John Quiggin has written a report into electricity privatisation in Australia – making the argument that privatisation has generally failed.
A couple of thing where we agree:
Economists, at least when they were thinking clearly and speaking honestly, were as one in rejecting the most popular political reasons for privatisation: as source of cash for governments or a way of financing desired public investments without incurring public debt.
I made a similar argument recently in New Zealand.
Then he is critical of Public-Private Partnerships. I am too – albeit for different reasons. All too often, I suspect, they are financing mechanisms looking for infrastructure to finance, as opposed to being a positive NPV infrastructure project looking for financing.
Then a point where we can quibble:
A survey of Australian and international experience yields the following conclusions:
- Privatisation does not improve, and usually worsens, the fiscal position of the governments that undertake it.
- Privatisation has always been politically unpopular, and public opposition has hardened with time and experience of private ownership of public infrastructure.
- Privatisation does not, in general, lead to better outcomes for consumers.
- Privatisation almost always leads to bad outcomes for employees.
private ownership must be considered superior to state ownership in all but the most narrowly defined fields or under very special circumstances.
Yes – privatisation is politically unpopular and the evidence on the impact of privatisation on employees is mixed. It may well be the case that electricity privatisation is a “narrowly defined field” where a policy of privatisation is less likely to be successful. That is the argument I expected to see in the paper – but there is no such argument, rather an assertion that electricity privatisation has failed.
I was particularly taken by this statement and graph:
Advocates of privatisation sometimes claim that the increase in prices is due to public ownership and that Victoria, which was the first state to undertake privatisation, has experienced smaller price increases than other states. This claim is often supported by selective reporting of data.
That is a pretty damning graph – it looks like price increases in Victoria have tracked the rest of the country. So I went to the original ABS data and played around. First I disaggregated “Australia” into the actual other cities and replotted the data.
Okay – looks like Victoria is in the middle of the pack, and on the low side from time to time. To get another perspective I standardised all the series to start at 100 and plotted the data again.
Now it looks like Victorian (Melbourne) prices were on the low side compared to other states until about 2007. Next thing I compared electricity price inflation to general CPI for each state and territory.
Not bad, but not as good as say Brisbane …
… but certainly better than the ACT.
What I do next is show the ratio of the electricity price index to the CPI index for each state and territory. When that number is greater than 1 electricity prices are rising faster than CPI and when less than 1 they are rising slower than CPI.
Perth and Brisbane were the places to be for low electricity prices relative to CPI. Melbourne too. But there is another problem that John Quiggin barely touches on – those massive price spikes after 2007/8. Now he does say:
The design flaws that have led, over 20 years, to the failure of the NEM were not anticipated.
To be fair, however, the rise of the global warming movement and the political response to that movement is not a design flaw in the National Energy Market. Here is how John Quiggin describes the issue:
Efficient investment – the pricing system has not delivered coherent signals for investment. In particular, the existing system has failed to cope with the entry of renewables.
Well actually, no. The pricing mechanism left to its own devices would have provided very effective investment signals – renewables are not price efficient and no or little investment would have been made. Rather it was political intervention in mandating renewable targets and the regime uncertainty associated with the carbon price/tax/mechanism that lead to sub-optimal investment decisions being made.
After all that, where does that leave us? John Quiggin has repeated his long standing criticisms of privatisation.* He has suggested that electricity privatisation has failed – but, in my view, not substantiated that argument. Many of his criticisms of the NEM relate to the process of corporatisation and (in some states) privatisation but to my mind those are public choice problems, not a critique of how actual markets could or should operate. Based on his argument to date, I think it is premature to suggest that there has been a record of failure in privatisation.
* I have other criticisms of his argument (discount rate used for public investment and around perfect v efficient markets) but that’s not important for this discussion. As always this is not an invitation to launch into John Quiggin – please keep your comments on topic and focussed.
Update: The ETU that commissioned John Quiggin’s report also released this clip.