Finance:Privatization in Australia

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Privatization in Australia is the process of transiting a public service or good to the private sector through a variety of mechanisms that was commenced by the Federal Government in the 1990s, receiving bipartisan support.[1] More generally, privatization is a set of economic policies that is part of a broader system of deregulation of government services, underpinned by the ideology of neoliberalism, in order to achieve economic outcomes of growth, efficiency and productivity. Some examples of sectors that have been privatized include finance, telecommunications and infrastructure. Australia's public service has also transformed with the introduction of New Public Management (NPM) in the late twentieth century which altered public administration models to appear more "business-like" through performance evaluations that emphasize efficiency, productivity and service delivery.[2]

Another definition of privatization is reliance on "more on private institutions and less on government, to satisfy people’s needs”.[3] The concept of privatization can be construed in a narrow or broad sense.[3] The narrow scope of privatization is portrayed as the sale of public goods, while the broader understanding of privatization involves the transfer of "ownership, management, finance and control" of public goods to private actors.[3] Historically, the Australian government played an influential role in society as the idea of a strong state was prevalent to the Australian story since Federation.[4] This changed in the twentieth-century, as Australia’s adoption of privatization as a set of government policies, reflected the rise of privatization across the Western world, specifically in the United States and United Kingdom.[5] The Australian experience of privatization involves substituting government ownership, provision and funding to the private sector, in an attempt to liberalize the economy.[6] The effectiveness of such policies is contested, as the motivations of privatization are widely debated.[7][8][9][10]

History

20th century

While economic literature points to the United Kingdom as being the first government to use privatization in the modern era, the Nazi government in Germany undertook a series of privatization policies to consolidate control of power over the economy.[11] While it may appear contradictory that privatization consolidates control over the economy, the Nazis realized that the economic fortunes of privatization would flow to Nazi officials who would subsequently, "exert control over the economy."[11]

Australia's 23rd Prime Minister (1983-1991) Bob Hawke initiated reforms that modernized the economy.

In Australia, the greatest influence on privatization were the policies of the Thatcher government, who “unleashed a wave of privatizations that transformed the economy” and became a model for other Western economies.[12] Unlike the rest of the world, Australia's privatization program was relatively early as it first commenced in the 1990s, under the Hawke Labor Government.[13] The New South Wales state government began the process of privatization earlier than the federal government, in 1989.[14] Australia’s first act of privatization occurred in 1991, when the federal government sold the Commonwealth Bank of Australia, followed by the partial sale of Telstra and Qantas, all of which were significant national icons.[13] The sectors most affected by privatization in the 1990s, were finance, electricity and transport, estimating profits of up to $61 billion from both federal and state privatization policies.[13] Consequently, Australia became second ranked in the world for privatization profits, employing one of the most comprehensive programs, the effects of which are continuing to impact the economy.[13]

Hawke-Keating Government (1983–1996)

The Hawke-Keating Labor Government's were instrumental in implementing deregulation policies that resulted in modernizing Australia's economy.[15] Emerging industries replaced traditional ones that suddenly became non-competitive, as productivity in the finance, education and legal sector increased, as real wages grew concurrently.[15] The decision to transition the Australian Dollar to a floating exchange rate in 1983 increased stability and confidence in the economy, as part of the deregulation program, that laid the foundations for a modern economy.[16] While privatization is supported by neoliberal ideology that stipulates less government intervention in the economy, Australia's history of privatization was initiated under a Labor government, which appears to defy Labor Party policy objectives. However, during the Hawke-Keating years, there were attempts to remove the ideological underpinnings of the debate on privatization, as the approach taken by the government was "more about a pragmatic choice" to modernize and open the economy to international markets.[17][15] Prime Minister Hawke said, "The difference between us will be one of ideology. That will distinguish us from the opposition (Liberals)."[17] Hawke was rebuking the charge that Labor had abandoned its commitments to public ownership and enterprise, while highlighting the need for economic rationalism in order to address pressing economic problems. The consensus-style leadership of Bob Hawke enabled structural economic reforms, through the Accord struck in 1983 between Labor and the Australian Council of Trade Unions (ACTU).[18] This accord brought together various stakeholders from unions, welfare organisations and the business community, to secure a mandate for market-oriented economic reforms, while remaining committed to social progress.[18]

