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Jan 14, 2014

To sell or not to sell government assets, that is the question

We crown four experts treasurer for a day, asking them which of the 11 government entities up for privatisation they'd sell. The answer? All or nothing.

Cathy Alexander — Freelance journalist and PhD candidate in politics at the University of Melbourne

Cathy Alexander

Freelance journalist and PhD candidate in politics at the University of Melbourne

For Sale

The debate about which government entities should go in the next round of Commonwealth privatisations has raised deep ideological questions on the role of the state.

Prime Minister Tony Abbott wants to sell off public corporations to pay down debt, but we don’t know which ones he has in mind. Yesterday, Crikey compiled a hit list of the bodies that could be sold off. Medibank Private, Australia Post, the ABC and SBS are on there. So is NBN Co, Snowy Hydro and the bodies that manage rail tracks, air traffic control, Defence housing and submarines. And Abbott could sell off HECS debt.

We’ve put that Crikey list to four experts to see what they would sell. As you’ll see, in a very polite way, they thoroughly disagree with each other …

Saul Eslake, chief economist at the Bank of America Merrill Lynch Australia

Eslake says there’s a good case to privatise some, but not all, of the Crikey list. He doesn’t believe a state-run company is “any more inclined to service the public interest” than a private one, and reckons public companies can become too powerful — and dumping grounds for ministers’ pals, “usually the lazy and inefficient”.

The government should ask whether each corporation should legitimately be in public hands, and if the answer is no, the next question is whether the benefit won from selling it off (and using the proceeds to pay down debt) outweighs the cost of lost dividends.

Eslake says Medibank Private could be sold because it “certainly isn’t doing anything that isn’t being done by a large number of private organisations”, it doesn’t keep premiums low (its original purpose), and the government regulates health insurance premiums anyway. Defence Housing Australia could go because other organisations could do that work, and HECS debt could “certainly” be sold.

He has an open mind on Australia Post; the private sector already does much of what AP does, but Eslake says delivering mail to the bush is an essential service that should remain in public hands.

There isn’t a compelling reason to keep the Snowy power scheme in public hands, according to Eslake, but it would be difficult to privatise because it is used for irrigation and recreation as well (and Alan Jones is against a sale). And he doesn’t advocate selling the ABC (although a function like merchandising could be privatised) but says there could be a case for a commercial broadcaster — or the ABC — to take over SBS.

Bill Mitchell, professor of economics at Charles Darwin University

Mitchell cautions against listening to Eslake. “All these characters who work for investment banks … they’re just selling their own services. They’re held out as if they are experts with good intentions, but they’re not independent at all.”

Mitchell says no body on the list should be privatised. “A public investment can take into account what we call social benefits and costs, whereas a private organisation only considers the private cost and benefit,” he told Crikey. Mitchell says the claim that the private sector performs better is “just plainly the most flakiest proposition”.

Look at Qantas, he says. Sold off in the ’90s, it is now asking for government money and cannot compete with large publicly owned airlines (Emirates, Etihad, etc).

Mitchell also argues against privatising Australia Post. In remote areas the post office “becomes a hub for social activity, for caring and hearing things. For regional Australia those things are really important.” AP is a public corporation that is astutely run and has positioned itself well in new markets, he says. Mitchell  points to the privatisation of Telstra, saying the result was poor management.

Mitchell isn’t buying Tony Abbott’s budget logic; “the fundamental proposition that the government has a debt problem and you sell off assets to resolve that is ridiculous.” And governments sometimes sell entities at a low price while bidding a permanent farewell to the revenue — on past examples, “the people who made a killing were the stockbrokers and lawyers”.

Mitchell runs the billy blog on economics. 

John Daley, CEO of the Grattan Institute

Daley says selling assets to pay down debt is a “tried and tested strategy” — but while some on the list could be sold, HECS debt should not be.

He points to a Grattan report to show how government asset sales helped reduce debt. However, Daley says Commonwealth debt is actually relatively low and the bigger problem is budget deficits. “And asset sales do not necessarily help here: by definition they only assist if the future interest on the asset sale price is more than the future dividends. There is no guarantee that the Commonwealth will, in fact, drive such a good bargain for any asset it sells,” Daley told Crikey. “Nevertheless, many of the assets may be more efficiently and better run in private than public hands.”

The Grattan Institute has not gone through Crikey’s list, but it has argued against selling the HECS debt. “Because this is simply a debt (rather than a business that requires active management), it is difficult to believe that it would be a good idea to sell it,” Daley said.

Bill Mitchell says the Grattan Institute’s views should be considered in light of who funds it, and suggests donations by big companies may predispose the institute to certain opinions. To that end, we note the institute’s donors and “affiliates” include BHP Billiton, the Myer Foundation, the National Australia Bank, Ernst and Young consultants, and PricewaterhouseCoopers consultants. Read the institute’s view on its independence here

Helen Dickinson, associate professor in public governance at the University of Melbourne

“Australia has relatively few remaining collective goods, and I would be sorry to see any of the list to be privatised without careful consideration,” she told Crikey. “History shows that those who do worst out of these privatisation processes are those with low levels of wealth.”

Dickinson says the mainstream media debate over whether to privatise Medibank Private had largely been presented as a done deal, but there is little public support for the move. “Whilst a sale would deliver a welcome injection of cash, there are no guarantees about how this might be spent, and the dividend provided by Medibank Private is a useful form of ongoing income generation,” she said. She says the insurer functions as a working asset that allows the government to reduce taxation. “The groups who arguably benefit most from Medibank Private being government-owned are working Australians who experience a lower tax burden, without losing quality of services,” she said.

Dickinson says the debate about privatisation is too simplistic and “needs to be about more than just economics”.

