Among many other challenges in dealing with the failure of urban policy in Australia, the Minns (NSW state) government is faced with the task of renegotiating, or repudiating, the disastrous set of contracts for toll roads in New South Wales made by its predecessors (Labor and Liberal) with the Transurban group. As a review by Allan Fels and David Cousins has found, the government is at risk of being held hostage by toll operators. According to Fels and Cousins, immediate legislation is needed “as a backup to negotiations and to give the government power if necessary to determine final outcomes”.
This is by no means an isolated case. The failure of the National Electricity Market, premised on the idea of competition between private companies, has led state and federal governments to re-enter the business of electricity generation, storage and transmission. The disastrous experiment with private prisons in NSW is being unwound. Plans for the eventual privatisation of the NBN, established in response to the failure of the privatised Telstra to deliver national broadband, have been abandoned.
In the United Kingdom, where the Thatcher government of the 1980s led the way in privatisation, the complex and difficult process of renationalisation has been going on even longer. Rail privatisation was partially reversed with the renationalisation of Railtrack under the Blair Labour government, further limited under the Tories, and is now likely to be completely reversed.
The UK’s new Starmer government is also grappling with the impending failure of Thames Water, privatised under Thatcher and stripped bare by its private owners. Australian readers won’t be surprised to learn that the “millionaires factory”, Macquarie Group, was a leading player here.
The end of the UK’s private finance initiative (PFI), the model for Australian public-private partnerships, is already producing huge problems. But it is now clear to everyone that dealing with these problems is better than persisting with the hopeless failure of PFI.
Even Thatcher’s greatest political success, the sale of council homes, looks a lot less appealing in light of the current housing crisis in the UK, paralleling that in Australia. It seems clear that governments will need to re-enter the business of building and operating social housing in big way.
In fact, the failures of privatisation are numerous and obvious, while unambiguous successes are hard to find. Claimed examples, such as the pharmaceutical enterprise CSL, turn out, on closer examination, to have used public money to build private empires.
Why, then, was privatisation such a popular policy, at least among those who dominated the policy debate from the 1980s until recently?
The simplest explanation is that politicians saw privatisation and private infrastructure as a way to get access to a big bucket of money, which could be spent on popular projects without the need to raise taxes. This was a fallacy, refuted many times over, but resurrected just as often in zombie form. Either the government hands over the right to collect revenue to private operators, as in the case of toll roads, or the public forgoes the earnings of government business enterprises, as with asset sales.
Even now this lesson has not been fully absorbed. On the one hand, the Victorian Labor government has begun the process of reversing Jeff Kennett’s privatisation of the State Electricity Commission of Victoria. On the other, having sold its land titles office, Labor is now poised to sell the Births, Deaths and Marriages Registry where it has already increased charges for the provision of legally required information.
Economists who advocated privatisation mostly avoided this silly error. Indeed, the NSW Treasury repeatedly warned against treating private provision of infrastructure as a “magic pudding”. But, under the influence of neoliberal ideology, they committed a subtler error. Rather than examining the fiscal outcomes of privatisation, they assumed public investments should be subject to a large risk premium to make them comparable to private alternatives. This premium was not needed to cover the actual loss from failed public investments, which has historically been low. Rather, it reflected the mysterious “equity premium” demanded by private investors in financial markets. At least until the GFC, neoliberal economists relied on the “efficient markets” hypothesis to conclude that the price observed in financial markets must be the right one. In a world where meme stocks and crypto scams are now a central part of the financial system, such a hypothesis is no longer credible.
Finally, of course, there were huge profits to be made in the financial sector from the sale process and from exploiting weaknesses in the regulation of privatised companies. The list of former politicians who have sold public assets and ended up with lucrative post-politics careers is, incidentally, rather long.
The era of privatisation is nearly over, at least in Australia and the UK. But cleaning up the mess left behind will take years, or even decades.
{ 38 comments }
Alex SL 07.25.24 at 7:56 am
Why, then, was privatisation such a popular policy, at least among those who dominated the policy debate from the 1980s until recently?
