I’m not a fan of the convention that newspaper and magazine editors choose the headline for articles, but I liked this one for a piece I published in The Conversation. The heading is neat and the sub-heading gives you the tl;dr version.
It’s about Australia, but disillusionment with privatisation is now widespread, so I hope this is of more general interest.
The promise by the Andrews government to reintroduce public enterprise to Victoria’s electricity industry, through a revived State Electricity Commission, is something of a shock.
The process of electricity privatisation in Australia began with Labor in Victoria, when the government of Joan Kirner sold 51% of the Loy Yang B power station in 1992. Her Liberal successor, Jeff Kennett, then sold the remainder of Loy Lang B, as well as the rest of the state’s publicly owned generation, transmission and distribution assets.
Labor has been office for all but four years since Kennett’s defeat in 1999. Until now it has made no attempt to reverse his policies. Rather, it has undertaken some rather dubious privatisations of its own, notably the Andrews government’s 2018 sale of the Land Titles and Registry office.
Premier Daniel Andrews’ statement that “it was wrong, it was a mistake, to sell our energy companies” therefore marks a clear shift.
The change is part of a broader shift in Labor’s position throughout Australia.
Arguably this shift began in Queensland after the trouncing of Anna Bligh’s Labor government in 2012, winning just seven of 89 seats. The Bligh government had sold a range of public assets (though retaining distribution and transmission networks, and coal-fired power generators). The remnants of the Labor party concluded privatisation was electoral and economic poison.
Labor was returned to power in 2015 after the LNP government of Campbell Newman, having sought to push privatisation further, was ousted after one term. Under Annastacia Palaszczuk the Queensland government is now investing in new renewable generation through the publicly owned CleanCo – including 18 wind turbines as part of the MacIntyre Wind Precinct, the largest wind farm project in the southern hemisphere.
NSW Labor went through similar contortions over privatisation, with a series of premiers and treasurers trying and failing to find a way of selling the electricity industry.
The disastrous defeat of the Keneally Labor government in 2011 was driven by this failure, along with the string of scandals that seem to be the rule rather than the exception in NSW politics.
Now, with the prospect of Labor returning to power next March, Opposition leader Chris Minns has given a guarantee there will be no more privatisations.
At the national level, the biggest single commitment of the Albanese government is the $20 billion Rewiring the Nation initiative, to build the transmission network needed for clean energy. The first two projects to be financed – the Marinus Link between Tasmania and Victoria, and the Kerang link, between Victoria and NSW – are publicly owned.
What explains this shift?
First, public opinion is now opposed to privatisation.
There was significant public support for privatisation in the 1980s, but this went into decline after major privatisations began in the early 1990s. Contrary to the hopes of supporters, experience with privatisation only made voters more hostile. This has finally permeated through to political commentary. The failings of formerly public enterprises like Qantas are now regularly traced back to the process of privatisation.
More importantly, politicians now understand that the economics of selling income-generating assets don’t stack up.
The premise for privatisation was that it was better for taxpayers to sell state-owned assets and reduce public debt.
But, particularly when interest rates on public debt are below the rate of inflation, government-owned enterprises generate returns well above the cost of the capital invested in them.
Those states that kept ownership of their electricity networks, such as Queensland and Tasmania, have received a steady flow of dividends, and the value of their assets have appreciated. The proceeds of privatisation in other states have long dissipated.
According to the ideology of privatisation, the low cost of borrowing for public enterprises is an illusion, because the public is on the hook for the cost of a bailout in the event of any business failure. But such bailouts have been very rare in Australia, and taking their costs into account does not change the calculation significantly.
The risk premium demanded by investors in private equity has always been large, and is now growing, making the gap between the private and public cost of capital even larger. There has been a corresponding drop in private investment globally, and (outside mining) in Australia. The case for public investment has never been stronger. Labor politicians seem finally to have realised this.
{ 14 comments }
Alex SL 10.28.22 at 8:34 am
More importantly, politicians now understand that the economics of selling income-generating assets don’t stack up.
I will be glad if public opinion really has turned, but this sentence made me laugh.
