A privatised monopoly is still a monopoly, and consumers pay the price

So privatisation with competition can be a big win for Australia. Private ownership creates incentives to produce what we want, when we want it, at minimum cost. Competition keeps prices down.

But privatisation without competition is like a hidden tax. The government gets more today because we will all be paying more tomorrow.

Hence the comments this week by the ACCC chairman, Rod Sims, by Fred Hilmer and by former ACCC chairs, Graeme Samuel and Alan Fels (in the pay-walled AFR). If a state government privatises a monopoly port or airport, then it will get more money than if it establishes a competitive market. If it privatises those businesses with a first right of refusal to develop a competitor (such as Badgerys Creek airport or the Port of Hastings in Victoria) then the government will get even more money, because competition will never happen.

So the current debate on privatisation is only half the story. Privatisation without competition risks turning a public monopoly into a private monopoly. The owners may change but the public will get ripped off just the same.

What is the second option? If competition is not possible then the privatised business needs to be regulated so that it cannot exploit its market power.

In today’s Australian Financial Review, Graeme Samuel notes this alternative.

“He believed that most issues could be resolved through regulation and access regimes and that Australia had a reasonable record in that regard”.

Professor Samuel is correct. But regulation is always going to be a second best solution. Both government-owned and private monopolies can play games with regulators and the end result will always fall short of vigorous competition between private businesses. If competition is not possible, for example for monopoly electricity transmission lines, then privatisation and regulation is a compromise solution. But privatisation with competition is where society really wins.

The current round of privatisations is predictable and regular. Businesses move into and out of government ownership over time. Government ownership is only needed when there are strong conflicts between profit-incentives and public welfare. But if privatisation occurs without competition, then, as a nation, we only get a fraction of the benefit. The government will make more money but do not be fooled. It is just a future hidden tax as consumers pay for today’s increased government revenue through tomorrow’s higher prices.