Privatisation

This paper builds on earlier work: Hodge G.A. ‘Good Governance and the Privatising State: Some International Lessons’, (2002) 6(2) Journal of Social and Economic Policy 56–67, and was presented at the American Society for Public Administration, Phoenix, March, 2002.

See respectively Anonymous, ‘Escaping the Heavy Hand of the State’, The Economist, 13 June 1992, pp.69–70; Savas E.S. , Privatisation: The Key To Better Government, Chatham House Publishers; Ernst J. , ‘Seven Deadly Myths of Public Utility Privatisation’, Public presentation, Melbourne, March, 1993; and Abramovitz M. , The Bottom Line is Society Loses, (1987) 46 New Doctor 22–4.

Some six years later, citizens were to roundly reject a third term for a political leader seen as out of touch with citizens, and who had gone too far on privatisation with little accountability and precious little transparency and concern for democratic processes. Such negative public judgments seemed to also follow those privatisation programs of both the United Kingdom and New Zealand.

Russell E.W. Waterman E. and Seddon N. , ‘Audit Review of Government Contracts: Contracting, Privatisation, Probity and Disclosure in Victoria 1992–1999’, An Independent Report to Government, May 2000, Volume 1, Main Report, 176 pp.

All three fronts have achieved currency recently, with the Worldcom and Enron failures and a renewed interest in the role of government in security and business regulation matters in the US exemplifying this.

Mintzberg H. , ‘Managing Government — Governing Management’, (1996) Harvard Business Review, May-June, pp.75–83.

The identification of contrasting values is also a useful starting point in assessing the privatisation argument here. Business in a marketplace and government are both symbolic of treasured values. Business values look towards a greater reliance on individual choices, and towards smaller government. The implicit assumption is that the financial system will solve our economic and social problems. Individual choices in markets are usually seen as more important than collective choices in political processes. Price mechanisms are preferred to discussing our needs. Secrecy behind contracts is preferred to openness for public scrutiny and debate, and the search is for market satisfaction rather than for a more just and fair society; Pollitt C. , Managerialism and the Public Services, Blackwell Publishers, 2nd edn, 1993.

See Mintzberg H. , above, ref 6; Stretton H. and Orchard L. , Public Goods, Public Enterprise, Public Choice: Theoretical Foundations of the Contemporary Attack on Government, St Martins Press, 1994.

See Hutton W. , The State To Come, Vintage, 1997, p.9.

Prokopenko J. , Privatisation: Lessons from Russia and China, Enterprise and Management Development Working Paper EMD/24, International Labour Organisation, 1998 (also available at <http://www.ilo.org/public/english/employment/ent/paper/emd24.htm>.

De Soto H. , The Mystery of Capitalism: Why Capitalism Triumphs in the West and Fails Everywhere Else, Bantam Press, Great Britain.

Galal A. Jones L. Tandon P. and Vogelsang I. , Welfare Consequences of Selling Enterprises: An Empirical Analysis, Oxford University Press, International Bank for Reconstruction and Development, The World Bank, 1994, 619 pp.

Hodge G. A. , Privatisation: An International Review of Performance, Theoretical Lenses on Public Policy Series, edited by Sabatier Paul A. , Westview Press, Colorado, 2000.

See Abdala M. A. , ‘Distributional Impact Evaluation of Divestiture in a High Inflation Economy: The Case of Entel Argentina’, Unpublished PhD Thesis, Boston University, 1992, p.190.

Saul Ralston J. , The Unconscious Civilisation, Penguin Books, 1997, 205 pp.

Asset sales proceeds were not as poor as those in the UK, but the good prices for electricity assets ($23.2 billion) must be tempered against the give-aways of Tabcorp, HRL and AH Plant. In the case of the Tabcorp alone, a wealth transfer of around $3.2 billion to the private sector was estimated by Walker B. and Walker B.C. , Privatisation Sell Off or Sell Out? The Australian Experience, ABC Books, 2000. I might also comment in passing that the excellent sales revenues from electricity assets were as much due to market sentiment and the expected ‘light touch’ regulation regime being discussed informally as they were due to any explicit government design. Put simply, Victoria was seen by international investors as the first domino likely to fall in the national competition policy driven frenzy to sell off Australia's electricity assets. This sale ‘frenzy’ has simply not eventuated, at least not to the depth or speed initially assumed.

Department of Treasury and Finance, Victoria's Electricity Supply Industry Toward 2000, Report prepared by the Energy Projects Division, June 1997, Melbourne.