Howard Government (1996–2007)

Privatization was implemented by successive governments, including the Howard Government in 1996 to 2007, which saw record rates of continuous economic growth, a testament which economists attribute to the economic reforms of the Hawke-Keating Government.[19] Economists indicate the continuous rates of economic growth were not the result of Howard's policies of privatization, but rather, to one of the world's biggest booms in the mining sector, where investments rose from 2 to 8 percent of GDP.[20] The difference between privatization under Hawke-Keating and Howard governments, is argued to be one of ideology, however this does not suggest the Labor Party was not divided on this issue and continues to be.[2][17] Privatization remained part of government policy through the twenty-first century, as it represented a form of economic rationalism.[21]

Types of Privatization

The following methods of privatization are common for governments to employ:

1.    Divestiture: The sale of public services to private industry.[3] This is one of the simplest methods of privatization, where all aspects of a government asset are sold off to private buyers.[22]

2.    Withdrawal: The Government no longer supplies a service and enables private providers to enter.[3] Therefore, it withdraws from the public sphere and enables the market to fill the void.[23]

3.    Outsourcing: Governments, through a contractual agreement, confers non-core functions of a service to “private service providers to deliver services to the public.”[24] File:ABC Dollar Float.ogv

4.    Divestment: Leasing or selling public assets to the private sector, however the government has some control over the regulatory mechanisms of the private asset .[25]

5.    Public-Private-Partnership (PPP): Private financing of infrastructure, through an agreement with private corporations.[26] An example of this is Sydney's WestConnex project,[27] where the government offsets the risk of construction to Transurban, a private company, which also removes the burden of government accumulating debt.[28][27]

Government Approaches

Governments have differing approaches to privatization policies, such as pragmatic, tactical and systemic privatization.

Pragmatic privatization is highly technical and engages in solving problems.[3] This approach is privatization is conditional upon the fact that public interests are preserved, therefore it is bereft of ideology.[29] Former Treasurer Wayne Swan believes that Labor's economic reforms were pragmatic and rational, in contrast to Thatcherism.[30] He coined the term, "Australian Laborism" to describe liberal economic policies that also assist working families and are pro-union.[30][31]

Tactical privatization seeks to gain short-term political benefits for parties or political actors.[3] By serving political goals, this approach to privatization is appealing to supporters, especially during specific political or global events.[32] Some economists categorize Labor's privatization scheme in the 1990s as tactical, because it aimed to achieve macroeconomic aims to ensure the competitiveness of Australia's economy, against the backdrop of an increasingly globalized economy.[2]

The systemic approach to privatization is derived from ideological predispositions that seek to restructure society by minimizing government influence.[32] The ultimate objective of this approach is to “encourage greater reliance on the market than the state”.[3] This approach was undertaken during Howard's leadership, as privatization was underpinned by ideology, to ensure smaller government interference in the economy and to embolden private market actors over the public sector.[2] Howard's systemic approach to privatization is encapsulated in the following quote: "[T]he coalition...has...embraced a full-blooded policy of privatization."[2] This relates to Thatcher's concept of privatization, which incorporates an ideological aspect of shrinking government interference in society, according to the classical liberal theory.[33]

Cases

Commonwealth Bank of Australia (1991–1996)

The Commonwealth Bank of Australia (CBA), often referred to as the People's Bank, was privatized in three stages, commencing from 1991 to 1996, by Treasurer Paul Keating, representing one of the earliest privatization projects in Australia.[34] It was initiated due to the burden of government investment to ensure the viability of the Bank, which was "a net cost to the taxpayer".[35] The profits accumulated the from the sale of Commonwealth Bank equated over $7 billion by 1996.[36] In recent years, the CBA has become one of the most profitable banks in Australia, with strong financial performance and a 10% growth in dividends annually.[37] This policy was considered sensible by economists at the time, due to the competitive environment which CBA was operating in, rendering it inefficient.[38]

Qantas (1992)

