The State Enterprise Sector

CHAPTER 4

INTRODUCTION

The state enterprise sector is at the heart of Victoria's problems.  Our ports, mineral, and agricultural base are, potentially, world class resources, as are our water, coastal, forest and other natural endowments.  Yet a major part of the activity in these areas of internationally competitive strength is dependent on, or controlled by, the least efficient part of the Victorian economy -- the state enterprise sector.

In the period 1860 to 1885, before the blooming of state enterprises and quangos, Victoria became arguably the wealthiest corner of the entire world.  This standard of living was achieved through pre-eminence in gold mining, agriculture and the pastoral industry, supported by the private manufacturing and service sectors.  Both the escalating role and the problems of the state enterprise sector were recognised almost 60 years ago in Eggleston's "State Socialism in Victoria".  Eggleston, a leading conservative politician, referred in 1932 to Victoria's public services as "the largest and most comprehensive use of State power outside Russia". ⁽¹⁾  While perhaps an exaggeration then and now, the fact remains that under all political parties there seems to have been, in Victoria, a predilection for state monopoly enterprises and quangos, rather than private enterprise and competition.

There has been a secular and disturbing willingness to replace business and commercial decisions with political decisions.  In this way advantages and privileges could be obtained through politics, rather than through risk-taking commercial and industrial activity. ⁽²⁾  The rationale for this political interference in business life has often been that of assisting the needy through (usually disguised) state enterprise subsidies.  However the reality is that, if Victoria was not bogged down in the low levels of efficiency which have inevitably characterised state enterprise in Australia -- 50% worse than the OECD average ⁽³⁾ -- we could afford to be a lot more generous to those who are disadvantaged.  After all, in Victoria 22 cents in the dollar of government revenue is for debt servicing, with approximately half for the debt of state enterprises such as the SECV (non-budget enterprises account for 46% of state debt).

The problem with state enterprises lies not in the skills or talents of managers, but rather with the politically driven incentives under which they are obliged to operate.  What is worse, it seems to be impossible to create effective incentive structures for managers when the real "board" is Cabinet and the legal shareholders are politicians.  This is because politicians tend to be concerned about re-election, rather than increasing the efficiency and value of the enterprises under their control.

Evidence at home and abroad has increasingly made it plain that state ownership is largely to be avoided -- the efficiency gains from competition and private ownership accrue to all, whereas the politically driven waste of capital and labour in state enterprise lowers community incomes across the board -- as millions in Eastern Europe can sadly testify.

Victoria prospered in the early years of self government not because government picked winners;  not because state enterprises converted business into politics;  not because of tariff-cosseted enterprises;  and not because wages were set by remote and market-shy tribunals.  Rather, Victorians were once at the top of the per capita income tables because they adapted their know-how to the resources at hand, making use of the standard corporate forms and competitive structures which account for most wealth creation around the world.

Now that our real incomes are declining;  now that interest on our debt accounts for 22% of our tax burden (and our credit rating is being down-graded) the time has come to reassess the fundamentals of State economic policy.  This chapter develops a program and a notional timetable for a complete restructuring of what is now tagged with the oxy-moronic label "state enterprise". ⁽⁴⁾

THE STYLISED FACTS OF STATE ENTERPRISE

In 1989-90 Victorian state enterprises (excluding on-budget industries such as education and health) accounted for around 4.2% of State product, 4.6% of employment but had generated 46% of state indebtedness. ⁽⁵⁾  The services provided are fundamental -- electricity, gas, water, sewerage, and ports -- making efficiency vital if we are not to waste our scarce human and capital resources, and if we are to be in a position to afford other priority services.

This chapter focuses on key enterprises:  the SECV, the GFCV, the MMBW and the Port of Melbourne Authority, which manage assets valued at over $27 billion and employ more than 32,000 people (See Table 4.1).  The Port Authority of Geelong and Portland, and the financial/insurance institutions such as the Transport Accident Commission and the Accident Compensation Commission also receive some attention.  However, our observations and prescriptions have broad applicability to other state enterprises, and even to "enterprises" currently funded within the budget such as hospitals and schools.

TABLE 4.1:
KEY AGGREGATES FOR SELECTED VICTORIAN PUBLIC ENTERPRISES 1989-90

	Total Revenue ($m)	Total Assets ($m)	Total Liabilities ($m)	Equity ($m)	Expenditure on Capital Works ($m)	No. of Employees
State Electricity Commission of Victoria	2629	16430	8985	7124	1008	17962
Gas and Fuel Corporation of Victoria	966	1865	900	963	119	6129
Melbourne Metropolitan Board of Works	874	8049	3165	4082	337	6878
Port of Melbourne Authority	144	1052	346	706	706	1257
	4613	27396	13396	12876	2170	32226

Note:  Financial estimates are on a current cost basis

Source:  Annual Reports 1989-90 for relevant authorities

Our assessment of the performance of state enterprises reveals significant and costly deficiencies.  After a review of recent initiatives aimed at improving performance, we set out a Project Victoria agenda of fundamental reforms.

ASSESSING THE PERFORMANCE OF
THE STATE ENTERPRISE SECTOR

Measuring the performance of "commercial" enterprises should be simple.  Unfortunately, while "bottom line" financial performance indicates the poor performance of state enterprise authorities, even those losses do not tell the full story (eg the ABS data show losses).  Furthermore, the vague and conflicting goals and reporting obligations of state enterprises, make it hard accurately to judge the real value of services performed and assets used.  We do know, however, from OECD and EPAC analysis, that our overmanning in state enterprises has probably been close to 50% relative to a far from perfect OECD average over recent decades -- although those statistics are starting to improve, notably in NSW, the SECV and the MMBW.

Other factors complicate assessment including requirements to fulfil community service obligations (such as the SECV's obligation to charge concessional tariffs to residential users), political interference in managerial decision-making, exemption from certain taxes or government regulations, and the adoption of different accounting practices.  Other indicators such as share prices, bankruptcy and takeover bids do not apply to state enterprises, and their absence reduces incentives to monitor performance.

Despite these qualifications, it is possible to assess performance of state enterprise sector authorities by focusing on -

1. productive efficiency, and
2. allocative efficiency.

Productive efficiency, or minimising resource costs, frees labour and capital to produce other things of value.  Resources not used in state enterprises can be spent on leisure, environmental amenities or welfare payments, to choose a few examples.  Indicators of productive efficiency include data on capital utilisation, usage of material inputs, management and work practices, and the estimates of the quality of the output produced.  Importantly, productive efficiency requires the sustained minimisation of production costs.  The capital intensity of much of state enterprise -- for example, electricity, gas and water, not to mention Tennis, Arts and World Trade Centres -- means that productive inefficiencies in the form of "white elephants", including well meaning ventures which operate under poor financial and corporate structures, may impose particularly high costs on the community.

Allocative efficiency is about achieving the maximum value from consuming a given income over time.  To achieve this, the prices charged should reflect the cost of resources used.  The classic examples of allocative inefficiency usually arise when the state enterprise charges so little for a service that everyone wants more of the subsidised service and less of those which pay their way -- creating huge new capital demands and provision of services which consumers value far less than what they cost to produce!  A further benefit of proper prices is that those who do produce competitively are not driven out of business by subsidised government services.

As an example -- failing to charge for the full cost of water artificially encourages demand to the point where value is below cost.  The false price signals feeds into investment decisions, that is, too many dams may be built.  Overpricing, as can happen when greedy or desperate Treasuries seek to exploit the monopoly powers of state enterprises, can lead to insufficient output and investment.  Either way, to the extent state enterprises are about divorcing prices from costs, the community bears a cost which would generally not arise under private enterprise provision.

Having defined what we mean by "economic efficiency", the following sections examine the recent performance of selected Victorian state enterprise authorities against these criteria.  While this analysis does not purport to be a fully encompassing one, it does uncover sufficient evidence for some fairly strong assessments of the performance of these enterprises.

ELECTRICITY (SECV)

It is vital that the energy needs of Victorians be met at the lowest possible cost.  The question here is the form of industry structure which can best deliver the goods.

The SECV is a vertically integrated monopoly and is involved in each of the industry segments:  generation, transmission and distribution.  Table 4.2 presents selected performance measures for the SECV over the mid to late 1980s.  While these figures certainly show improvement in performance, the base was one of low productivity.  There are also concerns at the $8 billion debt, given retained earnings of only $72.8 million in the year to June 1990, and roughly $3 billion annual revenue.  Not surprisingly, the SECV has now adopted a policy of "no new debt".

TABLE 4.2:
SELECTED PERFORMANCE MEASURES FOR THE SECV 1985-86 TO 1989-90

	1985-86	1986-87	1987-88	1988-89	1989-90
Real Rate of Return on Assets	4.6	6.3	5.5	5.2	5.4
Average Published Tariff Increase relative to CPI (%)	-3.2	-2.9	-2.7	-3.8	-3.6
Reserve Plant Margin (%)	45	48	45	36	25
KWh sold per employee	1.01	1.09	1.22	1.36	1.55

Sources:
Victorian Government Budget Paper No 2, 1990-91
SECV Annual Reports, various issues
Industry Commission, Energy Generation and Distribution, Draft Report January 1991

Concern over productivity was confirmed by Lawrence, Swan and Zeitsch (1990), ⁽⁶⁾ who found that between 1975 and 1988 the SECV consistently had the lowest total factor productivity levels ⁽⁷⁾ of all state electricity authorities in Australia (after adjusting for scale, output composition and geographic spread).  The study estimated that, if the SECV were to achieve the total factor productivity levels of those in Queensland, Victoria could save some $339 million.

Part of the reason for this poor performance is the SECV's reliance on low grade brown coal deposits and the capital-intensive nature of power generation from this source.  (It is an interesting to note that Eggleston [1932] wrote that Victoria's first power station, if privately owned, would probably have been shelved after the low quality of the fuel source was more fully appreciated.  Construction went ahead, in order to avoid a "political ordeal of criticism".)

In 1989-90, the available capacity factor for major brown coal generating plant in Victoria was, according to the SECV, 69% (compared to 59% in the previous year). ⁽⁸⁾  By contrast, the Economic and Budget Review Committee of the Victorian Parliament noted that Alcoa's power station had availabilities of 90 to 95% since installation in 1968. ⁽⁹⁾  Garlick (1987) has estimated that for the SECV, a 10% increase in plant availability could eliminate one 500 MW unit, saving capital charges of $60 million to $100 million per year. ⁽¹⁰⁾

Perhaps the best-known example of cost overruns is Loy Yang A power station.  Lack of tight control over costs, industrial relation problems and construction difficulties led to delays in completion and an overrun of about $1 billion on an original budget of $2.3 billion.

The SECV's operations have, for many years, been characterised by gross overmanning, which has started to be addressed.  The workforce of the SECV declined by 18% between January 1989 and June 1990 and other initiatives are expected to save $50 million annually, including a reduced number of awards, enhanced training and skills extension, and improved career paths.  Nevertheless, significant problems remain.  The SECV has, for example, pointed to difficulties in achieving the management/union identified operating cost reduction targets at Loy Yang.  More generally, the SECV has stated that:

While substantial progress has been made, some structural impediments within the union movement have restricted the rate at which benefits have flowed to customers.  Whilst almost all employees are now covered by only four new awards, they are still represented by an undesirably large number of unions.  This inhibits productivity gains by restricting the opportunity for multi-skilling, employee flexibility, demarcations, minimum manning requirements, restricted use of contract labour and an inability to reward superior performance of employees. ⁽¹¹⁾

Inefficient management practices, and not just overmanning, are also clear targets of current SECV reforms.

