16 June 2008

Privatisations more about getting re-elected than good management

Sense in the australian business section!

Bob and Betty Con Walker | May 14, 2008

SOMEONE once said: never get between a politician and a microphone. They might have added, never get between a politician and a pot of money.

Since the 1980s, governments have used any excuse to sell public assets and then squandered the proceeds to get elected. That goes some way to explaining why infrastructure across the country is in such poor condition.

No political leader in recent memory has articulated a positive vision of the role of government in contemporary society. Rather, leaders have argued about negatives -- claiming there was no need for government to be in this or that business, and that without a sale they couldn't fund services in critical areas.

Some have committed themselves to the sale of government enterprises, at any price. The sale of the State Bank of NSW is a case in point.

Early in 1995, the bank was sold by the Fahey government for a headline price of $576 million to Colonial Mutual. But to get the sale away, the government assumed most of the risks of bad debts on a $13 billion loan book. After indemnity payouts, the net sale proceeds ended up as $80-100 million.

Before Colonial merged with the Commonwealth Bank in 2000, its banking business -- for all intents and purposes the old State Bank -- was valued at $2.5-2.75 billion. So what was depicted as a good way for the state to avoid risks ended up costing taxpayers billions of dollars. Total proceeds from Australian sales of government enterprises over the past two decades have been some $118 billion, $50 billion for the states and $68 billion for the commonwealth.

Yet in just one election in 2007, the last (failed) election budget of the Howard government involved spending and tax breaks of about $684 billion -- effectively giving away the equivalent of the proceeds.

In one election, John Howard and Peter Costello gave away the equivalent of selling the Commonwealth Bank, Qantas, CSL, and Telstra.

Political leaders attain their position by getting the numbers. But, sadly, when they argue for privatisation, they reveal a failure to understand the numbers that should be counted -- the projected cash flows from sale versus retention of an enterprise.

Close analysis of the proposed privatisation of the NSW electricity industry suggests that the NSW Premier's stubborn determination is explainable by the prospect of a pre-election pot of money, rather than any economic rationale.

Pushing ahead with a sale (at any price) has been presented as a "reform". Yet Premier Morris Iemma's only argument is that the state needs to spend $15 billion to keep the lights on.

Unless the sell-off proceeds, the state could not afford to invest in schools, hospitals and transport. The critics have not come up with an alternative plan. He is making the "hard decisions".

Yet it's easy to sell off an inheritance, and harder to build on it, by managing complex problems. Listed company boards have to rank competing investment proposals. That's also a basic responsibility of government. It's called "financial management".

The facts are that the six state-owned electricity agencies slated for privatisation reported earnings of $1.5 billion in 2006-07 (and paid $1.3 billion to the state budget). That's a rate of return of more than 25 per cent per annum.

Granted that includes the "poles and wires" businesses, but audited accounts don't report separate results of those segments, contrary to accounting standards.

The bottom line is that any funding of additional generating capacity should be regarded not as a "cost" but as a money-spinning "investment".

Iemma's own Owen Report, while saying that the state may need one more base load station by 2014, never claimed that $15billion was needed to avoid brown-outs. The cost of one new station is about $3 billion.

The report provided an extravagant wish list of infrastructure that could be acquired over 10 to 15 years: nine new power stations; retrofitting existing stations; and purchase of an "upstream gas position".

It failed to consider the possibility that California-style demand management could make much of this unnecessary. Then again, it was never intended to be a hard-nosed assessment of what was really required to secure supply.

As to the farcical argument by potential privatisation beneficiaries Bob Carr and Paul Keating that privatisation is inevitable because of the national electricity market, the fact is that 93-95 per cent of energy used in NSW comes from NSW government agencies.

Moreover, Iemma now argues that the sale of retailers would be conditional on buyers also leasing generators. Tying the two together would make the national electricity market virtually irrelevant.

The alternative to a sell-off was obvious: keep the businesses and fund new investment from retained earnings and borrowings. Moody's Investor Services recently stated that NSW water and electricity utilities were self funding and could carry more debt.

In February, Treasurer Michael Costa's department deleted its website link to that report.

The jeering at the ALP State Conference was most intense when Iemma and some of his ministers made fools of themselves with simplistic claims that unless the sell-off proceeded, there wouldn't be any money to cater for the disabled, or to fund any services but health.

Most in the audience, having spent months debating the issue at branch meetings, expected better than fallacious reasoning, let alone Costa's snarling abuse of those who argued that government's role is to provide essential community services.

Iemma may have won in his caucus with people who rely on his goodwill for office or promotion. But other numbers show there are more in the community who now see through political expediency and who oppose this sell-off, on principle.

Bob Walker is Professor of Accounting at the University of Sydney. Betty Con Walker is a former Treasury official who runs Centennial Consultancy. They are the authors of Privatisation: Sell Off or Sell Out?, recently reissued by Sydney University Press.

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