CHAPTER 2
INTRODUCTION
The Victorian Government is characterised by high debt servicing charges and costly government involvement in service provision, ranging from education, health, transport, electricity, gas, water and sewerage services through to the waterfront and public housing. Victoria's financial situation is not sustainable and something has to be done about it. The real questions are when and what? This Chapter explains the framework within which Project Victoria makes its recommendations.
SOME REASONABLE EXPECTATIONS
Victorians should expect their government to represent community interests, to assist the unfortunate and to maintain a fair judicial system. Inevitably, given our legal system and our traditions, a fair system of justice must draw on our common law heritage.
Common sense and experience also call for government support for community and environmental services. But the evidence is clearly against the pervasive involvement of government in managing businesses, and against governments imposing detailed conditions of employment, superannuation and severance. Imposed and arbitrary standards, however well meant, reduce the capacity of actual and potential employers to employ staff on terms tailored both to the preferences of workers and the opportunities of the market place.
When determining the best role for government there are difficult borderline cases -- for example, promotion of employment, occupational health and safety. Such areas are largely avoided in this first Report of Project Victoria, not because they are unimportant, but because other matters require more urgent attention. The intention is to describe the actions the Victorian Government must take promptly to avoid the worst consequences of past errors.
WHY DID VICTORIA GO WRONG?
Victoria, although it has serious problems, in most matters differs from the other states only in degree. Nevertheless, these differences are significant and should be spelled out.
By almost any standard, the degree of government intervention in Victoria is very high relative to what analysis and experience now demonstrate to be appropriate levels of public ownership, regulation and intervention (see Chapters 3, 4, 5 and 6 below).
Government in Victoria has been more prone than most to impose terms and conditions of employment and severance, making employers more constrained in adapting their work forces to competitive market conditions. The growth of state enterprise, like the growth of protected manufacturing, was not unconnected to the willingness of government in this State to lay down what some would like to see as standard conditions of employment, regardless of the relative competitive position of industry. The irony is that by putting wages before productivity, the cart before the horse, the ability of labour to compete was progressively undermined. But as taxpayers react, and as real incomes decline, the willingness to sustain the inefficiencies of government is severely tested.
After almost a century of expansion, few now dispute that the Victorian public sector is too big nor that Victorian services are generally no better than in other states where they cost less (see Chapter 3). More recently, the nature and extent of Victorian debt and the disastrous expansion into merchant banking and "modern financial management" -- through vehicles such as the Victorian Equity Trust, State Bank and Tricontinental -- have underlined the need to re-assess the boundaries of government involvement in the economy.
MARKET AND GOVERNMENT FAILURE
The post World War II era of big government, in Australia and elsewhere, with the back-door relationships between governments and private business, and flawed attempts to replace competitive market provision in areas such as worker insurance, have taught us to re-assess the relative costs of failure of both markets and governments. Markets, based on the perceptions and actions of fallible men and women, are never perfect, but the grass is rarely greener on the other side. After all, their alternative, committees of rational people, often do not act rationally, being in the business of building majorities for other causes, log-rolling and often pursuing goals that may have little to do with community well-being. Theory and much unfortunate experience have shown as much. Even when the objectives of political groupings are undoubtedly worthy, the incentive structures which are appropriate for politically controlled institutions simply do not allow the same performance-based remuneration systems which work so well in the private sector.
THE COSTS OF LOBBIES
Where the allocation of resources is largely political, interest groups are induced to lobby politicians for advantage. Wherever the government has the power to allocate resources, as with state enterprises, the tendency for them to be allocated by political rather than market means is inevitable. One consequence is an intrinsic difficulty in rewarding public servants according to performance. Given that the performance tests must ultimately be politically determined, and that many judgements are free of a "bottom line", there can never be adequate incentive-based remuneration. Public servants, short of a feather bed, cannot gain a share in any surplus generated; nor do they share any losses, because the surplus will, in many ways, reflect political rather than competitive market allocations.
