Is privatising power a real turn-off?

In Sandra Jobson’s On Line Opinion article on a history of electricity in Sydney ("Power for the People: A history of electricity in Sydney", August 25, 2004), Sandra paints a most fascinating picture of an industry with mixed leaps between private and public provision.

All the traditional reasons for privatising leave unanswered many questions, one of the most important being "Is any price regulator proposed similar to that instituted when telecommunications was privatised? If we recall, the price regulator used to ensure competition in a two-horse industry with one new entrant, Optus, and one monopolistic public supplier, Telstra, was a total regulatory failure in preventing collusive practices and non-sharing  of telecommunications lines.

The first question has been amply considered by the World Bank and can be summarised in four themes:

• private ownership is linked to greater efficiencies as the agency costs provide for managers with adequate incentives to achieve production efficiency;
• privatisation can produce gains due to a shift from monopoly to competitive markets;
• privatisation is considered more efficient because it subjects the firm to the scrutiny of capital markets; and
• privatisation leads to the removal of public sector constraints on efficient behaviour

Apart from these reasons, there are other rationale for reducing the reliance on government, such as achieving of a stated political mission:, for instance, helping finance certain sectors of the economy.

Another rationale may be to reduce political intervention in state owned or controlled business ventures, which prevents the true commercial operations of those entities. This has been particularly obvious in state owned banks (Currie, 2001). Such political interference can extend to the appointment of top managers; financing of government activities; offering higher than market interest rates for deposits in order to engender popularity for the government; over staffing; and the extension of loans to those individuals and companies who have close associations with the government in power. This can result often in non-payment of those loans and hence diminishing capital.

Privatisation is not the only means of reducing state ownership and control of enterprises. Economists have also touted public private partnerships and private finance initiatives as a means of promoting economic and social development. However, regulators are still debating whether privatisation and other ownership structures, which are not totally dependent on state ownership and control, achieve such goals or in fact cause deterioration in welfare levels from those existing under a command economy.

Academics and other advisers have refuted the trenchant criticism of development strategies, which rely largely on changing ownership structures, claiming success for such policies in China and Poland (Dabrowski, Gomulka and Rostowski, 2001). Dabrowski et al point out that critics ignore the principal reasons for failure of these policies in Russia, and fail to distinguish why these policies succeeded elsewhere.

The arguments of these authors illustrate some important flaws in contemporary thinking regarding the measurement and assessment of development yardsticks, which have implications for advocacy of an “optimal” model for reforming and restructuring an economy. They advocate policies to achieve success in reform by concentrating on improving the institutional, legal, and economic conditions for rapid and sustainable growth. Hence success should be measured by the increase in output deriving from the private sector from the start of recovery, (Dabrowski et al, 2001, p.297), and not by the overall growth of GNP of the whole economy as this indicator can be affected during transition by pre-reform crisis conditions.

Dabrowski et al advocate a principle where loss making State Owned Enterprises (SOEs) should be shutdown and not privatised, and the rapid expansion of a new private sector encouraged instead. The welfare costs associated with discontinuing and not privatising SOEs can be regarded as an investment “needed to achieve permanent welfare gains from the better allocation of labour and other resources in the future”.

First, protection of the existing organisational capital of SOEs is not essential for success, as it is unsuited to the private sector.

Second, privatising to insiders is not effective unless mechanisms for accountability exist through an electoral system.