We’ve had micro-economic reform - how come I didn’t win anything?

Fast backwards, if you will, to the late 1980s. In Margaret Thatcher’s Britain, investment bankers are gorging themselves on fee income from privatisations. Fledgling Australian versions wonder how they can get in on the act. Who better to help them than the World’s Greatest Finance Minister, Paul Keating: along with such towering international figures in the economics of public finance as Fred Hilmer, Nick Greiner and Graeme Samuel, they figure out how to get the party started.

First off is the need for a bit of public education. Remember the Debt Summit and boiling frogs? (The closest any of the participants would’ve got to boiling frogs was at the table nearest the kitchen in an upmarket French eatery.) Its purpose was to instil fear into the punters that government debt always your worst nightmare, whereas private sector debt doesn’t matter because the taxpayers are never be called on to ensure its repayment. (The latter has recently been confirmed when the US and UK governments declined to bail out GM, AIG, Citi, RBS, Northern Rock and so on, while the collapse of Lehman’s was shown to have no effect on anybody except its shareholders.)

Then came the behind-closed-doors deal with the States to restrict any further borrowings by threatening revenue sharing, compensation payments for loss of State revenues etc. The objective was to force the States to flog off their utilities, invite the private sector in to cherry-pick profitable bits of public services; and force the road network into gridlock unless private toll operators are allowed in.

Natural monopolies? No worries. Handing over taxing powers to the private sector? Not a problem. Remember the full public discussion of all this at the time? How the pros and cons were carefully weighed, guidelines set out and safeguards put in place? No, I don’t either.

So what did we get from the Keating revolution? Who were the winners apart from the investment banks, the accountants and the big lawyers doing due diligence, who in the years since have made multi-billions (yes, billions) of dollars out of it? Quite a few of the sons and daughters of ministers and top public servants got congenial jobs in New York and the City of London. Quite a few politicians found comfortable berths in investment banks after presiding over the garage sale of public assets. Public servants, particularly those with real infrastructure skills gained while in public service, suddenly doubled or tripled their money by becoming “consultants” to investment bankers. And the main political parties did handsomely from donations from the big players. But what about Joe Public?

Let’s see. We got a one-and-a-half airline policy and airfares to match. We got a one provider Pay TV network. We got a Telecoms industry that, 15 years down the track, needs government to upgrade it from 19th century copper wire, despite spending quadrazillions on imported executives’ remuneration and cute TV ads.

Although Keating didn’t privatise Telstra (his successor, John Howard, did), he insisted it be “commercialised” which clearly signaled an intention to sell in the future. Many economists at the time said that a competitive market with private sector entrants would not function satisfactorily unless there was structural separation i.e. the marketing part was hived of from the wires and exchanges that formed the natural monopoly, which should preferably remain in government ownership. So why didn’t separation, which is now effectively being forced on Telstra, happen then? Because the investment bankers kept telling government not to. They could make more money out of the sale, and it would be much easier, if it were sold as one entity.

Elsewhere, we’ve got public transport systems that are losing as much as they ever did and just get more run down, slower and more overcrowded every year. Completely invisible are the complex, fee-churning refinancing structures behind the same tired old assets, ultimately costing taxpayers far more than plain old government debt.

We’ve got a highly concentrated banking sector winning gongs for the highest retail fee-gouging in the world. Huge bad debt charges yet barely a nick in profitability. Isn’t this the private sector with the losses “taken to equity” as Keating used to say? Or aren’t the losses just being recouped from depositors and borrowers through a huge increase in interest rate spread?

Keating now says they ought to be treated like public utilities. Back then he hated the States owning banks. He thought that somehow they would circumvent his grand plan by raising money for their government owners’ projects, although none ever did. He wanted them gone and harangued the Premiers to sell them, knowing that they would eventually be delivered up to the Big Four. Last year, it finally became fact when BankWest (formerly Western Australia’s state bank) was taken over by the Commonwealth and Westpac bought St George (which bought Advance, which bought the remainder of State Bank of South Australia. The Commonwealth had earlier acquired the state banks of Victoria, New South Wales and Tasmania).

You can now be entertained by Keating telling you how brilliant his policy was, except there isn’t any real competition in the housing or small business banking markets. What a surprise!