In state enterprises, the difficulties of designing comparable incentives and levels of accountability in the public sector lead to a failure to achieve community, as opposed to sectional, goals. The situation becomes worse when many senior public servants and managers of state enterprises are political appointees. And whereas a business failure can hurt investors, lenders, customers and workers in the enterprise, the (once) deep pockets of Victorian taxpayers means that government failure has costs which are far more widespread, and far less likely to be self-corrected. Not least among the costs is confidence lost in the process of government itself. Imagine a football match where the administrators and umpires argued publicly, were confused, bored or simply tired. The quality of player performance would rapidly degenerate, given that the rule making and enforcing structure inspired no confidence. So too with government.
PUBLIC PROVISION OF "SPECIAL GOODS"?
There are reasonable arguments for government intervention and these must be examined. Some goods are said to have "special" features which make them unsuitable for production by private firms. Distinctions are often made between "private" or "commercial" goods or services (those where the benefits of consumption accrue only to the direct consumer, as with a motor vehicle) and three classes of "special" goods:
- "public" goods -- where one person's consumption does not reduce the amount available to others, who therefore have an incentive to "free ride" on others (national defence and, to a certain extent, health and education are examples here);
- "merit" goods -- which are deemed by some as intrinsically "good" and which it is therefore in the community's interests to have more of (examples might be the arts, tennis and trade centres and river beautification); and
- "necessities" -- those goods or services deemed "essentials" in life and to which every human has a "right".
Public and merit goods are sometimes discussed in terms of "externalities". This refers to the fact that a portion of the cost or benefit falls upon persons other than those who control the transaction. Then taxes and compulsory inter-person payments can be employed by governments to offset the cost or benefit accruing to third parties. Typically, "private" goods are seen as the province of the private sector, whereas in the case of the above three categories of goods a case can be made for government intervention.
PUBLIC GOODS
The case of a pure "public good" -- for which consumption by one party does not reduce availability to others, and where exclusion is not feasible, may justify government intervention on economic grounds since too little may be provided in a free market owing to the "free rider" problem. But public good status is not a sufficient condition for government production. Moreover, it is inherently difficult to establish the extent to which a particular good or service possesses "public good" characteristics.
MERIT GOODS
Public involvement in education is sometimes argued to be justified on "merit good" grounds, in that society may benefit from a person receiving an education, over and above the benefits to the individual themselves. But does the possibility of such an effect justify the wide-ranging government control and ownership in education? And if there is a case for intervention, would it not be best to assist students through a form of family income determined vouchers -- improving on the current 12 category semi-vouchers allocated according to measures of school resources?
The problem with "merit" goods is that most goods and services have "merit" in some eyes; but does this justify public sector provision or subsidy? Unfortunately, the incentives facing politicians and interest groups are such that, once public funding of "merit" goods (for example, the arts and tennis centres) is admitted, a can of worms is opened as there are more and more claims for government funding of "goods of merit".
ESSENTIAL GOODS
Similar considerations apply to so-called "essential" services. Few could disagree that access to food, water and shelter are essential -- but this has little or no relevance to the question of public sector provision. If something really is fundamental, then its production and distribution should be left to a sector that is subject to market forces -- which is why food and shelter are so abundant when produced in market economies, and so much scarcer in "command and control" economies.
A more direct way of helping people in need, of course, is to provide them with the means of affording these "essentials" through private support, through families and, if necessary, through the welfare system. We can help low income children gain a fine education by providing an educational grant and letting them choose, or we can fund state institutions and hope the bureaucrats look after them. In general, those goods seen as crucial to the economy and society generally should be the least likely candidates for public sector production, precisely because it is hard to get incentives right in the public sector.
NATURAL AND UN-NATURAL MONOPOLIES
Judgements as to whether government or private provision is appropriate are often made on the basis of the extent to which an industry is seen as "naturally" competitive. Where the optimal firm size is small relative to the size of the market, there are likely to be multiple producers (for example, agriculture). However, where economies of scale or scope are significant relative to the size of the market, there may be only few suppliers. At the extreme, an industry may be a natural monopoly able to support only one producer. Commonly cited examples include railway track, and gas and electricity transmission networks which it would be clearly uneconomic to duplicate. In these cases, government provision used to be seen as necessary to prevent the excesses of private monopoly.