The partial sale of Qantas, formerly known as ‘Australian Airlines’ is an example of privatization of one of Australia’s iconic brands, which was initiated in 1992. The government legislated to ensure Qantas was prohibited more than 50 percent foreign ownership.[39] A quarter of the shares were sold to British airways, while the remaining were available to the public, which floated in 1995.[40] The executive board of Qantas view this as a success, citing increasing staff numbers, flights and revenue growth since privatization.[41] However, critics claim that privatization of Qantas has failed, due to its weak financial position, with a loss of over $2 billion in 2014.[42]

Telstra (1997)

The telecommunications industry underwent the process of deregulation in Australia in 1997 by the Howard Government. When Telecom and Telecommunications Corporation amalgamated in 1992, Telstra was formed.[43] Approximately, 33 percent of Telstra shares were sold, indicating a partial privatization. Consequently, Telstra gained a monopoly over pay TV infrastructure and did not improve its network unless it received government funding.[44] Telstra's monopoly over telecommunications infrastructure in Australia was a direct result of privatization, limiting market competition and efficiency, which contradict the objectives of privatization.[45]

Sale of NSW Electricity (2015)

A more recent example of privatization was the sale of NSW electricity by the state Government in 2015, which accumulated over $16 billion in revenue.[46] Half of NSW electricity was sold, while the remaining was leased for 99 years.[47] Despite its unpopularity with the electorate, as 67% of NSW voters opposed it, the Baird Government was elected on a mandate to proceed with the sale.[47] Economists have signaled caution about privatizing electricity networks, due to the risk of creating a monopoly, which runs contrary to the policy aims of privatization.[48] While concerns have been raised about rising electricity prices and the loss of jobs in the electricity sector, the state government promised cheaper prices and the need to use the revenue generated from privatization, for infrastructure projects across the state.[49][50]

Impact

Privatization has remains somewhat unpopular with the Australian electorate,[10] which explains why the debate can be marred by ideologically-driven charges. Australia's experience of privatization differs from the United States and United Kingdom, as early economic objectives were pursued in conjunction with social objectives.[30] The Australian government has benefited from $100 billion from privatization since the 1990s, with mixed results of successes and failures.[38]

The Australian approach to privatization is nuanced, yielding some economic benefits, such as the sale of Telstra which accounts for $1 billion in government revenue,[13] enabling the government to use those funds to combat climate issues and also repay deficits.[13] Despite this positive effect of privatization, Telstra's monopoly over telecommunications infrastructure in Australia as a consequence of privatization, limited market competition, which reduced investment in the sector.[45] [48] Lack of investment stalled innovation which lead to reduced quality in services, even though customers were being overcharged.[51] Once alternative telecommunication infrastructures entered the market, Telstra's monopoly diminished, which lowered prices for customers.[51] This highlights the complexity of privatization, which has varying levels of benefits and costs to society.

The privatization of Commonwealth Bank of Australia was soundly justified at time as it operated in the private market, with competition from private banks who offered cheaper products to consumers.[38] Australian economist, John Quiggin, reveals that despite the sensible rationale in privatizing the Commonwealth Bank, it represents a net loss to the taxpayer.[38] Profits in the company have grown which explains the CBA Chief Executive Officer's highest salary package of $16.2 million in 2010.[52] Financial deregulation has improved some aspects of CBA's operations as it is projected to become Australia's leading digital bank,[53] while raising fees, reducing services, and in recent years, unethical conduct in the sector, were revealed by the Banking Royal Commission.[36]

A report from the People’s Inquiry in 2017, reveals the overall experience of Australian privatization has been largely negative, citing job losses, reduced services and rising prices in various sectors across aged care, prison systems, railway and social service.[54]

Positive

-      Economic efficiency: performance figures measured by financial returns. However, efficiency also measures the objectives of the firm, relative to its performance, which may not provide an accurate report.[55]

-      Competition: Removing government influence relates to less regulation, which is claimed to improve competition.[55]

-      Reduced political interference: The removal of government influence ensures that assets or services are run privately by firms that seek efficiency, with little political interference which produces more productive and efficient outcomes.

Negative

-      Rising inequality: Withdrawal of government influence enlarges the gap of inequality, due to the need to serve public interests.[54]

-      Job losses: contractors and outsourced functions of the service renders existing full-time employees redundant.

