Fred Hilmer

Concern that competition might suffer in the current privatisation push by state governments revives an issue we wrestled with in the National Competition Review I led in the early 1990s.

The warning from Australian Competition and Consumer Commission chairman Rod Sims that he would oppose privatisations unless competitive structures and pro-consumer regulations were in place has prompted a robust response from Victoria and NSW, with assurances that appropriate safeguards are being implemented.

But the issues involved are complicated. Almost half of our 1993 National Competition Policy Report dealt with the complex policy responses to monopoly structures, particularly those in public ownership.

There is often genuine confusion between privatisation and competition reform, with an assumption the move from public to private ownership will automatically lead to lower costs and lower prices. But while both head down the lower-cost route, only one – competition reform – delivers lower prices.

We need to treat privatisation and competition reform as separate but related concepts. And I believe we need both.

It is possible to contend there can be an effective competitive structure, such as multiple generators in electricity, or access regimes for ports or rail beds, even where the assets stay in public ownership.

This was our review’s position, but it is one that I have recently argued, on the basis of the past 20 years of experience, is wrong.

While competition matters, so does ownership if productivity gains are to be maximised to the benefit of consumers. The electricity industry in NSW is a case in point. Multiple generators, all in public hands, were not a great success.

The potential for ministerial involvement was always present, despite assurances this would never happen. Management never had the freedom to act, innovate and take the risks that private ownership would allow.

However, the reverse is also true. Ownership matters, but so do market structures and pro-competitive regulations such as access regimes. Otherwise we merely shift the monopoly from public to private.

Certainly privatisation brings benefits. There is the clarity of purpose a commercial board and owner provides. There is the willingness to take risks without concerns that there will be “electoral consequences”.

We have seen governments, subject to electoral pressures, avoid blackouts by overbuilding generating capacity, leading to poor capital productivity. Red tape – convoluted approval processes for key financial and investment decisions – further limits the performance of public entities.

But while private ownership alone may reduce costs and increase operating profit, consumers don’t necessarily benefit. The big winners from private monopolies are the owners, not the public.

Admittedly there is a one-time benefit to the community from the higher price received for a monopoly right. Because the monopoly has value, the state receives a higher price than would be the case if a competitive structure was created. It is argued the higher price, reflecting the present value of the stream of monopoly rents, compensates the public for putting up with monopoly pricing.

There are two problems with this. First, the premium for public monopoly rights should be heavily discounted, as governments can change regulation – a point clearly understood by taxi owners, pharmacists and owners of gaming licences.

Second, the privatisation benefits in terms of efficiency improvements are unlikely to be enjoyed by consumers, unless there is a competitive incentive structure in place. In addition, these efficiency improvements are heavily discounted in setting a bid price for public assets.

Hence, Sims’s point that privatisation and competition reform must go hand in hand. Independently, both can provide economic benefits. But the real gains in productivity and consumer welfare come when both ideas are implemented in a complementary way.

Moreover, it is crucial that competitive arrangements are adopted at the proposal stage, before assets are privatised. Public monopolies can be restructured by parliament. To deal with the negative effects of private monopolies is much harder.

Fred Hilmer is vice-chancellor of UNSW Australia. A version of this post appeared in The Australian Financial Review.