Natural monopoly is, however, not as widespread as is often claimed, nor is public ownership the preferred response. Natural monopoly usually pertains to only parts of industries such as water and sewer pipelines and electricity transmission -- and not to other segments (for example, water treatment or power generation). Moreover, changes in market demand and technology can mean that an industry previously able to support only one supplier can now support two or more. Many claimed examples of natural monopolies are not natural but government created. Natural monopolies certainly do not require legislation restricting the competition they face.
Nevertheless, if (part of) an industry is a natural monopoly, there may be legitimate concerns that its transfer to the private sector will open the possibility for a profit maximising firm to overcharge and under supply the good or service in question. But this does not automatically make a case for government ownership and operation. Alternatives which retain the advantages of single firm supply and private sector involvement in industries characterised by natural monopoly include the regulation of a private monopolist, or franchising out.
While charges for once subsidised services could rise with private franchising (despite some large costs savings), as firms sought commercial returns in exchange for commercial service, nothing would stop government explicitly funding tickets for the needy or infirm, or students. The virtue of such a change is that the subsidies would be out in the open, for the community to judge, rather than being decided behind closed doors in Spring Street, or by unelected and financially less accountable bureaucrats who currently borrow and spend on enterprises we "own" -- but cannot control, manage or sell! The subsidies can also be more precisely targeted on those in need.
MARKETS LESS THAN PERFECT
Markets are usually less than perfect, but market defects do not justify intervention unless net gains can be achieved by government intervention. For example, while there may be some natural monopoly elements in a system of private docks, it will almost always be more efficient to allow private ownership and restrict government to constraining monopoly abuse, than to endure the current public sector inefficiencies, such as gold-plating and feather-bedding.
Government trading enterprises typically employ considerably more capital and labour than their private sector counterparts -- indeed, productivity is about 50% of the OECD average for public enterprises. This results from a combination of inappropriate pricing policies in state enterprises, artificial access to capital, and inflexibilities in labour arrangements. Waste of investment capital is one of the key reasons why Australia, and Victoria in particular, now finds itself in such an economic predicament, burdened by excessive borrowing and wasted savings.
The capital market provides a dramatic example of how originally well-intentioned government action to correct perceived market failures can go badly awry. After 1984, following the much heralded "Victoria -- the Next Step", we saw, amongst other strategies:
- the VEDC expanding into high risk ventures which the rest of the market had rejected,
- the subsequent, and politically-led shift in State Bank lending priorities to risk capital rather than traditional (housing) investment, and;
- the contrived borrowing (and attempt to avoid Loan Council restraints) through the Victorian Equity Trust -- an institution which challenged the English language as much as it offended financial norms.
These "modern financial innovations" hardly proved to be in the public interest.
Even where some government intervention is called for, because of difficulties facing individuals in the community, or because some services and goods would otherwise be under or over-provided, this rarely has to be in the form of direct government production and provision. For example, while the existence of "public" goods may justify (partial) government financing of production of roads and rail lines, there is no reason why government should not contract out all service provision and management activities.
ACHIEVING SOCIAL OBJECTIVES
Public provision of goods and services is often directed at social objectives which might not be met if left to private provision. For example, rural phones and electricity, and some branch rail lines, are often provided at heavily subsidised prices. In an unfettered market, such services may not be provided at all (if they are uneconomic) or may only be provided at much higher prices. Where the community expresses through the political process a desire to ameliorate the effects of market prices on classes of consumers, the preferred approach is openly to provide community service funding by the relevant government department (for example, welfare), so that the remainder of the state enterprise can be operated on a normal commercial basis.
The argument for public monopoly provision of (electricity, water, transport and dock) services to fulfil social objectives raises two questions. Are the major beneficiaries of state ownership really groups in need, or is the monopoly being employed to disguise the extent of the benefit and the real beneficiaries, who include many public sector unions? And are there more effective ways of assisting deprived or deserving groups?
