Date created: March 25, 1998

Last modified:18 December 2002

Maintained by: John Quiggin

Privatisation misgivings

28 November 1997

The generally favourable reception given to the partial sale of Telstra, leaves a number of questions unanswered. For example, many of those who applaud the sale of one-third of Telstra for $14 billion also supported John Hewson's proposal, less than five years ago to sell the entire enterprise for $20 billion. Do they now admit that this would have been a bad deal for taxpayers ? Do advocates of privatisation now admit that those who argued that Telstra was worth more than $28 billion in public ownership were right after all ?

The critical questions however relate to the present and future rather than the past. Commentators including Peter Walsh and Michelle Grattan have argued that the case for privatisation is based on the savings in interest costs achieved through the repayment of public debt. But none of these commentators have bothered to ask whether these savings are greater or less than the income foregone by the public through privatisation. In the case of Telstra, this question cannot be definitely answered yet. But the example of the Commonwealth Bank is not encouraging.

Between 1991 and 1996, the government sold its shares in the Commonwealth Bank prices between $5.40 and $10.00 per share, yielding sale proceeds of approximately $6.5 billion. The interest saved this year would be about $400 million, and some of that would have been recouped in income tax. Meanwhile, the shareholders of the Bank received fully franked dividends in excess of $1 billion, without taking account of substantial retained earnings. The loss to taxpayers associated with privatisation alone was well over $600 milllion this year. There has been no year since privatisation commenced when interest savings exceeded the profits foregone, and the loss seems likely to grow even greater in the future. In present value terms, the privatisation of the Commonwealth Bank has cost Australian taxpayers at least $10 billion. Other privatisations, such as that of the Commonwealth Serum Laboratories, have been even worse.

It is sometimes argued that privatisation is justified as a way of avoiding losses like those incurred by the State Banks of South Australia and Victoria. However, these losses arose primarily because of the failure of State governments as prudential regulators and their acceptance of the rhetoric of financial deregulation. Similar losses, such as those associated with the Pyramid Building Society and Rothwells, arose with private sector institutions subject to state regulation. In any case, the loss associated with privatisation of the Commonwealth Bank far exceeded any benefit that might have been achieved by privatisation of the state banks.

Telecommunications privatisations have a particularly bad record. In 1985 Margaret Thatcher sold half of the UK government's interest in British Telecom for 3.7 billion stg (about $9 billion) at a time when the enterprise had assets of 14 billion stg and earnings before interest and tax of 3 billion stg a year. New Zealand Telecom was sold for $NZ4.25 billion to the American firms Ameritech and Bell Atlantic under conditions which guaranteed an effective monopoly. By 1996, the buyers had sold shares worth $NZ3.1 billion, repatriated around $NZ1 billion in dividends, and retained a majority shareholding valued at $NZ7 billion.

On current projections, the loss to taxpayers from the partial privatisation of Telstra will be smaller than in the United Kingdom and New Zealand, but still substantial. The interest saving associated with the repayment of $14 billion in debt will be around $700 million, assuming that government does not succumb to the temptation to dissipate what has been represented as a windfall gain. On the other side of the ledger, if prospectus projections are met, the earnings foregone by taxpayers will be more than $900 million, a figure which can be expected to grow as the telecommunications market expands.

The privatisation of peripheral assets like the Commonwealth Bank has been a financial failure. The industries currently under the hammer, including electricity and communications, are core public responsibilities, subject to extensive regulation. This makes privatisation a worse policy, but also makes it easier to disguise the financial losses privatisation usually brings about.

Telecommunications and electricity are highly regulated industries, where profitability is determined at least as much by the outcomes of regulation as by technical efficiency and marketing skill. Governments that have recently sold assets, whether to major foreign companies or 'mums and dads', are unlikely to countenance regulatory outcomes that impose large losses on the buyers. Hence, regulators are forced to act as insurers, adjusting the rules to validate high purchase prices. This pressure will add yet another strand to the tangled web that is Australian infrastructure policy.

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