In a number of areas, prices charged by the SECV have borne little relationship to the cost of supply.  This reflects government policy to cross-subsidise classes of consumers.  Community service obligations fulfilled by the SECV include:

• uniform tariffs across the State to cross-subsidise remote customers;
• participation in the Victorian Government's "Social Justice Strategy", which reduces the number of supply disconnections for non-payment of accounts and imposes no penalty for late payment;
• financing one third of the capital cost of new major public lighting schemes;
• financing under-grounding or relocation of power lines where a clear community benefit exists;
• subsidising the salinity mitigation program;
• providing the Home Energy Advisory Service free to people on low incomes;  and
• satisfying non-statutory environmental obligations.

Largely as a result of these CSOs, it has been estimated that Victorian commercial users as a group are overcharged by around 28% while domestic users are undercharged by 15%, representing a cross-subsidy in favour of domestic users of some $177 million in 1987-88. ⁽¹²⁾  Industry Commission estimates suggest that, to eliminate cross-subsidies, prices charged to farm users as a group would need to be increased by around 118%, prices to high voltage business users increased by 11%, but those to low voltage business users cut by some 26%. ⁽¹³⁾  The problem with cross-subsidies is that while they fulfil what some see as worthwhile social goals, they impede competitiveness by distorting service provision and generating higher average costs.

GAS AND FUEL (GFCV)

The Gas and Fuel Corporation of Victoria, a State owned company formed out of two private gas companies in 1950, is responsible for both the transmission and distribution, but not the production, of gas.  Table 4.3 presents some selected performance indicators covering the period 1985/86 to 1989/90.  Again, these figures suggest some significant improvements in recent years, but as with the SECV, from a very poor base.

TABLE 4.3:
SELECTED PERFORMACE MEASURES FOR THE GAS AND FUEL CORPORATION OF VICTORIA 1985-86 TO 1989-90

	1985-86	1986-87	1987-88	1988-89	1989-90
Real Rate of Return on Assets (%) *	5.9	6.0	10.0	6.5	6.0
Average Published Tariff increases Relative to CPI (%)	-2.9	-2.3	-2.3	-2.7	-3.1
Gas Sales (TJ) per Employee	24.5	25.3	25.2	25.7	26.7

* An accounting policy change was made in 1987-88.
Before the change the result would have been 4.9%

Source:
GFCV Annual Reports
Victorian Government, Budget Paper No 2 1990-91

There is considerable evidence that the overall performance of the GFCV has been poor.  For example, the Economic and Budget Review Committee of the Victorian Parliament found serious deficiencies in its performance, concluding that "there is probably substantial scope for improvement in the Corporation's operational efficiency". ⁽¹⁴⁾

In particular, it considered that:

• it was unacceptable that the GFCV had increased its staff levels by 8% over the four years 1985-1989, whereas those of the SECV and MMBW had decreased by 4% and 8% respectively over the same period;
• the lower prices for gas in Victoria compared with other States may be substantially due to economies of scale and a cheaper cost of gas to the Corporation under its long term contract with Esso -- BHP (rather than superior efficiency);
• there was a lack of internal systems and procedures in place to ensure that over-manning was reduced;  and, moreover, that it was "astonishing" that the Corporation had made a commitment to the maintenance of a constant workforce.  This made the Corporation "out of step with the policies and performance of other government enterprises in relation to reducing staffing levels, and the Corporation should be censured for its performance in this area";
• insufficient attention had been given to the identification and evaluation of opportunities for the use of contracting out as a means of increasing the GFCV's operational efficiency;
• it was "regrettable" that the GFCV appeared to have a policy of promoting internally at all levels including senior management;
• there was limited internal and external review of managerial performance and, as compared with the SECV and the MMBW, the GFCV had been slow to publish performance indicators.

Despite the fact that much of the Committee's criticism related to staffing matters, the GFCV increased total employees by a further 142 to 6129 in 1989/90.  In that year the GFCV serviced 194 customers per employee.  The corresponding figure for AGL (the private NSW supplier) was 211, and for British Gas was 221.  As has been pointed out by the GFCV, British Gas is substantially larger than GFCV, and its higher customers/employees ratio may be largely explained by economies of scale.  But the same logic suggests that the GFCV is significantly over-manned compared to AGL -- whose sales are about 42% less than those of the GFCV.

The pricing policies of the GFCV involve significant departures from "user pay" principles.  Like the SECV, the Gas and Fuel Corporation is also required to undertake certain community service obligations.  These include uniform pricing within customer classes, concessions to domestic users, pensioner rebates, and low income household concessions.  According to the GFCV, CSOs and energy management activities cost almost $6 million per annum, for which no compensation is received from government. ⁽¹⁵⁾

MELBOURNE WATER AND SEWERAGE (MMBW)

The performance of the MMBW has improved in recent years (Table 4.4), and has been strong in relation to that of other water and sewerage enterprises (WSEs) throughout Australia.  The Australian Water Resources Council (AWRC) calculated that MMBW's real rate of return in 1988-89 was 3.4% cf an Australian average of 2.8%. ⁽¹⁶⁾

TABLE 4.4:
SELECTED PERFORMANCE MEASURES FOR THE MELBOURNE METROPOLITAN BOARD OF WORKS 1985-86 TO 1989-89

	1985-86	1986-87	1987-88	1988-89	1989-90
Real Rate of Return on Assets	2.6	3.3	4.5	4.5	4.8
Average Published Tariff Increase relative to CPI (%)	-1.8	-2.2	-1.7	-0.8	-2.6
Employees per 1000 rented properties	7.7	6.9	6.2	5.7	5.1

Source:
MMBW Annual Reports
Victorian Government Budget Paper No. 2 1990-91

Overall rate of return results may hide significant variations in the returns to the components of the industry.  For example, the AWRC figures show that the MMBW earned 6% on sewerage assets but only 1.5% on water.

The MMBW's real return on investment is, however, rather lower than commercial rates of return considered to be appropriate in the business world and for government agencies.  To some extent, low rates of return may reflect a deliberate policy to hold down prices.  Charges have declined in real terms for each of the five years since 1985-86.  1989-90 saw a real reduction in charges of 2.6%, which exceeds charge reductions for the previous two years (0.8 and 1.7% respectively). ⁽¹⁷⁾

While low prices today are good news for current consumers, they may cause problems for future generations.  By restricting the Board's financial returns, and consequently its ability to finance capital expenditures or to retire debt, they create a major constraint on the growth and development of Melbourne's water industry.  The present schedule of prices has, for example, contributed to an under-recovery of costs in trade waste of $54 million, and in developer contributions for water supply of $25 million. ⁽¹⁸⁾

Melbourne faces considerable expenditure to augment the basic water supply, sewerage, and drainage infrastructure.  However capital expenditure between 1989-90 and 1991-92 is projected to increase in nominal terms from $223 million to $240 million, which in fact constitutes a projected fall in real terms of $9 million. ⁽¹⁹⁾  The ability of the MMBW to finance major capital works, and the processes by which the Board raises the necessary capital funding, are major concerns of the Victorian Government.

The Economic and Budget Review Committee found that the MMBW's total debt, in inflation adjusted terms, had gradually declined from $3,698 million in 1984-85 to $3,331 million in 1988-89. ⁽²⁰⁾  However, in 1989-90 net borrowings for capital works provided some 50% of capital expenditure.  And despite an injection of $100 million from the Victorian Equity Trust and forgiveness of $60 million debt by the State Government, the Board's debt to asset ratio has remained stable.  Interest payments on debt amounted to 43.3% of the Board's total revenue in 1988-89.

The MMBW's total interest/revenue ratio of 43.3% was well in excess of that for comparable organisations, such as the Sydney Water Board (15.3%), and the Auckland Regional Council (10.7%). ⁽²¹⁾  The observed net debt/revenue ratio for the MMBW, at 356%, further highlights the magnitude of the debt burden experienced by the MMBW -- debt/revenue ratios for Sydney Water Board and Auckland Regional Council are far superior, at 179% and 108% respectively.

Capital investment by the MMBW must not only take into account the needs of the current population, but must also provide for the future demands of an expanding population.  Increasingly, the cheapest way to provide water for new uses is for existing users to conserve water.  The most effective means of encouraging water conservation is implementation of water pricing based on the cost of providing water and sewerage services, and the amount of services consumed.

The gains that may be achieved through more rational pricing have been demonstrated in the Hunter Valley of New South Wales.  The Hunter Water Board's move in the mid 1980's from a property tax base to availability and volume charges has been associated with reduced household consumption of water of around 20% and has achieved substantial capital savings through deferral of major capital works.  While the MMBW has recently moved in the direction of more economically rational pricing by adopting a three-step increasing block tariff structure alongside water rates, the structure of charges still employs a property tax which, in effect, subsidises water use.

Labour productivity, measured in terms of employees per 1000 rated properties and reduced operating expenditure, increased in both 1987-88 and 1988-89 by 3.6% and 4.0% respectively, or a combined improvement of 10.6% over three years.  The number of employees per 1000 rateable properties, at 5.0 in 1989-90 and 5.8 in 1988-89, compares favourably with other WSEs, for example, the Sydney Water Board, with comparable figures of 7.55 and 7.47 employees respectively. ⁽²²⁾

The Economic and Budget Review Committee of the Victorian Parliament, while acknowledging the MMBW's "considerable efforts" in improving its productivity in recent times, suggested that "the evidence from the Board's own indicators raise real concerns". ⁽²³⁾  The Committee expressed particular concern over:

• the large number of working days lost from industrial disputes;
• the average sick leave days per person;
• an apparent decline in the degree of customer satisfaction with the Board's performance in customer service.

PORT AUTHORITIES

The Port Authorities of Melbourne, Geelong and Portland have responsibility for what are vital links in the transport chain.  Given that the vast majority of the State's exports, and many of its imports, move through these ports, their efficiency has direct and important effects on Victoria's economic performance.

Inefficiencies in Australia's ports are almost legendary and have been well-documented in a plethora of previous inquiries and reports.  The Inter-State Commission, ⁽²⁴⁾ for example, found that the industry was characterised by:

• high costs and endemic unreliability;
• ineffective management and poor response to user needs;
• a high level of industrial disputation and inappropriate manning levels and work practices;
• poor discipline and motivation throughout the industry;
• lack of supply and demand balance (often reflected in congestion and queues or in under-utilisation of expensive facilities;  and
• diffusion of governmental responsibility.

Abuse of monopoly power -- reflected particularly in port authority pricing and investment policies -- was seen as but one symptom of a pervasive lack of competition throughout the industry.

Admittedly, many port services are performed by private operators, but public port authorities do play a central role in all key decisions.  The recent financial performance of Victoria's public port authorities has been unsatisfactory.  For example, over the years 1985-86 to 1989-90 the Port of Melbourne recorded real rates of return of 2.7%, -4.2%, -0.6%, 1.9% and 3.5% respectively.