The first step is to identify exactly what the social objectives are. Often, so-called social objectives are very vaguely defined, and sometimes are even left up to the enterprise itself to interpret. A further problem is that, even if the objectives can be clearly established, their validity is not periodically re-assessed. Costs are usually hidden, often via disguised cross-subsidies within the state enterprises.
Alternative ways of delivering the government's real social objectives (sometimes called "community service obligations", CSOs) which avoid monopoly provision by public entities should be found wherever possible. These CSOs might include ear-marked funding from the budget, payable directly to suppliers or, preferably, to the target groups themselves.
Several examples of the approach we have in mind here relate to the provision of welfare services. Individuals in need, be they parents of children seeking schooling, persons in need of health care, or persons suffering significant income or housing shortages, should receive government help in the form of health, housing and education vouchers, or through entitlements paid to the individual rather than to the institutions which produce the relevant services. In this way, the competitive energies of private sector rivalry are harnessed and the individuals' preferences respected.
HOW DID WE GET THE PRESENT VICTORIAN PUBLIC SECTOR?
Attempting to explain the existing mix of public and private provision of goods and services in Victoria is no straightforward task. There are both public and private schools, hospitals and insurance companies. Gas production is undertaken by private firms but transportation and distribution are via a state monopoly. Electricity generation is largely the province of the public sector, despite superior performance in private generation (for example, Alcoa at Anglesea). Many activities which are run entirely by government in Victoria -- water supply, electricity and gas, for instance are increasingly being provided privately overseas.
This suggests the importance of political and/or historical factors, in determining the current public/private sector mix. State owned enterprises (SOEs), with their tentacles extending well beyond core activities, have been established over the last century in Victoria for a number of reasons which have little to do with efficiency, but a lot to do with achieving disguised cross-subsidies and socio-political objectives. While the ability to deliver disguised cross-subsidies may be an important factor in explaining the existing public/private sector mix in Victoria, it hardly provides a justification for the continued pervasive government involvement in the Victorian economy.
THE PROJECT VICTORIA PHILOSOPHY
We need a philosophy of government which enables us to address questions such as:
- What is government best at, and what is better left to the private sector?
- What are the characteristics of services that should be provided by the public sector?
- Where should government be involved and how can it perform better?
- What role should government play in defining wages, superannuation and conditions of employment and severance, given that imposition of more "generous" standards reduces the capacity of employers to pay and employ?
- Which public sector enterprises should be converted to private enterprise?
- Where can we gain advantage from contracting out or franchising the services provided using public sector monopoly assets, such as our water pipe systems, our gas pipelines, our tram and rail lines and our power grids"?
- How should we constrain any potential abuses of monopoly power?
By addressing these questions, and obtaining answers which find a reduced role for government in providing many traditional services and a very limited role for government in managing or owning businesses -- we set out an "Agenda for Change". We note, in passing, that the search for more efficient means of delivering services to the community is never complete, as interest groups will always be pressing for help at public expense. The fact that the benefits of government largesse are narrowly focussed, and the costs thinly spread over current and future generations, means that the cause of reform requires "eternal vigilance".
Several fundamental points flow from this philosophy:
GOVERNMENT SHOULD PROVIDE A STABLE FRAMEWORK
The policy and reform program set out in Project Victoria is based on the premise that government should be in the business of defining and enforcing the laws, rules and regulations governing our society, under a "transparent" parliamentary system. Government should set the framework within which men and women, individually and in groups, can go about their respective business and leisure activities, spurred on by incentives to do well, and with full accountability under the legal system. The dynamic processes of change and development which characterise a free society are more likely to be beneficial if stability is provided by governmental rules, including the common law, which are stable and which evolve in a predictable fashion. But government should not actually be in the business of owning or managing businesses unless the market failure arguments are powerful and there is clear evidence that government can do better.
GOVERNMENT SHOULD HELP UNFORTUNATE PEOPLE
Where disadvantage arises, through misfortune, bad luck, illness or disaster, government has both a role to play and the means to make sure that outcomes are fair and equitable. Financing, but not necessarily delivery of social security systems is a proper activity of government. Project Victoria suggests that the energies of private sector entities be used in delivering community services fairly and efficiently, although the details of these matters are largely left aside in this Preliminary Report.
