Among many other challenges in dealing with the failure of urban policy in Australia, the Minns government is faced with the task of renegotiating, or repudiating, the disastrous set of contracts for toll roads in New South Wales made by its predecessors (Labor and Liberal) with the Transurban group. As a review by Allan Fels and David Cousins has found, the government is at risk of being held hostage by toll operators. According to Fels and Cousins, immediate legislation is needed “as a backup to negotiations and to give the government power if necessary to determine final outcomes”.
This is by no means an isolated case. The failure of the National Electricity Market, premised on the idea of competition between private companies, has led state and federal governments to re-enter the business of electricity generation, storage and transmission. The disastrous experiment with private prisons in NSW is being unwound. Plans for the eventual privatisation of the NBN, established in response to the failure of the privatised Telstra to deliver national broadband, have been abandoned.
In the United Kingdom, where the Thatcher government of the 1980s led the way in privatisation, the complex and difficult process of renationalisation has been going on even longer. Rail privatisation was partially reversed with the renationalisation of Railtrack under the Blair Labour government, further limited under the Tories, and is now likely to be completely reversed.
The UK’s new Starmer government is also grappling with the impending failure of Thames Water, privatised under Thatcher and stripped bare by its private owners. Australian readers won’t be surprised to learn that the “millionaires factory”, Macquarie Group, was a leading player here.
The end of the UK’s private finance initiative (PFI), the model for Australian public-private partnerships, is already producing huge problems. But it is now clear to everyone that dealing with these problems is better than persisting with the hopeless failure of PFI.
Even Thatcher’s greatest political success, the sale of council homes, looks a lot less appealing in light of the current housing crisis in the UK, paralleling that in Australia. It seems clear that governments will need to re-enter the business of building and operating social housing in big way.
In fact, the failures of privatisation are numerous and obvious, while unambiguous successes are hard to find. Claimed examples, such as the pharmaceutical enterprise CSL, turn out, on closer examination, to have used public money to build private empires.
Why, then, was privatisation such a popular policy, at least among those who dominated the policy debate from the 1980s until recently?
The simplest explanation is that politicians saw privatisation and private infrastructure as a way to get access to a big bucket of money, which could be spent on popular projects without the need to raise taxes. This was a fallacy, refuted many times over, but resurrected just as often in zombie form. Either the government hands over the right to collect revenue to private operators, as in the case of toll roads, or the public forgoes the earnings of government business enterprises, as with asset sales.
But until very recently, governments remained keen on the idea of “asset recycling”, in which income-generating assets were sold, with the proceeds used to fund a variety of vanity projects.
Even now this lesson has not been fully absorbed. On the one hand, the Victorian Labor government has begun the process of reversing Jeff Kennett’s privatisation of the State Electricity Commission of Victoria. On the other, having sold its land titles office, Labor is now poised to sell the Births, Deaths and Marriages Registry where it has already increased charges for the provision of legally required information.
Economists who advocated privatisation mostly avoided this silly error. Indeed, the NSW Treasury repeatedly warned against treating private provision of infrastructure as a “magic pudding”. But, under the influence of neoliberal ideology, they committed a subtler error. Rather than examining the fiscal outcomes of privatisation, they assumed public investments should be subject to a large risk premium to make them comparable to private alternatives. This premium was not needed to cover the actual loss from failed public investments, which has historically been low. Rather, it reflected the mysterious “equity premium” demanded by private investors in financial markets. At least until the GFC, neoliberal economists relied on the “efficient markets” hypothesis to conclude that the price observed in financial markets must be the right one. In a world where meme stocks and crypto scams are now a central part of the financial system, such a hypothesis is no longer credible.
Finally, of course, there were huge profits to be made in the financial sector from the sale process and from exploiting weaknesses in the regulation of privatised companies. The list of former politicians who have sold public assets and ended up with lucrative post-politics careers is, incidentally, rather long.
The era of privatisation is nearly over, at least in Australia and the UK. But cleaning up the mess left behind will take years, or even decades.
John Quiggin is a professor at the University of Queensland’s school of economics