-      Increased prices: The cost for services that have been privatized or assets managed by private corporations can raise costs. Since privatization of Australia’s electricity, prices have risen by 183 percent.[56]

See also

References

  1. ↑ "The Pros and Cons of Privatization". https://www.investopedia.com/terms/p/privatization.asp. 
  2. ↑ 2.0 2.1 2.2 2.3 2.4 Aulich, Chris; O'Flynn, Janine (21 June 2007). "John Howard: The Great Privatiser?". Australian Journal of Political Science 42 (2): 365–381. doi:10.1080/10361140701320075. 
  3. ↑ 3.0 3.1 3.2 3.3 3.4 3.5 3.6 3.7 Aulich, Chris; O'Flynn, Janine (2007). "From Public to Private: The Australian Experience of Privatisation". Asia Pacific Journal of Public Administration 29 (2): 153–171. doi:10.1080/23276665.2007.10779332. 
  4. ↑ Aulich, Chris; O'Flynn, Janine (2007). "From Public to Private: The Australian Experience of Privatisation.". Asia Pacific Journal of Public Administration 29 (2): 153–171. doi:10.1080/23276665.2007.10779332. 
  5. ↑ Aulich, Chris; O'Flynn, Janine. "From Public to Private: The Australian Experience of Privatisation". Asia Pacific Journal of Public Administration: 153–171. 
  6. ↑ Aulich, Chris; O'Flynn, Janine. "From Public to Private: The Australian Experience of Privatisation". Asia Pacific Journal of Public Administration 29: 152–171. 
  7. ↑ Phillips, Scott (2017). "The good, the bad and the ugly of privatisation". Sydney Morning Herald. https://www.smh.com.au/business/markets/to-privatise-or-not-to-privatise-20170912-gyfho7.html. 
  8. ↑ Lewis, Peter; Woods, Jackie (2015). "Hate privatisation? There's nothing new about that". ABC News. https://www.abc.net.au/news/2015-02-11/lewis-and-woods-voters-still-sceptical-of-privatisation/6083982. 
  9. ↑ "The Privatisation Betrayal: Losing the things we value". Australian Services Union: 1–45. 2015. 
  10. ↑ 10.0 10.1 Davidson, Sinclair (2014). "Why is Privatisation so controversial?". Centre for Independent Studies: 1–5. https://www.cis.org.au/app/uploads/2015/04/images/stories/policy-magazine/2014-autumn/30-1-14-davidson-sinclair.pdf. 
  11. ↑ 11.0 11.1 Bel, Germa (2006). "Retrospectives: The Coining of "Privatization" and Germany's National Socialist Party". Journal of Economic Perspectives 20 (3): 187–194. doi:10.1257/jep.20.3.187. 
  12. ↑ Verrender, Ian (2017). "How the free market failed Australia and priced us out of our own gas supply". ABC NE=ews. https://www.abc.net.au/news/2017-03-20/ian-verrender-how-the-free-market-failed-australia/8368032. 
  13. ↑ 13.0 13.1 13.2 13.3 13.4 13.5 "Privatization in Australia". 1997. https://www.rba.gov.au/publications/bulletin/1997/dec/pdf/bu-1297-2.pdf. 
  14. ↑ "Privatisation in NSW: a timeline and key sources". 2017. https://www.parliament.nsw.gov.au/researchpapers/Documents/Privatisation%20in%20NSW%20-%20a%20timeline%20and%20key%20sources.pdf. 
  15. ↑ 15.0 15.1 15.2 Verrender, Ian (May 17, 2019). "Bob Hawke modernised Labor, the unions, the economy and the nation". ABC News. https://www.abc.net.au/news/2019-05-17/bob-hawke-economic-reform-analysis/11123976. 
  16. ↑ "Australian dollar floated". https://www.nma.gov.au/defining-moments/resources/australian-dollar-floated. 
  17. ↑ 17.0 17.1 17.2 Sherlock, Shawn (1999). "The Privatisation Debate and Labor Tradition". University of Newcastle: 164–169. https://ro.uow.edu.au/cgi/viewcontent.cgi?referer=https://www.google.com/&httpsredir=1&article=1034&context=labour1999. 