GOVERNMENTS SHOULD NOT TRY TO PICK WINNERS
It turns out that Victoria is now a monument to the fact that government is typically a bad manager of businesses, a poor investor, and perhaps worse, a bad banker, insurer and manager of superannuation funds. Government also has harmful effects on employment, in that government has set the "pace" by imposing or agreeing to terms and conditions of employment and termination which make it hard for many businesses which would employ labour to set up, let alone thrive.
The paradox to explain to many workers is that the effect of overly "generous" conditions of employment in government, and the flow-on to the private sector, worsens rather than enhances employment opportunities. As an example, attempts to impose artificially high wages and conditions cause employers to choose the high skilled and advantaged, and to stop the less fortunate, and non-conforming potential workers getting a toe in the door. Wage floors can thus end up creating injustice for the disadvantaged -- in Victoria under the banner of a "Social Justice" strategy.
Given that in all these areas of government failure business has a far better track record, there should be little surprise in stating that Project Victoria sees government vacating the fields of finance, insurance and superannuation, and many other activities in which private sector provision is demonstrably superior.
It follows that Project Victoria seeks a structure in which business, workers and other community organisations take their own risks, and trade in risks (via equity markets), in an environment which is both competitive and accountable. As part of this process corporate law and common law must be actively enforced, not least to ensure that confidence is retained in limited liability companies and other devices for risk sharing and the pooling of savings.
GOVERNMENTS SHOULD ENCOURAGE COMPETITION, NOT MONOPOLY
Government need not, and generally should not, own or take over monopolies, nor should government sanction anti-competitive business or union behaviour. Rather, government should create a pro-competitive environment and ensure that any natural monopoly power is not abused. Worker organisations, like their business counterparts, will deliver benefits of greater value to their members if the spur of competition is present, and it is a logical role for government to keep competitive pressures alive, not least in the labour market. Where possible, government bodies such as the industrial commissions, and monopolies contrived by government, should be subject to competitors, with workers and employers being free to sign their own contracts and employ their own mutually agreed arbitrators. In some cases the government agencies should simply be abolished if it turns out they provide services which are either unnecessary or which could better be provided federally or by the private sector.
FUND INDIVIDUALS, NOT INSTITUTIONS
All too often government trading enterprises and other government institutions such as state banks, state insurance offices, schools and universities, hospitals, electricity, transport, gas and water utilities are treated as ends in themselves, rather than as means to ends. Ultimately, it is individuals as customers and taxpayers who should pass judgement on the performance of these institutions. Those organisations which are deemed poor performers relative to private sector alternatives should be under commercial pressures to sell or close down.
State involvement -- whether regulatory or financial, or both -- should be with the objective of enabling individuals to choose the best way in which they wish to organise their lives. Individuals should be able to choose between government and private services on an equal footing, with especially deserving or disadvantaged individuals gaining support through government funded programs.
Fundamental to this process is that it is individuals not governments which should directly fund institutions, and so determine their success or failure in a competitive environment. (As one wit has observed, it is often no more efficient to assist individuals through government institutions than it is to feed sparrows through horses!) Government should charge so that total costs are recovered, and place government institutions that need to be retained in a corporate form to make them more accountable, competitive and efficient in the delivery of services. We need competition on the proverbial level playing field, with private operators facing the same taxes, charges and regulations as their public sector counterparts. Where individuals in need are unable to meet the cost of competitive service provision, government should assist them, but not place the whole industry under state control in order to contrive cross-subsidies.
PRIORITIES
In any real political environment there will be some reforms which would appear prime candidates for early action, for example, labour markets. Given that so many other reforms will be undermined, and unemployment increased, if employment rigidities prevent new enterprises forming and existing enterprises from performing better, a case can be made for attaching a high priority to labour market changes.
But the key to making it easier for one industry to adjust will often be to move on a broad front, so that the widespread excess costs, say through overmanning, are cut, lowering costs to other firms and individuals. The evidence that our efficiency in state enterprises is about half the OECD average means that broad based reform may be easier to swallow than piecemeal reform.
