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Privatising the Sunshine State

By Des Moore - posted Friday, 26 May 2006


On February 10, something almost unprecedented happened in Canberra. At the Council of Australian Governments all the state Labor premiers (and their territory colleagues) agreed with the Liberal prime minister on a national economic reform agenda designed to improve health and education outcomes, increase competition in the energy, transport and ports markets, and reduce the regulatory burden on businesses.

So, with reform supposedly in the air at all levels of government, and the emphasis on increasing competition, what are the implications for state governments - and particularly the Queensland Government, which is the subject of a report I have prepared on the role of government in that state.

Maximising the private sector’s role in providing services that have traditionally been regarded as the responsibility of governments is in the Queensland Government’s own interests - even if it means a smaller government sector.

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Providing services through a competitive framework will benefit the consumers - that is, most Queenslanders. Whether assessed in terms of economic prosperity or social well-being, such a framework provides a more efficient and higher quality way of delivering essential services wherever that is practicable.

And because an increased private sector role offers potential for lower taxes and better services, it is difficult to see that any government implementing a pro-private sector role would fail electorally.

A deliberative policy of increasing the competitive environment for service provision can be implemented in two ways: first, by acting directly to improve the performance of services retained within government and second, by taking steps to encourage a major increase in the proportion of such services provided by enterprises outside the government sector.

The direct approach can be implemented by giving effect to the 1996 Queensland Commission of Audit purchaser-provider recommendation that the government:

... strongly separate its role as a demanding purchaser of services … from the role of service provider; that it fund providers only against service outputs or results; and that it ensure that providers face competitive pressures to improve performance continuously.

In short, while the government would retain full responsibility for funding, the actual delivery of major services by the state would be opened to competition from the private sector.

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Queensland could implement the purchaser-provider approach over a period, proceeding initially on a step-by-step basis. For example, hospitals policy could start by giving public hospitals greater autonomy and the right (and financial incentive) to contract out discrete services such as pathology and certain types of surgery.

Victoria has already built a major new public hospital under a purchase-provider arrangement, and the government is reportedly moving to implement a similar arrangement to redevelop another major public hospital.

The New South Wales Government also has had a private sector firm finance, design and construct nine schools. According to a NSW Treasury analysis, these schools were built for much less, and two years earlier, than would have been possible under a traditional public sector contract. The contractor has also effectively taken over the administration of the schools for 30 years.

Schools policy would also benefit from giving principals greater autonomy over staffing decisions, increasing their capacity to manage the workforce effectively and reduce restrictive union practices.

The second, or what might be called the indirect, approach would be to further encourage the development of private sector services that compete with government services, or that take over the public sector role where that appears likely to improve efficiency and quality.

In Queensland, the government has been giving limited encouragement to the development of competing private sector services. However, the driving force behind the considerable expansion of such services since 1997-98 - with associated savings to the Queensland budget - has clearly been the community’s increasing acceptance that the private sector is offering higher quality services and the wider choice that modern society wants.

For example, the proportion of students attending fee-charging non-government schools has increased from 28 per cent to over 30 per cent since 1997-98, and the almost 200,000 students attending these schools in 2005 effectively saved the Queensland Government - and hence the taxpayer - over $1 billion net in that year.

The increasing proportion of patients being treated at fee-charging private hospitals has been little short of dramatic, from 36 per cent to 47 per cent in 2003-04. This is the highest for any state, and effectively saved the Queensland Government nearly $1.9 billion net a year.

Another reason for developing a competitive framework is Queensland’s seriously deteriorating budgetary outlook. The harsh reality is that the government’s capacity to finance expenditure will be much reduced compared with recent years.

But the most serious problem facing the Queensland Government in the period immediately ahead relates to its capacity to finance recurrent expenditures.

Projections to 2008-09 suggest total revenue will increase nominally by only 4 per cent annually - much slower than the projected 7 per cent annual increase in GST and importantly, much slower than the 7 per cent annual revenue growth between1997-98 and 2005-06.

In other words, the government faces the prospect of having to reduce the annual growth in recurrent spending on its services by 3 per cent, mainly because of the much slower projected growth in GST revenue. This is now projected to increase at only about 4 per cent a year rather than the 10.3 per cent a year from 2000-01 to 2005-06, reflecting an expected slower growth in national consumption expenditure and reduction in Queensland’s share of GST revenues.

In practical terms, this means Queensland’s projected total budget revenue of $30.3 billion in 2008-09 is about $2.7 billion less than if the previous GST growth rate had continued, and recurrent expenditure is lower to the same extent.

In short, the GST “bonanza” appears to be over, and unless taxes are to be increased the shortfall in service level can be made up only from increases by the private sector.

Two insufficiently recognised aspects of the Queensland economy also enhance the case for an increased private sector role.

