Privatisation is not enough

Bookmark and Share Economics & Deregulation, Governance & Service Provision, Deregulation Unit and Energy | Alan Moran
The Australian 14th June, 2010

State governments cannot seem to rein in spending so it matches their revenues. The upshot is skyrocketing debt levels. The NSW and Queensland governments see selling assets through privatisation as a solution. Privatisation of government-owned businesses improves efficiency. But it should not be seen as a means of achieving the necessary fundamental reform of state finances.

With its revolving door for state premiers and ministerial scandals, NSW is widely seen as the worst-run Australian state. Yet NSW has been less profligate in its spending than other states in the past decade, though no state government has lived within its means.

Between 2000-01 and the coming financial year, the Queensland government will have taken the prize for extravagance among the bigger states. In real terms its spending will have increased by 55 per cent. This compares with 50 per cent for Western Australia and 40 per cent for Victoria, with an ostensibly parsimonious NSW having seen its spending increase by less than a quarter.

As a share of total spending within each state, government spending in Queensland has reached 15.5 per cent compared with 12.7 per cent in NSW and 11.5 per cent in booming WA.

Government extravagances during the past decade have led to mounting levels of state debt. By the end of next year, overall state debt will total $120 billion, having increased from only $33bn in 2001. Victoria was close to debt-free 10 years ago after the frugal Kennett administration, but Labor has managed to rack up $20bn. Queensland has gone from the astonishing position of having negative debt four years ago to owing more than $30bn and NSW debt continues to rise and will top $40bn this year.

These are disturbing trends because ALP governments rarely show an ability to cut spending.

Privatisation proposals by the governments of NSW and Queensland are aimed at reducing state debt. Queensland Premier Anna Bligh has announced she plans to get $16bn from selling port, rail and forestry assets. NSW Premier Kristina Keneally has her state's electricity retailers on the auction block and is hoping to realise $8bn from this and from the rights to build new generators. Queensland has already sold its electricity retailers and the state's generation supply is partly privately owned.

Both states have resisted privatisation of their poles and wires. This is largely because of opposition from unions, but the governments also claim electricity poles and wires should remain in public ownership because they are natural monopolies.

Victoria and South Australia, however, have privatised this part of the electricity supply industry. The natural monopoly characteristics of poles and wires mean they must operate under regulatory controls whether or not they are government-owned.

The regulatory approach sets price ceilings and reliability standards. These protect consumers while giving incentives for the supply businesses to improve their profits and cost savings.

In the course of their oversight duties, regulators also assemble data that allows comparisons of different utilities' performance. In Australia this data shows privately owned poles and wires businesses are more efficient than their government-owned counterparts. A fortnight ago a report by the Australian Energy Regulator corroborated findings that had been published in work by former British regulator Stephen Littlechild and Australian consultant Bruce Mountain. According to the AER, depending on the measure used, the Victorian businesses spend between 20 per cent and 50 per cent less than their government-owned counterparts in NSW and Queensland in operating and maintaining their lines.

The private companies' cost savings have not been at the expense of supply reliability. Though one-off events such as bushfires mean it is difficult to make short-term comparisons, across the long term, reliability in the Victorian, NSW and Queensland businesses has been similar. Regulatory control ensures the cost savings get passed back to consumers as lower prices, but the lack of savings in the government-owned businesses prevents such benefits.

The message for the NSW and Queensland governments is their electricity consumers would see lower prices if the state-owned poles and wires businesses were privatised. This would also allow debt retirement. In the case of NSW, sale of these businesses is likely to raise $15bn, approaching half the state's present debt.

However, such a windfall should be a platform for achieving balanced budgets and not be used as an opportunity to defer spending restraint.