The performance of Victorian port authorities has been criticised in a number of inquiries and reports.  For example, a 1987 review of the Port of Melbourne ⁽²⁵⁾ found that, even though the Port of Melbourne Authority compared favourably with other Australian port authorities:

• industrial problems were inhibiting the effective use of a number of port assets;
• several expensive berths were under-utilised, yet pressures existed for additional berths; ⁽²⁶⁾
• in a number of areas the Authority had more staff than its present and future roles were likely to justify.

The problem of low capacity utilisation of assets is common to each of the port authorities.  In 1989/90, the annual average berth occupancy for container berths and general cargo berths at the Port of Melbourne was only 46 and 24% respectively. ⁽²⁷⁾  A 1987 review of the Port of Portland noted that "with only 150 ship calls per year, using four specialised berths and two general purpose berths, the utilisation of infrastructure assets has been a problem for the Authority." ⁽²⁸⁾  Inevitably, questions must be raised about the wisdom of many capital investments previously undertaken by the port authorities.

The Webber Report went so far as to suggest that public ownership of ports had encouraged:

... decision-making by State Governments based more on State or regional objectives than on the commercial and economic needs of users, resulting in a number of high-cost, under-utilised facilities (for example there are now at least 12 ports with container cranes and more are planned, when already crane utilisation in Australia appears poor by world standards).  These costs are either underwritten by the State or are reflected in higher charges and costs to users. ⁽²⁹⁾

One recommendation of the Inter-State Commission's 1989 report was that proposed port investments should be evaluated by a process which "should determine the proposal's economic and financial viability on the basis of realistic costings and traffic projections and appropriate pricing". ⁽³⁰⁾  The implication is that such obvious processes are currently ignored!

Historically, prices charged for port services have had to cover costs of unrelated investments, often for regional purposes, or the provision of facilities largely unrelated to commercial shipping (for example the cost of the debt associated with the World Trade Centre).  As another example, a review of the Portland Port Authority in 1987 found that there were a number of charges -- particularly those applying to the live sheep trade, fishing and small boat facilities which were "below levels justified by current cost and user-pays principles". ⁽³¹⁾  Similarly, a review of the Port of Geelong recommended that the Authority should limit its readiness to accept non-economic obligations in providing community facilities such as the renewal of the Yarra Pier (at a cost of some $4 million). ⁽³²⁾  Project Victoria acknowledges, however, that new tariff structures for Victorian port authorities have been or are in the process of being implemented (see below).

Traditionally, port authorities in Australia have acted as landlords, investing in port facilities such as container terminals which are then leased out to private sector operators for very long periods.  It has long been argued that port authorities have not used their central role in a manner designed to promote maximum efficiency throughout the entire port.  The BCA, for example, has suggested that until recently port authorities were more concerned with the interests of shipping lines, stevedores, and regulatory and engineering matters than with the efficient delivery of port services to users.  Goss, in recounting proceedings of Prices Justification Tribunals inquiries in the late 1970s which exposed a wide range of cost-padding practices by stevedoring and container terminal companies, noted that the "head of one port authority considered the whole business of the Tribunal's findings in respect of his tenants amusing:  and certainly no concern of his". ⁽³³⁾  While attitudes have no doubt improved since that time, it was still a common complaint by participants in the Inter-State Commission's Waterfront Strategy Inquiry that there was a "distinct lack of port authority involvement in actively encouraging and even enforcing the efficient and timely movement of cargo along the transport chain". ⁽³⁴⁾

There is abundant evidence that Australian cargo handling at the wharf is vastly less efficient than its overseas competition.  Data provided by the Association of Employers of Waterside Labour (AEWL) to the Inter-State Commission suggested that removal of inefficient work practices in stevedoring at the Port of Melbourne could yield productivity improvements of 25.6% -- well short of international best practice. ⁽³⁵⁾  In the same report, the Centre for Transport Policy Analysis estimated that overall productivity could be improved by 50% for conventional stevedoring, by 65% for terminals, and by 60% for depots. ⁽³⁶⁾  A separate comparison of average container handling rates in Australia with those achieved overseas found rates in overseas ports were between 60 and 117 better than those in Australian ports (see Table 4.5).

TABLE 4.5
INTERNATIONAL COMPARISON OF CONTAINER HANDLING RATES

	Lifts only		Lifts and Restows
	Australia	International	Australia	International
TEUs per crane hour	13.34	24.72	13.62	26.26
TEUs per work hour	18.13	32.18	18.51	34.18
TEUs per berth hour	15.30	22.73	15.64	24.29

Note:  Data is for round-the-world cellular container ships that call at Australian ports.  Figures for Australia refer to average handling rates;  those for international are rates achieved on 84% of all port visits overseas.

Source:  Inter-State Commission 1989 (based on International Cargo Handling Co-ordination Association Data).

A recent consultant's report by Maunsell and Partners noted that, although the Port of Melbourne was better than most Australian ports, container terminal productivity of Australian ports was barely 53% of the average in the world and was about one quarter of terminals in Hong Kong, Taiwan or Singapore.  The consultants considered that changed work practices, better scheduling of vessels, and greater emphasis on rail would increase productivity. ⁽³⁷⁾

Perhaps the most costly part of the loading/unloading process, however, results from the time cargo spends sitting in stacks on the wharf or in terminals.  A recent study by the PMA indicated that the average "dwell in stacks" time for containers was 100 hours, ⁽³⁸⁾ at an annual cost of some $34 million.  The corresponding time for ports such as Singapore is about 6 hours.

While international comparisons must be treated with caution (for example Melbourne is an end point rather than a through-port of a substantially different nature and scale from, say, Singapore), performance in Melbourne is very poor by world standards.  The technology is often 20 years out of date, equipment breakdown is common, and inefficient work and management practices have been allowed to flourish.

PUBLIC FINANCIAL ENTERPRISES

Victorians hardly need reminding of the recent performance of some of the State-owned financial institutions.  The litany of disaster in this area includes:

• collapse of the State Bank of Victoria following massive losses (around $2.7 billion) of its merchant banking arm, Tri-continental;
• accruing by the Victorian Economic Development Corporation (VEDC) of some $120 million of bad debts;
• uncontrolled cost blowout of the WorkCare scheme where at one point the Accident Compensation Commission had unfunded liabilities of over $5 billion.
• rapidly escalating obligations to pay defined benefits, including lump sums, through the State run superannuation funds -- funds which are increasingly borrowing large amounts to meet their legal commitments.

OVERALL ASSESSMENT OF THE
PERFORMANCE OF STATE ENTERPRISES

It is abundantly clear that there have been large deficiencies in the economic performance of Victorian state enterprises.  While the most spectacular failures have occurred in the financial institutions, it should not be assumed that poor performance in other areas do not impose costs of similar or even greater magnitude.

An indication of the relative performance of Victorian state enterprises is given by Chart 4.1.  In 1990-91 public trading enterprises in Victoria ran losses totalling over $1 billion.  The next worst result was the Northern Territory with a loss of just over $100 million.  The New South Wales figure was a loss of only $9 million, while Queensland registered a profit of $592 million (although accounting standards may differ across states).

CHART 4.1
PROFIT/LOSS OF STATE PUBLIC TRADING ENTERPRISES:  1984-85 TO 1990-91

Source:  ABS 1990-91 Government Financial Estimates, Australia Cat No. 551.0

The authorities accept that inefficiencies remain.  The following section briefly reviews recent initiatives and presents Project Victoria's assessment of the way ahead.

RECENT INITIATIVES TO IMPROVE PERFORMANCE

Since 1982-83 the Victorian Government has issued various economic policy guidelines for public authorities, covering asset and liability management, accounting and reporting guidelines, non-financial performance indicators and investment evaluation. ⁽³⁹⁾  A tariff review program aimed at aligning prices more closely to the costs of supply is also taking place.

In 1985-86, the Government introduced Rate of Return Reporting which requires disclosure of the return or the written down current value of assets (rather than historic cost).  The Rate of Return Guidelines also require the authorities to meet a target rate of return (currently 4%).  Rate of Return reporting now applies to the SECV, the Gas and Fuel Corporation, the Melbourne and Metropolitan Board of Works, the Port of Melbourne Authority, and the Grain Elevators Board.

In addition to these general measures, individual authorities have also pursued various reforms and in particular have started to deal with pervasive overmanning.

As noted earlier, the SECV is achieving major increases in productivity via staffing reductions.  Its new Corporate Strategy has led, amongst other things, to restructuring along commercial lines, with tariffs more closely reflecting cost of supply to each type of customer.

The Gas and Fuel Corporation adopted in 1986 the Total Quality Management philosophy aimed at integrating "into all levels of the Corporation a continuous review and improvement procedure of all operations".  However, in comparison with initiatives implemented by gas supply authorities in other States (for example QEC, ECNSW), reforms adopted by the GFCV have been independently judged to be "only modest". ⁽⁴⁰⁾  The GFCV has plans to reduce staffing levels by at least 6.5% over the two years to June 1992. ⁽⁴¹⁾

The MMBW has developed a business plan "Framework for the Future" setting out future directions and targets (financial, operational and environmental) against which performance can subsequently be assessed. ⁽⁴²⁾  A flatter management structure has been introduced and key internal support functions are to be reconstituted on a business centre basis, charging a fee for service.  For example, the Board now makes use of legal consultants, for example, rather than in-house legal resources.  The Board has achieved significant improvements in labour productivity over the past five years, largely through a reduction in staff numbers by some 1500, combined with training and multiskilling programs.  The Board expects to reduce staffing levels by 300 persons to 1993-94.

Following a review the MMBW's has recently adopted a three-step increasing block tariff (although substantial inefficiencies remain due to the property tax basis for the bulk of water charges).  It is important that the MMBW, and any institutions which emerge from it, are free from the current "semi tax agency" status which grossly distorts its incentive structure.

Following the recommendations of the Inter-State Commission, the Port of Melbourne Authority (and other ports) have reviewed pricing policies and are implementing tariffs which more closely reflect costs.  Difficulties remain in apportioning costs and due to the resistance to the quite massive realignments to tariff structures which a "user pays" policy necessarily entails.  The Victorian Government has recently announced changes to port authority leasing policies designed to encourage investment and efficiency by stevedores and other private operators in the ports. ⁽⁴³⁾  More generally, the Commonwealth Government's waterfront strategy continues to be implemented;  and a number of agreements between container terminal operators and unions have been concluded.  However, widespread dissatisfaction with the pace of reform remains.

The sale of the State Bank apart, some significant changes have occurred in respect of financial institutions.  For example, changes have been made to the WorkCare scheme which have brought about some improvement.  However the scheme is still in a poor financial state, with unfunded liabilities of $2.1 billion.  In addition, the WorkCare scheme makes Victorian employees less competitive than their New South Wales counterparts, as the comparative average premium rates are 3.3% in Victoria, and 2.0% in New South Wales.  While there are other factors to take into account in comparing state systems, which differ in a number of ways, clearly the present workers' compensation system in Victoria is not working effectively, and remains a severe financial burden on future employers.

