percentage points).

Ironically, were the Government to rely on its Treasury to raise debt (in the way it once always did), it might well end up with even more revenue to play with.

It’s a pretty efficient business delivering $104 million as dividends next year.

The budget anticipates even more privatisations are on the way, not that there’s much left to sell.

Money has been set aside to scope the sale of the land titles registry, which will probably happen early in 2018…

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.

CityLink still does not show signs to motorists as to how much they will pay as they drive onto their increasingly lengthy toll roads.

Electricity companies have pricing regimes that are so complex the Essential Services Commissioner has found it necessary to give them a lengthy and increasingly testy serve.

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.

This is what you’d expect were the privatisers to deliver the promised efficiency gains.

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 and, in the case of energy, increasingly from China.

The metropolitan trains are run by a company from Hong Kong; the trams, a fifth of the metropolitan buses and the massive desalination plant by firms from France; and about 40 per cent of prisons by an American corrections company.

Profits from taxpayer payments are repatriated overseas in a nice little twist that sees privatisation down under contributing to globalisation on top.

Victoria is not the only state to see privatisation as a convenient solution, and it is but the first of the states and territories to tell us its budget plans for coming years.

We can expect the others to look to Victoria as a model, raising important policy questions about whether our governments are leaving an expensive legacy that someone else might one day have to fix.

This procession of dubious asset sales has gotten so bad that ACCC head and longtime supporter of privatisation, Rod Sims, recently called for a moratorium on further privatisations because of the damage that they are doing to consumers and the economy:

“I’ve been a very strong advocate of privatisation for probably 30 years. I believe it enhances economic efficiency [but] 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…

“It is increasing prices – let’s call it out… I want them to stop and think about the fact that when they’re privatising these things without effective regulation you are going to have increases in prices, and just think about the effects of that on the economy.

Stop and think. And don’t be surprised that your electorates think that privatisations increase prices. Of course they shouldn’t [increase prices] but the history tells you differently”.

The first rule of any privatisation should be that it boosts competition within the relevant market, and at a minimum does not lessen competition.

Unfortunately, recent privatisations have broken this golden rule, placing achieving a heavy sale price above the interests of users, in turn stifling competition and productivity.

Governments like to pursue this approach because they believe it allows them to deliver both lower taxes and reduced public debt simply by transferring the ownership of monopolies from public to private ownership.

But here’s the catch: the new private owners will almost always use their market power to force-up user costs and boost their profits. We have seen this time and time again with ports, airport parking, toll roads, and utilities (e.g. electricity, water and gas). In most cases, the cost-of-living burden for users is the same (or worse) as raising their taxes, albeit it in a less transparent manner since monopoly profits are easier to hide from public view.

In short, Victorians are justified in disliking the privatisation of public assets. Moreover, Labor is wise to tap into this resentment.

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Comments

  1. State Labor should buy back the electricity grid. The money can come from charging foreigners a massive rental tax. And a massive tax on each kid of each 457 visa worker in a Vic school.

    Stop wasting $60 million per year on the Formula 1 race!

    • $60 million is chicken feed and not even material when you consider how much the Vic Gov would have to shell out to buy back the electricity grid.

      • $60m x 10 years = $600 million.

        That would allow land to be purchased for the Doncaster railway. But the nutty ALP allows more and more apartment blocks to be built in Doncaster! Where the hell will the station go? 80 metres underground at enormous expense?

        $600 million would allow Vic to start buying back MEL Airport. Monopolies should not be privatised! Factories can/should be.

      • No doncaster (or any other line) can be touched until they fix the loop, so until metro is completed in 10 years time its a pointless converstation

      • It’s not about the money, Labor lost any contact with the post war settlement a long time ago, it’s about the ideology of modern Labor, Thatcherite, just like New Labour in the UK were before Corbyn

      • Doncaster is a liberal stronghold. Why would Labor bother?

        The people of Doncaster apparently prefer an EWL.

  2. Our policy makers – elected by the public – continue to privatise hand over fist against the public interest in part because politics is a two-stage career: attain public office and upon leaving it, move into a high paid position in the industries you once regulated. They are simply shoring up their own personal interests ahead of the nation.

  3. Wasn’t MB cheering leading privatisation of the electricity grid? MB was showing heaps of charts when Mike was privatising the electricity network showing that government owned distributors was massively gold plating the network. Have you guys now seen the light?

  4. Labor types like Shorten never talk about bringing back privatized assets into state ownership do they? That’s the real test, the rest is just bleating

  5. Just wait until we have the Andrews 40% renewables in 2025. Expensive energy, if there is enough of it. I’m worried.

    Looking at the chart above, there is also possibly some influence from the expansion of renewables over the same period. Government policy!

  6. Pretty sure Labor Guvts around the place are doing privatisations so its a bit of pot & black from Shorten et al. SA Labor doesn’t like privatising public assets either ……woops MAC, LTO……? So just because they are calling out “energy privatisation” the same call should be made on all State privatisations & perhaps Commonwealth Bank for example. Where is big Bill on all these as well?

