Interview

An Economic Wet

Interview with Noel Hester - ASU Services Branch

Dr Christopher Sheil on economic rationalism and the 1997-98 water failures in Adelaide and Sydney.

What are the lessons to be learnt from the Sydney and Adelaide water failures?

If our governments keep insisting on improving the performance of water utilities by making their commercial returns continually rise without corresponding real productivity improvements sooner or later all of the nation's water infrastructure must crash.

This emphasis on hiking water's return has therefore created an inherent conflict between our government's democratic obligation to serve the public interest and our water's domination by commercial interests.

But both the Productivity Commission and the National Competition Council say water is now more efficient since the corporatisation of the water utilities?

The standard measure of performance they use for commercialised government bodies is rate of return reporting. Rate of return can be increased by either increasing revenue or reducing costs. But utilities have a natural monopoly and therefore can manipulate prices and therefore revenue. They also have incredibly large and unique physical assets such as dams, reservoirs and mains which can last for centuries. Estimating the annual capital costs for catchments, dams and mains for example is like trying to estimate the wear and tear on the pyramids. Financial results based on these highly variable and unknowable annual capital costs ultimately tell us very little about the genuine productivity of water infrastructure.

How is the conflict between public good and commercial interests effected by privatisation?

The conflict is likely to be more intense following privatisation because of the higher costs this places on government intervention. There is more freedom for the production risks created by commercialisation to grow.

The conflict is less likely to be resolved under privatisation before it gets to breaking point. It will be more intense and the eventual government intervention that will be needed to resolve it will be more difficult and more expensive - or less effective. A good example of these costs can be seen in the fallout from the Esso Longford plant. Longford was an essential piece of infrastructure which knocked out the Victorian economy for two weeks, left two people dead and required an expensive royal commission - which didn't resolve the issues. Who was looking after the public good interest here?

What risks are there for the government in privatisation?

When a private corporation buys into something as important to an entire society as water no government can allow that firm to fail. If they do that government will pay at the polls for neglecting the public interest. The political risks to the government of failure provide the private firm with the opportunity to transfer the costs of any breakdowns to the public.

What public policy changes will better protect the public interest?

Commercial reporting is important but can't be allowed to dominate. The best opportunity to get the balance right is the Water Auditor.

What role is there for a trade union in protecting the public interest in water?

A well resourced and effective trade union organisation within the infrastructure would provide another independent democratic eye on production conditions. Along with the Water Auditor this can be an additional source of advice to government and the public on the quality of water and its production capacity. Unions of course have a rich tradition and unsurpassed experience in identifying the brutal realities of over exploited resources than any other institution.

Do the conclusions you have drawn from the study of water have implications for the broader public sector?

Water is unique in almost every sense, so it is important not to exaggerate their applicability. Nevertheless, by inference, they are transferable insofar as the history, characteristics and conditions of other production either (1) approach those of water or (2) approach other arrangements that are equally incompatible with rate of return theory.

Energy and communications infrastructure would seem to suggest themselves, as do some of the attributes of health, education and, indeed, the waterfront, where the Howard government rushed so keenly to assume most of the theoretically private income risks to production on behalf of one of the managing duopolists last Easter.

It is important to be careful. It would be foolish to rush anxiously toward forging an all encompassing, repressive, intellectual counter clamp to economic rationalism.

What about the private sector?

No question with water. Private or public, the production risks in water are inherent to commercialisation no matter who owns the infrastructure. This is reflected in the McClellan recommendations about establishing the water auditor. The auditor is to be empowered to investigate any matter in the system, including any in the Private prospect water treatment plant. The Longford breakdown in Victoria also shows how important it is for governments to monitor the production of essential services on behalf of the public.

In some ways, my conclusions are more important for the private sector, since the attribution of private rights acts as a form of government tariff on public intervention. This provides more room for the production risks to grow. It also means that, if there are emergent conflicts between commercial and public interests, intervention to resolve them is less likely to occur before the conflicts get to breaking point. One way or another, more risks means more costs.

What do your results and conclusions say about the effectiveness of the methodology of the Productivity Commission and the NCC in evaluating economic efficiency?

Leaving their penchant for dogma aside, their material can be useful provided it is free of errors. The big problem is that they present their findings as conclusive and as having been drawn from a total system. In fact they are a very narrow slice of reality - more a starting than a finishing point. Imagine relying on a methodology that would reflect the lack of investment spending that led to the total breakdown of essential infrastructure in Adelaide, Sydney, Longford, Brisbane and Auckland as positives in the bottom line. Not only were these savings negatives, all of this infrastructure completely failed to meet the purpose for which it actually came into existence in the first place - the breakdowns were historical, social, political and technical failures, not only commercial failures. The fact that commercial methodology actually fails to adequately grasp the causes for failures like these is, indeed, one of the causes, since governments and managers have come to rely upon the method too heavily.

What are the alternatives in terms of policy and methodology?

Again, I would stress the uniqueness of water, and the importance of not just tossing commercial reporting away. It should remain, but not necessarily dominate. Pricing, for example, can be an effective way to ration water in an ancient dry continent like Australia, and commercial principles can help in this. Connection, on the other hand, does not necessarily have to be priced on a commercial basis at all. Given that the opportunity costs of water infrastructure are in the end a guess, at best, revenue neutrality is a more reliable policy benchmark than commercial returns.

The crucial thing is to make sure the government and the minister have the opportunity to effectively represent the public interest in the infrastructure. I don't think anyone would like to go back to the days when ministers could use the infrastructure as political playthings. Ministers should be accountable, but there is far too much rigmarole at the moment. Ministers should, for example, be able to ask managers any question they want and freely propose policy innovations and alternatives on revenue neutral grounds.

In the immediate future, the crucial thing is to get a water auditor established on the non commercial basis that McClellan recommended. Treasury will, of course, be trying to work out a way where they can keep commercialisation in play through the back door.

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  Issue 23 contents

»	Water Staff Pull Plug on Pay Talks
»	Hotel Survey Warns of New Years Labour Crisis
»	Pfizer Jerks Workers Off
»	Shafted: Howard Squibs on Entitlements
»	Olympics Jobs Shortage Looms
»	Nurses Change Tack on Public Health Campaign
»	Actors Save Conditions from Reith Attack
»	Global Mariner Shines Spotlight on Howard Shipping Policy
»	New Currawong Deal Ends 25 Years of Trying
»	Hands off Workers Comp
»	Scully Off the Rails Over Contract Security
»	PiersWatch and The Chaser in Mega Merger Deal
»	Apology to Dr Bridget Griffen-Foley

»	Guest Report
»	Sport
»	Trades Hall
»	Piers Watch

»	Upcoming Chippo Politics Events
»	Bright Oakdale Idea
»	Calling All Linesmen
»	Dissent Within the Ranks!!
»	Reply to Don Macchiato

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