Some of the reforms outlined above will continue to secure improvement in the performance of Victorian state enterprises.  In some cases (for example the SECV structural efficiency program) the benefits will be substantial.  However, initiatives undertaken to date are not enough, and are focussed more on symptoms rather than causes.  There is a need for an ongoing stimulus to efficient performance, through a shift to a corporate and consumer driven ethos, rather than a production, "jobs" or political orientation.  Corporatisation and privatisation are clearly key options, as is contracting out and franchising of service delivery.  As an example of the need for structural and ownership changes, while the General Manager of the Gas and Fuel Corporation recently referred to the "fundamental transformation which has taken place within the organisation and the notable improvement in the overall efficiency of our operations over the past five years", ⁽⁴⁴⁾ the real question is why did the management allow such inefficiencies in the first place.

The perspective of Project Victoria is that of preventing the re-emergence of problems down-the-track.  This requires a more fundamental change to the structure of incentives and systems of accountability.

THE PROJECT VICTORIA AGENDA

Central to the Project Victoria strategy are fundamental changes to the structure of incentives in what are now state enterprises.  The poor performance reflects:

• lack of competition in product markets
• politico/social goals rather than a single commercial objective,
• unclear and unfunded community service obligations
• ineffective monitoring mechanisms.

It follows that strategies to improve state enterprise performance in Victoria should focus on correcting these incentives.

CORPORATISATION

A large proportion of the savings, capital, and debt of Victoria are tied up in state enterprises.  Similarly, too many Victorians are employed in the state sector, on terms and conditions which fail to offer appropriate incentives and which create precedents and obligations on private employers (See table 4.1).

One step in restructuring Victorian state enterprises is to place them on a corporate or private sector footing -- "corporatisation".  To the extent that private monopolies are created, to achieve best practice levels of efficiency in capital and labour and other dynamic benefits of private ownership, there will be a need for regulatory constraint on any potential abuse of monopoly power.  But the key is the specification of clear and simple wealth maximising goals, and the ear-marking of any community service functions for separate funding.

Labour Reform is Fundamental

Restructuring and making competitive businesses out of Victorian state enterprises will inevitably release large number of staff not necessary for the efficient performance of these enterprises.  Unless the private sector takes up the slack, this will add further to unemployment.  An important contribution to preventing this would be to ensure that, in tandem with the reforms of state enterprises, that labour market reforms be put in place -- offering far greater scope to new management of what often will be small enterprises to contract with labour on terms which will generate job and training opportunities, and competitive profits for the owners of capital.

The major efficiencies achieved in corporatisation and privatisation in the UK and New Zealand have regrettably been followed by a rise in unemployment in the transition towards a larger private sector.  The challenge facing Victoria is to make sure that labour market reforms are put in place at the same time as state enterprises are privatised or corporatised, so that labour has a rewarding place to go.  These reforms include greater use of enterprise agreements, contracts and other mutually beneficial arrangements linked to workplace performance.

While the bulk of this section of Project Victoria is concerned with the restructuring of state enterprises, it is important to bear in mind that labour market and other reforms will be an integral part of the strategy.

Elements of Corporatisation

The Project Victoria strategy includes the specification for each new corporation, and former GTE:

• clear objectives

  The efficiency of state enterprises is considerably hampered by the existence of unclear or conflicting objectives set by government.  Moreover, unclear objectives cloud assessment of enterprise performance.  For example, the GFCV cited their requirement to deliver community service obligations (CSOs) as an excuse for poor performance in hearings before the Economic and Budget Review Committee of the Victorian Parliament. ⁽⁴⁵⁾

• increased managerial authority

  Government control over state enterprises can result in political interference in decision-making not in the community's overall interests.  For example, Port of Melbourne Authority documents revealed recently show that it was forced to approve construction of a financially unjustifiable $3.6 million slipway at the Dudley Street workshops or otherwise "incur the wrath" of the Trades Hall Council, the Government and unionists.  The proposal was approved despite the fact that the facility would be used by only eight vessels and repairs could be carried out more cheaply at Geelong. ⁽⁴⁶⁾

• improved performance monitoring

  State enterprises have traditionally been characterised by a poor level of performance reporting.  While there has been significant improvement in Victoria in recent years (eg rate of return reporting) the monopoly position of many state enterprises means there is a need for a abroad set of indicators.  Particularly important here is the development of inter-state and international performance measures which can facilitate "yardstick" competition.

• more effective rewards and sanctions

  Hand in hand with better performance monitoring is the need for those within the enterprise to be suitably rewarded or penalised.  Traditional public service conditions of employment and severance are not generally appropriate for setting up new business enterprises.  There is a need for more "performance-based" employment contracts and other arrangements generally applying in the private sector.

• competitive neutrality

  Victorian public enterprises, while paying some taxes and charges in lieu, do not pay income tax or sales tax, and borrow funds at favourable rates because of government guarantee.  On the other hand, they are required to observe some government policies (eg public service conditions of employment) not applying to private firms.  A more level playing field is needed both to help assessment of enterprises' performance and to ensure that competition (where it occurs) provides a genuine stimulus to efficiency.

• "user pays" pricing structures

  Alignment of prices to costs of production is essential if wasteful (or insufficient) consumption and investment is to be avoided.  Where prices for services are currently subsidised for social reasons, more direct assistance (for example, vouchers) should be provided.

Gains from Corporatisation

Implementation of corporatisation can be expected to yield significant benefits.  In New Zealand, the corporatisation of public trading enterprises has led to some spectacular results including:

• a turnaround by the newly created Coal Corp of a $23 million loss by its predecessor into a small profit within one year without increases in prices;
• achievement by New Zealand Post of a profit in its first year of operation compared to a loss of $38 million incurred by the former New Zealand Post Office in 1986-87, without price increases for basic mail;
• reductions by the Electricity Corporation in unit costs in real terms by 23% over its first three years of operation, an increase in output of electricity per employee of 12% over the past year, and a doubling in its net profit after tax in the same period. ⁽⁴⁷⁾

Notwithstanding the substantial gains which would stem from corporatising state enterprises in Victoria, we argue that there is a need for a more fundamental re-think of the role of the public and private sectors and that further gains could be realised by considering the scope for introducing competition and/or private sector ownership.  The danger with reliance on the corporatisation approach is that public ownership remains and politicians may find it impossible -- sooner or later -- not to interfere with the management of enterprises for political purposes.  And the knowledge that this may happen must inevitably colour the decisions taken by enterprise management, thus putting at risk the drive for efficiency which corporatisation seeks to engender.

SCOPE FOR INTRODUCING COMPETITION/PRIVATISATION

In considering the scope for competition and/or privatisation of activities currently undertaken by public enterprises, it is important to focus not on ideologies but rather on delivering services people want at the lowest possible cost.  With this end goal in mind, Project Victoria sees the opening of activities to competition as the most important element.  We do not just want to convert public monopolies into private ones without imposing disciplines -- preferably through competition, but if necessary by regulation of any monopoly power.

In examining the scope for individual activities to be opened up to competition we need to consider the circumstances prevailing in each case.  In particular, we need to apply several tests (see Chapter 2) such as:

• are the services provided "public goods"?
• is the activity a natural monopoly?
• does the enterprise deliver community service obligations (CSOs)?

If the answer to any or all of these questions is "yes", this does not preclude private sector involvement.  It does mean, however, that appropriate arrangements will need to be put into place (for example separation of natural monopoly elements from those which are not, or devising alternative means of delivering accepted CSOs).

In what follows, this preliminary report of Project Victoria surveys the current status of the key SOEs -- the SECV, GFCV, MMBW and the Port Authorities -- and canvasses options including privatisation.  Where there will always be an element of natural monopoly power, because of the impossibility of direct competition with power or pipe grids, we will also note the need for regulatory reform.

SPECIFIC ACTION PLANS

The following section specifies action plans for electricity, gas and fuel, water supply, ports, and financial institutions.

ELECTRICITY

The recent improvements flowing from the adoption of a more commercial approach by the SECV should be consolidated and extended by immediately proceeding down the path to full corporatisation of the power grid and to privatisation of generation stations and distribution.  Corporatisation/privatisation would involve a further restructuring of electricity tariffs towards a "user pays" system (for example time-of-day pricing), a greater focus on commercial performance and a reduction in political interference.

The benefits of corporatisation are starkly evident from experience in New Zealand.  Corporatisation of the Electricity Corporation of New Zealand (ECNZ) saw a reduction in unit costs in real terms of 23% over the first three years.  Output of electricity per employee increased by 12% over the year to June 1989.  The net profit of $332 million in 1988/89 was more than double the amount in the previous year. ⁽⁴⁸⁾  Despite this, prices have not increased in real terms.  Indeed, more flexible pricing structures have been developed which address the needs of users more directly and have opened up market opportunities for ECNZ and users alike not available under rigid pricing policies of the past.  For example, time-of-use pricing has allowed retailers to pass on to customers the benefits of off-peak electricity usage.  Also, a "dynamic" pricing option (whereby consumers can elect to purchase part of their supply on a weekly basis rather than on a fixed price) enabled abnormally high water levels in the South Island hydro lakes to translate into a 50% reduction in the retail price to irrigators at a time of drought -- with the 95% increase in sales that this engendered avoiding about 50 GWh of hydro spillage. ⁽⁴⁹⁾  And while there have been some job losses, greater opportunities have been opened up for individual employees, and pay increases have been granted.

While corporatisation will bring gains, there is a need to examine more closely the opportunities for greater private sector participation and competition in the Victorian electricity industry.  At present, the SECV dominates the entire industry, from electricity generation through transmission and distribution.  There is now a growing recognition, both in Australia and overseas, that a whole range of alternative industry structures should be investigated.  While the SECV has established separate business units there is a need to go further, focussing on the possibilities for introducing competition.  Indeed, the SECV, has recently conceded that:

SECV's experience suggests that internal administrative changes must be reinforced by external market forces if substantial improvements are going to be made and sustained. ⁽⁵⁰⁾

Generation

Generation is by far the biggest sector in terms of costs.  As argued by the Industry Commission (1991),

"the traditional imperative that all new capacity be provided from plant owned, operated, and often constructed by the utility itself should no longer apply.  Lower-cost options include buy-back arrangements with private generators, the use of private sector resources to build, own and operate new capacity, and purchasing electricity from interstate utilities". ⁽⁵¹⁾

Private generators operate in many countries (for example Germany, Japan, and Sweden).  In the U.K., generating capacity has been divided between three entities.  Indeed, around half of the world's generating capacity is now provided privately.  New private power stations are under consideration in New South Wales, South Australia, and Western Australia.

The SECV has stated its desire to sell Loy Yang B, and there have reportedly been several expressions of interest, despite the ad hoc nature of the proposal and the absence of any clear philosophy from the government regarding industry structure.  Alcoa has a private electricity generation plant at Anglesea to service its aluminium smelting operations -- a plant reputed, despite the coal quality, to be highly cost-effective.

Clearly, electricity generation has no "public good" nature, as evidenced by the willingness of private operators all over the world to get involved in the activity.  Nor are natural monopoly arguments relevant:  economies of scale in generation are exhausted well before total market demand is satisfied.  The SECV currently has 15 generating plants, ranging in capacity from 0.3 MW (Rubicon Falls) to 2000 MW (Loy Yang A).  In the United States, the ability of numerous smaller generators to compete with the larger utilities has been demonstrated by experience.  This indicates that there would be little cause for concern over the possible exploitation of monopoly power by any one private firm.