We’ve got an electricity industry which has had no new baseload capacity installed for decades and, just like the UK with its artificial market designed to give the banks new trading income opportunities (which we copied), has built-in financial incentives to “lose” a transformer here or there on extreme days and is running perilously close to brownouts. Large slabs of the distribution network are crumbling and need replacement.

For several years prior to privatisation retail tariffs were jacked up relentlessly, When privatisation came in, households then had their tariffs escalated by inflation from a high base, propped up by fixed matching supply contracts. (Pushing up prices and changing accounting to boost current income and increase valuations is a common feature of privatisations.) Large commercial users, taking advantage of surplus generating capacity at the time, were allowed and able to bid the prices they paid down, often by more than half. Note that this had nothing to do with economies of scale or cost of supply and everything to do with market power. Those of you who managed to stay awake in Economics 101 would recognise that this is the antithesis of a competitive market where no individual participant is able to influence price.

All of this was predicted at the time. But such whinging wasn’t to be allowed to obstruct a magnificent money-making adventure. Nevertheless, governments presided over a truly massive transfer of resources from households (and small business who got little out of it) to large and powerful interests, like for example the coal industry, a heavy power user. At least we didn’t squander all our natural gas in power generation like silly Margaret Thatcher did.

Here in Sydney we have an international airport seemingly with the highest car parking charges in the world, immaculate shopping concourses, scruffy baggage reclaim and the only international airport where you can be fined for picking up an arriving passenger directly from the terminal - an obvious efficiency in the age of mobile phones. And the road system is totally bizarre. If you live on the upper North Shore and work in Sydney CBD, you can tool down the highway for free and only pay a bridge toll. If you live in Penrith you get slugged a toll on the M4 but you can then claim it back!

On the other hand, if you live in the Hills district and your employer transfers you from Parramatta to the Randwick office you will suddenly face more than $100 a week in tolls. At least you don’t have to go through the cross-city tunnel which is described as a scary experience as there are so few cars in it. You do need to use the Lane Cove Tunnel which parallels Epping Road. The latter used to provide three car lanes in the dominant peak traffic flow direction. After the tunnel was built (which provides two lanes each way), Epping Road was reduced to one car lane in each direction.

In other words, after a spending one and a half billion bucks now being recouped by tolls paid by said long-suffering Hills’ residents among others, we got no extra car capacity! And just in case you are enjoying a warm fuzzy feeling that the original sponsors of these tunnels deservedly lost their equity, remember that you have no way of knowing whether the equity wasn’t built into the cost of packaging and construction and financed by the debt providers (maybe your superannuation) from the start.

The people in the Hills District would like a railway. Whenever it’s put on the list, it always gets taken off again before anything’s done. Is it possible that somewhere the State Government has rendered itself liable to compensation if it builds a railway which competes with a toll road? It was taken off again quite recently, just before the public announcement that the Lane Cove tunnel has gone belly-up and is to be sold. When there are losses, the law suits will follow. No one can find out because all of these arrangements are “commercial in confidence”. I can only suggest to my Hills’ friends that they ask for the railway to be in a tunnel. If there’s one consistency in transport plans, it seems to be related to keeping a tunneling machine fully occupied!

It is reported that a consortium of toll road operators now want to be given a 50 year concession to collect tolls (i.e. taxes - a toll becomes a tax the moment traffic-funneling measures are put in place) from long suffering Sydney drivers, in exchange for filling in the gaps they didn’t want to pay for when building their toll roads in the first place, because it didn’t maximise their profit, minimise their risk or suit the book-building capabilities of the investment bankers.

The fact is, infrastructure is no longer being driven by the body politic, the public interest. It is now being driven by investment bankers, big construction contractors and assorted hangers-on, solely motivated by how much profit they can make squeezed out of the public using, in effect, coercive powers. They tell governments what infrastructure they can have, how it is to be sized, where it is to be and how competition is to be kept out (i.e. get a monopoly), all of it in secret, out of the purview of the public, until presented as a fait accompli.

I think it is about time we had a Commission of Inquiry into this frolic in micro-economic reform. Who made the money? Who’s wearing the costs? Let’s have all the documents out in the open. No countries these days seem anxious to follow the path we took, and those that did are finding it all falling apart and are having this same conversation, so what are the lessons for the future? I’m sure Mr Keating would be an avid supporter, even if the bankers won’t rate him their first best friend anymore!