Surely nobody anywhere in the world at any moment in time ever would have actually believed that it was good economics to sell a town hall for fifty ducats and then rent it back for the next twenty years at ten ducats per year? If a private investor is willing to pick up an asset in the first place, then that is logical proof that the taxpayer will lose out on the privatisation.
In the case of facilities like the power grid or water pipes, add to that the problem that no matter how privatised the profits, when something goes wrong the electorate will expect the government to fix it anyway.
No, if a politician is smart enough to run an election campaign without trying to eat a pencil or wearing their trousers on their head, they can figure all that out within seconds, be it the 1980s or today.
The real reasons for privatisation have always been some combination of the following:
1) If I sell the town hall, I have fifty ducats to balance the books right now, but the two hundred ducats taxpayer money we will lose in turn are a problem for the next few governments when I may already have left office.
2) If I sell the town hall to my entrepreneur buddy from private school so that he can milk 150 ducats out of the taxpayers for the next twenty years, he will give me donations for the next campaign and maybe a cushy advisor’s contract once I am voted out.
3) An ideological desire to concentrate more and more assets in private hands, regardless of whether that leads to good outcomes. Again, nobody can be so stupid as to think that selling off an asset is actually a good thing to do for the state, not even libertarian politicians. But libertarian politicians want to destroy the state and believe that there is no such thing as public good, so by definition they must always pick the course of action that is the opposite of good public policy.
Given that the OP is mostly about Labor, one can assume that the first two points are the most relevant ones.
reason 10.28.22 at 10:39 am
To be honest John, I think you are UNDERSTATING the case for reversing privatization. There is another aspect. The importance of resilience in public services (particularly infrastructure) rather than just efficiency, cannot be overstated, and is something that capitalism, especially monopoly capitalism is very bad at.
NomadUK 10.28.22 at 10:35 pm
Huzzah for Australia. Those of us who happen to be stuck in the declining empire that is the US can look forward to something similar happening here about two weeks from doomsday.
Jim Harrison 10.28.22 at 11:42 pm
I worked for the utilities during the heyday of neoliberalism when it was taken for granted that private outfits were better than public ones. I never bought that if only because of the psychology of utility management. If you’re in the power business, what matters is keeping the lights on. The last thing you need is visionaries, aka greed heads.
MisterMr 10.29.22 at 8:11 am
Depending on how the government does it, though, re-nationalisation might be very expensive for the government if it buys back stuff at market price, because the fact that the government announces that it wants to buy back a thing will push up prices a lot. So I think that re nationalisation is a good idea but it will take time (I’m assuming the government is not going to just expropriate stuff).
Alex SL 10.29.22 at 11:18 pm
MisterMr,
Depends on the situation, I would say.
Sometimes it might be relatively cheap to buy an asset back, especially if the private investor has run it down through rent extraction and insufficient maintenance to the degree where it is close to collapse and starts becoming unprofitable. Admittedly, however, the real expense is then to bring the asset back to functionality. But that cannot be avoided either way if your nation is to have a functional asset; the question is only whether you pay for that investment with fees that hit poor people hardest or you pay for it with taxes shouldered more by the wealthier, and whether or not a private investor gets to skim off the top of that investment.
Or, sometimes reversing the push for privatisation may be more gradual. Instead of buying back or expropriating what it once owned, a government could simply build up entirely new public assets, e.g., wind farms or public housing.
Alex SL 10.29.22 at 11:34 pm
But yes, the fact that a neoliberal and/or corrupt government usually sells off assets for much less money than it would cost to build them or buy them back is part of the problem. Again, if the privatisation deal is attractive to a private investor, then that proves that the taxpayer will lose out on the privatisation. That isn’t an opinion or ideology, it is simply counting.
