Privatisation has done too much to perpetuate monopolies

It always disturbs me to see how few of our econocrats and economic rationalists – “neo-liberals” to their lefty critics – are willing to acknowledge the many cases where, what looked like perfectly sensible micro-economic reform on the drawing board, turned into a disastrous rort in the hands of the politicians.

But that’s not true of one of the great survivors from the reform era. Rod Sims, now chair of the Australian Competition and Consumer Commission, who’s an experienced econocrat and formerly a key advisor on the 1993 Hilmer report on national competition policy, which urged increased competition at state as well as federal level.

At the commission’s annual regulatory conference last week, Sims criticised the many privatisations of government-owned businesses that have simply bundled up a public monopoly and sold it to the highest bidder, without doing anything to get some competition into the industry, or even to adequately regulate the prices charged by a now-privately owned monopoly.

“Privatising assets without allowing for competition or regulation creates private monopolies that raise prices, reduce efficiency and harm the economy,” Sims said.

Why would governments do such a terrible thing? Because they put short-term budgetary pressures ahead of the best interests of their voters, as consumers and business-users of essential services. It’s actually part of a trick that buys the appearance of good management at the price of paying more than necessary for essential services from now on.

The pollies say: “Look at how much I got for that business, look at how I’ve got the budget back to surplus and reduced government debt, look at how I’ve kept our triple-A credit rating”. (Just don’t look at how much more you’re paying for electricity, for using the airport and for imported goods.)

Adding to these short-term budgetary temptations is the way politics and public policy have become more tribal, more public bad/private good. More “binary” as Prime Minister Scott Morrison would say. By definition, the public sector is inefficient and the private sector is efficient, people think.

It follows that merely by changing the ownership of a business from government to private you’ve made it more efficient. But that’s not economics, it’s just prejudice. Economists believe that whether a business should be privatised should be judged case-by-case, and by the way it’s proposed to be done.

Sims says “privatisation can generate important benefits to the economy, such as improved incentives for cost control, investment and innovation to meet the needs of consumers”.

“There have been many examples of privatisations that have been done well and that have benefited Australia. The privatisation of Qantas was done appropriately, for example, and the privatisation of Telstra was accompanied with measures to promote rather than constrain competition.”

Governments can be bad owners of businesses because – thanks to budgetary pressures – they’re usually hungry for big dividends, but reluctant to provide the extra capital needed to keep up with innovation and changing consumer needs.

But I’ve never understood people who lament the privatisation of the Commonwealth Bank. Its treatment of customers was never very different to that of its three big privately-owned competitors. On aviation, we’ve long had trouble keeping enough competition in our domestic market, but Qantas had plenty of international competitors.

“The problem is that, in more recent years, many of Australia’s key economic assets have been privatised without regulation, and often with rules designed to prevent them ever facing competition. This makes us all poorer,” Sims says.

“You regularly hear people calling for micro-economic reform these days. The best way to do that is to expose more of our economy to competition, and by dealing with excessive market power. Australia has on a number of occasions been doing the opposite.

“Many monopolies are subject to regulation, such as gas pipelines, electricity networks, railways and the NBN. In contrast, many ports and airports, which are essential gateways for our economy, are largely unregulated, mostly due to decisions made when they were privatised.”

In its search for a top-dollar selling price, the Keating government stuffed up the privatisation of capital-city airports, particularly Sydney’s. But nothing Victorian governments have done compares in infamy with the behaviour of the Baird and Berejiklian governments in NSW.

They took the state’s three vertically integrated electricity companies – each owning power stations and electricity retailers – and sold them to the people offering to buy them at the highest price. They became the three oligopolists dominating the national electricity market, Origin Energy, AGL and EnergyAustralia.

Then, when they privatised NSW ports, they promised the new owner of the Botany and Port Kembla ports it would be compensated should the Port of Newcastle start handling containers, not just coal.

Then they made the new owners of the Newcastle port agree to pay this compensation should they set up a container facility. They were so proud of this deal they tried to keep it a deep dark secret.

When its existence became known, the ACCC tied to get it struck down by the court as anti-competitive. But it failed to persuade the judge that trying to maximise the sale price by including monopoly rights in the deal was anti-competitive.

