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Governments love privatisation; the public loathes it. Elections can be won and lost on the strength of the disagreement. By Mike Seccombe.

The troubled campaign to privatise state assets

The trick to successfully privatising government assets, says Bob Carr, is stealth. You’ve got to sneak them through.

“They are never popular,” the former premier of New South Wales says. “The view I formed was that if it’s going to be done, do it quickly.”

And keep it off the front pages, he says. Best if it’s a fait accompli before the punters can get agitated.

“We had three successful privatisations that nobody is able to recall,” he says, and enumerates them: the state TAB, the rail freight service and the state-owned coalmines that fuelled the power stations.

He recalls with some pride how in the case of both FreightCorp and the state coalmines, the relevant unions were quietly offered sweeteners and persuaded to go along quietly. But it was the ease and lucrativeness of the first sale, the TAB, that persuaded Carr it would be “worth trying with electricity”.

He couldn’t sneak that one through, though. The unions rejected the idea of selling off electricity assets, as did the party and the Liberal opposition of the time. That was 17 years ago, and Carr is still cranky about it.

In 1997, when the privatisation mania was at its height, and demand for electricity was still growing fast, the asset would have been worth more than it is now. The expectation was that the sale could have reaped some $33 billion, a not unreasonable estimate given Victoria had flogged its much smaller electricity assets four years earlier for some $25 billion.

“It would have wiped out all of the state’s debt … liberated future budgets from any debt maintenance costs and left a great pot for infrastructure,” he laments.

That’s how Carr sees it – an opportunity missed. An alternative view, though, is that it was a bullet dodged. For politicians who mess with power tend to lose power.

Professor John Quiggin, of the Queensland University school of economics, can rattle off a long list of them in NSW, Queensland, South Australia, Tasmania and the ACT. In most but not all cases, the focus of that privatisation debate was the sale of electricity assets.

“The striking thing is we have seen a long succession of examples, in just about every state in Australia, where the government has been beaten in an election and where privatisation has played a major role,” says Quiggin. “The pro-privatisation party has been thumped.

“It’s remarkable how persistent the disconnect is, between elite opinion, which is continually in favour of privatisation, and general public opinion, which is hostile. The public, having experienced privatisation over 20 years, is more resolutely hostile to it than ever.”

Whatever one thinks about the economics of the issue – and Quiggin is one of the more trenchant and controversial critics on that score – his assessment of the politics of privatisation is undeniable.

The most recent example of a privatisation-focused election was Queensland in 2012. It followed the usual pattern, starting with hand-on-heart denials by the incumbent Labor government that it had any agenda to privatise.

‘’Privatisation of public enterprises should not be used to solve revenue problems of governments,” said the 2008 party platform document.

But just a year later, the premier, Anna Bligh, reneged on that, pleading with some justification that the global financial crisis had changed the state’s economic equation.

“I can’t afford to let Queensland stand still when our royalties fall through the floor, GST is wiped off and property taxes have collapsed,” she said.

She outlined a five-year program of selloffs, the scope of which would have made even a champion privatiser such as Bob Carr proud.

Motorways, ports, rail, and forestry plantations were among the things to go. The plan was to raise $15 billion and save another $12 billion in capital outlays.

Come the election, the Bligh government suffered the worst defeat in Queensland political history. Labor went into the election holding a comfortable majority of 51 of 89 seats in the parliament. It came out with seven. The Liberal National Coalition went from 34 seats to 78.

The incoming Campbell Newman government promptly announced a commission of audit, under former federal treasurer Peter Costello, which recommended an even more comprehensive list of things to be flogged off, as well as major cuts to services. The big ticket item was the state’s electricity assets, worth an estimated $25 billion.

You might think, given the fate of its predecessor, the new government would have proceeded cautiously. And indeed there were certain things they promised, hand-on-heart again, not to put up for sale. The power distribution network, for one, the so-called “poles and wires”.

Newman promised over and over again that they would not be privatised. Then a couple of weeks ago, Treasurer Tim Nicholls announced the government was looking to grant a lease, of either 50 or 99 years, over the same infrastructure.

Notwithstanding the fact he had previously, in opposition, condemned such an arrangement as being, effectively, privatisation, he now argued it was not. As with the Bligh government, he argued that dire economic circumstance had forced the issue. Same old, same old.

Ditto NSW. Internecine warfare between the Labor government and the party’s industrial wing over the sale of poles and wires played a big part in the massive defeat of the government in 2011.

