The following was published in the AFR this morning. It compares the relative efficiency of private and public networks. Not mentioned in the article is evidence that the private networks, as well as paying much lower wages than the government owned systems in NSW and Queensland, use about twice as much labour to perform the service.
Thirty years ago, at the dawn of the Australian reform era, there was a lively debate about the respective merits of public versus private ownership. At that stage, conscious of its support from featherbedded unions, Labor argued that it was competition not ownership that was the driver of efficiency.
Since then, those carrying the flag for public ownership have seen their ranks thinning and they are now confined to the hard left and elements of the populist right. Hardly anybody now sees a case for retaining public ownership of businesses that compete with the private sector in supplying goods and services. Indeed, it was 20 years ago when even Gough Whitlam supported Bob Hawke’s privatisation of the Commonwealth Bank and Qantas.
This week’s decision of the Baird Government to start selling NSW’s electricity poles and wires renews the efforts Bob Carr’s Treasurer, Michael Egan, made twenty years ago.
Locking up public funds in firms that have business rivals makes no sense, especially since the private sector will always prove superior in keeping down costs and seeking out better ways to profitably supply current and new market needs.
Even so, state owned firms like electricity generators, in competition with private businesses, are forced to emulate their private sector competitors’ cost savings and innovatory measures. If they don’t, they start losing money.
These disciplines are totally absent with monopoly businesses, the most important of which are the electricity networks. Hence, in many ways the benefits of privatisation are even greater where there is a natural monopoly.
The relative performances of private and public owned networks can be compared even though no two networks pose identical challenges. This year, costs of the state-owned distribution businesses in NSW and Queensland mean network prices at around twice those of Victoria’s private distribution businesses. And the situation is deteriorating. Over the past three years NSW and Queensland costs increased three times as fast as those of Victoria (the private South Australian network also has high costs as it serves a very peaky load and had been run-down). The following chart illustrates this.
Electricity distribution costs (cents per kilowatt hour)
In the case of NSW and Queensland, costs are inflated for three main reasons.
First the government ownership has led to more gold-plating of the systems as ministers, being risk-averse and having little incentive to save costs, have over-reacted to mishaps. Notwithstanding this, the reliability of those states’ networks is, if anything, rather less than that of Victoria.
Secondly, because government ownership equates to a relative indifference to costs, workforces become bloated and increasingly over-generous conditions prevail. Private sector workers in networks earn far less than the $138,000 a year average earned by Sydney/Newcastle distribution business Ausgrid or the $127,000 average country supplier Essential Energy, most of whose workers also have use of a company car. Private sector management also requires greater workplace flexibility. And private firms would not tolerate the use of their equipment for purposes like the erection of anti-privatisation signs on Ausgrid poles – effectively forcing consumers to finance propaganda that seeks to maintain the high costs government ownership imposes on them.
Finally, the lack of controls in government businesses means little discipline on spending. All electricity network businesses, as monopolies, have to obtain agreement from the regulator for a total spending cap. This dictates the prices that can be set. Having better information about their businesses, the firms will normally persuade the regulator to approve over-generous levels of the spending (and therefore higher prices than are necessary).
In the case of private sector firms, the owners will seek savings in the regulator-approved capital and operational spending for the benefit of shareholders. In subsequent regulatory rounds this provides guidance to the regulator who will demand a lower spending cap and lower prices. There is no such operational management discipline on government firms. Executives in those firms will spend all that they are allocated and often even more, confident that they will recoup the additional costs in subsequent regulatory rounds.
The case for privatisation of networks is therefore compelling.
However, the NSW proposals are rather timid in exempting the scandalously inefficient Essential Energy from privatisation seeking only a 49 per cent private holding for the rest of the network. With regard to the latter, Mr Baird is hoping that placing 51 per cent with an apolitical future fund will offer buyers sufficient assurances that they can pursue the necessary management reforms.