Grossly offensive political ads about the alleged dangers of Chinese purchase of electricity “poles and wires” during the last week of the New South Wales election campaign say much more about the Labor-affiliated unions who placed them than they do about the Baird government’s privatisation plans. It seems that Richo’s “whatever it takes” political philosophy remains alive and well in the ALP.
As for the power privatisation policy they were seeking to demonise, my own attitude is succinctly summarised by Ross Gittins:
I’m never sure who annoy me more, the business types who are certain every business is better run if privately owned, or the lefties who oppose every sale of government-owned businesses on principle.
As a general rule, privatising a natural monopoly is a dumb idea, because the monopolist will extract monopoly rents and prices paid by consumers almost inevitably rise. However, as Gittins points out, the situation is different with power in Australia because of the tight regulatory regime surrounding the industry:
The obvious starting point for consumers is: would selling the businesses lead to electricity prices being higher than they would be under continued public ownership? Or would there be a decline in the quality of service, such as blackouts?
In this particular case, the answers are more certain than usual: no and no. That’s because, the networks being natural monopolies, the prices they charge are controlled by the Australian Energy Regulator, which believes they’re already too high. Service quality is also tightly regulated.
Long-term effects on the New South Wales budget, because of loss of the ongoing dividend stream from power distribution infrastructure, are also dealt with by Gittins:
This being so, the main issues of contention concern state government finances. The critics of privatisation stress that it’s no magic pudding: sell these profitable businesses and you lose the dividends they were paying the government, along with the equivalent of the company tax they were paying to the state (because state-owned businesses don’t pay tax to the federal government).
That’s obviously true. But remember that, according to economic theory, the sale price of any business should be the “present value” of the stream of income it’s expected to earn in coming years.
If so, the seller is perfectly compensated in the sale price for the loss of future dividends. Why else would they sell?
Just as importantly, the “asset recycling” nature of the Baird government’s policy is worth examining. Flogging off power infrastructure to build much-needed road and rail projects prima facie makes sense as long as the cost-benefit analysis of the road and rail projects stacks up. However, that’s where Baird/Berejiklian’s plans run into trouble. Essentially the whole of the proceeds from the sale/lease of electricity “poles and wires” is intended to go into financing the proposed new WestConnex toll road/tunnel project. But a recent NSW Auditor-General’s report casts serious doubt on the processes and business case surrounding WestConnex. At the very least it highlights the importance of a long-time hobbyhorse of mine, namely the proposition that all major publicly-funded infrastructure projects should be compulsorily subjected to cost-benefit analysis by Infrastructure Australia. NSW Labor might at least have won itself some brownie points, and possibly even electoral credit in overcoming its epic reputation for dodgy dealing, had it made an election promise along those lines.
Nevertheless, I must say that my own tentative view, as a born-and-bred Sydneysider who drove taxis for years, is that WestConnex is a critical part of Sydney’s future transport infrastructure that really must be built in the near future. You only have to glance at a map of Sydney’s current motorway network to see how essential it is to create a link between Port Botany and Mascot Airport to the south-east of the city and the booming western suburbs. I’d be surprised if a kosher cost-benefit analysis doesn’t stack up, especially on the new alignment shown on the map above. In fact, I reckon the NSW government would be well advised to go into hock and borrow the billions extra it would need to expedite construction of the northern extension and western harbour tunnel (for both road and rail) also shown on the map.
The problem with public discussions of transport infrastructure in Australia is that they divide predictably on ideological lines in a fairly similar way to the privatisation debate. Lefties tend to favour public transport spending especially railways, and are knee-jerk opponents of motorway/tollroad projects, while the Right pushes a private sector-driven California Dreaming vision of endless concrete motorways and apparently sees trains, trams and buses as infernal contrivances patronised largely by Labor and Green-voting hippies.
Fortunately, the Baird government appears to have a much more balanced and rational approach to transport infrastructure than Tony Abbott and his ilk. The reality is that any workable long-term transport plan for fast-growing major cities like Sydney and Melbourne requires balanced emphasis on both road and rail. Heavy rail is essential for high-volume commuting to and from the CBD, while motorways are equally essential for journeys between places other than the CBD.
I didn’t see the ads however I would have trouble about the Chinese government entity or any entity from another Government owning the assets of electricity here.
and your lnk provides no evidence for the grossly political adds either!
See this article on The Conversation by academic James Laurenceson.
Stop being disingenuous, Homer.