See Office of the Regulator General, Electricity Distribution Businesses: Comparative Performance for the Calendar Year 1998, Melbourne, July 1999, p.21. Note that the number of residential customers disconnected for non-payment has apparently fallen by around two-thirds since 1995, with business disconnections being halved over this time. Both of these performance results are impressive, though not without criticism. Romeril, for instance, argues that disconnection figures for the state-owned monopoly as at 1994 are an inappropriate benchmark, these being around 75% higher than those of the state facility two years previously: Romeril B. , ‘Cut Off: The Losers in Utility Privatisation — A Study of Disconnections in the Victorian Electricity Industry’, (1997) 1(5) Consumer Rights Journal, July-August, pp.7–10.

See 'Gravy Train Worth $419 m, Age, 29 May 1999, Business, p.1.

See Hodge G.A. , above, ref 13, p.199. We might surmise a host of reasons for this surprising result. We could postulate firstly that earlier privatisations represented those that were simpler and less sophisticated, paying less attention to strengthened regulation, price controls and competition. This logic has a ring of truth about it. Secondly, we might question the use of particular research techniques such as meta-analysis. Against this, though, the overview research undertaken by Martin and Parker (see ref 21) used a quite different methodology and came to essentially the same conclusion. Thirdly, we might believe that the relationship between private ownership and improved performance does exist, but that, it is more complex than first assumed and likely to take perhaps decades before the data eventually yields sufficiently strong proof. Lastly, we might surmise that there is indeed little inherent difference between the efficiency of the public and private sectors.

See Martin S. and Parker D. , The Impact of Privatisation: Ownership and Corporate Performance in the UK, Series on Industrial Economic Strategies for Europe, Routledge, 1997.

See Hodge G.A. , above, ref 13, p.212.

This research showed that averaged over all available international measurements (most of which related to local government garbage collection, cleaning and maintenance services), a mean cost saving of around 12% was found, but averaged over services (equally weighted), a mean of around 6% was found.

Furthermore, significant flow-ons also seemed to operate in that agencies not contracting services, but in areas adjacent to those doing so, showed cost reductions of around two thirds of those for areas contracting out. It is not necessary to contract all services comprehensively in order to achieve extensive cost savings. A little bit of contracting reform appears to go along way.

See for example Wiltshire K. , Privatization: The British Experience — An Australian Perspective, Committee for Economic Development, Longman Cheshire, 1987, 130 pp; Whitfield D. , The Welfare State — Privatization, Deregulation, Commercialisation of Public Services: Alternative Strategies for the 1990s, Pluto Press, 1992, 545 pp; and Foster C.D. , Privatization, Public Ownership and the Regulation of Natural Monopoly, Blackwell Publishers, Oxford, 1992, 458 pp, p.116.

Whitfield D. , above, ref 25.

Kelsey J. , Rolling Back the State: Privatization of Power in Aotearoa/New Zealand, Bridget Williams Books Limited, 1993, NZ, 391 pp.

We might note similar concerns in the United States with the rise and fall of Enron. Bush's Cabinet is reputed to be the wealthiest in American history, with average personal wealth at around $US10.9 million; Age, ‘Bush Has Wealthiest Cabinet’, Monday, 5 February 2001. Given this, and its close political links with Enron, one could be forgiven for asking whether in the US there has also been, to a degree, a ‘systemic transfer of power over the country's economic, social and political future to individuals and institutions of private capital …’

Bishop M. Kay J. and Mayer C. , Privatization and Economic Performance, Oxford University Press, 1994, 378 pp.

Of course much of this improvement in financial performance accountability is also achievable through corporatisation and regulation processes — without a change in ownership.

Stone B. , ‘Administrative Accountability in the Westminster Democracies: Towards a New Conceptual Framework’, (1995) 8 Governance, October, p.8.

Taggart M. , The Impact of Corporatisation and Privatization on Administrative Law, (1992) 51(3) Australian Journal of Public Administration 368–73.

Kikeri S. Nellis J. and Shirley M. , ‘Privatization: The Lessons of Experience’, The World Bank, Washington, DC, 1992, 86 pp, p.70; World Bank, ‘Bureaucrats in Business: The Economics and Politics of Government Ownership’, World Bank Policy Research Report, Oxford University Press, 1995, cite a myriad of examples of lack of transparency in the initial programs of Mexico, Pakistan, and Guinea. In the United Kingdom, Wiltshire (see above, ref 25) notes that subsequent to the sale of the Rover organisation, the UK Public Accounts Committee revealed that the Thatcher government deliberately undervalued Rover to allow a takeover by British Aerospace, thereby deceiving the European Commission, and the UK taxpayers and voters.