In came the Coalition under Barry O’Farrell, promising not to sell off the poles and wires. To his credit, O’Farrell did not break his word. Instead he lost the party leadership and was replaced by his treasurer, Mike Baird, a former investment banker.

If there’s one group that really believes in the gospel of privatisation, it’s investment bankers, so what happened next was no surprise. Baird announced a plan to enter into a 99-year lease deal for 49 per cent of the state’s poles and wires.

The only surprise was that it took him two months after O’Farrell’s demise to nail down the details of the arrangement, because of opposition from National Party members.

Eventually they were mollified by the exclusion of the country-based Essential Energy.

It was a clever formulation. One could argue the semantics of whether a 99-year lease of 49 per cent of an asset was really a privatisation. And the NSW government is focusing its sales pitch not on the need to pay down debt, à la Queensland, but on the much-needed infrastructure that could be built with the estimated $20 billion proceeds of the deal.

New road and rail links, a $2 billion schools and hospitals building fund, a $500 million sports and cultural fund, another billion each for a regional roads fund and a regional water fund. The list goes on and on.

No one could accuse Baird of taking the stealth approach, either. He promised the people the plan would not proceed until after the next election.

“This is a courageous decision,” he declared, apparently oblivious to the fact the line was a Yes Minister euphemism, for “this will cost you the election”.

Then again, maybe it was not so courageous and will not be so costly.

Privatisation is orthodoxy now, on both sides. In opposition, parties are mindful of public opinion on privatisations, and similar methods of shifting government out of infrastructure provision, such as public-private partnerships. But once in government, they defy public opinion.

“And in broad terms, public opinion is right,” says Quiggin. “In general, the price received for assets has been less than their value in continued public ownership. And conversely, in cases where privatisation was proposed but did not go ahead, the actual earnings received have been more than the return from the estimated sale price.’’

One study by Bob Walker, professor of accounting at Sydney University, and Betty Con Walker, an economist and former treasury official, which compared the share values post-privatisation to the float prices, reckoned Commonwealth privatisations alone were $43 billion undervalued.

Nicholas Gruen, of Lateral Economics, analysed the cost of Sydney’s network of toll roads, and found that if the government had simply borrowed the money to build and operate them,
the state would have been $4.6 billion to $5.8 billion better off, because “the governments cost of capital is 40 per cent lower than the private sector’s”.

This is an assessment Victorian voters might consider when weighing their attitude to the Napthine government’s controversial and vastly expensive East West Link toll road.

There is a growing body of evidence, too, suggesting that handing responsibility to the private sector does not always increase efficiency.

An Australia Institute investigation of privatised electricity providers, to cite just one example, showed their productivity actually declined after being sold. One reason was the proliferation of “managers” and salespeople.

“Go back to 1996, and look at the workers in the industry by occupations, you find a national total of about 1000 salespeople. Now there’s about 6000,” says Dave Richardson, author of the report. “Over the same time, the number of managers has increased dramatically. It was one manager to every 13 workers. Now it’s about one to nine.”

There are numerous other studies, auditors’ reports and analyses suggesting privatisations, corporatisations and public-private partnerships are not all they are cracked up to be.

Not all are equally bad, of course. The Abbott government has just this week invited policy holders to preregister for shares in Medibank Private, as the first stage of privatising the health insurer, which the government hopes will raise some $4 billion.

Even the usual critics of privatisation were muted in their views.

“Medibank Private is a tough one. It falls outside the general considerations,” says Ian McAuley, a lecturer in public sector finance at the University of Canberra. “[But] I’m not terribly excited about it.”

The consensus is that Medibank Private does not have any great role in setting the price for private health insurance, although it does return a dividend to government, which will be lost with privatisation.

“One way of looking at it is to say, ‘Well, it’s just another insurer, like all the others, why should the government be in it?’ ” says McAuley. “Another way is to say, ‘Well, it’s a bloody useless industry anyway. The government should just flog it and then get rid of all subsidies to the private health insurance sector.’ ”

Labor, of course, is against the sale. But then that’s what the big parties do, when they’re in opposition. For the electors of Australia, who overwhelmingly dislike privatisations, the problem remains. What to do when neither of the major parties appears to consistently share your view? Look to Clive Palmer’s party, maybe? For Palmer is resolutely populist on the subject.

In the meantime, there are a couple of very interesting state elections looming.

This article was first published in the print edition of The Saturday Paper on Oct 4, 2014 as "Sell! Sell! Sell!". Subscribe here.

Mike Seccombe
is The Saturday Paper's national correspondent.