Ken, privatisation has been poorly defended by its politician supporters because the real reason it should be supported is deemed too politically ‘courageous’ to reveal. The new owner will have heightened incentives to increase profits, but as you point out correctly it can’t do so by ‘gouging’ to the extent that this is prevented by regulation anyway. So what can it do? Because it isn’t government owned anymore and therefore its tactics can’t be used to target the government of the day in future political campaigns, it will have a freer hand in dealing with unions and it will seek efficiencies in the form of increased labour productivity i.e. cutting excess staffing. Thus unfortunately Fred Nile’s condition for supporting privatisation would appear to negate its main benefits.
Jason you may have no trouble with a Foreign government owning electrcity assets I do.
I don’t care about a foreign company but I do stop at a foreign Government and Ken provided no evidence for his assertion.
I might add what is important is not whether the assets are owned by the private or public sector but how much competiton there is in the sector.
something that no-one has addressed as such!
err no Homer, my hypothesis that if ‘poles and wires’ are owned at arm’s length from the government of the day, the owner might be more inclined to reduce featherbedding doesn’t depend on the degree of competition. it’s more of a ‘political economy’ type argument and there are studies supporting this ownership effect,
Err no Jason I wasn’t commenting on your piece but in general although you like many others ignore the competition of the industry that has been privatised.
I would have thought since Thatcher’s cockup of British Telecom where NOTHING changed when there was privatisation and people were ogling at the revenue raised people would have learned something but apparently not.
Moreover, kneejerk union opposition to privatisations is itself evidence for this hypothesis. Or do you think they are being irrational? (in defending their short term interests)
Jason you do not seen to understand liberalise the product markets and the labour market changes automnatically however in this case you have a monopoly.
you avoid the obvious question of whether a foreign government should own electricity assets
“Grossly offensive” did seem to me to be gilding the proverbial, Ken. Opportunistic and sounding a bit desperate – yes; but I can’t personally see the “gross offensiveness”.
One of the puzzling things to me about the whole debate is that I couldn’t see that the graphs being bandied about were actually supporting the benefits claimed – network costs are much lower in Victoria than NSW, but much higher in South Australia and Tasmania. Actual electricity prices are line ball between Victoria and Queensland, and although network costs are higher in QLD, shouldn’t they be given our vast coastal population spread?
Maybe NSW’s high network costs are due to a highly unionised industry, and maybe selling (part of it) will help. But I can’t see how the picture across the nation is supposed to convincingly show that privatisation is always effective for reducing network and electricity costs.
Figure 3 in this Grattan article is what I am referring to.
http://theconversation.com/nsw-power-privatisation-stop-the-sell-off-claims-put-to-the-test-38099
Gosh, political ads that overstate their case. Im shocked! Shocked, I tell you! Particularly when the Coalition always has and always will run only ads that are emblematic of right reason directed to the achievement of the good, the true, and the beautiful.
Privatisation does not necessarily make inherent sense to the balance sheet. As John Quiggin has noted repeatedly:
There is no magic pudding
The privatisation of the UK electricity industry had the amusing result that EDF, the French public authority for electricity,owns 90% of the UK industry. You’d wonder, when domestic public ownership is such an obvious an universally accepted public evil, that offshore public ownership is not.
France does not suffer from endemic corruption, a tight elite of oligarchic lineages that control both state and economy, or an appalling record of human rights. It is not inherently offensive to worry that a state with all of these characteristics is likely to exercise what capacities we give it.
I don’t oppose all privatisations. I am not absolutely sure that selling the cow to buy milk is always and everywhere and under all circumstances a terrific idea. Nor am I absolutely persuaded that a rhetoric of privatisation whose chief claim is that it is unarguable is necessary deeply persuasive.
The Quiggler is rarely wrong.
What I noted with the private equivalent of my public service function was the lower wages, reduced benefits and the de facto mandatory unpaid overtime of the private sector. These factors alone accounted for, um, higher productivity.
Altho I don’t usually support privatisation, I think the threat of having one’s function privatised by itself can increase public service efficiency. This was certainly the case with my function.
I’m not sure what country’s Wikipedia page JQ looked at but it wasn’t France’s.
Quiggin made no comment about France. I did.
Nor would I think a distinguished academic economist relies on Wikipedia for his research, although stating (not implying) that he would is a fine way to shoot the messenger.
I don’t think that is shooting the messenger. Not that there is anything wrong with wikipedia, it is just that a cynic might say that France does have:
, or with regard to the last 50 years and to the French labor laws:
But that would be unfair to your main point, whatever it is.
Incidentally, I did take a look at the Wikipedia article for France so I could see what you say Quiggin missed. No mention in there of France having:
1 a tight elite of oligarchic lineages that control both state and economy
2 an appalling record of human rights
Are you completely sure that you looked at the right country?