Associated with these reforms there will, of course, be winners and losers. This increases the case for a broad-ranging program of reform, so that workers who lose on the swings of transport charges gain on the roundabouts of lower rates and taxes.
OUR APPROACH IN SUMMARY
In summary, governments should set stable rules, assist needy people, avoid making commercial judgements which they tend to get wrong, discourage private or public sector monopolies and fund individuals rather than institutions. Governments must start with what is and will inevitably be influenced by prevailing public opinion.
PUTTING PROJECT VICTORIA INTO PRACTICE
While there is clearly scope for greatly narrowing the role of government in Victoria, Project Victoria does not advocate an immediate major reduction in government provision of basic services or a "sell-off of all public assets. Where assets are clearly not natural monopolies, or where there are no community service obligations, then placing assets in a form ready for sale is an immediate priority. In such cases the object will be to secure a market price in terms of the values of the day.
For natural-monopoly assets a case-by-case approach is needed, based on careful and rational analysis of the issues involved. A preliminary analysis of certain areas -- electricity, gas, water and ports -- is undertaken in Chapter 4, and to a lesser extent in Chapter 3, where the scope for enlarging the role of the private sector in education, health and transport is briefly addressed.
We note also that while the case for broad-based privatisation is strong, there are a number of ways in which the range of activities currently performed by the Victorian Government could be exposed to private sector incentives, through the following classes of reform.
CORPORATISATION AND CAPITATION
This general approach aims to reproduce private sector incentives, legal obligations and controls, while retaining public sector ownership. Initiatives here could range from moving away from funding public services directly to a capitation basis (for example, funding schools on the basis of the number of students who enrol), through to full corporatisation, involving clarifying objectives, increasing managerial authority, instituting effective rewards and sanctions based on bottom-line performance. A more detailed exposition of the corporatisation approach is set out in Chapter 4.
The shift to explicit commercial goals is intended to achieve production and consumption efficiencies which are lost when non-commercial goals apply or overlap.
There have been major cost reductions achieved in recent years in corporatised entities in the UK and New Zealand. For example, British Airways, prior to its privatisation, transformed its balance sheet from a negative net worth to a value amongst the best in the world, based on greatly enhanced profitability. In Victoria, the SECV and the MMBW are starting to achieve greater efficiency with revamped managements and more commercially oriented goals.
All this said, political owners will always see opportunity to intervene, and will find capital hard to provide, so diverting the organisation from pursuit of commercial to political goals. Incentives for superior economic performance are hard to fashion, or to distinguish from rewards for political performance. A private company is subject to the disciplines of takeover, loss and bankruptcy which cannot be replicated in the public sector.
PROMOTING COMPETITION
Project Victoria argues that competition is the key to ensuring that the services wanted by people and business in Victoria are provided effectively and at least cost. The most appropriate way of opening up state businesses may vary from case to case.
Exit Governments
In some fields where there are already a number of private competitors -- such as insurance, banking and many commercial services -- governments should simply vacate the field.
Contracting Out
In areas where public services and enterprises are producing "in-house" goods and services for internal use, competition could be introduced by use of contracting out. Obvious examples include maintenance, and cleaning which are ancillary to the core functions. But the potential extends beyond that.
Unbundling
In areas where natural monopoly or externality considerations come into play, exposure to competition is more complex, but by no means precluded. Natural monopoly generally only applies to a part of a public enterprise's operations (for example, to electricity transmission but not generation). Providing competition may therefore require unbundling of separate activities and imposition of common carrier requirements on the natural monopoly component. Even in respect of natural monopoly elements, competition can be introduced by franchising out for specified periods the operation of public infrastructure (for example railway and tram services, or -- as in France -- water and waste water services).
Privatisation
The ultimate means of introducing private sector incentives would be to transfer ownership of assets to private hands. As outlined earlier, the profit motive and disciplines associated with the markets for shares, capital and managers provide strong incentives to eliminate waste and inefficiency. Again, however, privatisation is only a means to an end -- the delivery of what users want. Where markets are not naturally contestable, the benefits from privatisation may be conditional upon the prior existence of appropriate regulations to prevent monopoly abuses. In each case the Government would form a Privatisation Committee, serviced by a specialist unit in the Government to make sure that the efficiency and other gains from privatisation would be obtained, and with external commercial expertise being used in the flotation process. New Zealand and the UK provide good examples of how the process can be done effectively and how some of the pitfalls can be avoided.