Yet the Victorian Government has billions of dollars tied up in electricity generation.  In the absence of any convincing rationale for public ownership, serious questions must be raised about whether ownership of power stations represents a valid government priority over investments in say, schools, hospitals, or police stations.  Loy Yang B alone represents an investment to date of some $1.3 billion (with a further $2 billion envisaged to complete the project).

Power generation is clearly contestable and can be provided on a competitive basis.  Project Victoria therefore suggests that the respective business units generating power in Victoria should be made into separate private enterprises selling power into a common carrier grid (see below).

Competition in generation also demands the abolition of the Victorian Government policy which permits gas firing of new electricity generating capacity only up to 500 MW, and only for intermediate or peak-load plants.

Interstate connection also offers great scope for reducing costs of power and better utilisation of capacity.  As NSW Premier Greiner has observed, "it is sheer madness for the Victorian tax-payer to sink billions of dollars into inefficient brown coal-fired generating capacity, when a privately-owned and operated plant sited on Southern NSW black coal would be vastly more efficient and in the national interest". ⁽⁵²⁾

Transmission

The high voltage transmission grid, which can trade power between Victoria, NSW, and South Australia, and potentially Tasmania and Queensland, is seen as a natural monopoly, in that costs are less with a single service.

The fact that the market is not readily contestable does not in itself justify monopoly provision in the manner currently performed by the SECV.  For example, ownership options considered by the Industry Commission include a corporatised public enterprise, a club of generators, a club of distributors, and independent private ownership.  Experience in the US, the UK and elsewhere suggests that it can be efficient to place the grid in private ownership, subject to a regulatory constraint -- the controversial issue is the form of regulation which delivers the best mix of efficiency gains and constraint on monopoly power.

Particularly important under Project Victoria's proposal to open generation up to full competition is the need to ensure that the owner of the transmission network does not discriminate against generating and distributing companies by denying them access to the (pool) network or by permitting access only on unfavourable terms.

Project Victoria suggests that there should be an unbundling of power generation from the transmission system, and that the owner of the network should be required to act as a common carrier (that is, be required at law to transmit electricity on behalf of any party on a non-discriminatory fee for service basis, rather than purchasing and re-selling the electricity itself).  This suggestion is in line with assessments by the Industry Commission that any advantages stemming from vertical integration of generation and transmission are likely to be outweighed by the benefits from competition.  Alleged difficulties in system co-ordination seem overstated:  a variety of (sometimes imaginative) contractual arrangements have developed in the United States between transmission utilities and private generating firms.

There are also advantages in having geographically distinct re-sellers of power so that consumers can, in principle, experience choice, for example, by re-locating in order to obtain power at differential rates.  It is envisaged that, along the lines suggested by Vernon Smith, of the University of Arizona, customers could contract with different power generators for blocks of power, there being considerable scope for beneficial variation in power charges by time of day, with differential interruptibility clauses, such that it is possible for different classes of customers to pay different prices depending on the differing opportunity costs.  For example, aluminium smelters can absorb some interruptibility, for a discount, but cannot afford a 5 hour black out owing to the costs of "freezing" potlines with molten aluminium.

Firms wishing to generate from new power stations, or to feed blocks of power into the grid, or to final customers, should have the right to do so, as defined under the regulatory structure underlying the common carrier status of the grid company.  Indeed, this is happening in the U.K., which split electricity generation into three main companies which compete to supply regional distribution companies and end-users, with the regional distributors competing to supply end-users (there would have been a dozen or more competitive generators in the UK had there not been a political decision -- since reversed -- to bundle the nuclear generator into one of the generating companies, which was then required to be large enough to absorb the perceived risk).

Another question is whether there should be separate transmission organisations in each State or whether there should be a single transmission entity for the entire South-Eastern Australian grid.

Distribution

At present, about 30% of distribution of electricity in Melbourne is undertaken by 11 Municipal Electricity Undertakings (MEUs).  Distribution in the rest of the State is performed by various SECV District Business Centres (DBC).

Again, placing these entities on a more commercial footing via corporatisation is likely to bring significant improvements in their performance.  However, further pressure on the performance of distributors (and others in the industry) requires the ongoing stimulus of competition.  While some elements of localised natural monopoly may apply to electricity distribution, there is still potential for competition on a geographical or "bench-mark" basis.  The SECV itself has stated that it "has an open mind to examining the possible benefits of conducting a trial of a privately franchised MEU or DBC".  To promote such competition, Project Victoria suggests that exclusive franchises currently in force should be made competitive, and distribution should be unbundled from generation and transmission.  Moreover, distributors should also be made to act as common carriers, thus facilitating competition in all sectors of the industry as outlined above.  With theses changes, electricity distribution would be sufficiently contestable for the various distribution units to be privatised, subject to some (light-handed) regulation if necessary.

GAS

The assessment in Section 2 of this chapter, and the general flavour of the Report of the Economic and Budget Review Committee on public debt suggests that the GFCV has further to go than, say, the SECV, in adopting a commercial approach aimed at the delivery of gas to users at lowest possible cost.  This is of particular concern in light of the fact that the GFCV has a virtual monopoly over both the transmission and distribution of gas in Victoria.

The performance of the GFCV and its tendency to be inward-looking (as evidenced, for example, by its reliance on inside appointees and its ambivalent attitude to its performance relative to the SECV or other gas authorities) suggests the urgent need for greater exposure to the external pressure of competition.

In examining the scope for greater competition and private sector involvement in the Victorian gas industry, similar considerations arise to those in the electricity industry.

The central question is whether unbundling will result in a net fall in unit costs.  On the one hand, the injection of competition will provide strong incentives for cost-cutting and eliminating waste.  On the other hand, any cost advantages of physically combining distribution and transmission will be foregone, and there may even be additional costs if it is difficult and expensive to formulate and/or enforce contracts between separate transmission and distribution companies.

Given that storage of gas allows flexibility in the supply of gas relative to that for electricity, the Industry Commission considered that there was only a small possibility of higher costs associated with unbundling.  Quantifying the extent of any economies from vertical integration of gas transmission and distribution is difficult.  The Industry Commission, for example, was unable to identify any Australian or overseas studies which have examined this matter in any detail.  Exacerbating the problem is an apparent reluctance on the part of interested parties to shed much light on the issue.  In its evidence to the recent Industry Commission inquiry, for example, information provided by the gas utilities was "very general", with comments by the GFCV such as:

The integration of distribution with other activities leads to lower costs and increased operating benefits, as demand and transmission capacity can be more effectively matched. ⁽⁵³⁾

The apparent reluctance of vested interests to clearly demonstrate the benefits of vertical integration is in itself an argument for separation to allow the market to test the issue, or at least an argument for "ring-fencing".  The overriding concern must be to promote competition so that distributors or end users can negotiate directly with gas suppliers for the competitive provision of gas, thus stimulating efficiency throughout the entire industry.

Overseas experience confirms that the most successful industry structure is likely to be one which concentrates on fostering a competitive environment.  In the US, for example, the industry is characterised by a large number of independent private distributors and (a lesser number) of private transmission companies.  However, there has been general dissatisfaction with industry performance, largely attributable to the inability of companies to respond quickly and flexibly to market circumstances because of a raft of rate of return and other regulation which has developed in an ad hoc way in response to particular events.  In the UK, the privatisation of British Gas occurred without simultaneous introduction of effective measures to inject competition into the industry.  The upshot was a finding by the Monopolies and Mergers Commission in 1988 that British Gas had practised extensive discrimination in the pricing and supply of gas to contract customers in a manner which deterred new entry into the market.

It is pertinent to note that in NSW, where gas distribution is undertaken by a private firm (AGL), the NSW Government has recently moved to regulate AGL by a price control formula based on the CPI, rather than the previous complex and expensive system of negotiating gas tariffs by ad hoc boards of inquiry and arbitration.  The new legislation will also promote competition through provisions allowing third party access to the distribution network if required.

Project Victoria proposes that gas distribution and transmission should be unbundled, and that operators of pipelines be constrained to act as common carriers.  Provided adequate safeguards against the possible abuse of monopoly power were in place, there would be considerable advantages in privatising individual distribution units in geographical areas, and even privatising the transmission pipelines.  Full private ownership brings with it all the incentives for efficient performance imposed through capital markets.  In contrast, the existing 28% private holding in the GFCV does not instil these incentives because the GFCV remains essentially under the direct control of government.  On balance, greater efficiencies could be expected if these operators were private firms subject to light-handed regulation (of prices and quality of service), rather than corporatised public authorities.

WATER SUPPLY

The MMBW was established in December, 1890, to address major pollution and sanitation problems in Melbourne at the time.  The tradition of public provision of water and sewerage infrastructure has continued to the present, in spite of mounting challenges and costs in maintaining existing system capacity, and in providing for new demands.  Political and revenue raising objectives have been imposed on top of commercial objectives, resulting in low financial returns and excessive debt burden and some arbitrary cross-subsidies.  For example, the MMBW has been directed to restrict the growth of prices, and is not required to earn what might generally be considered a competitive rate of return.  In fulfilment of its statutory obligations, the MMBW must also deliver certain "community services", including drainage, management of parks and gardens, and free provision of water supply, which impose substantial losses on the Board as they cannot be provided on a commercial basis.

Dissatisfaction with the status quo is mounting, not least because of growing capital requirements, and attention is turning towards more efficient modes of service delivery in the water industry.  There is thus a strong case for considering organisational arrangements which enhance commercial performance of the MMBW.  Reform in the water industry should encourage greater competition, and establish commercial incentives for water and sewerage enterprises aimed at reducing costs, improving capability to undertake capital investments, and providing more scope for entrepreneurial management.

Given effective checks on prices and standards of service, either through market processes where sufficient competition exists, or through regulation by appropriate authorities, private ownership and management of water and sewerage enterprises, or some mix of public ownership coupled with private service provision on contractual bases, have the potential to provide substantial benefits in an Australian context.

A 1990 Industry Commission study of the Australian water industry found that there was great potential for reducing costs in the industry, particularly by appropriately managing assets to ensure that they are not replaced prematurely, and by placing greater emphasis on competitive tendering for asset replacement. ⁽⁵⁴⁾  The IC suggested that contract rather than "in-house" labour could yield cost savings of around 25%.  The Commission observed that authorities which exclusively use contractors for asset replacement (for example ACTEW) reported asset replacement costs substantially less than in other parts of the sector.

Project Victoria contends that the MMBW is well placed to take advantage of overseas experience with reform in the water industry.  Governments world-wide are increasingly turning away from public ownership and management in search of more efficient arrangements for delivery of water and sewerage services.  Private sector provision is prevalent, but to differing degrees, in the United Kingdom, France and the United States.

In the UK, the responsibilities of the ten existing water and sewerage authorities were transferred into private hands in December, 1989, when the authorities were transformed into public limited companies.  Privatisation has been coupled with a strict regulatory regime.  Regulation of prices and service quality is seen as a necessary constraint on the exploitation of monopoly power by the PLCs, which are the sole providers of combined water and sewerage services in their respective areas of operation.

Private management of water and sewerage facilities has also been occurring in France and the United States.  In the US, where the burden of constructing and maintaining facilities falls on local councils, and where augmenting and replacing the present infrastructure is proving a substantial drain on government budgets, local councils are seeking out savings by contracting with private firms to operate sewerage facilities.