*Crikey’s aviation guru Ben Sandilands makes the case for why AirServices Australia should not be privatised at Plane Talking

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18 thoughts on “To sell or not to sell government assets, that is the question

  1. michael crook

    The name change will be formalised this year, the “Commonwealth of Australia” will become the “Private wealth of Australia”.

  2. klewso

    [Are they going to pay off the Howard (and Abbott) government’s Coal-ition of the Shilling’s invasion of Iraq? What’s that cost in funds that could have gone to worthier causes……?]
    I reckon the quick-fix short term sugar rush (which any governments are likely to piss up their pet projects wall anyway) gained from the sale of other’s accumulated state assets, strips the cupboard bare and just moves longer term inevitable problems on to later governments and generations to have to face.
    Eventually someone is going to have to bite that higher taxes bullet (the ones Howard and Cosjello used, cutting them to buy votes). We’re reasonably well off now, why can’t we?
    If we all want better services – we should be prepared to pay for them?
    How much better off are we after those tax cuts – paying for education, health, transport etc as individuals, when aggregated taxes (to the cost of a sanga and milk-shake) could have been used to subsidise their funding?

  3. Mark Duffett

    I begin to weary of accusations of ‘lack of independence’ that seem to go only one way. It’s salient that both the academic (i.e. entirely publicly funded) experts are the ones coolest on privatisation. Isn’t there broad self-interest at work here as well? Is anyone truly independent?

    Alternatively, we could try evaluating opinions based on evidence, rather than who is voicing them.

  4. CML

    @ Mark Duffett – I think the ‘evidence’ is already there for all to see. As I pointed out yesterday, the structural deficit in the federal budget is far worse than it was before the government started selling off commonwealth assets. The lack of ongoing profits from said assets will only make things worse if more are sold.
    Coupled with the LNP mania for cutting taxes (Howard), we are in a diabolical situation now. The revenue to fund essential services has to come from somewhere.
    Choose your poison!!

  5. MJPC

    After they sell the silverware and royal doulton, what is left?
    I’m with Prof Mitchell, QANTAS is competing against state owned airlines! And what of the Commonwealth Bank, it was flogged off and maintains its profits as one of the 4 financial oligarchs which, when times were tough (GFC) ran to the Government with the other 3 to obtain guarantee on its loans. Talk about having the cake and eating also.
    I am with Klewso: The proletariat (those that pay tax rather than make every attempt to not) need to ask…do we want the current level of services? If so, we have to pay for them (i.e: tax receipts) and it’s not flogging off everything valuable in public hands to buy it back from private ones who add excess profits. I pay taxes to enjoy the standard of living for all, rich or poor. Cut this ‘give me’ mentality that we pay too much tax, then are slugged by the big end of town in excess fee’s using newly acquired public assets, keep them in public ownership and use the profits responsibly. Tax cuts are a cargo cult mentality.Revolution now!

  6. Malcolm Harrison

    The government does not have any assets. The ‘feds’ as you persist in calling the government in Canberra do not own anything. They are managers of assets owned by the people. In these days, such notions of public ownership may seem quaint and romantic, although in some parts of the world they are still a significant reality.

    While the government can sell these assets if they have the necessary parliamentary support, it is not appropriate for journalists such as yourself to use such misleading language. Unless of course you are blogging, but if that’s the case I think you should declare your own interest.

  7. leon knight

    I’m with MJPC and the professors, you don’t need much evidence or economic nous to figure out that you can’t compensate structural shortfalls in tax income v services expenditure (no matter who caused them)by selling off what is left of your impoverished income earning asset portfolio.
    The Grattan institute and Mr Eslake also will advise that the books should be properly balanced if you ask them the right questions!

  8. CML

    @ Malcolm Harrison – What on earth are you on about?
    This article reports on what four experts, two from the private sector and two from academia have to say about further privitisation of Commonwealth assets.
    Did you even read the article? As far as I can see Cathy Alexander did not express a view at all.
    You are entitled to your view, but please get your facts right before slagging off at the author of this report.

  9. griffin27

    It is all very well to say, “the money could be better spent on new infrastructure.” I do not believe modern Australian governments, at State or Federal level, are capable of building infrastructure.

    The Snowy Mountains scheme was built “on time and on budget” at a cost equivalent to $6b (Wikipedia). This sort of result is inconceivable now, given the lack of talent in both main political parties. And where are the William Hudsons of today? Should one such exist, the queue in front of him or her would be populated by the armies of consultants and all the private consortia that are the fashion nowadays.

    I would prefer to leave the money where it is rather than see it frittered away.

  10. drmick

    OK here are a few issues about your privatisation. Electricity: the last 3 fires that have claimed lives have been caused by electricity poles that have failed or wires that have fallen to the ground.
    The arseholes that own these systems have increased their profit %2000 since privatisation, allegedly to provide a “rolls royce” system and eliminated preventative maintenance to save money. Save money = murder innocents.
    The only rolls royce they have provided is a hearse; they have killed people and destroyed homes in their pathetic effort to turn a profit.
    Pretty sure that rail deaths and road deaths are similarly tied to the cost savings associated with privatisation.
    Shove privatisation.
    Who do you call when you want the police? Do not use ours because you do not pay tax. Your private mob are sure to look after you.
    Who do you call when someone is sick? do not use medicare because you are really clever and avoid paying tax. Do not go to the local hospital because you dont believe in a public health system. Good luck getting your own doctor within 24 hours let alone 24 days.
    Your larvae need educating and you don’t want them to be as ignorant and as narrow minded as you are. Do not use our education system. You are not an Australian. You live in Australia, and you are a parasite, but you are not Australian.