An address to the Managing and Regulating Public Private Partnerships Conference,
16 August 2001
Over the past decade, Australia has enjoyed perhaps the most comprehensive privatisation program seen anywhere in the world.
Since the early 1990s over $90 billion of publicly owned entities have been sold into the private sector. The process has covered a wide range of asset types: telecom, electricity and gas, ports, banks, and gambling.
All States except Tasmania have been part of the process. The Commonwealth with Telstra and the sale of the Commonwealth Bank and Qantas dominating has been the major privatiser with Victoria punching well above its weight with the energy privatisations eclipsing all others in value. Other states have privatised less, in South Australia, energy has dominated, in Western Australia energy and banking and in Queensland and NSW it has been financial services.
Privatisation has been an immense blessing. It has been part of the range of microeconomic reforms that constitute the much loathed economic rationalism. As such it has contributed to a situation where Australian productivity growth has shifted from among the worst in the world to among the best. It has allowed the economy a measure of considerable prosperity and growth during the past half dozen years. During this period, Japan, our major trading partner, has stagnated and the economies of several of our near neighbours which were providing most of the better trading prospects have gone into a series of tailspins.
We have many worthwhile prospects for privatisation but it seems the political will or economic necessity has waned, except in the case of some rail assets. It now seems unlikely that over the next few years we shall see privatisation of the rest of the power industry or of Telstra or of water and all the other remaining areas where private enterprise can make a difference.
Private partnerships allow some of the momentum of the privatisation process to be maintained. They allow the galvanising onto a public sector development of some of the cost savings and innovation seen in private enterprise. At the very least this should ensure against the horremndous cost over-runs and dead-weight government staff that accompanied developments of yesteryear.
Contracting out and privatisation has a long history. Contracting out has always been a feature of manufacturing and service industries. Often it has taken the form of vast numbers of sub-contractors. Such methods, used by the Japanese transformed the motor industry from the previous archetype where steel and leather went in the factory at one end and a finished car rolled off the other.
A further variant, franchising, has proven immensely successful in galvanising the self interest of a quasi employee and turning him or her into a self motivated entrepreneur who seeks out economies in achieving customer satisfaction.
This reminds us that it has been in the operations of these facilities that the real economies have been made. The Victorian privatised electricity distribution businesses started by contracting out activities on the periphery of their core business. Among the first such candidates were workshops, civil engineering and construction activity. These have been followed by undergrounding, meter installation, public lighting and in some cases line workers.
Most of the power stations have outsourced maintenance, catering, cleaning and security functions. A great deal of this took place prior to privatisations. Further efficiency gains have been made since then by paring down on excess staffing and better management generally.
For the power stations a major driving force for cost cutting generally and outsourcing in particular was the coming national electricity market where the Victorian generators estimated they needed to cut at least 35% of direct costs if they were to be competitive with NSW and Queensland. The generation business reflected all the poor symptoms of union control: restrictive work practices, over-manning, poor performance leading to major outages all stemming from an ingrained antipathy towards management.
In the case of maintenance, considerable pre-conditioning was necessary. The first step was to establish a profit centre. Some early successes in outsourcing, included Siemens taking over the electrical workshops in 1991 and Linfox taking over transport and stores at the same time followed by a consortium taking over part of the coal cutting business. These early outsourcings presented a demonstaration effect. Although the unions fought to retain existing staffing levels, the gains were plain to see and the Kennett Government was particularly ill-disposed to union featherbedding. The contracting out of maintenance entailed 2,200 jobs with about 1,000 of those displaced finding work with the contractors.
Anticipating the current private public partnership push, some assets with a specialised role, like milling and boring machines for turbo-generator overhauls were not sold but leased out to the new contractor. Such a move carries some risk that the new contractor will stint on maintenance of an asset he does not own. This carries particular risks where the contractor feels he won't win the next round of contracts. Although not followed in the SECV case, a strategy for combating this is to have an independent appraisal of the value of the asset pre-contracting and a further appraisal at the end of the contract with an agreement for payment where the asset has depreciated beyond an agreed point.
As with many other businesses, there are fears that the "emaciated corporation" will just become a bundle of contracts that nobody in the corporation itself is capable of overseeing properly. Keeping core competencies and contracting skills is essential but the concept of core competencies is often elusive. Western Mining, for example, outsources all its work at two of its biggest mines. The Kennett Government outsourced its policy functions in the privatisation of the electricity industry. The present government found a cost saving by abandoning the task altogether!
All this underlines the importance of what is meant by private partnerships.
More than 121 developing countries introduced private participation in at least one infrastructure sector between 1990 and 1999. Those countries awarded over 1,900 projects that involved investment commitments of US$580 billion.
Investments encompass bridges, electricity, roads, dams etc.