Which shows that it’s not just the ulterior motives of politicians that can turn good reform into a travesty. It’s also that many privatisation deals end up before the courts, where economic questions are decided by judges “learned in the law” but, in too many cases, not as well-versed in economics.

I understand that, in a recent case where one of the state’s public-sector unions sought to object to the NSW government’s wage freeze before the NSW Industrial Relations Commission, an economist brought as an expert witness by the union mentioned that wage increases were supposed to reflect productivity improvement.

He was chastised by the bench for introducing such a novel and controversial notion so late in the proceedings. Really?

My point is that would-be reformers need to be a lot warier of doing more harm than good.

Read more >>

ACCC wins watchdog of the year, as others lick their wounds

It’s been an infamous year for Australia’s economic regulators. Most ended it with their lack of vigilance exposed, their reputations battered and their ears stinging from judicial rebuke.

The biggest loser is the Australian Securities and Investments Commission, followed by the Australian Prudential Regulation Authority. But the mismanagement of the national electricity market became more apparent. And neither the Reserve Bank nor Treasury emerged unscathed.

Just one regulator had a good year, the Australian Competition and Consumer Commission. It worked hard, discharging its duties with vigour and initiative, taking on powerful business interests, seeking and being granted hugely increased maximum penalties, and fighting to make up for the negligence of its fellow regulators.

As the others have been found wanting, its role has been expanded. And as next year we see the government’s response to this year’s seemingly endless revelations of regulatory failure, it’s role may well be further widened. That’s what tends to happen when rival regulators’ failures become apparent.

It’s been a watershed year. From now on, life will never be the same for regulators found wanting under the microscope of public scrutiny.

Much of that scrutiny came from the banking royal commission, of course. Its interim report in September criticised ASIC for "rarely" going to court "to seek public denunciation of and punishment for misconduct," and being too accommodative when negotiating penalties with the companies it polices.

APRA faced criticism for a "lack of action" in response to widespread misbehaviour in superannuation, including cases where thousands of members were kept in higher fee accounts, rather than being moved into no-frills MySuper products.

But the royal commission wasn’t the only critic of economic regulators this year. I’ve said plenty elsewhere about the failure of the national electricity market’s three (and now four) official operators and regulators to prevent the massive blowout in retail power prices.

One of the many things the Turnbull government did in its vain attempt to fend off pressure for a royal commission was to get the Productivity Commission to report on competition in the financial sector.

The commission confirmed competition in banking was weak and made one eye-opening revelation: part of the problem was that, in their concern to ensure the stability of the banking system, APRA and the Reserve Bank weren’t too worried about ensuring this did as little as possible to inhibit price competition between the big banks.

The commission noted that when APRA had imposed limits on new interest-only lending, it and the Reserve had looked the other way while all four big banks used this as an excuse to jack up interest rates on new and existing interest-only loans.

It recommended that a “consumer champion” be appointed to join APRA, ASIC, Treasury and the Reserve on the co-ordinating Council of Financial Regulators. No prize for guessing the ACCC was the champion the commission had in mind. Nor for reading between the lines that the commission suspected the Reserve and Treasury had been “captured” by the bankers they were supposed to be regulating.

The ACCC has done what little it could over the years to oppose the misregulation and oligopolisation of the national electricity market, and its reports this year revealed what went wrong.

Last week it acted on three fronts. Its preliminary report on digital platforms took on Google and Facebook, greatly expanding our understanding of the questionable ways they operate and working on ways they could be regulated.

ACCC boss Rod Sims has long worried publicly about the state governments privatising their electricity businesses and ports in ways that maximised their sale price by inhibiting price competition. The banker-led Baird-Berejiklian government in NSW is the worst offender.

Last week Sims announced the ACCC was taking the Botany port operator to court, alleging its agreement with the NSW government is anti-competitive and illegal.

And last week the ACCC released its final report on factors influencing residential mortgage prices, commissioned at a time when the banks were threatening to pass the new “major bank levy” straight on to their customers.

The report covered similar territory to the earlier Productivity Commission report, noting again the way the banks had used APRA’s move on interest-only loans as an opportunity for “synchronised pricing”.

But the ACCC’s analysis of pricing dynamics in an oligopolistic market like banking revealed far more realism (and advanced economics) than the Productivity Commission’s trademark introductory textbook neo-classicism. The more I see, the more I like.