As mentioned in the post, it was because of a combination of raging ideological hatred of public services and short-sightedly funding of tax cuts with the one-off proceeds of selling off public assets.
And neither of those are going away, so I strongly doubt that the era of privatisations is over. Libertarian and neo-liberal ideology persists, and many of its adherents are firmly of the mindset that if their ideology demonstrably fails, it is only because it wasn’t implemented radically enough, i.e., not enough of the economy has been privatised and deregulated. Evidence of failure is completely irrelevant to those who, when faced with the choice of paying a public servant $100 to dig a hole or paying a private subcontractor $150 to dig a hole, conclude that the former must be an inefficient waste of taxpayer money because they are a public servant, end of discussion.
Matt 07.25.24 at 10:10 am
Plans for the eventual privatisation of the NBN, established in response to the failure of the privatised Telstra to deliver national broadband, have been abandoned.
I don’t know if privatizing the NBN would be a good idea or not, but it’s a funny example to focus on because the NBN is hot garbage. Before moving to Australia I would have scoffed that the idea that anything could make me nostalgic for the fine customer service and performance of, say, Verizon or Comcast, but dealing w/ the NBN has done just that. It’s slow, over-priced, unreliable, and has non-existent customer serivce. And note I don’t mean the providers “to the door”. The one I use is, mostly, fine. I mean the NBN itself, which is bad, costs too much, is worse in performance than I had in the US 7 years ago, goes down all the time, and is impossible to get actual information or service from. Again, maybe a privatized version would be even worse, but given that the current system is worse than some private companies in the US that are very widely hated, it’s hard to imagine for me.
Matt Young 07.25.24 at 12:14 pm
I wish I shared your optimism, John, in two respects.
First, that the initial and welcome (if limited) steps to re-nationalize some public goods and service provision marks a genuine end to the ‘era of privatization.’ In the case of the UK in particular, another view suggests that a Starmerite Labour party is one exogenous (or even endogenous) shock away from mournfully shaking their heads, noting that better things are no longer possible, and continuing to sell off state assets either directly or indirectly.
But even if one credits them with a more credible commitment to the renationalization project, you also have to wonder whether this government can make enough significant and well-implemented changes rapidly enough to improve voter’s real and perceived material conditions before the next election. Claims of the death of the Tory party / right-wing political parties in the West-at-large after embarrassing defeats do not have particularly strong predictive validity, so we can’t presume that this current milieu has a shelf life beyond the 2020s at the latest (again looking solely at the UK, as I am far less familiar with the circumstances in AUS).
The second optimistic view is of politicians and your colleagues-at-large in economics. When you write that “[t]he simplest explanation is that politicians saw privatisation and private infrastructure as a way to get access to a big bucket of money, which could be spent on popular projects without the need to raise taxes” I can’t help but note that this does not pass the smell test of looking at the stated preferences of many of the politicians in question and, perhaps more importantly, the policy position statements, biographies, and other historical documents that detail the stated preferences of the donors, advisors, etc. that supported and underwrote the privatization movement. Nor does it pass the revealed-preferences test, as you directly if succinctly conclude on. I understand the duty to treat those with different political preferences with respect, but your ordering and focus on the motivations driving the privatization movement in this post reads almost hagiographic. All else equal, the dominant motivation for privatization is to maximize private profits for the in-group at the public expense. That’s what its proponents say off-camera, and it’s what we observe empirically.
engels 07.25.24 at 1:02 pm
Baby one more time
https://www.theguardian.com/commentisfree/article/2024/jul/02/labour-plans-britain-private-finance-blackrock
engels 07.25.24 at 3:12 pm
You won’t believe what happened next
https://www.theguardian.com/commentisfree/article/2024/jul/02/labour-plans-britain-private-finance-blackrock
Garrett Wollman 07.25.24 at 6:06 pm
I have not yet heard of a refutation of the ten-year-old paper which presented a proof that the Efficient Markets Hypothesis is equivalent to a claim in complexity theory that P=NP. Most computer scientists, for good reason, believe that P!=NP, and even though a proof has eluded us for half a century, this should at least cast strong doubts on the validity of the general form of EMH even without appeals to apparent market insanity.
engels 07.26.24 at 12:01 pm
Starmer’s project has been been described (by his own apparatchik) as “getting Blackrock to rebuild Britain”.
https://www.bloomberg.com/news/articles/2024-06-27/labour-expects-billions-of-private-investment-after-uk-election
I’m afraid the light at the end of the PFI tunnel is an oncoming train.