  7. Philly SlimMEMBER

    This is misguided.

    Firstly, haven’t Victoria’s prices risen by less than in NSW and QLD (where power has been in State hands for longer, and still is in QLD).

    Secondly, a large part of the rise over the last decade was the rollout of smart meters. That was a Government decision. Take out the smart meter fiasco (in principal a good idea, but too early, they may save money in the longer term but I don’t think the current practice matches what was thought would happen).

    Thirdly, there would have been massive productivity savings when privatising these assets. That some has been wasted on a poor market structure (marketing professionals) is lamentable. I have dealt with a number of govt businesses in many jurisdictions in my time as both an investment banker and a treasury official. They are all run inefficiently, HR / IR is usually terrible in comparison to the private sector.

    Are there better ways to privatise? Yes. I think the NZ mixed ownership model (where the State retains a significant % and lists the business on the share market) to be a great middle ground. Something the States should do here (except for the fact a busted federation model and vertical fiscal imbalance incents them to do trade sales).

    • “Secondly, a large part of the rise over the last decade was the rollout of smart meters. That was a Government decision.” Please show evidence of this, because I think this is just some drummed up ideology.

      “Thirdly, there would have been massive productivity savings when privatising these asset” Please show evidence, because I think this again is just some drummed ideology. As evidence shown on this blog a number times, something that is inherently a monopoly means no productivity gains due to a direct lack of competition.

      • Jumping jack flash

        So was it that anyone who got a smart meter would pay the new rate for it, or did they just use that as an excuse that prices have risen, and any excuse was as good as any other to try and hose down the ire of the Australian consumer?

        Sure the smart meters aren’t free, and neither is their installation, but it really seems like they billed everyone in Australia for the cost of a smart meter and installation, and then only actually installed a handful of them.

        This whole smart meter thing raises a lot more questions than it answers, at least for me.
        Where’s the minister for energy when you need him? 😀

      • Philly SlimMEMBER

        Please show evidence?? I don’t see how any of what I have said isn’t self-evident, but anyways ……

        https://theconversation.com/smart-meters-dumb-policy-the-victorian-experience-47685

        “The Victorian roll-out of smart meters is a textbook case of bad public policy. It came about because the local regulator, the Essential Services Commission, decided that the market would not work and central planning would lead to a better outcome. See the AG’s report at p.4. This is almost always wrong. Good economic policy relies on providing the right people with the right incentives. The auditor-general’s report highlights the failure that arises when bureaucrats think that they know best and impose their wisdom on us all.”

      • Philly SlimMEMBER

        And here is the Productivity Commission looking into public v private. Read chapter 7. And do some googling. There is a massive amount of material that suggests private firms are better run than government owned corporations.

        https://www.pc.gov.au/inquiries/completed/electricity/report/electricity-volume1.pdf

        Oh, and have a look at page 15 of the Spark investor presentation. They just bought TransGrid (the best run NSW network, better than Ausgrid, Endeavour and essential) and even at Transgrid they have made 9% gross savings in a year.

        http://sparkinfrastructure.com/wp-content/uploads/2017/08/035_Aug-2017-HY2017-Investor-presentation-28-Aug-2017.pdf

  8. Jumping jack flash

    Oh this is awesome!

    I was listening to the radio this morning and the minister for energy was saying that he had a good relationship with AGL. This was in regards to the closure of some coal plants or whatever.
    And of course the electricity companies want to get rid of coal to replace with gas, because as we have seen here, gas is where the money is at!

    It got me thinking though about what would possibly happen if the minister for energy had a bad relationship with AGL. Would it even matter? I concluded no. It wouldn’t matter because the private companies in charge of the whole thing would just do whatever it is they do, and the minister for energy is largely irrelevant.

    And what exactly does the minister for energy actually do with his time every day? Its not like he needs to really do anything because private companies just do it, and do whatever they like. I doubt they even call him before they make decisions on anything, they probably just CC him onto the bottom of an email advising that this is what they’re going to do now.

    Then I remembered, what was said a couple of weeks ago: if anyone has a problem with electricity costs, then instead of complaining to the minister for energy, they should go and complain to the Indonesian call centres of the private companies that set the prices.

    Minister for energy must be one of the easiest portfolios ever! I wonder how much it pays?

    Mate, my cat could take that one on, and probably do just as good a job.

  9. MediocritasMEMBER

    Maximum economic activity is constrained by available energy (first Law of Thermodynamics).
    Pragmatically, from the user’s perspective, available energy is impacted by price.

    Pushing up the price of energy is therefore rather unintelligent if the objective is economic growth.

    A better strategy is to approach energy as a “loss leader”: https://en.wikipedia.org/wiki/Loss_leader , selling it at cost or at a loss to boost greater economic activity that can then be taxed back to easily pay for the loss, keeping the rest as profit. This pretty much requires nationalisation of energy.