States should embrace reform - it’s in their interest

Victoria has taken the lead on private-sector infrastructure.

At the Council of Australian Governments (COAG) meeting in February, all state and territory leaders of Labor governments readily reached an almost unprecedented agreement with a Liberal prime minister on a national economic reform agenda designed to improve health and education outcomes, to increase competition in the energy, transport and ports markets and to reduce the regulatory burden on businesses.

So reform is supposedly in the air at all levels of government and the emphasis is on boosting competition.

But first, agreement will need to be reached - presumably at the next COAG meeting - on intergovernmental action plans (IAPs) and the proposed independent body to report annually on progress.

Reforms will improve economic growth and hence government revenues, but who will meet the costs of compensating any losers from reform? Unsurprisingly, states argue federal revenues benefit most, and the February communiqué of COAG indicated a preparedness to consider funding assistance to them once IAPs were developed.

The prospect of a slower growth in state revenues from federal sources also indicates they will seek additional assistance. Initially, the GST was a bonanza for the states, with receipts increasing by 45 per cent - nearly 10 per cent a year - in the first four years to 2004-05.  But projections in the federal budget for 2006-07 are for only a 22 per cent increase in the next four years. With the GST and other federal grants now providing around 45 per cent of total revenues, the states face the prospect of needing markedly to reduce the growth in their recurrent spending.

But governments can, and should, do much reform on their own without waiting for a COAG-driven states-wide agreement. Indeed, it is in their interests to maximise the role of the private sector in the provision of services traditionally regarded as the responsibility of governments.

The line between the private and government sectors has ceased to be clearly defined because governments - and others - are increasingly realising the private sector can provide much of what have hitherto been regarded as public goods.

A deliberative policy of increasing the competitive environment for service provision can be implemented in two ways.

First, by further encouraging the expansion of private sector services that compete directly with government services, or by taking over of the public sector role where that appears likely to improve the efficiency and quality.

For example, since 1997-98 the proportion of students attending fee-charging non-government schools has risen from 28 to 33 per cent, and the million-plus students attending such schools in 2005 effectively save state governments, and thus the taxpayer, about $8 billion a year. A similarly large increase in the proportion of patients treated at fee-charging private hospitals, up from 33 to 39 per cent in 2003-04, is saving over $9 billion a year.

In effect, the higher quality and the wider choice that modern society wants means users of private services are increasingly voting with their feet, even though they have to pay fees as well as taxes. It pays governments to further assist this process both financially and through reduced regulation.