Matt 07.26.24 at 12:12 pm
On the topic more generally, I thought that the discussion here was useful and interesting: https://ejpe.org/journal/issue/view/33
engels 07.26.24 at 12:21 pm
Labour would ‘hold the door open’ for private sector in NHS, says Wes Streeting
https://inews.co.uk/news/politics/labour-private-sector-nhs-wes-streeting-2760505
steven t johnson 07.26.24 at 1:30 pm
Glad to endorse Alex SL@1
Matt@2 Might it be possible whatever parts of NBN are filing so miserably are being starved of funds and micromanaged to ensure NBN doesn’t threaten private enterprises existing or projected to exist? (Thinking of things like Telstra referred to in the OP.) A socialistic entity that provides services relatively efficiently (which means to everyone, by the way,) is never approved by interested parties, who devote much effort to forestalling such “competition.” But maybe I’m thinking too much about the US where principled objections to things like public health care and public education are still widely promoted by libertarians/liberals.
somebody who remembers they closed the public pools rather than let black people swim in them 07.26.24 at 4:17 pm
from an american perspective, our predictions for you are even worse – that privatization is the first step to elimination. nothing will be “re-nationalized”, they’ll just eliminate the service permanently. best wishes, good luck to our cousins across the sea in learning what a “deductible” is
Matt 07.27.24 at 5:26 am
Might it be possible whatever parts of NBN are filing so miserably are being starved of funds and micromanaged to ensure NBN doesn’t threaten private enterprises existing or projected to exist?
Maybe! And, as I said, I don’t know that the NBN should be privatized. Maybe that would be even worse. But I think that a big part of the reason why it’s bad is that there’s just no incentive for those running it to provide good service – they face very little competition (the only other real alternative is Starlink, I think, and that seems to be more popular here than you’d expect), no incentives to provide good service, no punishment if they provide bad service, etc. So, unsurprisingly, the service isn’t good.
Gar Lipow 07.27.24 at 6:17 am
Can I add another motivation for privatization, at least in the USA. Many of the advocates were bribed, or had family with personal stakes in the private gains made from privatization. By “bribed” I refer both to various forms of bribery which are legal, and to a smaller extent illegal bribery which is seldom caught. Legal bribes in the USA include campaign contributions, relatives hired, other forms of lucrative business thrown at relatives. The Menendez cases illustrates how how rare prosecution of such crimes are. After decades he was finally convicted because of possession of large sums of cash, actual gold bars, and direct gifts of expensive cars. (Note by the way, an attempt to convict him of only slightly less blatant corruption failed some years ago.) If he had stuck to offshore bank accounts he might be a free man today.
Possibly this is unique to the United States, and politicians in the UK and Australia have no personal stakes in their decisions and never receive any kind of favors that influence their policy choices.
bad Jim 07.27.24 at 6:28 am
Is there a more remarkable instance of the triumph of theory over history than the strong form of the efficient markets hypothesis? It was falsified before economics even had a name!
Just as much a superstition is the conviction that a private enterprise will be better run than a public institution. As an erstwhile entrepreneur, a veteran of a merger with a larger firm and a lifelong observer of other such mishaps, I can confidently assert that either sort of operation will at best continue to cycle between Scylla and Charybdis.
Bob 07.27.24 at 5:10 pm
Thanks for this John. I find convincing your overall point that much of privatisation has been a failure. But it raises the question: what sort of criteria do you use to “draw the line” in deciding when a good or service should be provided publically or privately?
