There’s been a bit of a discussion recently about privatisation and if it’s been a good or a bad thing.

Personally, I think it’s a bit of a curate’s egg – good in parts.

Being party to the process of privatisation allows for a point of view perhaps worth exploring.

Having been at the pointy end of some of these privatisations, my conclusion is that their success depends on a) the criteria you use to measure success and b) what the rationale for the privatisation was.

Let me start by going back a ways. One of the things that you notice working in a place like Treasury and Finance is the undeniable tension between being a policy department and the government’s financial manager. Not only does the department have a suite of policy areas specifically under its remit, but it also has an overarching policy responsibility that extends to a whole-of-government view. But more than that, it is the government’s chief financial advisor. A large part of the department’s work is on budgets, making sure that money in and money out are organised and deliver value – both in the spending and in the collection. Sometimes the policy and financial requirements do not align. But what to do when the Treasurer wants to have a particular budget outcome and revenues are going to fall short? If someone suggests a revenue raising option that might jeopardise a future policy reform option which way to jump? I only faced this quandary once, but I’m sure Treasury Secretaries face it often. In the case I recall, our secretary went for the revenue, despite pleas from yours truly and a possie of converts – some very senior – but happily (for me) he was rolled in an interdepartmental committee!

But this highlights an ongoing issue for Treasury – it is a balancing act of good policy and making the books work. And, most importantly, as I have alluded to before, making the politics work. It was this last factor that I suspect got my Secretary to plug for the budget measure over the policy measure.

Privatisations are one area where these tensions are often front and centre.

It’s not a matter of all public enterprises being poorly managed and all private enterprises being good. Often, the government has invested in an enterprise for good reasons and often privatising these comes with a lot of issues – for example, they might be what economists like to call natural monopolies – ie where it is cheaper to have one supplier than multiple suppliers. A natural monopoly has the ability to charge higher prices and/or provide a smaller output than a supplier in a competitive market. If the enterprise is government owned, then the conventional wisdom is the government can control the prices and make them lower than they would have been if the enterprise was in private hands. Regulating a private natural monopoly is fraught, not least because the regulator will never have all the information and will necessarily make a ‘wrong’ price call. The trick is to not make it too wrong. But the other trick is to make sure the regulator has as much access to information as possible, and is not overly hamstrung in doing its job of regulating.

Where am I going with all this?

If government privatises an enterprise because it believes it has no value to add in owning the enterprise, that the need for finances and innovative leadership is beyond the scope of the current structure, or any number of other reasons like this, then it should be open to discussions about how best to manage the transition to ensure that consumers benefit from the privatisation. This will require that appropriate regulation and regulatory models be in place. Importantly, buyers need to understand the restrictions on what they will be able to do and policy makers and regulators need to be aware and forearmed to deal with the ways a regulated entity might seek to circumvent the regulation. The regulation may not be prefect – I can guarantee it won’t be – but so long as in the privatisation process there is enough understanding of the industry and the entity, and a workable outcome should be achievable. I’d point to a small but I believe successful deal done with the Port of Portland in western Victoria.

However, while many privatisations start with an ideal of improving the market and the outcomes for consumers, the promise of high purchase prices sways governments if certain things happen. Others are aimed squarely at getting some revenue – usually as much as possible. The only way I can reconcile the mess that was the privatisation of the Victorian rail freight network was that at the very last moment, the financial advisors whispered to a cash strapped government, that they could secure a much higher price if they went for an integrated service provider – ie providing rails and rolling stock – with a very light handed arbitrate negotiate access regime as the regulatory response. How often did I have to look crest fallen in intergovernmental meetings with that outcome handed to me to defend? An integrated provider with a weak regulatory regime will do what you would expect – gouge the system.

Likewise, it would seem that the lure of high purchase/lease prices encouraged some very questionable inclusions in some transactions – for example, the hampering of the Port of Newcastle to compete in providing a container service, the weak price regulation and some restrictions on a new port in the Port of Melbourne lease, and let’s not forget the Sydney Airport lease which gave the new airport operator first right of refusal to develop a second Sydney Basin airport. You don’t need to be a genius to work out what these little sweeteners did to the purchase price and the subsequent ability of the buyers to make a decent return on the inflated price. And of course, who pays for this inflated return? Consumers do of course.

These privatisations will almost certainly result in consumers being worse off, and quite possibly a poorer economy as prices rise to meet the required rate of return to justify the high price paid for the enterprise and so on. A short cash sugar hit and then it all goes pear-shaped, but by that time the government has moved on and regulators and others are left to try to salvage something from the single-minded pursuit of high prices.

Part of this must also be attributed to the mixed requirements of bureaucrats where the charge of raising the revenue comes hard up against a policy oversight role for the long term interests of the community. Those charged with the privatisation process know that their aim is to maximise the sale price. Others in the same department, or indeed in related departments, may try hard to lobby for a regulatory regime, for example, which will result in a lower purchase price because the prices the new owner will be able to charge (and hence their return on the investment) will be moderated by the regulation. Into this stride the financial advisers, employed by the government to bring a good dose of commercial expertise to the process. But while I don’t know, I’d take a bet that their remuneration is not a flat fee, but is tied to a percentage of the sale price. What does this do to their advice? Well arguably it skews it because the financial advisors have an incentive to push for as many concessions as possible to get the highest purchase price. They aren’t responsible for the longer-term ramifications.

So to me, it’s no surprise that lots of privatisations can be judged a failure – especially from a consumer perspective, but also from an economy wide perspective when restrictions on competition and regulatory failure are factored in.

But let’s not get too carried away either by the view to the rear through our rose tinted glasses. Often letting the status quo continue would have lead to other not desirable outcomes. Allowing a group of talented and well meaning (maybe) engineers run a company with no strong strategic or economic oversight (at an entity like the SECV) may well have lead to a different outcome, but I am not convinced it would have been better. The discipline of the market can be a powerful tool for innovation, understanding and progress. And if I am to believe Thom Hogg, the SECV had grown somewhat too big for it’s boots and imposed the odd tariff increase – of major proportions, without so much as a note to the government about its intentions.

So the answer to the question – are privatisations good or bad? – is, like lots of other interesting and worthwhile questions, it depends. We shouldn’t expect simple answers to complex scenarios, but what we should expect is a frank and honest discussion, unfettered by rosy views of the past or in thrall of the ‘miracle of the market’. And yes, of course be aware of the incentives of the players in the process.