Date created:14 September 2002 Last modified: 14 September 2002 Maintained by: John Quiggin John Quiggin
1 August 2002
One of the marvellous things about economics is that, in a lot of cases, important questions can be answered simply by adding things up. For example, simple arithmetic shows that the current account deficit must be exactly equal to the difference between national investment and national saving. The arithmetic of privatisation is almost as simple, and yields some surprising answers.
As an example, I first examined the proposed sale of airports in 1994. I concluded that, if the government was to receive a price sufficient to offset the loss of income from the Federal Airports Corporation, airport charges would have to rise. That analysis was spectacularly vindicated a couple of weeks ago, with the announcement of increases across the board, ranging as high as 100 per cent, and the prospect of more to come. These increases come on top of higher parking charges, taxi rank fees and a slew of other imposts on the travelling public.
How could I make predictions with such confidence nearly a decade in advance? The answer is a simple matter of arithmetic. Private investors in infrastructure assets expect real returns of around 8 per cent. The same investors are prepared to buy government bonds with a real return of 4 per cent or less, reflecting the government's superior ability to spread risk through the tax system. Hence, the government can break even on an asset sale only if the private buyer can make twice the profits that were realised under public ownership.
In some cases, greater profits can be realised through superior efficiency, but the FAC was already close to world's best practice. The only other way of increasing profits is to raise prices or reduce service quality.
The first round of airport sales revealed another possibility, which I had neglected. If private buyers overestimate potential profits, they may pay more for an asset than its true value on the private market. After the first round of airport sales, it appeared that this outcome had been realised. Buyers anticipated substantial monopoly profits, and paid accordingly, but then found themselves under the scrutiny of Allan Fels and the ACCC. For once, it seemed, the public, considered as taxpayers, had received a reasonably good price, while considered as consumers, we had not been too badly hit by privatised monopolies.
Unfortunately, the biggest prize of all, Sydney airport, had not been sold at the same time as the others. Potential buyers, having seen the losses incurred elsewhere in Australia, were unwilling to pay a substantial price for an asset with tightly regulated returns. The sensible option of keeping Sydney in public ownership was never considered. The next-best alternative, as far as the interests of the public was concerned, would have been to deregulate charges at Sydney alone, but this would have raised all sorts of political difficulties. So, instead, the government bailed out all the private buyers at the expense of the travelling public.
The basic arithmetic of privatisation is inescapable. Whenever an efficient public enterprise is privatised, either taxpayers get an inadequate return on their asset, consumers pay more, or the buyers pay more than the true private market value. In every major Australian privatisation, one or more of these outcomes has occurred. Since private buyers have usually done well, consumers and taxpayers have been net losers.
There are many kinds of business in which government business enterprises invariably perform poorly, so that privatisation is beneficial. The history of Australia is littered with such enterprises, from government farms to State-owned butcher shops. But Australian governments got out of most of these businesses decades ago.
The privatisation wave of the last two decades was based on the claim that the private sector could do a better job of providing basic infrastructure than could government. This claim was always based on faith rather than empirical evidence and, in the wake of Enron, Worldcom and Railtrack, it looks positively absurd.
These facts are starting to sink in. It is not that long ago that Richard Alston taunted opponents of privatisation with the claim that the policy was being adopted everywhere but in North Korea. Today, however, the tide has turned. As the Economist recently noted, privatisation has ground to a halt in Europe, and in much of South America.
Renationalisation is now on the agenda. Following Railtrack in the UK, accident compensation in New Zealand and airport security in the US, France Telecom is the latest candidate, as the conservative French government tries to fix up the mess created by entrepreneurial managers under partial privatisation.
Professor John Quiggin is a Senior Research Fellow of the Australian Research Council, based at the Australian National University and Queensland University of Technology.Read more articles from John Quiggin's home page
