Decisions on privatisation of public assets and services should
not be driven by ideology, but by sound understanding of how an
optimal mix of ownership, creation of competitive market structures,
and the appropriate regulatory frameworks can maximise public good.
While private ownership may be the right option in some cases, in
others government ownership can achieve better outcomes. Neither
alternative is a panacea. The key requirements are the creation
of competitive market structures and efficient economic regulation
in the case of natural monopoly networks.
CEDA's recent publication, Privatisation:
A Review of the Australian Experience
(exec summ pdf, 121Kb), is a collection
of nine perspectives on Australia's privatisation
experience authored by prominent economists
and commentators. It again demonstrates
that such a group will provide at least
as many views on a subject as there are
members of the group. However, it is useful
to emphasise some general conclusions
that can be drawn.
First, government's primary motivation for privatisation should
be to achieve more efficient provision of goods and services, and
not to prop up an ailing budget. This is not to disagree, however,
that opportunity costs exist whenever governments invest in business
Second, irrespective of the type of ownership, allocative and productive
efficiency will improve if markets are subject to competitive market
disciplines, and if there are no complex social objectives that
conflict with profit maximisation and efficiency objectives.
Third, even under government ownership,
public-sector managers are subject to
mixed incentives and political influences
that can conflict with public interest.
Where possible, industry restructure should seek to establish competitive
markets or contestability and to isolate natural monopoly elements.
The Kennett Government used this approach in the Victorian electricity
industry, where contestable sectors such as generators and retailers/distributors
were separated from the monopoly transmission network business.
A similar approach is advocated by some as part of the Telstra privatisation
debate. The electricity market continues to evolve with mergers
and diversification into gas retailing. However, the failure of
some states to create more competitive market structures and more
effective and efficient regulatory frameworks, has, to a degree,
limited the success of the National Electricity Market.
The level of regulatory intervention to achieve non-profit objectives
must be dealt with case by case. If competitive market structures
can be created, Community Service Obligations (CSO's) are simply
defined and funded through budget allocations, and regulation is
light-handed and based on economic efficiency objectives, then the
case for privatisation is good. However, where externalities are
great, and complex regulation and inappropriate price controls can
negate potential economic efficiency gains then public sector management
and accountability arrangements may in some cases be preferred.
For example, prisons and ambulance services have not been successfully
Effective economic regulation can be the key to successful privatisation
where natural monopoly powers exist. But privatisation to create
private monopolies, in the absence of appropriate regulation, does
not achieve efficient economic outcomes or meet public interest.
It is merely an auctioning of monopoly rents or franchises.
Politically, the focus of Telstra privatisation
has been on regional service provision.
However, bush service levels were not
adequate when Telstra was fully government
owned. Today Telstra Countrywide's improvements
are occurring under a regulatory framework
including Universal Service Obligations
and Customer Service Guarantees. Increasingly,
Telstra is subject to innovative competitive
markets, where privatisation is important
to provide access to capital and to increase
management flexibility. Telstra's Customer
Access Network is a natural monopoly that
is not easily divested. Telstra's capacity
to innovate and compete globally would
be impaired, as would opportunities to
develop value-adding intelligence in the
network. A critical component of successful
privatisation will be effective regulation;
ensuring competitors open access to the
While not all privatisation has been successful, there have clearly
been benefits, particularly as a dimension of micro-economic and
national competition policy reforms, which contributed to Australia's
1990s productivity improvement. However, the public has focused
on negative aspects of privatisation, magnified by the elimination
of unprofitable services and the dismantling of domestic cross-subsidies.
The decline of public support for privatisation has made a difficult
task even harder for governments. There is a need for governments
to be more ready to step in with CSO's to meet short-term adjustments
and social objectives.
Where to from here? The pace of privatisation has slowed but private-sector
involvement will continue to grow. Governments must recognise what
services should be provided by the public service and when private
sector involvement is beneficial. They must also improve the effectiveness
of regulatory frameworks and the process of regulation, both to
ensure competition and economic efficiency and to be ready to achieve
non-profit objectives through CSO's. Over-regulation through regulatory
duplication (Commonwealth and States) and regulatory inconsistencies
must be removed.
We may also see more market-based solutions,
such as fuel taxes incorporating environmental
externalities or congestion pricing on
roads. Governments will increasingly utilise
other forms of private involvement such
as public-private partnerships, including
BOOT (Build Own Operate Transfer) arrangements.
In such cases governments must improve
risk allocation, and the matching of risk
and control. As the Victorian Government
has discovered in public transport, residual
risk rests with governments. Less ideology
and more focus on creating competitive
market outcomes and optimising the balance
between ownership and regulation, will
achieve the best public outcomes.