In France, about 60% of the population is serviced by private water companies, including the major cities of Paris and Lyon.  Many French municipalities contract the management of water and sewerage facilities to one of five private companies which operate both nationally and internationally.  Typically, the municipalities maintain ownership of the basic infrastructure, and franchise management of facilities to private companies, which are responsible for operation, maintenance, and billing.  The contractor may also be responsible for financing infrastructure investment, with assets passed over to the municipality at the end of the contract.  Municipalities retain the right to resume management at any stage.

Private ownership and/or management of water and waste-water enterprises overseas has provided incentives and opportunities for entrepreneurial management, through expansion into new business activities which offer synergies with water and wastewater operations in response to new profit opportunities.  Cable television in France, for example, is dominated by private French water companies.  Lyonnaise des Eaux Dumez is involved in the provision of a range of community services on contract, including water and funeral services!

In 1990, the UK Colne Valley, Lee Valley, and Ricksmanworth water companies were merged as a wholly owned subsidiary of Compagnie Generale des Eaux.  In the UK the private water companies have also expanded into new markets.  Severn Trent has negotiated a 20% share in a Belgian company set up by the Flanders government to provide sewage treatment, and has plans for expanding into the former East Germany and into Italy.  In December 1990, Welsh water brought a substantial share in South Wales Electricity.

Experience from overseas suggests not only that private ownership and management is feasible, but will generally encourage efficient enterprise management and greater investment which is not limited to water related businesses.  Similar investment opportunities may be both profitable for the MMBW and beneficial for the people of Melbourne and Victoria generally.  However, whether these opportunities are discovered and capitalised on depends on giving appropriate commercial incentives to management, staff and customers of the MMBW.

PORTS

In its final report of March 1989, the Inter-State Commission noted that "it is absolutely clear that the waterfront industry will not reform itself'. ⁽⁵⁵⁾  Today, general dissatisfaction with progress on waterfront reform suggests that it has not put into place incentives for those involved (be they waterside workers, their employers, or port authorities) to sufficiently lift their game.

In light of past experience, and the observation by the Inter-State Commission that in the waterfront industry there was "a tendency for matters to improve considerably while they are under investigation but to lapse once pressure is removed", ⁽⁵⁶⁾ sustained improvements in performance clearly requires permanent changes to the fundamental incentives facing those in the industry.  The problems on the waterfront are pervasive and it would be a mistake to attempt to fix particular symptoms in turn rather than invoking a comprehensive strategy aimed at addressing the root of the problems.  Project Victoria contends that the scope and pace of change which is so urgently needed will only be secured by introducing the disciplines of competition and private ownership to a much greater extent than has so far been the case.  We need competitive private docks, capable of contracting directly with labour, shippers, exporters, importers, and other customers.

The strategy of promoting competition does not equate to handing over all port functions to the market.  Government has a role to play in making sure the docks are competitive and efficient, and that no private dock or labour group is allowed to exploit monopoly power.  Rather, the aim is to obtain that mix of public and private involvement which delivers the services port users require at the lowest possible cost.

Implementing this strategy requires identifying and then addressing any natural or institutional constraints to competition.  Among those identified by the Inter-State Commission are:

• industry-wide employment arrangements in the stevedoring industry;
• restrictive container depot arrangements;
• port authority leasing policies;
• union monopolies over the supply of labour. ⁽⁵⁷⁾

Some (modest) progress has been made on some of these issues under the Commonwealth Government's Waterfront Strategy.  Regardless of developments in this arena, however, there is a number of steps which the Victorian State Government and the port authorities themselves could take to stimulate competition in the delivery of port services to users.

Unbundling the Wharves

A useful starting point is to critically examine the full range of functions currently undertaken by the State's port authorities and ask whether many of these could not be more efficiently delivered by the private sector, and concentrating on certain "core" functions.

The Mission of the Port of Melbourne Authority is "to ensure the provision of port and marine related services for the economic and social benefit of the Victorian community". ⁽⁵⁸⁾  It is empowered to regulate, manage and improve the operations of the commercial ports of Melbourne and Hastings and several smaller ports together with portions of the Yarra and Maribyrnong rivers.  The Authority is also responsible for the maintenance and upgrading of navigational aids and combatting oil pollution in all Victorian coastal waters, hydrographic surveying of Victorian ports and coastline, beach re-nourishment and the construction and maintenance of recreational boating facilities along the Victorian coast.  Clearly, however, the PMA sees, or ought to see, as its major role the facilitation of increased trade through Melbourne.  Melbourne is Australia's largest general cargo port and handled 25.9 million revenue tonnes of cargo in 1989/90. ⁽⁵⁹⁾  The PMA is not directly involved in stevedoring, which is performed by private firms operating under licence.

The Port of Geelong Authority's mission statement is "to meet the needs of stakeholders by ensuring the provision of a market led, commercially-based port service as part of the transport network". ⁽⁶⁰⁾  The Authority's strategic plan sees its future as a handler of bulk and special cargoes.  In 1989/90 trade through the port totalled almost 6 million tonnes, a significant proportion of this comprising bulk shipments of crude oil and petroleum products. ⁽⁶¹⁾  The Authority's activities extend into stevedoring (via both Geelong Stevedoring services and the joint venture with the WWF and Federated Stevedores Geelong), engineering, ship repair (Rippleside Ship Repair).

The Port of Melbourne Authority currently has some 1250 employees. ⁽⁶²⁾  Unfortunately, breakdowns of employment within particular areas or functions in the port are not given in PMA annual reports or other documents, but it would seem that there is both considerable over-manning and employment of staff in "non-core" functions.  Many of the services provided by port authorities (for example ship repair, electrical services) clearly go beyond any "public good" justification and should be quickly vacated by port authorities.  Is it really necessary for the PMA to operate its own workshop and slipways at Williamstown?  There would seem to be considerable scope for the PMA to withdraw from many activities better left to the private sector.  Obvious candidates for unbundling include ship services such as towage, pilotage, and berthing lines;  and complementary services such as ship repair, engineering, and electrical services.  Whether such unbundling would make sense is, ultimately, a purely commercial matter and given the absence of natural monopoly characteristics of these services, is best left to the market once privatisation has been facilitated.

There are clearly some "core" functions which would remain within the purview of public port authorities.  These core functions are those concerning the basic rules within the port such as ensuring maritime safety, over-seeing contracts for private provision of port services including channels and navigation aids and, perhaps, basic port planning.  Where a port service is seen to have "public good" characteristics (for example navigation aids), there is an in-principle argument for continued government involvement.  Similarly, there may be a case for central co-ordination of a vehicle booking and other inter-related systems.

Crucially, however, a role for government does not necessarily imply "in-house" provision by the port authority.  Harbour dredging, the provision of navigation aids and other "public goods" could all be franchised or contracted out.  While not precluding continued provision by the public port authority, putting a contract to tender ensures not only that the service is provided, but that it is provided at least cost to the public purse.

Corporatisation of Port Authorities

Whatever the functions retained by the port authorities it is vital that they are performed as efficiently as possible.  At present, the "public service" framework under which port authorities operate does not lead to the delivery of services demanded by users at lowest possible cost.  Corporatisation of the port authorities may allow many of the gains of full privatisation to be achieved.  At the very least, it would go a long way towards providing the appropriate incentives for efficient performance.  In particular, there is a need to more clearly specify the objectives of port authorities and to create a board which is accountable under the Companies Code.

A clear commercial objective which required managers to maximise the value of the business -- as is the case in the private sector -- would provide strong incentives for eliminating waste and inefficiency.  There is also a need separately to account for and fund any non-commercial obligations (for example provision of recreation facilities).  Allied to this is the need for increased managerial autonomy and a reduction in political interference in day-to-day decision-making.  It can be forcibly argued that many of the greatest inefficiencies associated with port authority behaviour stem from excessive government intervention.  Examples include politically-inspired investment decisions, directives to pursue non-commercial objectives, and interference in pricing policies.

The benefits of the corporatisation approach are clearly evident from experience in New Zealand and in the UK.  In New Zealand, the formation of port companies with clear commercial charters has resulted in more effective management and reduced charges.  Importantly, a clearer focus on bottom-line performance (and tying managerial rewards and sanctions to such measures) would provide greater incentives for port authorities to promote overall port efficiency, rather than having to be "goaded" into doing so.

Pricing Policy

An integral part of the corporatisation of port authorities would be adoption of more cost-based pricing policies, not least because of their capacity to achieve economies in capital expenditures.  While part of the privatisation strategy will lower costs, as waste is eliminated, the shift to commercial pricing and time of day charges for example, may increase some charges.  A major point is that when services are under-priced, an artificial excess demand is generated.  The relationship between pricing and incentives to utilise existing capacity more efficiently is well illustrated by the PMA's experience.  For example, considerable sums were spent on PMA's 16-17 Victoria Dock as a multi-purpose container and general cargo berth.  At one stage, it was even planned to equip the berth with a second container crane, despite container terminal operators opposition.  Implementation of the first stage of the new pricing policy has meant that the need for the berth has been virtually eliminated.  Had commercial hiring policies been in force ten years ago, the berth would not have been built.  Similarly, the Port of Geelong Authority observed in its 1990 Annual Report that "the added incentive to move swiftly in and out of port now created by the Authority's new pricing structure is further expected to reduce the need for a short-term expansion of facilities". ⁽⁶³⁾

Privatisation

Project Victoria suggests that consideration should be given to privatising Victoria's ports (and individual docks), starting with the first authority willing to co-operate.  The performance of private ports in Australia (for example single user mining operations) bears testimony to the incentives private ownership has on efficiency.  The privatisation of the former British Transport Docks Board (which controlled a disparate collection of ports) into Associated British Ports has led to significant enhancement of financial performance, and according to one British expert, without any apparent disadvantages. ⁽⁶⁴⁾

Perhaps the most stunning example of privatisation is the Port of Felixstowe in the U.K.  Despite disadvantages of location and tide problems, and a limited local workforce, this port has grown from an abandoned naval station just after World War II to be the largest container port in the country handling in excess of 1.2 million TEUA each year.  While government-controlled ports stagnated, Felixstowe developed new markets, embraced mechanisation and computerisation earlier than its competitors, and created a sophisticated intelligence network and well-developed forward plans.  The fact that the port is privately owned and operated, has a non-unionised workforce with a direct stake in the port's success, and was one of the few ports to reject the National Dock Labour Scheme in 1961 and remain free of government subsidy and control is, to us, no coincidence. ⁽⁶⁵⁾

Private ownership provides strong incentives to cost-minimisation.  Absence of any resort to government funds to bail out uneconomic investments in port facilities is likely to lead to investment appraisal based on commercial realities, thereby avoiding the devotion of scarce community resources to expensive and grossly under-utilised facilities (for example the recently disposed of container crane at the Port of Geelong).

Given Australia's geography, there could be some anti-competitive behaviour from the owners of strategic ports as competition is phased in.  This may suggest the need for some form of constraint or watchdog over port authorities, but we see real inter-port and inter-dock competition as preferable to regulatory controls.