Ken
The appeal of the Baird government is that it in motoring terms, has reliable handling: goes exactly were it is pointed. And that is for all but thrill seekers, a very good feature.
The mystery is why so many recent Australian governments have been the complete opposite, no?
I concede that Baird is personable and an excellent communicator. I suspect that Baird, and Labor’s appalling record of corruption, may be the main reasons the Baird government has not joined its friends north of the border.
However, privatisation for a reason rejected by most economists does not suggest that the next 4 years will be entirely free of thrills and spills. If the privatisation is rejected by the legislative council, Baird himself admits there is no Plan B.
The NSW constitution does not provide for double dissolutions or joint sittings. A bill blocked by the council can be put to referendum. Somehow I don’t think a privatisation referendum would be wildly desirable to the government.
The opponents of privatization, within labor, were prepared to stop at nothing and literally wrecked their own government, to get their own way. Would not trust them , ever.
evidence as yours like Ken’s is very sparse
The following is from PJ Keatings ,27 October 2008 letter to John Robertson:
I am not completely sure that I would consider Paul Keating a reliable authority on the need for restraint and moderation in political discourse.
John that is an opinion. I want evidence of grossly offensive political acts and as yet there is none! Bugger all, diddly squat, a big goose egg
I might add I do not recall anyone saying this to the opposition of Singtel being allowed to take over Optus.
There are plenty of other witnesses , for example Costa…
Costa is a rightwing nutter who resigned from the legislative council on the day his superannuation maxed to take service with Rupert Murdoch as a headkicker. He has not been active in Labor politics since his removal as NSW treasurer. He is a frequent and welcome political commentator on the Alan Bolt show.
It is not unknown for politicians to turn their coats. It is unusual to have such people quoted in evidence of either temperance or loyalty:
loyalty at any price is the last refuge of the scumbag
loyalty at any price is the last refuge of the scumbag
That cuts both ways. Loyalty to privatisation is…
In this thread so far all we have from the advocates of privatisation is:
1 claims about the content of the Wikipedia France article that proved to be unsubstantiated
2 claims abut the political conduct of the opponents of privatisation within the ALP that proved equally unsubstantiated
3 an ambit claim against loyalty that owes more to language than logic
Is there an economic argument for privatisation or do we have to continue reading all this second- and third-order stuff?
Oh FFS I wasn’t making claims about Wikipedia content, you really need to re-read my comment. And lighten up!
Am happy to agree with both Keating and the former NSW Labor treasurer- there is no compelling argument that keeping it in public hands is a necessity, and we need the money for building new public infrastructure.
‘we need the money for building new public infrastructure’
Incorrect.
Then use the bloody ‘AAA’ rating of NSW to borrow at historically v low rates to build whatever we decide is important & has a financial justification!
This has the additional benefit of ‘intergenerational equity’, so that future generations who will avail themselves of this new infrastructure can also pay for it.
That’s an argument from authority not an argument from economics.
We’ve given you the compelling economic argument against the magic pudding theory. Nether you, Keating, nor Costa have answered it.
Surely the spodestatarchy can do a tad better than this?
You seem to be pointing to an example of regulatory failure, as admitted by the regulator, to justify the claim that regulation is effective.
I’m concerned by the possible interaction between the TPP and privatisation, specifically that any action taken by government that reduces consumption or grid use would open the government to paying compensation. Even without the TPP there was the gross city funnel debacle where the government contracted itself out of the ability to change surface streets and bus routes in an effort to defer the failure of the “private business”. I’d hate to see the same done with the electricity grid – US-style solar feed-in fees? Or just the fixed connection charge continuing to rise without limit as usage falls.
1) All voters know the promise of lower prices from privatisation’s are a crock of _ _ _ _.
2) If I was King, I wouldn’t allow the sale of strategic assets like one of our two oligopoly telcos to a sovereign gov’t (Optus) nor NSW’s poles ‘n wires to a CHI COMM co.
3) The blogger carefully elides the $ several hundred million dollar hole in NSW’s fiscal revenues which this sale will create. What will fill this?
UPSHOT: the sale of revenue generating businesses from state owned to private is a neo liberal obsession of conservative politicians. They simply cannot let it go.
ps btw, the reason electricity distribution costs are lower in VIC is due to the smaller footprint of the state vis a vis NSW, and higher population density within it.
Perhaps you’re not aware of this, but Optus is owned by Singtel, which is a subsidary of Temasek, which is of course the Singapore government’s investment fund. So you’re trying to stop the sale of something already entirely owned by some other countries government (let alone private investors).