People on the left or liberals sometimes talk about public provision being necessary for anything that is essential, or deemed to be a “right.” But food is clearly essential, and certainly ought to be a right, at the same time, it’s hard to see how you would justify the nationalisation of food production, transport, and distribution. The quantity, quality, and variety of food available in a modern, developed country is astounding. The far simpler solution to hunger is to give the hungry money, so that they can go to the supermarket and buy what they need like everyone else.
Is the rationale for when, or when not, to nationalise the classic “public goods” argument in economics? Or is it for cases of “natural” monopoly? Or both?
Gar Lipow 07.28.24 at 3:08 am
I put my comment really badly. So let me rephrase it. I think that in addition to all the other explanations, simple personal self interest has to be included. Legal bribery in the form of campaign contributions (mainly USA), jobs and other forms of value to relatives of politicians. Also the promise of future benefits (such as jobs or speaking engagements) once a politician leaves office.
In the USA, I would add that classic illegal bribery has to be considered. Menendez was convicted because he accepted bribes in easily detectable forms like cash, gold and Mercedes. He was acquitted once before in a case where he was clearly guilty, and probably would never have been caught this time if he had followed the standard procedures of accepting payments only to offshore electronic accounts, and then spent the proceeds with a little discretion. So it is a solid guess that there is a great deal of illegal bribery going on in the USA that is never detected.
Alex SL 07.28.24 at 7:36 am
Bob,
I am not an economist, but to my understanding, outside of the kind of communist who would prefer every part of the economy to be run by the state by default, there appear to be two arguments.
First, certain strategic industries should not be privatised, and should not be owned by foreign interests, to keep a nation in control of its own destiny and able to react to crises. Examples would be a country nationalising its oil or gas sector so that the profits don’t go to some overseas corporation but can benefit its own citizens. Food would fall under the category of strategic importance, of course, but it is generally accepted that turning all farms into one large public service conglomerate doesn’t work so well (whereas it does work well for a national oil company), so the solution for food is subsidies and strong regulation.
Second, and this is my own perspective, there are certain kinds of activities that work well as for-profit private enterprises (hair dressers, family farms, taxis), and others that demonstrably work really badly as for-profit private enterprises (any kind of public infrastructure and basic service, education, policing, military). The reasons to end up in the latter category vary case by case. In part the problem is that maximising profits is a terrible idea and creates perverse incentives, for example in education or mercenary warfare. In part it is that the main supposed advantage of private enterprise is competition on the free market, but with natural monopolies like rail, water, or power lines there is no market, so that we only get the downsides of private enterprise such as privatisation of the profits, while the public still has to pick up the pieces if an essential service is run into the ground through profit extraction and under-investment by the private owner.
An underappreciated aspect of private enterprise is IMO the reality of how larger enterprises actually function. There is this widespread, naive idea that private owners will take better care of a company than supposedly disinterested public servants, because it is their own property, and they hope to pass it on to their heirs. In reality, the people running anything larger than a little shop or farm are usually managers on term contracts. Their incentive structure is to maximise short-term profits to get a higher bonus, even if their current risk-taking or under-investment damages or kills the company ten years from now, because by then they are likely to be on their next gig. Again we get all the disadvantages of private enterprise but not the supposed advantage of good stewardship.
Matt 07.28.24 at 12:21 pm
But it raises the question: what sort of criteria do you use to “draw the line” in deciding when a good or service should be provided publically or privately?
