Fast backwards, if you will, to the late 1980s. In Margaret Thatcher’s Britain, investment bankers are gorging themselves on fee income from privatisations. Fledgling Australian versions wonder how they can get in on the act. Who better to help them than the World’s Greatest Finance Minister, Paul Keating: along with such towering international figures in the economics of public finance as Fred Hilmer, Nick Greiner and Graeme Samuel, they figure out how to get the party started.
First off is the need for a bit of public education. Remember the Debt Summit and boiling frogs? (The closest any of the participants would’ve got to boiling frogs was at the table nearest the kitchen in an upmarket French eatery.) Its purpose was to instil fear into the punters that government debt always your worst nightmare, whereas private sector debt doesn’t matter because the taxpayers are never be called on to ensure its repayment. (The latter has recently been confirmed when the US and UK governments declined to bail out GM, AIG, Citi, RBS, Northern Rock and so on, while the collapse of Lehman’s was shown to have no effect on anybody except its shareholders.)
Then came the behind-closed-doors deal with the States to restrict any further borrowings by threatening revenue sharing, compensation payments for loss of State revenues etc. The objective was to force the States to flog off their utilities, invite the private sector in to cherry-pick profitable bits of public services; and force the road network into gridlock unless private toll operators are allowed in.
Natural monopolies? No worries. Handing over taxing powers to the private sector? Not a problem. Remember the full public discussion of all this at the time? How the pros and cons were carefully weighed, guidelines set out and safeguards put in place? No, I don’t either.
So what did we get from the Keating revolution? Who were the winners apart from the investment banks, the accountants and the big lawyers doing due diligence, who in the years since have made multi-billions (yes, billions) of dollars out of it? Quite a few of the sons and daughters of ministers and top public servants got congenial jobs in New York and the City of London. Quite a few politicians found comfortable berths in investment banks after presiding over the garage sale of public assets. Public servants, particularly those with real infrastructure skills gained while in public service, suddenly doubled or tripled their money by becoming “consultants” to investment bankers. And the main political parties did handsomely from donations from the big players. But what about Joe Public?
Let’s see. We got a one-and-a-half airline policy and airfares to match. We got a one provider Pay TV network. We got a Telecoms industry that, 15 years down the track, needs government to upgrade it from 19th century copper wire, despite spending quadrazillions on imported executives’ remuneration and cute TV ads.
Although Keating didn’t privatise Telstra (his successor, John Howard, did), he insisted it be “commercialised” which clearly signaled an intention to sell in the future. Many economists at the time said that a competitive market with private sector entrants would not function satisfactorily unless there was structural separation i.e. the marketing part was hived of from the wires and exchanges that formed the natural monopoly, which should preferably remain in government ownership. So why didn’t separation, which is now effectively being forced on Telstra, happen then? Because the investment bankers kept telling government not to. They could make more money out of the sale, and it would be much easier, if it were sold as one entity.
Elsewhere, we’ve got public transport systems that are losing as much as they ever did and just get more run down, slower and more overcrowded every year. Completely invisible are the complex, fee-churning refinancing structures behind the same tired old assets, ultimately costing taxpayers far more than plain old government debt.
We’ve got a highly concentrated banking sector winning gongs for the highest retail fee-gouging in the world. Huge bad debt charges yet barely a nick in profitability. Isn’t this the private sector with the losses “taken to equity” as Keating used to say? Or aren’t the losses just being recouped from depositors and borrowers through a huge increase in interest rate spread?
Keating now says they ought to be treated like public utilities. Back then he hated the States owning banks. He thought that somehow they would circumvent his grand plan by raising money for their government owners’ projects, although none ever did. He wanted them gone and harangued the Premiers to sell them, knowing that they would eventually be delivered up to the Big Four. Last year, it finally became fact when BankWest (formerly Western Australia’s state bank) was taken over by the Commonwealth and Westpac bought St George (which bought Advance, which bought the remainder of State Bank of South Australia. The Commonwealth had earlier acquired the state banks of Victoria, New South Wales and Tasmania).
You can now be entertained by Keating telling you how brilliant his policy was, except there isn’t any real competition in the housing or small business banking markets. What a surprise!
We’ve got an electricity industry which has had no new baseload capacity installed for decades and, just like the UK with its artificial market designed to give the banks new trading income opportunities (which we copied), has built-in financial incentives to “lose” a transformer here or there on extreme days and is running perilously close to brownouts. Large slabs of the distribution network are crumbling and need replacement.