  18. ↑ 18.0 18.1 Drum, Patricia (2018-02-20). "'We lost the storytellers': Accord-era politics is gone, but not forgotten". https://www.abc.net.au/news/2018-02-20/hawke-whitlam-unions-historic-accord-revisited/9462332. 
  19. ↑ Hull, Crispin (2017-03-17). "Australia still plagued by destructive policies of John Howard, our worst prime minister". https://www.smh.com.au/opinion/australia-still-plagued-by-destructive-policies-of-john-howard-our-worst-prime-minister-20170317-gv08hi.html. 
  20. ↑ Phillips, Keri (2016-04-13). "The mining boom that changed Australia". https://www.abc.net.au/radionational/programs/rearvision/the-mining-boom-that-changed-australia/7319586. 
  21. ↑ Stokes, Geoffrey (2014). "The rise and fall of economic rationalism". Studies in Australian Political Rhetoric: 195–220. 
  22. ↑ "Full Divestiture / Privatization | Public private partnership". https://ppp.worldbank.org/public-private-partnership/agreements/full-divestiture-privatization. 
  23. ↑ "Deregulation & Privatisation". https://www.ldp.org.au/deregulation_privatisation. 
  24. ↑ "Government". http://www.outsourcing-law.com/services-outsourced/customer-care/government/. 
  25. ↑ Berg, Andrew; Berg, Elliot (1997). "Methods of Privatization". Journal of International Affairs 50 (2): 357–390. 
  26. ↑ "Infrastructure and Transport PPPs and Privatisation in Australia". 2017. https://www.bitre.gov.au/publications/2017/files/is_093.pdf. 
  27. ↑ 27.0 27.1 Standen, Christopher. "Privatising WestConnex is the biggest waste of public funds for corporate gain in Australian history". http://theconversation.com/privatising-westconnex-is-the-biggest-waste-of-public-funds-for-corporate-gain-in-australian-history-102790. 
  28. ↑ "Privatization". https://www.econlib.org/library/Enc/Privatization.html. 
  29. ↑ Van Damme, Eric (2004). "Pragmatic Privatisation: The Netherlands 1982-2002". Tilburg University: 1–56. 
  30. ↑ 30.0 30.1 30.2 Swan, Wayne (2017-05-13). "The Hawke-Keating agenda was Laborism, not neoliberalism, and is still a guiding light | Wayne Swan". The Guardian. ISSN 0261-3077. https://www.theguardian.com/commentisfree/2017/may/14/the-hawke-keating-agenda-was-laborism-not-neoliberalism-and-is-still-a-guiding-light. 
  31. ↑ Beilharz, Peter (1989). "Australian Laborism, Social Democracy, and Social Justice". Social Justice 16: 15–29. 
  32. ↑ 32.0 32.1 Feigenbaum, Harvey; Henig, Jeffrey (1994). "The Political Underpinnings of Privatization: A typology". World Politics 46 (2): 185–208. doi:10.2307/2950672. 
  33. ↑ Robertson, Derek (2018). "Why the 'classical liberal' is making a comeback". https://www.politico.eu/article/classical-liberal-making-a-comeback-right-wing/. 
  34. ↑ Otchere, Isaac; Chan, Janus (2003). "Intra-industry effects of bank privatization: A clinical analysis of the privatization of the Commonwealth Bank of Australia". Journal of Banking & Finance 27 (5): 949–975. doi:10.1016/S0378-4266(02)00242-X. 
  35. ↑ Hughson, John (29 May 1992). "The trade union response to the partial privatisation of the Commonwealth Bank". Journal of Australian Political Economy: 63–82. 
  36. ↑ 36.0 36.1 Quiggin, John (2001). "The People's Bank: the privatisation of the Commonwealth Bank and the case for a new publicly-owned bank". Australian National University: 6. 
  37. ↑ Yeates, Clancy (2016-09-13). "CBA shareholders in the money 25 years after float". https://www.smh.com.au/business/banking-and-finance/cba-shareholders-in-the-money-25-years-after-float-20160912-gre7i9.html. 
  38. ↑ 38.0 38.1 38.2 38.3 Mead, Margaret; Withers, Glenn (2002). "Privatisation: A review of the Australian Experience". Committee for Economic Development of Australia: 2–76. 