Read more >>

Privatisation has been a disaster in many cases

If you’ve always doubted the sense of privatising government-owned businesses, vindication is now flowing thick and fast. In many – but not all - cases it’s turned out to be bad idea. One that’s costing consumers a pretty penny. Unscrambling the egg, however, is proving a frustrating and painful process.

Many people feared that if private businesses were allowed to buy government businesses, the first thing they’d do would be to jack up their prices. Politicians and supposed experts told them not to worry. Sorry, experts wrong, doubting punters right.

In some cases, the businesses privatised were natural monopolies – electricity transmission and distribution networks, and geographic monopolies, such as federally owned airports and state-owned ports.

It the case of the electricity networks, the experts told us not to worry. The prices the private owners are allowed to charge would be tightly regulated. Wrong. In no time the monopolists found ways to rort the system.

One of Scott Morrison’s biggest problems at the coming federal election is voter anger over the huge increase in electricity prices and his government’s limited progress in getting them back down.

Morrison was so rattled he made the most un-Liberal-like threat to use a “big stick” to force the three big companies that have come to dominate the national electricity market to be broken up if they didn’t cut their prices before the election.

He’s since had to replace his big stick with a small one – suggesting he won’t get far in lowering power prices.

The blowout in power prices is the direct result of a decision to take five state-owned electricity generation, transmission and retailing monopolies and turn them into a national electricity market of competing privatised businesses.

But although the feds are now carrying the can for this giant national stuff-up, it was all the doing of the state governments who did the privatising.

How did they get is so badly wrong? They sabotaged it. While you and I were being told not to worry – that vigorous competition would prevent the businesses from raising their prices unduly – the state governments were busy selling their businesses to the highest bidders.

The highest bidders turned out to be companies putting together a vertically integrated business of power stations at the bottom and power retailers at the top. In some cases, governments tightened reliability standards in a way they knew would make it easier for potential purchasers to game the price regulation rules.

If you wonder why parking is so expensive at airports – and catching a taxi home comes with an extra fee – it’s because the Keating government privatised these geographic monopolies without price controls.

With the state governments’ privatisation of their ports, some private lessees have been allowed to fatten their profits in ways too diffuse for us to see how we’re being got at.

For scheming behaviour by premiers and treasurers, there’s no case more appalling than the way the NSW government privatised its ports of Botany, Port Kembla and Newcastle.

Botany is the state’s one big container port, with Port Kembla specialising in bulk commodities and Newcastle the biggest coal port in the world.

In 2013, Botany and Kembla were leased to a single operator and the sale price was enhanced by a “confidential” agreement that the state government would compensate the operator for each additional container handled by the Newcastle port beyond a minimal level.

The Newcastle port was leased to a separate operator with a confidential agreement requiring it to compensate the government – to the tune of about $100 a box, it’s said - for any money it has to pay the other operator if Newcastle increases its handling of containers.

Trouble is, five years on, this deal the public wasn’t supposed to know about is a classic “seemed like a good idea at the time”. Newcastle’s future as a coal port is all decline (the more so if the Adani mine in Queensland goes ahead), but it’s well placed to diversify by building a big new, state-of-the art container terminal.

It has the land, it could build a single ship-rail-road interchange and its port is deep enough to take the next generation of much bigger container ships that will otherwise be accommodated by only one other Australian port, Brisbane.

But the confidential deal makes a container port in Newcastle uneconomic.

Meanwhile, routing all the state’s inward and outward container movements through Botany is a crazy idea. It’s a long way from the Moorebank intermodal terminal, meaning a huge amount of heavy trucks lumbering through Sydney.

New modelling by AlphaBeta economic consultants for the Port of Newcastle claims a new container terminal would allow businesses in the northern part of the state to divert about 16 per cent of the state’s two-way container traffic through Newcastle, cutting their freight distance by 40 per cent, putting competitive pressure on Botany’s container handling prices, taking many trucks off Sydney roads, boosting the NSW economy and cutting the freight costs hidden in the prices consumers pay.

On Monday the Australian Competition and Consumer Commission announced it was taking the Botany operator to court, alleging its agreement with the NSW government is anti-competitive and illegal.

Just another skirmish in what will be a long-running battle to undo the not-so-unintended consequences of privatisation.

Read more >>