Deconstructing the privatisation scam

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It is increasingly evident how pernicious the privatisation myth is. Two recent examples have underlined it: the failings in Australia's privatised energy grid and the usurious pricing in airport car parks. Both examples demonstrated that it is folly to expect a public benefit to inevitably emerge from private profit seeking.

Melbourne airport parking ticketThe federal government, feigning surprise, is mounting an inquiry into the profit margins of the energy companies. There should be no surprise. Businesses always maximise their profit margins; that is their basic operational discipline. And when they are offered a monopoly, or an oligopolistic position, such profiteering can be undertaken aggressively. It is essentially an invitation to be a parasite.

To understand the scam, let us look at how money is created. In broad outline, there are three kinds of capital: private, profit-making capital; government funding; and non-profit capital, such as the capital formed in cooperatives.

For several decades the lie has been broadcast that the only capital worth having is private capital — what I call the 'privatisation myth'. Everything else has been depicted as discredited 'socialism'. The fact that the financial system in the 19th century was in part created by non-profit enterprises (which is why words like 'mutual' and 'provident' proliferate in the names of older financial institutions) is ignored.

For example, this writer can remember absurd arguments that the New Zealand dairy cooperative Fonterra should be 'privatised', because cooperatives do not have sufficient access to the capital markets. Yet Fonterra is, with Nestle, the biggest and most successful dairy company in the world. Meanwhile, the 'privatised' Australian dairy industry is a collapsing mess.

There are several fallacies in the pro-private business argument. One is the claim that business is efficient whereas government is not. It is true that government is often not especially efficient, but that does not mean the converse applies. Business is often spectacularly wasteful to the extent that most companies go out of business within a decade if they are subject to genuine competitive forces. That, indeed, is why purchasing public assets is so attractive: competition is either weak or non-existent.

Another fallacy is what might be called the 'profit circularity': because profits are the only thing measured, they are thought to be the only things that exist.

The purpose of government funded public infrastructure is not to make profits but to lower the cost of doing business, sometimes called the socialisation of the means of production. Countries that are able to fund public education, roads, energy grids, water and sewerage and communications will outperform those that do not because businesses operating in such an environment will have lower costs.

 

"The benefits of public investment in social goods usually remain invisible because to know what the monetary effect is it would be necessary to know what would have happened if they were not there."

 

The extraordinary advance of China, probably the most sustained economic growth in the history of the world, is an example of how this works, although big gaps remain in the health system. A large part of the United States' success in the middle part of the 20th century was due to its previous heavy public investment in its infrastructure.

Such a lowering of costs will not, however, be measurable because no profit is recorded. The benefits of public investment in social goods usually remain invisible because to know what the monetary effect is it would be necessary to know what would have happened if they were not there. Yet as the Australian Industry Group is noting with its comments about the impact of soaring power prices on business, when those benefits are absent the effects are severe.

The privatisation fiction is evident when we compare the health sectors of the United States, Britain and Australia. In America, health spending is 17.8 per cent of GDP. In Britain and Australia it is about half that, 9 per cent of GDP. A raft of commentators conclude that America 'spends' twice as much on health as most other countries.

Yet the standards of health care in the three countries are roughly comparable. How can this be, if America 'spends' twice as much? The reason is that health costs are mostly socialised in Britain, which has a public health system. It is the same in Australia which has a mostly public health system.

But in America, where the health system is largely private, massive profits are generated. There has to be large outlays for health insurance, for instance. That shows up in the GDP statistics as 'spending'. What is really going on is more profiteering.

It is to be hoped that the privatisation myth, which has dominated over the last 30 years, will increasingly be exposed as the scam it is. There may even be a push to re-nationalise important infrastructure (this writer would include the banks after their disgusting performance in the GFC). When these means of production are socialised the benefits accrue to all, including all businesses, and not just to the privateers and their investors.

 


David JamesDavid James is the managing editor of businessadvantagepng.com

Topic tags: David James, socialism, capitalism, privatisation


 

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Existing comments

The QLD state government (Labour) allowed industry to build LNG export terminals with 10% of design capacity buffer left for domestic sources. These projects have underperformed "design capacity" by 10-15% equals no gas left for east coast at the old "domestic" price. We now pay a global price. The largest LNG facilities are located in WA and the gas "deposits" are conventional/easier to assess, understand and extract. Ie less design risk. The WA government (liberal) required projects keep 35% for domestic Use. Therefore, WA has ample gas for domestic use and NSW/QLD has none because the policy setting did not match the risk of the projects. We elect governments to get these policies right. These prices will mostly impact people that cannot afford to pay the vastly increased prices of 100-200% headed our way. Do not be misled, this is the result of poor government regulatory settings. WA gets it right and QLD gets is horribly wrong. John Ellis Flint the previous CEO and Chair of Santos said last week it could cost the east coast 1M jobs. It will become uneconomic to buy anything that is Australian made.
Luke | 05 April 2017