There is some (to my mine) quite good discussion of this question in Joseph Heath’s recent book The Machinery of Government: Public Administration in the Liberal State. It is, as you’d expect from a philosopher, done more at the level of principle than practice, but there is some discussion of particular cases and applications. Some of this is also discussed in his contribution to the discussion of the topic I linked to above, along with commentary by some others who are more sympathetic to de or non privatisation than Heath is. Those might be worth looking at.
engels 07.28.24 at 12:34 pm
Apologies for the redundant comments above. Another in the “what can possibly go wrong” genre: Macquarie takes full ownership of Britain’s gas network
https://www.ft.com/content/9b615f98-f88c-4086-a3ab-3858ed299ca5
steven t johnson 07.28.24 at 4:50 pm
Matt@12 has more faith in the power of competition to “force” a good performance than I do. If that were true, mercenaries or Professional Military Contractors, should replace the US armed forces. And of course, public schools should all be replaced by private. And all urban development needs is more private land developer input. I’m afraid I’m so retrograde that I think it a true principle, albeit do not apply blindly, is, if you really want to get the job done, you need a government.
engels 07.28.24 at 11:18 pm
“[Reeves] will say surplus publicly owned property will be sold…”
https://www.theguardian.com/society/article/2024/jul/28/rachel-reeves-to-set-out-plans-to-fill-the-shortfall-in-public-finances-left-by-tories
engels 07.29.24 at 11:57 am
what sort of criteria do you use to “draw the line” in deciding when a good or service should be provided publically or privately?
Public sector should provide the things we actually need. Private sector can provide the flashy/expensive/useless stuff better off people use to pass the time and signal their status.
Bob 07.30.24 at 2:01 pm
engels @22: “Public sector should provide the things we actually need” So food, then?
engels 07.30.24 at 2:50 pm
Yes, considering how much the state pays farmers anyway, just nationalise the whole thing.
https://www.gov.uk/government/news/farmers-3-billion-support-confirmed-in-time-for-2020
Chris Bertram 07.30.24 at 2:55 pm
@engels I look forward to receiving my state-selected veg box (or maybe eating in the collective canteen) as an alternative to shopping at my lovely local greengrocer. I’m sure that would work out just fine (those complaining about variety or quality will be publicly shamed as the petty bourgeois backsliders we no doubt are).
Daragh McDowell 07.30.24 at 4:29 pm
I’m also greatly looking forward to the comprehensive list of things that people “need” which will surely be both uncontroversial and take full account of the variety of the human species. My only concern is that state owned collective farms might prove to be too productive and inadvertently contribute to the obesity epidemic. I wonder, is there any historical record of such agricultural enterprises being attempted in the past? Surely the countries that did must have had overwhelming surpluses.
engels 07.30.24 at 7:57 pm
There are some disadvantages but they’re outweighed by not having to see a “vote Conservative” sign every five minutes when you’re driving through Somerset.
Bob 07.30.24 at 9:20 pm
Chris @ 25, I couldn’t put it any better!
engels 07.30.24 at 11:04 pm
Potemkin capitalism: “The average farmer made £28,300 in subsidies [in 2016] and £2,100 from agriculture.”
https://fullfact.org/economy/farming-subsidies-uk/
Bob 07.31.24 at 5:01 pm
Daragh McDowell @ 26: “I’m also greatly looking forward to the comprehensive list of things that people “need” which will surely be both uncontroversial and take full account of the variety of the human species. ”
Quite right. As Lear put it, “Oh, reason not the need!”
John Q 07.31.24 at 8:03 pm
What approach do you use to “draw the line”
I talked about this in an article I wrote in 1999, when the privatisation movement was approaching its peak. Here’s a table I extacted
Table 1: Characteristics that Determine the Suitability of an Enterprise for Location in the Private or the Public Sector
Private Sector More Suitable
Competitive market
No externalities or market failures
No special taxes or subsidies needed
Risk is enterprise specific
Labour intensive
Public Sector More Suitable
Natural monopoly
Severe externalities or market failures
Need for special taxes or subsidies
Risk is economy-wide or regulatory
Capital intensive
Quiggin, J. 1999. The Future of Government: Mixed Economy Or Minimal State? Australian Journal of Public Administration 58 (4): 39-53.
Matt 08.01.24 at 3:19 am
Thanks for the list, John. No doubt you spell some of this out in the paper, and it seems pretty reasonable, but I do wonder about two things. First, the externalities/market failures bit is clearly important, but it seems like there’s a gap – maybe a larger one – between “no externalities/market failures” on one side and “Severe externalities/market failures” on the other side. Is this middle ground one where we just decide on a case-by-case basis or on the basis of other factors?