I actually said that the anti-privatisation group within NSW labor were prepared to stop at nothing, including wrecking their own government, to get their own way. And that is by now a matter of historical record.
How do supporters of Chinese investment explain China’s limits on investment in their own country? Investment in China is always through a controlling Chinese partner. I think the answer is that they do not invest for monetary gain – they invest for control. As someone who has lived in China and heard their views of the west and the historical destiny of China, I think we need to view Chinese government investment through a very different prism than say a US commercial investment.
I think that would be true no matter what policy China holds for it’s own investment — they can of course hold a policy like this given far more investment money goes in versus out. I also think the asset class makes a big difference — for example, it’s clearly in China’s national interest to flood the market as much as possible with cheap resources, and that would be worth losing money for with the purchase of an individual company. Alternatively, I doubt anyone should care too much about things like their companies building housing (indeed, we should encourage such investment).
I believe I said that but Soony didn’t like that.
Well selling or not selling has to be based on the long-term value of the poles and wires. May want to sell when the value is high!
“CSIRO last year suggested in its future grid report that nearly one half of generation could come from the users themselves – such as rooftop solar on households and businesses. But it also warned that one third of customers could take themselves off the grid if the utilities did not respond adequately and merely tried to shift the cost elsewhere.” http://reneweconomy.com.au/2014/australian-network-operators-ready-to-ditch-poles-and-wires-59519
Ken, I’m disappointed in your summary as I was disappointed with Ross Gittin’s article.
There seem two main issues.
1) the cost of capital for governments is a good deal lower and it’s lower even if they take several hits on their credit rating, though it’s hard to see them doing so for investing in assets that generate greater income than interest payments.
2) governments may featherbed assets.
I reckon that is all ye know and all ye need to know. So then you have to work out what you think of those two issues – and preferably quantify them. But in your post and Ross’s column they seem like talking points amongst a bunch of others which then receive pretty summary treatment.
The business about asset recycling is somewhere around 80% snake oil – selling assets that generate income gives you next to no room to buy new non-earning assets if you’re worried about your credit rating. Likewise if it’s such a good policy why is the government half selling it? And the argument that the price is regulated doesn’t seem very convincing to me. It’s a good argument for five years or so. The bottom line is that with privatisation, in the long run returns must be kept above the private cost of capital to stimulate investment. If it’s government capital the rate is lower. And if the Government is unhappy with featherbedding surely it can put in managers that don’t featherbed.
Both you and Ross Gittins seem to arrive at a position supporting Baird after a pretty vague process of canvassing the issues and then arriving at summary judgements on the balance of them all. It feels like argument from body language to me. Gittin’s beginning
doesn’t bode well – as if the column is about picking a spot between these two stupid extremes rather than picking one’s way through the issues, working out which matter, ignoring the ones that don’t and making up one’s mind about the ones that do.
I would probably have voted for Baird as the more impressive leader, and a leader of (I’m hoping) integrity, and also because when they got in the ALP would have pursued the same policy after the elapse of some appropriate period of time (as they seem to be doing pretty much immediately in Queensland).
Nick, I have perhaps a naive question about credit rating. Why must Australian state governments accept the consequences of a downgrade? We KNOW the state governments are AAA+ regardless of what S&P might say. Surely, the federal government can just borrow the money and lend it to them. Presumably this is considered sacrilege by economic dries. Is the argument that the Fed govt is not supposed to be an investment bank? But they fund all sorts of state projects already.
Chris, what you’ve suggested makes perfect sense and as I understand it the Commonwealth is doing this to some extent – conditional on states ‘asset recycling’. But the old ‘loan council’ days followed this process of the Commonwealth formally supervising state borrowing which presumably one gets drawn into if the Commonwealth formally guarantees state borrowing. Certainly it has the taxing powers and the balance sheet for it – and those things – along with its larger size and so greater liquidity see it have lower costs of capital.
So I guess I wonder why state governments care about ratings at all. baseless electoral backlash I guess. But I have never heard any state politician argue against letting rating threats drive policy. You can imagine the headlines. Gotya!
It is probably another of these shibboleths (like debt and sovereign risk) that get trotted out by the Murdoch press to stop government investment. It is pretty easy to convince a gullible electorate that an ostensibly independent downgrade in rating is intrinsically bad. Explaining that the commonwealth could guarantee state debt makes the average punter’s eyes glaze over.
