Privatisation — Sell-off or Sell-out? The Australian Experience
Bob Walker & Betty Con Walker
Sydney University Press, 2008, $19.95
In this new edition of their 2000 classic Bob Walker, professor of accounting at the University of Sydney, and Betty Con Walker, former New South Wales Treasury official, review over two decades of privatisation of publicly owned assets in Australia, and ask what state and federal governments have learned from an often disastrous experience.
Their answer is: not very much. That immediately raises the question — why administrations that are presumably committed to achieving rational and efficient public policy keep persisting in privatisations that are irrational on a whole range of measures?
Why, after the disasters of the State Bank of NSW ($2.5 billion lost to taxpayers), Commonwealth Serum Laboratories (900% increase in share price in five years along with increased cost of pharmaceuticals to government), Telstra ($23 billion loss of value to the public sector on the first "tranche" alone), along with many others, do we now have the madness of the New South Wales electricity sell-off?
This is such a baseless project that economists who might normally be expected to support it — like former federal treasury official Nicholas Gruen of Lateral Economics — have been driven to attack the NSW treasury's arguments in its favour.
As the Walkers comment: "After all the mistakes made in past privatisations, some might say that it is a case of deja vu all over again!" The explanation for this strange inability to learn from life is, of course, that rational public policy isn't rational from the point of view of specific business interests.
The Walkers reveal that in 2007 alone, a desperate Howard government splurged $64 billion on bribes mainly targeted at swinging voters and marginal seats. The goodies from a successful NSW electricity privatisation are already being earmarked for the schemes designed to save the hide of the Iemma government in 2011 — Sydney's north-west "metro", rural and regional water and road improvements and "clean coal" technologies.
In the face of these blindly partisan but very determined interests, the Walkers are again obliged to dismantle the old self-seeking pro-privatisation arguments,
which have become a cracked record in our public life.
First, there's the hardy perennial of "defending our credit rating", an early favourite of shameless NSW treasurer Michael Costa. The Walkers note that while rating agency Standard and Poors claimed in September 2007 that "if the state decides to sell its retail and generation businesses, we would expect this to significantly reduce risk to the state", it provided no supporting analysis.
At the same time Moody's Investor Services, said that although increased infrastructure spending could be expected to see debt more than double, "the moderate starting-point [6% of gross state product compared to an OECD average of 43%] provides the state with room to take on a heavier debt load". After the 2008 NSW state budget, with its increase in debt, the mantra of defence of credit rating has practically disappeared from the Iemma-Costa case.
For the Walkers, a vital lesson of the two decades of privatisation is that "essential services such as power and communications should remain in government hands". However, the "grave mistake" of Telstra privatisation could be repeated with NSW electricity.
For example, the overall Telstra privatisation yielded the apparently huge sum of $45.6 billion. But that's only a little more than the $40 billion the company has paid out in dividends over the past 15 years, as well as being $18.9 billion less than its market value of $64.5 billion (at share prices prevailing at the end of February).
Similarly, NSW power generation and retail assets yielded a pre-tax profit of $1.5 billion in 2007 alone (a return on equity of 25.2%), yet the likely total proceeds of the sell-off are now being put, not at $15 billion but $10 billion (around only eight years of contributions to the state budget).
As to the government claim that these proceeds, when invested in a new NSW Intergenerational Fund, will "provide revenue at least equal to that currently provided by dividends from energy businesses" (Iemma), the Walkers point out that the energy businesses not only pay dividends. They also make contributions to the government in the form of tax equivalents and capital repayments ($575 million out a total contribution of $1.264 billion in 2006-07), as well as retaining profits for reinvestment.
They conclude: "It is difficult to conceive of an alternative investment that would produce better returns than those obtainable from a business that provides a basic service to the community, and that has many of the characteristics of a natural monopoly."
Then there's the argument that privatisation is required to fund badly needed upgrading in the power industry itself. Leaving aside the nasty reality that the running down of infrastructure is the result of deliberate government neglect (and even designed to "prove" that privatisation is necessary), the Walkers simply remind us that "the supposedly 'required' investment in new generating capacity [$10 billion] would be well within the capability of the agencies simply by reinvesting profits".
Such arguments are clear and compelling, and in the current fight in NSW have become a potent political weapon. The 702 ALP state conference delegates who voted electricity privatisation down in May were largely equipped by the Walkers in their battle of ideas with Macquarie Street.
Since the first edition of the Walkers' book (and in the light of many rotten privatisation experiences hear and abroad), the pro-privatisation camp has been forced on the defensive as the benefits of sell-offs never appeared or accrued overwhelmingly to shareholders.
Privatisation: Sell-off or sell-out? should make any reader very angry. The case for privatisation has never been made objectively and never stood up to serious scrutiny — it has always been about converting public assets into private profit. Those who gain are the corporations and (in the short run) governments, while consumers lose services or received them at a higher price than they would from public provision. Jobs are massacred — the main source of the leap in "shareholder value".
Armed with the detailed and invaluable analysis of this experience that the Walkers provide, our immediate job is to stop any further privatisations, beginning with NSW electricity.
Our other job is to start rewinning the idea of a new public sector — democratically run by workers, administrators and consumers and dedicated to delivering the services we need in ways that repair and sustain our damaged environment.