John Quiggin 10.29.22 at 11:37 pm
Most of the action in Australia so far has involved creating new government enterprises rather than renationalising those that were previously sold. That makes sense in generation and long-distance transmission where we need a lot of new investment
The big issue for renationalisation is electricity distribution (the poles and wires that connect your house to the grid). Privatisation was accompanied by rate-of-return regulation on excessively generous terms. That needs to be unwound, at which point current owners might welcome renationalisation
TM 10.31.22 at 12:31 pm
The Swiss government recently introduced a proposal to partially privatize Postfinance, a federally owned financial institution (similar to Postal banks in other countries but not actually a bank). The proposal was rejected in both chanbers of parliament with 0 – zero – votes. (https://www.parlament.ch/de/services/news/Seiten/2022/20220926192954279194158159038_bsd153.aspx) Which may be a record, I’m not sure.
The consequences of this are less clear than it looks because the parties had different and contradictory reasons for rejection but it seems fair to say that privatization is probably dead, in part because it would never survive a popular vote. It’s pretty bizarre that such a proposal was even offered now. Yet not so long ago, privatization of state owned public services was a fairly popular policy throughout Europe. It really was, I’m sorry to say.
Ebenezer Scrooge 10.31.22 at 8:01 pm
The cost of government debt is typically lower than the cost of private debt. This is a valid argument in favor of public services, but is not sufficient. The other question compares the cost of government management to the cost of private management. Where the costs are comparable (as I believe is true for utilities), government ownership is better, because government debt is cheaper. The best book I’ve seen on the relative costs of government v private management is James Q. Wilson’s Bureaucracy. tl;dr–government is better where the pace of innovation is relatively slow, and the enterprise has fairly simple metrics of performance.
Alex SL 11.01.22 at 9:20 pm
Ebenezer Scrooge,
The real other question is then, when and why would it ever be more expensive for the government to manage a service than for a private company, especially given that the latter expects to make a profit, have an advertising budget, etc? Logically, the government must always be able to provide the service more cheaply, because it can be content to at most break even.
The only solution to the puzzle is if the private company is allowed either to pay its workers considerably less than they would have got as public employees, or to neglect maintenance of the service and run it down until it collapses and has to be rebuilt by the government. But these strategies aren’t something I, at least, find preferable to paying slightly more for the service so that its employees are treated fairly and it is run sustainably.
Aardvark Cheeselog 11.04.22 at 4:19 pm
Alex SL @11:
I live near a smallish town that has its own municipal electrical generation facility. When the area was hit by one of the 200x hurricanes there were widespread power outages, and the municipality did not have deep enough pockets to finance repairing their infrastructure. They were without power for much longer than other residents of the area who were served by the state power megacorp.
There is maybe an argument that municipalities don’t want to be in the business of employing large numbers of people who lay asphalt or empty garbage cans or something and wants to hire that out. In theory there could be cases where there are motives other than not paying the employees fairly. There might be expenses that come with employing people in certain occupations that are highly dependent on the expertise of the person doing the employing, where the relevant public sector unit doesn’t have the relevant expertise or any way of quickly acquiring it. In this situation the cost savings of not hiring a middleman would be illusory.
But yes by and large the motivation for public officials seems to have mainly been to get inconvenient people off the public payroll, without really caring what the impact is on the employees.
Davis X. Machina 11.05.22 at 1:10 am
Maine may have on the ballot the creation, rather than de-privatization or re-privatization, of a public electric power utility via a consumer-owned non-profit acquiring the assets of the two largest for-profit incumbents. CMP and Versant Power (There are 9 existing consumer-owned utilities, all small)
https://www.mainepublic.org/environment-and-outdoors/2022-10-31/two-groups-say-they-have-the-signatures-for-competing-ballot-initiatives-on-electric-utilities
Alex SL 11.06.22 at 7:53 am
Aardvark Cheeselog,
I am certainly not arguing for every small operation to replicate every individual function at its local level. There is value in specialisation and economies of scale, and I see the point in research institutes or government offices not all having their own plumbers or carpenters on payroll. But there is simply no reason why a utility, and especially a natural monopoly like power or water supply or public transport, should be run privately, as it would have all the downsides of being private without even the (sometimes questionable) benefit of free market competition. The solution to the situation you described seems to be to organise power supply publicly but a level that has critical mass and deep pockets, such as the entire state?
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