Thanks for the feedback Nicholas. Not being an economist I wouldn’t want to argue strongly against you. However, it seems to me that the point that returns on electricity infrastructure are likely to fall over time (given households moving to solar voltaic etc) isn’t a bad reason to consider divesting ownership. OTOH if I know that then so do potential buyers which means they will build that factor into their tender price, thus reducing the attractiveness of privatisation.
I’m also not so sure that the asset recycling points don’t have some substance. Both Sydney and Melbourne certainly badly need major capital investment in transport infrastructure (both road and rail). It may well be that the most cost-effective way of doing that would be public borrowing. However, as long as the myth about the unmitigated evils of public debt and deficit continue to control voters’ attitudes, ignoring that realpolitik fact and borrowing mega-billions will continue to be a courageous decision for any state government in a Sir Humphrey Appleby sense. There is a clear and close connection here with my other recent musings about your fiscal prudence authority concept.
Finally, a factor I didn’t mention in my post is that I wouldn’t in fact be at all fussed if private owners of power infrastructure started hiking prices in due course. It might end up doing the same practical job on carbon emissions as a carbon tax or ETS. It would be a neat irony if the application of neoliberal privatisation religion were to have that paradoxical effect!
What is the logical connection between advocating particular public expenditures and financing them by a method that does not work?
Thanks Ken,
Agreed that greater fiscal independence is an important contributor to more rational policy – which should include triumphing over fiscal populism both when it’s too expansionary (say before elections) and when it’s too contractionary (as it is on debt in recessions and for investment).
But the left leaning pollies have been so pusillanimous on this subject that I don’t think we’ve had any real test of the popularity or otherwise of a more sensible approach to debt. I’d much rather sell the case I have to the public than any manner of ideas – like reducing the pension in the future or privatising the railways in Queensland after you’ve promised not to. If you’re in government and you make the case, I think it’s a complete no-brainer, particularly debt for investment. People really do understand that and you can bolster it with the institutions of fiscal policy as I keep saying in columns. Not only that, but if your opponents argue against this, you then nominate all the projects you’re debt financing and ask your opponents to explain why they want to cancel these projects.
But the geniuses vegetarians in the ALP know better than that – the dear old pets.
I am certainly not an economist nor even the shadow of one, but I am person (ok, barely a shadow of many people around, but that title is all I’ve got and I’m sticking with it). I’ve also dealt with people for, well, my whole life. I think this gives me a particularly valid perspective on one of your two branches of the tree of all relevant knowledge, namely, that bureaucracies tend to featherbed.
So I have a few comments on why I think you have committed a bit of the same sin as Ross Gittins, starting with the featherbedding part before wasting your time with my completely ignorant thoughts on the first point.
I think you have done something a bit similar to Ross (maybe deliberately??) because you define the whole debate as: does the cost of featherbedding outweigh the savings on cost of capital? Whilst at a sufficient level of generality, that may be right, I think the use of the word featherbedding undersells the point, in a Louisiana purchase way, and elides what might be thought of as discrete points.
Featherbedding does evoke the fact that:
– bureaucracies are unlikely to push particularly hard to cut costs, and in fact are likely to tolerate significantly greater costs than a competitive entity might;
– bureacracies are particularly vulnerable to internal capture at the expense of external parties (i.e. non-union taxpayers)
Some of the discrete points that are not readily evoked by ‘featherbedding’ are:
– bureacracies appear less likely, perhaps dramatically so, to innovate;
– the long-run cost of that failure to innovate can be very high, although in certain cases it can be mitigated if there are other (eg foreign or other-state) markets with innovative participants who can be copied; and
– bureacracies are likely to, and particularly capable of, suppressing competition including potentially innovative new entrants.
I think those factors are very significant, even in an absurdly highly regulated industry as power generation and transmission. In fact I think they should be at least a third branch to your tree.
Now to waste your time with my ignorance on cost of capital. Isn’t this only superficially true? I.e. doesn’t government have a lower cost of capital of electricity plant construction only in the same way Nestlé does: that is, government has exactly the same cost of capital of the particular activity, but secures that capital against a far greater range of receipts (i.e. taxes) than a power generation company?
So is it not the case that the lower cost of capital just amounts to taxpayers accepting a higher potential tax burden in the form of a guarantee over the particular funding allocated to that activity? This is exactly why, notwithstanding that Nestlé can raise money for free at the moment, it’s shareholders would not let it build power plants without compelling reasons that have nothing to do with the cost of capital.
Hopefully that doesn’t take too long to read relative to its value :)
In response to Chris, well rating threats should ultimately drive policy – it’s just that if they did we’d try to optimise our rating – and if we did that it would not be AAA.