So is privatisation good, bad or something else?

  • So is privatisation good, bad or something else?

    So is privatisation good, bad or something else?

    What you will learn:

    The recent Queensland and NSW elections confirmed that the debate regarding privatisation of Government owned enterprises is still very much alive in the community. It’s fair to say that privatisation of State-owned assets is not widely popular. So is privatisation good, bad or something else? 

     

    New Sam Wilko Advisory Blog by Peter Wilkinson

    The recent Queensland and NSW elections confirmed that the debate regarding privatisation of Government owned enterprises is still very much alive in the community. It’s fair to say that privatisation of State-owned assets is not widely popular. At the same time though and as pointed out by Gary Sturgess in his article in the Australian Financial Review “History Has Turned the Page on State Ownership”, research in Britain and Australia has consistently shown that most people are opposed to privatisations before they occur. Six months later – as long as the privatisation has been well managed – they typically don’t care.

     

    So is privatisation good or bad? An easier question to answer might be whether privatisation achieves results in terms of higher industry productivity and better service to consumers? Ross Gittins explores this question in his Sydney Morning Herald article “Searching for our Salvation in Privatisation”. He asserts that deregulating an industry to foster competition within it (for instance exposing a Government owned monopoly to private sector competition) is far more important in driving reform than privatising a public sector business. This is certainly true of the major industry transformations over the last two decades in the airline, railway, electricity and water sectors. Once greater competitive pressure has been achieved, selling the business on behalf of taxpayers for a reasonable return can then be considered as an option.

     

    So to return to the question of whether public ownership versus privatisation is essentially “good” versus “bad”? If we consider Gittins and the SMH again in “Take rational measures on electricity privatisation issue” he reminds us that mindless prejudice is no substitute for rational analysis of the pros and cons.

     

    On the question of “asset recycling” currently being promoted by the Federal Government to all State governments with businesses left to sell, he suggests that careful analysis is essential. One must cover all the relevant major considerations for and against privatising a public sector asset, taking account of opportunity costs as well as actual costs and avoiding any double counting.

     

    But is it possible to simplify an evaluation of whether privatisation will result in a beneficial outcome in a given circumstance? I believe history demonstrates that a successful privatisation requires three pre-conditions:

     

    1. Well-developed Government procurement capability – an issue that I explored in an earlier article;
    2. Well-developed private sector capability in providing the required services; and
    3. A fair and effective way of incentivising performance via both monetary and non-monetary means.

     

    In the past and as a particular case study in Britain during the Thatcher years, privatisation was used as a “blunt instrument” to address poor service provision by public sector monopolies with entrenched work practices built up over decades. It’s probably not surprising then that initial outsourcing efforts had a chequered history, as both the public and private sector lacked capability in managing transformational change as well as respectively administering and providing services in these industries.

     

    In Australia and with the passage of time, we now have a relatively well-developed local market for outsourced services and key agencies within the public sector with administrative expertise in procurement. So what’s missing? I would like to think that the community remains concerned about the people involved in the industries undergoing major change, exposed as we are to the risk (and in many cases the reality) of lost employment. I’ll focus on this issue in my next article.

     

    Has this article been helpful? Please comment below or send me an email. I am always excited to hear from people making it happen!

     

    Peter Wilkinson

    BE (Mech), MBA

     

    Website: www.samwilkoadvisory.com

    Email: peter@samwilkoadvisory.com

    Linked-In: http://au.linkedin.com/in/samwilkoadvisory/

     

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