Today’s AFR column.
These Thai workers made their views about electricity privatisation very clearly known. Mind you, that isn’t of itself a great argument against it, just an apt photo - KP (from The Age)
Paul Keatings strength in government was his ability to make the case for government policies. There was theatre as well, but behind the drama was the compelling essence. It was a much needed skill, and its absence in NSW is a problem. The Iemma government wants to privatise its electricity generators, but it is floundering to make the case, even against weak union argument.
The union movement wants to win over the electorate, but its conflicting arguments must confuse more people than they convert. For example, unions want an electricity generating industry of world best practice. But they also worry that private owners of generators would reduce staff. Controlling costs is important to attaining best practice, and government bodies are typically over-staffed.
Unions also profess a concern that privatisation will lead to higher prices. But a properly structured, competitive electricity generating industry will lead to a reduction in electricity prices. Some efficiency improvements were achieved when the NSW generating monopoly, Pacific Power, was dismembered into contesting entities. However, continued government ownership of NSWs main generators – and weak transmission links between states – has allowed NSW Treasury to moderate competition to ensure the flow of healthy dividends into state coffers.
It is thus not surprising that the average wholesale price of electricity in NSW have been as much as 42 per cent a megawatt hour higher than Victorias. The NSW Audit Office further reported last year that, on average over the last five financial years, NSW prices were more than 20 per cent higher than Victorias. A similar but lesser difference exists between NSW and Queensland electricity prices. Costs must have had some bearing on these differences, but profit maximisation also played a part.
Because of NSWs desires for dividends, the profitability of the governments electricity industry has been markedly higher than the Australian average, and too high in absolute terms. Using Productivity Commission data, the Audit Office reported that NSW generators, transmitters and distributors collectively recorded a 15 per cent return on equity for 2006 and 2007. In the last three financial years, NSWs three electricity generating businesses recorded an average pre-tax annual return on equity of nearly 20 per cent. Earnings on assets were around 10 per cent. These are sterling returns for humdrum utility businesses.
But unions have not been the only dissemblers. When the union movement criticised privatisation because it would reduce government dividends and revenues, the NSW Treasurer, Michael Costa, said the proceeds of sale could be put in a term deposit at the local bank and earn more for the NSW taxpayers. Comparing annual dividend flows with interest earned on sale proceeds is misleading. And as the above returns indicate, the NSW government would be hard pressed to find a better investment than electricity, if revenues were the only concern.
Similarly, the government reassures voters by saying it will retain ownership of the electricity generators; it is merely leasing them. Economists, accountants, lessees and lessors know that there is little to distinguish a long-term lease from a sale. The passage of time eliminates nearly all of the differences between these divestment tools.
The Electricity Reform Implementation Group, a body established by the Council of Australian Governments, also embellished the case for privatisation when it claimed that budget pressures were limiting further government investment in the electricity sector. A large additional investment in NSWs generation and distribution sectors is pressing. But even with recent interest rate increases, needed investments can earn sufficient gross profit to service borrowings. And such borrowings, made outside of the general government sector, would not affect the governments budget. Still less would they imperil the states AAA status.
If jobs, dividends and revenue flow were the main issues, the union movement should have objected to governments selling banks, airlines, a gambling business, motor manufacturing, insurance companies, aluminium smelters, a brick factory, petrol refining, a shopping centre, a uranium mine and all the other businesses which Australian governments have sold over the last few decades. What we have seen from these sales is that governments run their businesses as monopolies, at the cost of the customer. And when they do engage in competition, it is at the cost of the taxpayer. Politics and business are bad company: each suffers when they are forced together.