Where privatisation of the entire port is not seen as a realistic option -- privatisation and/or franchising of individual components may be a preferable alternative.  The preferred form of un-bundling, is, in any case a commercial decision.  Traditionally, port authorities in Australia have acted as landlords, investing in port facilities such as container terminals which are then leased out to private sector operators.  Without secure tenure and the associated freedom to make and live by decisions, however, the incentives for private operators to innovate is blunted.  For example, until recently, the Melbourne, Geelong and Portland port authorities have all been required to comply with the State Government's land rental policy, whereby any improvements paid by lessees revert to the lessor (ie the port authority) on expiration of the lease.  In recognition of this disincentive, the Victorian Government has now exempted stevedores from this asset reversion policy and hopes that private investment of a similar order to that now underway in New South Wales ports ($80 to $100 million) will be forthcoming in Victoria. ⁽⁶⁶⁾  Full privatisation of the facilities could only strengthen these incentives.

An expected objection to the sale of port facilities to private operators is that it might afford opportunities for the exploitation of monopoly power.  One response to this objection, drawing on experience in the U.K. and Australia, is that the combination of ports, rail and road transport means that ports such as Melbourne, Geelong and Westernport, not to mention Sydney and Adelaide, are in competition.  But, taking a narrower view, in the Port of Melbourne the volume of trade would in any case seem sufficient to ensure competition in the provision of most port services.  For example, there are 58 berths for commercial shipping at five docks -- Victoria, Appleton, Swanson, Holden, and Webb docks.  Swanson Dock has four container terminals with a total of eight berths while Webb Dock has five berths serving coastal and overseas roll-on roll-off vessels.  There is also some container handling capacity at Appleton Dock.

In some cases the economies of scale in industries such as container handling and towage relative to the size of the markets they serve may mean that there is only room for one or two suppliers.  For example, all commercial tugs and lineboats in the Port of Melbourne are operated by one company.  More importantly, the considerable capital costs required to set up in certain industries may pose a significant barrier to potential new competitors.  This is particularly the case when the site- or function-specific nature of the investments (for example a container depot at a particular port) means that a large part of the investment could not be recouped if the attempt to enter the industry proved unsuccessful.

While the threat of regulation and potential entry should be sufficient to deter anti-competitive behaviour, we remain confident that competition will prevail, indeed that it will prove intense with a mixture of unbundling and privatisation across Australian ports.  And, just as it is difficult to be a "little bit pregnant", so it will be difficult for the docks to be a "little bit competitive" once the seed of privatisation and enterprise agreements has been sewn.

Franchising

Where, for political or other reasons, public ownership of port facilities is seen as necessary, franchising of particular services provides port authorities a relatively fast means of ensuring that private operators within the port perform efficiently.  Private sector service providers subject to particularly scathing criticism have included stevedores and towage operators.  Poor performance by these operators stems in large measure from the lack of competitive pressures they face in their relevant markets.

A more fundamental approach to the problem would be for port authorities to intervene in a manner whereby competition for the market rather than within the market, is made possible.  Making the market "contestable" by allowing new entrants provides a stimulus to performance by incumbents rather than relying solely on the "heavy hand" of regulation.  One way of doing this would be for port authorities to become franchisors who allocate the right to provide a particular port service for a period of time (for example 5 to 10 years) to private firms on the basis of competitive bidding, and subject to agreed contractual terms of performance.  On expiry of this period, or if the terms of the contract were violated, the contract would again come up for tender.

This franchising approach would ensure that opportunities for providing port services such as towage go to the most efficient operator.  Indeed, the Port of Geelong Authority, following a review of towage charges and services now has a three year agreement with Howard Smith Industries Ltd. to provide towage services under strict pricing and service quality controls.  This contrasts strongly with cosy traditional practices whereby port authorities let long-term leases (for example 25 years) to largely self-selecting operators.  Drawing on the example of leasing arrangements in North America, the Inter-State Commission recommended that port authorities consider shorter term leases and the encouragement of new operators. ⁽⁶⁷⁾

Enterprise-based employment

The full benefits from competitive franchising of port services (for example stevedoring) are unlikely to be secured unless inflexibilities in the relevant labour markets are also removed.  For example, the National Farmers Federation's attempts to establish a stevedoring operation were "stymied by overly restrictive industrial relations legislation" by virtue of the union monopoly over cargo-handling activities.

Enterprise employment is essential if the skill capacities and preferences of employers and workers are to be properly taken into account.  Testament to this is the apparent early success of several recent joint ventures involving the Waterside Workers Federation at Mackay and Geelong.  While perhaps too early to make definitive judgments, the Port of Geelong Authority has claimed that "the greater industrial harmony and productivity generated as a result of the joint venture stevedoring arrangement in Geelong has not only helped spread the concept to other Australian ports, but has been instrumental in lifting the productivity of other stevedoring companies as well" ⁽⁶⁸⁾

In New Zealand a move to direct employment by stevedoring companies engendered more positive workforce attitudes, yielding productivity improvements starting at around 80% and a reduction in conventional stevedoring charges of between 20 and 50% in the first nine months alone.  The cost savings -- estimated at $NZ 58 million in the first year -- more than offset total redundancy costs of some $NZ 45 million, while the remuneration of stevedores remaining frequently rose by up to 10%. ⁽⁶⁹⁾  The repeal of the National Dock Labour Scheme in the U.K. led to similarly stunning results.

The port of Liverpool was restructured into six self-contained units (containers, timber, grain, Irish Sea ferries, Pandoro ferries, and conventional cargo) and workers re-hired to each of these cost centres on new contracts tied to changes in work practices in each area rather than port-wide terms and conditions.  The result was productivity improvements of 20 to 25%, significant increases in employee earnings, and a doubling of cargo volume handled to that of ten years ago. ⁽⁷⁰⁾

In Australia, the process of negotiating enterprise-based agreements is running behind schedule, let alone the implementation of these in-principle agreements.  Moreover, the difficulty in the negotiation process suggests that even after implementation, the agreements may not be those which ensure the efficient movement of cargo through the transport chain (for example because of a narrow focus on only one aspect of productivity, such as boxes unloaded rather than boxes successfully processed to the next stage of the transport chain).  This highlights the need for a comprehensive set of reforms which make each link in the chain accountable for their performance.

FINANCIAL INSTITUTIONS

In this chapter and in chapter 2 we have highlighted the inappropriateness and irrationality of governments, particularly state governments, operating trading enterprises where private enterprise has the capacity to deliver more efficient services.  This principle is well illustrated in general insurance, where Victoria's State Insurance Office came to exist allegedly because the private sector was not able to provide the full range of products.  Historically, the bases of most of the government insurance agencies were established in market sectors from which private sector insurers were either specifically excluded by legislation, or which were rendered unviable to commercial general insurance companies because of the artificial containment of premiums levels by governments, which made it impossible for private sector insurers to obtain premiums commensurate with claims exposure.

There is no evidence of economies of scale or natural monopoly in insurance which could make a case for a SIO.  Competition between private sector insurers brings clear benefits to policy-holders, whether they be employers under workers' compensation insurance, motorists under compulsory third party insurance, or other policy-holders in the classes of general insurance.  While moral hazard and adverse selection issues arise in insurance, this makes a case not for government ownership, but for some forms of regulation.  Competition brings competitively priced insurance, innovation and efficiency in product service (including claims settlement) brought about by the need to better the performance of one's competitors.

Private sector insurers bring one further critical benefit, especially important in the "long tail" classes such as workers' compensation and compulsory third party motor insurance -- namely fully funded insurance operations, under which premium rates are set to cover the costs of claims occurring during the period insured.  This means that the cost of today's claims, though they may be paid in several year's time, are met by today's policy-holders and are not deferred as a burden for future generations, as is typically the case when governments underwrite long "tail" classes of insurance.

In its 1989 report, the then Industries Assistance Commission expressed its concern with single insurer workers' compensation schemes of the type operated by the Victorian Government. ⁽⁷¹⁾  The Commission commented that:

"... the establishment of public monopolies in workers' compensation insurance raises concerns that the removal of competitive pressures will result in reduced incentives to minimise costs", and

"... the setting of premium rates without sufficient provision for future costs of current claims will give rise to the unfunding of insurance liabilities (as occurs under WorkCare in Victoria) with current employers in effect being subsidised by future employers ..."

A timely example of the clear benefits of private sector competition instead of government monopoly can be seen in the compulsory third party motor vehicle insurance market in New South Wales.  Since 1990 private insurers in NSW have been able to provide the insurance cover (as has the Government Insurance Office), with competition purely on price and service, since the scope of the product is governed by statute.  Even without the benefits of product differentiation which would be present in other fields of general insurance, the involvement of private sector insurers has had a dramatic downward impact on premiums, while maintaining the full benefits established under the scheme in that State, and introducing the important element of competition in the product service area.

Put simply, Project Victoria emphasizes that, as a matter of principle, the role of governments is to govern, and not to run or own trading enterprises.  There is no evidence that the private sector market will fail to deliver quality products at viable prices.  The functions of providing statutory classes or other forms of general insurance should be placed in the hands of competitive private insurers, subject only to appropriate prudential legislation.  The former government instrumentalities should be sold, at market prices, and the funds applied either to retirement of existing state debt.

A TIMETABLE FOR REFORM

Project Victoria recommends that the Government of Victoria immediately appoint a Minister for Victorian State Owned Corporations (VSOCs).

It is envisaged that an expert unit of Treasury with special skills in privatisation and corporatisation would be formed, reporting to the Minister for State Owned Corporations.  This unit would also service individual Transition Committees appointed to oversee the transition to corporatised or privatised companies for each of the respective areas (eg electricity, gas, water, transport, port and dock authorities).

An initial task of the Minister and the VSOC unit would be to classify all business enterprises of the Victorian Government into those which are natural monopolies and those whose services are either contestable or capable of being made competitive.

Businesses which provide services which are fully contestable would be listed as part of a planned privatisation program.  Each business would be given a timetable, and a reporting process, and would report to a Privatisation Implementation Committee (PIC).

In the case of natural monopoly assets, such as the SECV power grid, the Bass Strait gas pipeline, the water and waste water pipe networks, rail and tram lines and some port authorities, these business activities would be listed for conversion into VSOCs such as Transpower Victoria -- the power grid;  Gas-Grid Victoria -- the gas pipeline company;  VicLines -- the tram lines system;  VicRail -- the railway line system, WaterCorp Victoria -- the company or companies owning the water and waste water pipe transportation systems, and so forth.

The Minister would transfer the ownership of natural monopoly assets of the Victorian Government into distinct corporate entities.  Under a State owned Corporations Act, the VSOC Minister would apply private sector standards and normal commercial law to all companies in the VSOC Act Schedule.  It is envisaged that the boards of these state enterprises will have an agreed Statement of Corporate Intent (SCI) negotiated with the shareholder Ministers, specifying the objectives of the organisation and making board and management fully accountable under normal corporate law.  Boards would be appointed on the basis of commercial expertise.

The only difference between the VSOC and a normal public company would be that the voting shareholders of the VSOC would be the Treasurer and the Minister for VSOCs, whereas the shareholders of public companies are private individuals and corporations.

In the case of the border areas, where business activities are attached to natural monopolies (for example, water and waste water treatment, provision of train and tram services, and provision of dock handling containers and other services), these business activities would be referred to a Commercialisation Implementation Committee (CIC) which would be charged with developing a program for franchising, unbundling or placing on a commercial basis the provision services which make use of natural monopoly assets.