Second, I’m not sure what counts as “capital intensive”. Again, you probably say more on this, but, for example, making cars seems pretty capital intensive (you need large factories, lots of machines, the machines are pretty specialized, the inputs are also capital intensive, etc.), but there seems to be a pretty good history of private car manufacturing and not much great history of state-run car manufacturing. Even, say, beer manufacutring and bottling/canning is fairly capital intensive, especially for the big brands, but the case for state-owned beer doesn’t seem that clear to me, and I don’t think it would become more clear if, say, beer manufacturing and bottling became more mechanized (and so more capital intensive and less labor intensive.) Can you say a bit more here?
(It’s maybe also worth noting how “natural monoplies” are not always long-lasting. Phone service seemed like an example at one point, but not at all now. Is there a worry about stifling innovation if we take things too categorically here? I worry that the NBN in Australia might again be an example of this, where it’s worse than the bad by world standards US services, and the services that are considered among the best – Korea, for example – are also not state-run systems, suggesting that this isn’t at least clearly a natural monopoly.)
Bob 08.02.24 at 3:02 am
John Q @31: Thanks!
Janus Daniels 08.04.24 at 1:28 pm
Bizarre. In most nations, “politicians saw privatisation and private infrastructure as a way to get access to a big bucket of money, which could be spent on popular projects without the need to raise taxes.” Why? We all need to know how money works.
Politicians, who run the central government, create all the money.
steven t johnson 08.04.24 at 3:29 pm
Janus Daniels@34 assert politicians create all the money. It seems to me that most acceptable states shield their central bankers from politicians as much as possible. Even more, given that private bankers can create money with a keystroke, it doesn’t seem to me factually true. I don’t think enough weight was given to the phrase “without the need to create taxes.”
John Q 08.04.24 at 11:09 pm
Hi Matt
Yes, there’s a middle ground question here. Regulation can handle some externality problems but when the profits of an enterprise depend mainly on the outcomes of regulation, it should be in public ownership.
Infrastructure is more capital-intensive than manufacturing in general, and also has less enterprise-specific risk. A car manufacturer that produces a lemon can go bust, but that’s not going to happen to a water utility.
The NBN is an example of messy cleanup following privatisation, further messed up by the conservative attempt to do a mixed-mode network. That’s been slow, but we are getting closer to a full fibre network in the last couple of years. If Telstra had been kept in public ownership, we would have had it much cheaper and faster.
Janus @34 Not sure what you mean here. If it’s a “pop MMT “claim that governments can give us nice things without collecting tax revenue, then it’s both wrong and a misunderstanding of MMT.
MisterMr 08.05.24 at 4:13 pm
@Matt 32
Here in Italy, the privatisation of phone companies is one of the few privatisations that worked well. However this is because the private company that inherited the previously public infrastructure is mandated by law to lend said infrastructure to its competitors, otherwise it could have squeezed out the competitors easily; so at least for some infrastructure it is true that there is a natural monopoly.
When said infrastructure is provided by the state or is heavily regulated it stops being a money cow and privates can make profits thanks to it.
notGoodenough 08.06.24 at 10:01 am
While I agree with much of the OP, I fear it is a little overoptimistic to suggest we are witnessing the end of the era of privatisation. While it is true that it has largely been a failure in terms of “providing efficient and useful services to the public” it has also been quite successful in terms of “syphoning the public purse into private pockets”, and I suspect that – given the political climate – the latter consideration will carry more weight. I am unconvinced that nationalisation in itself is the answer to this problem, as it seems to me that the last few decades have illustrated that it is all too easy for the power of an embourgified state to be turned towards the enrichment of the few (though nationalisation under a sufficiently empowered left would, of course, be a different calculation). However, though communal collectivism would naturally be easier under the auspices of a sympathetic state, it is possible in its absence – though, as always, organisation would be difficult yet critical to success.
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