Contracting out in Victoria has been accompanied by a comprehensive sales campaign of government publications selling the notion of Partnerships Victoria. Under this the Government explains how it is to vastly expand public infrastructure and to do so in ways that:
- get the best value for the taxpayers' money
- ensure best practice
- protect the public interest
- ensure all the usual suspects are given rights to participate in the processes and to ensure disadvantaged groups can effectively use the infrastructure.
Of great importance in this respect is the need to have full transparency. Unfortunately, dealings by government cannot be like dealings by BHP. Government does not have the discipline of the bottom line profit result and owners who can exit the share registry in the event of poor performance. This lack of consistent attention to fully benefiting the, shareholder, who in the populist nostrums of triple line accountability and corporate social responsibility would be dubbed the residual stakeholders, marks out business from government. It is the feature that makes business intrinsically more efficient than government.
A perceived lack of full disclosure by government can be poison. The public criticism that continually confronted the previous government with regard to the Casino deal was made possible because the deal was undertaken in greater confidence than occurred with the electricity privatisations. Those opposed to privatisation were able to capitalise on aspects of the deal that were never made public. In the event, after years of trying to uncover supposed political payback, both in Opposition and in Government nothing untoward has come to light and one would presume therefore that there is nothing untoward in existence. However the issue became a cause celebre among the anti-capitalist cheer squad. It allowed massive scope for the pro government ownership cadres to ventilate their prejudices.
This provides a message in all government dealings and one that the present government appears to have learned well: all dealings must be out in the open Bids, terms of agreement, performance measures and all aspects of the deal should be open to public scrutiny and to the scrutiny of the Auditor General. This is also an extra cost for the private sector of doing business with government but it is one that is unavoidable.
Let me finish on a note of caution.
The considerable activity of privatisation has allowed the debt that was amassed at all levels of government to be virtually eliminated. Commonwealth general government debt is scheduled to be eliminated in two or three years, state general government debt is already eliminated and the debt of the public non financial corporations is down by over a third. In overall terms, debt which in the dollars of the day was $164 billion in the mid-1990s is now more than halved.
In the context of the privatisation, and the vast reduction of debt we have seen, private public partnerships offer both a source of salvation and a source of risk to the soundness of public accounts.
The risk is that the outsourcing of schools, hospitals, law courts and the like will become a hidden way of increasing public spending, a means by which expenditure gives the impression of being under control but only because some big ticket long lasting capital items are now off the budget statement and are being paid for over decades rather than in one year.
This is not to argue against the treatment of these items on an accrual rather than cash basis. The objection is that it becomes more difficult to hold governments accountable for their expenditure decisions. We have budgets constructed on a different basis. And the Treasury either won't or cannot offer a series of accounts that allow the comparisons that are meaningful and essential. All we have is a spartan few lines informing us of "non quantifiable contingent liabilities".
The privatisations have left the infrastructure businesses at risk of government interference. Already we are seeing grumbles on the part of some in the electricity business who feel the regulator has treated them harshly. These have brought sales or attempted sales of two of the five businesses. In the early years of the electricity market, there was downward pressure on prices. Government could rest easy. Now the investment cycle is such that there is upward pressure. The political impact of this is vastly exacerbated by the rate-payer or tax-payer consumerist agitators that governments, even conservative governments, feel obliged to put in place. We are seeing some further regulation of electricity prices being mooted. This is serious for the electricity industry, itself a major part of the Victorian economy, but the impact could spill over onto other areas of investment by increasing the sovereign risk of investing in the State generally.
In the case of prisons, the renationalisation of Deer Park offers an indication of the ideology of government ministers seeking out situations where they are able to exercise their preferences. An independent review found the prison to be superior to others in the public sector yet it was pilloried. The Government also readily seized the opportunity to take back control of the Latrobe Hospital, only to see its waiting lists balloon out.
Governments are notoriously close chested when it comes to scrutiny of their operations. We don't have a true public assessment of the different schools (although the UK Blair Government has grasped that nettle). Anyone who tried to get information on the old public transport system was whistling into the wind. Under privatisation, performance measures are in place and under firm public scrutiny.
But it needs measures that go beyond a building and lease back if we are to see efficiency. To be sure, governments can utilise public/private partnerships to have a building constructed and leased back to them, thereby taking advantage of superannuation savings to step in where previously tax payers money went direct. But is this enough to justify the program? The real economies are in operations, which often means escaping the yoke of union conditions. Will the government come at that? Will the government say to MLC or Caulfield Grammar "We'll outsource the build operate and own of schools in Victoria to you"?
It may well outsource law courts as buildings or negotiate a long term lease on a school but if that is all that is entailed this is a pale imitation of the potentialities available.
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