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Releasing industry from government ownership

By Alan Moran - posted Friday, 12 August 2005


Aside from his role as NSW Finance Minister, one of Michael Costa’s new jobs is, alongside new Premier Morris Iemma, as the shareholder minister to the state’s eight corporatised electricity businesses.

This role is one fraught with peril. As one former shareholder minister, South Australian Minister Rob Lucas related, being shareholder representative of several competing businesses presents severe conflicts of interest. Rob Lucas found that he would hear confidential plans from one government business in which he held a stewardship and other plans from another rival business only one of which could profitably proceed.

Former NSW treasurer Michael Egan, with lukewarm support from former premier Bob Carr, had a solution: privatise the industry. Egan’s eyes lit up when he saw the $22 billion booty that Victorian Treasurer Stockdale amassed from the Victorian electricity industry privatisation. Mr Carr however had no stomach to face the various tribal interests that comprise the NSW Labor Party. These included those on the left who are ideologically opposed to private ownership. Many on the right were also opposed since they represented union interests keen to maintain a closed shop and, if possible, bloated workforces.

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This week marks the tenth anniversary of the sale of Victorian electricity retailer-distributor United Energy. This was the first of a dozen businesses sold and it realised $1.553 billion. At the time, many especially within the Labor Opposition, were talking down the sale process and made vague statements that it would be reversed. Some speculated that, as a result, the sale might bring as little as $800 million.

All of the businesses sold by the Kennett Government have since experienced major ownership changes. In some cases, notably the electricity generation businesses, the buyers proved to have been over-enthusiastic in the prices they paid. The level of inefficiency in Victoria was such that better management by private profit-oriented owners effectively added 20 per cent to the available capacity. This drove down wholesale electricity prices, stripping the industry’s profitability.

Partly as a result of this, many of the original owners lost money on their outlays. The original buyers of the massive Loy Yang generation business (now controlled by an AGL-led consortium) copped a $1 billion loss on their $4.7 billion original outlay. This was in spite of it cutting costs by slashing its workforce.

The Victorian and later the South Australian electricity privatisations were the incubator of a new breed of Australian or Australian-based energy businesses. AGL grafted electricity onto existing assets; others like Alinta and Origin have been created from standing starts; other overseas-owned businesses like Powercor, International Power, Truenergy and Singapore Power have added strong Australian arms. None of this occurred painlessly. Every one of the original businesses has been re-sold, re-structured and re-parcelled. Private owners of generators and retailers strove to wring value out of assets in their new highly competitive environments. The network businesses added functions and divested others to maintain profits in the face of price regulation by independent regulators.

By most measures the privatised Victorian industry has outperformed the state-owned industries in NSW and Queensland. But the wonder is that these government-owned businesses have done as well as they have. Notwithstanding their often politically appointed boards and constrained ability to deal with their workforces, the corporatised businesses have been able to operate not far below the level of efficiency of their privatised rivals. Part of this is bred from the necessity of having to show similar performance levels in markets where they face competition.

But as time goes by the difficulties of government ownership mounts. The Erarings, MacGens and Energy Australias are always going to be subject to controls. Sometimes the government shareholder will restrain investment, as is said to be the case in NSW. Sometimes the government will encourage unprofitable investment, as is said to be the case with the Queensland-owned generation businesses.

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The new brooms in NSW, Premier Iemma and his co-shareholder Michael Costa, have a rare opportunity to recognise electricity as the competitive business it is and to move into the 21st century. This will also offer a welcome opportunity to cut taxes.

Releasing the industry from its government ownership shackles could also herald new development in the Hunter Region. As well as the state’s energy heartland, the Hunter is also one of Mr Costa’s other ministerial responsibilities. This would give the new minister ample opportunity to display his famed combat skills by confronting the power unions head on to promote state prosperity and energy security.

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First published in the Newcastle Herald on August 12, 2005.



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Alan Moran is the principle of Regulatory Economics.

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