The Pitfalls of Privatisation

By Dr Marjorie O'Neill, Member for Coogee on March 9, 2020 in Other

Formerly government-owned, by Alan Joyce.

There was a time when Australians believed in the importance of government-owned enterprise. This was how things got done, people’s needs were met and great institutions were built. The Commonwealth Bank, established by the Australian Government in 1911, was the first bank in Australia to receive a federal government guarantee and set a standard of service that others needed to follow. Qantas, initially privately founded and owned, was nationalised in 1947, with the Australian government buying the shares and then building the great iconic source of national pride. Telstra was founded by the Australian government in 1901, because it understood the importance of communications in this vast country and the need to provide access to dispersed and ‘uneconomic’ populations. Medibank Private, established in 1976 as a not-for-profit private health insurer, began as an operating division of a statutory authority (the Health Insurance Commission) to inject competition into the health insurance industry.
The tide of public opinion changed as people perceived inefficiencies (workers having a smoko around a hole in the ground), lack of customer service (alleged rudeness at the post office), lack of competitiveness (Telstra service poor? Tough luck!) and an unfair tax burden born by the diligent to subsidise the lazy. The perceptions were real and, no doubt, to varying degrees legitimate, although smoko breaks might have been just as common in the private sector, most post offices were lacking much amenity for staff, no one else actually wanted to provide public phones in isolated and poor areas and the actual distribution of tax burden is a whole different story!
So, from the 1990s, we saw the privatisation of many public enterprises – Qantas in March 1993, Commonwealth Bank in three stages from 1991-96, Telstra – also in three stages – from 1997-2011 and Medibank Private by the Abbott government in 2014. The percentage of the workforce engaged in public sector employment has also steadily declined from over a third in the 1970s to about 30 per cent in 1987, then 22 per cent in 1997 to a current low of around 16 per cent. The largest public employers in Australia are the State governments, which employ more than three quarters of Australia’s public servants – not surprising given that they deliver education and health services.
The big question of course is whether privatisation has produced the efficiency gains that many envisaged. In 2016, the then CEO of the Australian Competition and Consumer Commission, Rod Sims, stated that privatisation was severely damaging the Australian economy. In an article published in The Guardian, Mr Sims said, “Governments have repeatedly botched the sale of airports, electricity infrastructure and major ports – making things worse for consumers – because, when selling the assets, they have been motivated by maximising profits rather than making efficiency gains.” In doing so, governments have created private monopolies without sufficient regulation to stop those monopolies overcharging users. The public is well aware of this and has a right to be angry.
Four years on, and with many more assets already privatised or destined for privatisation, including the last remaining public bus services and our state-owned forests, it is time to stop and reflect on what this means, not only for competition but also for equity, citizens’ rights and the New South Wales government’s balance sheet.
The consequences of some privatisation initiatives appear easier to calculate than others. For example, prior to its sale in 2017, the Land Titles Office NSW generated $130 million profit a year for the NSW government. A 35-year lease to run the office was sold to Hastings Funds Management and First State Super for $2.6 billion, representing just 20 years of profits at 2017 levels. How is that a good deal for the people of NSW? It is obviously more difficult to assess the longer term implications of many other privatisations.
There are a range of guiding principles that we can utilise in assessing the worth of privatisation – will the service be more efficient, quality improved, major required investment secured and the best interests of citizens protected? It is difficult to argue that the private sector should not aim at making profits. After all, this is the dividend we expect from our investments and the basis of our superannuation value. Yet there are many investors who have become increasingly vocal in their opposition to profit maximisation at the expense, for example, of the environment.
Whether citizens’ and consumers’ rights will be better or less protected under a particular privatisation is a further concern. It would seem somewhat self-evident that government-owned enterprises and not-for-profits are more likely to protect and service the needs of the disadvantaged and marginalised than organisations whose purpose is to make financial profits for investors. Within government-owned businesses, cross subsidies could be (and were) utilised to provide discounted phone, transport and other costs for the geographically isolated, the old, the very young and those otherwise in need of financial assistance. Buses, filled with the fit and employed at peak hour, helped subsidise the cost of transporting the old, sick and unemployed during non-peak times.
We should also apply the competition test. For the free market to thrive and work effectively for consumers, it requires healthy competition. What better competitor is there than government? Competition is important as it drives innovation, something that Australian companies lack – StollzNow Research revealed that innovation is not core for 75 per cent of Australian businesses. Innovation is important as it keeps us up-to-date with global change and maintains our economic productivity.
The NSW government has proudly declared that it will be privatising our buses, and many thousands of local residents have expressed their deep opposition to this plan. The government has also proposed to privatise NSW forests. As we face the next wave of privatisation, hopefully issues associated not only with equity and fairness, but also the health of our market economy and the need for competition, will be properly considered.