  39. ↑ "Timeline: The history of Qantas". 2014. https://www.sbs.com.au/news/timeline-the-history-of-qantas. 
  40. ↑ "Where it all began: The history of Qantas". 2011. https://www.news.com.au/travel/australian-holidays/where-it-all-began-the-history-of-qantas/news-story/44d3787ee59a6d32d92446ab269883f2#.yx4lo. 
  41. ↑ "About Qantas | News Room | Media Releases | Qantas - 10 Years Since Privatisation". https://www.qantas.com/travel/airlines/media-releases/jul-2005/3303/global/en. 
  42. ↑ Verrender, Ian (2014-09-01). "Is Qantas too big to fail?". https://www.abc.net.au/news/2014-09-01/verrender-is-qantas-too-big-to-fail/5709128. 
  43. ↑ "Our Company". https://www.telstra.com.au/aboutus/our-company/past. 
  44. ↑ Mclaren, Gary (2016-02-18). "Will Australia learn from its chequered history of privatisation?". https://www.theaustralian.com.au/business/business-spectator/news-story/will-australia-learn-from-its-chequered-history-of-privatisation/b0d79f91aa76de5cee9f4bd5ab796597. 
  45. ↑ 45.0 45.1 "Telstra privatisation". https://www.uow.edu.au/~sharonb/telstra.html. 
  46. ↑ Brook, Benedict (2016-10-20). "The Chinese weren't allowed to buy them. Now the NSW Government has found a new bidder for the state's electricity network". https://www.news.com.au/finance/business/other-industries/nsw-government-to-sell-ausgrid-for-16bn-to-australian-consortium/news-story/241c15edc1442b9270f0bd324dcf294e. 
  47. ↑ 47.0 47.1 Hasham, Sean Nicholls and Nicole (2015-02-09). "Support falling for Mike Baird's electricity privatisation plan despite $20 billion infrastructure promise". https://www.smh.com.au/national/nsw/support-falling-for-mike-bairds-electricity-privatisation-plan-despite-20-billion-infrastructure-promise-20150209-139iqh.html. 
  48. ↑ 48.0 48.1 Quiggin, John (6 March 2017). "The case for renationalising Australia's electricity grid". http://theconversation.com/the-case-for-renationalising-australias-electricity-grid-73951. 
  49. ↑ "Power sell splash - Stop the Sell Off". http://stoptheselloff.org.au/. 
  50. ↑ Chester, Lynne. "Myths, not facts, muddy the electricity privatisation debate". http://theconversation.com/myths-not-facts-muddy-the-electricity-privatisation-debate-38524. 
  51. ↑ 51.0 51.1 Ormonde, Tom (2010-12-23). "Telstra sell-off was a mess. Let's hope we've learnt for the NBN". https://www.smh.com.au/politics/federal/telstra-selloff-was-a-mess-lets-hope-weve-learnt-for-the-nbn-20101223-196hx.html. 
  52. ↑ Main, Andrew (2010-09-17). "Norris sees pay packet soar to $16.2m". https://www.theaustralian.com.au/archive/business-old/cba-chief-executive-ralph-norris-sees-pay-packet-soar-to-162m/news-story/ac5f57241f0238eb0e3284000432f4ed. 
  53. ↑ "Commonwealth Bank interim profit shows the power of its franchise". 2019-02-06. https://www.afr.com/chanticleer/commbank-interim-profit-shows-the-power-of-its-franchise-20190206-h1aww1. 
  54. ↑ 54.0 54.1 Hetherington, David (1998). Taking Back Control: A community response to privatisation. Australia: Australian Unions. pp. 109. 
  55. ↑ 55.0 55.1 Kingford, Stephen; Pitchford, Rohan (1998). "Privatisation in Australia: Understanding the Incentives in Public and Private Firms". The Australian Economic Review 31 (4): 313–328. doi:10.1111/1467-8462.00076. 
  56. ↑ Van Onselen, Leith (2017). "How privatisation pushed-up Australia's electricity costs". https://www.macrobusiness.com.au/2017/07/privatisation-pushed-australias-electricity-costs/. 

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