For example, in the case of water the British model shows that it is possible to bring private ownership into the water and sewerage industry, but there will remain a need for regulation of any potential abuse of monopoly power.  Alternatively, as in France, the State Owned Victorian Water-Corp could be charged with devising an unbundling/franchising strategy whereby the regional distribution could be put out to franchise as could water and waste water treatment.

Alternatively, some of the core business activities such as waste and water treatment could be privatised, with the transportation network and perhaps water treatment remaining in WaterCorp.  The major issue for review then, in the case of water, but also in the areas of electricity distribution and transportation, is the precise form of unbundling, corporatisation and privatisation of these enterprises.

The above agenda for change would see an ending over the next decade of the Victorian "corporate state".  The agenda could see selected natural monopoly assets remaining as state owned corporations, but unlike earlier Victorian state enterprises, these companies would be fully accountable under corporate law, and members of the Board and management would have the same legal responsibilities as their private sector counterparts.

The privatisation of all those State business activities which are not natural monopolies, and the unbundling or franchising of service functions associated with natural monopolies, should start to generate productivity levels which give the State a competitive edge.

While the prime aim of the reform package presented in this chapter is the delivery of services consumers want at least cost, significant Victorian debt retirement will be possible through the privatisation of the power generation stations and other public assets.  Project Victoria suggests that any proceeds of privatisation should be used for debt retirement, not for funding government consumption.

It is expected that with corporatisation and privatisation, less workers would be employed but on terms and conditions which would be much more attractive than at present.  However, these terms and conditions would be matters for competitive bargaining between management and the unions which will tend form around the new business enterprises.

CONCLUSION

In the view of Project Victoria we need to reverse the preference for politically convenient but economically wasteful state enterprises rather than private businesses.  Managers and workers in these enterprises also need the dignity, productivity and resulting high incomes that can emerge from a real enterprise based wage and productivity bargaining process.  We need business success to derive from competitive fundamentals, not from special relationships with Spring Street or Canberra.  The politicians need to shift their focus back to creating a legal and institutional environment within which business can function efficiently.  Such reforms can create a climate of self reliance and independence on which our early, and much of our current, community wealth was built.

The recent attempts to further centralise even financial management in Spring Street has been the last straw, but at least has the virtue of bringing matters to a head.  Victoria, the wealthiest state in the "Lucky Country", needed a few bad cards to wake up to her losing strategies.  There is considerable evidence that we need less management of businesses by government and more stability in law making and enforcing.  The boundaries of government in Victoria need to be reassessed.

While some attempts have been made to improve matters, to date the reforms undertaken have only touched at the margins of what is required.  Rather than relying on periodic reviews to identify and then attempt to correct deficiencies in particular areas, what is required is a comprehensive and soundly-based reform program aimed at putting in place appropriate incentives for continuing good performance.  Corporatisation of government trading enterprises -- already embraced in New South Wales and Queensland -- would yield significant benefits.  However, the analysis in this chapter suggests that there is tremendous scope for introducing competition and greater private sector involvement to most, if not all, of the activities now undertaken in the state enterprise sector without compromising social objectives of government.

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ENDNOTES

1.  See Eggleston, R. (1990), State Socialism in Victoria, P.S. King & Son Ltd., London.

2.  For further analysis of the origins and forms of accountability of state enterprises and quangos, see Centre of Policy Studies 1982, Quangos:  The Problems of Accountability, including papers by J Halligan, K Folie, S R Davis, E W Russell and R Clarke and M G Porter.

3.  OECD (Organisation for Economic Co-operation and Development) 1990, OECD Economic Surveys -- Australasia, Paris, pp.50-51.

4.  The state enterprise sector comprises those government entities operating largely outside the Public Account.  This chapter also looks briefly at several public financial enterprises -- including the Transport Accident Commission and the State Insurance Office -- whose financial transactions are formally classified separately from the public sector.  Those organisations included in the Victorian state enterprise sector are the State Electricity Commission;  the Melbourne and Metropolitan Board of Works, the Latrobe Valley Water and Sewerage Board, and the Geelong and District and Mornington Peninsula and District Water Boards;  the Gas and Fuel Corporation of Victoria, the Grain Elevators Board, the Port of Geelong, Port of Melbourne, and Port of Portland Authorities;  the Country Fire Authority;  the Government Employee Housing Authority;  the Metropolitan Fire Brigades Board;  the Totalizator Agency Board;  the Urban Land Authority and Universities and CAEs.

5.  Derived from ABS 5501.0 and ABS 6248.0

6.  See Lawrence, Swan and Zeitsch 1990, The Comparative Efficiency of State Electricity Authorities, A Paper prepared for the 19th Conference of Economists, September.

7.  Total factor productivity is an index of the ratio of total output quantity to total input quantity.  It provides a measure of the efficiency with which all inputs are used.  Partial productivity measures (eg labour productivity) while useful, can conceal deficiencies in other areas.

8.  State Electricity Commission of Victoria 1990, Submission to Industry Commission Inquiry into Energy Generation and Distribution, August, p.27.

9.  Economic and Budget Review Committee of the Victorian Parliament 1990, Electricity, Water and Gas:  Limits of Debt, September, pp.127-8.

10.  See Garlick P.M. & Associates Pty Ltd. 1987, Power Plant Availability Issues, A background paper prepared for the Natural Resources and Environmental Committee of the Victorian Parliament, November.

11.  State Electricity Commission of Victoria 1990b, Submission to Industry Commission Inquiry into Energy Generation and Distribution, August, p.17.

12.  State Electricity Commission of Victoria 1989, Pricing Development Plan, Discussion Paper No.1, August

13.  Industry Commission 1991, Energy Generation and Distribution, Draft Report, 15 January, p.38.

14.  Economic and Budget Review Committee of the Victorian Parliament 1990, Electricity, Water and Gas:  Limits of Debt, September, p.196.

15.  Gas and Fuel Corporation of Victoria 1991, Submission into Industry Commission Inquiry into Energy Generation and Distribution.

16.  Australian Water Resources Commission.  1990, Interagency Performance Review.

17.  Economic and Budget Review Committee of the Victorian Parliament 1990, op. cit.

18.  Ibid, p.232.

19.  Ibid, p.226.

20.  Ibid, p.235.

21.  Ibid, p.239.

22.  Ibid, p.239.

23.  Ibid, p.271.

24.  Inter-state Commission 1989, Waterfront Investigation:  Conclusions and Recommendations, Volume 1, AGPS, Canberra, March, p.xv.

25.  Victorian Ministry of Transport (S. Joy) 1987, The Port of Melbourne:  Future Prospects and Problems, March.

26.  Pressures for additional berths appear to have abated in recent times with the general slowdown in trade.

27.  Port of Melbourne Authority 1990, Annual Report 1989/90

28.  Ministry of Transport 1987 (S. Joy), Port of Portland:  Prospects and Problems.

29.  Shore-Based Shipping:  Final Report of the Industry Task Force on Shore-Based Shipping Costs, (Mr I.E. Webber) 1986, AGPS, Canberra, p.45.

30.  Inter-state Commission 1989, op. cit.

31.  Ministry of Transport 1987 (S. Joy), Port of Portland:  Prospects and Problems, p.6.

32.  Ministry of Transport 1987, The Port of Geelong:  Future Prospects and Problems, p.1.

33.  Bureau of Transport Economics (R.O. Goss) 1987, Port Authorities in Australia, Occasional Paper 84, AGPS, Canberra, October.

34.  Inter-State Commission 1989, op. cit.

35.  Ibid., p.61.

36.  Ibid, p.160.

37.  Docklands Taskforce (Maunsell and Partners), The Establishment of a TechnoPort in Melbourne, An Initial Examination of the Issues.

38.  A Joint Industry Project "Truck Management in the Port of Melbourne", Action Plan to Reduce Cargo Delays Associated with Trucks", Final Report.  4 July

39.  See, for example, Department of Management and Budget, Public Authority Policy and Rate of Return Reporting, Information Paper No.1, 14 October 1986.

40.  Industry Commission 1991, Energy Generation and Distribution, Draft Report, 15 January, Volume 1, Summary and draft recommendations, p.9.

41.  Gas and Fuel Corporation of Victoria 1991, Response to the Industry Commission Inquiry Draft Report on Energy Generation and Distribution, p.11.

42.  Melbourne Metropolitan Board of Works, Framework for the Future, April 1990.

43.  Premier of Victoria, An Address by the Hon Joan E. Kirner, Launch of Victoria First, March 26, 1991.

44.  Gas and Fuel Corporation of Victoria 1990, Annual Report 1989/90, p.6.

45.  Economic and Budget Review Committee of the Victorian Parliament 1990, op. cit., p.194.

46.  The Age, Port plan passed to appease THC, December 1, 1990.

47.  Business Council of Australia 1989, "Corporatisation and Privatisation:  Lessons from across the Tasman", in Business Council Bulletin, August.

48.  Ibid

49.  Electricity Corporation of New Zealand Limited 1989, Annual Report, 31 March, pp.22-4.

50.  State Electricity Commission of Victoria 1990b, Submission to Industry Commission Inquiry into Energy Generation and Distribution, August, p.1.

51.  Industry Commission 1991, Energy Generation and Distribution, Draft Report, 15 January.

52.  Greiner 1990, Microeconomic Reform of Australian Government, A Speech by the NSW Premier to the National Press Club 25 July 1990, in Business Council Bulletin, October.

53.  Gas and Fuel Corporation of Victoria 1991, Submission into Industry Commission Inquiry into Energy Generation and Distribution.

54.  Industry Commission 1990, op. cit. p.51.

55.  Ibid p.xvi.

56.  Ibid p.xv.

57.  Ibid p.xvi.

58.  Port of Melbourne Authority, Corporate Plan 1989/90.

59.  Port of Melbourne Authority, Trade and Transport Review 1989/90.

60.  Port of Geelong Authority 1990, Annual Report 1989/90.

61.  Ibid.

62.  Port of Melbourne Authority 1990, Annual Report 1989/90

63.  Port of Geelong Authority 1990, Annual Report 1989/90.

64.  Bureau of Transport Economics (R.O. Goss) 1987, op. cit.

65.  Samuels, N.G. 1990, "Case Study of a New Modern Private Port -- Felixstowe", Speech Delivered to the State Chamber of Commerce and Industry (Victoria) Waterfront Summit, March.

66.  Premier of Victoria, An Address by the Hon Joan E. Kirner, Launch of Victoria First, March 26, 1991.

67.  Inter-state Commission 1989, op. cit.

68.  Port of Geelong Authority 1990, Annual Report 1989/90.

69.  Trebeck, D. (Principal Consultant ACIL Australia Ltd.), "Trans-Tasman Shipping and Port Reform in New Zealand", Address to Trans-Tasman Transportation:  A Report on Progress;  a conference organised by the Australia-New Zealand Business Council Inc., Melbourne 15 August 1990.

70.  See "Liverpool takes on the south", Fairplay, 4th October 1990.

71.  Industry Commission 1989, Government (Non-Tax) Charges, Report No.422, Volume 4 Studies -- Public Rail Freight, Electricity and Workers Compensation Arrangements, 29 September.