Where existing government enterprises have a natural monopoly, for example, tram lines, unique port docking facilities, electricity, water and pipeline grids and so forth, any move to privatisation will clearly involve the implementation of some structure to prevent the abuse of monopoly power. There are also franchising techniques, as discussed below, which offer competition for the provision of monopoly services.
Regulation of Private Monopolies
The process of converting natural monopolies to private monopolies, subject to regulatory constraint, is more complicated and in each case there will be a need for careful attention to the processes whereby the community interests are protected while the efficiency gains are delivered. Scope for using monopoly power to raise prices, chisel quality, or restrict supply needs to be subject to independent monitoring.
While any regulation will bring a new set of costs, and efficiency losses, these need to be set against the potentially vast savings from reduced spending on white elephants or assets unable to deliver a return commensurate with that given up by forced community savings. So long as these government trading enterprises are not privatised, they will always be liable to be asked to satisfy political, rather than their customers' needs.
Franchising
Franchising offers the prospect of selling public sector monopoly facilities such as tram lines, power grids, and networks of water pipes into common carrier companies, which could be owned by the State but operate under the company code (as per the SOC Act companies in New South Wales), but with the public grid company calling for tenders for provision of services on the grid. Thus we might see competitive tram and train services using Victorian lines, private sector service companies in the water and sewerage treatment areas and privately owned power stations and distribution companies transacting with the common carrier grid.
DIFFERENT LEVELS OF GOVERNMENTS
Having considered the general question of which activities should be left to the market and which are properly the role of government, there remains the issue of the appropriate level of government to undertake each activity. The principle governing any allocation of functions across government should be that of comparative advantage. Following the special Premier's Conference in October 1990, processes are under way to re-appraise the relationship between the Commonwealth and State Government jurisdictions. The communique from the conference highlights the urgency:
"Leaders and representatives acknowledged that past inefficiencies can no longer be tolerated and that changes are needed to make the Australian economy more competitive and flexible. An integral part of any micro economic reform strategy is a more effective public sector. Leaders and representatives therefore declared their intention to use this unique opportunity to maximise co-operation, ensure a mutual understanding of roles with a view to avoidance of duplication and achieve significant progress towards increasing Australia's competitiveness."
While these initiatives are to be welcomed, Project Victoria stresses that there is enormous scope for reform in Victoria without changes in Federal-State relations. Also, the maximum benefits from reform are likely to be realised only if the overriding focus is on the efficient delivery of goods and services to consumers. We want far more than a patch-up job -- in particular, we seek a shift to the private sector of functions which private incentive structures can better deliver. For example, gains from extending the interstate electricity grid, as proposed at the Premiers' Conference, will not be substantial unless the new structure allows competitive power generation by private competitors. Power generation must be separated from the "club" of existing public utilities. Equally, a National Rail Freight Corporation scarcely presages the introduction of a more competitive railway system.
There is also a need for federal/state tax reforms which allow the capital intensive areas such as water, transport and electricity to shift into the private sector in a manner which is economically efficient. This will not happen if, to achieve it, the states must forego revenue relative to the federal government. While the precedent created by the State Bank of Victoria case is helpful, taxing arrangements and revenue sharing following privatisation of state assets need to be clarified.
CONCLUSION -- BACK TO BASICS IN VICTORIA
There is a strong case for critically re-examining the rationales for government involvement in the wide range of activities currently undertaken by the Victorian Government with a view to a vastly reduced role for government in actually running businesses and an increased private sector role in the operation, even the financing, of basic services. This strategy would allow government to focus on providing a stable framework of rules and regulations which allow individuals the opportunity to prosper, while helping those in genuine need.
The following chapters review the performance of the Victorian Government, particularly in providing and financing services. They apply the principles outlined in this Chapter to specific areas, to formulate a desirable and achievable blueprint for reform.
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