Thomson L. , ‘Reporting Changes in The Electricity Supply Industry’, (1993) 9(2) Financial Accountability and Management 131–5; Heald D. , ‘A Financial Autopsy on the CEGB’, (1989) 17(4) Energy Policy 337–50.

Kelsey J. , above, ref 27.

Strong similarities have also been observed throughout privatisation processes in Victoria, Australia, where the Administrative Appeals Tribunal, the Office of the Auditor General and other independent offices were all attacked and weakened by the privatising government.

Saunders P. and Harris C. , Privatization and Popular Capitalism, Open University Press, 1994, 181 pp.

Likewise, the observations of Moussios A. , ‘Hybrid’ Status, Regulation and Performance: An Empirical Analysis of the Denationalisation of British Telecom', 1994 Unpublished DPA Thesis, University of Georgia, US, 337 pp. He argued that legislation and other mechanisms were needed to ensure that service quality from British Telecom improved. This suggests that privatisation led to a reduction in accountability here as well.

Hayward D. , How Mr Kennett Lost and How the Coalition Let Him Do It, (1999) December Dissent 58–64.

Rhodes R.A.W. , ‘The Hollowing Out of the State: The Changing Nature of the Public Service in Britain’, (1994) 65(2) The Political Quarterly 138–51. Rhodes notes the unpublished and undated paper by Peters entitled ‘Managing the Hollow State’.

Rhodes R. A.W. , Different Roads to Unfamiliar Places: UK Experience in Comparative Perspective, (1998) 57(4) Australian Journal of Public Administration 19–31.

Osborne D. and Gaebler T. , Reinventing Government: How the Entrepreneurial Spirit is Transforming the Public Sector, Addison-Wesley Publishing Co. 1993.

De Carvalho D. , ‘“The Captain is a Schizophrenic!” or Contradictions in the Concept of the Steering State’, (1998) 57(2) Australian Journal of Public Administration 107–14. De Carvalho argues that rowing may, for instance, be undertaken in the style of the huge Roman trireme, as depicted in the movie Ben Hur. This Roman version of rowing saw galley slaves so little trusted that they were chained to their posts, the admiral standing on the deck above the rowers, and with rowing undertaken under the beating (benchmarking) of the monotonous drum. The contrast with rowing under the Vikings was stark. Viking vessels were open decked, with room for feedback between the rowers and the admiral of the ship as well as between the rowers themselves. Being free men rather than slaves, the rowers were also not chained to their posts, thus enhancing cooperation. We might contemplate whether Victoria's steering state was closer to the Roman trireme than the Viking open deck vessel.

Such problems have not necessarily been exclusive to the public sector, with other writers also proclaiming the existence of ‘corporate amnesia’ when personnel discontinuities occur in private companies; Kransdorff A. , Corporate Amnesia: Keeping Know-How in the Company, Butterworth-Heinemann, 1998, 224 pp.

Yates A. , ‘Government as an Informed Buyer: Recognising Technical Expertise as a Crucial Factor in the Success of Engineering Contracts’, The Institution of Engineers, Australia, 2000.

Fox C. , Reinventing Government as Postmodern Symbolic Politics, (1996) 56(3) Public Administration Review 256–62.

Brady N. , ‘Slashing 50,000 PS Jobs Is Biggest Landmark – Kennett’, Age, 10 March 1995.

Russell E. ‘Rebuilding Victoria after Kennett’, (1999) December Dissent 54–7.

See Russell E.W. and others, above, ref 4. This review was conducted after the fall of Kennett's regime, and examined the degree to which six major privatisation project contracts were subject to economic, environmental or a social analysis, or else were referred to a Parliamentary Committee. These project contracts included a Casino, a Major Road, two Public Transport Projects, Prisons and a Grand Prix Event. One of the six contracts was subject to a full economic evaluation. Another of the contracts was subject to both a partial economic evaluation and to a partial environmental effects statement. The other contracts were not subject to any economic or environmental review. Importantly, no contract was subject to a social impact analysis or was referred to a Parliamentary Committee for discussion.

Wealth transfers of around $48.3 billion dollars from a selection of seven Australian privatisations have been suggested, for instance by Walker, B. and Walker, B.C. above, ref 16.