I an not hopeful that we can expect any change when the politicians pushing the privatisation message are all themselves profit-oriented businessmen. To mention public investment in and ownership of infrastructure is to attract ridicule as a 'socialist'.
Leo | 05 April 2017


Spot on, David. Spot on also regarding the start of this pernicious falsehood, except that I would put it five or six years earlier. Certain infrastructure categories (such as electricity, gas, roads, telecommunications,) were regarded once by economists as "natural monopolies" because of (a) the magnitude of capital required to launch, maintain and upgrade them and (b) because of their centrality to commerce (i.e., not just another type of business) and (c) national security issues (in business sense plus military sense). This has gone out not just because of the glib falsehood of private being more efficient than public enterprises, but initially catalysed by the decisions to sell off the farm to fix massive public debt (hence the sale of State Bank and the Electricity Commission in Victoria). It is true that at the time the Vic state debt was huge, but the repercussions of the decisions was vast and everlasting, but easy to sell politically because the repercussions gathered momerntum only slowly and could not be seen immediately by the public. In Victoria's electricity for example, there was a constant operating profit, but it was ploghed back into maintenance and long term upgrades including new power stations. Now that goes to profits to shareholders, not the public - and often foreign owners/ shareholders- hence siphoned off from the domestic economy, leaving upgrades to be funded by the users in the form of higher prices.
Dennis | 05 April 2017


Great article. Can you please do the same with self regulation.
Dave Wilson | 05 April 2017


A splendidly clear and rigorous article.
John Langmore | 05 April 2017


I saw what 'privatisation' did first hand when Jeff Kennett tried to privatise community palliative care in 1998. I was so incensed that I went and studied public policy where I discovered that Victoria was privatised more than the whole of the UK under Margaret Thatcher. The neo-liberal mantra of business efficiencies vs government-funded inefficiencies gutted the some public service systems here in Victoria with loss of good will and trust (competitive Tendering processes) that still have fall out today. The problem we now have is that, with an ageing population that needs income to live on, its either the pension, superannuation, or shares that supports this cohort ... at the expense of our children. With 'commercial-in-confidence' clauses rampant in these public-private contracts, it is also impossible to uphold any accountability. "where's it gunna end mate?"!
Mary Tehan | 05 April 2017


Could not agree more with your article - but, has the horse bolted!
Patricia Russell | 05 April 2017


David, A brilliant article. In Canberra we are faced with a whopping increase in electricity prices thanks to the fact we have to buy from the privatized national grid. We are told we have the lowest price/unit anywhere in Australia .What the pollies forget is that we also have very cold Winters compared to the coastal cities so we have to use more electricity (and gas) to keep warm. Not holding my breath to see the pollies doing anything about it other than silly "Brain explosion" ideas!
Gavin | 06 April 2017


You might reflect that before privatisation of public assets became fashionable there was great concern about the failure of publicly-owned organisations to produce services at a reasonable cost, to maintain their assets and to avoid capture by interests not aligned to the welfare of their communities, all the while protected from competition. The failures of privatisation are substantially about governmental failure to regulate the privatised markets and to anticipate and thwart rent-seeking behaviour. Airports are a good illustration as governments did not clearly foresee the riches that local monopolies unfettered would be able to harvest from them. Would you want to bring the PTC back in Melbourne? What you are bemoaning has a lot to do with the public sector's unwillingness and inability to acquire the new commercial skills it needs to make privatisation work better for everyone.. We should feel good about superannuation funds garnering a good safe income from investible infrastructure for our later selves and providing a means for the public sector to do new and more relevant things for our benefit - if only they would.
Anthony | 06 April 2017


Excellent article. In addition look at the "privatisation" of education and training. A complete rip off. Let's hope the NDIS does not end up like this with clients worse off.
Penny | 07 April 2017


Privatisation may not be a universal fix, but for electricity and probably airports I think it is a better policy. I think back to the old state owned electricity commissions - excessive generation capacity, no competition, monopolies, featherbedded working conditions etc. No thank you. It is simplistic to blame our current situation on privatisation. Factors such as the regulatory environment (which needs re-setting) don't help. Nor does uncertainty on government policy. Nor the continued and at times ad hoc involvement of government investment. The Money program on RN last week listed continued overspend by government organisations in "poles and wires" as contributing to high prices. Also, the industry is at a tipping point, so not surprising a few problems. No mention of competition. You won't get that if a monopoly government operation. We do get competition at the retail level - just search around alternative suppliers and see the reaction. So... no U turns here. Just improve the policy and regulatory system. As for sell-offs. I think Kennett did a great job. Some of the companies overpaid - that was to Victoria's benefit. The same can be said for airports, which I think is why car parking is expensive there.
William Frilay | 09 April 2017


I agree entirely, having been a public servant involved in the building of key water resources and economic development infrastructure. Government is there to provide services the public require that are not profitably delivered by private enterprise. Countless governments, Federal, state and local, have sold off public assets to the private sector destroying public service jobs and resulting in increasing pricing to consumers.
Cam BEAR | 10 April 2017