First, although the private sector’s contribution to the state’s total final demand has become progressively larger since the early 1990s, other states have also experienced an increase.

Second, despite Queensland’s much-vaunted faster rate of economic growth than any other state in recent years, it is starting well behind scratch in the per head growth stakes. In 2004-05 it was running fourth in those stakes with a per head income 10 per cent lower than the Australian average, and about 12 per cent lower than in NSW and Victoria.

In the seven years of the present government, Queensland has just managed to pass South Australia on the home turn, and is still a good distance behind the heavyweights as the horses move down the straight.

The government would be better advised if it recognised the need for more general policies that create an economic environment that is receptive to the private sector. A major program of reduced business regulation would be both helpful and have the potential to lead the states.

Although there is no proven direct relationship between changes in economic growth and the size of the public sector, it seems almost indisputable Queensland would have performed better if it had done more to encourage the sector that is driving growth and employment.

The contrast between NSW’s and Victoria’s experiences over the past seven years may have some relevance to Queensland. While those states’ private sectors did not increase their relative contributions to state final demand over this period, Victoria started with the advantage of already having a larger contribution from that sector.

Victoria has also been more receptive than NSW to private sector participation in government services, so it is not altogether surprising that its per head income increased relative to the Australian average, while NSW’s fell. From being well out in front, NSW is now struggling to keep its head in front of Victoria.

If the Queensland Government were now to take the lead among the states by announcing that it will positively and comprehensively seek and encourage private sector involvement across the whole range of government services, and in the economy more generally, such a policy would have considerable potential for improving the wider Queensland community’s economic and social positions, and for closing the remaining per head income gap.

My proposal is for a program to reduce state taxation by between one-fifth and one-seventh - by $1,000 -1,500 million a year. This is not because Queensland has a big-spending government: it does not. But in a budget of $27 billion it would undoubtedly be able to find savings of $1 billion - about 4 per cent of total expenditure - if the government can adjust its priorities.

The government may feel unable politically to handle the outcry from those who would lose from reductions. But what if it decided to reduce spending specifically to finance major tax cuts as part of a new and innovative approach to governing the state?

In short, if the government has the capacity and inclination to effect a major change in its priorities that would benefit the Queensland community, it should be able to handle the reduced-spending complainers with minimal electoral harm.

This proposal would be presented as part of a comprehensive change in priorities to make Queensland renowned for being the most attractive state to private investors. Instead of having taxes only about 14 per cent below the average for the states, Queensland would have them about 30 per cent below.

The tax reductions would be partly financed by reducing concessional expenditures, such as subsidies for tariffs and petroleum, and some allocations included under the rubric of “general public services”. These reductions would involve no more than bringing Queensland’s spending in these areas down to the same as the average for the states.

Further expenditure savings could be made by reducing the excessive number of departments and statutory authorities - by amalgamating those with similar functions and eliminating functions such as the government printer, and by centralising public works maintenance that the private sector could perform more efficiently

There is also a case for limiting the annual growth in public service employees to, say, 1 per cent after their recent growth of over 3 per cent in circumstances where the annual population growth has been only 2 per cent.

Over time, significant savings in expenditure would also emerge if the policy of an enhanced private sector role in providing intra-government services was seriously pursued. That would include implementing the Audit Commission’s purchaser-provider model.

But the most important initiative would be the pursuit of policies to actively encourage both non-government schools and private hospitals, and to replace services provided by most public corporations with those provided by private sector enterprises. I outline possible such policies in my report, but mention four main themes here.

First, an announced government policy intent of a comprehensive and enhanced private sector role in Queensland in relation to so-called government services, and more generally.

Second, an announced intention that most of the $22 billion of public corporation assets will be sold.

Third, an announced intention of active encouragement of non-government schools and private hospitals, and an indication of specific policies designed to achieve that end.

And fourth would be an inquiry into establishing an elected upper house as a house of review as a means of having additional accountability testing of the government.

The challenge to all state political parties is to recognise that state government action along these lines will be beneficial to residents (and visitors) - and to the government itself.

By beneficial I mean not simply an improved economic situation but a society that will be more satisfied with life because individuals will make more decisions themselves - and the role of governments will be limited to no more than what cannot be performed by individuals or private enterprises.

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Article edited by Allan Sharp.
If you'd like to be a volunteer editor too, click here.

This is an edited version of a speech given to the Commerce Queensland Function on May 4, 2006. Read the full speech



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About the Author

Des Moore is Director, Institute for Private Enterprise and a former Deputy Secretary, Treasury. He authored Schooling Victorians, 1992, Institute of Public Affairs as part of the Project Victoria series which contributed to the educational and other reforms instituted by the Kennett Government. The views are his own.

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